Vietnam Economic Times Ten years on Vietnam Economic Times - No.131 [ 2005-01-01 ] by Christopher W. Runckel, President of Runckel & Associates (www.business-in-asia.com)

On the tenth anniversary of this event and again just recently in late 2004, I thought it made sense to take another look at how Hanoi and Vietnam in general had changed, and was therefore pleased when a US company that was sourcing over 300 forty-foot containers a year from China asked our firm to look at Vietnam and also Thailand as possible sources for a portion of their supplies in order to take advantage of Vietnam’s potentially lower labour costs. You can see my earlier report on my visit in late 2003 at our website, www.business-in-asia.com.

We flew to Vietnam with Cathay Pacific through Hong Kong, which is probably the easiest and quickest way to make the trip with a direct service to Hong Kong from San Francisco or Los Angeles, and only a two-hour lay over before a connecting flight. This is expected to change in 2005 as United Airlines and potentially others are talking about a new service that could make the trip even more convenient for US visitors.

On the road into Hanoi, which has also been rebuilt, billboards advertised all sorts of products and we passed two industrial parks, which showed that modern international industry is a basic part of life in the north. Before hitting the city proper we passed a new Water Park. Here the city looked less changed, although there are now several modern office buildings and a number of four- and five-star hotels.

According to statistics from the Asian Development Bank, Vietnam experienced growth of 7.1 per cent in 2003, with both consumption and investment making strong contributions to overall demand. Domestic demand grew by 9.4 per cent, and total investment by 15.8 per cent. On the supply side, the industry sector turned in a strong 9.6 per cent growth performance. This sector, which includes mining, manufacturing, utilities, and construction, furthered Vietnam’s continuing economic expansion (see graphic). The industry sector’s share of GDP was 38.7 per cent in 2003.

Within industry, the non-state sub-sector grew by 18.7 per cent. The continuing strong development of the private sector generally is a result of the improved business environment. Over the past four years, an average of 19,000 private enterprises have been registered every year, thus raising to 26.7 per cent the share of private sector capital in total investment in 2003.

As Vietnam’s economy has continued to grow, the unemployment rate in urban areas has declined over one percentage point in recent years, from 6.9 per cent of the labour force in 1998 to about 5.8 per cent in 2003. However, underemployment in rural areas and also city areas remains high. The minimum wage was raised by 38 per cent (about $19 a month) in 2003 and this has helped to increase take home pay countrywide.

In 2003, the top exports were crude oil (19 per cent of total exports by value), textiles and garments (18.3 per cent), footwear (11.2 per cent), seafood (11 per cent), rice (4 per cent), and coffee (2.4 per cent), which together accounted for two thirds of total exports. Total exports of $19.26 billion were exceeded by imports of $22.64 billion, widening the trade deficit to $3.38 billion in 2003 from $1.3 billion in 2002. The strong growth in imports was the result of higher demand from industry for capital goods and intermediate goods, including construction materials, and of preparations for the 22nd Southeast Asian Games that Vietnam hosted in December 2003. The liberalisation of import restrictions reflected as part of the US-Vietnam Bilateral Trade Agreement, the ASEAN Free Trade agreement and other documents encouraged greater imports, as can be seen in the following table.

Over the few days following my arrival, I toured the city, met with people from the Vietnamese Government, the US Embassy and the diplomatic community. Many of the Vietnamese I met started the conversation with me by asking, "Have you seen all the changes?" The truth is that there are a number of new office buildings and also a sprinkling of new hotels that we visited – the Sheraton, the Nikko, the Sofitel and others, but not really the building boom that one would expect to have happened over a ten year period. Rusting green sheet metal surrounded several failed joint venture real estate projects and although the traffic is notably worse, much of the old flavour of the city remains. Jogging in the mornings around Hoan Kiem Lake in the pre-dawn, the area still teems with thousands exercising either to tai chi, aerobics, running, badminton and other activities. There has been much rebuilding of smaller structures, but Hanoi remains less changed than most Asian cities, which is not necessarily a bad thing.

In talking with Vietnamese government officials, US Embassy staff, western bankers and financiers, and Vietnamese and American businessmen, they all readily admit that although there has been considerable investment in Vietnam, the promise has not met reality. All acknowledged that international investment (FDI) was falling and that many high profile projects failed to become reality as investors succumbed to the Asian financial crisis or their own over-optimism. Newly committed foreign direct investment capital decreased dramatically by 60 per cent from 1996 to $3.1 billion in 2003. In 2004, FDI continued to decline, although our company has seen a pickup in interest in Vietnam from US businesses in the latter part of the year.

A further problem was that investment was not being made evenly throughout the country. According to several western financial investment companies, perhaps as much as 60 per cent has gone into Ho Chi Minh City or the surrounding area, with arguably only 20 per cent going into the area around Hanoi.

In talks with Vietnamese officials, it is obvious that they can see the current fall in FDI, the tremendous pull that China is exerting on worldwide FDI, competitive pressures on Vietnamese markets from a burgeoning Chinese consumer market, and other factors, and have decided that Vietnam try harder to attract investment. This change in attitude I sensed is real, and this was confirmed to me by many local residents, both Vietnamese and foreign. Recent changes in the tax code in 2004 are just one recent example of this. This bodes well for Vietnam and for investors, and the Embassy and others noted that American and Western companies are looking at Vietnam as a place to locate a portion of their Asian production as an insurance policy in the event that the situation in China should become less attractive. This is further supported by a recent Japanese report that rated Vietnam in the number four slot after China, Taiwan and Thailand, as a site for Japanese investment in Asia.

A further pull is regional integration, which since 1997 has been moving ahead in Southeast Asia and more recently through the active diplomacy of Thailand, China and, more recently, Japan, in Asia as a whole. The five Northeast Asian nations and 10 Southeast Asian nations collectively have a total population of 1.7 billion and $7 trillion in gross domestic product (calculated at current exchange rates). Freer trade now with China in agricultural products and with Southeast Asia in a broader variety of goods offers access to a large and rapidly growing market that is increasingly attracting attention in corporate boardrooms.

Although it is hard to put a nearly one week visit into a few words and although I am hesitant to be neither too critical nor overly optimistic, Vietnam seems to me to be little changed, although I sense that the government and the people are all building consensus for a new period of change that will be necessary for more fundamental development in business and work if Vietnam is to progress further and to compete effectively with China for FDI, consumer sales, etc. Vietnam and particularly the north, in my view, offer opportunities for those who do their homework, negotiate hard before committing resources and are willing to make the commitment in time and effort that a successful investment requires. Vietnam is definitely changing and becoming more competitive.