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

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?