Lessons from Nam: Learning from Vietnam’s manufacturing experience

All too often, Vietnam's impressive economic growth is attributed to just cheap wages or government-imposed incentives. The reality is a lot more complicated than that. By GREG MILLS.

Ho Chi Minh city

Can Africa be the next China? It's the question on the lips of those contemplating the development opportunities in filling the void left by Chinese manufacturers as labour unit costs rise in the People’s Republic and its industries move into higher-tech, capital intensive production.

This question is not just appropriate for markets with low labour costs. It is also relevant for richer African economies, including South Africa, given especially the temptation of trying to deal with development policy dilemmas through state-owned enterprises.

African policy-makers are routinely keen to point out that they are doing all the things expected of them to build a manufacturing base: Setting up Special Economic Zones (SEZs) to offer duty- and tax-free terms to export manufacturers, along with a range of other incentives on land and services. The problem is that, since most other countries are already doing this, it does not offer a special deal. The same applies to one-stop shops. African labour costs are no differentiator either, being generally no cheaper (and mostly more expensive) than Asian competitors, while the cost of corresponding services in Africa can be higher and less reliable.

Of course, at the bottom end of the production chain, such as in textiles and clothing manufacture, price and productivity matter. But the overall difference between success and failure is a combination of governance and attitude.

Vietnam is among those Asian countries that show Africa how it might be done; how policy might be used to a country’s advantage, in spite of seemingly entrenched ideological positions and a deep (and well-founded) suspicion of the outside world.

As a result of such changes, Vietnam has managed an extraordinary development turnaround within a generation: from a (real) per capita GDP of $97 in 1989 to $2,052 in 2015. This reflects a dynamic annual growth record, averaging over 6 percent since 1997, though this has been higher in the cities. With more than 6-million people (and the same number of registered motorcycles), Saigon in the south (after 1975, officially renamed Ho Chi Minh City) delivered 9.6 percent growth between 2010 and 2015.

Vietnam’s success has been based on two fundamental choices:

The first has been Vietnam’s ability to put the past behind them, a remarkable feat given the level of devastation during the last century, including four periods of foreign intervention (Chinese, French, Japanese and American), 4-million casualties of war, and the devastation caused subsequently by the retribution and communist economic folly that followed.

The second, related aspect is a wholesale recognition of the importance of foreigners in this process. One Vietnamese worker put it thus: “We grow with foreigners.”

The People’s Committee Head Office of Ho Chi Minh City would not be out of place in Paris, which presumably was the whole idea when built by the French in 1908 as the Hotel de Ville de Saigon. Outside, its elegant yellow and white façade offers an insight into the country’s colonial past; inside its marble foyer, a rich red and gold carpet leads up a sweeping staircase to the meeting chamber, with its painted tapestries, grand chandeliers and painted blue-sky ceiling. Two giant blue and white vases frame a pre-Google Earth abstract at one end, at the other sit two grander chairs for the heads of delegations.

It’s a most incongruous site for a discussion on total factor productivity (TFP).

“We envision Vietnam to become a country of industry and modernity by 2025,” says Le Thanh Liem, the vice-chairman of the city, his seniority denoted by a gold party lapel badge.

“To achieve this,” he says, “we use our internal strengths and mobilise external reserves through investment. The negotiation of the TPP [Trans-Pacific Partnership trade agreement with the US] is part of it, but we aim to try and make investors feel welcome here. Capital is key, as is the development of human resources, and [increasingly] total factor productivity,” i.e. the improvements in outputs not accounted for by labour and capital improvements, including technology and governance.

Le Thanh Liem, the vice-chairman of Ho Chi Min City, with the author.

It’s not often you hear a functionary talking about such terms. “Although the city is growing at 9.6 percent per annum, our year on year increase in TFP has grown from 20 percent in 2014 to 32 percent in 2015,” he observed.

This is not the sophisticated analysis one expects from a city official anywhere, let alone in a country which most hesitantly started its market reforms 30 years ago, and only when its attempts at a command economy had collapsed amid famine.

For all of the drawbacks of a single-party state, including widespread corruption, and the rhetorical adherence to the ubiquitous hammer-and-sickle and socialist banners, the thinking is both liberal and pragmatic enough to realise the need for the state to relinquish its role in the economy.

The extent of Vietnam’s transformation can be seen in the role of state-owned enterprises. With privatisation – referred to more palatably as “equitisation” – the number of SOEs halved between 1990 and 2000 to 5,800, and again further to 3,135 by 2013. This has paralleled a transformation in the economic contribution of SOEs, which, in 2001, employed 60 percent of total capital to generate 38 percent of GDP.

By 2012, these figures had fallen to 38 percent and 33 percent respectively. By 2015 SOEs officially contributed 31.5 percent of GDP and just 1.7-million jobs (or 3.2 percent) out of a total workforce of 52.2-million, falling from 1.8-million the previous year. By comparison two-thirds of jobs came from the private sector, and 26 percent were from foreign investment enterprises.

Public listings are another measure of this transition. The Ho Chi Minh stock exchange was launched in 2000 with two companies. Fifteen years later there were 303 counters with a $50-billion market capitalisation, with another 370 on the Hanoi bourse. A further 400 SOEs were expected to be listed by 2017.

 The Ho Chi Minh stock exchange 

A number have successfully made the leap from state-run to commercial enterprise.

Started by a Soviet-trained engineer in 1976, Vinamilk is based north of Ho Chi Minh City at My Phuoc.

There its $120-million state-of-the-art hyper-automated factory is capable of producing 400-million litres annually. Vietnam’s annual milk consumption has risen from just 10 litres per person in 2010 to 17 litres five years later with improved wealth and greater awareness of health benefits. This is still some way behind Chinese (26 litres), Thai (35 litres), and Malaysian (58 litres) consumption, hence plans to double the Tetra Pak-built factory’s capacity by 2018. Vinamilk attracted a number of foreign investors to its IPO in 2003. The same is true of Vinatex, the textiles firm, which moved to become a “joint stock company” through its $57-million September 2014 IPO.

Vinamilk

To achieve this, the state has had to get out of business, not the reverse, and leave the past behind.

Tân SÆ¡n Nhất International Airport is scarcely recognisable as the principal American air facility during its war in Vietnam, then one of the busiest military air bases in the world. In the early 1990s the American-built hardened aircraft blast facilities were still discernible, daubed with peace signs and slogans. Today Tân SÆ¡n Nhất the airport has been transformed into one of the top 50 busiest in the world, handling 26-million passengers in 2015.

Vietnam Airlines is now among the big SOEs that remain to be “equitised”. This is being driven in part by the TPP, its provision including a condition to end subsidies. In this way, just as with Mexico and the North American Trade Area, trade policy drives industrial policy, not the other way around, as Pretoria’s mandarins would prefer. The attraction of foreign businesses has required competitive tax breaks, good logistics and openness with the outside world as evident in a plethora of free trade agreements, remarkable given its Soviet and anti-American history. As Liem put it, “Increasing, competitiveness demands meeting the challenge of international integration.”

While wages are low in Vietnam, in backing up Liem’s point, competitiveness is not a cage fight on cheaper labour costs, a “race to the bottom”. Generally the richer the market, the better the manufacturing business.

“A general rule in manufacturing,” says Alvin Lao of the D&L group, a regional food conglomerate based in the Philippines, “is that the more you customise for a client, the higher the margin. The growth rate of such higher marginal goods is closely linked to the rate of growth of disposable income.”

He argues that in Southeast Asia the rate of disposable income increases faster above a threshold of $3,000 per capita income, “in its mid teens” compared to the rate of GDP growth, which averages 6 percent.

Ho Chi Minh City

Of course there are problems and setbacks. Businesses are hampered by corruption, for example in the requirement for endless paperwork, what are referred to as “baby permits”. This has encouraged foreigners to participate in Vietnam’s now nearly 300 industrial parks countrywide, where the operation of one-stop-shops and special customs facilities largely circumvents greedy officialdom.

Still, the notion that Vietnam’s growth success is just about incentives or cheap wages is a cop-out for critics. It’s about a whole lot more, not least the commitment of government to liberal change, however bumpy that path may be. DM

Dr Mills heads the Johannesburg-based Brenthurst Foundation, and has been in Vietnam.

Main photo: Ho Chi Minh City by Gavindeas, via Flickr.

Source: Daily Maverick