After China, Vietnam will be world’s factory

After China, Vietnam will be world’s factory

The four million motorcycles on the streets of Ho Chi Minh City offer a remarkable—if somewhat noisy—testimony to the prosperity that beckons Vietnam.

A $900 (Rs35,505)-Honda may not be everyone’s idea of affluence. However, it has the same pride of place in this rapidly industrializing nation as a bullock cart in an agrarian society. Young men and women—many of them migrants from rural areas—commute to large, modern factories on the city outskirts on bikes they are proud to own and scared to lose. This mobility is so crucial to the workers’ productivity that some employers in the city formerly known as Saigon have even begun buying insurance, at their own expense, against the risk of bikes being stolen from their factory premises.

Investors who take the boom in Vietnam’s two-wheeler market as a harbinger of a burgeoning mass market may be disappointed for a few years. Those who see the lust for bike ownership as a sign of Vietnam’s young labour force yearning for the tools it needs to plug into a global supply chain will win. After China, Vietnam is emerging as the world’s next factory of choice for labour-intensive goods.

One can see that in the changing composition exports. Rice and coffee—two of Vietnam’s biggest agricultural exports—are now becoming less significant to the $61 billion economy than textiles. Footwear shipments are gaining prominence over seafood.

The other fast-growing export industry is furniture. Exports of wood-based products have grown 24% from last year to more than $2 billion. James Koh, a Singapore businessman, makes dining tables and chairs in Vietnam for customers around the world, including Williams-Sonoma Inc.’s Pottery Barn stores in the US. Koda Ltd, of which he is the managing director, also has factories in Malaysia and China. Yet, it’s Vietnam’s lower costs that are prompting the firm to expand capacity here by 25%. “The labour cost in Vietnam is half that of China, while worker productivity is about the same," says Koh. Starting next year, the government will increase the mandated minimum wage for foreign-funded companies in Ho Chi Minh City and Hanoi, the national capital, by 13% to 1 million Vietnamese dong ($62), a level that is still affordable, Koh says.

Ready to compete

Chinese-made goods have become increasingly expensive in the US for the past six months. That gives Vietnamese manufacturers an opportunity to win a bigger share in their largest export market.

The ingredients are in place. Vietnam’s accession to the World Trade Organization (WTO) in January has provided its textile industry with quota-free access to the US. Joining the WTO regime has also caused a 37% surge this year in overseas investment commitments to $13 billion.

The biggest draw of the country is clearly its labour. The median age in Vietnam is 25. The workforce isn’t just young, but also literate and healthy: The proportion of people who are undernourished has been cut by half over the past three decades. The risk for Vietnam is inflation, which accelerated to 10% last month, the fastest pace in three years.

Inflation risk

In the short run, Vietnam must stand ready to sacrifice some economic growth to halt the increase in prices, especially of construction material. If left unchecked, inflation will become a drag on Vietnam’s competitiveness even if the central bank doesn’t allow the dong’s nominal exchange rate to appreciate. On the whole, though, Vietnam is on the road to prosperity.

With a population of 85 million, and an economy that the International Monetary Fund says will grow more than 8% this year and next, Vietnam will soon represent a sizable domestic market.

For now, the producer is the bigger opportunity. There is, however, no room for complacency. Cheap labour makes it relatively easy for a country to enter the global supply chain, but it has to work hard to stay in.

Especially now, when a seemingly simple task such as attaching four legs to a rectangular piece of American poplar wood and shipping it back to the US has become too complex to undertake without overseas capital and expertise.

First, there is a minimum investment in technology without which large orders from retailers are impossible to win. Each of the Taiwanese-built assembly lines that Koda is installing in its new Vietnam factory costs $300,000.

Second, buyers in Europe are demanding more exacting environmental standards from their vendors, such as minimum use of packaging material, Koh says. Americans, meanwhile, are getting fussy about making all shipments terror-proof. Most importantly, no retail store—European or American—wants a sweatshop scandal at any of its suppliers’ units. Like most developing countries, Vietnam is dogged by corruption and red tape. It must strive to improve its record now that it’s getting the investments it needs for the workers to graduate from motorcycles today to cars in the future. Bloomberg

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