Vietnam’s growth thesis post-Covid
Early in the pandemic, Vietnam had handled Covid-19 so well that its name was tossed around quite often as the new manufacturing and supply chain hub in South-East Asia. The country seemingly would stand to benefit from the inevitable economic and political decoupling between China and the western world (particularly the US and Australia). Given the situation, this article will first examine Vietnam’s economic growth potential. The second part of the article discusses Vietnam’s recent mishandlings of the last Covid-19 wave and its adverse effects on Vietnam as the leading destination for FDIs, as well as the lesson Vietnam could draw from that experience. I will do so by contrasting China and Germany in their differing business philosophies, and, based on the analysis, recommending a general approach to managing relationships with international investors and multinational conglomerates that Vietnam should consider if it were to fully take advantage of the unfolding geopolitical circumstance.
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:
One prominent example would be Apple’s beginning of mass production of AirPods in Vietnam in the second quarter of 2020, a move seen as part of its long-term strategy to reduce its reliance on China. Meanwhile, mainland Chinese investors themselves, fearful of the impending burst of real-estate bubbles and further tech-crackdown from the government for “common prosperity”, also diversify away from their own country, exemplified by recent Alibaba’s lead in USD 400bn bet on Vietnam’s Masan. Because the country’s manufacturing as a percentage of GDP (16%) has not yet reached the level seen by those from countries with similar profiles such as China (27%), Korea (25%), Myanmar (25%), Indonesia (20%), and Japan (20%), it still has a lot of room for growth.
Growth in manufacturing also necessitates and fosters the development of supply chain industries. Located in a strategically important area in South-East Asia and being close to China that would enable firms to minimize their cost of switching supply chain, Vietnam could become the region’s logistic centre. The country could be the focal point to coordinate regional logistic and manufacturing activities with Indonesia, Malaysia, and even Australia as well as New Zealand. That’s why, Hanoi is raising the contribution of logistic services to GDP to 5–6 percent by 2020, with the industry expected to grow 15–20 percent in the next five years. Finally, Vietnam’s 3260km coastline and its good access to the Pacific Ocean also further proved the point.
Tourism, especially international tourism, is gaining traction and promises to contribute more and more to the country’s GDP in the coming years. The following two graphs show that Vietnam’s tourism industry is yet mature. Despite having a long coastal line and a rather “swimmable” weather year-round (The temperature in Nha Trang — my hometown — stays in the range of 22–35 Celsius Degree for most of a year), it is yet to capitalize enough on its strength. Its utilization of beaches as of 2019, shown by the coastal usage index, is far below average. Its number of arrivals in 2019 from international tourism is half that of Thailand, suggesting there are still a lot of upsides awaiting clever money.
Vietnam should consider developing international tourism as one of its important growth mandates for several reasons. First, international tourism, if done properly, may also serve as a marketing campaign and promote the country’s attractiveness in terms of FDI destination and support the development of other industries such as manufacturing, technology, and logistics. At this point in history where globalism is ebbing and nationalism rising, companies mull moving manufacturing to their home country to hedge political as well as regulatory risk, effectively slowing down FDIs flows into emerging markets. Thus, if Vietnam was to compete for a smaller pool of FDIs, it should get word-of-mouth going. Second, foreign tourists help develop the population’s English fluency and ultimately its education level (the English language is, for me, the gateway to the global knowledge pool). Third, as Work-from-Home (WFH), and nomad lifestyle, and work-life-balance trend continue to soar, WFH could just be anywhere, either in your bedroom or under one of those umbrellas at a beach somewhere in Nha Trang. Thus, international tourism can contribute more and more to the country’s GDP growth in the coming years.
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.
Since China is still a big market, investors, according to tech billionaire turned hedge fund manager Chamath Palihapitiya, will continue to invest in China, albeit with a much higher discount rate to account for regulatory risk. In layman’s terms, companies operate in China need to bear far higher risk premium to borrow money from investors.
Germany, on the other hand, is much less fickle. Despite its much slower GDP growth in the last decade (averaging 2 percent annually in the period 2010–2019) than China’s and thick layers of bureaucracy, when companies want to expand their manufacturing bases in Europe, Germany is always the leading destination. Tesla’ new Gigafactory in Berlin and TMSC’s plan to build Europe’s first chip plant are the most recent examples. A large chunk of the rationale for Germany’s attractiveness is that German business and political culture prioritizes reliability above all else. German companies are well-known for the reliability and high quality of their products/services. On the government’s side, new regulations do not just materialise out of thin air. As the government mulls a new regulation, there will be open and comprehensive discussions on the various aspects of a new regulatory change and its impact on all stakeholders before the change is written into law. As a result, businesses have adequate time to adapt their operations to the new regulation. Thus, regulatory risks are hedged in a way, resulting in much lower risk premiums for companies operating in Germany generally.
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.
If Vietnam wanted to become the top choice for FDIs, it would need to prove itself a reliable partner, for companies, having learned the pricey lessons from China, will not tolerate another fickle regime, investing hundreds of billions of dollars into a country, only to withdraw home ten years later. In fact, reshoring manufacturing is a trendy move at the moment, given the current politically charged and uncertain regulatory environment.
Vietnam does not have 1.3bn people population in order to “turn inward” for growth like China is planning to do. Without international companies investing in factories and buildings, granting local firms fat contracts, and imparting technical know-how, Vietnam cannot become Asia’s economic powerhouse it wanted to be. Thus, Hanoi has a lot of deep thinking to do in its approach to regulations and its relationships with global business partners.
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.