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Published on September 10, 2007

 Vietnam has become one of the most attractive countries for industrialists with labour-intensive operations or who want to benefit from the country's rapidly growing domestic market. Vietnam has also become an economic rival of some consequence to Thailand.

It seems that every big corporation that is looking to invest in Thailand these days must first make it past the growing allure of Vietnam, and the companies that are being drawn to our Asean neighbour are not only foreigners. Thai companies are in the pack as well. Suffering from increasing labour costs, as well as other "negative factors" at home, Thai investors are increasingly turning their eyes eastwards to Vietnam.

Foreign direct investment (FDI) in Vietnam was worth US$8.32 billion (Bt285 billion) in the first eight months of the year. Of this, $247 million came from Thai investors, who are ranked seventh on Vietnam's list of investing countries, following South Korea, Singapore, the British Virgin Islands, India, Taiwan and Japan.

Vietnam's inflow of foreign investment is growing in great leaps, from $5.3 billion in 2005 to $10.2 billion last year and $8.32 billion in the first half of 2007.

Among the Thai companies already well established in Vietnam are Amata Corp and the Siam Cement Group (SCG).

Amata (Vietnam) has registered capital of $17 million and spent billions of baht to create an industrial estate called Bien Hoa in Dong Nai province near Ho Chi Minh City.

Thai companies that have followed Amata to Bien Hoa include Goldfine Manufacturers (a gold and jewellery exporter), Starprint Vietnam (a printing and paper-packaging manufacturer) and Auromex Vietnam (a plating company).

SCG has also poured huge investments into Vietnam, with the goal of promoting itself as a regional leader.

The group has spent Bt5.2 billion setting up a new Kraft paper plant with a production capacity of 220,000 tonnes a year.

"Vietnam has great potential for our business because foreign industries are expanding their investment there and, as a result, the demand for Kraft paper for packaging will enjoy strong growth," says SCG Paper's president Chaovalit Ekabut.

Earlier, SCG's construction material business spent Bt3 billion on a fibre-cement plant in Vietnam with advanced green technology.

Following SCG, an equally well-known group of Thai companies seems poised to grab the opportunities offered by Vietnam. They include Preuksa Real Estate and Central Pattana.

Most of the Thai investors see Vietnam as the best place to expand their businesses because the country's gross domestic product has been growing at a rate of 6-8 per cent per year and is expected to reach double-digit growth next year.

Amata Corp director and senior vice president Viboon Kromadit says many labour-intensive industries such as textiles and garment-makers have moved their production bases to Vietnam because of the cheap cost of labour. Compared to Thailand, where the minimum rate of pay is around $3,000 per year, Vietnamese workers are paid only about $660 per year.

Moreover, Vietnamese workers are diligent and highly productive, he says.

As well as the low wages, foreign investors are attracted to the almost unbelievably cheap rental fees for land. Amata Corp's first industrial estate covers an area of 700 hectares, for which it pays a rental fee of between Bt1 million and Bt2 million per year.

Land must be rented because Vietnam does not allow foreigners to purchase and occupy their own land. Presently, the Vietnamese government allows companies to sign a 50-year contract, which is the maximum period, to rent their land.

Amata Corp set up Amata (Vietnam) to run its business there in 1995, and its first industrial estate is only 30 kilometres from Ho Chi Minh City.

Viboon says Vietnam has another obvious advantage over Thailand as a place for industrial investment. Despite its socialist government, its political situation is stable.

"The first words that Vietnam utters to attract foreign investors and secure investors' confidence are, 'Our country has stable politics'," Viboon says, and he confirms that Thailand's cloudy political situation is particularly relevant to investors' confidence, especially that of overseas firms.

However, there are two sides to every situation, and investment in Vietnam is no exception.

"You may spend a small amount of money on labour and land-rental fees, but you need to pay billions of baht to develop infrastructures, including roads and power-generating plants," says Amata's senior vice president.

In the contest for foreign investment, the infrastructure issue is one of Thailand's biggest plus points. For some multinationals like New Zealand-based electrical appliance giant Fisher and Paykel, infrastructure was the pivotal issue. CEO and managing director John Bongard says his company's investment in Thailand will keep it competitive in international markets.

"It's very difficult for exporters in New Zealand and Australia to remain profitable, because of high exchange rates and labour costs," he says.

Before making its decision, Fisher and Paykel also considered setting up in Vietnam or China, countries well known for their cheap labour.

However, he says it finally chose Thailand because it has better infrastructure than Vietnam and is much closer to New Zealand and Australia than China.

Following a recent free-trade agreement between New Zealand and Thailand, other New Zealand companies are also reportedly thinking of shifting their manufacturing operations to Thailand, in order to take advantage of relatively cheaper labour costs.

Viboon says most operators setting up in Vietnam face complicated financial processes, because the banking system there has yet to earn the trust of the international banking community. For example, operators find difficulty with letters of credit because international banks give little creditability to Vietnamese banks.

In terms of incentives offered to industrial newcomers, Vietnam's Planning and Investment Ministry does not offer privileges any more attractive than those offered by Thailand's Board of Investment (BoI), he says.

Vietnam offers tax exemption for 10 years, and companies begin paying the standard corporate tax rate of 28 per cent in the 11th year. The BoI grants tax exemption for eight years and then collects only half the standard rate of 30 per cent for the following five years.

Viboon says Vietnam is seriously supporting foreign firms involved in technology and innovation in order to get their know-how and create more local value-added products. It is a strategy successfully employed by Thailand.

"I believe Vietnam will upgrade from a labour-intensive to a technology-based country within five years," he says.

Supachai Watanangura, chairman of the Federation of Thai Industries' Petrochemical Industry Club, says the petrochemical business in Vietnam has grown rapidly in the past few years. He believes that the way Vietnam is developing the industry is similar to the path chosen by Thailand several years ago.

"Vietnam is focusing on high economic growth, and it pays less attention to environmental issues," he says.

When companies wish to establish a petrochemical plant there, the processes to be employed must be approved, but there's no environmental impact assessment. At present, the country has few petrochemical plants, and they are scattered. However, if greater numbers of petrochemical industries begin springing up in just one location, Vietnam and its local communities will have to take more care with environmental problems.

Amata's senior vice president suggests companies considering investment in Vietnam study that country's laws and tax regulations carefully. He says they are quite conservative.

Moreover, potential investors should understand consumer behaviour if they want to set up service businesses or sell their products in Vietnam. The Vietnamese, he says, have very high brand loyalty. Most people, for example, ride Honda motorcycles.

"If you think you need cheaper labour, and you want to use local resources for your raw materials, then Vietnam is your destination," Viboon says. "But you have to remind yourself that this is still a socialist country and prepare yourself for sudden changes."

Although Vietnam is currently Southeast Asia's rising star, Thailand has not lost its competitiveness, he says. It is in the midst of a process of change from labour-intensive to technology-intensive industries and is becoming a knowledge-based country.

"Thailand has better infrastructure than Vietnam. Thailand also has to improve its technology-information systems. The next step to drive Thailand beyond Vietnam will come if our political situation is stable and the new government can create ways of improving the country to become a knowledge-based society," Viboon says.

Chalida Ekvitthayavechnukul

 The Nation