01:48 (GMT +7) - Thursday 21/09/2017

Business

Shining light

Released at: 20:00, 14/03/2017

Shining light

Photo: Viet Tuan

Samsung’s investments in Vietnam have given the country a boost in myriad ways.

by Duy Anh

Bicycles are gone, replaced by Honda scooters. Satellite dishes adorn village roofs. In Bac Ninh province in Vietnam’s north, the lives of many farmers have undergone a drastic transformation. Moving from rice paddies to production lines has given them higher wages, social security benefits like pensions and sick leave, and job security. Such is modern Bac Ninh, the country’s second-largest export center after Ho Chi Minh City, a place that, 20 years ago, was one of the poorest regions of Vietnam. Foreign investment now accounts for 60 per cent of the province’s economy and out of the 856 foreign companies that had invested a combined $11.9 billion in Bac Ninh province as at last June, more than half are related to Samsung. 

Choosing Vietnam 

In the 22 years since it arrived, Samsung has almost single-handedly helped turn Vietnam into an electronics manufacturing hub, with over $17 billion in investment. From just an ordinary TV manufacturing factory, Samsung’s plants moved into the northern provinces of Bac Ninh and Thai Nguyen and Ho Chi Minh City, manufacturing mobile phones, displays, battery and household electronic products. It is now Vietnam’s biggest exporter, shipping about $39.9 billion of electronics in 2016 and about 22.7 per cent of the country’s total shipments.  

But why Vietnam? Perhaps the biggest factor in the country’s favor is its geography. Its border with China, a military flashpoint in the past, is now a competitive advantage. No other country is closer to the manufacturing heartland of China’s south, with connections by land and by sea. Samsung represents the first stage in Vietnam’s plan to take a slice of the manufacturing mantle held by China, which is losing makers of apparel, electronics and consumer goods because of soaring wages and costs. As Chinese wages rise, that makes Vietnam the obvious substitute for companies moving to lower-cost production hubs, especially if they want to maintain links with China’s well-stocked supply chains.

A relatively young population added to Vietnam’s appeal. Many other countries also boast young workforces, but few have had as effective policies as Vietnam. Since the early 1990s, the government has been very open to international trade and investment. “Largely engaged in the textile and garment industry, which is labor-intensive, foreign investors have been pouring investment into Vietnam because of cheap labor costs, preferential incentives from the government and more than a little love for Vietnamese culture,” Mr. HyunWoo Bang, Vice President of Samsung Vietnam, told VET.

And Vietnam’s workforce is not just young but also skilled. “Compared with the 24 countries that Samsung has research and development (R&D) centers in, Vietnam’s workforce ranks extremely highly in terms of potential and skills,” Mr. Bang said. Public spending on education is about 6.3 per cent of GDP, two percentage points higher than the average for low- and middle-income countries. Though some governments spend even more, Vietnam’s outlay has been focused, aiming to boost enrolment levels and ensure minimum standards.  

Vietnam’s solid growth over the years has also given foreign companies the confidence to build their factories here. The country already has a strong, often underappreciated record. Since 1990, GDP per-capita growth has averaged nearly 6 per cent, second only to China. Thirty-one years of political and economic reforms have transformed the country from one of the poorest, with a per capita income of about $100, to lower-middle income status in just a quarter of a century, with a per capita income of about $2,100 as at the end of 2015. 

Over 70 per cent of members of the American Chamber of Commerce (AmCham) in Vietnam believe its business environment is improving, even in the face of global headwinds and economic challenges, while the European Chamber of Commerce (EuroCham) has acknowledged the new government’s efforts to further improve the business environment and increase Vietnam’s competitiveness in issuing Resolutions 19 and 35. Moreover, “since 2016, a number of new laws and regulations governing foreign investment, enterprises, real estate and foreign ownership limits have come into effect, such as the Law on Investment and Law on Enterprises,” Mr. Nguyen Van Toan, Vice Chairman of the Vietnam Association of Foreign Invested Enterprises, told VET. “Together with its own competitive advantages and improved business environment, Vietnam in general appears more attractive among the list of potential candidates,” Mr. Bang said. 

It’s beyond question that the preferential incentives, including corporate income tax (CIT) exemptions and land rental waivers, offered by the Vietnamese Government have encouraged Samsung to expand its production in the country. The government has granted both facilities a full CIT exemption for their first four years of operations and a 50 per cent CIT reduction for the next nine years. The Thai Nguyen plant will then pay 15 per cent (down from the normal 25 per cent) for the following 30 years, while the Bac Ninh plant will be subject to a 15 per cent rate for the remainder of its lifespan.

In early February, the government agreed with Samsung Display Vietnam (SDV)’s plan to pour an additional $2.5 billion into its AMOLED module plant in Bac Ninh. The provincial government earlier asked for government permission to offer tax incentives for the additional investment, which will enable the project to be classified as large-scale project, receiving a 10 per cent CIT reduction for the following 30 years. This has once again raised concerns about whether Vietnam has been over-generous to foreign investors.

Strategic weapon

Among its potential suitors, Vietnam did not offer Samsung the most incentives. “We were offered a 100 per cent CIT exemption for 25 years elsewhere, and also a complete value-added-tax (VAT) exemption from some countries,” Mr. Bang said, adding that for electronics companies like Samsung, a VAT exemption is even more beneficial than a CIT exemption.

The FDI sector continues to lift Vietnam’s profile and the South Korean company has been a huge part of that. But Samsung by itself would not be enough for the country to achieve its targets, as it also needs other FDI enterprises to arrive before it is recognized as a modern industrialized country by 2020. The government understands this, and is luring as much investment as possible, not in the low technology sector but in the high technology sector.

This will be a crucial task for the government, because Vietnam is at risk of losing its own competitive advantages. Demographic transition, characterized by population decline and aging, is taking place in Asia-Pacific countries at an unprecedented rate, according to the United Nations Development Programme (UNDP). Vietnam’s “golden population structure” has been estimated to last about 30 years, from 2010 to 2040, but its population is aging rapidly due to lower fertility and mortality rates. 

Compared with other countries in the region, Vietnam’s labor costs are lower than China’s but higher than other Southeast Asian countries, including Myanmar, Bangladesh, and India. “When the aging problem kicks in, which also means there will be fewer Vietnamese workers, India, with a relatively large and cheap workforce, will be Vietnam’s main competitor in luring foreign investment,” Mr. Bang said, adding that the Vietnamese Government already considers increasing labor costs as one of its major challenges in socioeconomic development.

Samsung’s contribution to Vietnam is profoundly welcomed by the government, but it’s anxious about any economic dependency. Last year, the fallout from Samsung’s dramatic move to end production of its Galaxy Note 7 smartphone hurt an economy already hit by drought and lower oil prices. The recall of 2.5 million smartphones after complaints of exploding batteries contributed to a $1.1 billion decline in exports in September, according to the General Statistics Office (GSO). 

Although Vietnam has benefited from foreign investment, only 36 per cent of its enterprises are integrated into export industries, compared with nearly 60 per cent in Malaysia and Thailand, according to the Asian Development Bank (ADB). In some cases, Vietnam has gone too high-end. Much has been made of Samsung’s plans to invest $3 billion in mobile phone production in the country, but domestic suppliers provide it with little except plastic wrapping. Mr. Vu Thanh Tu Anh, Director of the Fulbright Economics Teaching Program in Ho Chi Minh City, said the government needs to help establish supply chains, for example training companies in textile production to support the apparel sector.

But Vietnam has its own unique strengths. The 16 foreign trade agreements (FTAs) it is party to are vital, especially given that anti-globalization sentiment has already derailed the TPP. The government announced ten special preferential import tariff rates last September, while the Ministry of Finance has implemented or is creating roadmaps to meet import tariff commitments. Vietnam also has cut more than 8,500, or nearly 90 per cent, of its tariff lines on imports from South Korea. The completed negotiations with the EU and ongoing negotiations for the Regional Comprehensive Economic Partnership (RCEP) are the two that foreign companies are following most closely. “For FDI companies like Samsung, who have 97 per cent of their revenues coming from exports, commitments the Vietnamese Government makes or has made with other countries are extremely important, because foreign companies will either be greatly benefited by or suffer from import risks,” Mr. Bang said. “Still, the government has done a great job, and FTAs are Vietnam’s strategic weapon, making it somewhere foreign companies must look to pour investment into.” 

The partnership

During his official visit to the US in 2015, Party General Secretary Nguyen Phu Trong asked it to drop its designation of Vietnam as a “non-market” economy before 2018, when the label is due to expire. A switch to a “market-economy” designation would help Vietnamese firms fight anti-dumping lawsuits. Vietnam has already secured market economy status with other countries, and that is also very important, Mr. Bang said, “because scoring the new designation would also lure new foreign investments to Vietnam.” 

On February 12, Prime Minister Nguyen Xuan Phuc paid a visit to the Samsung complex at the Yen Phong Industrial Park in Bac Ninh, where he expressed a desire for Samsung to allow more domestic companies to join its production chain. Local input at Samsung currently stands at 45 per cent. “Vietnam in general and Bac Ninh province in particular will create a favorable environment for Samsung to expand its business in the country, including ensuring political stability and sufficient labor resources,” he said.

For its part, the South Korean company aims to increase its employee numbers from the current 130,000 to 150,000 by the end of this year. “Samsung’s workers with a high school certificate have seen their annual incomes go up from about $1,000 in 2008 to about $5,000 now, which is nearly three times higher than the country’s average,” said Mr. Bang. Incomes earned by Samsung’s workers in Bac Ninh are then spent in the province. “This has helped to bolster provincial socioeconomic development and, for me, this is the most important corporate social responsibility activity Samsung has done in Vietnam,” he added.

Despite rising labor costs, there are still grounds for cautious optimism. “More than labor costs, which are unavoidably increasing, it is the workforce that will matter in the time to come,” Mr. Bang said. This means Vietnam should have new tax policies and a new labor code to maintain the competitiveness of its workforce. Besides, for Vietnam not to lose its appeal, “the government should decide to focus on specific industries,” Mr. Bang believes. “Labor cost incentives do not work best for high technology investment projects, while CIT exemptions may not be as beneficial for textiles and garments.” 

Whether Samsung would choose Vietnam again if it could go back in time is like asking “if I would marry my wife again,” he explained. There is perhaps no clear answer, but the future may well decide the fate of what has, for both sides, been a fruitful partnership. 

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