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China and the US trade war effect
Foreign investors have continued to flock to Vietnam’s factory districts as the trade war between the United States and China approaches its second year.
“US-China trade war is speeding up a trend that was already well under way, namely to move factories out of China,” said Adam McCarty, chief economist at Mekong Economics in Hanoi.
Few countries have benefited more than Vietnam from the year-old trade war between the United States and China. Companies, already under pressure from rising production costs in China, have been scrambling to identify factories to work with in the Southeast Asian country to avoid heavy tariffs. Besides, 52 percent of Vietnamese goods are enjoying an import substitution effect as a result of the high tariffs imposed by both the United States and China against each other. Among the economies studied in Nomura Securities, Vietnam is the biggest beneficiary from the trade war — with a possible increase of up to 7.9 percent in the country’s GDP.
In the first five months of 2019, Vietnamese exports to the U.S. have surged 36% compared with the same period last year. With $25 billion in shipped goods through May, Vietnam has become the eighth biggest source of American imports, up from 12th place a year ago.
Better regulations for foreign investors
Vietnam will maintain its policy of encouraging foreign investment and continue to improve its investment environment to facilitate investors, said Prime Minister Nguyễn Xuân Phúc.
Government has been undertaking much reform of its complicated tax system in recent years, and this has been reflected in a rise in the World Bank’s Ease of Doing Business rankings. Those rankings state there are 10 corporate tax payments to be made each year, with other tax burdens including VAT (Value Added Tax) and social insurance. The country’s Ministry of Finance notes that the Tax Department has issued regulations that create favorable conditions for businesses, including listing invoices of goods and services purchased and sold together along with the VAT declaration, and a simplification of procedures for calculating VAT and CIT (Company Income Tax). There has also been much work undertaken in the IT side of tax reporting, with electronic tax declaration fully implemented. In addition, proposals to amend and supplement current laws on CIT, VAT, special sales tax and natural resources tax regulations comes into force on January 2019; these proposals aim to clarify unclear tax issues and reduce the tax compliance burden for businesses with operations in Vietnam.
The World Bank’s Doing Business rankings has Vietnam at No 104 in the world for ease of starting a business (69 overall globally for doing business), but it does note that reform is underway - it only takes eight procedures now, where it was over 100 a few years ago. You must have a company address and a lease signed before you register your entity. It’s also worth noting there are conditions and limits placed on some foreign investments, with some undertakings - dealing with certain types of drugs, chemicals and minerals, some biological businesses, and firecrackers - banned from accepting foreign injections.
The entrance of foreign investors, many service sectors such as finance-banking, insurance, auditing, maritime transport, logistics, education-training, healthcare and tourism have developed remarkably recently.
Vietnam named among fastest growing economies in 2020
Report from Standard Charter predicts that Vietnam’s per-capital income will surge to US$10,400 in 2030 from roughly US$2,500 in 2018.
According to Institute of Chartered Accountants in England and Wales’ recent Economic Insight: South East Asia report, the Vietnamese economy is expected to grow at around 6.7 percent this year, the fastest rate in Southeast Asia. In fact, its economy grew at 6.8 percent in the first quarter driven by strong manufacturing, steady services and higher agricultural output.
Southeast Asian economies except Vietnam have seen exports drop in the second quarter of this year compared to the same period last year while Vietnam’s exports grew albeit slower than in 2018.
Foreign direct investment (FDI) and manufacturing are expected to remain big drivers of economic growth. According to the Foreign Investment Agency, FDI disbursed in the first two months of 2019 increased by 9.8 percent year-on-year to around US$2.6 billion.
More and more giant foreign companies coming to Vietnam
Over the past time, the local market has seen giants Singapore-based Grab, and Sea Group joining hands and acquiring Vietnam startups. Grab purchased e-wallet application Moca’s shares from Access Venture Capital for hundreds of thousands of US dollars. Besides, Shopee’s parent company – Sea Group – also spent $64 million to acquire 82 per cent of the shares of Foody Corporation – the owner of food delivery firm Now. The firm also purchased the local delivery firm Giaohangtietkiem at an undisclosed price.
In addition, Malaysia-based real estate company Property Guru acquired its online real estate searching website batdongsan.vn after years of investment.
Speaking of logistics vertical, foreign companies are taking up 70%-80% of Vietnam’s market thanks to a series of merger and acquisition (M&A) deals over the past years, leaving domestic firms struggling with fierce competition. International firms account for only 2%-3% of more than 1,300 logistics companies in Vietnam but they dominate the logistics and warehousing market which is likely to reach US$86.7 billion by 2022, according to Pieter Pennings, consulting director at CEL Consulting.
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While micro-communities of business enthusiasts are popping up all over the country and in particular in Da Nang, Hai Phong and Dong Thap, the main startup hubs are still centered around the capital city of Hanoi in northern Vietnam, and Ho Chi Minh City (HCM) in the south.
The local business culture in both areas have quite distinct characteristics. Hanoi is known as a technological hub, where local players are pushing the needle in terms of software development and innovation. However, Ho Chi Minh’s community is known for its strong entrepreneurial mindset and culture, producing local talent who are business-minded, market-oriented and know how to build and scale businesses.
Local experts suggest that the community is not as united in Hanoi as in HCM city, partly due to the fact that lower average levels of English in Hanoi reduce the amount of international and bi-lingual events held there. There are a number of regular events in English across HCM city, appealing to foreign founders, returning Vietnamese who were born or have lived abroad, and locals who tend to have much higher levels of English than in other parts of the country.
Contributing 45 percent to the country’s gross domestic product (GDP), HCM City has seen investment in companies triple from 2017 to 2018 – making it only natural that Singapore’s programme to connect the city-state with major innovation hubs across the globe has now turned its attention to Vietnam’s largest city.
Also, HCM City is the third ASEAN city to join the GIA (Global Innovation Alliance) network after Jakarta and Bangkok. The eight other cities in the network are Beijing, Shanghai and Suzhou (China), Berlin and Munich (Germany), San Francisco (United States), Tokyo (Japan) and Paris (France). From a city-wide perspective, Ho Chi Minh City’s addition to the GIA is in line with city planners’ goal to turn the urban sprawl of 8.6 million people into an international financial hub. By June 2020, the newly-developed Thu Thiem area in District 2 is expected to start construction of a financial centre complex as part of the government’s plans to attract major investors, enterprises and financial institutions.
Besides, culture differences existing in big cities should be taken into consideration before doing business. Of course, wherever you choose to invest and work, your lifestyle choices will be much better than that with which you have become accustomed in your own countries.
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Over decades, Vietnam has emerged as a favored destination among foreign firms looking to invest in many sectors. Since Vietnam offers a lot of potential for foreign investors, especially for those who are looking to venture into Southeast Asia. According to the World Bank, Vietnam has moved from being one of the world’s poorest nations into a lower middle-income country over the past three decades.
Here are some facts updated in 2019 proving why Vietnam has become more of an attractive destination for investment.
Consistently strong growth
Associate Professor, Dr. Dang Van Thanh, Chairman of the Vietnam Association of Accountants and Auditors, said that Vietnam is reaching a growth rate of about 6% and the figure is expected to reach 6.7% this year. The number of registered enterprises increased significantly, while the number of dissolved enterprises decreased. Budget collection and expenditure still reached the desired target.
Regarding infrastructure, in the next five years from 2019, the investment in this sector is about 7.3% of the total GDP. The main investment source depends on FDI. Along with that, the private sector will get more involved in infrastructure and will change the overall picture of infrastructure. There is also a positive impact of the investment flows into increased imports, exports, transportation and tourism, then resulting in the increase in number of tourists entering Vietnam, which in turn stimulates development of infrastructure.
Red tape to be cut in 2019
Government announced to make resolutions on improving the business environment and national competition from 2019 to 2023. The resolution reflected the Government’s determination to cut red tape for businesses this year with detailed targets and specific deadlines. As a result of this, company licensing procedure is increasingly being digitalized, this makes the process become faster than ever.
According to Mr.Tuan who is head of the Việt Nam Chamber of Commerce and Industry (VCCI)’s Legal Department, the Government’s target of having 1 million firms by 2020 was challenging given the fewer-than-expected number of new firms set up. This means government is seeking many ways to prevent bureaucracy and cut down on official processes.
In fact, the local authorities were still slower in tackling problems raised by firms than ministries and ministerial-level agencies. Though it is known that reforms being still a long road for policies to benefit businesses, the room for positive changes remained large in the upcoming days.
Vietnam economy and free trade agreements
One key way of boosting trade and economic development is through participation in free trade agreements (FTAs). Over the past few years, Vietnam has been active in signing bilateral trade agreements with countries throughout the world. Additionally, due to its membership in the Association of Southeast Asian Nations (ASEAN), Vietnam has become a party to several FTAs that the regional trade bloc has signed as following:
· ASEAN Free Trade Area (AFTA)
· World Trade Organization (WTO)
· The U.S.-Vietnam Bilateral Trade Agreement (BTA)
· EU-Vietnam Free Trade Agreement (EVFTA)
· Trans-Pacific Partnership (CPTPP)
Two such pacts that are slated to come into effect in 2019 and could have a profound impact on the economy are the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) and the European Union-Vietnam Free Trade Agreement (EVFTA). According to the Vietnamese Ministry of Planning and Investment, the CPTPP could raise Vietnam’s GDP by 1.3 percentage points and exports by 4.0 percentage points by 2035, while the EU considers that the EVFTA could lift Vietnam’s GDP by 15%.
These two deals, along with other FTAs which will likely come in the future, should help ensure that the next 30 years are just as positive.
Vietnam has become Asia’s hottest investment destination
With a record US$19.1 billion in foreign direct investment (FDI) disbursement in 2018, Vietnam has become Asia’s hottest investment destination, according to a Forbes report.
Following this, data from the Foreign Investment Agency under the Ministry of Planning and Investment showed foreign investors registered to pour US$8.47 billion into Vietnam in the first two months of 2019, 2.5 times higher than the same period of last year. Disbursement of FDI projects also rose by 9.8 per cent year-on-year to $2.58 billion, hitting a three-year record high.
Notably, foreign investment in science and technology surged sharply, helping it for the first time ranked third in the hottest sectors in the country’s FDI attraction. The positive move is continuing this month with many provinces and cities consecutively announcing licences for high-quality projects.
Infrastructure has been a central factor of Vietnam’s fast-paced economic development. However, economic growth is putting increasing pressure on Vietnam’s infrastructure. Freight volumes are expanding rapidly. Road traffic has increased by an astounding 11 percent annually and the demand for energy is expected to grow by about 10 percent per year until 2030.
Demand for transportation assets benefits from strong GDP growth due to a rapidly growing middle class, increasing urbanization and improving connectivity in Vietnam, with future growth rates expected to outstrip GDP growth. Road and rail network investment will be key to drive infrastructure investment across other sectors in Vietnam. Demand for these assets reflects strong traffic and freight volumes supported by strong and sustained economic growth as well as increasing connectivity and improving logistics.
The growth outlook for the next three years remains robust at around 6.6 percent, providing the perfect opportunity for Vietnam to continue making its infrastructure more productive—especially in energy, transport, and telecommunications—and so generating the jobs and prosperity its people seeks and wants. Vietnam already invests much in infrastructure—almost double the global average—but keeping up with its fast-paced economic growth and development will demand even higher levels.
These developments would be attractive to foreign investors in a general sense.
Tax Incentives for Foreign Investment in Vietnam
Tax incentives have been applied consistently to stimulate investment, especially for the inflows of FDI in Vietnam. It can be seen that reductions in tax obligations while increasing tax incentives in some investment sectors and locations have created favourable conditions for the enterprises to increase capital accumulation, expand manufacturing and speed up the economic growth in Vietnam in the past more than two decades of economic reform.
FDI enterprises enjoy a wide range of incentives when operating in Vietnam, including tax incentives that allow them to pay only 10.7% in corporate tax on average, compared to 20 percent for regular businesses
In the upcoming revision of its incentive policies for FDI enterprises, Vietnam will focus on attracting foreign investment into areas of manufacturing with high added value and technological content.
Lately, many world big corporations start pouring investment into Vietnam. Here are some examples of companies having their presence/ planning to invest in Vietnam:
April 2018, Indian firms strengthen renewable energy investment in Vietnam
Indian giants, including TATA Group, Adani Green Energy Ltd., and Suzlon Energy Ltd. set foot in Vietnam very early after the country opened its doors for foreign investment. TATA Group's solar power project in Binh Phuoc province is the latest Indian investment project. Its total capacity is 49 megawatts and is located on 55 hectares in Loc Ninh district of the southern province. To date, India has 176 projects in Vietnam with the total investment of $814 million
April 2018, The Samsung Electronics factory in Thai Nguyen, in northern Vietnam, employs more than 60,000 people. Its three canteens serve some 13 tonnes of rice a day. It churns out more mobile phones than any other facility in the world. It and Samsung Electronics’ other factories in Vietnam produce almost a third of the firm’s global output. The company has invested a cumulative $17bn in the country.
Its local subsidiary’s $58bn in revenue last year made it the biggest company in Vietnam, pipping PetroVietnam, the state oil company. It employs more than 100,000 people. It has helped to make Vietnam the second-biggest exporter of smartphones in the world, after China. Samsung alone accounted for almost a quarter of Vietnam’s total exports of $214bn last year.
November 2018, Thailand’s TCP Group to invest US$120 million in Vietnam in 3 years
The company owns several brands of energy drinks, including Krating Daeng (Red Bull), Som Plus, Sponsor, Puriku, as well as “Warrior”, its latest product geared for the Vietnamese market. The opening of the office in Vietnam is part of the group’s five-year plan announced in 2017 to triple its total sales to over US$3 billion annually, said Yoovidhya.
March 2019, American Universal Alloy Corporation and Alton International Enterprises were approved to build high technology parks
The central city of Da Nang said it licensed two projects of American giants – leading global manufacturer of aircraft components American Universal Alloy Corporation and electronics manufacturer Alton International Enterprises – to set up their production bases at its hi-tech parks while some others also from the US, such as Key Tronic EMS, are also proposing projects in the park.
Early 2019, Ikea planned to invest US$450 million
Hanoi City also expected to receive Ikea as the Swedish furniture giant plans to invest US$450 million in a retail centre and warehouse system in the capital.
2019 - Lenovo Group proposed a plan building a computer factory
In the northern province of Bac Giang, Lenovo Group from China also expressed a desire to develop a computer component factory during a recent meeting with local authorities. The group said it would need 20-30ha of land for the factory’s development and its products would be exported to the US, the provincial portal reports.
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