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Generational Dynamics Web Log for 3-Jul-2019
3-Jul-19 World View -- Vietnam to gain from collapse of US-China trade talks

Web Log - July, 2019

3-Jul-19 World View -- Vietnam to gain from collapse of US-China trade talks

North vs South Vietnam

by John J. Xenakis

This morning's key headlines from GenerationalDynamics.com

Vietnam to gain from collapse of US-China trade talks
Business opportunities in Vietnam
North vs South Vietnam
Doing Business in North Vietnam after the US-China negotiations
Doing business in South Vietnam -- Ho Chi Minh City (HCMC or Saigon)

Vietnam to gain from collapse of US-China trade talks

Anti-Chinese protesters in Vietnam in 2014 (AFP)

Anti-Chinese protesters in Vietnam in 2014 (AFP)

Thanks to China's new Foreign Investment Law and the apparently complete collapse of the US-China trade negotiations, companies doing business in China are now considering moves to China's neighbors, especially Vietnam.

China passed its Foreign Investment Law in March. It allows any Chinese Communist Party (CCP) official to visit a foreign-owned business with offices in China and demand copies of all confidential company business records and company data, as well as its source code and all other intellectual property. Compliance is required.

US and Chinese trade negotiators had reached a 150-page written agreement that removed all of these regulations.

US trade negotiators had thought that they had an agreement with the Chinese negotiators that threw out all these onerous conditions. But late in the evening, Friday May 3, Washington received the latest edits from their Chinese counterparts that completely reneged on all of Beijing's commitments. It's now believed that Beijing never had any intention of honoring the its commitments, but expected that political pressure would force President Donald Trump to accept the watered-down agreement anyway. Instead, Trump angrily announced a new rounds of tariffs and restrictions on Huawei. It's believed to be quite a shock to Beijing that Trump is receiving wide support from the international community and Democrats in Washington to stand up to China, at least for the time being. China will not back down from its trade model that uses subterfuge, extortion, and ignoring its commitments and obligations, and Trump cannot back down because to do so would be appeasement, and would do no good anyway.

And so the US-China trade negotiations have mostly collapsed, although the talks may be revived as a result of last week's meeting between Donald Trump and Xi Jinping.

Business opportunities in Vietnam

The collapse of the US-China trade talks is shaking up all of Asia, and there are certainly going to be winners and losers. Vietnam is hoping to be one of the major winners, as businesses look for countries to which to shift their manufacturing out of China, in order to avoid the US tariffs.

Vietnam’s economy today is one of the fastest-growing and most vibrant in the world. GDP grew at 7% in 2018, with similar growth forecast for 2019.

Vietnam also has a young, ambitious labor force, with two-thirds of the population under age 35. Just as the West had its "baby boom" after World War II, Vietnam had its own baby boom after the extremely bloody generational crisis civil war between North and South Vietnam in the 1970s, and those babies are now of working age.

Furthermore, labor costs are a fraction of what they are in neighboring countries. According to one estimate, labor costs in Vietnam are half those of China, with the same worker productivity.

Because of the US-China trade dispute, many companies are considering moving their manufacturing facilities from China to Vietnam, since exports from Vietnam would not be subject to the US tariffs.

For example, China's wireless earphone maker GoerTek has expressed an intent to move production to Vietnam, to avoid the tariffs, because labor is cheap, and because Vietnam is close by. Taiwan's massive tech firm Hon Hai Precision Industry Company, better known as Foxconn, has begun moving its production to Vietnam in recent months.

Vietnam was flat on its back after the 1970s wars, but the economy has changed substantially in the last decade or so. For example, fifteen years ago Vietnam imported almost all the food it consumed, but today Vietnam is in the top two exporters of rice and coffee and exports a lot of seafood worldwide, mainly to China and Hong Kong.

North vs South Vietnam

Those wanting to do business in Vietnam should distinguish between the the North and the South, because they have two very different cultures, and in many ways they're like two different countries.

North Vietnam (Vietnamese Kingdom) was originally populated by ethnic Chinese, while South Vietnam (Champa Kingdom) was populated by Polynesian settlers from Indonesia and Malaysia. These ethnic differences resulted in one North-South crisis civil war after another over the centuries.

The country was united by the Tay-Son rebellion (1771-1790), the most celebrated military event in Vietnamese history, ending in a brilliant battle in 1789 where the Vietnamese troops repelled a much larger Chinese army. The North and South remained technically united through the French colonial period, until Ho Chi Minh founded the Vietnam Communist Party and drove the French out of North Vietnam in 1956.

The North and the South went through bloody civil war (America's "Vietnam war") that united the two regions under the North Vietnamese communists. However, although the war has ended, there's still a great deal of animosity between the North and the South. Furthermore, after the war ended, Vietnam followed up with wars against Cambodia, and then a border war with China.

After the 1970s wars, the Communist government in Hanoi applied Communist restrictions on businesses in the South, with the continued use of wartime planning mechanisms that emphasized output targets and paid little heed to production.

In 1986, Hanoi adopted the Doi Moi economic reforms, with a significant effect on the south, making it the engine for Vietnam’s industrial growth. These reforms were inspired by Deng Xiaoping's 'Reform and Opening Up' of China in 1978.

Doing Business in North Vietnam after the US-China negotiations

Most companies moving their production facilities from China to Vietnam to evade US tariffs want to select sites for convenience, in North Vietnam, close to China's border. The Hanoi government is encouraging investments from China, but North Vietnamese public in general is opposed.

Capital inflows from mainland China, Hong Kong and Macau stood at $700 million in 2011, but by last year had topped $2.4 billion. China is the fifth biggest investor in Vietnam behind Japan, South Korea and Singapore. But critics, especially among North Vietnamese, argue that Chinese projects exploit cheap labor and minerals, while polluting the environment and landing the locals in debt.

Vietnamese hostility toward China is great for a number of reasons. In the late 1970s, after the Vietnam civil war, there was an extremely bloody border war between China and Vietnam that left a lot of dead but was otherwise inconclusive. More important, China has illegally annexed the South China Sea, including regions that historically belonged to Vietnam. China's navy has even attacked Vietnamese fishing boats in Vietnam's own territorial waters.

In 2014, thousands of anti-Chinese protesters in Vietnam, furious over China's installation of an oil rig in waters in the South China Sea historically claimed by Vietnam, turned violent and torched a number of factories in a southern Vietnam industrial park. It was Chinese factories that were the nominal targets, but the angry mob also attacked properties owned by Korea, Singapore, Taiwan and Japan.

Public opposition last year to Chinese investments became focused when thousands of people filled the streets of several major cities across Vietnam in June, 2018. They were protesting a proposal to create three "economic zones" which would give special business and trade privileges to foreign investors. They were particularly objecting to a proposal to allow 99 year leases by foreign investors, which allow the Chinese to set up Chinese enclaves that would remain forever. The Vietnamese public strongly opposed the economic zones. So far, public pressure has prevented the Communist government in Hanoi from gaining approval of the economic zones.

Doing business in South Vietnam -- Ho Chi Minh City (HCMC or Saigon)

Those who wish to do business in South Vietnam should focus on the city of Saigon, which was renamed to Ho Chi Minh City or HCMC by the Communists after the 1970s civil war. Last year HCMC attracted foreign investment of over $7 billion, 22% of the country’s total.

HCMC is experiencing a major real estate boom, thanks to low property prices. The following are average property prices in Asian cities, per square meter:

Hong Kong $48K
Singapore $30K
Tokyo $18K
Taipei $15k
Bangkok $9K
HCMC $8K
Hanoi $7K

According to one study, 35,000 new apartments were put on the market between 2015 and 2018. During 2016-17, developers and corporate buyers snapped up about $1.2 billion of residential-zoned land. Most of this was from foreign buyers, mostly from South Korea, Hong Kong and China. According to estimates, over a third of historic old Saigon city buildings have been destroyed in the last 20 years to make room for new construction.

However, the disproportionate investment in real estate is raising concerns. Foreign investment money is pouring into Saigon for real estate, but not so much for industries.

During the first four months of 2019, real estate accounted for 46.8% of foreign investment, with little going for industries such as manufacturing or agricultural processing.

In response, the HCMC People's Committee chairman Le Thanh Liem has called for $53.8 billion in foreign invesments, focusing on nine areas, including transport, infrastructure, agriculture, commerce-service, education, and healthcare. 1,000 hectares of land would be earmarked for industrial purposes to attract investors.

This should represent a big opportunity for investors or for businesses that would like to relocate to South Vietnam, because of low-cost labor, low-cost housing, and government incentives for foreign investment.

Sources:

(Comments: For reader comments, questions and discussion, see the Generational Dynamics World View News thread of the Generational Dynamics forum. Comments may be posted anonymously.) (3-Jul-2019) Permanent Link
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