Vietnam's position in the wave of relocation of global supply chains

Tran Thai Binh, partner from LNT & Partners

The wide spread of the COVID-19 has resulted in hundreds of thousands of deaths around the world. Lockdown policy granted by states has caused factories, retail space,and other business locations to be temporarily shut down and millions of jobs lost. Concentrating manufacturing and relying on a single market have resulted in instabilities, disruptions, and severe impacts on global supply chains. Multinational corporations are poised to take a look back on their strategies in diversifying sources for supply chains.

In fact, there has been a wave of relocating supply chains out of China and towards other Asian countries. Vietnam has appeared on the table as a potential market. But what does Vietnam really have to offer?

Investment spotlights

Apart from being in staying in great control over the spread of the COVID-19 pandemic, Vietnam is a developing country with room for growth and development. With this, it has been able to attract foreign investors to directly invest for lasting interest.

The labour market in Vietnam is tempting. Despite the impact of COVID-19 on the economy, the labour market in Vietnam is relatively competitive as the working age population in the second quarter of 2020 was around 46.8 million people, against a total population of 96.2 million, according to the most recent official report from April 2019.

Duong Thi Minh Han, associate of LNT & Partners

A study by the World Bank shows that the Human Capital Index (HCI) in Vietnam is ranked second, after Singapore, with a comparatively high index of 65 per cent. Furthermore, Vietnam also offers lower labour costs (approximately $200 a month in 2020) than other countries, especially Myanmar, Thailand, and Indonesia.

In terms of potential fields of investment, manufacturing or developing high-technology digital, software, and electronics products are eligible for attractive investment incentives.

This effectively means that Vietnam is open for investment in the development of high-technology in many industries. The Doing Business in Vietnam report conducted by PwC in 2019 shows that, “Vietnam has been shifting gear into high-technology, represented by around $43 billion of high-tech export value in 2016, which is higher than its peers including Thailand ($34 billion), the Philippines ($32 billion), and Indonesia ($3.9 billion).”

Additionally, Vietnam is determined to improve its legal framework on the back of international treaties and practices by recently amending many basic laws on enterprises and investment.

The new Law on Investment 2020 continues to cut conditional business lines for investment, and extends the list of subjects eligible for trade incentives to eliminate barriers to business and guarantee the right to business freedom of people and enterprises.

The government has also attempted to promote foreign direct investment by actively negotiating, ratifying, and adopting free trade agreements. The most recent success is the European Union-Vietnam Free Trade Agreement (EVFTA) under which preferential duties will promote EU business to invest in Vietnam, rather than in competing countries.

Besides, the Vietnamese government has been aggressively tackling the issue of corruption in recent years. A stable political system mitigates the risk of economic crisis arising from political distress, facilitates a transparent business environment, and improves the confidence of investors.

Investment challenges

In the race to attract the new wave of foreign investment, Vietnam is not the only attractive destination and has to compete with other Asian countries. It is also facing some restrictions on economic development which affect its competitiveness in comparison with neighbouring countries.

As reported by the General Statistics Office of Vietnam, trained and qualified labour force in Vietnam is still in short order, accounting for only 24 per cent of the labour force in the second quarter of 2020.

The General View of the Work Bank addresses the requirement to improve the quality of the labour force in Vietnam to safeguard a competitive labour market and sustainable development. Higher education and advanced (vocational) training courses are required to ensure a steady supply of skilled labour in order to ensure efficiency and productivity. This will also enable the Vietnamese labour market to satisfy foreign investors' high demand for highly skilled workers.

Regarding transportation, although the government is developing infrastructure extensively, expanding its airport and underground systems, construction works are prolonged and delayed. Besides, there need to be stronger mechanisms and city planning to solve the problem of heavy flow of traffic towards the big city centers and to improve public transportation both in quantity and quality as it is still poorly serviced as a result of then uneven allocation of the population. Furthermore, big cities also experience heavy inundation due to the poor sewer drainage systems.

Another trade barrier is that the law enforcement is considered obscure and subjective. There are grey areas in the laws and there are issues that have not been regulated in detail and where the decision depends largely on the discretion of an authority.

Furthermore, the application of the law is conducted based on different rationales and standards set by different individual authorities which can come to different conclusions on the same issue. The lack of transparency, uniformity, and consistency, therefore, present a poor legal system and law enforcement. Besides, there is a significant level of bureaucracy in the government apparatus.

Unless changes are made in the state authority system, including law making and law enforcement bodies, investors' confidence in the market will be eroded as there are no mechanisms to sufficiently protect their interests.

In addition, registration and administrative procedures are still time-consuming and bureaucratic. Registering a company operating in new business lines that are neither committed under the WTO nor regulated under Vietnamese laws may take up to 38 days. This may cause investors to miss out on a golden time to invest. Moreover, what may demotivate foreign investors is that foreign-invested companies are only allowed to lease land for a maximum time period of 50 years from the state to implement their investment project.

It should be noted that China has previously set very clear commitments with foreign investors in securing their property rights and maintaining their investments in China. What Vietnam has and gives will definitely be subject to comparison by foreign investors with what China has committed to them.

The torch is lit

However, Vietnam is aiming to integrate into the international market. The EVFTA is Vietnam's new hope for development in the next few years. Amongst other things, the EVFTA imposes on Vietnam the obligation to ensure “predictable regulatory environment and efficient procedures for economic operators, especially small- and medium-sized enterprises” as a recognition of the impact that “regulatory environment and procedures may have on trade and investment.”

It is expected that legislation and law enforcement in Vietnam will become more transparent, reliable, and uniform to fully protect the rights and interests of economic organisations, and hence earn their confidence.

Furthermore, Vietnam undertakes to embrace sustainable development which comprises of social, economic, and environmental development. Vietnam is therefore required to implement greater trade and labour policies as the means to recognise the beneficial role of decent work which brings the economy efficiency, productivity, and innovation. This includes setting and implementing core labour standards, enforcing the freedom of association, and the effective recognition of the right to collective bargain. This comes with the trust that the government will implement regulations to mandate high labour quality. Besides, Vietnam is bound to enact stricter regulations on environment protection and remedy any violations thereof.

Lessons to be learned

Learning from the negative externalities of foreign investment already caused to Vietnam, the government should be stricter and more selective in approving foreign investment projects. Foreign capital should not be attracted at all costs, as there have been projects which were detrimental to the environment in the past, such as coal-fired power plants or Formosa. Instead, Vietnam should target projects which yield external benefits to local businesses and the economy such as high-tech industries or which can enrich Vietnam’s essential role in global supply chains.

The government should use foreign investment as a force to facilitate, level up and reinforce the competitiveness of local businesses, at least for the next 10 years. In that sense, the government is encouraged to have a masterplan for foreign investment projects to avoid provinces arbitrarily setting incentive policies to welcome foreign investment as in the past.

The coming wave of foreign investment is obvious, but whether we can effectively grab it and how we would embrace it depends very much on the perceptions of the government.