Foreign investments in Vietnam have been seeing steady growth since 1988, when the country started to transform itself into a socialist-oriented market economy. The World Bank, International Monetary Fund, and various organizations taking a closer look into the rising nation predicted its continuous growth.
In 2021, however, when Vietnam went into full lockdown due to COVID-19, foreign direct investment dropped. 106 countries invested in Vietnam in 2021, with Singapore retaining its top spot as the largest investor.
This year, with the country having finally reopened its borders, resumed visa-free agreements and allowed entry of all foreign nationals, investors’ interest in its flourishing business landscape is beginning to pick up once again.
Business consulting firms like KPMG, with an established and profound presence in Vietnam, help bring foreign investors into the country, allowing them to see and grasp the vast opportunities that can be found in a country that’s strategically positioned both geographically and in the global free trade map.
Vietcetera talked with Mr. Chang Hung Chun, Partner – Head of Chinese Speaking sector at KPMG in Vietnam, to better understand Vietnam’s standing in the global economy and the potential its young population holds in both labor and consumer markets.
COVID-19 caused sudden changes in the flow of foreign investment to Vietnam. How did investors react to these changes?
The pandemic undoubtedly impacted the flow of investment to Vietnam. When the borders closed and international flights were stopped, it was harder to close deals or even meet with potential investors. Many investors were also used to visiting Vietnam physically to check the environment, the infrastructure, and the market, but they weren’t able to do so because of the lockdowns.
But to be honest, the FDI to Vietnam didn’t actually drop by a lot amidst the pandemic. Foreign investors and international enterprises are still very interested in this particular market. LG had even increased its investment in Vietnam (with total investment now at $4.65 billion) by building a new factory in Hai Phong, and Lego from Denmark has also just recently announced to invest approximately $1.4 billion in Vietnam. The confidence investors have in Vietnam is really high.
What’s driving this interest and confidence?
Foreign investors acknowledge how bright the future for Vietnam is. The business landscape is expanding and the market here is growing in terms of population and spending capabilities. But there are three factors that need to be highlighted to better understand why this country is getting so much attention.
First, its location is perfect. Vietnam is very close to China, which is considered the “global factory.” With the growing demands for goods and services, Vietnam is an ideal place to set up an extension of manufacturing centers for those enterprises that have already established their presence in China. The flow of the supply chain, sourcing raw materials, for example, will continue to go smoothly because of the shared borders.
Second, Vietnam’s huge young population makes it a labor-intensive country. More than 51 million people are in the labor force. The country also has one of the cheapest labor costs compared to China and other Asian countries.
The last point is Vietnam’s open international trade stance. The country has, I believe, signed the most number of free trade agreements in ASEAN in the past year. For example, the EVFTA, which came into force in early 2020. This means that a lot of Vietnam products exported to Europe are enjoying zero tariffs. It’s a perfect reason why companies should come here and set up their manufacturing base and save up costs on exports.
All these advantages and benefits Vietnam can offer are pulling factors for international investors.
Cheap labor cost is advantageous for investors, but does this hinder the Vietnamese government from raising the minimum wage for the local labor force?
I don’t think so. Foreign companies coming to Vietnam are paying their employees above the minimum wage. I also understand that the Vietnamese government is raising minimum monthly wage this year because of inflation. Vietnam is just cheaper compared to other more developed countries, but it doesn’t mean the local workers are at a disadvantage.
We also have to consider how Vietnam’s industries have evolved. Before, there was a big focus on agriculture. But with the investments coming in, the country is on its path to becoming more industrialized. Manufacturing-wise, before, it was more on textiles, shoes, and furniture. Right now, Vietnam is producing more high-end and high-tech products like smartphones.
By attracting all these kinds of new companies and investments, Vietnam is helping people’s lives improve.
Most foreign investors see Vietnam as a manufacturing hub rather than a consumer market. Aren’t investors missing out on Vietnam’s potential beyond just being a production base?
At this moment, the majority of foreign companies in Vietnam are export-oriented, not focusing much on the local market. When KPMG deals with potential clients, we always ask about their objectives: Are they here because of the cheap labor and free trade agreements for easy export? Or is it because they have something to offer to the local market? These require very different things, from location to partners and supply chain.
I believe the Vietnamese market is very raw, big, and has lots of potentials. We shouldn’t underestimate the local market, because the middle-class is growing bigger and bigger, and they are very young; and they dare to spend. If you look at the mobile phones the people here are using, you can easily see how they’ve adapted to modern times. Then there are top brands of motorbikes and cars on the streets! It’s a big consumer market that investors shouldn’t ignore.
For investors interested in Vietnam, what new business trends should they be looking deeper into?
E-commerce and Fintech — These sectors grew incredibly during the pandemic. With everyone stuck at home, people relied on purchasing and paying bills online, through their smartphones. These are emerging trends that have the potential to grow even bigger. Since these are relatively new, there are a lot of opportunities for investment and room for growth that investors can take advantage of.
ESG — The world is talking about ESG right now. Environmental, Social and Governance — investors are applying this as part of their business models. Vietnam, however, is still quite far behind on the ESG agenda. But I see that it’s been pushing for renewable energy and solar power. My understanding is that a lot of Chinese investors are participating in this particular area. They are looking into investing in this sector.
These are new trends that came out from the pandemic, but investors should think long-term. For now, Vietnam isn’t really very strict on green energy, but this is the future of business. Sooner or later, all enterprises will have to adhere to more sustainable production. Businesses should sell themselves as “environment-friendly brands that don’t add to the pollution” because consumers have now also grown to become more aware and discerning.
You just hosted KPMG in Vietnam’s 2022 Tax Inspection Support Program for Chinese-speaking enterprises last week in HCMC. What were the key takeaways from the event?
Our tax and legal seminars are done every year to service the Chinese investors and the market. However, in the last two years because of COVID, we had to do it online. Now that the pandemic is basically under control, this is one of the first offline gatherings for the Chinese-speaking business community in Vietnam.
Last week, on May 25, we welcomed more than 150 business leaders to the venue in HCMC. The major purpose was to explain the major changes in the tax laws in Vietnam. There are quite a lot of modifications to adjust to the pandemic, so we want to bring our clients up to speed. Some of the regulations aren’t very clear because they changed so fast that people can’t catch up.
KPMG in Vietnam was there to offer our knowledge and insights and help our partner businesses continue to thrive. We always want to maintain a connection with the clients and assist them with tax, audits, and legal needs.
We will organize another session in Hanoi on 17 June for our clients in Northern Vietnam.
Read more about this event here.