In recent times, there has been much discussion about the opportunities for Vietnam in joining various agreements such as the ASEAN Economic Community (AEC), the Trans-Pacific Partnership (TPP), the Free Trade Agreement (FTA) between Vietnam and the EU, the Regional Comprehensive Economic Partnership (RCEP), and others. Participation in these agreements will bring a wave of investors, goods, services, labor, and capital flooding into Vietnam. We often emphasize Vietnam’s advantages in this fair competition, including abundant and cheap labor, strong agricultural strengths, and opportunities to develop supporting industries. However, are these factors entirely advantageous when they themselves carry hidden challenges — even “worst-case” scenarios — for what we consider to be opportunities?
Advantages in human resources?
Everyone recognizes Vietnam’s advantage with a population close to 100 million, mostly young people, and cheap labor costs. However, a major obstacle often raised is that Vietnamese workers lack sufficient skills. At the regular meeting in September, Deputy Prime Minister Vu Duc Dam stated that international organizations have assessed that 80% of office workers, 83% of technical laborers, and 40% of unskilled workers in Vietnam lack necessary skills.
Not only is there a skills shortage, but labor productivity in Vietnam is also very low as a natural consequence. Statistics show that the productivity of one American equals that of 20 Vietnamese, one Singaporean equals 14 Vietnamese, and even our neighbors like Thailand and China have productivity nearly three times higher than Vietnam. International organizations have warned that Vietnam risks falling into the middle-income trap, with low labor productivity being a key cause.
Additionally, as the ASEAN Economic Community (AEC) took effect in 2015, the free movement of labor among the ten ASEAN countries created some worrying challenges, including:
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Skilled workers from neighboring countries, who generally have higher qualifications and reasonable wages, may come to compete directly with Vietnamese labor within Vietnam. Imagine a skilled doctor from Singapore, Malaysia, or Thailand practicing here; while their qualifications may be comparable or higher, they likely don’t share some local corrupt practices like taking bribes or kickbacks from prescribing medicine, which some Vietnamese doctors reportedly do.
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Skilled Vietnamese workers may move to countries with higher wages and better living environments, causing brain drain.
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Unskilled laborers from countries like Cambodia or especially Myanmar may outperform Vietnamese workers in aspects such as discipline, lower absenteeism, higher productivity, fewer petty thefts, and importantly, lower wages. This workforce will compete directly with Vietnamese unskilled laborers.
Is agriculture really an advantage?
Vietnam was seen as having a strong advantage in rice exports when joining the TPP because Thailand and India—the two main competitors—did not participate. Moreover, the large U.S. rice market would reduce import tariffs on Vietnamese rice from 7% to 0%.
However, in a country whose economy is predominantly agricultural, is this really a competitive advantage? Recent developments paint a different picture.
Ahead of AEC 2015, ASEAN countries raced to enter Vietnam’s retail chains through M&A or new investments. Large hypermarket chains like Metro, Parkson, and Giant were poised to flood the Vietnamese market with their products as import tariffs dropped to zero. Not only industrial and handicraft goods but also Vietnamese agricultural products faced serious threats.
The livestock sector is also under pressure as most large-scale farms have fallen into the hands of foreign corporations. Industry researchers have pointed out the risks facing cattle, pigs, and poultry. As frozen food culture becomes common in industrial life, frozen pork and chicken that are both clean and cheap from neighboring countries will flood the market. In a recent seminar, Dr. Le Dang Doanh noted that in the first nine months of 2014 alone, Vietnam imported 51,000 heads of cattle from Australia for consumption—a staggering figure to consider.
Rice, once thought a great advantage for Vietnam, may not be so. While Vietnam competes in the low-cost rice segment, Cambodia has successfully competed in the premium rice market. Cambodia has implemented a highly strategic plan from cultivation to marketing that has caused its high-quality rice exports to grow remarkably. The fact that major Vietnamese private corporations are investing in agriculture in Laos, Cambodia, and Myanmar further shows that agriculture is not necessarily Vietnam’s advantage.
Should we place too much hope in developing supporting industries?
With global giants like Samsung, Nokia, Intel, Microsoft, etc., investing in Vietnam, the government and regulators see this as an opportunity to develop supporting industries.
We are loudly calling for supporting industry development, but have we ever asked ourselves: these investors already know very well the capabilities of Vietnamese suppliers, so why are they investing here? Do they really expect to find supporting equipment suppliers in Vietnam in the future? Corporations with visions extending 20, 30, or even 50 years would likely say they do not have such expectations.
For example, a factory in Germany invested $35 million just to produce sewing needles. We could invest a similar amount in a factory here. However, their factory has been depreciated for many years, while ours starts depreciation from day one. Simply put, their costs will be much lower. Then consider a garment factory in Shenzhen with massive production, supplying the global value chain, making unit costs much cheaper than a factory in Vietnam serving only local investors.
We recognize the value-added for outsourced products is very low, but investing in supporting factories to add value for export products must be carefully considered based on the fact that global suppliers have joined value chains years before us.
Moreover, competition in processing industries such as textiles, footwear will become increasingly difficult in the 2015 AEC era, with ASEAN countries like Thailand, Cambodia, and Myanmar having cheaper labor or better supporting industries.
What other “worst-case” scenarios exist?
In a recent seminar on the AEC 2015 agreement, ASEAN investors identified two main factors about Vietnam. First, the abundant raw materials and natural resources raise the question of whether we will just keep selling off our descendants’ resources. Second, being the 14th largest population globally, they expect a large consumer market rather than cheap and abundant labor.
A series of ongoing negotiations could threaten domestic producers. For example, among 167 steel product codes Vietnam is negotiating to reduce tariffs to zero under the Customs Union Agreement with Russia, Belarus, and Kazakhstan (VCUFTA) effective in 2015, 40 items already have surplus domestic production.
Vietnam’s financial sector is also seriously challenged. With ASEAN’s free movement of capital under AEC, competition will intensify, especially as Vietnamese banks are currently weakened by unhealthy practices, large non-performing loans, and protection by vested interest groups.
In conclusion, despite these challenges and “worst-case” scenarios, joining these agreements remains a good opportunity for the country and its people. It is also the best opportunity for the government to restructure the economy, increase transparency, and reallocate resources more efficiently.
Sai Gon, 04/11/2014
Dinh Hong Ky
