'China plus one' pulls investors to Vietnam

Published: 14 July 2008

Vietnam FDI surges as Greater China investors spread operations bases

While mainland China remains the primary production base for most of Greater China's manufacturers, rising costs on the mainland have convinced many companies to establish secondary manufacturing operations in other developing economies.

“At the end of the ’80s, a lot of Taiwanese and Hong Kong companies migrated their manufacturing operations to China,” recalled Tony Kuo, Vice President and Head of Greater China Business, Commercial Banking. “As the China market opened up, there was a tremendous influx of companies. At the time, Vietnam was nowhere on the radar screen.”

But in recent years China's comparative advantage as a source of low-cost labour has slipped, as its manpower costs have risen. With an abundance of multinationals recruiting, China’s workforce is graduating from low-wage labour in favour of higher paying, skilled employment. Costs have risen further due to a dependence on imported raw materials, and China's manufacturing dominance in many product sectors has seen export limits imposed on Chinese-made products by some trading partners.

Aligning regional interests and resources

While China's continuing strength as a manufacturing base remains unchallenged, many international corporations have adopted a "China plus one" strategy – adding a second or third production base outside China so as not to be at the mercy of fluctuations in China’s labour and resources market. For example, a number of Taiwan companies have, over the past few years, migrated parts of their manufacturing operations to Vietnam.

In 2005, in response to this trend, HSBC set up its Regional Alignment Business in Vietnam with the purpose of joining up geographically-related economies. The Regional Alignment Strategy is part of HSBC Commercial Banking's (CMB) Leading International Business initiative under the leadership of Margaret Leung, CMB's Global Co-Head and Group General Manager. Vietnam was included under this regional alignment strategy due to the growing number of customers from Greater China Region.

Vietnam star rising

“More and more people took notice of Vietnam,” said Tony. “That’s why, in the early ’90s, we saw an influx of companies from Hong Kong and Taiwan entering Vietnam as they diversified their manufacturing base of operations. Also in Vietnam’s favour is that investors and economists watching from the sidelines perceive that the country’s relationship with the United States is due to normalise." Those investors anticipate a sharp increase in exports and foreign direct investments (FDIs) for Vietnam once trade agreements with the US are in place.

“FDIs from the Greater China Region account for more than 30 per cent of total FDIs into Vietnam and more than 28 per cent of the total investment capital. The year-to-date figures show that Taiwan is the number one foreign investor in Vietnam. Fifty per cent of FDI is from Taiwan,” said Mr Kuo.

Selling Vietnam

HSBC is actively promoting Vietnam to its corporate clients. Over the past two years, HSBC has sponsored the Euromoney Vietnam Investment Forum, involving some 1,200 candidates from more than 36 countries and territories studying investment opportunities in Vietnam.

According to Lenny Chu, Assistant Vice President for HSBC Global Banking in Vietnam, HSBC Taiwan maintains business relationships with more than 25 large Taiwanese multinational corporates. “Of these, 12 are already investing in Vietnam. Plus, we have heard the investment plans of two or three more groups,” said Lenny. “This shows that over 50 per cent of our Taiwanese multinational clients are now actively participating or have plans to invest in the Vietnamese economy.”

Expanding industry, supporting government

In 2003, HSBC Vietnam played a role in a USD162.3 million syndicated loan made to Formosa Industries Corp (FIC), a locally incorporated textile raw materials manufacturer. FIC is wholly owned by Formosa Plastics Group (FPG), Taiwan’s largest industrial conglomerate and one of Asia’s biggest petrochemical groups. This was followed in 2004 by a USD126.9 million syndicated loan for FIC, with HSBC as co-arranger. At the time, these were Taiwan’s biggest investments in Vietnam.

With registered capital of USD270 million, FIC has made sizeable investments in Vietnam. These investments have given a tremendous boost to the country’s textile and garments industry, which employs 4.7 per cent of the nation’s workforce. The availability of raw materials in Vietnam is an added advantage for textile and garment manufacturers setting up operations in the country.

In 2006, Vietnam’s textile and garments industry was the country’s number two export, after crude oil, bringing in USD5.8 billion. The sector’s top clients include: Itochu Corporation, JC Penney, K-mart, Lee Cooper, Li & Fung, Sara Lee, Sumitomo, Tommy Hilfiger, Victoria’s Secret, and Wal-Mart.

FIC’s investments include a coal-fired power plant as a backup supply for the factory. A portion of the 150MW of electricity generated by the plant is bought by the government-owned Vietnam Electricity (EVN), under a power purchasing agreement (PPA). This investment to supplement Vietnam’s electricity supply is significant in a country where electricity is a precious resource.

Offering HSBC efficiencies

As with the rest of the world, Vietnam is battling with inflation. Meanwhile, the foreign investment picture continues to look promising.

The Formosa Plastics Group announced this year a USD7.8 billion investment in a number of projects, including what will be Vietnam’s largest steel plant, a deep port harbour, a petrochemical refinery, and another power plant. This commitment makes FPG this year’s biggest foreign investor in Vietnam.

Hon Hai Technology Group, one of the world's largest Electronic Manufacturing Services (EMS) providers with more than 15,000 patents worldwide, has committed to invest USD5 billion in Vietnam over the next three to five years. The company, an existing HSBC client, manufactures on behalf of global brands including Apple, Nokia and Sony, and is building manufacturing facilities in several provinces across the country.

“HSBC is offering the efficiencies of our strong Payments and Cash Management solutions to facilitate the transactions involved in these major Vietnam projects, both local and cross-border,” said Mr Chu.

While a growing number of investors in Vietnam realise the cost benefits of a China plus one strategy, HSBC has been able to extend that advantage. The Group's global distribution network and technology infrastructure help international firms to connect across borders and achieve greater efficiencies beyond simple labour savings.