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Vietnam Tech Exports Overtaking Garments Eases Trade Gap

Vietnam’s cost advantage has drawn investments from U.S. and South Korean technology companies, whose exports have overtaken garments and provided a bright spot for a government struggling to revive economic growth.

Intel Corp. (INTC), Samsung Electronics Co. (005930) and Jabil Circuit Inc. (JBL) are among a growing roster of companies setting up or expanding in Vietnam, spurring exports amid a global slowdown that has damped demand for goods from other Asian nations. Shipments of mobile phones and other electronics from Vietnam surged 91 percent in the first 10 months of the year to $16 billion, making them the biggest source of export revenue.
The boost from global technology companies may help damp investor concern about the economy, which is set to grow at the slowest pace since 1999 amid credit downgrades and an undercapitalized banking system. Rising costs from Singapore to Thailand, as well as tensions between China and Japan may precipitate a manufacturing shift to Vietnam, which may help cut the trade deficit to its smallest in more than a decade.
“The country is realizing its cost advantage and is now becoming a rising assembly point for global technology firms,” said Vincent Conti, a Singapore-based economist at Australia & New Zealand Banking Group Ltd. “This rapid growth has helped to diversify Vietnam’s trade profile and improve the structure of its vulnerable trade balance.”
The benchmark VN Index rose 1.2 percent today and has gained 8.4 percent this year after sliding 27 percent in 2011.
Market Share
Vietnam’s shipments of electrical machinery, a category that includes modems, telephones and wiring sets, to the U.S. climbed 58 percent in the first eight months of the year, according to the U.S. International Trade Commission. By comparison, China’s sales to the U.S. in the category rose 11 percent, Malaysia’s grew 4 percent, Thailand’s slid 5 percent and Indonesia’s fell 16 percent in the period, the data showed.
Garment exports to the U.S., Vietnam’s top market, reached $6.5 billion last year, making Vietnam the second-biggest supplier of apparel to the American market after China. Garment exports were $47 million a decade earlier, before a tariff- cutting trade agreement buoyed Vietnamese access to the U.S. market and helped spark six years of Vietnamese economic growth exceeding 7 percent annually starting in 2002.
“Vietnam is taking technology market share from other Asian countries in the region,” said Than Trong Phuc, the Ho Chi Minh City-based managing director of technology-focused investment fund DFJ VinaCapital LP. “There is a combination of factors, but it’s primarily driven by labor costs.”
Doubled Investment
Jabil, a Florida-based electronics manufacturer, plans to increase its total investment in a factory in Ho Chi Minh City that currently makes point-of-sales terminals and routers to $100 million from $50 million over the next three years, said Mike Matthes, senior vice president of global operations.
The company may employ as many as 5,000 workers in Vietnam within five years, up from 1,400 now, Singapore-based Matthes said in an e-mail. Jabil’s three top clients were Apple Inc. (AAPL), Cisco Systems Inc. (CSCO) and Research in Motion Ltd. last year, based on company filings.
Samsung plans to invest $700 million in a new mobile-phone plant in northern Vietnam, Yonhap News reported Oct. 13. The plan marks the second phase of its investment in the country, with an annual production capacity at its first plant at 150 million units, Yonhap News reported.
Intel, Nidec
Production at Intel’s $1 billion factory in Ho Chi Minh City is “ramping up smoothly,” said Rick Howarth, general manager of Intel Products Vietnam.
Intel opened its assembly and testing plant in Ho Chi Minh City in 2010, the largest such facility for the world’s largest semiconductor maker.
“We’re looking to increase the complexity of work that’s being done in Vietnam,” Howarth said. “Over time we can expect to see an ecosystem of high-tech design and manufacturing grow in Vietnam, increasing the country’s relevance in the industry globally.”
Japan’s Nidec Corp. (6594), the world’s biggest maker of disk- drive motors, said in June it would open its seventh Vietnamese factory in Ho Chi Minh City by the end of the year. Its workforce in Vietnam’s biggest city will reach 25,000.
China Reliance
Vietnam is also benefiting from a move by manufacturers to diversify away from China, said Alessandro Parimbelli, a Bergamo, Italy-based senior vice president of global business units at Jabil.
“We’re trying to offer alternatives to our customers for whom some products are made in China, who whether because of the currency’s appreciation or for other reasons, don’t want to have all their eggs in one basket,” Parimbelli said. A “much cheaper” cost structure in Vietnam also contributed, he said.
The Vietnamese dong was little changed as of 2:32 p.m. in Hanoi. It’s also little changed against the U.S. dollar since it was devalued by about 7 percent in February last year. China’s yuan has gained 5.6 percent in the same period.
Vietnam’s tech exports are surging in an economy that Prime Minister Nguyen Tan Dung said would struggle to grow even 5.2 percent this year, the slowest pace since 1999. Exports are helping to offset slowing consumer demand domestically. Retail sales growth slowed to 17.1 percent in October from a year earlier, the eighth straight month the figure has declined.
Moody’s Investors Service cut Vietnam’s debt rating on Sept. 28 for the first time since 2010, citing the country’s growth prospects and banking system weaknesses.
Narrowing Gap
The higher export revenue is helping narrow Vietnam’s trade deficit. The nation has posted a shortfall every year since 1993, peaking at about $18 billion in 2008, according to data from the General Statistics Office in Hanoi. In the first 10 months of the year, the deficit totaled $357 million, compared with $8.9 billion at the same time in 2011.
“The improvement is basically a sustainable one,” said David Kadarauch, the Ho Chi Minh City-based managing director of investment banking at Saigon Securities Inc. “Tech is part of the story, as is overall strong foreign investment in export- oriented manufacturing.”
The smaller deficit represents an improvement in one of Vietnam’s key risk indicators, Standard & Poor’s said in a statement in October.
“The days of very large trade deficits in Vietnam seem to be over,” said Johanna Chua, the Hong Kong-based head of Asian economic research at Citigroup Inc. “Part of that is due to weaker imports, but Vietnam is also benefiting from a structural transition. A lower trade deficit means that concerns about foreign-exchange risks should dissipate and reserves should be more ample, which improves confidence in the currency and in overall macroeconomic stability.”
(Source: bloomberg)

Intel Corp. (INTC), Samsung Electronics Co.