Vietnam for China Diversification

As a law firm that does Vietnam legal work, we are always monitoring developments in Vietnam and our frequent visits there help give us an “on the ground” sense of the overall business climate there. We are seeing an increase in our China clients looking to diversify their Asia presence by going to Vietnam and so its importance to our law firm is increasing.

As more foreign companies look to diversify their manufacturing and product sourcing bases in Asia, Vietnam is competing with the other ASEAN countries for more foreign investment and trade. Though not without its issues, Vietnam has been generally placing higher than most of the other ASEAN countries as a potential place for foreign companies to invest.

Just since our last Vietnam visit several months ago, much has changed. Nguyen Hue Boulevard in Ho Chi Minh has been renovated, creating a beautiful pedestrian-friendly thoroughfare in the heart of District 1. We also enjoyed traveling on the new multi-lane freeway which now connects recently renovated Noi Bai airport to Hanoi. Positive developments to be sure, but not enough to gauge the current and business climate in Vietnam.

However, during this trip, the results of the latest Vietnam Provincial Competitiveness Index (PCI) came out. The PCI, now in its tenth year, is an annual collaboration of the Vietnam Chamber of Commerce and Industry (VCCI) and USAID. Simply stated, the PCI measures the business climate in Vietnam for private (domestic and foreign-invested) businesses on a province-by-province basis and is intended to measure the ease of doing business in Vietnam. In compiling its Index, it looks at factors like entry costs for business start-ups, access to land and security of business premises, the transparency of the business environment and equitable business information, the prevalence and amount of information charges, the extent of bureaucratic procedures and inspections, bias toward state, foreign or connected companies, proactive and creative provincial leadership in solving problems for businesses, availability of quality business support services, sound labor training policies, and fair and effective procedures for dispute resolution. The following are some highlights from this year’s PCI.

The PCI showed increased growth and higher business confidence compared to the previous two years, with 46.1% of domestic firms planning to expand their businesses in the next two years and only 8.3% planning to downsize their operations or close their businesses.

The Foreign Investment Survey portion of the PCI reflected an uptick in optimism among foreign-invested enterprises (“FIE”) in Vietnam. Of the 1,491 FIEs from 43 countries surveyed, 16.3% had increased their investments in existing operations and 65.1% had added new employees. More than half of the FIEs said they intend to increase the size of their operations. The increase in employment and business expansion plans were the highest recorded for FIEs in the last five years. Interestingly, upwards of 80% of FIEs said their plans to invest in Vietnam were not adversely affected by the riots which took place in several Vietnamese provinces in May 2014.

Approximately half the FIEs surveyed considered other countries before choosing Vietnam. Of the investors which considered other countries, 83% selected Vietnam over other countries and 17% were in Vietnam as part of a strategy to invest in multiple countries. Vietnam’s competitiveness, as reflected in the PCI, is generally consistent with the results of the American Chamber of Commerce’s (AmCham) ASEAN Business Outlook Survey 2015, which ranked Vietnam ahead of all of the other ASEAN countries except Indonesia. We expect Vietnam to eclipse Indonesia if and when the Trans Pacific Partnership Agreement — to which Vietnam but not Indonesia is a party — enters into force.

The PCI survey showed that FIEs considered Vietnam better than most of the other countries with which it traditionally competes on the issues of expropriation risk, policy stability and the ability of FIEs to influence government policies that affect the business environment for foreign investment in Vietnam. Vietnam is also considered to have a relatively favorable overall tax regime compared to other countries with which it is competing for foreign investment.

As was the case the last year, FIEs find Vietnam less attractive on the issues of corruption, regulatory burdens (e.g., business regulations, inspections and customs procedures), availability of quality public services, and the quality and dependability of infrastructure. Also, due to the shortage of skilled labor in Vietnam, FIEs have had to provide additional training to 20%-35% of their newly hired workers.  The cost of this has been offset somewhat by the fact that employee retention rates in Vietnam are high, with relatively few employees leaving their employers for greener pastures after having been trained.

With respect to customs procedures, Vietnam is in the process of taking steps to simplify customs and tax procedures, and FIEs, through such organizations as AmCham, are lobbying the Vietnamese government to, among other things, provide for advance rulings from customs authorities on tariffs applicable to imported goods, a step that would go a long way to making supply chain issues for FIEs more manageable.

Meanwhile, ground has broken on several new highways that will cut travel times in the southern, central and northern parts of Vietnam. It is hoped that prospective improvements to Vietnam’s Public Private Partnership regime and related legal framework, now under discussion, will help facilitate the some $200 billion in investment needed to modernize Vietnam, bridges, ports, water sanitation, power, and other infrastructure.

For more on Vietnam and its China connections, check out China vs. Vietnam For Product Sourcing and What’s Your Vietnam Strategy?