As per a recent report published by the Economist Intelligence Unit, Vietnam has emerged as a new low-cost manufacturing base in Asia, beating India and even China in indicators such as international direct funding (FDI) coverage and international commerce and change controls. In fact, Vietnam scored six out of ten in FDI policy while India and China scored 5.5 each. Likewise, In foreign trade and exchange controls, Vietnam scored 7.3, while India and China respectively scored 5.5 and 6.4. Vietnam has successfully leveraged the trade war between Beijing and Washington, but its success predates trade tensions and has been made possible by the enticing incentives Vietnam has provided to foreign companies. Many of these incentives are also offered by India, yet Vietnam continues to be a much more attractive business proposition. What lessons can India learn from Vietnam?
Vietnam’s success is in large part driven by its adaptability to the changing trends of the global economy. For example, when Beijing and Washington’s trade war first escalated during Trump’s term in office, Vietnam was quick to offer attractive corporate tax rates for large firms wanting to relocate out of China; 26 of the 56 companies that have since moved from China have shifted their operations to Vietnam, while only eight have relocated to India. The benefits of this adaptability are illustrated by the ongoing pandemic, during which Vietnam’s exports have in fact increased by 3%, while India’s exports have fallen by 24%.
Although the trade war has helped Vietnam push past India and many other South Asian countries, its competitive edge over India predates this period in US-China relations. For example, between 2009 and 2019, Vietnam’s total merchandise exports grew at an average annual rate of 18%, compared with India’s 5%. The constant upwards progression of its economy is underscored by the fact that it went from a trade deficit of $13 billion in 2010 to a trade surplus of $47 billion in 2019. Over the same period, India’s trade deficit increased from $130 billion in 2010 to $156 billion in 2019.
Alongside alluring corporate tax rates to boost foreign investment, Vietnam is also credited with banning state-owned enterprises from competing with FDI projects. Admittedly, India, too, has been consistently working on liberalising its labour laws and improving the ease of doing business by setting up a special investment promotion task force, implementing fast-track clearance programs and developing a land pool of 461,589 hectares to attract businesses looking for alternatives to China. During the pandemic, India also extended the tax filing deadline for companies by two weeks. Nevertheless, it has failed to match the swiftness of Vietnam in bringing investors through the door.
Vietnam’s adaptability can in part be attributed to quick policy execution in a rapidly changing global environment. At the very beginning of the COVID-19 pandemic in March 2020, Vietnam launched a $10.8 billion (approximately 0.4% of its GDP) credit support package that included “policies to restructure loan terms and reduce interest rates and fees”. In addition, the government also introduced two budget support packages of $1.3 billion that included a tax and fee reduction for adversely affected companies, which was complemented by an extension on the tax payment schedules. Additionally, it also introduced tax breaks and reduced land-use fees for businesses, revised investment laws, and expanded free trade agreements.
Vietnam also offers the promise of greater manoeuvrability and control for businesses. For example, last year, Vietnam adopted a new labour policy that is set to be in force from 2021 and will allow private companies greater flexibility in setting wage and salary scales. It will also ease dispute settlements by “emphasising conciliation procedures over state intervention and administrative settlements”. Additionally, independent trade unions will require permission from the state-run Vietnam General Confederation of Labour to operate. Meanwhile, India’s manufacturing industry is regularly interrupted by strikes and labour issues; for example, in 2015, 500 textile mills were shut down due to the financial troubles introduced by such developments.
Although India also offers cheap labour, Vietnam’s proximity to Shenzhen, one of the world’s foremost manufacturing hubs, offers Vietnam an advantage that India will find hard to match. Since companies moving from China are unlikely to move the entire manufacturing process out of China, given the associated time and cost ineffectiveness, being in close proximity to the manufacturing hub will bring down the cost of movement of the raw materials.
Reducing the cost of the movement of goods and resources has been one of the pillars of Vietnam’s economic strategy, and has informed its decisions to join multiple free trade agreements (FTAs). For instance, Vietnam has effectively used its membership to the ASEAN to join the Regional Comprehensive Economic Partnership (RCEP) that India opted out of due to concerns about “fairness and balance of the agreement”. Considered to be the world’s largest trading bloc, the RCEP is expected to simplify procedures such as customs and rules of origin. This will help reduce bureaucracy and allow for the participation of small and medium enterprises (SMEs), which account for 98% of all enterprises in Vietnam, contribute to roughly 40% of the country’s GDP, and employ 50% of Vietnam’s workforce.
Similarly, the recent EU-Vietnam free trade agreement (EVFTA) eliminates almost 99% of customs duties and cuts down import duties, as well as tariffs on Vietnamese exports, including footwear, garments, marine products, and furniture. Coincidentally, these goods form India’s biggest exports to the 27 members of the bloc, demonstrating how Vietnam has successfully undercut India’s competitiveness in these industries. It is thus no surprise that India has sought to sign a similar deal with the EU as well.
However, all is not gloomy. For example, India is slowly catching up to Vietnam’s technological progress and the incentives it for innovation and in 2020 finally ranked among the top 50 nations in the 2020 Global Innovation Index (GII) list, just 6 ranks below Vietnam, who was at 42 for the second year running. For India to continue along the same positive trajectory, it must leverage its long coastline, which is almost twice the size of Vietnam’s, and its shipping prowess. While Vietnam’s 44 key seaports along its 3,260km coastline manage 400-500 million tonnes of cargo annually, India’s 2,234 comparatively handled nearly 1.3 billion metric tons of cargo in 2019. Additionally, the cost of shipping from Vietnam to major hotspots like the US, South Korea and Japan is between 50-100% higher than from India. In order to fully maximise the potential of its ports, India must expeditiously address dredging issues that have left its invaluable ports severely underutilised. Promisingly, in order to keep up with the expanding volume of global trade, the Indian government plans to invest $47 billion in port-related industrialisation and improving operational efficiency and connectivity between 2020 and 2025.
Additionally, the recently released production-linked incentive (PLI) scheme has attracted large multinational firms like Apple and Samsung to move some of their manufacturing from China, Vietnam, and Malaysia to India. This move is expected to generate 50,000 new jobs by March 2021 and lead to exports worth $100 billion over the next five years. To further strengthen its economic credentials, India also launched the Invest India initiative in 2009 that focuses on sustainable investment and seeks sector-specific investment through new partnerships. The impact of these efforts are clear: after a three-year stagnation in FDI at $60 billion, 2019-2020 saw this figure rise to $73.4 billion.
Therefore, it appears that India is already instituting some of the changes that have made Vietnam such an attractive destination; however, it must continue to accelerate these processes in light of a rapidly evolving global paradigm. In a world that is at least on the face of it embracing a more value and rules-based order, India’s strong commitment to democracy may stand it in good stead. Its growing diplomatic and strategic ventures across the Indo-Pacific and in the world at large portend to yield lucrative FTAs. However, this must be complemented by legislative and financial reforms to create a more inviting and friendly business environment that leverages its low-cost and high-skilled labour. At the same time, however, perhaps it is Vietnam’s lack of democracy that has allowed it to expeditiously make changes that India cannot match.
Vietnam Leapfrogged India as an Alternative Manufacturing Base to China. Here’s Why.
Vietnam has emerged as an alternative to China in the rapidly evolving global supply chain. Against this backdrop, India must do more in order to adapt to these seismic shifts in the global paradigm.
January 29, 2021
SOURCE: IISD