No, we are not going to become the Vietnam Law Blog, but I just could not resist using this post today.
I was in Vietnam (mostly Hanoi and Ho Chi Minh City) last May when Vietnamese rioters, sparked by anti-Chinese sentiment following China’s installation of an oil rig in disputed waters in the South China sea, attacked several hundred foreign-owned factories in a few provinces outside Ho Chi Minh City. Ironically, the biggest targets were not China-owned factories, but factories owned by Taiwanese, Hong Kong, and Singaporean investors whose companies play vital roles in the complex supply chains on which so many foreign-owned manufacturing entities in Vietnam depend.
The foreign business community immediately scrambled to assess the situation. Will Taiwanese, Hong Kong and Singaporean investors pull out of Vietnam and not come back? How will the complex and sensitive supply chains be affected? What will foreign investors from the U.S., Japan, Europe and other countries do? What are the implications for foreign investment in Vietnam?
Four months later, having just returned from yet another Vietnam trip, I am convinced that Vietnam has weathered the fallout from the May riots. Through July of this year, foreign direct investment in Vietnam hit $6.8 billion, up 2.3% over the same period last year and the Asian Development Bank predicts the Vietnamese economy will grow 5.5% this year and 5.7% next year. Not bad given the current state of the global economy.
According to a survey by the American Chamber of Commerce Singapore and the US Chamber of Commerce, the results of which were released last month, Vietnam remains second only to Indonesia among ASEAN countries as a priority destination for future U.S. business investment. 75 percent of the Vietnam respondents (made up mostly of American companies) expect their Vietnam businesses to expand and 57 percent expect their workforces to grow in 2014. 66 percent of the respondents see their profits increasing in 2014 and 82% predict profits to increase in 2015. Even Chinese, Taiwanese and Hong Kong businesspeople remain bullish on Vietnam. On September 29, 2014, the South China Morning Post reported that “investors including those from China have resumed operations in Vietnam” since the riots, noting that “government efforts to maintain peace and the underlying strength of the economy have managed to retain capital in the country.”
What gives? I see the following as some of the key reasons why Vietnam has done so well lately in terms of foreign investment, and why it is likely to do so well going forward:
- Riots are not likely to recur. The Vietnamese government, which was caught off guard and embarrassed by the riots, has “gotten the message” and has made clear that such lawlessness will not be allowed to happen again
- Vietnam remains attractive. Vietnam’s relatively low cost labor force, personal safety, stable government and favorable geographic location combine to make Vietnam attractive for foreign investment, particularly in comparison to other countries in the region. Taiwanese, Hong Kong and other companies affected by the riots neither want nor need to relocate to Cambodia and Bangladesh, as some were reportedly considering.
- Improving infrastructure. Though Vietnam’s less than ideal infrastructure remains a problem for many foreign investors, the pace of improvements has increased and foreign investors seem willing to remain patient. Construction has commenced on Ho Chi Minh City’s first subway line and the government recently announced a plan to build new expressways and railways and to improve its airports and seaports by 2020.
- The Trans Pacific Partnership (“TPP”). Though it is unlikely we will be seeing a final TPP Agreement within the next year or two, this will eventually happen and when it does, Vietnam will be one of its biggest beneficiaries. Vietnam is already considering a Draft Decree Implementing the Customs Law, which reportedly will include common commitments in the TPP and the EU-Vietnam Free Trade Agreement, as well as the WTO Trade Facilitation Agreement. Vietnam is warming to free trade.
- The Vietnamese government is becoming a better “listener.” In an apparent concession to Japanese enterprises that are considering relocating their production lines from China to Vietnam, the Vietnamese government has postponed implementing restrictions on importing used machinery into Vietnam. Foreign businesses are seeing this sort of thing and they appreciate it. Again, Vietnam is warming to free trade.
The foregoing means that Vietnam will remain an important country for foreign investment and one of the leading “China Plus One” countries for companies seeking to expand their business in Asia.