New Korean policy broadens horizons

There has been a recent surge in South Korean investments in Vietnam’s prioritised sectors including manufacturing, Photo: Le Toan

Last week, Jae-Young Lee, president of the Korea Institute for International Economic Policy (KIEP), visited Vietnam for the first time – for the very reason of his country’s New Southern Policy (NSP) that was officially launched in November 2017.

The NSP is the South Korean government’s prioritised foreign and economic policy, aiming to strengthen trade and investment ties with the ASEAN and ease the reliance on China and the US amid escalating trade tensions between the two major economies. In addition, the government intends to upgrade its relations with the ASEAN to the level it enjoys with the US, China, Japan, and Russia.

“I visited Vietnam to hold a conference to promote the NSP. My job earlier focused only on the northern regions, including Russia and Central Asia, but now it will increasingly include the ASEAN, as our country wants to form an axis of prosperity in Asia through linking the northern and southern regions,” he told VIR. “Vietnam will be among the business and investment targets in the ASEAN under the NSP, which is expected to help Vietnamese partners join global supply chains.”

KIEP’s trip came amidst a recent surge in South Korean investments in Vietnam’s prioritised sectors, namely transport infrastructure, smart/ICT, water sources management, and renewable energy, with outstanding names including Hanwha Aero Engines, Samsung, LG Display, and Lotte.

NEW FOCUS UNDER NSP

Late last week, Hanwha Aero Engines – a unit of Hanwha Business Group, a world-leader in technology and energy – inaugurated its $200 million factory at Hoa Lac Hi-Tech Park (HHTP), making it one of only a few foreign-invested project of its kind in the local aviation industry. The facility will produce airplane engine parts and components for leading aviation brands such as General Electric (GE), Pratt & Whitney (PW), and Rolls-Royce. The corporation has another $260 million expansion plan for the following years.

Hanwha Aero Engines’ new investment came in response to the NSP and Vietnam’s strategy for science and technology innovations.

According to Lee of KIEP, the smart/ICT sector will be crucial to grow the Vietnamese economy. South Korea and Vietnam could strengthen their partnership to develop this sector.

“The NSP encourages investment in smart/ICT, transport infrastructure, water sources management, and renewable energy. Moon Jae-in’s administration has announced various policy measures to promote investment in these sectors within Vietnam, such as expanding the size of the Global Infrastructure Fund, ASEAN-ROK Co-operation Fund and Korea-Mekong Co-operation Fund,” he said.

“There is little financial support, but there is a whole systematic supporting mechanism. In the past, businesses had to seek out opportunities in southern markets themselves, but now the South Korean government will build a network to connect them with the target markets by organising trips and meetings with potential partners and local agencies. The government will also work directly with the governments of Vietnam and the ASEAN on measures and solutions to deal with all possible business barriers,” he added.

In fact, there has been a series of new South Korean investments in Vietnam, mainly flowing into electronic equipment, water supply, telecoms and information, and research and development (R&D) in recent years aligning with Vietnam’s vision of stimulating inclusive socio-economic development through the application of science and technology innovation.

Samsung, Lotte, and LG – the most South Korean famous brands in Vietnam – have all announced new projects. In particular, LG Innotek Haiphong received the investment certificate to increase its investment by $501 million in its camera module factory, while LG Display Haiphong added $500 million to its operating project.

Similarly, Lotte, which is expanding fast in Vietnam, has said it plans to invest ₩12 trillion ($10.69 billion) in 2019, which would be the largest investment the corporation has made in a single year. This capital will mostly go to strengthening the two pillars of the group’s business – retail and chemicals – by reinforcing its online retail business with artificial intelligence and digital technology.

“In the past, investment from South Korea focused on textiles and garment and footwear. However, nowadays it goes mostly into high-tech industries such as electronic spare parts manufacturing,” Hong Sun, vice chairman of the Korea Chamber of Business in Vietnam (KorCham), told VIR.

As shown in statistics by the National Centre for Socio-economic Information and Forecast under the Vietnamese Ministry of Planning and Investment (MPI), electronic equipment made up 4.82 per cent of South Korea’s total investment in Vietnam in 2015, up from 0.67 per cent in 2014. The telecom and information sector accounted for 0.14 per cent of South Korean investment in 2015, up from 0.01 per cent in the year previous, while R&D took up 0.03 and 0.01 per cent, in the respective years.

Recent increases in the imports of electronics products and the exports of mobile phones and parts are a powerful illustration of these trends. According to the General Statistics Office (GSO), in the first 11 months of 2018, Vietnam’s electronics imports climbed 13.6 per cent on-year, while its export of electronics products rose by 13.9 per cent and mobile phones and parts by 11.5 per cent on-year.

POSSIBLE THREATS?

While insiders expect that the NPS will increase trade and investment ties between South Korea and the ASEAN, outsiders have raised concerns over Vietnam’s possible growing trade deficit and more difficulties for Vietnamese businesses to reach the supply chains.

Nguyen Thi Thu Trang, director of the WTO Centre under the Vietnam Chamber of Commerce and Industry, said that Vietnam’s trade deficit towards South Korea has increased significantly, with the latter surpassing China to become the country’s biggest trading partner in terms of trade deficit.

As announced by the GSO, in the first 11 months of 2018, Vietnam spent $43.5 billion on imports from South Korea and earned $16.9 billion from exports in return, up 1.7 and 23.5 per cent on-year, respectively, thus resulting in a $26.6 billion trade deficit.

Last year, Vietnam witnessed a trade deficit of about $31.8 billion towards South Korea, up 53.4 per cent from the $20.8 billion in 2016, and almost double the $18.7 billion in 2015.

The concerns appear founded because the percentage of Vietnamese businesses effectively benefiting from tariff cuts from the ASEAN-Korea Free Trade Agreement (AKFTA) has fallen from 91 per cent in 2013 to 51 per cent in 2017, though since 2015, they have had one more FTA – the Vietnam-South Korea Free Trade Agreement (VKFTA).

In the other side, South Korean businesses were proved to effectively tap the FTAs to increase investment and boost trade. The VKFTA brought benefits to South Korean businesses in different fields, from processing and manufacturing through retail, service, and IT to electronics and farm produce.

Statistics from the MPI showed that as of March 2015, South Korean investment in Vietnam totalled at $38.1 billion in registered capital with 4,200 projects. The figure increased to $50 billion and approximately 5,600 projects by the end of 2016 and to $54 billion as of March 2017. As of November 20, 2018, South Korea was Vietnam’s top foreign investor, with 7,389 projects registered with $62.27 billion in investment.

According to Trang, the investment scale of a South Korean project is equal to only 69 per cent of the average foreign-invested project in the country. South Korean investors are rumoured to prefer their fellow countryman’s satellite suppliers which might make it particularly difficult for Vietnamese companies to join the supply chains of South Korean giants.

To ease these concerns, Lee of KIEP citied similar worries when South Korea had established diplomatic ties with Russia in 1990. At the time, Russians were also troubled by the trade deficit. However, the situation has changed since and now South Korea runs a trade deficit towards Russia.

“The NSP will open up the South Korean market to Vietnamese businesses, while boosting co-operation between the two countries’ investors to develop in the Vietnamese market, as well as in other regional countries.”