VALKRYIE
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RALPH JENNINGS
Jan 31, 2015 8:00 AM EST
TAIPEI, Taiwan (TheStreet) -- Vietnam may still be communist, but the South East Asian country is all about business.
Helped by low costs and an eager government, Vietnam is taking over China's role as Asia's hotspot for foreign investment in manufacturing.
While China's economy slows and labor becomes more expensive, Vietnam is becoming to go-to place for manufacturing, making cars for Ford (F) and Toyota Motor (TM) . Offshore capital is expanding now into high-value, high-tech assembly. Hanoi is working on rules to bring in more of it.
Chinese officials, worried about pollution and dependence on foreign capital, are promoting private domestic investment and consumer spending instead.
"The Vietnamese government welcomes most sectors with open arms and market entry, so licensing and operating have become much simpler than in China," says Ralf Matthaes, partner in the Ho Chi Minh City-based investment advisory Infocus Consultants.
There's now significant foreign investment in tech in Vietnam. PC processor icon Intel's (INTC) has operated a $1 billion test and assembly plant in Ho Chi Minh City since 2010. Vietnam's largest foreign investor, Samsung Electronics (SSNLF) , has made an $11 billion investment in production there.Apple (AAPL) contractor Hon Hai Precision (HNHPF) makes smartphone parts in Vietnam, as well.
China's government says Chinese economic growth fell to 7.4% in 2014, a 24-year low, partly on a modest 8.3% increase in industrial production, down from 9.7% a year earlier. The Chinese economy will grow 7.1% this year, the World Bank forecasts.
China still wildly outranks Vietnam in terms of total foreign direct investment. Its economy of $10.4 trillion, compared to Vietnam's of about $170 billion, had pulled in foreign direct investment of $119.6 billion last year. But that's up less than 2% over 2013.
Officials in Beijing are drafting a new foreign direct investment law to offer offshore projects more equal treatment alongside domestic peers. The law might scrap case-by-case reviews of foreign projects and let them into China with fewer restrictions, the country's state-run media say.
But rising wages and land prices over the past five years have frustrated foreign investors looking to cut costs in China, while skittish consumer demand challenges companies trying to sell their products for long-term profit despite a massive Chinese population.
Vietnam's foreign direct investment rose 60% year over year in the fourth quarter of 2014, to about $8 billion over those three months, the country's statistics office says.
That's because labor remains 20% to 23% lower in Vietnam than China, while once-common wildcat labor strikes have eased. Since 2011, after half a decade of economic problems, Hanoi has put a lid on inflation and currency devaluation. It assured investors after anti-China riots in May hit foreign-owned factories that things would settle down, and they did. Although the two sides hardly get along, they've talked enough since May to make economic ties a high priority.
Vietnam's construction permit procedures number just half of China's. That's a relief to investors that intend to build factories, says market research firm Daxue Consulting in Beijing and Shanghai. To build a warehouse in Vietnam takes an average of 114 days, down from 244 in China, the advisory firm says. Credit is harder to get in China, it adds, while exports cost about $200 per container more in China.
Vietnam has been able to compete better in the "global value chain" as wages grow in China and the 10-member Southeast Asian trading bloc ASEAN "get their act together" to increase competitiveness, says Adam McCarty, chief economist with Mekong Economics in Hanoi.
"Vietnam picks up goods outsourcing that once went to China, while the Philippines picks up services outsourcing that once went to India," McCarty says.
Vietnamese officials are believed to be revising codes this year to let foreigners own majority stakes in Vietnamese companies and own property outright for investment reasons, two new boosts to foreign direct investment.
"All these barriers shall actually become benefits for investors and should propel Vietnam's overall GDP and investment climate forward, as China begins to slow," Matthaes says.
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