Forget China, can India match Vietnam?

As India continues to atone over its inability to keep pace with China, India is increasingly missing the bus with Vietnam as well. While Vietnam started the Doi Moi reform process in 1986, after China in late 1970s, and before India in 1991, there is little doubt that Vietnam has achieved massive economic success. Today US receives more garments from China, Bangladesh and Vietnam than from India.

With Covid-19 tainting millions, China is facing a unique global withdrawal threatening to destabilise its sway as the world’s factory of choice. Amidst this, Vietnam has emerged as the preferred choice of electronics and mobile phone companies, trying to move out of China.

Leaping forward

Vietnam’s total merchandise exports grew at an annualised average rate of 18 per cent in the last 10 years till 2019, as compared with India’s 5 per cent. During the same period, Vietnam attained a trade surplus of $47 billion, which again was a significant improvement over the trade deficit of $13 billion in 2010. While Vietnam started delivering trade surplus, India’s trade deficit increased to $156 billion in 2019 from $130 billion in 2010.

Vietnam’s top exports, in 2019, comprised electrical machinery and equipment (with 41 per cent share), apparel (11 per cent), footwear (8), and machinery and mechanical appliances (5). The highest increase in exports during 2010-19 was in electrical machinery and equipment, the share of which in Vietnam’s total exports rose from 10 per cent in 2010 to 42 per cent in 2019 — within which the highest exports were recorded for mobile telephone (with a 13 per cent share), followed by electronic integrated circuits (7 per cent) and parts of mobile phones (6). The US, the UAE and Austria accounted for 40 per cent of the mobile phone exports by Vietnam in 2019.

In comparison to Vietnam’s manufacturing and technology-oriented exports, India’s top exports comprised largely low-tech manufacturing products like mineral fuels (14 per cent share), pearls (11 per cent), machinery (6), organic chemicals (5) and vehicles (5). India could have been an ideal destination for hi-tech manufacturing, but Vietnam has been the frontrunner. Hi-tech exports as a percentage of manufacturing in Vietnam stands at 40 per cent, whereas in the case of India it stands abysmally low, at 9 per cent in 2018.

South Korea-based Samsung has one of its largest facilities outside its home country in Vietnam. In 2012, Samsung established a dedicated LFD business, Samsung Display Solutions, catering to the company’s SMART range of LED products. In fact, the company assembles half of its global handsets in Vietnam and has benefited hugely post the US-China trade war.

In 2018, the total sales by Samsung Electronics in Vietnam amounted to $66 billion which accounted for as much as 28 per cent of the country’s GDP. Reportedly, in such cases, Samsung is likely to diversify its production lines for making smartphones to India under the PLI (Production Linked Incentive) scheme — should this happen it will be a boost.

In June, Vietnam ratified its FTA with the EU, which would essentially allow European producers to invest in Vietnam and from there they can export further into other markets in Asia-Pacific with whom Vietnam provides preferential access.

Unfortunately, this has occurred when Indian exporters are losing market share to Vietnam in the EU market. India’s share to EU accounts for close to one-fifth of Indian outbound shipments. During 2009 and 2018, India’s exports to EU increased 1.6 times as against Vietnam’s 4.4 times.

Given the ongoing worldwide trends, if production continues to shift out of China post trade war, it would make sense for businesses to go into Vietnam. Once firms establish themselves in Vietnam, they can consider re-exporting back to China, or enlarge their operations to other ASEAN economies and the EU. Unfortunately, India would remain bereft of these benefits.

Elephant in the room

To up the ante, India needs to realise where it is going wrong. Since liberalisation, the country has had multiple policies — from the erstwhile National Manufacturing Policy to present day Make in India — but the share of manufacturing in India’s exports has remained muted.

Vietnam has evolved as an attractive destination for FDI, as it is increasingly providing cheap labour whilst offering a friendly environment and reduction in taxes to foreign enterprises. According to data available, out of 56 companies that have moved out of China since its trade war with US, only eight have invested in India, while 26 shifted bases to Vietnam.

India needs to be quick to react to the evolving global scenario. Recently, in the light of the trade war, Vietnam has been swift in offering attractive corporate tax rates for large firms wanting to relocate. For instance, the two common preferential corporate tax rates of 10 per cent and 20 per cent are applicable for eligible large manufacturing projects for 15 years and 10 years. In deviation, the standard rate is 40 per cent for foreign companies and branches of foreign companies in India. Considering the surcharge and cess, the highest effective rate is 43.68 per cent for foreign companies in the country.

During the first six months of 2020, amidst the devastating Covid-19, exports from Vietnam were almost on a par with India’s, speaking volumes about the country’s aspirations. In fact, the average annual growth rate of exports from Vietnam have shown a growth of 3 per cent, while India showed a negative growth of 24 per cent during the same period.

Ninety per cent of Vietnam’s merchandise trade is through seaports. In the case of India, despite its coastline being almost double that of Vietnam, it has not been successful in using it to its benefit. A part of the problem in India is because some of the seaports have dredging issues, unlike in Vietnam which has deep-water ports.

Going forward, India needs to undertake a rigorous analysis to compete with its Asian peers, whether it be in terms of free trade agreements, creation of an amicable and stable business environment, financial incentives, creating last mile connectivity and, most importantly, low-cost quality labour.

It remains to be seen whether India can support global companies set up plants here, when they need it most.

The author is an economist with EXIM Bank. Views are personal

COMMENT NOW