Credit: DH Illustration/Deepak Harichandan
In a study done by Nomura Capital three years ago, at the height of the US-China relationship meltdown, 56 US companies relocated their manufacturing base from China to Vietnam. Surprisingly, only three companies came to India.
As per JPMorgan, Apple has moved 20% of iPad, 5% of MacBook, 20% of Apple Watch and 65% of AirPods production to Vietnam. It also points out that Vietnam is emerging as a manufacturing hub for components (camera modules) and electronics manufacturing services (EMS) hub for smaller-volume products (Apple Watch, Mac, iPad) and is already a major in AirPods. Compared to this, Apple has moved 5% of its manufacturing of iPhone 14 to India. It is a start, but there’s a long way to catch up.
India has, quite frankly, lost the ‘China+1’ race to Vietnam. India should therefore stop playing ‘me too’ in the ‘China +1’ narrative and instead pivot to a more controlled strategy to compete in markets rather than in manufacturing.
Spin doesn’t help
There are some revealing parameters on which the compare what’s going on in the economies of India and Vietnam.
a. India’s GDP growth post-Covid, according to World Bank data, is three times that of Vietnam’s, for an economy that is 10 times bigger. However, GDP growth in India was driven by government spending and consumption, while Vietnam’s GDP growth was private capital and export-driven.
b. Vietnam is a single-party ‘socialist republic’ as compared to India being a democratic republic with a federal system. Vietnam’s political system is similar to that of China. In a single-party socialist republic economy, implementation of government and economic policy is much easier. Whereas, in a federal democracy, there are various types of challenges. In my conversations with those close to government, I have heard it argued that the government’s efforts to weaken institutions – the media, state governments, law enforcement, etc. – is to make India “more competitive” (India’s ranking improved from 140 to 70 in the Ease of Doing Business scale -- similar to that of Vietnam). But having the fabric of one country while trying to model the economy around that of another can only lead to a messy mix-up.
c. The unemployment rate in India is 23.5%, which is quite high compared to Vietnam’s 2.15%. I have heard it argued that this is a good thing because it means the availability of huge manpower in India for it to become a global manufacturing hub! It is also said to indicate the availability here of cheap labour to the world, as compared to Vietnam. The minimum wage level in India is 50% that in Vietnam. However, employability is a huge factor. Most of India’s unemployed, or even the employed, for that matter, are unskilled and, to a large extent, unemployable. Close to 85% of India’s labour force is employed in the small food and beverage (F&B), retail, and self-employment categories. Compared to this, 55% of Vietnam’s labour force is engaged in manufacturing.
Economist Raghuram Rajan is right when he says that India should look at the PLI afresh to determine the real cost-benefit of making in India. It is approximately 23% cheaper to make a white good in the ASEAN than in India.
India should therefore look at its ‘China+1’ policy afresh and instead craft a ‘India+2’ strategy to cater to a global market. India should have a foot-hold in Africa/Middle East (Saudi Arabia) and in the ASEAN (Vietnam) to cater to 66% of the world market. Government should encourage public/private investments in these regions, rather than allow a few disparate private investments in these regions such as done by the Tatas, TVS, Sanmar, Adani, Reliance, etc., groups. A focussed effort will enable a conducive policy framework in those regions, finance flows, and a conducive collaborative ecosystem that build goodwill rather than be mercantilist and exploitative like China’s BRI.
Doing Biz in Vietnam
Vietnam has all the advantages of working out of China, and then some. Its GDP is bigger than that of Bangladesh, with half the latter’s population. It is growing at nearly 3% and has a strong manufacturing culture. With a population of about 100 million people, its per capita is 1.5 times that of India.
Vietnam has over 325 State-supported industrial parks that offer incentives and fewer restrictions. Some 17 more industrial parks are expected to open in the next few years. The economic zones tend to be closer to main roads, ports, and airports for easier movement of goods. Most foreign investment in such zones are in the manufacturing and export-oriented sectors. Manufacturing in Vietnam has the dual advantage of catering to a domestic market besides being export-oriented and catering to a tariff-free ASEAN region. Repatriation of profits is allowed if financial obligations to the State of Vietnam have been complied with, and is similar to India, though simpler going by the number of laws one has to manage. Foreign businesses also prefer Vietnam to avoid currency risks, given its low currency fluctuation rate. In contrast, the Indian Rupee is rated as a “free-floating currency”, with exchange rates largely determined by the market.
India+2
India-Vietnam cooperation is a recent phenomenon. The last 5-6 years have seen a range of initiatives, including a broad free trade agreement that eliminates tariffs for over 80% of goods traded between the ASEAN countries and India. This year is also set to see the last of the tariff reductions/eliminations between Vietnam and India.
Currently, there are around 317 small and large Indian entities registered in Vietnam, with a cumulative investment of $1 billion. In 2021, 12 MoUs were signed between the two countries, largely in power, pharmaceuticals, vaccine production and agriculture. The largest Indian entity in Vietnam are the Tatas. Tata Power is building a $2.2-billion thermal power project in Soc Trang province, to cater to about 2% of Vietnam’s power needs by 2030. The Tatas have also inked a $ 54-million deal to build a 49 MW solar park in Vietnam’s Binh Phuoc province. In the agriculture sector, Tata International Vietnam signed an MoU with Agribank in 2017 to support Vietnamese farmers, cooperatives, and plantations for credit support, equipment insurance, and mechanisation solutions. In 2019, Tata Coffee inaugurated its $50-million freeze-dried coffee plant in Binh Duong. The public sector Oil & Natural Gas Corp. (ONGC) is involved in exploration in Vietnam. Its overseas arm — ONGC Videsh — has a 45% interest in an oil block in the Phu Khanh basin. The Adani Group is exploring a $3 billion investment in Vietnam.
This is a good start. But this is also a good opportunity for Indian entities to enter Vietnam’s manufacturing ecosystem. These are early days and the canvas is yet rather empty as Indian investment in Vietnam currently lags other countries and business entities. As of December 2022, the total newly registered capital of foreign investors in Vietnam reached $27.72 billion and the whole country had 36,278 valid foreign projects. Indian entities therefore make up less than 1% of the number of entities registered and less than 4% of FDI in Vietnam, ranking far behind the likes of Japan, South Korea and China. The West has also started investing in Vietnam, especially in and around Ho Chi Minh city.
Among Vietnam’s top 10 foreign investors, six are RCEP members, with South Korea being the biggest with an accumulated $70.5 billion, followed by Japan ($60.1 billion), Singapore ($56.3 billion), China ($18.28 billion), Malaysia ($12.8 billion), and Thailand ($12.8billion). India ranked 25th.
Labour costs in Vietnam are half that of China at $3 per hour. But it is twice that compared to a southern state in India. Productivity indices indicate that Vietnam’s strong manufacturing ethic and work culture makes them twice as productive as Indian labour, making it the preferred new destination for Taiwan, South Korea, Japan, and even China, compensating for the higher wage rate.
So, instead of putting all our eggs in the ‘Make in India’ basket and trying to get manufacturing here as part of the China+1 rhetoric, India must look outward and take an ‘India+2’ stance and address a global market. We must take greater control of the variables if we are to be a nation of global businesses with global brands, not just a global manufacturer.
(The writer runs a Corporate Finance practise headquartered in Bengaluru)