Vietnam loses appeal to foreign investment amid economic woes

Vietnam, once seen as on its way to joining economic tigers Taiwan and South Korea, has seen foreign investment decline sharply amid labor problems, crumbling roads, and the global financial crisis.

Men work at Haya furniture factory outside Hanoi, Vietnam, June 15. Haya boss Nguyen Manh Hung said he reduced production capacity by half compared with the same period last year due to the poor market situation and lack of financial sources as he continues to pay a 24.5-percent annual bank loan. As Vietnam fights to beat back raging inflation, many of its small and mid-sized businesses – disadvantaged even in good times – are struggling to survive the battle.

Vietnam's economic future is on the rocks.

Foreign firms in this ramshackle but once booming factory district just outside Ho Chi Minh City are watching bottom lines and studying other markets closely, both of which have become threats to Vietnam's economic growth.

But after the global financial crisis, foreign direct investment pledges fell from $66.5 billion in 2009 to $20 billion in 2010. Now, the number of foreigners leaving Vietnam slightly exceeds those entering, contrasting a 4-to-1 ratio favoring arrivals in 2008, says Ralf Matthaes, regional managing director with market research firm TNS Global.

Nightclub clientele has dropped, foreign patrons say, bubble tea shops popular with Taiwanese business people have closed, and Bien Hoa’s four-star hotel is barely half full.

“Most foreign firms will wait,” says Nguyen Xuan Thanh, public policy director with the Fulbright Economics teaching program in Ho Chi Minh City. “Of course some will choose [to invest] elsewhere. There are serious structural problems [in Vietnam]." He adds that there's some concern among investors about whether Vietnam will ever return to the type of growth it once knew.

What happened?

Five years of struggles with inflation, a slipping currency, and intractable labor problems have squeezed profits for the thousands of foreign firms that came to the impoverished country in 1987 when the Communist government suddenly opened to outside investment with the promise of cheap land and labor.

Investors built up this industrial heartland, filling its potholed roads with 24-hour truck traffic and lifting economic growth nationwide to an average of 7 percent per year during the past decade.

Now, foreign business people who flocked to invest in Vietnam's budding economy, particularly in manufacturing, say that since 2007 they have been hit by a volatile mix of economic pressures.

The limited pool of reliable and skilled workers around Ho Chi Minh City has hindered growth in foreign firms. And the inflation of 11.1 percent that followed economic overheating before 2008 has fueled a growing number of pay-related, nonunion strikes, 336 in the first four months of 2011 compared with 541 in all of 2007.

Struggling to stay afloat

In the Bien Hoa Industrial Zone, some 20 miles outside of Ho Chi Minh City, wary managers with the Taiwanese-owned manufacturer Taya Electric Wire & Cable have averted strikes at a 280-employee factory by raising pay, even though wages exceed the legal minimum that has gone up three times in 2011. If the government intervenes, the company fears, it will side with workers and force another round of raises.

Yuan Chang Industry Vina, a $6 million per year Taiwanese timber processing operation that has weathered two strikes this year at its 200-employee factory in Bien Hoa, relies on its core loyal workers. But it, too, is considering cutting staff.

“We don’t fear strikes so much anymore,” ] company country manager David Lin says. “They’re just a nuisance. [But] there’s no way for business owners to solve problems in Vietnam." He adds that the company just had to find ways to cope the best they could.

Minimum monthly wages range from $67.6 to $91.7, depending on location, since October, according to a 2011 government proposal to help the labor force. Workers need more than twice the minimum wage to cover expenses and send money to parents in poorer rural villages.

Successive revaluations of the centrally managed Vietnamese currency since 2008, followed by chronic over reliance on imports, have made that currency the world’s second least valued, hurting firms that import materials but sell locally.

Spiraling land prices, difficulties getting bank loans, power outages, and lack of paved roads between factories and ports add obstacles to business. And foreign retailers say they are taking hits from the decline in consumer confidence.

What's the way forward?

The government is working to solve the problems, say analysts and business groups who meet with officials. Tariffs have already been cut and customs streamlined. The World Bank Group named Vietnam as one of the top 10 reformer countries in its Doing Business 2011 report.

“While challenges remain, the government has in recent years has implemented significant structural reforms that have enhanced the business environment,” says Tomoyuki Kimura, the Asian Development Bank country director for Vietnam.

Steelmaker Fabrication Technology has helped build its own road and pays its 250 workers well enough, teaching them new skills along the way, to keep things humming, says General Director Michael Stretton of Australia. But profits are down. “It’s just the unknown factors that you can’t control,” Mr. Stretton says.

Most firms echo that sentiment, with some eying Bangladesh, Cambodia, or India for cheaper labor, says Leo Chiu, consultant to the Council of Taiwanese Chambers of Commerce in Vietnam, which represents about 3,000 firms and 11.8 of all foreign investment, more than anywhere else overseas.

“Business people know where the money is," and as soon as they see it's gone elsewhere, they run for it, Mr. Chiu says.

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