Past few months, in fact past couple of years since the trade war has taken off, there has been much talks and actions in global companies to shift their manufacturing base from China to other countries. India has been thinking of itself as the front runner in this golden opportunity but to the surprise of many, came a country which we never thought of, would give us a very tough competition “Vietnam”.
The competition from Vietnam has been so hard for India that as per the report of Nomura capital, in the last year between the period of April 18 to August 19, around 56 US Companies relocated its manufacturing base from china, but only 3 companies came to India, Vietnam took 26 of them (Vietnam – 26, Taiwan – 11, Thailand – 8 Mexico – 6).
Indian government has been on the path of various reforms, Since last five year. Government has taken various initiatives such as “Make In India” lot of efforts has been taken for improving the “Ease of doing business” ranking by almost 65 Ranks up to come to 63rd position in global ranking from 142nd. What’s not working for India, is a serious matter to look into by India.
Let’s have a analysis at various factors that has led Vietnam to be front runner in taking advantage of the Trade war, to understand if in long term Vietnam remains a favourable destination for the global companies to be next global manufacturer, What India need to do to become global manufacturing leader.
Let’s first have highlight of both the countries and analysis:-
Criteria
Viet Nam
India
Political
Single Party Socialist Republic
Federal Parliamentarian Constitution Republic
Population
96.48 Million
1312 Million
GDP Growth rate
3.82%
3.10%
Per Capita Income
1964 USD
2104 USD
Un Employment Rate
2.15%
23.50%
Wages high skilled
465 USD Per month
143 USD Per month
Foreign Exchange Reserve
80741 Billion
501703 Billion
Foreign Direct Investment
6.70
1365
Corporate Tax rate – Manufacturing
20%
15%
Ease of Doing business Ranking
70
63
India and Vietnam both liberalized almost in same time period of 19989-90s since then both countries have grown at an average rate of 6-7% annually. But in past few years Vietnam is leapfrogging mainly due to its proximity with china.
Looking at the above global economic parameters, Vietnams population is very small in comparison to India i.e. almost 1/13th which makes itself a small size market comparison to India, but the argument of being a huge market has not worked for India till now. The most important factor in favour of Vietnam is, it’s a Single party socialist republic which is on the similar line of China. China also has exactly similar political environment, this really gives edge to Vietnam over India, as implementation of any policy in socialist country is not as challenging as it is in a democratic country. The companies moving to Vietnam knows that they will find a conducive environment like China in the country, given the authoritarian nature of the political system.
By opting to setup huge manufacturing base in countries like China and Vietnam the global business companies have clearly shown to have their preference to authoritarian economy as compared to democracy. They want to live in a democratic country but they want to economically promote socialist countries. The long term impact of promoting such socialist country can be seen now with the way china is handling its position on global platform & its responsibility as a global power. This can never be expected in a democratic country like India.
The factors like Per capita income, GDP Growth rates are on similar line for both the countries. The Unemployment rate in India is 23.5% which quite high as compared to Vietnam’s 2.15%. This as an economic indicator is in favour of Vietnam but it also implies that the labour cost would be cheap in India as compared to Vietnam at the same time it also indicates availability of huge manpower for the various industry if this unemployed manpower is skilled well, Government of India has already initiated major steps in this direction by giving major boost to various programs of skill development etc.
Vietnams balance of payment is positive, it has more export then import as compared to India where the balance of payment is negative still the foreign exchange reserves of India are way higher then Vietnam. India has consistently shown very high foreign direct investment as compared to Vietnam.
In measures as economic reform Indian government has reduced corporate tax rate for manufacturing companies to 15% making one of most competitive corporate tax rates in the region.
The enormous work that government of India has done in ease of doing business has led to it position coming to 63rd in 2019 from 142nd in 2014, this is a huge jump whereas Vietnam was on 99th Position in 2014, currently it’s on 70th position in 2019.
From the above economic parameters in the table it can be seen that India has potential to become next manufacturer to the world still we have seen that international companies have preferred Vietnam over India.
Based on my reading of various articles on India and Vietnam, comparing various reforms undertaken by both the countries its very much clear that India has been very aggressive in its reform process since last 5 years with new government be it GST implementation, Demonetisation, easing on various FDI Norms, Major steps on ease of doing business, initiatives like Digital India, Skill development mission and many more. Whereas Vietnam has been working on certain fundamentals like education, infrastructure also establishing themselves as investor friendly country to attract the foreign investment in the country.
Now lets have analysis of the major foreign direct investors in Vietnam comparing with the FDI made by these similar countries to India. Let’s have a look at countries investing in Vietnam in the year 2018 & 2019 comparing with investment by similar countries in India.
(B- Billion)
Investment
Vietnam
India
2018
2019
2017-18
2018-19
South Korea
7.20 B
7.92 B
1.05 B
0.98 B (Prov.)
Japan
8.60 B
8.50 B
1.63 B
2.97 B
From the above table we can see that the major FDI investment in Vietnam is received from its two top investors South Korea & Japan, both have been consistently having major FDI share in the Vietnam economy. The third country who’s share has been rising is china which has been investing through Hongkong.
Whereas India’s major FDI has been coming from Mauritius & Singapore which contributes approx. 50% of total FDI. The key thing for India here is to understand about Japans position for investing heavily in Vietnam. Japan has been a friendly country to India, India has always been a pro japan economy due to its friendly relations, but still India is not able to attract FDI from Japan in comparison to Vietnam. I think this shall be one of the major area on which government need to work on as even after such a good relation India is not able to attract FDI from Japan.
Further South Korea’s investment in India has never been that great, India has never focused majorly on building strong relationship with south Korea, as major focus has always been Europe, USA and Japan. It now time that India shall specifically focus Korea which can work very well strategically for India as an alternative to dependency on china at the same time Korea can play a really big role by investing in India to make India a front runner in becoming a global manufacturer.
Major investment in India is coming through Mauritius, a tax heaven country. Which indicates that globally India is not a low tax country. Gradually Mauritius has slipped to second position bringing Singapore to first position. Further the current decision of Government to reduce overall corporate tax rates specifically to manufacturing companies, We can assume that India will start receiving direct FDI from respective countries instead of routing through tax heavens like Mauritius.
With all the above analysis there are certain major factors for India to work on in order to compete with Vietnam, India needs to learn, work really hard on following factors to find some very important solution for the below factors:-
1. Socialist Vs Democratic structure : This is one of the biggest challenge India is facing due to its democratic setup to attract the foreign investment. The investors prefer socialist environment compared to democratic for safety of their investment and business. As they assume socialist environment is better for their business. But in the long term impact of the socialist economy would be similar to china. While china was looking to become economic superpower and a manufacturing hub for the world things were good but gradually it has reached to a stage of strong economic powerhouse it could not sustain in parallel with world on its socialist policies leading the global community to have very low faith.
Also Vietnam being socialist country has observed having issues with various key matters like Human rights, no freedom to press, citizens are surveillance online etc and many more such matter. These scenario India needs to present these factors to global business community with a long term prospective to bring this factor in its favour.
2. Raw Material availability :- India is full of resource and raw material, whereas Vietnam is majorly dependent on china for its raw material requirement it is not a resource producer. That means most of the raw materials need to be purchased outside of Vietnam, its from China. This indicates that even though the companies have shifted out of china still their dependencies will remain on china indirectly. So even after incurring heavy cost on shifting their manufacturing base from China to Vietnam it is really difficult to comment as their dependency will continue to be on china.
3. FDI share of Hong Kong:- Through the above Foreign direct investment data, we could clearly see that the major FDI in Vietnam are from South Korea and Japan, both these countries has been historically investing in Vietnam. But in past few years there is one country whose share of investment in Vietnam has been rapidly increasing from Hong Kong. Over the years, it has become the seventh largest investor in Vietnam. In 2018, it moved up to fifth, is now fourth place in total investment up to 2019. In the year 2019 Hong Kong has become the second largest FDI Country after Korea to make an investment of 7.8 Billion. It is understood that china is making these investment thorough Hong Kong post the trade war push between China & USA, it does not want Vietnam to become cautious of Chinese investment.
This is again alarming situation for companies looking to shift from china. If china continues to invest in Vietnam through Hong Kong then the whole effort of shift from china to Vietnam might be at stake as many of the business in Vietnam are supposed to be invested by Chinese investors.
4. Business Environment : This is one of the major factors which is required to be worked on by India. Vietnamese government is committed to creating a fair and attractive business environment for foreign investors, this can be seen by the 26 out of 56 companies shifting their base to Vietnam. Further being Single party socialist republic framework there is no boreoarctic lethargy. Whereas India in the eyes of global business community “Despite the government focusing on a ‘single-window’ process, it is still multiple doors that big investors, MNCs’ representatives have to go through. When someone is bringing money to your country, you do not sit on his proposal, waiting for him to approach you again & again; you should just decide, convey a “Yes” or “No”. It should be that simple. But that is not the case right now. Even if a ‘yes’ is given, the company’s representatives have to go to multiple offices, meet several officials.Whereas Vietnam provide only one government official who takes care of every requirement of the Investors.
5. Improvement in legal framework: Vietnam has been very aggressive in continues improvement in its legal framework which has really impressed the global business community. India has also taken major steps in these directors in past few years. The results of the same are expected to come in the futures years if India is able to show these efforts on the international platforms and the reach of these framework implementation reaches to the lowest level of its user. As historically India has many times failed to attract global community with its simplified legal framework & structure.
It’s really a right time for India to work very aggressively towards presenting itself as the only best option to the world to become global manufacturer, it must take care of the above key factors in order to be the next leader in the manufacturing sector. With the above key factor for the government of India to take appropriate action in its policy to attract more foreign direct Investment & make India a hub for manufacturing. The global companies looking to shift their manufacturing base shall consider about key factors relevant to the type of economic & political scenario of country where they are investing before taking appropriate decision.