Vietnam struggles to cope with trade war-fuelled demand

Capacity problems at ports and soaring real estate and labour costs are among the hurdles that foreign investors face

Shipping containers at a port in Hai Phong city, Vietnam. More than 530 million tons of cargo were shipped through Vietnamese ports last year - a 20% year-on-year increase. But investment in the country's ports has lagged behind. Reuters
Shipping containers at a port in Hai Phong city, Vietnam. More than 530 million tons of cargo were shipped through Vietnamese ports last year - a 20% year-on-year increase. But investment in the country's ports has lagged behind. Reuters

Vietnam is finding it’s hard to win a trade war even when businesses are trying to hand you victories.

The Southeast Asian growth engine has a young and growing middle class, a horde of free-trade agreements, and a booming manufacturing industry. Businesses from Alphabet's Google to Crate & Barrel are lining up to invest in the country as supply chains migrate from neighbouring China, which served as the world’s factory for the better part of two decades.

But Vietnam is starting to see expectations outrun reality. More and more businesses are complaining about congested ports and roads, rocketing costs for land and labour, and regulations that aren’t being loosened fast enough.

Tapestry, owner of the Coach and Kate Spade fashion brands, has lamented insufficient infrastructure investment that’s left some containers stalled on the waters. Eclat Textile, a supplier to Nike, says it needs to diversify beyond Vietnam, including to cheaper locations.

If Vietnam isn’t able to fast-track progress in closing its infrastructure gap, it risks losing its “mini-China” status that has drawn so many of Bain & Co’s toy-supplier clients there since 2015, said Gerry Mattios, Bain’s Singapore-based vice president. Costs could outweigh the benefits, sending producers to the likes of Sri Lanka or Cambodia, he said.

For now, the money keeps rolling in. Total disbursed foreign direct investment rose 6.3 per cent to $12 billion (Dh44.07bn) in the first eight months of the year from the same period in 2018, according to government figures, with the number of new registered projects surging 25 per cent to 2,406.

So what are the main challenges Vietnam faces as it tries to lock in those trade-war wins?

Infrastructure is the big challenge for Vietnam, especially at its ports. China claims six of the top 10 ports by container traffic in the world — including Shanghai at No 1 — while Vietnam’s two biggest ports, Ho Chi Minh Seaport and Cai Mep, rank 25th and 50th, respectively, according to data compiled by Bloomberg Intelligence.

Vietnam’s share of global container traffic was just 2.5 per cent in 2017 versus 40 per cent for China. Shipping container capacity will need to grow at almost twice its 10-12 per cent pace of the past decade, as well as fold in third-party logistics and freight-forwarding practices to keep up with new demand, BI research shows.

The government estimates it would cost about 80-100 trillion dong (Dh12.6bn-Dh15.8bn) to develop its ports. Big-figure deals — around new ports or revamping of old ones — have yet to come to fruition.

Congestion at the ports often means rising inventory costs and less diverse production lines that are limited to non time-sensitive goods, according to the BI analysis. What would help: massive investments in warehouses, seaports, rail terminals, and inland container depots, for starters. BI also recommends a national or quasi-national container shipping company in order to support large-scale cross-border trade.

Demand is certainly growing. More than 530 million tons of cargo were shipped through Vietnam seaports last year, up 20 per cent from a year earlier, according to the Vietnam Maritime Administration’s website. The volume of exported goods handled rose 15 per cent to 142.8 million tons. And 18.1 million TEU (twenty-foot equivalent units) of containers were transported last year, up 26 per cent from the previous year.

“With the current situation, Vietnam for sure cannot meet the demand of a wave of companies if they move in,” Tsai Wen Jui, chairman of Taiwan-based bicycle saddle manufacturer DDK Group, said in an interview at their Binh Duong office. Even if 5 per cent of Taiwan’s companies in China relocated to Vietnam, the infrastructure would be overwhelmed, he said.

DDK Group has a joint venture with Warburg Pincus-backed Becamex IDC to manage a 200-acre section of the industrial park in Binh Duong province only for Taiwanese companies. While Tsai said he’s pleased with the quality of the roads inside the park, he bemoans the lack of a highway to deal with traffic that keeps getting more congested.

Land prices also are a constraint, said Tsai. The land costs in Bau Bang industrial park have doubled to $80 per square metre from three years ago. The price at some parks in Binh Duong province has increased to $150 per sq m from $65 in 2016, Tsai added.

It’s not just Binh Duong that’s seeing some property fever. Rental prices for industrial property rose by double digits year-on-year in the first half of 2019 for several provinces, including 54.6 per cent in Binh Duong and 31.1 per cent in Tay Ninh, northwest of Ho Chi Minh City. In Hai Duong, east of Hanoi, prices were up 29.4 per cent, according to data compiled by real estate service provider Savills. Occupancy in these areas has also soared, led by a 63.6 per cent growth rate in Tay Ninh province, the data show.

Residential costs have increased in Hanoi and Ho Chi Minh City, with the former seeing a 20 per cent price jump for condominiums in the second quarter from the previous year, and the latter experiencing a 4 per cent jump on the primary market over the same period.

Vietnam has made strides in the World Bank’s Ease of Doing Business gauge and the World Economic Forum’s Competitiveness Index. The business-friendly reputation has been helped by investment reforms, privatisation of state-owned entities, and free-trade policies.

Businesses counter that there’s still a way to go to root out corruption, and bureaucratic networks can be tough for outsiders to crack.

Vietnam scored a 33 on a scale of 0 to 100, with 0 being “highly corrupt” and 100 being “very clean,” in Transparency International’s annual corruption index in 2018. That was little changed from 2015, reflecting slow progress in combatting government bribery despite a recent crackdown on corruption, according to the group.

The demographics are on Vietnam’s side. The share of the population that’s working-age, or 15 to 64 years old, is set to remain larger than the average across Asia and worldwide through 2025, according to data from the United Nations Population Division. And the government has expressed an appetite to up-skill its workers, from its schools to the factory floors.

But it’s hard for Vietnam to supply high-qualified labour for technology companies moving in even as training efforts get a boost, Huang Yung Cheng, chairman of the Council of Taiwanese Chambers of Commerce in Bac Ninh province, said in an interview. And overt corruption remains a worry for business.

Taiwanese companies said they need 20 per cent to 30 per cent more workers to meet production goals, according to minutes of an August 21 meeting between those companies and Binh Duong officials posted to a government website. The fight over talent has meant higher labour costs, with wages for candidates with Mandarin proficiency rising about 60 per cent year-on-year in Binh Duong.

More broadly, Vietnam’s minimum wages in 2018 at $180 a month were much cheaper than in Thailand ($274) and competitive with Cambodia ($170), according to Suan Teck Kin and Manop Udomkerdmongkol, analysts at United Overseas Bank. Cambodia’s minimum wage has already risen to $182 at the start of 2019, with talk of further increases as soon as next month.

Vietnam “can’t come close to matching mainland China’s critical mass of workers, consumers and/or infrastructure,” Sean King, senior vice president at Park Strategies, said in an email. “What’s more, Vietnamese productivity rates are 25-30 per cent lower than PRC rates. In short, there’s only one mainland China.”

Published: September 19, 2019 08:30 AM


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