China Is The Next China, Now. Vietnam May Be The Next China Someday.

Vietnam lawyers

It seems that just about every emerging market country gets at least some mention as “the next China.” The other BRICS, India, Brazil and Russia are often mentioned. Poland and Turkey and Malaysia also often come up. But the name that seems to come up most often is Vietnam.

Since 1990, Vietnam has had the second fastest growing economy in Asia (and thus one of the fastest growing in the world), second only to China. The Washington Post  ran an article touting the burgeoning economy and rapid changes underway in Vietnam.  About a year ago Toronto’s Globe & Mail ran a story asking, “Is Vietnam Destined to Become the Next China?” [link no longer exists] and answered its own question with a “yes.”  The New York Times recently did an article [link no longer exists] describing how Vietnam is moving from the rice paddies to the factories and rapidly arriving as “a regional economic power.” In a story entitled, “Vietnam Revs Up,” [link no longer exists] Newsweek describes Vietnam as “cheaper than China” and as “challenging China in light manufacturing.”

Though Vietnam certainly does offer many opportunities, my vote for “the next China” is China itself.  At least for the next couple of years. When people talk about the next China, they are usually talking about duplicating the successes of Shanghai, Shenzhen and Beijing. In this context, I think the next China is going to be in the so-called Chinese second tier cities like Tianjin, Qingdao, Dalian, Shenyang and Chengdu. These cities all offer excellent infrastructure, decent to good living conditions, and costs and wage rates substantially less than China’s first tier cities.  Perhaps most importantly, these cities uniquely benefit from what has already occurred in China due to Shanghai, Shenzhen and Beijing.

I agree with this International Herald Tribune (IHT) article which posits that there likely will not be a next China for a very long time:

Countries are like people – they also like to try out the latest get-rich-quick scheme. The flavor of the moment is the “China model,” whereby a controlling government carefully injects capitalism into its economy to spur exports and foreign investment. Yet few, perhaps none, of the countries who hope to emulate China’s success have a real chance of doing so.
In the past couple of years, the China model has apparently become the favorite of authoritarian regimes looking to enrich themselves while assuaging any restless citizens with the prospect of riches. Iran, Syria and Vietnam jumped on the bandwagon early on. Lately, officials and academics from democracies like Brazil, South Africa and even India have expressed their admiration for the Chinese miracle.

The IHT states that “many different conditions led to China’s success” and “none of the countries listed above have them in the same combination.”  The article goes on to list various factors leading to China’s rise and then explains how these are lacking elsewhere:

At square one, consider China’s political stability. It is not involved in any particularly active conflicts with its neighbors, and any disturbances in its region – the Maoist revolt in Nepal, for example – are unlikely to unsettle its economy. Syria can’t claim this sort of calm, given its uneasy relations with Lebanon, Iraq and Israel. Iran’s nuclear program and alleged support for terrorist groups has made it a target for economic sanctions and political ill will, at least in the United States.

China’s political system also gives the government enough control to pave the way for foreign investors – if it has the inclination. China may still be dogged by corruption, but multinationals working in close partnership with Beijing can see obstacles posed by petty officials swept away. In Brazil, for example, the central government may have less power to impose its will.

What draws foreign investors to China depends on whether they want to tap its resources or its consumer market. Both are enticing. China’s massive urbanization wave continually supplies low-wage workers for manufacturing jobs and some service positions. South Africa’s HIV/AIDS problem, which has begun to shrink its population, raises big questions about the replenishment of its prime-age work force.

In Vietnam, multinationals might be tempted to go elsewhere once wages start to rise. But in China, millions of rural migrants are willing to pick up the slack every year.

The size of China’s businesses, underpinned by this stream of labor, gives them price-setting power in world markets for textiles, small manufactures and other products. The extent of this power can be bewildering. Recently, when the European Union decided to negotiate new quotas for Chinese textiles, public sighs of relief came from as far away as Mauritius. Could Iran tilt the globe in the same way?

The answer is probably not, and not just because of Iran’s size. China also enjoys good, although sometimes strained, trade relations with the United States – the world’s most valuable market for exports – and the European Union. While Vietnam is making slow progress toward freer trade with the United States, Iran and Syria are in Congress’s doghouse. On its own, Brazil has balked at opening markets with the United States through the increasingly dead-looking Free Trade Agreement of the Americas.

Then there is China’s consumer market. Of all the countries interested in the China model, only India can rival its size. Big Western manufacturers have begun to create entire brands especially for the burgeoning middle classes in both these countries. The new lines are steps up the ladder to the top-of-the-line televisions, dishwashers and cars sold in wealthier nations. It is hard to imagine Syria, with its 18 million people, eliciting the same sort of effort.

The IHT sees Vietnam as the most likely candidate “for China-like success:”

Vietnam may come the closest, as a fairly large country that is reasonably stable, with a controlling government and decent trade relations. Still, its ability to follow China’s path may be short-lived, because of its ongoing problems with corruption and, even at 84 million, its smaller size.

Brazil is bigger and more sophisticated, but, lest we forget, its per capita income is already about 45 percent higher than China’s, after adjusting for prices. India is still poorer than China, and nearly as big. But like Brazil, it is a democracy where the government may have a difficult time sticking to a fixed economic program for a few decades.

The IHT does not see any country as being able to stick with its economic policies the way China has over the last few decades:

Those decades, in fact, are the unmentioned, not-so-secret ingredient. The China model may smack of get-rich-quick, but it’s really get-rich-slow. Deng Xiaoping began to open China’s economy in the late 1970s. He maintained his power at least until 1990, perhaps later – an amazing feat of continuity. China has become the darling of global business only in the past decade or so. Can any of the other hopefuls be as patient?

I too attribute China’s success to its (relative) stability, its willingness to invest in infrastructure, and its huge population and I too do not see any country right now with all three of these critically important factors.  Though there are emerging market countries with stable governments, I see infrastructure and size as distinguishing China – not to mention that for places like Shenyang and Chengdu the “Chinese model” is their model.  It is an easy blueprint for both the public and private sectors.

Like Vietnam, other nations come close. India and, to a lesser extent, Russia have size, but they do not have infrastructure. I have spent much time in Russia and I can attest that outside of Moscow and St. Petersburg, its infrastructure is, for the most part, a disgrace.  Its airports, roads, internet and telephone system are sub-par. I hear India’s infrastructure is terrible as well.  Russia’s population is declining and crime there is rampant. I am convinced both Russia and India will continue to thrive economically, but I am also convinced neither will become the next China.

Again, I am a huge believer in Vietnam’s potential. Strong growth is predicted and it is working  towards WTO membership.  But right now, Vietnam’s physical and governmental infrastructure, though improving, is just not nearly as advanced as China’s nor do I see it becoming so during the next decade. Because of this, a large number of companies either cannot or will not consider Vietnam for their outsourcing.  Not yet, anyway.

The International lawyers at my law firm find doing business in Vietnam to in many ways be easier than doing business in China, though in. some ways more difficult. Time will tell.

What do you think?

24 responses to “China Is The Next China, Now. Vietnam May Be The Next China Someday.”

  1. Thanks for the post.
    In 2002, I spent a full month in Vietnam as a tourist and had a chance to visit much of the country, many parts of which are breathtaking. Yet, my trip did not take me into corporate boardrooms, so please take whatever I say with a large grain of salt.
    For what it’s worth, I would agree that Vietnam, while a huge exporter of coffee (was second in the world last I checked) and rice, and a country that has, at least in the South, embraced market economics, will need a great many years to develop to its full potential. I remember talking to a Belgium foreign service worker who went on for hours (it was a boat trip) on how literally every service for one’s home (electricity, heat, etc..) was subject to additional charges and so on.
    For one thing, as mentioned above, there is very little transparency in the government or in business. Secondly, at least when I was there, there was a lot of talk of how Hanoi was still stifling the South in terms of economic activity. Abysmal infrastructure, a poor health system.
    I think in the short term, new manufacturing opportunities caused by rising wages in China will help. I still remember a few years ago overhearing the words of an aid worker in Cambodia who said, “Vietnam is getting to its feet; Cambodia is still on its knees.” It may be this fact which accounts for why the Vietnamese themselves are often cited as being the most positive about their future prospects.

  2. Doug —
    Thanks for checking in. You mention “new manufacturing opportunities” caused by rising wages in China, but if you were a manufacturer of anything but something like party trinkets, would you trade the reliability of China (electricity, roads, ports, telephones, internet, hotels) to save $40 a month per person on wages?

  3. Well, I wouldn’t, but you hear a lot of noise out of both domestic and foreign factory owners that a number of factors (increased demand for wages, decreased supply of low-skilled laborers, high energy costs, and fluctuating currency) is making people consider these places. Of course, the reality is that Vietnam and other neighboring S.E. Asian economies have been unable to get their exports off the ground because of the flood of cheap Chinese products.

  4. Doug —
    Well that’s the thing, there is a lot of complaining and a lot of talk, but I think most of it is being done to try to keep things in line in China, not because the companies are really planning to move. Sort of like when big time sports teams start complaining about their stadium and throwing out names of cities that might be better.

  5. The great irony is that at least in the early stages of a country’s economic development, authoritarian regimes (communist or anti-communist) have more consistently business-friendly policies to create investment. Democratic governments usually are not able to deliver the consistency required, since they have to satisfy the needs of different constituencies and their interests.
    The position of the Chinese Communist Party is that it is the only organization which can consistently deliver economic growth for the Chinese people, and stability for the world. So far, they have proven right.
    In Russia, with the pro-Russian business policies of the Putin administration, Russia is beginning to get its act together, and is now accruing large foreign currency reserves because of that country’s huge energy reserves.
    As the CCP’s slogan says: “Stable growth takes precedence over everything else!”
    The question is if they can tackle the issues of resource waste and corruption at the same time without an external system of checks and balances.

  6. We have a couple of suppliers there in low tech items.. The answer to saving 40USD a month is that there are those willing and they are…
    If Chengdu is 5-8 years behind Shanghai, Hanoi is 15… and that is fine by some and too risky for others
    The success of Vietnam will not be that the same companies who sent billions to China will look to Vietnam, but that the Chinese suppliers they invested in will.
    American companies have just gone through 15 years of working out China, and they are not going to be inclined to revisit many of those pains if there is not the potential of tapping a large market (as mentioned before).
    However, Vietnam (like many other Asian countries) has an ethnic Chinese minority there that is economically strong. In addition, mainlanders who operated 15-20 years ago in an emerging China, will feel right at home as they traverse the Vietnamese cultural and political landscape to get things done.

  7. Rich —
    Thanks for checking in. I like your points. I would add that not only will those who know China “feel right at home as they traverse the Vietnamese cultural and political landscape to get things done,” they will also feel right at home with Vietnam’s legal landscape as well because so many of Vietnam’s newer business laws are modelled after China’s.

  8. Paul —
    Thanks for checking in. Interesting.
    I do not agree with your assessment of Russia. Russia is thriving now not becuase of any governmental genius but because the price of oil is north of $75 a barrel.

  9. The Next China
    Harris has admitted that he looks at China through rose colored glasses, but his analysis of why other countries will not be able to duplicate China’s success anytime in the near future is well worth reading.

  10. Thanks for mentioning my blog, Antidote to Burnout, about life (and business, too) in Viet Nam. I find that when I post about life and sociology in Viet Nam, I get feedback comments. When I post about design or development, I get no feedback. So I tend to feed my constituency what they respond to. I think it is fair to say that Viet Nam is only at the beginning of an international growth spurt, and the lack of business or law blogs reflects that. I would love to come across a good law blog here in HCMC.
    I made several business trips to Shanghai in the early 90s as an architect, trying to negotiate contracts. The conditions there at that time for business are much less than they are now in Viet Nam at this point. But I think it fair at this time to peg Viet Nam about ten years behind coastal China.
    One important characteristic favoring Viet Nam’s economy over China is the unfettered flow of information. Whereas in China, my Typepad blog is blocked, I have found no such restrictions on the internet or search for information in Viet Nam. The governent seems to be trying hard to get English-language websites up for their ministries with laws, procedures, and forms.
    — Mel

  11. Mel —
    Thanks for checking in. It is great to get the perspective of someone familiar with both places.
    I know what you are saying about feeding your constituency as we see the same thing here. I will do a quick post on a post that talks about why China fell behind during the industrial revolution and get 35 comments. Then we will do an in depth post on the benefits of forming a WFOE v. a joint venture and get nary a post. Yet, down the road, the WFOE v. JV joint venture article has been read hundreds of times by those who came across it using the search engines, as opposed to the Chinese history post being discovered in that manner less than ten times. The Chinese history post is quite a bit newer, but it goes beyond that. I just think that a factual business or law post is just not as “comment generating” as a “deep-think” history/social commmentary/economics post.
    Are you sure your blog is blocked in China? That surprises me. My blog is also typepad and one of the reasons I got typepad is that China generally does not block typepad blogs without a reason. I find it very interesting that you talk about the unfettered flow of information in Vietnam and I would love to hear more about that. Do you anticipate Vietnam’s “new” government going even farther with this?

  12. Emerging Markets: Vietnam as the Next China.
    Is Vietnam the “next Asian miracle”? Asia Business Law has a great post inspired by Dan Harris’s earlier and equally fine piece comparing Vietnam to China at his China Law Blog….

  13. I’ve been doing work on the vietnamese economy for 4 weeks now. All the data points to one turning point in the vietnam economy that did not happen in the Chinese economy; thats the liberalization of markets in 1986. If you look at a graph of GDP growth for Vietnam weighted in the current value of US dollars there is increased market stabilization resulting from the change in government. China’s communist regime is working effectively for the time being, however we have seen numerous instances of communism failing after attracting a lot of attention about their growth. I really don’t think China will be an exception. The main supporting argument for this project comes from the nature of authoritarian regimes. Growth will plateau at some point due to the supression of a nations citizens. At least growth will slow in relative to a nation whose citizens creativity is not stiffled. Vietnam has recently began its run of growth due to industrialization. WHile China is experiencing the same thing the differance between the two countries is that when industrial growth ends, Vietnam will start to see an increase in creativity growth from its citizens, something China cannot compete with. In short Vietnam is the next “China”

  14. I’m saying socialism has historically worked better than Communism. State planned economy can work if you can get a government elected that understands how economies work. Great Britian is a great example. With the exception of Cuba communist economies have failed everywhere. Maybe not in under their direct rule but communist governments put their economies in such a bad state that even if they liberalize in the future, economy eventually crashes. (Russia is a great example, some of the south american countries provide a similar yet differant support for the argument.) While Vietnam is still authoritian, it is signifitly less controlling than China. Most of Eastern Asia that converted to socialism from Communism has enjoyed wild success as far as unreplicatable growth. (Working under the assumption that the East Asian Economic crisis was fueled primarily by contagion effects of the tequila crisis and similiar South American Developing economies decline).
    What i’m saying is that Socialism will go a lot further than communism will ever be able to grow to expanding growth through human capital innovation.

  15. Jon the Economist —
    Thanks for checking back in. I hardly know where to begin, so I will start where you did.
    1. I assume when you say socialism has worked better than communism you are referring to economic growth. I am not sure how exactly to define what is or was a socialist country versus a communist country, but I still suspect you are probably right on this.
    2. I disagree that a “state planned economy can work if you can get a government elected that understands how economies work. I am of the view that the invisible hand works better than any government ever could. You say “Great Britian is a great example.” Great example of what? Seems to me GB’s economy was in the doldrums until Margaret Thatcher.
    3. You then say, “with the exception of Cuba communist economies have failed everywhere.” Are you kidding? Cuba’s economy has been a complete failure and it probably would have collapsed had it not been susidized by the Soviet Union and now by Hugo Chavez.
    4. You then say that “communist governments put their economies in such a bad state that even if they liberalize in the future, economy eventually crashes. (Russia is a great example, some of the south american countries provide a similar yet differant support for the argument.)” Again, I have to ask you what you are talking about? What South American countries? Russia’s economy is thriving right now, albeit due mostly to oil. I am not aware of any Eastern European economy that could be said to have collapsed post-Communism. Most are doing well, some are doing exceptionally well.
    5. I disagree that Vietnam “is signifitly less controlling than China.” I would argue that when it comes to the economy, it is actually more controlling than China.
    6. You say “most of Eastern Asia that converted to socialism from Communism has enjoyed wild success as far as unreplicatable growth. What countries are you talking about?
    7. You then say “Socialism will go a lot further than communism will ever be able to grow to expanding growth through human capital innovation.” Why not go even further with capitalism?

  16. I wanted take this time to thank you for the discussion. It’s always enlightening to debate theory. I’ve numbered my responses in a similar fasion towards you assertions so you can follow each argument.
    2. Great Britian is a great example of a socialist (state planned) economy. Adam Smith used the phrase “invisible hand” once in the entire Wealth of Nations manuscript to emphasize the idea of pursuit of self interest. Great Britain is far from pure capitalist (so is the US for that matter). The point being that socialism in conjunction with a state “regulated” (an attempt to use a better descriptive term) economy will function better with a parliament or any other decision making body if they have concrete economic experience instead of politics driving their decisions.
    I whole heartedly agree that Capitalism is a much stronger source of growth, and would love to see significantly less government regulation. I think the eventual trend of most countries is away from state planned governments towards free market democracy, but that’s a political theory not economic one. That’s a little astray from my expertise, but see below for my full response.
    3. I was merely stating the Communist Cuba was the only communist state that did not have a complete economic breakdown. You are right that it doesn’t function efficiently, I agree, I’m arguing against communism in favor of more liberal market: socialism.
    4. The Russian Economy suffered an extreme currency crisis and economic failure in the late 1990’s. (1997-8 I believe). That is why I make the statement that policy lag can affect even a liberalized economy. I would argue that an economy cannot thrive due to one commodity. Dutch Disease has proven that point in the late 70’s and 80’s. If you want you can disregard South American economies as examples, it is a little bit of a stretch to apply them under this scenario. I was attempting to prove that economies like Argentina (hyperinflation) and Brazil (severe inflation + inconsistent growth) find that even though they moved from state planned economies they still are unable to control their economies. (I realize that that is more easily attributed to the Washington Consensus, but I think it applies generally to state planned economies.
    5. I know very little about China’s political processes. You may be right, but upon speaking with Vietnam trade officials the only requirement for creation of a business in Vietnam is registration with the Ministry of Finance. More complicated businesses may require more steps but general the GVN is attempting to promote as much growth as possible through liberalized means.
    6. Most countries that converted to Socialism are considered to be the East Asian Tigers. These include the Philippines, Thailand, Hong Kong, Taiwan, etc. These countries pursued infant industry growth strategies (effectively using protectionism to grow domestic industry to enhance growth.)
    7. This is a political statement more than a economic one. But generally socialism allows more freedoms that communions would. On a spectrum you would classify communism as the most state controlled government, and democracy as the least, with socialism being on the middle but leaning towards communism. Socialist countries tend not to suppress the domestic masses; where as communism will deny rights and rise the “iron curtain” to hide their citizens from the world. States transition from step to step gradually. I cannot think of a state that went from Communism straight to democracy. Thus Vietnam is taking steps towards liberalized markets by graduating to Socialism in the mid 1980’s. They will grow even more if they continue to transition to democracy in the future where they can effectively liberalize more of their market structure, but that’s speculation, not fact. I’m not questioning capitalism: just communism versus socialism.

  17. Jon —
    Thanks for checking back in. I see where you are coming from and I pretty much agree with you. I do see Vietnam opening up its economy, particularly for foreign investment, and I see it continuing to thrive. At the same time, however, many of its big economic decisions are still made by the state and the state is making them based more on politics than economics. The best example of this is the decision to locate their new oil refinery in the center of the country for political reasons, rather than in Saigon (or even Hanoi) which would have made better economic sense.

  18. Perhaps this is inappropriate but any auto trend predictions for Vietnam would be very welcome and much appreciated.

  19. Mr. Frith —
    Thanks for checking in. I do not find your request at all “inappropriate,” but I do find it beyond my abilities. I just do not know enough about the Vietnamese consumer to make any predictions about the future of the auto there. Here’s what I can say. First, I find it very interesting how the motorbike is so widely accepted as a means of transportation there. Just about everyone has one and uses one. With the cost of gas being what it is today, I would think the transition to more cars will be slow. I do not know whether the
    Vietnamese government subsidizes gas prices or not. The roads there are not bad. I would think there have been studies done on correlating per capita GDP and auto purchases and I would check with those and see where Vietnam fits.

  20. The Next China
    Comparing Vietnam to China Dan Harris of China Law Blog did an excellent post discussing which country will be the next China, and his conclusion was China. Harris has admitted that he looks at China through rose colored glasses, but his analysis of wh…

  21. The Pros And Cons Of China’s Interior
    Interesting Reuters article by Jason Subler, entitled Firms embark on Long March to China’s interior, focusing on manufacturers setting up shop in Ji’an (h/t to All Roads Lead To China). The article is quite short, but in its two (online pages) it nice…

  22. The Pros And Cons Of China’s Interior
    Interesting Reuters article by Jason Subler, entitled "Firms embark on Long March to China’s interior, focusing on manufacturers setting up shop in Ji’an (h/t to All Roads Lead To China).  The article is quite short, but in its two (online pa…

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