12:50 (GMT +7) - Tuesday 30/05/2017

Business

Sum of its parts

Released at: 08:00, 19/03/2017

Sum of its parts

Photo: Viet Tuan

No one element of an investment attraction policy determines success.

by Mr. Dang Thanh Son / Special Counsel at Baker & McKenzie Vietnam

With Samsung reportedly planning to invest a further $2.5 billion in Vietnam, my view is that the grant requested by Samsung Display Vietnam Limited (SDV) regarding the investment in its factory expansion is entirely understandable from a business perspective. The fact is that any investor seeks the highest level of incentives for their investment project.
From a legal perspective, the regulations on investment incentives, especially tax incentives and those applicable to expansion investment projects, are contained in the Law on Corporate Income Tax (CIT). If SDV’s expansion project satisfies the conditions for tax incentives in accordance with the Law on CIT, it is my opinion that it is entitled to enjoy such incentives, because it is a right of an enterprise to enjoy investment incentives. In this case, licensing authorities are responsible for approving and amending the investment registration certificate to record the tax incentives applied to the expansion investment.

From an economic perspective, Vietnam is an attractive market for manufacturers and retailers of handsets, with a population of approximately 93 million people and 128 million mobile phone numbers. According to figures from the government, GDP grew 6.2 per cent in 2016. Vietnam also has among the cheapest labor costs in the world. The Economist Intelligence Unit (EIU) reports that production labor costs in China are now higher than in Vietnam. To my knowledge, in Vietnam the salary in production is about $3.6 per hour, whereas it is $4.79 per hour in China. The average price of a smartphone in the Vietnamese market is now about $250-270.

Given the demographic structure, labor costs, mobile penetration rate, and GDP growth, my opinion is that SDV’s decision to expand its factories is understandable because, in business, being aware of market trends and the potential impact on your business is a key element when deciding upon an investment strategy.

At the moment, Vietnam has certain competitive advantages when it comes to attracting FDI, including: (i) enterprise income tax incentives and exemptions policies; (ii) cheap land leases (for example: the land lease price for 1 sq m in an industrial zone is approximately $0.14 per month); and (iii) lower primary labor salaries than the average in other countries in the region (for example: the primary labor salary in Ho Chi Minh City is now about $173 per month, whereas the figure for Beijing is $522), with 69 per cent of the country’s population made up of people of working age. 

Vietnam is also one of the more proactive countries in Southeast Asia regarding intensive international integration through free trade agreements (FTAs) and the WTO. Moreover, Vietnam’s competitive advantages include its favorable climate, stable business environment, and maintenance of among the most impressive GDP growth in the region (at 6.2 per cent in 2016).
Over the past two decades, Vietnam has always been one of the leading countries in the region regarding the percentage of the population made up of people of working age as well as its cheap labor sources. However, in my opinion, these advantages can only last for the next five years. Over the long term, the development of science and technology, by utilizing robotics in manufacturing, management and distribution, has considerably lowered the demand for labor at factories.

According to figures from the International Labor Organization (ILO), in the next 20 years, 56 per cent of the workforce in five Southeast Asian countries, including Vietnam, are at risk of losing their jobs because of robotics, especially in the manufacturing of leather shoes and garments and the assembly and manufacturing of motor cars.

Vietnam currently lacks large numbers of highly-trained workers. At the same time, educational quality in secondary and high schools is witnessing certain improvements, with the involvement of private investors and FDI. In contrast, this change is happening very slowly at vocational schools and universities. Relationships and coordination between universities and research institutes with enterprises has not been uniformly established. Vietnam needs to develop more school-based enterprises and R&D centers, which have been implemented by many domestic enterprises, such as Viettel and FPT.

Currently, the quality of the workforce is a pressing issue in the country. I am of the view that if the government does not have a realistic action plan, Vietnam will remain purely a processing country and may even have to import labor. If that happens, young Vietnamese will be jobless in their own country. 

Some FIEs and potential foreign investors are said to abuse Vietnam’s low tax rates and tax incentives as a decisive investment tool when they look at Vietnam, but I think that this statement is unpersuasive. To commence an investment project, the investor must consider many factors, among which are tax rates and tax incentives. The investor must also consider the relevant legal framework relating to the investment project, the size of the market, the cost of materials, labor costs, political stability, and the infrastructure relating to production and distribution. There would be no profit for an enterprise if all of these issues are not properly dealt with and the tax issue would then be considered insignificant. Therefore, tax is a necessary condition, but tax alone is not adequate as a means of attracting investors to carry out investments.

For the next five years or more, Vietnam will basically retain its competitive advantages, such as tax incentive policies and low land rentals and labor costs. However, in the long run, to attract a heavier flow of FDI it needs to focus on resolving the following issues.

Firstly, the government, ministries and departments need to re-examine the entirety of the country’s legislation, especially legislation and regulations relating to enterprises and investment, to shorten the licensing period for investors, limit baby-licenses, limit the overlap between ministries and departments in the granting of investment registration certificates, and make transparent the granting of investment licenses.

Secondly, the government needs to continue maintaining attractive tax incentives to better attract investments from investors in the technology sector into Vietnam. There should be cooperation between Vietnamese universities and manufacturing and technology enterprises to: (i) train and produce a workforce of higher quality to better serve the needs of integration; (ii) focus on training and producing a highly-skilled workforce and highly-qualified management; and (iii) concentrate Vietnam’s education systems on foreign language training (for e.g. English) and IT and soft skills, to facilitate young Vietnamese in their global integration.

Thirdly, the government needs to continue to prioritize investing and upgrading the core infrastructure needed for manufacturing, such as seaports, railways, roads and highways, information technology infrastructure, power transmission, and airports, to improve connectivity between economic areas and Vietnam and neighboring countries.
Fourthly, the government needs to have a policy of encouraging support industries to ensure that FDI enterprises can approach quality services in support industries instead of having to use foreign sources, which increase the cost of production. Domestic enterprises also need to self-renovate in management skills and leadership, creating better relationships and building trust with FDI enterprises.

Fifthly, tax and customs authorities need to continue improving their operational methods and applying IT in the entirety of tax and customs declaration procedures, to help enterprises shorten the time spent on such procedures.

Sixthly. domestic investment promotion authorities and Vietnamese embassies abroad need to better carry out their roles as promoters of Vietnam, introducing the country to foreign investors and proactively approaching enterprises rather than waiting for investors to approach them. Correspondence between the heads of government and FDI enterprises need to happen more frequently, so that the government is updated with feedback from enterprises and can facilitate solutions for their concerns when necessary.

Attracting FDI is one of the key issues that require attention from the government. However, other issues of no less importance are the question of what Vietnamese enterprises can learn from FDI enterprises, the capacity for interaction between domestic and FDI enterprises to create added value for the country, and building a business culture and connecting enterprises with society, which also requires attention from the government and domestic enterprises. We have the opportunity, but whether we can seize and maintain it depends solely on our actions.

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