Vietnam: A sound alternative to China

Christopher Runckel, President of Runckel & Associates
This article was published in The Vietnam Economic Times: Supplement October 2006.

I have had an extensive involvement with helping to orchestrate US participation in APEC back to my overseeing the first APEC Leaders meeting in Seattle in 1993 for President Bill Clinton. Interestingly, my availability for this was also linked to Vietnam as I had just completed language training in Vietnamese and because the early negotiations with Vietnam on establishing diplomatic relations weren't proceeding as fast as hoped, I was allowed to oversee this before returning to my role as US Special Negotiator line for Vietnam.
This year I will most probably miss assisting the US side with APEC, for the very best of reasons, for Vietnam as I have already agreed to host a delegation from Binh Duong province who will visit the US in earl November to attract investment into one of the most economically exciting provinces in the country, and I will later be taking at least two US companies to Vietnam to look at sites for investment. I do wish the APEC attendees well and know that Vietnam will do its utmost to welcome them.
Recently I arranged the visit of a large US company to China, Vietnam and Thailand. The purpose of the visit was to review potential sites for a factory for this major US corporation in various locations in one of the three countries. Initially, only China was requested to be a place of focus but I convinced the client company that Vietnam and Thailand also deserved a look. This trip was instructive for what it said about the continuing lack of knowledge about Southeast Asia as a site for investment compared to China, comparative advantage in 2006, economic globalization and also for the future prospects of Vietnam in the second half of this decade.
In the past, companies looking to put a new factory in Asia had no more to follow the general buzz on the business news that China was the place to be and get on a plane and make the trip to Shanghai or Guangdong to start-up Asia operations. Increasingly; however, the days during which China's coastal region was a magnet that sucked up $60 billion in foreign direct investment (FDI) for China are behind us. In the first eight months of 2006, FDI in China had fallen by 2.1% according to the Chinese Ministry of Commerce. (FDI fell 8.5% in the month of August alone and should decrease as much or more in the remaining months of 2006.)
The reasons for this are many and varied, among them are rises in land, labor and other costs that increasingly are making incumbent upon foreign businesses to think carefully through their business objectives and to ensure their due diligence is complete. For example, in late August 2006, the Chinese central government issued "Circular of the State Council Concerning the Relative Questions of Enhancing the Adjustment of Land". This decree, which was just reaching officials in early September when I visited China, has become increasingly clear in the days that followed although final interpretations are only just now coming out.
The decision which was issued by the central government affects all of China's industrial parks which all have government involvement. The implementation of regulation is fairly complex but the reasons behind the change are not. Increasingly the Chinese Central government has decided the old policy that left pricing of land to local authorities was not working. Local authorities were setting below market value for land in an attempt to draw increasing investment. Local authorities were more focused on volume of investment instead of quality and the result was that land was often of that not fully recoup the costs relocating local farmers, building infrastructure and other related costs.
The net result of this is that all over China, the price of industrial land, which was in comparative terms to other Asia location is going up, in most cases more than double In the Shanghai area for example, land previously sold as long-term leasehold 100,000 RMB per Chinese equals .067 hectares) will in December 2006 when the new procedures are fully cost over RMB 200-300,000. This nationwide increase in property prices land comes on top of five years increase which saw land for industrial use prices Kunshan, a country-level city between Shanghai and Suzhou see the cost of increase five-fold during the last five years Whether this increase in pricing adequately resolve the problem availability for industry is hard to say. In cities like Ningbo, which has been very successful in attracting investment in years past, new projects are stymied not only by higher prices hut also by lack of availability of land in nearby areas for industrial use. This lack of available land has driven investors to look at other locations for their projects and total foreign investment in the first five months of the year in the city decreased by 23% over the same period of 2005.
In addition, to land prices taking a major leap, labor prices are also increasing swiftly throughout the coastal areas of China. In Qingdao, a coastal city and the major port in Shandong province, the minimum monthly wage in 2005 increased 29% over the previous year to RMB 530 ($66.5). In Shanghai, the minimum monthly wage has lumped from RMB 210 ($26) in 1993 to RMB 750 ($94) in 2006. Wage jumps in the Pearl River delta which last year saw a 20% rise, are even more pronounced in 2006. Further, enforcement which had been largely ignored in prior years is increasingly strict which is making manufacturers further increase their costs.
Utility bills are also increasing for all projects, again hitting the company's bottom line and reducing China's comparative competitive advantage. Many cities, particularly in the north or China but also in many coastal areas have increased the price of water 'border to cope with water shortages and increasing costs for wastewater treatment. Also at the end of June, China's National Development and Reform Commission (NDRC) decided to raise the electricity price by and average of 0.0025 Yuan per kilowatt-hour (KWH) throughout the country.
But even beyond increases in land, labor and utilities, government policy is also driving up other costs. In September, the Central government announced that it was further reducing rebates for raw materials purchased for export of particularly lower-tech items and that plans were to eliminate such export dates in the years ahead. In October, the Party Central Committee will meet in Beijing and according to government sources I met, the issue of tax incentives is also to be discussed with the likelihood being great that the current "Two Free - 3 at 50%" rule for Investment incentives for foreign businesses is to be reduced or most probably phased out totally.
The above changes are politically motivated changes to help to reduce Chinas soaring export balance or trade surplus with most nations which increasingly is leading to complaints not only by the US but by nations throughout the world. It is also being pushed by a belief that China needs to move up the value chain on production and not only be the lowest-cost producer anymore.
All of this changing costs and policies are causing foreign investors looking for a factory location in Asia to rethink their plans. Where the focus is the China market or this is a major component of the overall project, companies often will pay the higher prices or relocate to a slightly more remote but still close-by location to meet their siting requirements. Where the focus is not only the China market, the rise in costs is causing many new investors and many companies currently located in the eastern coastal areas of China to consider locations such as Vietnam, which has costs much lower than Chinas coastal regions and tax incentives much more generous for their projects new location.
But there are some caveats on this that the reaction of my clients helps illustrate and that I think the Vietnamese government needs to consider. First, knowledge of Southeast Asia and of the potential for investment in Vietnam and elsewhere in Southeast Asia is still very under under-appreciated in US and other major corporation boardrooms. More needs to be done to get the word out that Vietnam and elsewhere in the region are solid investment locations. Further, virtually every industrial park in China, Thailand or Malaysia has realized the importance of professional marketing and their presentations and material shows it. Vietnam's industrial parks need to realize this and improve their efforts as well.
Second, the investors I traveled with and most of the companies we have recently traveled with are positively impressed by Vietnamese efforts to learn English when compared to other nations in the region. They also are impressed with Vietnamese respect for and efforts to improve their overall education. With this said, education and the availability of skilled technical and other critical skills still continues to be an overwhelming concern. Education cannot only be an individual concern. Ultimately it must be a national concern and the truth is that the central government needs to do more to improve education throughout Vietnam.
Thirdly, although companies that we work with are impressed with the low salary levels in Vietnam and the availability of workers, they are appalled by the decrepit infrastructure, clogged roads, lack of expressways and bridges, inadequate ports, etc. Thailand by comparison gains high marks for infrastructure. The central government is doing much in this area but needs to do more as by the time they complete a road or bridge it is already overwhelmed by the increase in demand and growth of vehicles.
Fourth, the investors that I have met have all been concerned by the many stories and often-positive indications of corruption by government officials that are apparent in daily life by the police, immigration, customs and other officials. The 2005 report by Transparency International on the Corruption Perception Index has Vietnam as tied for 107th and as only exceeded by Indonesia, the Philippines and Cambodia in Asia as being a place of concern for corruption is more than just an embarrassment, it hurts Vietnam's overall competitiveness and scares off investment. The government needs to do more to ensure that all levels of society are protected from corruption and that violators are strongly prosecuted
Fifth, just as China has served as an important model for Vietnam in many areas, it should also serve as a warning in other areas like protecting the environment. The air quality in Vietnamese cities is already worsening on a daily basis both through an increase in prosperity and the motorbikes and vehicles that have come with it and by an increase in industrial and water pollution. Vietnam needs to act now to improve overall water and air quality and not wait, as was the case in China until conditions seriously endangered people’s health.
The above concerns do not change my perception that as Vietnam hosts the APEC Ministerial and Leaders meeting in mid-November that Vietnam's promise as a profitable home for investment is bright. Investment is increasing strongly and Vietnam has lured $5.15 billion of FDI in the first nine months of the year putting Vietnam just behind India as one of the hottest sites for foreign investment. What is needed now is continued solid support by the government to the five areas above, to observance of the many new laws promulgated to bring Vietnam's legal infrastructure up to international standards and continued market liberalization. Everyone who has lived and worked in Vietnam has tremendous respect and appreciation for the work ethic of the Vietnamese people and the quality they bring to production. When fully unleashed, these forces will offer a world of potential that foreign business will reach out to engage thereby increasing employment, wealth and national interests.

Latin America and the USA: Commerce between friends and foes

The Economist article about Latin America-USA commerce projections. October 4th 2007.

The United States may finally ratify a trade deal with Peru. But pan-American trade diplomacy remains a mess

In his first term as Peru's president, in the 1980s, Alan García was a firm believer in protectionism, banning the import of foreign cars and even of Chilean wine. But since coming to office again last year he has embraced free trade with a passion bordering on mania. “More trade and more investment [means] less migration, less poverty and less environmental destruction,” he told a meeting in Lima last month convened by the World Trade Organisation (WTO). “You might resign yourself to just having a free-trade agreement with the United States, but for me it's not enough,” he told his audience, ordering his harried trade minister to secure similar deals with a score of other countries.
That Mr García was so pumped up was perhaps because at long last Peru's trade deal with the United States, negotiated 18 months ago, looks close to ratification by a hitherto reluctant American Congress. On September 27th the administration sent a bill to Congress after a majority of the House Ways and Means Committee and the Senate Finance Committee indicated they would back it. Though upsets are still possible, supporters reckon the bill will be approved within weeks. But for free-traders, that is cause for only the faintest cheer.

The benefits to Peru seem clear. Mr García, who when a candidate was sceptical of the deal, now says that it could add an additional percentage point to economic growth (which reached 8% last year). That is mainly because it provides investors with greater security. Peru's industrialists' association reckons that it could prompt an extra $9 billion in industrial investment in 2008 and 2009 alone.
Opponents worry that farmers, especially of maize, cotton and wheat, will struggle to compete with their subsidised counterparts in the United States. They also fret that American companies will try to take out patents on Amazonian plants.
Free-traders have other worries. A decade ago, the United States and 33 countries in Latin America and the Caribbean hoped to negotiate an all-embracing Free Trade Area of the Americas (FTAA). But the mood has changed. The Democrats, who won control of the American Congress last November, are mistrustful of trade agreements, reflecting widespread fears that globalisation has made jobs more insecure in the United States. Mercosur, the trade block led by Brazil, backed away from an FTAA in favour of the Doha round of WTO talks, but these have stalled too. All this comes as some governments in Latin America, led by Venezuela's Hugo Chávez, are turning their backs on open trade.
Others have negotiated bilateral free-trade agreements (FTAs) with the United States. But George Bush's administration has struggled to persuade Congress to ratify them: even before the Democrats took control, the Central American Free Trade Agreement (known as CAFTA-DR) passed by just two votes; as well as Peru, deals with Panama and Colombia (and South Korea) still await approval.
So Latin American politicians, such as Mr García, who see trade as an engine of growth, find themselves caught between American indifference and a resurgent, anti-trade left at home. When they negotiate bilateral FTAs, they are in a much weaker position than they would have been when gathered together in an FTAA.
Even so, the Democrats have insisted on changing the agreements. In May they struck a deal with the administration under which the FTAs would have to include clauses to strengthen labour rights and the environment, while slightly loosening intellectual-property protection (giving more flexibility for generic medicines). The Democrats say this was the only way to restore bipartisan consensus on trade. Some economists note that since countries such as Peru already subscribe to many of these standards, in theory at least, their formal incorporation is no big deal.
Even so, only a minority of Democrats are likely to vote for any of the FTAs. Peter Hakim of the Inter-American Dialogue, a think-tank in Washington DC, reckons that at most about 70 of the 232 Democrats in the House of Representatives might vote for the Peru FTA. The agreement with Panama was supposed to be next in line. But the Bush administration has balked over the recent choice to head Panama's parliament of a politician whom it accuses of killing an American in 1992.
The FTA with Colombia faces even bigger obstacles. The Democratic leadership in the House has refused to back it, arguing that Colombia's government needs to do more to prevent the killing of trade unionists and to punish officials linked to right-wing paramilitaries. That was a slap in the face for Álvaro Uribe, Colombia's president, who has been Mr Bush's most loyal ally in Latin America. Colombian officials argue that their efforts to strengthen the rule of law in the face of violence from drug traffickers, guerrillas and former paramilitaries will be undermined by failure to approve an FTA.
This is a powerful point and an objection to the whole structure of trade agreements that is now evolving in Latin America. If the agreements with Peru and Panama are approved, the effect would be to divert trade and investment from Colombia. A recent study by EAFIT, a university in Medellín, and the University of Antioquia found that if the Colombia FTA is not approved and the others are, Colombia's GDP would be 2.2% smaller and 400,000 jobs would be lost.
Some Democrats, at least, recognise that this would be a perverse outcome. Mr Hakim reckons there is a chance the Colombia agreement could be ratified next year—but only if Mr Uribe's government takes further steps to protect trade unionists, and these are seen to be working.
The United States' hard-nosed approach to trade is winning few friends in Latin America. That may become apparent in Costa Rica, which is holding a referendum on October 7th on whether to ratify CAFTA-DR. Polls suggest the result will be close, but opponents appear to have momentum. They recently assembled more than 100,000 protestors in San José, the capital. Although Oscar Arias, the president, insists the accord is vital to his country's future, his government may have overplayed its hand. Last month one of his vice-presidents resigned after the leaking of a memo in which he advocated scare tactics such as painting opponents as allies of Mr Chávez. Some are—but others merely think CAFTA-DR a bad deal, especially in its intellectual-property clauses.
If the American Congress does ratify the pending FTAs, turning its back on CAFTA-DR could cause Costa Rica to lose jobs—a fate that may also await Bolivia and Ecuador. This whole mess underlines that bilateral deals are a third-best option after the Doha Round or the FTAA. But for those Latin American countries that are ambitious to expand their share of the biggest market for manufactured exports, they are the only game in town.

Approval of Sony-BMG merger is good news for Warner-EMI deal

From The Times' Law Supplement. October 9th 2007
An interesting article of Dan Sabbagh about the EU-Commission approval for music label mergers.

The Sony and BMG music merger has been approved for the second time by the European Commission in a judgment that, in theory, paves the way for a Warner/EMI merger.
EMI was recently bought by Guy Hands’s Terra Firma private equity group, leading to speculation that he may sell it to Warner.
In a 330-page analysis, the Commission dismissed objections from independent record labels that the reduction of recorded music companies from five to four would lead to tacit price collusion.

Impala, the trade body for independent labels worldwide, said it would ask the European Ombudsman to investigate “potential maladminstration” in a fresh challenge to the deal.
Impala claims that the Commission failed to look at the cultural impacts on “consumer choice and diversity”.
Patrick Zelnick, the president of Impala, said: “The EC [European Commission] has ignored the simple fact that four companies control 95 per cent of the music most citizens hear throughout the world.”
Sony BMG is the world’s second-largest recorded music group, with a share of 21.2 per cent last year behind Vivendi’s Universal at 25.7 per cent, but well ahead of the similarly sized Warner Music and EMI – at 13.8 per cent and 12.8 per cent respectively.
Sony BMG is half-owned by Sony, of Japan, and Bertelsmann, of Germany.
Regulators had to look at the deal again after the European Court of the First Instance struck down the original merger approval in June 2006.
This time the Commission has tried to avoid a repeat by conducting detailed research. Over 14 months it asked all the music majors to supply wholesale prices for its top-selling acts to key retailers in the 15 European member states.
The exercise took in more than 100 million pieces of information.
Given that the original approval for the merger ran to less than 50 pages, Sony BMG hopes that the more detailed work will withstand any legal challenge and allow the company, which has struggled to make the merger to work in practice, a chance to develop.
Neelie Kroes, the Competition Commissioner, said: “This investigation represents one of the most thorough analyses of complex information ever undertaken by the Commission in a merger procedure. It clearly shows that the merger would not raise competition concerns in any of the affected markets.”

–– There is growing expectation that the £8.8 billion Reuters-Thomson merger will go to a second-stage five-month inquiry.
A formal announcement is expected on Monday. The tie-up was always likely to go to a second stage because it involved the reduction of real-time financial information players from three to two.
The market leader is Bloomberg.

Record companies’ global market share
25.7% Universal Music

21.2% Sony BMG

13.8% Warner Music12.8% EMI