Investors return to challenges of Vietnam

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Nike set up shop in Vietnam in 1995, at a time when western companies were flirting with what was then seen as south-east Asia’s next tiger economy. Plenty of early prospectors soon packed their bags, dismissing Vietnam as an impoverished, war-scarred backwater too entrenched in Marxist ideology to provide a suitable business environment.

Nike, however, stayed put, patiently turning the Communist-ruled country into an integral part of its global supply chain – the second-largest manufacturer of Nike-branded products after China. About 160,000 Vietnamese now work making Nike shoes and apparel – accounting for about 30 per cent of the US company’s global supply and around 9 per cent of Vietnam’s manufactured exports.

With Hanoi poised to enter the World Trade Organisation, western and Asian companies are flocking back to Vietnam – many aiming to emulate Nike’s success in tapping the youthful workforce and burgeoning domestic market. Intel last week unveiled plans to build a $1bn semi-conductor assembly and testing facility in Ho Chi Minh City, the largest investment by a US company. And lawyers are receiving a flood of inquiries from business executives, all eager to hook into an economy growing around 8 per cent a year. Vietnam-dedicated funds are flush with newly-raised cash to invest in promising ventures.

But as new companies, large and small, rush into what they hope will be a “little China”, Vietnam’s more seasoned, established investors are fretting over whether the already-strained infrastructure, sluggish government bureaucracy and skilled workforce will keep up with the stampede of investors, or whether
economic bottlenecks will generate fresh disillusionment.

“It’s certainly not a perfect environment,” said Thomas O’Dore, chief representative of insurer Liberty Mutual and a veteran of the 1990s cycle of hype and letdown. “You have to come in with your eyes wide open and some patience.”

Unlike their more ambivalent predecessors, Hanoi’s new generation of less-ideological, more market-savvy Communist rulers certainly sees foreign investors as important assets in the
drive to transform the country into a regional powerhouse, and to generate job opportunities for the approximately 1m young people entering the labour force every year.

Yet the lingering legacy of the centrally-planned economy, decades of rule by fiat and pervasive corruption have left the government with formidable challenges in trying to meet investors’ requirements: modern infrastructure; predictable, transparent and timely bureaucratic decision-making; and a credible legal and regulatory system.

Port congestion, power shortages and other infrastructure deficiencies are already big investor headaches, even before the anticipated post-WTO surge of exports, which some business groups forecast will grow 25 per cent a year for the next several years.

Ports around the greater Ho Chi Minh City region – which accounts for around 73 per cent of Vietnam’s total exports – are already at full capacity. Blackouts are not uncommon.

While Hanoi has set out plans for both port and power expansion, manufacturers and business groups warn that cautious Vietnamese authorities are under-estimating future growth – and that the inevitable delays in getting projects off the ground will bring a crunch soon.

“It is not China, where they build in advance. Vietnam has really built infrastructure in a ‘just-in-time’ model,” said Chris Helzer, a senior regional executive for Nike. “That is how they have done it, and it’s always worked for them . . . But with this 25 per cent annual expected export growth, that approach is going to need to evolve.”

The nature of Vietnam’s port plans has also generated concern. Rather than building a handful of large-scale, world class ports in several strategic locations along the country’s long coastline, Hanoi, preoccupied with distributing the benefits of growth equally, wants to build smaller ports, one in every province. “They are very socialist, very 1960s in their thinking,” said
one logistics expert, who predicts serious port congestion for the next four years, at least.

Investors may encounter other unexpected difficulties. Competition to find and retain skilled workers – even managers and executives – will intensify. Companies aiming to sell their products in the local market will find high-quality counterfeits – many imported from China – are rampant and authorities have insufficient resources to eradicate the fakes. Smaller companies, without a highly-recognisable name, may contend with low-level bureaucrats, who may not share their superiors’ commitment to wooing as much investment as they can.

Yet chastened by their past failed flirtation with this emerging market, many western companies this time around are far more realistic. And Mr O’Dore predicts Hanoi will also make strenuous efforts to try to remain the darling of investors, as it seems to be now. “There’s going to be growing pains,” he said. “But when the pressure is at its highest, Vietnam will come through.”

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