strategy+business is published by PwC Strategy& Inc.
 
or, sign in with:
strategy and business
Published: November 25, 2008

 
 

Growing Pains in Vietnam

For the past five years, foreign direct investment in Vietnam has surged, which has brought good news and bad to the country.

Consider the double-edged sword hanging over Vietnam. For the past five years, the tiny emerging nation has been a favorite of foreign investors. Real foreign direct investment (FDI) in productive assets rose an average of 45 percent in both 2006 and 2007, reaching approximately US$20 billion. That’s roughly one-fourth of comparable FDI in China, a country with a nominal GDP 46 times that of Vietnam’s.

Concerned about the commercial risks — and growing costs — of concentrating their entire Asian op­erations in China, many multi­nationals adopted a “China plus one” investment strategy, opening facilities in at least one non-Chinese Asian location to balance their manufacturing footprint. Vietnam has become the second-choice nation for more and more companies. For example, Canon and Nissan are expanding their existing operations in the country, and Hanesbrands is setting up two new apparel factories. One of the main reasons for these moves: Manufacturing workers in Vietnam are paid about $110 per month, including benefits; in popular Chinese regions like Dongguan and Shenzhen, wages range from $180 to $232.

But all this positive news has come at a significant cost to Vietnam. The surge in FDI overheated the economy, causing a boom in imports; the subsequent inflation was worsened by speculators. With so much investment powering the economy, Vietnamese authorities faced pressure in early 2008 to minimize inflation by strengthening the nation’s currency, the dong, primar­ily through higher interest rates. Authorities were reluctant to take this step, however, because the de­pressed dong, kept low artificially, ensured the competitiveness of Vietnam’s exports. Hence, instead of tackling the threat of rising prices, Vietnamese financial chiefs issued new dong to buy U.S. dollars in hopes of devaluing the nation’s currency even more. This boosted overall liquid­ity and loosened the credit markets, which, in turn, fueled further speculative investment and consumption and brought a fresh round of inflation.

Consumer prices took off throughout 2008, hitting a new peak in July when they increased 27 percent year-over-year, with food registering the highest rise, at 45 percent. Wages rose as well, up as high as 20 percent in the first half of 2008, according to Citibank.

As if the situation weren’t bad enough, Vietnam’s young stock market also holds the dubious honor of being the worst performer worldwide in the first half of 2008. The index gained 23 percent in 2007, but fell 59 percent between January and June — largely because of the belated efforts of the central bank, the State Bank of Vietnam, to reduce liquidity by increasing bank-deposit and lending rates after having kept the rates unchanged for more than three years. Local investors pulled their money out to cover short-term borrowings or to protect themselves from the worsening correction in share prices, while domestic and foreign investors alike found their ability to participate in the market constrained by the State Bank’s rules requiring local banks to provide funding for the purchase of equity shares. Vietnam’s 2008 GDP will likely fall below the gov­ernment’s revised estimate of 7 percent, after having risen nearly 9 percent in 2007.

All of this has begun to interfere with the plans of some multi­national companies that at one time looked to Vietnam as a refuge from higher costs in China. For example, Nippon Light Metal Company has canceled construction of an aluminum hydroxide plant in Vietnam that was originally slated to open in 2011 because of the escalating prices of construction and raw materials. And Samsung Electronics, although still committed to opening a new cell phone handset facility in Hanoi, has slowed its hiring efforts because fewer capable Vietnamese are willing to work for the inflation-battered dong.

 
 
 
Follow Us 
Facebook Twitter LinkedIn Google Plus YouTube RSS strategy+business Digital and Mobile products App Store

 

 
Close