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Vietnam may still be communist, but the Southest Asian country is all about business German company Knauf “Yep our investment was pretty surreal”

Saturday - 15/04/2017 06:19
Helped by low costs and an eager government, Vietnam has taken over China’s role as Asia’s hotspot for foreign investment in manufacturing. Rising wages and land prices in China over the past five years have frustrated foreign investors.
Vietnam may still be communist, but the Southest Asian country is all about business  German company Knauf  “Yep our investment was pretty surreal”
„Instead the Vietnamese government welcomes most sectors with open arms and market entry, also licensing and operating have become much simpler than in China.

While China’s economy slows and labor becomes more and more expensive, Vietnam is becoming to go-to place for manufacturing. Offshore capital is expanding now into high-value, high-tech assembly. Hanoi is working on rules to bring in more of it.

That’s because labor remains over 60% lower in Vietnam than China. Vietnam’s construction permit procedures number just half of China’s. That’s a relief to investors that intend to build factories. To build a warehouse in Vietnam takes an average of 90 days, down from 230 in China. Credit is harder to get in China, it adds, while exports cost about $250 per container more in China.

Vietnam has been able to compete better in the „global value chain“ as wages grow in China and the 10-member Southeast Asian trading bloc ASEAN „get their act together“ to increase competitiveness.  Vietnam picks up goods outsourcing that once went to China, while the Philippines picks up services outsourcing that once went to India.

Since 2015 Vietnam let foreigners own majority stakes in Vietnamese companies and own property outright for investment reasons, two new boosts to foreign direct investment. „All these barriers shall actually become benefits for investors and should propel Vietnam’s overall GDP and investment climate forward, as China continue to slow more and more.“

If you thought Asia’s manufacturing giants are just China, South Korea and Thailand, you must say hello to a new one, meanwhile leading in ASEAN: it’s Vietnam.

Vietnam’s manufacturing is on a steady uptick fueled by its young population and cheaper wages.

„Central to the latest improvement in business conditions were further rises in both output and new orders,“ HSBC and Markit said in a note accompanying the release of Vietnam’s March data. Vietnamese firms were able to secure more new orders from both domestic and export clients and „falling commodity prices in world markets continued to feed through to lower input costs.“

Vietnam 2014 became the biggest exporter to the U.S. among the 10 AEC (Association of Southeast Asian Nations, or Asean). And with its strategic location, younger population and lower costs than China, it has drawn the likes of Samsung Electronics, Intel and Siemens, besides apparel and shoe makers.

Even though Donald Trump now stopped the TPP FTA

Vietnam has 16 other worldwide FTAs. Especially the EU-Vietnam FTA will unlock huge opportunities to Vietnam as as tariff reductions, trade facilitation, investment attraction, expansion of markets to 27 EU countries, sustainable development and economic restructuring. 99% of Vietnam’s exports to the EU will be charged with 0% import duty, leading to an increase of 30-40% in exports and 20% -25% in imports.

In Vietnam’s favor, wages are still low, with the average monthly wage at $197 in 2013 (Vietnams minimum wages 2016 $ 157), compared with $391 for Thailand and $613 for China, according to the International Labour Organization. Its population is younger: only about 6 percent is above the age of 65, compared with about 10 percent in China and Thailand and almost 13 percent in South Korea.

Of course, much of Vietnam’s work now is in low-end manufacturing in textiles, garments, furniture and electronics. That change rapidly, as more and more companies invest ongoing in training and R&D.

David Thomas, a manager and Australian, has seen the world. He was in Indonesia when the dictator Suharto had to abdicate. For years, he worked for a building firm abroad. Yet he’s never experienced anything like his working for mid-sized German company Knauf. “Yep, it was pretty surreal,” said the man from Sydney in reference to the behaviour of his boss.

Alexander Knauf, who has been directing the fortunes of the plasterboard manufacturer from Iphofen, Germany for two-and-a-half years, listened to a presentation by Thomas. Thomas has been head of the company’s Vietnam operations for some months. With his presentation in the north-Vietnamese harbour city of Haiphong he wanted to convince Alexander Knauf and his managers of the market’s prospects for growth.

“After the first three slides Herr Knauf interrupted: ‘Listen, we just decided to at least double your factory here,’ said the plasterboard King. It was a moment which testified to the charm of an owner-managed company. Even today, three weeks later, people in Haiphong are still talking about the now almost legendary appearance of the company head from lower Franconia.

Knauf may well be right; Vietnam is growing. In addition the North of the country is undersupplied with building materials. Knauf’s competitors, such as Lafarge, have settled in the prospering south. Knauf chose another way. The factory is not yet operational and is already being expanded. Instead of producing the planned 12 million m², it should supply up to 30 million.

“To sell twelve million square metres would have been no problem for us,” says Thomas in his swaggering Australian fashion. “And we’ll manage 24 too.” The costs for the expansion before becoming operational will likely be lower than the launch investment as the land had already been hired.

What makes Knauf so confident is statistics. Putting it this way, the Vietnamese at the moment use just half a square metre of plasterboard annually per person. For Germany that figure rises to 7, and for Australia 9. “We reckon that we will increase that by an average 10 percent over the next seven years,” states Thomas.

Aiming for these quantities means the factory in Haiphong is on the same scale as Knauf’s two large production sites in China and considerably exceeds the production capacity factories in Indonesia and Thailand.  Perhaps the Germans will actually export from Vietnam. Indeed, site costs in Dinh Vu are 50 percent lower than those in China.

Thomas expects that the German company will build five or six factories in the Asia-Pacific region over the next ten years, with Knauf currently operating nine production sites there. The move into North Vietnam seems a smart one, then, with 38 percent of the Vietnamese market located in the region.

To deliver to this market from the prospering south of the country,1800 kilometres away, would be more than 10 percent more expensive than supplying it from Thailand. The work costs of North Vietnam are around 20 percent lower than South Vietnam, an area already overrun by investors*. The risk that Alexander Knauf, from his location in distant Franconia, will regret his investment in Haiphong, seems at present low.

*Note from the editor:

The Ho Chi Minh City region is the business and production center of Vietnam and covers the city itself and such provinces as Dong Nai, Binh Duong, Ba Ria-Vung Tau and may be expanded to Long An and Tay Ninh provinces later. This first four places/provinces, out of the 63 provinces of Vietnam, accounting indeed only for 15 percent of the population of Vietnam, but are creating more than 33 percent of the country’s GDP and contributing 60 percent of the national budget and 60% of the foreign investment! It is also the future high-tech hub of Vietnam. And central springboard to all other Asean neighbour countries.

The Ho Chi Minh City area is also in the center of the ASEAN Countrys Cambodia, Myanmar, Laos, Thailand, Vietnam, Brunei, Malaysia, Singapore, Indonesia and Philippines. And instead of Hanoi and Haiphong, located direct on the main Maritime Containerroute Asia – Europe: Via Japan, China, Taiwan, Hong Kong, Vietnam, Malaysia, Singapore, India, Africa, Europe.

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