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UNLEASH THE FORCE

Vietnam is a sound alternative to China for those looking at Asia for their investment, writes Mr. Christopher Runckel, President of Runckel & Associates

- this article was published in The Vietnam Economic Times: Supplement October 2006. In association with the Press & Information Department (MOFA).  Special edition for APEC Vietnam 2006.

    
An interview with Chris Runckel, the author, on the content of this article. Listen to the show - From Business Now Asia Pacific Radio, a weekly 30 min online program featuring reports and original analysis on the Asia Pacific region (www.businessnowasiapacific.com)

I have had an extensive involvement with helping to orchestrate US participation in APEC back to my overseeing the first APEC Leaders meeting in Seattle in 1993 for President Bill Clinton. Interestingly, my availability for this was also linked to Vietnam as I had just completed language training in Vietnamese and because the early negotiations with Vietnam on establishing diplomatic relations weren't proceeding as fast as hoped, I was allowed to oversee this before returning to my role as US Special Negotiator line for Vietnam.

This year I will most probably miss assisting the US side with APEC, for the very best of reasons, for Vietnam as I have already agreed to host a delegation from Binh Duong province who will visit the US in earl November to attract investment into one of the most economically exciting provinces in the country, and I will later be taking at least two US companies to Vietnam to look at sites for investment. I do wish the APEC attendees well and know that Vietnam will do its utmost to welcome them.

Recently I arranged the visit of a large US company to China, Vietnam and Thailand. The purpose of the visit was to review potential sites for a factory for this major US corporation in various locations in one of the three countries. Initially, only China was requested to be a place of focus but I convinced the client company that Vietnam and Thailand also deserved a look. This trip was instructive for what it said about the continuing lack of knowledge about Southeast Asia as a site for investment compared to China, comparative advantage in 2006, economic globalization and also for the future prospects of Vietnam in the second half of this decade.

In the past, companies looking to put a new factory in Asia had no more to follow the general buzz on the business news that China was the place to be and get on a plane and make the trip to Shanghai or Guangdong to start-up Asia operations. Increasingly; however, the days during which China's coastal region was a magnet that sucked up $60 billion in foreign direct investment (FDI) for China are behind us. In the first eight months of 2006, FDI in China had fallen by 2.1% according to the Chinese Ministry of Commerce. (FDI fell 8.5% in the month of August alone and should decrease as much or more in the remaining months of 2006.)

The reasons for this are many and varied, among them are rises in land, labor and other costs that increasingly are making incumbent upon foreign businesses to think carefully through their business objectives and to ensure their due diligence is complete. For example, in late August 2006, the Chinese central government issued "Circular of the State Council Concerning the Relative Questions of Enhancing the Adjustment of Land". This decree, which was just reaching officials in early September when I visited China, has become increasingly clear in the days that followed although final interpretations are only just now coming out.

The decision which was issued by the central government affects all of China's industrial parks which all have government involvement. The implementation of regulation is fairly complex but the reasons behind the change are not. Increasingly the Chinese Central government has decided the old policy that left pricing of land to local authorities was not working. Local authorities were setting below market value for land in an attempt to draw increasing investment. Local authorities were more focused on volume of investment instead of quality and the result was that land was often of that not fully recoup the costs relocating local farmers, building infrastructure and other related costs.

The net result of this is that all over China, the price of industrial land, which was in comparative terms to other Asia location is going up, in most cases more than double In the Shanghai area for example, land previously sold as long-term leasehold 100,000 RMB per Chinese equals .067 hectares) will in December 2006 when the new procedures are fully cost over RMB 200-300,000. This nationwide increase in property prices land comes on top of five years increase which saw land for industrial use prices Kunshan, a country-level city between Shanghai and Suzhou  see the cost of increase five-fold during the last five years Whether this increase in pricing adequately resolve the problem availability for industry is hard to say. In cities like Ningbo, which has been very successful in attracting investment in years past, new projects are stymied not only by higher prices hut also by lack of availability of land in nearby areas for industrial use. This lack of available land has driven investors to look at other locations for their projects and total foreign investment in the first five months of the year in the city decreased by 23% over the same period of 2005.

In addition, to land prices taking a major leap, labor prices are also increasing swiftly throughout the coastal areas of China. In Qingdao, a coastal city and the major port in Shandong province, the minimum monthly wage in 2005 increased 29% over the previous year to RMB 530 ($66.5). In Shanghai, the minimum monthly wage has lumped from RMB 210 ($26) in 1993 to RMB 750 ($94) in 2006. Wage jumps in the Pearl River delta which last year saw a 20% rise, are even more pronounced in 2006. Further, enforcement which had been largely ignored in prior years is increasingly strict which is making manufacturers further increase their costs.

Utility bills are also increasing for all projects, again hitting the company's bottom line and reducing China's comparative competitive advantage. Many cities, particularly in the north or China but also in many coastal areas have increased the price of water 'border to cope with water shortages and increasing costs for wastewater treatment. Also at the end of June, China's National Development and Reform Commission (NDRC) decided to raise the electricity price by and average of 0.0025 Yuan per kilowatt-hour (KWH) throughout the country.

But even beyond increases in land, labor and utilities, government policy is also driving up other costs. In September, the Central government announced that it was further reducing rebates for raw materials purchased for export of particularly lower-tech items and that plans were to eliminate such export dates in the years ahead. In October, the Party Central Committee will meet in Beijing and according to  government sources I met, the issue of tax incentives is also to be discussed with the likelihood being great that the current "Two Free - 3 at 50%" rule for Investment incentives for foreign businesses is to be reduced or most probably phased out totally.

The above changes are politically motivated changes to help to reduce Chinas soaring export balance or trade surplus with most nations which increasingly is leading to complaints not only by the US but by nations throughout the world. It is also being pushed by a belief that China needs to move up the value chain on production and not only be the lowest-cost producer anymore.

All of this changing costs and policies are causing foreign investors looking for a factory location in Asia to rethink their plans. Where the focus is the China market or this is a major component of the overall project, companies often will pay the higher prices or relocate to a slightly more remote but still close-by location to meet their siting requirements. Where the focus is not only the China market, the rise in costs is causing many new investors and many companies currently located in the eastern coastal areas of China to consider locations such as Vietnam, which has costs much lower than Chinas coastal regions and tax incentives much more generous for their projects new location.

But there are some caveats on this that the reaction of my clients helps illustrate and that I think the Vietnamese government needs to consider. First, knowledge of Southeast Asia and of the potential for investment in Vietnam and elsewhere in Southeast Asia is still very under under-appreciated in US and other major corporation boardrooms. More needs to be done to get the word out that Vietnam and elsewhere in the region are solid investment locations. Further, virtually every industrial park in China, Thailand or Malaysia has realized the importance of professional marketing and their presentations and material shows it. Vietnam's industrial parks need to realize this and improve their efforts as well.

Second, the investors I traveled with and most of the companies we have recently traveled with are positively impressed by Vietnamese efforts to learn English when compared to other nations in the region. They also are impressed with Vietnamese respect for and efforts to improve their overall education. With this said, education and the availability of skilled technical and other critical skills still continues to be an overwhelming concern. Education cannot only be an individual concern. Ultimately it must be a national concern and the truth is that the central government needs to do more to improve education throughout Vietnam.

Thirdly, although companies that we work with are impressed with the low salary levels in Vietnam and the availability of workers, they are appalled by the decrepit infrastructure, clogged roads, lack of expressways and bridges, inadequate ports, etc. Thailand by comparison gains high marks for infrastructure. The central government is doing much in this area but needs to do more as by the time they complete a road or bridge it is already overwhelmed by the increase in demand and growth of vehicles.

Fourth, the investors that I have met have all been concerned by the many stories and often-positive indications of corruption by government officials that are apparent in daily life by the police, immigration, customs and other officials. The 2005 report by Transparency International on the Corruption Perception Index has Vietnam as tied for 107th and as only exceeded by Indonesia, the Philippines and Cambodia in Asia as being a place of concern for corruption is more than just an embarrassment, it hurts Vietnam's overall competitiveness and scares off investment. The government needs to do more to ensure that all levels of society are protected from corruption and that violators are strongly prosecuted

Fifth, just as China has served as an important model for Vietnam in many areas, it should also serve as a warning in other areas like protecting the environment. The air quality in Vietnamese cities is already worsening on a daily basis both through an increase in prosperity and the motorbikes and vehicles that have come with it and by an increase in industrial and water pollution. Vietnam needs to act now to improve overall water and air quality and not wait, as was the case in China until conditions seriously endangered people’s health.

The above concerns do not change my perception that as Vietnam hosts the APEC Ministerial and Leaders meeting in mid-November that Vietnam's promise as a profitable home for investment is bright. Investment is increasing strongly and Vietnam has lured $5.15 billion of FDI in the first nine months of the year putting Vietnam just behind India as one of the hottest sites for foreign investment. What is needed now is continued solid support by the government to the five areas above, to observance of the many new laws promulgated to bring Vietnam's legal infrastructure up to international standards and continued market liberalization. Everyone who has lived and worked in Vietnam has tremendous respect and appreciation for the work ethic of the Vietnamese people and the quality they bring to production. When fully unleashed, these forces will offer a world of potential that foreign business will reach out to engage thereby increasing employment, wealth and national interests.

About the Author:

Christopher W. Runckel, a former senior US diplomat who served in many counties in Asia, is a graduate of the University of Oregon and Lewis and Clark Law School. He served as Deputy General Counsel of President Gerald Ford's Presidential Clemency Board. Mr. Runckel is the principal and founder of Runckel & Associates, a Portland, Oregon based consulting company that assists businesses expand business opportunities in Asia. (www. business-in-asia.corn) Until April of 1999, Mr. Runckel was Minister-Counselor of the US Embassy in Beijing, China. Mr. Runckel lived and worked in Thailand for over six years. He was the first permanently assigned U.S. diplomat to return to Vietnam after the Vietnam War. In 1997, he was awarded the U.S. Department of States highest award for service, the Distinguished Honor Award, for his contribution to improving U.S.-Vietnam relations. Mr. Runckel is one of only two non-Ambassadors to receive this award in the 200-year history of the U.S.diplomatic service.

 


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