In Favor Of Bidding

Will China’s investment in Vietnam soar? What do experts and enterprises say? Over 2,000 Chinese firms are pouring foreign direct investment (FDI) into Vietnam. Nearly 200 Chinese enterprises attended the dialogue held by the Ministry of Industry and Trade and the Ministry of Planning and Investment in Hanoi in mid-July. Nguyen The Phuong, deputy minister of planning and investment, says that by the end of June this year, China’s registered FDI in Vietnam had reached US$2.92 billion, with Fuco’s US$180-million steel billet factory, located in Phu My II Industrial Park (Ba Ria-Vung Tau Province), as the biggest project. Some other projects worth over US$100 million of registered investment each are in the fields of hospitality, industrial parks and export processing zones and spring up in HCM City, Haiphong and Lao Cai. China’s lackluster FDI in Vietnam (ranking 15th out of 91 countries and territories) is ascribable to the former’s preference for inbound investment as compared with outbound investment (China ranks first in Asia and third in the world in terms of FDI attraction). Investment from China to Vietnam has increased since both countries started comprehensive and strategic cooperation in 2008, but continues to trail behind trade relations (with Vietnam running enormous deficits with China). By late 2009, two-way trade between Vietnam and China had been more than seven times as much as China’s FDI in Vietnam (US$22 billion compared with US2.9 billion). A report by the Hanoi-based Institute of Chinese Studies pinpoints the causes. Although the scale of investment projects from China has expanded recently, some with capital of over US$10 million each, small projects with investment of less than US$500,000 or even US$100,000 remain. “Given their small scale, many Chinese projects have low technological content and cannot turn out sophisticated products,” states the report. China’s FDI in Vietnam does not reflect the countries’ proximity; economic, political and cultural similarities; the establishment of the ASEAN-China Free Trade Area (ACFTA) and other forms of cooperation. There had been more than 2,000 projects from Taiwan, worth more than US$20 billion in total, as Taiwanese investors consider Vietnam a steppingstone to mainland China by the end of 2009. In contrast, China accounted for merely 1.1% of FDI in Vietnam in 2009 and equaled to 3% of the capital injected by the U.S., the top runner. The above institute adds that Chinese firms often suffer from an inadequate understanding of Vietnam’s investment environment. To aggravate matters, Vietnam’s legal framework is still riddled with loopholes and fraught with frequent changes. It is also hard for Chinese firms to find reliable partners in Vietnam and win trust from local enterprises and authorities. “Some Chinese businesses do not keep their promise and are plagued by both poor brand awareness and dismal after-sale services. The image of Chinese investors in Vietnam has been adversely affected as a result,” the report states. According to this institute, a leader of Hongdou Group, a consistently strong enterprise in China which eyes Cambodia and Laos rather than Vietnam, offers the following comment on the reason behind such preference: “Vietnam’s development space is limited. Vietnam is not exempt from tariffs and quotas, especially when it exports some products to Europe and the U.S.” This stands in contrast to China’s goal of transferring labor-intensive, low-wage industries with cheap products and low technological content to other countries. Bidding matters most Considering China’s enormous economy, as well as Chinese enterprises’ business sense and plan to expand markets, it may seem perplexing why Vietnam, a neighboring country with many shared cultural values and a big importer of Chinese goods, is not an appealing destination for China’s FDI. The confusion is compounded when wages are rising in China and the renminbi is also appreciating. At the above dialogue, Yang Zhen, chairman of the Association of Chinese Enterprises in Vietnam, says the reason is China’s role as Vietnam’s biggest foreign contractor. As contractors, China’s firms can reap enormous profits and create jobs for many Chinese. Dr. Do Tien Sam, rector of the Institute for Chinese Studies, says that China has four interrelated goals when it comes to foreign relations and economic matters: trade, investment, official development assistance (ODA) and contracting projects. Thanks to advantages in human resources and equipment, Chinese contractors often outperform their counterparts in other countries by offering surprisingly low-cost bids. “China has trade relations with 220 countries, is a contractor in 180 countries and territories, provides ODA to 90 countries and pour FDI into 129 countries. Vietnam falls into all four categories,” Sam says. He adds that China’s role as the biggest foreign contractor in Vietnam is in line with the Chinese Government’s goal of winning engineering, procurement and construction (EPC) contracts in Asia and then Africa. Many Chinese enterprises say that they receive support from the Chinese Government when bidding for overseas projects. This is indubitably a great advantage. There have been no official figures on the total value of the deals clinched by Chinese contractors in Vietnam. However, it is known that in 2009, of the US$4.15 billion worth of Chinese machinery, equipment, tools and parts imported into Vietnam, 70% caters to projects where Chinese firms are the main contractors, including key cooperation deals and projects which use preferential credit offered by China. They include many big projects such as Haiphong thermopower plant and aluminum plants under the bauxite mining projects in Dak Nong and Lam Dong provinces. Sam says that China is exerting efforts to transform the technological profile of its economy. “Many enterprises in the east are being requested to relocate to the west. However, human resources in the west are plagued with shortcomings, not to mention transport problems. Therefore, China has relocated some factories to India, Indonesia and Vietnam to reduce risks. However, a clear trend has yet to emerge,” he says.