Tuesday, December 29, 2009

NYT: Vietnam is Refining Its Role on the Global Stage

We've discussed Vietnam in a tangental manner in the past, mostly as a potential destination for corporate America once Chinese labor becomes too expensive [Feb 28, 2008: China Raising Minimum Wage] - but this is our first post completely focused on the subject.  Strangely, while far larger countries (and economies) do not yet have their own ETFs, Van Eck Global launched Market Vectors Vietnam (VNM) this summer - information here.  Thus far the performance has been uninspiring, partly due to a currency devaluation (5%) the country has done, to try to compete with China. [Dec 15, 2009: NYT - China's Economic Power Unsettles Neighbors]  Thus far the ETF has attracted about $80M in assets, so a not too shabby start.

Unlike Malaysia, Singapore, or Indonesia - I have yet to really dig into Vietnam to see if it's the proper time to invest, or what the core strengths are - but certainly it will be on our radar in the years to come.  Currently the GDP of the country is about $250 Billion, which puts it at par with Singapore.  That said, Vietnam has 86 million people while Singapore has 5 million.  Agriculture accounts for more than half of GDP; the US accounts for 20% of Vietnam's exports (Japan next at about 12.5%).

Via New York Times:
  • More than many countries, Vietnam has been buffeted by the ups and downs of globalization.  A relatively new player in the global economy, it benefited from a flood of Western capital and interest in the 1990s and early this decade, only to be devastated by the reverberations of the latest economic crisis in the United States, 7,500 miles away.
  • Vietnam’s strategy for competing in the global arena — and a relatively successful one until recently — had been to carve out niche markets where it could deliver, say, quality products like handicrafts or specialized clothing that China could not.
  • But all of Vietnam’s main export industries are heavily dependent on sales to the United States. In 2009, the United States was the biggest importer of Vietnamese goods, absorbing about a fifth of the country’s exports.
  • Furniture companies, to take one industry, have had a huge drop in orders after the rapid downward spiral in sales of new homes in the United States. “A lot of the smaller factories have had a very, very difficult time,” said Michael Gunther, a manager at Honai Furniture, a 900-employee company about 20 miles outside of Ho Chi Minh City that makes items as varied as bedroom dressers and parts for bows and arrows.
  • Vietnam’s economy grew 4.6 percent for the first nine months of 2009, compared with the same period in 2008, according to the World Bank, in part because of government stimulus measures. While a developed country like the United States would be happy with such growth, Vietnam in recent years had been able to sustain an average growth rate above 7 percent.
  • At the same time, the country has seen a strong retrenchment in exports. In the first 10 months of 2009, Vietnamese exports declined 13.8 percent compared with the period in 2008, the World Bank said.
  • Though that drop is less than declines in most other developing countries, it could make 2009 the first year with a decline in exports since the beginning of Vietnam’s economic reforms, the World Bank said.
  • The pullback is a significant growing pain for Vietnam, one of the world’s newer export economies. Compared with others in the region like Thailand and Malaysia, Vietnam is still an infant in its experiences with globalization.
  • For decades after the Vietnam War, the economy limped along, sustained largely by its agriculture. Until President Bill Clinton and the Senate lifted the United States trade embargo in 1994, Vietnam was a bit player in the export market. Even after that shift, it took years for the country’s manufacturing sector to be competitive, particularly given its location near more mature exporting countries like China.
  • In order to square off against China, many manufacturers try to rely on niche industries and specialties rather than competing solely on price or low labor costs.  Many factory owners say that labor costs make up about 20 to 30 percent of the cost of manufacturing (that low of a % is actually quite amazing when you think about it - and why global wage arbitrage will continue to hamper the middle class in Western countries for decades to come), so cutting workers, overtime or wages does not help much in response to lower demand. In addition, the shipping and transportation networks are much more robust in China, which can put Vietnam at a disadvantage.

  • As Vietnam’s tourism market grows, particularly attracting new golf resorts and vacationers from other nearby countries in Southeast Asia and elsewhere, furniture manufacturers like Sadaco are turning to supply such new resorts.
  • Corporate enterprise is still guided by the hands of the officially socialist government of Vietnam, a country where the hammer-and-sickle flag flies alongside the red Vietnamese flag at many government office buildings and where socialist motivational banners are a common sight at factories.
  • The Vietnamese government tried several measures to force factories to keep their employment levels up during the economic downturn, and it adopted a sizable fiscal stimulus package as well.
  • But many economic experts are optimistic that a global recovery will help the country regain its growth track.  “The government is learning through experience,” said V. Bruce J. Tolentino, chief economist at the Asia Foundation, a nonprofit group based in San Francisco. “They are pragmatic, and that pragmatism is serving them well.”

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