Mekong Delta Frontier Offers Investor Opportunities

Vietnam, and its neighbor Cambodia, also have low labor costs in their favor. That’s something that has not only attracted business from neighboring China as its own manufacturing costs rise, but also could play a major role in bringing benefits from free trade agreements (FTAs). For the moment, China’s move to invest in manufacturing facilities in Vietnam, Cambodia and elsewhere within the Mekong Delta region is coming not just from companies but also from their customers. It’s understandable; in Vietnam wages are about half the cost of those for Chinese workers, and in Cambodia they’re a quarter as much.

When you add in the fact that corporate income taxes in both countries can provide advantages for certain sectors as well—in Cambodia, garment manufacturers pay no corporate income taxes at all for the first five years, while in Vietnam manufacturers in high-value-added industries, like healthcare, environmental and energy efficiency technology, education and electronics, pay just 10% instead of the standard rate of 22%—it’s hardly surprising that many industries are looking to take advantage of what they see as a friendlier business climate.

Vietnam is looking higher than low-tech manufacturing, hence the corporate tax rate favoring higher-tech companies. That shows in the fact that the country’s biggest export is no longer textiles but mobile phones.

Of course, it’s not necessarily as easy as adjusting corporate tax rates. Bell said, “Vietnam has had significant success already in recent years in attracting electronic manufacturing due to government incentives and lower wages. Building on this success to attract more investment will require a mix of things though the most important would be continuing to secure FTAs (especially the TPP—Trans-Pacific Partnership), maintaining a predictable investment environment and providing adequate infrastructure. Longer term development of the sector will depend on improving the skill level of the workforce so that Vietnam can manufacture and export increasingly high value added products.”

Vietnam already has an FTA with the European Union, its second-largest trading partner and South Korea, its fourth largest, concluded at the end of the year. According to Bell, that “will continue to support Vietnam’s export growth. The EU is an important and growing trade partner for Vietnam with 18% of its exports going there (up from 13% in 2010).” That said, Bell added that the “TPP remains the trade deal that would have the most significant effect on Vietnam.”

One thing investors should remember when considering investments in the region, said Bell, is liquidity. “Hence taking a long-term view is important, as is having the ability to get in to these stocks early and get out early as well,” Bell said. “Having dedicated resources on both the equity and fixed side enable us to do this. However, we do expect the liquidity of the market to improve as [foreign ownership limits] rise and the opportunity set increases.”