A Country in Transition
THE RAPID ECONOMIC CHANGE in Vietnam has specifically been felt hard by the residents of the island of Cat Hai. Just a few years ago, their homeland was a long way away from the flow of goods in the global economy. The existence of the inhabitants was based mainly on fish farms and agriculture. Those who had something to do in the neighboring metropolis of Haiphong depended on the ferry boat, which stopped twice a day on the island.
Solitude has been over since September 2017: After three years of construction, the five-and-a-half kilometer long Tan Vu Lach Huyen bridge opened – the longest sea bridge in Southeast Asia that connects the once sleepy island to the mainland. Just a few months later, an international container terminal began operations on Cat Hai – North Vietnam's first port of call for large container ships.
With the infrastructure came the industry: Since the middle of last year, production by Vietnam’s first car manufacturer has been up and running on the island. Under the Vinfast brand, billionaire Pham Nhat Vuong wants to produce a quarter of a million cars a year.
The establishment of its own automotive sector is a milestone in economic development for the country, which has a population of around 100 million. After the end of the Vietnam War and the victory of the Communists, Vietnam was one of the poorest countries in Asia until the 1980s. The hardship forced the leadership of the Socialist Republic to reform. The ensuing economic opening initiated a historic upswing that continues to this day – even in the face of the coronavirus crisis, economists in the country expect growth of up to five percent by 2020. While Vietnam has long been known primarily for cheap textiles and footwear, it is now increasingly establishing itself as a location for high-tech production and offering machine builders good sales opportunities.
Vu Trong Tai is one of the profiteers of the trend. He heads the Vietnam branch of the Southeast Asian trade fair company Reed Tradex and is responsible for the Metalex machine tool trade fair. Until the coronavirus crisis began, he was able to look forward year after year to a growing number of exhibitors and visitors. “The rapid industrial development is causing the demand for machine tools to rise sharply,” he says. The trade dispute between the US and China, which disrupted global supply chains last year, has encouraged development. "Many companies have migrated from China to Vietnam with their factories," he says. "This has helped the country to become the new production center in Southeast Asia." In 2020, manufacturing will continue to be the main driver of economic growth, which last year was more than seven percent, exceeding the government's expectations.
The massive rush of foreign companies was one of the main reasons for the economic boom: 3,880 projects received investment licenses last year, an increase of 28 percent. The total volume of announced foreign direct investment also rose sharply, growing by seven percent to 38 billion dollars. Two-thirds of the capital that went to Vietnam went to the manufacturing sector. With new factories in Vietnam, many companies tried to escape the punitive tariffs imposed on each other by China and the US.
The country is considered as an ideal alternative location: The population is young and comparatively well educated. And the government sees globalization as a great opportunity for the country and has signed a number of free trade agreements: With the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), Vietnam has been in a free trade area with countries such as Japan, Canada, and Mexico since 2018. At the end of June 2020, Vietnam signed a free trade agreement with the EU that abolishes 99 percent of reciprocal tariffs. The RCEP trade pact, which includes Vietnam and its Southeast Asian neighbours, is also due to be completed in 2020.
The good conditions particularly attracted electronics manufacturers: Nintendo announced that it would move part of its game console production to Vietnam. Sharp relies on the site for its production of LCD displays for the US market. And the Apple supplier, Goertek, also opted for another mainstay in the Southeast Asian state.
Vietnam was also able to convince other industries: In May 2019, the automotive and mechanical engineering supplier, Schaeffler, opened a 45 million euro plant in the South Vietnamese industrial city of Bien Hoa, with the declared goal of becoming more independent from China. The supplier ZF Friedrichshafen built a factory for chassis module technology right next to the Vinfast factory on the Cat Hai island. The Chinese engineering company, Omnidex, also moved part of its production to the neighboring country.
“Vietnam has established itself as an important component of international supply chains,” says the Association of German Machine Tool Manufacturers (VDW). In order to be competitive on the world market, manufacturers are dependent on sophisticated production technology. However, the machine tool industry in Vietnam itself is only slightly developed, according to an analysis by the association. The German foreign trade development agency GTAI also observes a pent-up demand: “In order to increase their productivity, Vietnamese companies need new or at least modernized equipment,” said Vietnam expert, Frauke Schmitz-Bauerdick, in a market analysis.
The situation of Vietnamese machine tool builders has changed little since then. “It is a great challenge for local manufacturers to keep up-to-date with modern technologies, in order to be able to compete,” says industry expert, Vu Trong Tai. Currently, Vietnam’s economy primarily relies on machine imports from abroad. In the first nine months of last year, they had a total value of 26.9 billion dollars – 12 percent more than in the same period last year. Imports come from Europe, America, Japan and South Korea – but above all from China, which last accounted for almost 40 percent of machine deliveries.
Chinese machine builders still have a strong advantage over Vietnamese ones, Tai finds. This is due to the fact that Chinese manufacturers can rely on industrial supply chains that are significantly better developed. Vietnam is also lagging behind in terms of infrastructure. Tai, however, is convinced that this will soon change. The government is working to improve the conditions, he says. Import restrictions adopted last year could also help local manufacturers: For example, used machinery older than ten years may no longer be imported into the country. "The time has come for foreign manufacturers to increasingly engage with production in Vietnam," Tai says. He is optimistic: "There is great scope for growth."