INVESTING IN VIETNAMA Guide for Foreign Investments

IBUS 462Environment of World Business

Presented to:Nasserzadeh Seyed Mohammad Reza

Presented by:Baptiste Attar 27268556Malak Daghi 27463375

Pauline Faivre 26964273Bruno Moureaux 26252826

November 23rd, 2015

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Table of ContentsCountry Overview...........................................................................................................................4

Geography....................................................................................................................................4Demographic Overview...............................................................................................................4Economy......................................................................................................................................4

Political, Legal, and Cultural Environment.....................................................................................5Political Environment..................................................................................................................6Regulatory Environment..............................................................................................................7Cultural Environment..................................................................................................................8

Niall Ferguson’s Six Mainsprings of Global Power........................................................................9Competition: Average..................................................................................................................9Science: Excellent......................................................................................................................10Property Rights: Average..........................................................................................................11Medicine: Excellent...................................................................................................................12Consumer Society: Excellent.....................................................................................................12The Work Ethic: Good...............................................................................................................13

Strengths and Weaknesses.............................................................................................................14Strengths....................................................................................................................................14Weaknesses................................................................................................................................15

Ethical Issues.................................................................................................................................16Corruption..................................................................................................................................16Integrate the National Supply Chain..........................................................................................16Restricted Freedom of Speech...................................................................................................17SOE’s – State-Owned Enterprises.............................................................................................17

Major Industries.............................................................................................................................17Prime Investment Industries..........................................................................................................19Examples of Foreign Investment Success Stories.........................................................................20

Sun Life.....................................................................................................................................20Apple..........................................................................................................................................21Ford............................................................................................................................................21

Country’s Main Competitors.........................................................................................................22China..........................................................................................................................................22Thailand.....................................................................................................................................23Indonesia....................................................................................................................................23

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Potential Risks and Rewards for Investors....................................................................................24Risks..........................................................................................................................................24Rewards.....................................................................................................................................26

Three surprising facts about Vietnam............................................................................................27Investments proposed....................................................................................................................27Proposed Next Steps......................................................................................................................28Works Cited...................................................................................................................................29

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Country Overview

Before discussing Vietnam’s current foreign investment implications, it is important to look at an

overview of the country.

Geography

Vietnam is located in Southeast Asia sharing borders with Cambodia, Laos and China. Some of

the natural resources that can be found are phosphates, coal, manganese, offshore oil, gas

deposits and hydropower (The World Factbook, 2015). Vietnam is known for holding an ideal

geographical location as it is an access point to China and in the center of Asia pacific making it

the perfect bridge between Northeast Asia and Southeast Asia (When Vietnam Replaces China

as ‘’a promised land’’, 2015).

Demographic Overview

Vietnam’s population accounts for 94 348 335 people and has a median age of 29.6 years, with

only 5.82% of the population that is 65 years and over (The World Factbook, 2015). This

makes Vietnam a country with a relatively younger population in comparison to others, which

means that not only there is available labor, but also a workforce with more innovative minds.

Moreover, education rates have increased in the past 20 years which was translated into

significant economic growth, living standards and a higher number of skilled workers (An

Overview of Population and Development in Vietnam, 2015).

Economy

Vietnam operates under a communist system with many state-owned companies and little

economic freedom, but the trend has dramatically changed in the past 10 years as the country

strives to become a developed nation. This change has caused a shift in many industries, notably

the agriculture industry which once represented 25% of the economic share, in 2014, this

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percentage dropped to 18% (The World Factbook, 2015). Also, the number of state-owned

companies now only represents 40% of the GDP (The World Factbook, 2015). Furthermore, the

government has doubled its efforts to prove its determination to improve Vietnam’s economy.

Following years of negotiations, Vietnam has finally agreed to join the World Trade

Organization in 2007 which contributed to the promotion of more export-driven firms (Vietnam

Profile, 2015). Today, Vietnam represents a huge market for foreign investors as young, middle

class consumers are seeking electronic and luxury goods (Vietnam Profile, 2015). A free trade

agreement was negotiated in 2015 as Vietnam joined the 12-nation Trans-Pacific Partnership

((The World Factbook, 2015). Vietnam’s national debt reached 89 697 million dollars which

means that it represents 52.59% of its GDP (Vietnam National Debt, 2013). As for its capita per

debt, it is evaluated to be a 1000$ per inhabitant (Vietnam National Debt, 2013). Given that the

per capita debt has increased comparatively to the previous year, which was at 852$ per

inhabitant (Vietnam National Debt, 2013). Vietnam will most probably have to raise the yield on

the newly issued securities in order to attract new investors. Vietnam is known to struggle with

some debt problems that surfaced following the 2000s real estate asset bubble caused by state-

owned banks (Rosen, 2014). However, the government has been trying to solve this issue as it

could slow down economic growth; in fact, it is considering some new laws that will force state-

owned companies to stay away from investing in risky industries (Rosen, 2014).

Political, Legal, and Cultural Environment

Now that we have a better idea of Vietnam’s outlook, we will discuss more in depth the political,

legal, and cultural environments of Vietnam.

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Political Environment

The Vietnamese Constitution places the people in control, under the leadership of the

Communist Party, which is represented by the Politburo and the Party Secretary General who is

in command. It is the National Assembly that exercises the power of Vietnamese, along with the

People’s Council which operates at different levels rather than a central one (Political and Legal

Environment in Vietnam, 2014).Vietnam is becoming more and more attractive investment-wise,

despite the fact that it is a one state communist party. If we look closer at the real political and

economic evolution the country has faced in the past decade, we can see that a conservative

movement is taking the lead and pulling Vietnam towards ASEAN-6 standards.

After ten years under the charge of Nong Duc Manh, Vietnam has increased its gross domestic

product by 384%, modernizing the country and allowing it to follow the booming trend of

Southeast Asia with more than 2000 development operations and projects (Vietnam Overview,

2015). These changes led the country to become a new business playground for investors.

In 2011, Nguyen Phu Trong became the new secretary-general of the Communist Party. His

politics mainly focus on conservatism and close cooperation with his gargantuan neighbor,

China. Favoring economic progress, Trong strongly supports the Trans-Pacific Partnership that

links Vietnam to eleven other economic powers in the Pacific, and has requested the United-

States to recognize the country as a market economy despite their said communist ideology

(Vietnam Profile, 2015).

In sum, Vietnam is a socialist republic which provides a stable political environment that favors

business projects. It is a member of 46 world organizations, such as the UN, WTO, Interpol,

ASEAN and the UNESCO (Vietnam, CIA, 2015).

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Regulatory Environment

Like many Southeast Asian countries, Vietnam has a severe law system which allows the

country to build up on serious bases and to progressively alter its practices for the ones used in

more developed countries.

The Vietnamese legal system is composed of laws, decrees, ordinances, codes, decisions and

circulars and official letters. To be recognized as such, a law must be voted by the National

Assembly and ordinances are issued by its Standing Committee. Other regulations, circulars and

decrees can be issued by ministries and other State agencies. In order to establish a better path of

development for Vietnam, the Department of Foreign Affairs, Trade and Development of Canada

is supporting the Vietnamese government’s efforts to improve coherence and transparency of the

legal system. This also shows how Canada is tied with the country by assisting it on a legal level

(Reforming how laws are made in Vietnam, CBA, 2014).

However, there are still some judicial aspects to take into account when dealing with the

Vietnamese Law. Capital punishment, or death penalty is still a legal form of punishment as of

today and can be found in business related articles of the Penal Code such as “Crimes of

Infringing Upon The Economic Management Order” or “Crimes of Infringing Upon Ownership

Rights”. Also, when thinking of doing business in Vietnam, we must take into consideration the

different work ethics exerted on its population. Human Rights are not given the same level of

importance in Vietnam as they are given in Western nations. However, this should not slow

down any projects as history has proven us many times that economic performance does not

heavily rely on the level of freedom given to the population.

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Cultural Environment

Culture should be seen as a fundamental aspect of the Vietnamese society. The Vietnamese

culture is driven by a value system which is based on three basic interrelated principles:

allegiance to the family, love of learning, and concept of respect.

1) Allegiance to the family is one of the most important factors in the value system of Vietnam.

It is considered the center of the Vietnamese common man's preoccupation and the backbone of

a society where each individual strives to be the pride of his own family. Inappropriate behavior

of an individual is blamed on the family as a whole, as well, success achieved by an individual

brings honor and pride to all members of the family. Moreover, Vietnamese children are

expected to be thankful to their parents for the education that they have received which is more

oriented towards a sense of sacrifices and care for the family (Vietnamese traditional family

values, Ton Nu Luong Trinh ).

2) The second principle is love of learning. Vietnamese are eager to acquire knowledge and keep

learning. They actually show particular respect and admiration for knowledgeable people (The

Vietnamese Value System, Vietnam Culture). Learning is considered more valuable than wealth

and material success, and it explains why no matter the social class of an individual, a

willingness to learn will always translate into respect.

3) The third principle emphasizes the concept of respect. A Vietnamese individual is expected to

show respect to the elderly. Furthermore, at home, respect to the family is expressed by

obedience in words and actions (The Vietnamese Value System, Vietnam Culture).

These principles based on a value system all shape the Vietnamese culture. However, culture is

also determined by four main factors which are social structure, religion, and language.

Vietnamese social structure is composed of 54 ethnic groups. Each ethnic group has its own

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cultural identity. Therefore, the Vietnamese culture has both diversity and unity. 88% is Viet and

the remaining 12% is composed of ethnic minorities. (Investing in Vietnam, KPMG)

Even though most Vietnamese go to temples to pray, they nowadays consider themselves as

being non-religious. Yet, their daily behaviors and perceptions are influenced from concepts of

Confucianism, Buddhism, Taoism and Christianity. (Vietnamese cultural profile, Ethnomed).

As for the spoken language, Vietnamese is the official language and the language of most

people. Many older Vietnamese are familiar with French or English due to the French colonies.

In addition, interest in English has increased as many language schools have been established

across the country (Investing in Vietnam, KPMG).

Niall Ferguson’s Six Mainsprings of Global Power

In his book ‘‘Civilization: The West and the Rest’’ Niall Ferguson refers to the six main springs

of Global Power as the « killer apps » that allowed a minority of Eurasia to dominate the world

for almost 500 years (Ferguson, 2014). They consist of competition, science, property rights,

medicine, consumer society and work ethic. We rated Vietnam based on their performance in

these six mainsprings.

Competition: Average

In 1986, the communist government of oh Hanoi decided to put an end to the Vietnamese

command economy under which the country was operating since 1976. The government initiated

a number of political and economic reforms in order to set in motion the country toward a world

economic integration.

During the 90's, after the U.S lifted its trade embargo, Vietnam enjoyed a period of dynamic

development and gained approximately an 8% GDP growth per year (Brynes, 2013). Also, since

the implementation of the “market-based” system/ mixed economy, Vietnam has seen its poverty 9

level drop below the one of China and India. In 1993, almost 70 million people were considered

in poverty, representing nearly 64% of the population; whereas in 2008, with a population of 85

million, only 17% Vietnamese were considered poor (Poverty Reduction in Vietnam:

Remarkable Progress, Emerging Challenges, 2013).

Competition in Vietnam since 1986 has been made possible by the government with the

purchasing power doubling between 1995 and 2004 (Kinley and Nguyen, 2008).This has given

the population higher living standards and an access to global products and companies. The

biggest issues regarding competition in Vietnam are the state owned enterprises. They are given

protection by the Vietnamese government which can disadvantage foreign investors.

Science: Excellent

The report of The International Foundation for Science, ‘’Science in Vietnam An assessment of

IFS grants, young scientists, and the research environment’’ showed that the government and the

whole scientific community in Vietnam consider science as an engine for national development.

Both entities have for goal to achieve a status of industrialized nation through the development

of science. Research & Development in Vietnam is mostly encouraged by the government who

implemented a project named FIRST (Fostering Innovation through Research, Science and

Technology. The project began in May 31, 2013 and is planned to last until June 2019, its budget

is about 110 million dollars and its objective is the support the STI (Science Technology and

Innovation) through (Zink, 2009):

Knowledge and policy development in order to attract international and skilled experts

The reinforcement and support of GRI (Government Research Institutes) to foster

reforms and enterprises innovation.

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Project management will be implemented to strengthen the Ministry of science and

technology of Vietnam (MOST).

Property Rights: Average

Based on the International Property Rights Index of 2014, Vietnam globally ranked 66th on 97

countries and ranked regionally 13th among sixteen countries. Those numbers do not reflect

strong property rights in Vietnam, but we must look deeper into them to understand the

implications for potential investors.

The biggest issue that Vietnam faces is corruption. Despite the improvements that have been

made, regulations have not been well implemented. State-owned businesses have been privatized

but not to serve the best interest of the population. In fact, the government officials have been

involved in nepotism, favoring members of their families and friends, meaning that only a small

portion of the population can benefit from the creation of thousands of jobs (Business Ethics and

Anti-Corruption Laws: Vietnam, 2014). Any business planning on investing in Vietnam is likely

to encounter these widely used practices:

Offering and receiving “Gifts”

Bribes

Facilitation payments

Surprisingly, Vietnam offers a great patent protection. Foreign investors should take into

consideration Vietnam's accession to the WTO in 2007, which means that it is now complying

with the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS), therefore

improving compliance on international regulations.

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Medicine: Excellent

Vietnam has a strong background in medicine. According to the FIA Foreign Investment Agency

of Vietnam (under the authority of the ministry of planning and investment), it has achieved

great results in healthcare and medical services in the recent decade. They have an extremely

competent medical body and doctors that are just as capable as those in more developed

countries, which allow them to compete internationally when it comes to complex surgeries.

Public hospitals equipped with advanced equipment are available in all relatively big cities; these

resources are much scarcer in undeveloped areas (outside cities). However the government, in

attempting to set up Universal Health-care Coverage (goal of 70% population by 2015, 80% by

2020), in order to improve healthcare access across the country.

As a result of the interventions taken by the Asian Development Bank in Vietnam's Central

Highland almost five million inhabitants can now benefit from:

Improved access to medical, construction of hospitals and medical schools

Upgrade the skills of health workers, improved care

Partnership with the government to increase the public investment in primary healthcare

Less reliance on untrained traditional village practitioners and herbal medicines, and

more acceptance of modern medicine

Reduction of infant mortality from 60 to 41 /1000 births

Consumer Society: Excellent

It is through the Doi Moi (Renovation) politic in 1986 that Vietnam's communist party decided

to begin the liberalization of the economy. At the end of the U.S embargo in 1994, multinationals

began to flow in the country, Vietnam’s economy grew in the years that followed and,

ultimately, the country joined the WTO. This reflects the trend that Vietnam is following: a

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move toward a market-economy or “market-socialism” and a consumer society where the

demand for goods such as mobile phones, personal computers, cars and debit cards is growing at

an extremely fast rate (Growing up fast: Vietnam discovers the consumer society, 2010).

The fastest growing middle class in Southeast-Asia is Vietnamese and this means that potential

investors should take into consideration that Vietnam’s population is rapidly becoming a

consumer society.

The Work Ethic: Good

Vietnam adopted 4 of the 8 ILO Fundamental Conventions which is a subdivision of the Union

Nations that has for goal to unify workers, employers and government bodies of its 183 country

members by promoting decent work conditions throughout the world.

The four conventions concern:

Equal Remuneration Convention, 1951 (No. 100)

Discrimination (Employment and Occupation) Convention, 1958 (No. 111)

Minimum Age Convention, 1973 (No. 138)

Worst Forms of Child Labor Convention, 1999 (No. 182)

The rights to collective bargaining as well as freedom of association are limited in Vietnam, but

the National Assembly approved in June 2012 several provisions such as:

6-months maternity leave

Preludes for a minimum wage law regulation

Prevent employee to work over 50% of their daily hours

Revised version of the Law on Trade Unions which formalized trade union as official

protectors of workers' rights.

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Through this analysis of the six mainsprings of global power, we can now identify the strengths

and the weaknesses of Vietnam.

Strengths and Weaknesses

Strengths

We have identified the following strengths for Vietnam as an investment candidate:

China is becoming less and less attractive for FDI. Vietnam is now the number one

exporter in the USA because of high rising costs of land and labor.

Vietnam's position in South-East Asia is considered as a key export hub to have access to

other Asian markets. Given its lower costs and its strategic position, numerous companies

are now relocating their operations in Vietnam.

Vietnam's labor force is cheap, young and more skilled than neighboring countries.

Vietnam's FTA (Free-Trade Agreements) with major international players (EU and the

soon signed Trans-Pacific Partnership, TPP) represent major incentives for foreign

investors to move in Vietnam and to gain access to unregulated export markets

worldwide.

The numerous financial incentives offered by the Vietnamese government must be taken

into account; from tax incentives 0% of tax on overseas dividends for foreigners, to low

corporate income taxation of 22% and it is planned to drop to 20% by 2016 (2014 FDI

Report Vietnam, 2014).

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The country's manufacture industry now saturated is slowly being replaced by high-

technology manufacturing. The most re-known Multinationals (Intel, Nokia, LG,

Samsung) are investing billions of dollars in the country (Leong, 2014).

We can conclude that Vietnam's major strengths are: its opportunities for growth and FDI, its

huge market size/labor force and the incentives the government provides for FDI.

Weaknesses

Along with Vietnam’s strengths, we have identified some weaknesses that might be challenging

for potential investors:

Vietnam's public debt has never risen so fast, reaching the highest peak in 2014,

representing 60% of the GDP and may increase to 64% in 2015 (Vietnam Rushes to

Avoid Debt Woes Inherent in China Growth Model, 2015).The public debt level is

considered too high by many investors.

The only existent political party is the Communist party, which means there are

numerous SOE's (State-Owned Enterprises) that pull-down the overall country's

efficiency. Also, there are many restrictions on human freedoms (association, expression,

etc.).

Weak monetary and economic policies that the government struggled to implement,

especially regarding the high corruption level and the red tape administration slowing

down Vietnam's development.

The implications of these weaknesses for foreign investors will translate into higher costs of

doing business in Vietnam. However, we should be aware that the government as well as

international businesses are positively turning those flaws into opportunities.

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Ethical Issues

As seen earlier, there are several ethical issues to be taken into consideration by foreign investors

when doing business in Vietnam.

Corruption

The government, now, considers corruption improvements a key factor in the country's

development. Some improvements have been made such as (Business Ethics and Anti-

Corruption Laws: Vietnam, 2014):

Strengthening regulations and punishment for corrupted public officers.

Joining the ADB/OEC Anti-Corruption initiative to fight corruption in Pacific and Asian

countries.

Signing bilateral partnership agreements with U.K, Japan, Malaysia and the EU to fight

corruption.

Integrate the National Supply Chain

Many ethical issues arise as foreign businesses take advantage of Vietnam’s low costs, as certain

companies omit to take into consideration human and workers’ rights. If the foreign investors do

not want to use children or employ workers in bad conditions, they should conduct an audit of

the local suppliers or use foreign suppliers set up in Vietnam that respect their corporate code of

ethics.

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Restricted Freedom of Speech

The World Report of the Human Rights Watch (HRW) of 2014 on Vietnam signals a significant

deterioration of human rights since 2013. Many peaceful activists are imprisoned because they

call for political change over social media, denounce bribery acts, question policies, etc. The

Internet is becoming the battlefield for the “discontented” of the regime to fight for more

freedom. More and more petitions are being signed over the internet to fight for multiparty

elections and a more democratic society.

SOE’s – State-Owned Enterprises

There are still many SOE's in Vietnam, 3,135 as of 2013 (General Statistics Office’s Industrial

Statistics Department, 2013). They are considered detrimental for the Vietnamese society

because of the following reasons:

Reduce the supply of jobs by diminishing the influence of privately-owned companies

State-monopoly unjustifiably decrease consumer surplus, affecting consumers in a bad

way and therefore society.

Slower development, less FDI, less investments, less competition, less innovation, all

detrimental to society.

Overall, we can see that Vietnam still has a long road ahead if it wishes to eliminate these

ethical issues and attract more FDI.

Major Industries

In the recent years, Vietnam became one of the most attractive destinations for many foreign

investors. Many factors have contributed to this, notably low-cost labor, tax incentives and

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favorable port infrastructure (Investing in Vietnam, 2015). The government is particularly

seeking to attract investors in certain sectors and industries (Investing in Vietnam, 2015):

1. The technological industry in the production of information and technology which

represented 3988.16 million dollars in investment capital (2014 FDI Report: Vietnam, 2014).

This would be a good sector to invest in for notably the low costs of labor, but most

importantly its quality. The general director of LG praised the performance of Vietnamese

workers for being ‘’smarter’’, ‘’abler’’, and ‘’more energetic’’ (Vietnam’s High-Tech Boom,

2014). However, investing in the technology sector could be challenging given the lack of

supporting industries (Vietnam’s High-Tech Boom, 2014). In fact, a survey conducted by the

Japan External Trade Organization concluded that the localization rate of part and

components is much lower in Vietnam (30%), comparatively to China and Thailand who

average around 50-60% (Vietnam’s High-Tech Boom, 2014). Vietnam is still assuring

investors that supporting industries have had difficulties catching up to the rapid growth in

FDI investments, but that they will progressively meet the demand (Vietnam’s High-Tech

Boom, 2014)).

2. The agriculture, forestry and fishery sector which accounted for 3336.08 million dollars in

investment capital (2014 FDI Report: Vietnam, 2014). Foreign investments in this industry

have declined in the past 14 years, going from 8% in 2001 to 0.5% in 2011 (Foreign

Investment Agency, 2015). This is largely due to inflation, credit volatility of international

agricultural markets and climate changes (Foreign investment Agency, 2015). However, this

market does have growth potential according to market analysis (Foreign investment

Agency, 2015). Moreover, the Vietnamese government is providing potential investors with

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incentives for land use, preferential credit, and preferential tax rates ((Foreign investment

Agency, 2015).

3. Labor intensive industries such as manufacturing and processing which is the most saturated

investment sector with a total of 120964.54 million dollars of investment capital. Many

producers from Japan, South Korea and Taiwan are opting to relocate in Vietnam. Once

again the biggest challenge these producers face is the need to import materials from abroad

(Demand for Support Industry in Southern Vietnam Picks up over Increased FDI Inflows,

2015).

4. The construction industry which amounted to 9804.91 investment capital in 2014 (2014 FDI

Report: Vietnam, 2014). The construction sector refers to investments in urban development,

housing, office building, hotels and infrastructure. The factors that have contributed to the

major growth in the construction sector is the demand for affordable housing and the

government initiatives (Increase in FDI Spurring Growth Opportunities in The Construction

Market Outlook In Vietnam: Technavio Report, 2015). This industry can present some good

opportunities for foreign investors as its growth is set to continue in the next years.

Prime Investment Industries

After evaluating the major industries in Vietnam, we chose two prime investment industries that

are not saturated and that present a very good opportunity of growth in the upcoming years.

The first industry is the technology industry, but targeting more specifically computer and phone

components, the automotive sector and medical devices and equipment. Samsung has made a 10

billion dollars investment in Vietnam and it will certainly require a lot of supportive industries in

the technology components area, which is why we are suggesting to invest in technological

components. Also, the Vietnamese government has made it clear that it supports research and

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development through the financing of scientific and equipment research and by training scientists

with the best industry practices from Asia, Europe and America. Therefore, an investment in

medical devices and equipment will not only receive a lot of support from the government, but it

will also lead to an investment with a lot of growth potential (Zink, 2009).

The second prime industry is the construction industry. Vietnam aims to become a developed

nation within the next years meaning that it will require a lot of new infrastructure and many new

roads. Moreover, there is the real estate business that is growing as the Vietnamese middle class

is starting to emerge and is in need of affordable housing and better quality homes. Once again,

the government is offering its support to foreigners willing to invest in this industry such as

exemption from land use or land rental fees, and reduction of corporate income tax (Business

Advantage Vietnam, 2010).

Examples of Foreign Investment Success Stories

As Vietnam’s market became more and more attractive in the past years, many Canadian and

American companies have invested in the country. Here are some examples of successful foreign

direct investments in Vietnam:

Sun Life

In 2012, PVI Holdings, a Vietnamese company and Sun Life, a Canadian firm, formed a joint

venture to form an insurance company (PVI Holdings and Sun Life Financial to form joint

venture to deliver life insurance products in Vietnam, 2012). PVI Sun Life offers seven main

products along with multiple secondary products. Its most popular product is the PVI Sun Life

product which represents 90% market share (PVI Sun Life aims to lead Vietnam’s life insurance

market, 2015). Moreover, it is ranked seventh among 17 other life insurers and first in voluntary

pension product (PVI Sun Life aims to lead Vietnam’s life insurance market,2015). In Vietnam, 20

Sun Life operates in 63 cities and provinces with 3000 workers (PVI Sun Life aims to lead

Vietnam’s life insurance market, 2015). In the next five years, PVI Sun Life aims to become a

leader in terms of life insurance (PVI Sun Life aims to lead Vietnam’s life insurance market,

2015).

Apple

Apple opened a subsidiary company in Vietnam in order to freely import and distribute its smart

phones in the Asia-Pacific which is considered to be a market that is growing at an incredibly

rapid rate (Apple opens subsidiary in Vietnam, tapping Smartphone growth, 2015). The firm is

based in Ho Chi Minh City where it operates as a wholesaler for Smartphone, provides

information technology (Apple opens subsidiary in Vietnam, tapping Smartphone growth, 2015).

The Vietnamese market is set to be extremely promising given that the number of phone

subscribers grew by 26% from 2009 to 2013 (Apple opens subsidiary in Vietnam, tapping

Smartphone growth, 2015). This growth contributed to tripling Apple’s sales in the first half of

the fiscal year in Vietnam, which is a rate that proved to be five times faster than in India (Apple

opens subsidiary in Vietnam, tapping Smartphone growth, 2015).

Ford

Ford was among one of the first American companies to invest in Vietnam, which proved to be a

good decision following the constant growth in the number of sales (Ford Sees Long-Term

Opportunity in Vietnam’s Auto Industry, 2015). This year is no different; Ford sold 8900

vehicles in Vietnam which represents a 70% increase in comparison to the numbers registered

during the same period last year (Ford Sees Long-Term Opportunity in Vietnam’s Auto Industry,

2015). Market analysts believe that this trend will continue given that the annual per capita

income is set to continue rising (Ford Sees Long-Term Opportunity in Vietnam’s Auto Industry,

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2015). Investing early on in Vietnam has paid for Ford; today, the brand owns three of the top

best-selling brands in Vietnam (Ford Sees Long-Term Opportunity in Vietnam’s Auto Industry,

2015).

Country’s Main Competitors

China, Thailand and Indonesia are Vietnam’s main competitors, as they are also emerging

countries and are currently attracting many foreign investors. Given that Vietnam only started

opening its borders about 20 years after the majority of its surrounding countries, one of the

challenges it faces is keeping up and not falling behind its competitors. As a result, there would

be three are three industries in which Vietnam faces ferocious competition: high-technology

industry, manufacturing industry, automobile industry and textiles.

China

Even though, many firms continue to have major incentives to invest in China within the

manufacturing industry, it seems that over the past few years, this trend has started to change.

Vietnam is becoming a major threat for China in the high tech manufacturing.

In the high tech industry, one of the most striking changes has been phones manufacturing. For

example, Samsung has decided to move its manufacturing facilities to Vietnam due to the low

manufacturing costs, low wages and tax incentives. Regarding the tax incentives, SSamsung is

not required to pay any corporate taxes for the first four years of operation and only half the rate

for the next nine years, subject to certain conditions. Last year, the company spent an extra $3

billion on a second mobile phone plant in Vietnam (International Business Times, 2014). Indeed,

China is close to saturating in terms of Smartphones and Samsung’s new Vietnam plant would

help its scale operations. In terms of competition incentives for companies similar to Samsung, it

represents a major advantage. Moving to Vietnam would drive down manufacturing costs and 22

labor costs since the GDP per capita in Vietnam represents a quarter of the one in China

(International Business Times, 2014). Moreover, Vietnam is also strategically located with

access to the component supply chain from Taiwan. To conclude, Vietnam has been increasing

its exports in the high tech industry and positions itself as the biggest China competitor in this

sector.

Thailand

Vietnam’s second main competitor is Thailand. In fact, Thailand has stated that Vietnam is

rapidly becoming an attractive destination for foreign investors as a regional manufacturing base.

The factor that explains why investors are starting to turn to Vietnam is the political instability

characterized by violence and turbulence in Thailand (Thai PM Says Vietnam a Friend, Not

Competitor, 2015). However, Thailand is seeking to put an end to this hostility and has

established a two way trade that should amount to $20 billion by 2020 (Thai PM Says Vietnam a

Friend, Not Competitor, 2015). Another industry in which Vietnam faces fierce competition

from Thailand is the automobile industry. In fact, despite Vietnam’s lower way, Thailand

remains more efficient in the manufacturing of automobile parts, thus the most important

producer in Southeast Asia (Automobile Industry in Vietnam, n.d.). Overall, Vietnam needs to

focus on the creation of more supporting industries to achieve the same economies of scale as

Thailand if the country wants to outdo its competitor (Automobile Industry in Vietnam, n.d.).

Indonesia

Vietnam’s third main competitor is Indonesia. This competitor seeks growth in its textiles

industry, where it is currently falling behind in comparison to Vietnam. In fact, Vietnam is

currently the main regional exporter in textiles due to its free trade agreements (Supporting

Expansion of Industry in Indonesia, n.d.). In 2013, Vietnam gained a position of third largest

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textile market while it was in 82nd place back in 2000; however, Indonesia has remained at the

sixth position during those thirteen years (Supporting Expansion of Industry in Indonesia, n.d.).

The competition in textiles that Indonesia had to face from Vietnam declined its market share to

less than1% in 2013 (Supporting Expansion of Industry in Indonesia, n.d.). Despite the fact that

Vietnam is currently ahead of Indonesia, it has to remain careful as the Indonesian government

plans on setting up free trade agreements with the European Union and Turkey (Supporting

Expansion of Industry in Indonesia, n.d.).

Potential Risks and Rewards for Investors

Every country has its qualities and flaws, Vietnam is no exception. Investing in a fast growing

country is very appealing but the potential risks of doing business there should still be identified

and analyzed.

Risks

Let’s start with the potential risks that Canadian investors could face in Vietnam; these risks can

come from a variety of internal issues such as political and economic ones, corruption, organized

crime and Human rights malfunctions are also factors of risks.

- Vietnam is politically stable; however it is difficult to predict what changes are to come with

each new elected Party Secretary General in this single socialist party governed state. For now

Nguyen Phu Trong, the current leader is promoting a market economy model for Vietnam, but

this does not mean that his successor in 2016 will have the same goals and ambitions for the

country. Internal conflict is rare in Vietnam but this might come from the fact that freedom of

speech is quite limited for its people. For instance, some websites are restricted by authorities

and content can become inaccessible without notice.

24

- Economical factors in the country can also represent a threat for investors. Foreign (and

domestic) investments are prohibited when it comes to National Defense and are conditional for

multiple major sectors such as real estate, education, television/cultural broadcasting,

transportation (airports/ports), mining, import/export distribution, aquaculture and others.

Therefore investors should be careful when planning long-term investments in these sectors and

make sure they are acceptable (Legal Guide to Invest in Vietnam, 2015).

- Corruption is a real risk in Vietnam and is often associated with organized crime. Although

minor corruption has decreased in the streets of Vietnam, high-level corruption has increased in

the past years. Plus, the country has a fragile legal system which does not promote the decrease

of bribery and other corruption methods. Many sources such as Business Anti-Corruption Portal

state that corruption is more important on the business market than any other places. However, it

is important to note that the government is now considering corruption as a serious issue in its

agenda, and is currently taking action on this matter (Doing Business in Vietnam: Opportunities

and Threats, 2015).

- Another risk to consider when doing business in Vietnam is the current lack of efficient

infrastructures. The development of a country can depend on the quality of its infrastructures as

it reflects the level of technology it uses. Thus Vietnam should not hinder its development by

maintaining the same edifices and should build more appealing and practical infrastructures to

lead the country. However, today many development projects are being launched to work on this

issue (Why investment in Vietnam is booming, 2014).

- Basic rights and freedoms found in the West World can be lacking in Vietnam and can scare

away investors if they know their assets won’t be treated as rightly and morally as they wish for

it to be. Note that this lack of rights and freedom can also have the opposite effect by attracting

25

and supporting unethical foreign companies. An example of this situation would be the

implication of Nike Inc. in the exploitation of Vietnamese sweatshops. Unparalleled intellectual

property concepts between two cultures can result in the loss of a patent or a business idea,

which would discourage any investor with new projects to come develop them. This asymmetric

relationship is being worked on by the government as they attempt to enforce the impact of

Human Rights in the country (Business Overseas Risks - Vietnam, 2015).

Rewards

While having some risk factors associated with foreign investments, Vietnam is also known for

its rapid economic growth, the second GDP per capita rate behind China at 350% since 1991

(Google Public Data, 2015). This blooming comes with other advantages for the country, but for

the investors too. Let’s take a look at the opportunities offered by Vietnam’s present situation.

- The first and most valuable benefit Vietnam has to offer is the development situation it is

undergoing. The population is evolving from rural to urban and much laying out is necessary to

welcome everyone correctly; and the country has the fastest growing middle-class in Southeast-

Asia today. Therefore it is essential for the country to develop major industries like real estate,

services and sustainable agriculture in order to respond to the demand of this gentrifying

population with rising incomes. Thus, investments in these sectors can strive for long term grow.

If made properly, these ventures could benefit from low cost of production at the beginning

(although increasing as income increase) and a skilled workforce with graduate students from

recently built universities. In conclusion, the first movers in Vietnam would have the privilege to

set trends and habits in the country and maybe even become part of the daily culture.

- Investors could have a major impact on politics in the country as businesses and the

government is maintaining an ongoing relationship to develop the country. An example of that

26

role would be the vote of certain laws benefitting companies to produce more efficiently and/or

ethically, which would also benefit the rest of society. Again with the trends investors could set

in the country, new generations could revolve around new ideas which would be put to life with

upcoming politicians.

- What investors and companies could benefit from venturing in Vietnam is properly designed

management teams, formed locally. This would help build companies in terms of Greenfield

investments and brownfield investments (The Risks and Rewards of Frontier Markets Investing,

2015).

- Geographically, Vietnam is situated in the center of Southeast-Asia. This means it is quickly

turning into a major pole of investment as it is in the way of many transactions between other

countries in the region. This is a perk that allows investors to serve not only Vietnam but a

regional market of more than 618 million people (Vietnam, 2015).

Three surprising facts about Vietnam

As we started learning more about Vietnam, we came across certain aspects of the country that

surprised:

•the world’s second largest exporter of coffee.

•The Baguette is an important part of the Vietnamese cuisine.

•Vietnamese call “The Vietnam War” “The American War”.

Investments proposed

After a thorough analysis of the industries in Vietnam, we would suggest to the Canadian

investors to invest in the construction and high technology sector. The main reason for this

suggestion are that both sectors are not saturated, yet they represent a big long-term growth

27

opportunity. Many technology companies are starting to heavily invest in Vietnam, and will need

a lot of supporting industries. Given that there is a shortage of supporting industries, we would

suggest to invest in the manufacturing of phone and computer components. As for the

construction industry, Vietnam is undergoing an increasing rate of urbanization, an emergence of

a middle-class, and an overall economic growth. Therefore, there is an opportunity in the real-

estate business as well as for new infrastructure and roads.

The major risks that a Canadian investor would have to face when investing in Vietnam rather

than Canada or the United-States are corruption, lack of human rights and freedoms, and the

difficulty to predict what changes might occur in the political system and how it will affect

businesses. However, it is important to keep in mind that the opportunities offered by the

Vietnamese economy far outweigh those that can be found in Canada or the United-States. It is

an emerging country and there are many opportunities to be a first mover. Moreover, there are

many changes that are being put in place to decrease risks and attract more FDIs.

Proposed Next Steps

We suggest starting immediately to research the industry you wish to enter, its main competitors

and the opportunities. We advise investors to focus on construction of high-tech manufacturing

facilities, construction as well as infrastructure. It is important to start implementing the business

as soon as possible and mainly think in terms of long-term investment, as it takes quite a lot of

time to establish a business in Vietnam and it can be quite a rigorous process. However, there

will be a significant return on your investment if you follow the laws and regulations of Vietnam

because you will be able to take advantage of Vietnam’s huge middle-class and its growing

purchasing power.

28

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