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Country Watch: Vietnam’s Momentum Stalls

What does the continuing global financial crisis mean for Asian electronics manufacturing? To answer that question, Asia Time is going to look at 10 countries along Asia’s electronics supply chain, and see how the crisis is affecting business there. This week: Vietnam.

When Vietnam joined the World Trade Organization in 2007, it looked like the future of Asian manufacturing.

Lured by fast-dropping taxes and rock-bottom wages — Vietnam workers make an average of $107 per month, or three times less than a Chinese worker, according to a study by the Japan External Trade Organization — electronics firms including Samsung, Toshiba, LG, and Canon were soon making deals with Vietnamese partners. And it was not just low-wage assembly work. Soon, Toshiba announced intentions to open a software design center, and Sony began manufacturing televisions for the Vietnamese domestic market. Japanese companies in particular loved Vietnam, with only China, India, and Thailand more popular for Japanese foreign investment through most of the decade of the 2000s, according to a report in Asia Times.

Four years later, though, the enthusiasm hasn’t lasted, and, amidst the current economic turmoil, Vietnam finds itself falling out of the mainstream of the electronics supply chain. What happened?

Part of the problem has been bad luck. Vietnam was still adjusting to joining the WTO, which mandated lowering longtime trade barriers, just as the global financial crisis hit in 2008.

So changes that were supposed to make it easier for the electronics supply chain to pass through Vietnam instead yanked the chain back. Sony’s TV factory became an albatross, for example, after import taxes fell to WTO-mandated levels. With it now cheaper to import finished TVs to Vietnam, for sale in the domestic market, it was no longer necessary for Sony to import components and do the manufacturing inside the country’s borders. Two hundred lost jobs resulted, which isn’t a huge number in the overall scheme of things, but was a worrying bellwether. Instead of being part of Sony’s electronics supply chain, Vietnam had suddenly become just another of its retail customers.

The bitter cocktail of sudden globalization coming at the moment of the crisis wasn’t the only explanation for Vietnam’s current shaky position in the chain. Money was still pouring in; as late as last year, Intel had opened a $1 billion chip manufacturing and testing center outside Ho Chi Minh city, the largest such facility in the chip giant’s network.

But Vietnam’s government has overplayed its hand, letting the currency overheat, and victories like the Intel plant opening have become rare. Inflation reached nearly 30 percent in 2008 and, while falling, is still at unsustainable levels. Last year the three major bond agencies lowered the country’s rating, on fears that if Hanoi is unable to stabilize its currency, it will not be able to pay its debts.

For manufacturers, the continuing volatility seems to have undermined Vietnam’s wage advantage over regional rivals like Indonesia and Thailand. Corruption and inefficiency are also concerns, where competitors like Indonesia have taken recent steps to address those same problems.

So today, Vietnam remains an outsider looking in on much of the action. Considered optimistically, most of its problems are self-inflicted, and it’s still a country with skilled workers, comparatively low wages, and a recent history of interest from the giants of the electronics world. To take advantage of those qualities, though, Vietnam still needs to convince the rest of the chain that it isn’t a weak link.

8 comments on “Country Watch: Vietnam’s Momentum Stalls

  1. jbond
    September 8, 2011

    This is a rather unique position for Vietnam. They joined the trade organization and landed some large deals until the bottom fell out of the global economy. It seems like Vietnam is getting pelted from all sides except for their labor pool. They have issues with corruption, high inflation, and a poor credit rating. It is going to take a serious commitment from the Vietnamese government a few large respected companies to help pull this country back into the chain. Looking in from the outside it would appear there is still hope for the country, but only time will tell. 

  2. AnalyzeThis
    September 8, 2011

    Marc, thanks for what I think is a pretty good summary of the current situation with Vietnam.

    I agree that the enthusiasm has faded. Beyond the numerous economic difficulties you mentioned, there are many additional economic and bureaucratic-related issues which combine to make Vietnam less attractive.

    The initial appeal of lower wages is enticing, but once you dig deeper it's clear that there are other rather large sacrifices and risks you'll have to take on to develop a presence in the country. For all the concerns the industry has with China, at least there are certain things that China offers that we have come to rely on. Other nations in the region have difficulty maintaining a similar degree of reliability, and in Vietnam's case, it does indeed appear that it has a long ways to go before it will be able to grow into a major player.

  3. Anand
    September 8, 2011

    Inflation reached nearly 30 percent in 2008 and, while falling, is still at unsustainable levels.

    @Marc, thanks for the post. Inflation is the problem faced by most of the Asian countries. Many countries like India, China are also facing high inflation pressure. In the end what will matter is which country handled the inflation pressure better. Challenges like inflation will help separate the men from the boys.

  4. t.alex
    September 11, 2011

    I believe cleaning up the government corruption practices is equally important. This is a major issue facing most countries in asia region. 

  5. mfbertozzi
    September 12, 2011

    Good point DennisQ. I personally think problems are also a matter of “size”. Financial difficults are involving several countries in that regions (and abroad to be honest), but I am convinced China and India, due to their dimensions and potential political power as consequence, are in condition to find quicky alternatives faster than countries just a little smaller as Vietnam, for trying to solve (or address at least) recovery plans.

  6. Kunmi
    September 24, 2011

    Corruption is at the highest level across the globe. Asia region may be one out of many. What errupted wars in African countries today…..traceable to corruption and greed. Globally, I think each country should rise up to fight the corrupt leaders and sanitize their domain. It is high time to do “operation Sweep the corrupt leaders”

     Take US for example, the leaders are aware that if you are caught in corruption and malpractices, you are done.”May God bless America” The fact that such victims respect themselves and resign from public services does not stop them from being probed. That is what the Asia needs to emulate and that is what the rest of the World needs to embrace. It works.

  7. maou_villaflores
    September 30, 2011

    I think corruption is everywhere.. and we should not blame corruption with the economic struggle of Vietnam. Why dont we try to understand the history of Vietnam from war and communism..maybe we can appreaciate more the progress over the year.

    Based on my travel to Vietnam and the people i met their life is better now compared 10 years ago …in short there is economic progress in their country.

  8. Ashu001
    September 30, 2011

    Marc,

    All across Asia its the same philosophy playing out.

    Jobs or Inflation.

    The major thing is that if we keep currencies weak to ensure exports succeed we get Inflation and jobs.In this sceanario jobs will always be there but if the workers feel not upto it(basically its not worth it) then they will just stop working(or mount go-slow movements) or get very angry leading to lot of violence .

    This has already been seen all across Asia[China,India and Bangladesh are leading examples of this phenomenon playing out today]

    Vietnam also falls into the same category.

    Regards

    Ashish.

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