Vietnam’s growth thesis post-Covid

Potential

Manufacturing was taking off in Vietnam just before the last Covid-19 wave hit. Following the Sino-US political fallouts and because of rising costs in Asia’ biggest economy, multinational conglomerates are pivoting away from China into Vietnam — a trend dubbed “China Plus One”. Furthermore, the country, having established a dense network of free trade agreements, stands to benefit from the circumstance. Two years after Trump pulled out of Tran-Pacific Partnership in 2017, Vietnam witnessed a tremendous surge in exports to the US, while that of China dropped significantly:

US goods imports — % change (Jan-Apr 2019 vs the same period a year earlier)
Vietnam’s 2019 coastal usage index and number of international tourists’ arrivals
Nha Trang beach

Lesson from Covid-19 mishandling and the way forward

Before discussing Vietnam’s latest Covid-19 mishandlings and the way forward, I will take a moment to contrast the current Chinese and German business philosophies and, from the analysis, draw a conclusion on a general approach to regulations and relationship management Hanoi should consider.

China vs Germany — differing business approaches

Besides its geopolitically fraught situation with the West, China is increasingly a tricky environment in which to operate because of its inclination for abrupt regulation changes without giving businesses adequate time to adjust. A case in point is China’s declaration that the private tutoring industry can no longer make profits. It was announced almost out of nowhere, crashing US-listed TAL Education Group’s share price by 95 percent from its March high. Allegedly on the grounds of data privacy concerns, China’s banning Didi from registering new customers, wiping out as much as 50 percent from its market capitalization, is another example of a knee-jerk regulatory move from the ruling Communist Party.

Covid-19 handlings and the way forward

Vietnam’s recent handlings of the last Covid-19 wave did not inspire confidence, to say the least, among just-until-recently-bullish investors and business leaders. The country adopted a “zero-tolerance” Covid strategy just as China does by taking drastic actions and aiming for zero Covid-19 infection at all costs. As a result, the Communist party was at odds with local businesses and created significant operational headwinds in times of crisis. Companies had to either move their production elsewhere in order to fulfil their contractual commitments or bear huge cost to maintain operations (albeit only half-capacity maximum). Thus, investors and international conglomerates alike now are having second thoughts on investing in manufacturing or moving its supply chain to the country.

Conclusions

Due to the current geopolitical situation, companies are planning to diversify away from Asia’s biggest economy due to its fickle regime and the increasingly tricky operational environment. Vietnam could benefit from China’s deteriorating relationship with the West and has full potential to do so. Can Vietnam step up its game and prove itself a reliable and resilient business partner? Only time will tell. One thing is for sure: The ball is in its court.

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