This article is from the WeChat public account: singularity (ID: gh_04eb15f69687), author: singularity, the original title: "How are Vietnam's FDI and exports?", the header picture comes from: Visual China
After a year, I went to Vietnam for a while. The overall feeling is as if you have returned to China more than ten years ago, with low prices and a slow pace of life (except for Ho Chi Minh). One day, I happened to find a large industrial park near a friend's house, which was almost full of Chinese enterprises. Suddenly curious, how is the development of Vietnam's manufacturing industry and foreign investment?
In fact, most of the conclusions of this article are familiar like the Federal Reserve's interest rate hike and Xiaomi's SU7. The point is actually the process of argumentation, and the same logic is still very different in different countries and different times and backgrounds.
Let's start with FDI, which stands for Foreign Direct Investment. What are the concepts and ingredients?
Let's take a look at Vietnam's FDI data last year.
In 2023, FDI (foreign direct investment) increased by 32.1% year-on-year to US$36.61 billion, and the number of new projects increased by 56.6% year-on-year to 3,188.
Source: Ministry of Planning and Investment, Vietnam
If we look at the longer term, the inflow of foreign investment into Vietnam since 2017 has been around US$30 billion. Growth in 2023 also seems to have only rebounded to a normal range.
But if you compare it horizontally, it's worth mentioning.
According to the Organisation for Economic Co-operation and Development (OECD), global FDI flows statistics as of the second quarter of 2023. As of the first half of 2023, global net FDI inflows have accumulated to nearly US$600 billion, down 36% from the same period in 2022.
The FDI inflows of the world's major economies, China, the United States, and the European Union in January ~ September 2023, were 25.1, 2651, and 85.3 billion US dollars, respectively, with year-on-year growth rates of -84.33%, -9.03%, and 120.22% respectively.
Source: China Administration of Foreign Exchange, OECD
Several major economies have shown a downward trend in volatility in recent years, while the rebound in the EU is mainly due to the low base in the same period of '22. If you look at the green column of the EU in 2022 in the chart above, it is negative.
This brings us to the issue of the statistical caliber of FDI. FDI inflow data released by the OECD, which is a net value.
Take, for example, the data from China. There are two main types of FDI: the State Administration of Foreign Exchange and the Ministry of Commerce, the former follows the balance of payments method, and the FDI under this method mainly includes two major items - equity and related enterprise debt. The first difference is that the Ministry of Commerce's caliber does not take into account the debts of affiliated enterprises.
According to the statistics of the Ministry of Commerce, in the third quarter of 2023, the actual utilization of foreign direct investment was 216.3 billion yuan, equivalent to about 30.2 billion US dollars at the central price of the quarterly average RMB exchange rate, a year-on-year decrease of 26.6%.
According to the statistics of the State Administration of Foreign Exchange, foreign direct investment in Q3 was -12.1 billion US dollars, a year-on-year increase of -179% (the version released on February 18, 2024 was -118, and the version on March 29, 2024 increased Q1Q2 and reduced the data for Q3). For the whole year, the FDI version on February 18 was +33 billion US dollars, and on March 29 it was +42.7 billion US dollars, taking the latest version of the data as an example). The trend is the same, but the difference between the two is more than $40 billion.
Source: China Administration of Foreign Exchange
The difference of more than $40 billion comes from two components. One is the debt of affiliated enterprises, which has been negative since the third quarter of 2022, with -17.1 billion US dollars in Q3 and 2.9 billion US dollars in Q2, a decrease of 20 billion yuan from the previous quarter, which may be related to the quarter-on-quarter increase in US bond yields in the third quarter.
The second difference comes from the equity component. In Q3, the data of the State Administration of Foreign Exchange and the Ministry of Commerce were 51/302, respectively, a difference of 25.1 billion US dollars. The reason is that the statistics on the reinvestment and divestment of profits of foreign-invested enterprises by the Ministry of Commerce are not as complete and timely as those on the basis of the balance of payments.
There are two scenarios for the reduction in profit reinvestment – the decline in the profitability of foreign companies and the repatriation of profits.
According to the National Bureau of Statistics, in the first half of 2023, the profits of foreign-invested industrial enterprises fell by 12.8% year-on-year (10.5% year-on-year in the first three quarters).
Are there any cases where profits are remitted? In the third quarter of 2023, the cumulative income and current transfer expenses of banks on behalf of customers amounted to US$98.2 billion, a year-on-year increase of 15.0%, 6.3 percentage points higher than the average quarterly growth rate from 2018 to 2022. Is this a normal range? I don't know.
This means that the reinvestment of profits is decreasing, the divestment is increasing, and the new equity investment itself is decreasing. But the good news is that the data is back on track in Q4.
After explaining the concept of FDI, let's go back to the situation in Vietnam. In recent years, the FDI of the world's major economies has fluctuated downward, and Vietnam's growth is the most stable. About 80% of the FDI flowing into Vietnam in 2023 will come from Asian countries. On the one hand, the growth of foreign investment is benefiting from the transfer of the "fruit chain", and on the other hand, the flow of capital has slowed down under anti-globalization, and the "nearby" transfer of the industrial chain has become the first choice.
So, what is the impact of the growth of FDI on Vietnam's exports, and what role does the FDI sector play in Vietnam's economy?
Let's take a look at Vietnam's overall economy. From the perspective of per capita GDP, Vietnam's per capita GDP in 2023 is 4,284 US dollars, which is equivalent to the level of China in 2009~2010.
Source: World Bank, Wind
However, from the perspective of GDP structure, there is still a big difference between the two.
China's economic growth is more on its own, while Vietnam's economy is export-oriented.
Source: Wind
Vietnam's exports/GDP have risen from single digits in the late 80s of the 20th century. In 2023, exports will account for about 94%. A high proportion of exports also means that they are more sensitive to fluctuations in the external political and economic environment, and there is a greater risk of social problems such as unemployment due to a decline in external demand.
However, the sharp increase in exports has also improved Vietnam's trade deficit, which has lasted for 25 years since 1986, and has achieved a stable trade surplus since 2012.
Why 1986? Because in this year, the hyperinflationary pressure caused by the economic crisis and the promotion of local governments led to the official launch of Vietnam's reform and opening up in this year. The planned economy gradually shifted to a market economy, while the right to import and export was delegated to local governments.
The redistribution of resources and surpluses under the market economy fueled Vietnam's first wave of exports.
Back to the topic of big in big out. In addition to reform and opening up, the planned economy was abolished and exports were stimulated. Another long-term key to boosting exports is foreign investment.
Source: Wind
As part of innovation and opening up, opening up to the outside world and investing in the outside world has both internal contradictions and external factors. One of the conclusions he came to when Vietnam's then Deputy Prime Minister Vo Van Kiet visited Indonesia in 1987 was that favorable conditions should be created for foreign direct investment. In the same year, Vietnam promulgated the Law on Foreign Investment in Vietnam, and in the decade of 1990~2000, it experienced four revisions, the promulgation of the Company Law and the promotion of the shareholding reform of state-owned enterprises, and Vietnam gradually became a hot spot for investment. After China's accession to the WTO in 2007, FDI and imports and exports started a new round of growth.
However, neither FDI nor exports have a positive correlation with net exports. In other words, the expansion of local production capacity and foreign investment may have contributed more in absolute terms to net exports, but only quantitatively. This is similar to the analysis of a company, the net profit is more, but the net profit margin is still the same. It shows that the company's profit model has not been upgraded, and the production efficiency, management efficiency and technical level are still the same.
Source: Wind
However, all of this is just speculation. There are also many developed countries with increased FDI but persistent trade deficits. Therefore, it is necessary to take a specific look at the breakdown of Vietnam's exports and imports, as well as their division of labor and roles in the industrial chain.
In fact, there are three questions:
- Who dominates imports and exports, foreign or local?
- What is the composition of import and export, and what are the things that are bought and sold?
- How to sell, with a high degree of integration, or with low value-added assembly?
Let's first look at which sectors the import and export take place. According to Vietnam's 2022 Statistical Yearbook, the FDI sector contributed US$275.93 billion, nearly three-quarters, of the US$371.3 billion in exports for the year, with the remaining quarter contributed by local enterprises. In terms of imports, FDI also accounted for 65%, reaching $233.2 billion.
Conclusion 1: Foreign investors dominate Vietnam's imports and exports.
The second issue is also mentioned in the Statistical Yearbook. In 2022, 89.6% of exports were industrial products, with mobile phones accounting for the highest share of exports, reaching US$58 billion, accounting for 17.4% of industrial exports.
On the import side, capital goods amounted to US$316.22 billion, accounting for 88.1% of total imports. Among them, the value of electronic products and their parts reached 81.88 billion US dollars, accounting for 25.9% of capital goods.
Here we will explain the concepts of capital goods and industrial goods together. The former is a durable product or service used to produce a product or service in the production process, which is one of the four factors invested by the producer (the other three are land, manpower and enterprise capacity), and the four are collectively called production factors. The latter is a product that is purchased and used for processing production or business operation.
The relationship between the two can be simply understood as the former is mainly a factor of production, and the latter is mainly a finished product, upstream and downstream. In this way, the answer to the second question is also clear.
On the whole, 88.1% of capital goods are imported, 89.6% are exported, and the added value of intermediate industries is not high. But if you look at it by sector (divided into foreign sector and local), the difference is actually very large.
There is a set of data above: in 2022, exports from the FDI sector accounted for nearly three-quarters (74.3%) of total imports, and imports accounted for 65% of total imports. Ignoring the 5% difference, Vietnam's total imports ≈ total exports ≈ GDP in 2022. So, if we look at the FDI sector alone, net exports by foreign companies account for about 10% of GDP.
In other words, the added value of these factories built by foreign investors in Vietnam is still considerable. The local sector is still dominated by the export of primary industry products, and the value of imports brought by some medium and high-end products that the people use daily is naturally higher than that of rubber, fruits and other agricultural and sideline products, which also causes negative net exports.
数据来源：Statistical Yearbook of Viet Nam 2022、世界银行
Therefore, the second problem has also been solved: Vietnam's local exports are dominated by the primary industry (agriculture, forestry, animal husbandry and fishery), which has a low industrial added value, while the exports led by foreign capital are mainly secondary industry products, which have a higher industrial added value and account for the majority of Vietnam's overall exports.
The last question, which is actually half answered by the time we figure out the second question, is that the local sector is dominated by exports in the primary sector, while the foreign sector is dominated by manufacturing. There is not much to say about the former, and it is not the focus of this article, which focuses on Vietnam's manufacturing industry.
Looking at the proportion of manufacturing in GDP alone, a high proportion may indicate that the country's economy is dominated by manufacturing, but it does not judge how developed the country's manufacturing industry is.
The value created per capita is the key.
The four factors of production mentioned earlier - raw materials, land, manpower, and enterprise capacity. These four things are also the cost of the enterprise.
Land and manpower are natural gifts, not very elastic.
In my opinion, raw materials and corporate capabilities are mutually reinforcing. Take new energy vehicles as an example. The manufacture of a battery alone involves the manufacturing process of "raw ore smelting, battery material manufacturing, single cell, module, and whole package". Every time a car company extends a link to the upstream, it can save a processing fee, and the money saved is the extra profit, which in turn supports the development of new technologies and extends further upstream. The reason why BYD can sell cheaply and make money has a lot to do with its integration.
However, for the entire consumer market, consumers and producers have to bear the upstream premium and tariffs on parts and components, which is definitely not conducive to consumption.
Most of Vietnam's FDI projects are also dominated by assembly plants.
After all, among the four factors of production, Vietnam's most advantageous advantage is manpower, and technology is still relatively scarce.
The value created per capita mentioned above is a good proof of this view. In 2018, China's manufacturing GDP and the number of employees in the industry were 26,482 billion yuan and 99.54 million people, respectively, while Vietnam's GDP was 2087476 billion VND and 7.3 million people. According to the exchange rate of 1:3400, the per capita added value of Vietnam's manufacturing industry in 2018 was 84,000 yuan, and China's was nearly three times that of Vietnam, which was 266,000 yuan. The degree of integration and productivity are the main sources of difference.
Take the mobile phone industry, for example. Almost all of Vietnam's electronics exports come from the FDI sector (Samsung, Canon, Panasonic, etc.) and Apple's industrial chain companies that have moved from China in recent years. However, from the perspective of the main business of these FDI enterprises, most of them are still limited to downstream assembly links.
Source: Tianfeng Securities' Southeast Asian Footprint of Enterprises Going Overseas
summary
At present, Vietnam's most advantageous resource endowment is labor costs. As the most important player in Vietnam's economy, whether the FDI sector can continue to promote Vietnam's economic growth depends on whether its industrial chain can shift to a higher upstream link with a higher proportion of industrial added value.
Another key is Vietnam's own talents, judging from the population distribution in 2023, the proportion of the working-age population will reach 68.2%, which is still very potential, but the proportion of liberal arts students in Vietnam seems to be high.
本文来自微信公众号:Singularity(ID:GH_04EB15F69687),作者:Singularity
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