FDI allured by a huge single market The huge single market, created by the ASEAN Economic Community, combined with Vietnam’s business advantages and new tariff cuts, are turning the country into a regional hotspot for foreign direct investment. Thanh Tung reports.   The AEC brings about the prospect of a huge single market and common manufacturing base  Photo: Le Toan Last week, more than 300 German firms in Vietnam concluded their assessment on the importance of the ASEAN Economic Community, officially launched on December 31, 2015. The assessment is featured in a Southeast Asian large-scale survey, co-conducted by the German Industry and Commerce in Vietnam (AHK) and Ernst & Young. The survey covers the assessments of thousands of German firms in Southeast Asia and will be released in September 2016. AHK’s chief representative Marko Walde told VIR that the AEC is critically important for German firms to do business in Vietnam. “German enterprises now seek bigger investment opportunities and further investment in Vietnam. They see the country as an attractive destination in terms of the Vietnamese government’s latest efforts to open up the market to international companies, joining the AEC, EU-Vietnam Free Trade Agreement and Trans-Pacific Partnership (TPP),” Walde said. A single market As one of the main pillars of the ASEAN Community, the AEC is expected to bring big opportunities to businesses across the 10 member countries, including Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand, and Vietnam. The AEC reflects ASEAN’s aim to establish a single market (of more than 600 million people) and a common manufacturing base for ASEAN members, giving rise to the free flow of goods, services, investment, and skilled labour within ASEAN. Under the ASEAN Comprehensive Investment Agreement, non-ASEAN investors investing in ASEAN markets are considered “ASEAN investors” and can enjoy incentives under the agreement. Since the establishment of the AEC, all intra-ASEAN import tariffs for member states must be eventually removed. Its tax reduction and elimination scheme, contained in the ASEAN Trade in Goods Agreement (ATIGA), took effect on May 17, 2010. In terms of tariffs, the trade liberalisation level in AEC is the highest when compared with the free trade agreements Vietnam has signed (see box for details). Apart from eliminating tariff barriers, ATIGA is also focused on erasing non-tariff barriers, customs co-operation, sanitation and quarantine. Lucrative investment spot AHK’s Marko Walde said that when viewed from the AEC perspective, “Vietnam is a major frontier market in ASEAN for German companies.” According to the AHK World Business Outlook survey 2016, Vietnam shows the largest potential for growth in investment from German investors in ASEAN. “German companies could use Vietnam as a hub for ASEAN markets. In Vietnam, several sectors show promise and potential, especially electronics, food processing, packaging, and various manufactured goods,” Walde said. Echoing this view, Ponpimon Petcharakul, the commercial minister counselor from the Thai Embassy in Vietnam, told VIR that “Vietnam is one of the most vibrant economies in Asia with a large market for capital goods and a growing domestic market for consumer goods. There is an ambitious programme of major infrastructural developments, including new urban railway networks, a brand new international hub airport along with the proposed expansion of other regional airports.” “Overall, the AEC will benefit Thai companies working in Vietnam as the country will soon cut import tariffs for many products which at the moment face high taxes,” Petcharakul said. “Thousands of Thai companies are planning to do business here and shift their production from China to Vietnam, where labour and production costs remain lower.” Commenting on the AEC’s importance to European investors in Vietnam, EuroCham Vietnam chairman Michael Behrens, said that even though in its early stages, “the AEC signals great prospects for cross-border investment in Southeast Asia.” He said European investors have been generally satisfied entering the Vietnamese market with many operating in the country for years. “With the AEC, Vietnam can be a launch pad for investors in the region. EuroCham will continue to follow the AEC developments and inform our members of relevant opportunities which could make a difference to their business.” Xavier Denoly, country president of Schneider Electric Vietnam, Cambodia and Myanmar, said the AEC offers important opportunities to the firm. “Thanks to the lowered trade barriers, the AEC will spur exports from Vietnam to other ASEAN countries and vice versa, which is truly beneficial for Schneider Electric. Moreover, the expanded materials market enables us to save time and reduce production costs.” Denoly said that the establishment of the AEC would create a new foreign direct investment (FDI) wave into Vietnam, particularly in manufacturing. “This provides business opportunities for Schneider Electric as our portfolio of energy management and automated solution facilitates the stable operation of manufacturing plants.” Agreeing with this view, Bosch Vietnam’s managing director Vo Quang Hue stressed that ASEAN is a focused market for Bosch in the Asia Pacific region. The AEC brings about the prospect of a single market with the free flow of trade, investment, and movement of labour. “These are favourable conditions for foreign investors and we expect more positive developments to come with the realisation of this community,” Hue said. “We have seen an increasing inflow of foreign investment into Vietnam in the first half of the year which is obviously a positive signal for the business environment. This year Bosch in Vietnam will invest in expanding our manufacturing capacity as well as developing highly-skilled labour,” he said. “With the AEC comes the freer movement of labour and that will help us put our associates in the right place. In fact, we have just relocated two of our Vietnamese associates to Bosch in the Philippines.” Tran Quoc Huan, deputy general director of Dutch dairy firm FrieslandCampina Vietnam, told VIR that the AEC would also give his firm greater business opportunities in Vietnam. FrieslandCampina has production facilities in Indonesia, Malaysia, the Philippines, Thailand, and Vietnam, and sales and distribution units in Cambodia, Laos, Myanmar, and Singapore. The plants in the first five countries make similar products (although under different brand names) including formula powder milk, liquid milk (UHT and pasteurised), yogurt, and sweetened condensed milk. “FrieslandCampina Vietnam can rely on four sister companies in Indonesia, Malaysia, Thailand, Philippines to increase supply without costly and time-consuming expansion investment,” Huan said. “Besides supply and demand, “One ASEAN” offers great opportunities in terms of shared services in ICT, human resources, marketing, communication, and research and development (R&D). Eventually, consumers will benefit with better products and better prices.” According to these entrepreneurs, in addition to the AEC, Vietnam has big potential for luring more FDI, such as its macro-economic stability and a stable political climate. The country has the third largest population in South East Asia (after Indonesia and Philippines), reaching 92 million with an average age of 29.6, and 55 million young people of working age. Recommendations “In order to attract more FDI in an open market, the government should create more incentives to increase Vietnam’s attractiveness, as investors will evaluate the comparative advantages of each individual ASEAN countries,” said Denoly of Schneider Electric. “On the other hand, established Vietnamese enterprises must improve their competitiveness and stay ahead of the game to face new challenges arising from free trade and investment liberalisation.” Echoing this view, Bosch’s Hue suggested Vietnam improve its competiveness, strengthening its legal framework, and increasing transparency in order to take part in the globalised economy. “This needs the embracing of smart technologies, investing more into R&D and a long-term view to help up-skill for the labour force as well as improving their employability,” he said. “Joint efforts from both the government and the business community are essential.” According to Walde, Vietnam should help local state-owned enterprises improve their competitiveness in order to compete with companies from other countries within the AEC, the TPP and other free trade agreements. It is recommended to establish professional business concepts and structures, for the purpose of assigning key management positions based on qualification and objective criteria. “Moreover, Vietnam should build a modern and practical vocational training system that meets the demands of companies and attracts investors to Vietnam,” Walde said. Vietnam has reduced tariffs to 0 per cent for 93 per cent of the product lines imported from ASEAN countries. By late 2014, Vietnam reduced 6,859 lines of taxes (occupying 72 per cent of its total export-import tariff programme) to 0 per cent. Last year, another 1,720 lines of tariffs were trimmed down to 0 per cent. During 2016-2018, the remaining 687 lines of sensitive items (occupying 7 per cent of total items in the programme), will be gradually reduced. Such items include steel, paper, automobiles and their spare parts, machinery and equipment, construction materials, air conditioners, refrigerators, milk, and milk products. For example, before January 1, 2016, regarding automobiles, the average import tax rate for completely-built units (CBU) imported from ASEAN was 50 per cent. However, the rate is reduced to 40 per cent this year, 30 per cent next year and dropping to 0 per cent by 2018. Under the ATIGA, Vietnam is allowed to permanently keep its import tariffs at 5 per cent for a number of its agricultural products, such as live poultry, chicken, eggs, sectioned fruit, unhusked rice, unpolished rice, processed meat, and sugar. However, in order to benefit from such tariff reductions, goods must meet many conditions. For example, they must have at least 40 per cent of their materials sourced from within ASEAN. VIR