Vietnam’s economy is growing fast. But as with China, responsible companies will have to be careful when sourcing from there, says Paul French, Asia Editor Previous reports of Vietnam’s economic rise have invariably turned out to be premature.
However, over the past 18 months a combination of World Trade Organisation entry, a more relaxed government in Hanoi, growing foreign direct investment thanks to more companies adopting a “China+1” sourcing strategy – of looking for low-cost manufacturing outside the People’s Republic – and a surge in domestic consumption have combined to raise hopes.
Economic growth is currently strong – Vietnam has been the second fastest growing Asian economy over the past five years, behind China, and the fastest in south-east Asia. Exports now compose 66% of the economy. But problems remain – not least ethical issues, labour relations and corporate governance
Vietnam is a one-party state lacking democracy and in the past independent worker protests have been suppressed. Since WTO accession, foreign companies have employed more Vietnamese workers, but in general these workers are disappointed that wages have not risen faster – despite working for multinational corporations and in a country where, since the mass entry of foreign firms, inflation has rocketed.
The Hanoi-based and government-linked Central Institute for Workers and Worker Unions found in a recent survey of workers at foreign-owned factories that disgruntlement was rising. One in five foreign companies fails to comply with laws requiring them to have a trade union. Only half of those that do comply have negotiated collective bargaining agreements. Additionally, wages have risen slowly and many workers are not provided with social insurance benefits.
Foreign investors in Vietnam must also consider questionable corporate governance standards in the nation’s top companies. As the stock exchange expands so corporate governance is becoming an issue. As most of the companies listed on Vietnam’s stock index – Vnindex – are former state owned enterprises, analysts are concerned about how independent their boards really are. Cearly strong links still exist with Hanoi. A recent report from CLSA Emerging Markets, an investment bank, noted that “disclosure levels are poor” and that many companies that have floated are yet to issue an annual report.
Additionally, Vietnam’s infrastructure needs serious upgrading, though moves are afoot to revamp Hanoi’s port and internal road and rail connections. But while the government has started to invest and welcome foreign money, there has been a lack of investment in education, leading to a shortage of skilled workers. And while the rule of law remains patchy, red tape is often stifling and corruption is growing. Despite this, investors have started to pay attention – the value of the more than 200 companies listed on the stock market rose by 144% in 2006.
Still, two major hurdles to economic growth appear to have been overcome. Vastly improved relations with the US, boosted by the 2001 Bilateral Trade Agreement, has seen US money flooding in while the US now accounts for 21% of Vietnam’s exports. The other improvement has been in Sino-Vietnamese relations with significantly increased cross-border trade and relations.
Vietnam also finds itself in a demographic sweet spot – the country’s young population, balanced gender ratio and high levels of literacy all point to a consumer boom. Indeed per capita consumer spending has doubled over the past five years, making Vietnam a plausible market for a wider range of western good and services than previously.
While all this is generally positive, some analysts worry that little has changed in the Hanoi hierarchy and that, economically, the government remains an uncertain factor. Like its larger neighbour China, Vietnam must maintain high growth rates if it is to generate enough jobs for its people – 8% GDP growth is the minimum required to create new jobs for the 1.4 million new workers who enter the labour market annually.
Crucially, Vietnam’s economic planners have yet to be seriously tested. Growth has been maintained so far but is far from certain in the future. A combination of rising oil prices and high levels of inflation along with steep rises in the consumer price index pose challenges that Hanoi has yet to tackle.
For international investors, Vietnam is certainly more attractive than it was a few years ago. But with global firms facing ethical risks of a similar order to those in China, this is still frontier investment.