Vietnam’s Got Talent

31 August 2020

Vietnam’s Got Talent

While the global pandemic and the Sino-American trade war have made multinational corporations move factories out of China to nearby countries such as Vietnam, is Vietnam ready to take it all? Johnny Chan reports.

Foremost in threats to global supply chains is the ongoing trade war between China and the United States. “It has led to a growing trend of shifting supply chain activities from China to Southeast Asia, especially at the stages of final product assembly and finishing. Furthermore, the complete shutdown of the world economy in general, and of China’s in particular, for an extended period due to Covid-19 has led to a break in global supply chains. For this reason, the need for greater diversity in supply chains and the reduction of reliance on China is evident,” says Duc Dang, managing partner at Indochine Counsel in Ho Chi Minh City. “Vietnam has attracted more supply chains because of its significant advantages, including but not limited to the initial ability to control the outbreak of the coronavirus at an early stage and to reopen its economy, but also its relatively developed infrastructure and proximity to the existing supply chains in China.”

 

When they go low, Viet go high

Vietnam has accelerated the restructuring of its labour force from low-skilled labour-intensive industries to industries that use a lot of high-quality labour, says Xuan Duc Nguyen, managing partner at Ageless IP Attorneys & Consultants in Hanoi. “The proportion of employees in the electronics industry has increased from 8.03 percent in 2012 to 15.7 percent in 2017.”

Nguyen says that in order for Vietnam to develop high quality human resources and improve national competitiveness, the government has introduced the following policies:

  • Developing a vocational education renewal programme for the period of 2020-2025 associated with training high-quality human resources for each specific field and retraining of employees to meet the requirements of the Fourth Industrial Revolution;
  • Creating an attractive working environment for highly qualified Vietnamese people working abroad, overseas Vietnamese and foreign experts to work in the country;
  • Prioritizing budget allocations and other resources for high-quality labour education; and
  • Strengthening cohesion and incentives for businesses to participate in training high quality human resources as well as cooperating with large corporations and enterprises in training high-quality human resources for enterprises (i.e. Vinfast, Samsung, FPT).

In the short term, Vietnam must continue to control the pandemic, Nguyen emphasizes. “In early March, the government announced a comprehensive anti-Covid-19 solution including a monetary policy package worth D250 trillion (more than US$10 billion) to restructure debt, reduce interest rates and support loans for businesses; a social security package worth D62 trillion (US$2.7 billion); and a fiscal policy package worth D180 trillion (US$8 billion) which extends tax payment time and land rental.”

 

The specifics of the packages are as follows:

  • Capital support (according to Directive No. 11/CT-TTg dated March 4, 2020 of the Prime Minister): shortening the time for reviewing loan applications, rescheduling the repayment period, interest exemption and reduction, etc;
  • Tax support: extension of tax payment time, exemption of late payment interest (according to Official Dispatch No. 897/TCT-QLN of the General Department of Taxation; Circular No. 156/2013/TT-BTC of the Ministry of Finance; Decree 41/2020/ND-CP on extension of tax payment time and land rental);
  • Exemption, reduction of interest and fees according to Circular No. 01/2020/TT-NHNN issued by the State Bank of Vietnam;
  • 10 percent reduction of the retail electricity price for the manufacturing and trading industries;
  • Enterprises are allowed to borrow money to pay for redundancy of employment (according to Resolution No. 42/NQ-CP of the government);
  • Enterprises are entitled to delay payment of social insurance (according to Official Dispatch No. 1511/LĐTBXH-BHXH of the Ministry of Labour - Invalids and Social Affairs);
  • Enterprises are entitled to delay payment of trade union fee (according to Official Dispatch No. 245/TLĐ of Vietnam General Confederation of Labour).

In the medium- and long-term, Vietnam must maintain macroeconomic stability, improve the resilience of the economy to external shocks, the competitiveness of the country and enterprises, the domestic market, the foreign exchange reserve, the financial system and the control of bad debt, Xuan says. “We must ensure the consistency, stability and suitability of mechanisms such as policies, especially those on land, tax, labour and macroeconomic management (i.e. exchange rates, interest rates).”

The greatly improved infrastructure and administrative reform would further attract foreign investors and manufacturers, he says. “We must also continue to enhance the logistics system, as it is a core part of any supply chain.”

Tuan Nguyen, managing partner at ANT Lawyers in Hanoi, cautions that while Vietnam has signed many free trade agreements such as the ASEAN Free Trade Area, the EU-Vietnam Free Trade Agreement and the Comprehensive and Progressive Agreement for Trans-Pacific Partnership, such FTAs still have limitations.

One of the utmost important matters is strengthening IP protection, Tuan Nguyen says. “Raising IP awareness and building up of an effective enforcement system are essential. Many foreign investors have been reluctant to carry out production and business activities in Vietnam because of the lack of serious enforcement.”

 

The new generation FTAs are a great opportunity for Vietnam to change its legal system in general, or its IP law specifically, he says. “For instance, Vietnam took the initiative to join the Hague Agreement on International Registration of Industrial Designs on September 30,2019, while according to Article 12.34 sub-section for Industrial Design in the chapter of IP of the EVFTA, Vietnam could have two years to participate in that agreement from the date the EVFTA takes effect,” he says. “Vietnamese IP law has been amended as well in order to be in accordance with the regulations of the CPTPP regarding the validity of a trademark, establishment of an IP or grace period on a patent, etc.”

Furthermore, local administrative procedure reform and investment opportunities are being promoted to fight for a place in the global supply chain. “On the regulatory aspects, Vietnam has amended the Enterprises Law and the Investment Law taking effect from January 1, 2021, to improve the business environment,” he adds. “Vietnam has applied a number of preferential policies to attract investors with financial capacity, using high technology, implementing projects to protect the environment, social security, etc. However, the limitations on the complexity of administrative procedures and ineffective management of state agencies still lead to the lower score on ease of doing business in Vietnam in comparison with neighbouring countries.”

Therefore, in order for Vietnam to become a link in the global supply chain, it is necessary to cut down the customs procedures for importing and exporting.

“Clearing customs for import goods in Vietnam has been considered an obstacle for a smooth supply chain, and this is the ‘minus point’ when foreign investors consider Vietnam as their destination. Hence, the application of IT for customs declaration as well as control and management of goods is an important thing,” he says. “Although, local customs has applied IT in the fields of customs management, tax collection, risk management, checks after clearance, violation handling [and others], it still needs to reduce the number of procedures, provide clearer instructions in the implementation procedures, shorten clearance and document processes in order to help create a favourable business environment.”

The use of data to substantially boost supply chain operations has indeed improved accuracy, accelerated delivery, and reduced costs, says Dang.

Another noteworthy technology is the internet of things, which helps combat false product labeling, he says. “That has been a mounting threat to Vietnamese exports.”

Last but not least, artificial intelligence is essential with its ability to automatically process and control supply chains without the need for human intervention. “However, AI is still fairly new in Vietnam due to the lack of large databases, infrastructure, resources, and a solid foundation for strong AI platforms,” he adds. “To take advantage of this innovation, Vietnam needs to map out strategies and directions for the AI industry by gradually developing preferential policies in training talent for the sector.”

 

The immigrants

Prior to the pandemic, Vietnam’s foreign direct investment was mainly from processing and manufacturing, real estate trading, wholesaling and retailing as well as automobile and motorcycle assembly, which account for 81 percent of the total registered capital in 2019, says Xuan Nguyen. But since Covid-19 hit, FDI has been shifted to the following fields:

  • Technology. “For example: Samsung Electronics plans to move its last plant from China to Vietnam,” Xuan Nguyen says. “Also, according to the official website, Apple has announced vacancies for hardware engineers, engineers and managers in operations and supply chains, managers in sales and business development, as well as managers in corporate functions in Hanoi and Ho Chi Minh City. The series of job openings have been posted over the past few months, fueling the rumour that the iPhone producer is fleshing out a plan to launch a production site in Vietnam.”
  • Electronic equipment and accessories (i.e. Panasonic);
  • Logistics or e-commerce (i.e. Alibaba); and
  • Consumer goods, retail (i.e. Zara, H&M).

 

Money never sleeps

When relocating supply chains to Vietnam, costs will be a key consideration, especially in a post-Covid-19 world, so what are the cost considerations for companies when relocating their supply chains?

“The most important cost factors for businesses are labour development, relocation and facility development, imported material and components, quality control and regulatory compliance,” Dang says. “The last has shrunk over the last decade though remains higher in Vietnam than other countries. One benefit, here, for companies shifting to Vietnam, is the fact that the application of Vietnam’s policies have become more transparent than China’s and that Vietnam is still looking to lure new investment in comparison with its already sated neighbour. Businesses will also consider incentives and tax breaks that the country currently offers to make the most of the opportunities available.”

 

Insatiable appetite

Vietnam is confident to take on most, if not all, supply chains after the pandemic.

“Vietnam’s capabilities have long been proven by multinational companies. As global supply chains have been disrupted by Covid-19, Vietnam has turned into an appealing alternative to China due to the country’s young and comparatively low-cost labour force, stable government, and business-friendly environment. Furthermore, it is anticipated that Vietnam’s economy will have exceptional growth after becoming a part of the Quadrilateral Security Dialogue on combating Covid-19 and reviving the economy post-pandemic,” Dang says. “The road ahead won’t be easy nor short! In the next few years, Vietnam will face a challenge of increasing its value as part of global supply chains, rather than simply increasing trade volume. It can accomplish by increasing high-skilled workforce, investing in infrastructure, and enforcing more stringent standards. With these elements in mind, Vietnam won’t only enhance its position as a valued partner in global supply chains but also a strong competitor in the global economy.”


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