Discrepancy between GDP and GNI of Asian countries

[William Hung]

Thank you. Can you shed any light on why Intel would choose Vietnam as a location for this? No local sourcing, no local talent pool, and probably comparatively inferior infrastructure, let alone a government that's not known for friendliness to business--on the surface, a mind-boggling decision. Why bother exporting chips to Vietnam for this specific step, instead of co-locating with the foundries?

Electronics Manufacturers Bet Big on Vietnam » Techonomy

1.) Extremely cheap labor - note that test/assembly is the most labor intensive and least capital equipment intensive part of the semiconductor manufacturing process.

2.) Unlikely to leak IP to local competitors.

3.) Huge incentives to move.

A quick Google search also showed this news piece about VN's supporting industrial problem:

English - VietNamNet News

Vietnam urged to quickly improve supporting industries

The Japan External Trade Organization (JETRO) in HCMC called for Vietnam to speed up improvement in supporting industries to help companies, particularly those from Japan, reduce heavy dependence on imports.

Hirotaka Yasuzumi, managing director of JETRO in HCMC, raised the point at a seminar on solutions to develop supporting industries in Vietnam in HCMC last week. The event was organized by the Industrial Policy and Strategy Institute, Heavy Industry Department and Vietnam Trade Promotion Agency in collaboration with the city’s Department of Industry and Trade.

Yasuzumi said Japanese enterprises in Asia generally spend 60% of their costs on materials and components. If they can cut spending on this part, they will be able to reduce selling prices of their products and enhance their competitive edge.

A survey conducted by JETRO in 2012 indicated that the local content ratio of Japanese products made in Vietnam accounted for less than 28% , well below 61% in China and 53% in Thailand.

According to the Ministry of Industry and Trade, the manufacturing sector has to import some 80% of material and component needs. As a result, prices of Vietnam’s exports are often higher than those made in other regional countries and the world.

For example, automakers in Thailand have parts provided by local companies, and this is why autos assembled in Thailand are cheaper than in Vietnam.

Yasuzumi said supporting industries in Vietnam have been set up for a long time but are now underdeveloped due to the lack of appropriate policies to fund enterprises in the sector. Notably, finances for supporting industries are limited.

Yasuzumi gave an example that small- and medium-sized enterprises (SMEs) in Vietnam take out loans with annual lending rates of 8-15% while SMEs in Japan enjoy preferential rates of 1-3% per annum. The Japanese government is also willing to share risks with its enterprises.

Speaking at the seminar, Truong Thanh Hoai, deputy head of the Department of Heavy Industry under the ministry, said the Government will issue a decree propping up supporting industries.

So these Japanese owned manufacturer need to import about 80% of materials or components. And I'm guessing these Japanese companies are relatively lower-tech than Intel. Not quite 100% component importation, but 80% is still shockingly high. Like what FairAndUnbiased said, it's been 28 years since VN started it's economic reform, and over 10 years since large foreign companies been making investment into the country. So what have their leaders being doing the last decade? we would normally expect their supporting industries to be relatively developed by now. But they are now only at the stage in drafting policy to address these supporting industry problem.

Why have foreign companies moving into VN all these years? I think FairAndUnbiased have covered the main points, but I'd like to make another two speculation of mine:

1. If a MNC also owns or control (through partnership, etc) their supporting industries, whether locally or outside the country, then they could cook up or manipulate their balance sheet in order to maximise their overall profits. I suspect, without evidence, that Samsung could be doing this. They bring along with them "partners" in the their supporting industry chain and can manipulate or dictate the "cost" of the components or materials being imported. Likewise, Intel could dictate the value of the "product" that are getting exported out of VN back to other Intel factory abroad.

2. Contrarily, some foreign companies may indeed be losing profits due to poor local supporting industries and really want to see it getting improved and developed. When first making the investment, they probably predicted that the local supporting industries will develop, but the local govt have failed them and didn't produce this expectation.

 

[LeveragedBuyout]

A quick Google search also showed this news piece about VN's supporting industrial problem:

English - VietNamNet News



So these Japanese owned manufacturer need to import about 80% of materials or components. And I'm guessing these Japanese companies are relatively lower-tech than Intel. Not quite 100% component importation, but 80% is still shockingly high. Like what FairAndUnbiased said, it's been 28 years since VN started it's economic reform, and over 10 years since large foreign companies been making investment into the country. So what have their leaders being doing the last decade? we would normally expect their supporting industries to be relatively developed by now. But they are now only at the stage in drafting policy to address these supporting industry problem.

Why have foreign companies moving into VN all these years? I think FairAndUnbiased have covered the main points, but I'd like to make another two speculation of mine:

1. If a MNC also owns or control (through partnership, etc) their supporting industries, whether locally or outside the country, then they could cook up or manipulate their balance sheet in order to maximise their overall profits. I suspect, without evidence, that Samsung could be doing this. They bring along with them "partners" in the their supporting industry chain and can manipulate or dictate the "cost" of the components or materials being imported. Likewise, Intel could dictate the value of the "product" that are getting exported out of VN back to other Intel factory abroad.

2. Contrarily, some foreign companies may indeed be losing profits due to poor local supporting industries and really want to see it getting improved and developed. When first making the investment, they probably predicted that the local supporting industries will develop, but the local govt have failed them and didn't produce this expectation.

Good analysis, and I am with you on #2. Point #1, however, is an issue known as transfer pricing, and due to historical problems with manipulation, the big audit firms generally won't sign off on such cost inflation, let alone the IRS scrutiny that would bring. I can't speak for Samsung, though.

It sounds like there are business opportunities available to set up the supporting industries, but exceptionally poor governance and policy making stands in the way.

Parallels can be observed in India. Not everyone gets it right.

 

[William Hung]

Good analysis, and I am with you on #2. Point #1, however, is an issue known as transfer pricing, and due to historical problems with manipulation, the big audit firms generally won't sign off on such cost inflation, let alone the IRS scrutiny that would bring. I can't speak for Samsung, though.

It sounds like there are business opportunities available to set up the supporting industries, but exceptionally poor governance and policy making stands in the way.

Parallels can be observed in India. Not everyone gets it right.

It was only my speculation. I don't have proof that Samsung is practicing any form of manipulation either. But keep in mind that most of their supporting supply chain are in China, alot of which are their own subsidies, partners, etc. And the auditing in both VN and China might not be as strict as it is in the US. Korean owned companies in China do have a reputation of playing cunning tricks, perhaps other PRC members doing business in China can chime in on this. This is only a speculation on my part.

Yes, there are opportunities in VN indeed. But this window of opportunity is slowly closing and won't last forever. Remember VN has already passed it's "golden age" so their population is now slowly ageing like a developed country, contrary to their developing status. Their workers wage are also increasing each days. So their image of being a country with a "cheap, young, energetic workforce" will slowly vanish as other emerging countries take on that image and the foreign investors will naturally look towards them.

 

[Cossack25A1]

Well, at least your GNI is still a lot higher than your GDP. If you receive a significant amount of remittance and your GNI is still lower than your GDP, then, you will need to start worrying. Right now, your GNI is still about 15% higher than your GDP.

Someone said your country has 15million oversea workers, which is about 10% of your population? So surely, the remittance from these oversea workers alone cannot account for the 15% divergence. I think your GNI will still be higher than your GDP if you ignore the incomes from the oversea workers. I think this is surprising.

The official number of overseas workers is around 2.2 million but there are undocumented people thus the number could be higher. The 15 million mark is likely the number of Filipinos that are outside the Philippines, including the emigrated Filipinos. Problem is that relying on overseas workers is a short-term solution and may no longer work in the future specially as the current societies across the world are getting volatile, particularly in the Middle East. The only long-term solution is to lessen the restriction and let foreign direct investments in into the country and separate economics from politics.

We have already experimented with a restrictive economy and the result is unsatisfactory.

 

[Viet]

i'm so goona vomit right now after reading you disgusting self-dreaming comments. man u really need sum professional help,cause u have totally been brainwashed to a madman. before u r dreaming too far away i have to say,why not just come and get those illegal-vietnamese workers out of China first.

I don´t understand you at all. a tip: take the food out of your mouth first before you speak.

 

[Muzits]

I don´t understand you at all. a tip: take the food out of your mouth first before you speak.

okay then u r more pathetic than i thought.my advice for u is,just save those disgusting self-dreaming words for your brainwashed and malnourished vietmonkeys.and don't come here to insult your country anymore,is that clear for u pathetic moron?and tell your viets to stop smuggling themselves to China.

 

[Viet]

okay then u r more pathetic than i thought.my advice for u is,just save those disgusting self-dreaming words for your brainwashed and malnourished vietmonkeys.and don't come here to insult your country anymore,is that clear for u pathetic moron?and tell your viets to stop smuggling themselves to China.

I believe you are very angry now. do you like "pho"? not sure if it is available in JP. a bowl can calm you down a bit.

 

[FairAndUnbiased]

I believe you are very angry now. do you like "pho"? not sure if it is available in JP. a bowl can calm you down a bit.

I'm sure JP has lots of pho restaraunts. Many Vietnamese in Japan do not have the ability to go to college - only 40% or so of Vietnamese in Japan even graduate high school, as opposed to 99% of native Japanese. Those high school dropouts have limited opportunities outside the pho industry.

 

[Muzits]

I believe you are very angry now. do you like "pho"? not sure if it is available in JP. a bowl can calm you down a bit.

angry?u r self-dreaming again,cause u r nothing more than a funny material for us to laught at as usual.we kinda like ur self-dreaming words which made us laughing on the ground,I just care about your mental healthy.i was just feeling my sympathy for u,u poor brainwashed viets. - -

 

[bolo]

I believe you are very angry now. do you like "pho"? not sure if it is available in JP. a bowl can calm you down a bit.

Pho is poor people food. If you like carbs and MSG pho is fo you

 

[Muzits]

I'm sure JP has lots of pho restaraunts. Many Vietnamese in Japan do not have the ability to go to college - only 40% or so of Vietnamese in Japan even graduate high school, as opposed to 99% of native Japanese. Those high school dropouts have limited opportunities outside the pho industry.

Pho is poor people food. If you like carbs and MSG pho is fo you

what the **** is PHO,never heard that before,is sumthing like shit?

I'm sure JP has lots of pho restaraunts. Many Vietnamese in Japan do not have the ability to go to college - only 40% or so of Vietnamese in Japan even graduate high school, as opposed to 99% of native Japanese. Those high school dropouts have limited opportunities outside the pho industry.

what the **** is pho?never heard that before,is sumthing like shit?or does it taste like shit?forget about the illegal-vietnamese immigrants,cause they r treated like rats in both japan and china.

 

[William Hung]

@FairAndUnbiased, @LeveragedBuyout, @Cossack25A1 @alaungphaya @fuse2014 ... here are some more very recent news articles related to the discussion.

The European commission have begun their investigation into possible transfer pricing manipulation used by Apple:

The European Commission Opens an Investigation into Transfer Pricing Practices | The National Law Review

... the Commission announced that it will investigate whether Ireland followed transfer pricing guidelines promulgated by the Organization for Economic Cooperation and Development (the OECD) in reaching transfer pricing agreements with Apple Computer . After requesting that Ireland provide additional information on the practice of tax rulings, and in particular, on the tax rulings negotiated with Apple in 1990 and 2007, the Commission concluded that the rulings constitute “State aid” by allowing Apple to understate its profits in Ireland .

Interestingly, Ireland is another country with huge negative GNI/GDP discrepancy/divergence.

It seems like Apple has also involved Australia in its transfer pricing scheme. The Aus govt is also now investigating other tech corp like Google and Amazon who might also be doing similar manipulation via Australia:

Tech companies in tax avoidance inquiry crosshairs | ZDNet

The inquiry, which will look at "tax avoidance and aggressive minimisation by corporations registered in Australia and multinational corporations operating in Australia", is set to place in its cross hairs some of the biggest technology companies operating in Australia, including Apple, Google, and Amazon....

...Dr Antony Ting, a senior lecturer in taxation law at Sydney University, told the ABC that Apple uses a form of "transfer pricing" to shift taxable income to low tax countries, a method that sees it purchase its stock from what is effectively a "paper company" subsidiary in Ireland — a low tax country.

So there is a real possibility that big name corporations are still practicing transfer pricing and other form of manipulations by using low tax countries with lax regulation like Ireland and Vietnam.

I'm not too sure what the real situation is like in Ireland but this article here about VietNam just nails the coffin for me:

Foreign investors make big profits, then flee country - Lexology

More and more foreign-invested enterprises (FIEs) have left Vietnam after making big money, leaving unpaid debts...

...The Hanoi Planning and Investment Department has also reported that 5 FIEs have “disappeared”, including Fujiya Vietnam (Japan), Narai Company Ltd (Japan), Vladivostok Avia (Russia), Opac Power and Investimo JSC.

The other five enterprises reported as absent at registered head offices, including Tabata Nam Viet Nam, Airea Company Ltd (Japan), DIC Vietnam, To Viet Construction Company Ltd (China) and Thai Viet Nam Company Ltd (India).

The Ministry of Planning and Investment (MPI) also released a report showing that 500 FIEs escaped in 2013.

Meanwhile, the number of FIEs evading tax and conducting transfer pricing has become alarmingly high. The General Department of Taxation (GDT) reported that 720 out of the 870 inspected FIEs were suspected of evading tax or regularly declaring losses.

FIEs pocket profits, then run

“They left after they ate their fill,” he said, adding that the government should tighten the control over the operation of FIEs.

Pham Chi Lan, a renowned economist, has also repeatedly warned about the “reverse side of the FDI coin”, saying that many foreign investors come to Vietnam just to exploit the bad business environment and mismanagement in the country. As such, the foreign investor, to some extent, does not bring what Vietnam wants – advanced technologies, capital and modern corporate governance.

The article said not all foreign companies are practicing these kind of behaviours (only some). But it sounds like the environment (huge tax holidays, lax law, questionable auditing, no transparency, corruption, etc.) is ripe for foreign companies to manipulate and exploit the situation.

My suspicion is now off the richter scale.

 

[yue10]

@FairAndUnbiased, @LeveragedBuyout, @Cossack25A1 @alaungphaya @fuse2014 ... here are some more very recent news articles related to the discussion.

The European commission have begun their investigation into possible transfer pricing manipulation used by Apple:

The European Commission Opens an Investigation into Transfer Pricing Practices | The National Law Review



Interestingly, Ireland is another country with huge negative GNI/GDP discrepancy/divergence.

It seems like Apple has also involved Australia in its transfer pricing scheme. The Aus govt is also now investigating other tech corp like Google and Amazon who might also be doing similar manipulation via Australia:

Tech companies in tax avoidance inquiry crosshairs | ZDNet



So there is a real possibility that big name corporations are still practicing transfer pricing and other form of manipulations by using low tax countries with lax regulation like Ireland and Vietnam.

I'm not too sure what the real situation is like in Ireland but this article here about VietNam just nails the coffin for me:

Foreign investors make big profits, then flee country - Lexology







The article said not all foreign companies are practicing these kind of behaviours (only some). But it sounds like the environment (huge tax holidays, lax law, questionable auditing, no transparency, corruption, etc.) is ripe for foreign companies to manipulate and exploit the situation.

My suspicion is now off the richter scale.

yes, it's true shame, what you think will happen if they got TPP? you have not seen anything yet for those annam pigs

 

[LeveragedBuyout]

@FairAndUnbiased, @LeveragedBuyout, @Cossack25A1 @alaungphaya @fuse2014 ... here are some more very recent news articles related to the discussion.

The European commission have begun their investigation into possible transfer pricing manipulation used by Apple:

The European Commission Opens an Investigation into Transfer Pricing Practices | The National Law Review



Interestingly, Ireland is another country with huge negative GNI/GDP discrepancy/divergence.

It seems like Apple has also involved Australia in its transfer pricing scheme. The Aus govt is also now investigating other tech corp like Google and Amazon who might also be doing similar manipulation via Australia:

Tech companies in tax avoidance inquiry crosshairs | ZDNet



So there is a real possibility that big name corporations are still practicing transfer pricing and other form of manipulations by using low tax countries with lax regulation like Ireland and Vietnam.

I'm not too sure what the real situation is like in Ireland but this article here about VietNam just nails the coffin for me:

Foreign investors make big profits, then flee country - Lexology







The article said not all foreign companies are practicing these kind of behaviours (only some). But it sounds like the environment (huge tax holidays, lax law, questionable auditing, no transparency, corruption, etc.) is ripe for foreign companies to manipulate and exploit the situation.

My suspicion is now off the richter scale.

Dear G-d, Vietnam needs to get its act together. Any respectable tax collector would be able to see through hit-and-run tactics like those employed against it, and if Vietnam's tax authority can't, then perhaps Vietnam needs capital controls until it can, or some kind of exit tax.

I have never had a positive opinion of Ireland, so I am not surprised that the government was involved in fraud, but it's slowly becoming irrelevant. Between talk of "tax harmonization," to scrutiny of schemes like the "double Irish with a Dutch sandwich" arrangement (ridiculous sounding name for such an insidious and intractable tax evasion scheme), and US Treasury bullying of other countries to have all of our banks share information... Well, in short, you can run, but you can't hide.

 

[alaungphaya]

@FairAndUnbiased, @LeveragedBuyout, @Cossack25A1 @alaungphaya @fuse2014 ... here are some more very recent news articles related to the discussion.

The European commission have begun their investigation into possible transfer pricing manipulation used by Apple:

The European Commission Opens an Investigation into Transfer Pricing Practices | The National Law Review



Interestingly, Ireland is another country with huge negative GNI/GDP discrepancy/divergence.

It seems like Apple has also involved Australia in its transfer pricing scheme. The Aus govt is also now investigating other tech corp like Google and Amazon who might also be doing similar manipulation via Australia:

Tech companies in tax avoidance inquiry crosshairs | ZDNet



So there is a real possibility that big name corporations are still practicing transfer pricing and other form of manipulations by using low tax countries with lax regulation like Ireland and Vietnam.

I'm not too sure what the real situation is like in Ireland but this article here about VietNam just nails the coffin for me:

Foreign investors make big profits, then flee country - Lexology







The article said not all foreign companies are practicing these kind of behaviours (only some). But it sounds like the environment (huge tax holidays, lax law, questionable auditing, no transparency, corruption, etc.) is ripe for foreign companies to manipulate and exploit the situation.

My suspicion is now off the richter scale.

This shouldn't come as any surprise. EVERY company does this to take advantage of tax loopholes, local conditions etc. Transfer pricing is just one of the tricks. I would be surprised if a company didn't try to pull this around every country.

It's like a casino. Entrepreneurs come to gamble with their money, try to game the house and leave when the party's over. Because there are more casinos than players, they overlook when players break the house rules in the hope keeping them in the casino and even provide free drinks to get them to stay.

The technical term is 'policy arbitrage' but in reality, the countries hope that they have unique characteristics that entices companies to stay. That's why countries set low to none corporate tax, set up tax holidays for new entrants and set up SEZ. But if the barrier to entry is low then so is the barrier to exit.

I can't speak for other countries but in Myanmar, the accounting rules are enforced to FAR stricter levels for foreign companies than to domestic. We also require new entrants to partner with a domestic partner as a form of control and oversight though that is starting to change. In the short run, it may discourage investment but it works out better in the long run IMO.

Ireland is a good example - they had the advantage of being an English speaking country and then they set corporate tax at very low levels. They attracted a lot of tech companies and now they're trying very hard stopping them from leaving. In the meanwhile, they had a property bubble, a banking crisis and enforced austerity measures. They're also under pressure to raise the corporate tax rate to ease these austerity measures. It's all very double-edged.


Edit: this is a weakness of shortsighted politicians btw. They set the conditions for this but they don't have the foresight to plan out the consequences. Probably because by the time their policies backfire, they'll be long retired.