Hopes hang on trade agreements to speed up reform in Vietnam
The Vietnamese economy is slowly but surely emerging from the shadow of successful Asian neighbours such as China, Japan and Singapore. Moreover, the country’s young population is eager to learn and ready to move ahead. While there are still hurdles to overcome, including bureaucracy and inadequate infrastructure, trade agreements, such as one to be signed shortly with the European Union, promise to further open the country’s markets. In this article, a banker, an ambassador and a businessman explain why they are optimistic about Vietnam’s future and outline its considerable business opportunities.
Vietnam is an emerging market that has come of age. Since 1988, GDP growth has only been below 5% in one year (in the aftermath of the Asian crisis): growth was 5.4% in 2013 and, barring unforeseen problems, the economy will expand by 5.6% this year. Western companies have been a driving force of growth over the last 20 years, when the economy first began to open up. Pim Schuurman, managing director for Vietnam at Dutch shipbuilding company Damen Shipyards, was one of the early arrivals. “In 2002 we started cautiously by building six search and rescue ships, in the spirit of development and cooperation. Since then we have built 230 ships in Vietnam and another 70 are under construction.”
Schuurman, who also acts as honorary consul for the Netherlands, says that Vietnam is not a country where opportunities can be seized quickly, but rather one where opportunities need to ripen. “Here, everything starts with a relationship, then you need to build respect and finally you gain trust. Only then do the opportunities come.”
The Vietnamese government sees Damen as a shining example of how Vietnam can cooperate with Europe. Schuurman says that Damen’s secret is striking a balance between the company’s interests and those of the Vietnamese. “Right from the start, we have asked ourselves: how do we make it interesting, enjoyable and profitable for them, too?” Damen cooperates closely with Vietnamese companies, in some cases through joint ventures, and hires large numbers of Vietnamese staff. “For example, we conducted a selection procedure at the Vietnamese Maritime University to recruit students,” notes Schuurman. “The winners get a traineeship with us, during which we will give them the chance to see how things are done in the Netherlands. Activities like that get you lots of positive attention here in Vietnam.”
The outgoing Dutch ambassador to Vietnam, Joop Scheffers, also believes that the country offers great opportunities for Western companies. Having taken up his post in 2009, he has watched the country rebound after the global crisis. He was struck by how resilient the Vietnamese are.
Further growth will now be dependent on Vietnam climbing the value chain, says Scheffers. “Vietnam initially prospered by attracting large companies that were outsourcing their production and didn’t want to put all their eggs in one basket [by concentrating manufacturing in China]. So far, the country has mainly competed on price, including for labour. For example, the Vietnamese assemble mobile phones using off-the-shelf components supplied by other countries. But now they realise that this is not the be-all and end-all. Vietnam is no longer the cheapest country. To ensure healthy growth in the future they need to start adding more value to products.” This applies not only to manufacturing but also to agricultural products. Vietnam is the world’s second-largest exporter of coffee and rice, but derives relatively little revenue from this because it exports the raw commodities rather than finished consumer products. Consequently, there are great opportunities for foreign food companies wanting to establish a presence in Vietnam.
ING Bank Vietnam country manager Remco Gaanderse says that the country is ready to make the switch to a modern economy focused on added value. The banker, who is also deputy chairman of the European Chamber of Commerce in Vietnam, is optimistic about its chances of success. “Vietnam has a young population who are prepared to work hard and are eager to learn. And the consumer market is growing because of the rapid emergence of the middle class. Therefore I believe current annual growth figures of 5 to 6% are relatively low compared to what is possible, especially if Vietnam makes progress in removing a number of barriers.” Gaanderse lists bureaucracy, the Central Bank-imposed limit on credit capacity, and the advantages still enjoyed by state-owned companies as the main barriers to faster growth.
Gaanderse expects foreign companies to play an important role in modernising the economy: “Vietnam realises that it needs foreigners, but obviously it doesn’t want them running off with all the profits.” That might be one reason why Damen is hailed as a success: the shipyard cooperates closely with local parties to make high added-value products. Moreover, nine out of every ten ships built are exported.
Gaanderse sees opportunities for Vietnam beyond the manufacturing and food sectors, with infrastructure – roads, airports and ports are currently inadequate – in desperate need of investment. Similarly, opportunities exist in the healthcare and energy sectors – the latter is characterised by structural shortages that are threatening to stifle economic growth. “The energy shortage presents opportunities for international companies, such as AES,” notes Gaanderse. ING acted as adviser to AES when it commissioned the largest private power station in Vietnam in the province of Quang Ninh in 2011.
Vietnam’s open mindset and famed hospitality are major assets for the country, according to most observers. Schuurman affectionately describes Vietnam as “a beautiful country with beautiful people” and says that despite the language barrier, there is often an immediate click: “The difference in culture compared to European countries is not that great for an Asian country. Communication is full of humour, even when you can’t understand each other.” Schuurman talks about close and warm connections – even among competing companies. “When the Dutch Prime Minister Mark Rutte recently visited our Damen Song Cam yard, many of our partners – who compete locally – got on a plane so they could be there too.”
The image of a hospitable people who are easy to communicate with also rings true for Gaanderse. “Although the Vietnamese, like many other Asian people, are sticklers for formality, they are relatively open,” he says, adding, that Vietnam still needs to be more outward looking. “Tourism is a good example. Their country is stunning in terms of nature, history and culture, and yet they are not successful enough in attracting tourists. They should promote it more.”
More generally, too few people are aware of the attractive and modern aspects of Vietnam, while its unattractive features, such as its bureaucracy, are relatively familiar. Certainly, there is room for improvement. “Arranging licences and work permits is really hard work here and negotiations are needlessly protracted,” notes Gaanderse. “Vietnam is a consensus society. While the economy is centrally planned by a single party, you need to get the provinces and cities on board. Everyone has to agree on everything before anything can be decided.”
Successful business relations with Vietnam are conditional on good contact with the government. Contact can be through an agent or an embassy: Ambassador Scheffers views mediating on behalf of companies as one of his key tasks. “Governments like to deal with representatives of other governments, such as embassy representatives. That’s why we help out with things like writing letters and why we are present at negotiations.”
There have been some improvements with regard to bureaucracy and fair competition. For example, since Vietnam joined the World Trade Organisation in 2008, there are fewer state-owned companies and their power has been somewhat reduced. And, says Scheffers, Vietnam has launched a programme aimed at reducing administrative expenses by 30%. Furthermore, Scheffers has high hopes regarding trade agreements with Pacific Rim countries (the US, Australia and Japan) and the European Union (scheduled for signing in October 2014). “Vietnam really wants to participate in the global economy,” says Scheffers. “If there is one thing the Vietnamese agree on, it is that they want to move ahead. They see the trade agreements as a way of stepping up the pressure for reform in their own country.”
Gaanderse, who is indirectly involved in the process for the trade agreement with Europe, also has high expectations of the trade agreements. “Together with the European Chamber of Commerce in Vietnam, we are compiling a white book of suggested improvements to boost trade. Our suggestions are part of the negotiations,” he says. “They concern customs, work permits and equal, competitive pricing.”
While agreements with Europe and the countries of the Pacific Rim may further boost trade, Schuurman, Gaanderse and Scheffers emphasise that economic ties with countries such as Japan, South Korea, China and Russia remain important.
Given this, Schuurman is concerned about the situation in the South China Sea (the Vietnamese call it the East Sea), which could pose a threat to stability. “In the last 10 or 15 years, growth and opportunities have been paramount,” he says. “However, as the level of prosperity increases in certain Asian countries, the agenda changes too. It is to be hoped that they go for elegant solutions in the end. And that they realise that economic cooperation is best for everyone.”
In order to reduce dependence on other Asian countries, Gaanderse says it would be advantageous for Vietnam to make better use of its ports, many of which are currently not suitable for large container ships. “The country’s vast coastline still offers unexploited opportunities,” he notes. Gaanderse says that it would also be healthy for Vietnam to spread trade among as many partners as possible, while seeking to gain knowledge from Europe and the US.
Scheffers concurs that Vietnam’s focus is on Europe and the US and notes that many young people choose a Western lifestyle and increasing numbers go to Europe and the US to study: “I understand from the American ambassador that the Vietnamese now constitute the eighth-largest group of foreign students.” Scheffers is convinced that the new generation will clear away obstacles to a better future, not least because of their willingness to learn. “The Vietnamese recognise their own shortcomings and are very receptive to sincere advice,” he notes, adding that many Westerners could benefit from taking a similar approach.