Vietnam begin move up production ladder by targeting quality projects; Competition within ASEAN?

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With falling Foreign Direct Investments (FDI) into Vietnam, down some 27.3% in first half of 2012, from rising labor costs and weak financial oversight, Vietnam plans moving up the manufacturing ladder, in targeting quality projects.

If the policy shift succeed, Vietnam, will give its more developed ASEAN partners, such as Thailand and Indonesia, some competition for quality FDI. However, Vietnam Financial Review says Vietnam’s labor competitiveness is lagging. In the period 2001-2010, the growth rate of labor productivity of Vietnam was 5.13 percent, while China was 2 times that of Vietnam, Thailand 4.5 times, Malaysia 12 times and Korea 23.5 times.

Clearly, for Vietnam to move up the production ladder, it will require a more competitive workforce, through better education and training. Here, Vietnam have emerged before, as significant player in the High-Tech area, based very much on a “Centrally Planned, Controlled and Implemented” program to produce large numbers of information science graduates.

That necessity to focus on labor productivity, can be seen from what Vietnam Financial Review says: Cheap Labor Competitiveness no longer an advantage. Vietnam has achieved continuously high growth for almost a decade by relying on natural resources and a cheap labor source. But now, it is losing those advantages. The advantage of cheap labor is not the only factor for multi-national corporations considering transferring their production abroad, but it does play an important role in their decisions.

  • That fall of some 27% in FDI into Vietnam, is hitting hard, however.

Vietnam Finance Review says: Many foreign enterprises have canceled plans to invest in Vietnam. A Japanese motor manufacturing corporation (Minebea) has chosen Cambodia instead of Vietnam to build a plant for 5000 workers. Srithai Superware PCL (SITHSI), a Thai company specializing in tableware production, has also suspended plans for a US$5 million expansion at its plant in southern Vietnam. Instead, it will set up a subsidiary in neighboring Laos. A Company representative said that, in the short term, they have little confidence in the economic situation of Vietnam. The operation of its plant has been hampered by rising production costs after wages rose twice this year.

As a result, Vietnam’s current GDP growth of about 5%, is the lowest in Vietnam in about 10 years. During the first half of this year, foreign investors have committed to FDI of about $ 5.96 billion. New FDI only registered the total capital of US$ 4.76 billion, a sharp fall of 24.6 percent from 2011. Expansion FDI in existing projects also decreased. If present trends continue, FDI in 2012 could be about one-half of FDI in 2010.

Vietnam said it may fail to achieve its goal of attracting at least $15 billion of committed foreign direct investment this year amid a faltering global recovery and a domestic growth slowdown. Disbursement of foreign investment may fall to $10 billion this year, lower than an earlier forecast of $11 billion. Vietnam aimed to attract $15 billion to $16 billion of pledged foreign investments in 2012, according to a Dec. 30 government statement.

On a positive note, previously approved projects are getting underway. An MPI report released on June 26 showed that US$ 900 million worth of previously approved FDI has been implemented, raising the total FDI capital disbursed in the first six months of the year to US$ 5.4 billion, higher than the US$ 5.3 billion level of the same period of the last year, and equal to that of 2010.

Bridgestone tyre manufacturing project, with investment capital of US$ 574.8 million, would be kicked off on July 2, when the construction of its factory would start in Dinh Vu Industrial Zone in the sea city of Hai Phong. The first phase of the project is expected to be completed by the first half of 2014, while the second one would be completed by the first half of 2016. The factory would have the capacity of 24,700 tires per day.

Nokia, the mobile phone manufacturer, which is facing big difficulties in the global market and has to cut down 10,000 workers, has been moving ahead with the implementation of its mobile phone factory in the northern province of Bac Ninh. According to Ivan Hurt, general director of Nokia Bac Ninh mobile phone factory, everything has been done as scheduled since April 2012, when the construction began with the total disbursed capital of US$ 15 million so far. He has committed that the investor would carry out the next steps of the project in accordance with the pledged timetable, and that the factory would become operational as initially planned. The factory has been projected to be put into operation by 2013.

Samsung Electronics Vietnam committed to disburse all the registered capital of US$ 670 million for the first phase by 2015, before raising the investment capital to US$ 1.5 billion to build Samsung Complex. Meanwhile, the latest report of the company showed that the disbursement has been fulfilled three years ahead of the deadline. It is estimated that the total disbursed capital by the end of June has reached US$ 684.7 million.

  • Stop-Gap: Training Cost High in Vietnam:

Currently, Vietnam’s minimum wage (based on purchasing power parity) is only US$85 per month, and ranks the second lowest against other Asian economies, according to an assessment by the International Labor Organization (ILO). Vietnam’s monthly minimum wage is only just higher than Bangladesh, while the monthly minimum wage in China is US$173. However, according to Mr. Adam Sitkoff, Executive Director of AmCham in Hanoi, Vietnam cannot immediately take advantage of its cheap labor in comparison with neighboring China, even though the labor wage is half that of China.

This is because the low-qualified workforce means that the cost of training is higher. Training costs are one of the biggest factors in the labor costs of enterprises. Around 60 percent of workers hired by multinational companies need to be retrained for periods of 6 to 12 months before they can start work, according to a report by a Dutch educational nonprofit organization. The growth rate of labor productivity in Vietnam is said to be lower than that of other countries in the region.

Vietnam News

Publication Date : 28-12-2012

Reforming the investment environment and improving foreign investment policies are crucial cogs in Vietnam’s efforts to restructure the economy and reform growth models.

This was the message from leading government officials at the regular cabinet meeting of the government for December held on Wednesday.

The government vowed that Vietnam would work to attract investment in projects through quality human resources rather than the present model of low-cost labour.

The measures proposed are the revision of policies to enable favourable conditions for investment and reforms of business promotion activities.

Prime Minister Nguyen Tan Dung said outdated policies would have to be revised as they were no longer suitable in the current business context.

Dung also called for quick completion of the draft for the Resolution on foreign direct investment so that the Government can act as soon as possible.

The cabinet members were also in favour of support policies on poverty reduction during 2013-17 for 23 poor districts in 11 provinces nationwide.

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