Vietnam open for business, but will India Inc cash in?

The south-east Asian nation's growing prosperity offers huge opportunities, but India Inc is yet to cash in

A few weeks ago, Samsung invited Prime Minister Narendra Modi to inaugurate what the South  Korean giant said would be its largest mobile device factory in the world in the outskirts of Delhi. The investment tag: just under Rs 50 billion.  

Yet some 3,000 kilometres away in Vietnam, the South Korean chaebol has already pumped $17.3 billion (Rs 1,092 billion) in eight factories, a large part of it for mobile phones, making them one of the largest investors in that country. 

Thanks to these companies and attractive incentives provided by the government (from cheap land, tax holidays, great infrastructure in industrial parks), Vietnam has catapulted from nowhere into the world’s second largest exporter of mobile phones with a share of over 11 per cent. India’s share? Despite its aggressive “Make in India” programme for mobile manufacturing, supported by a large booming local market, the country imported $1.2 billion worth of mobile devices from Vietnam, accounting for nearly a third of all mobile imports last year. 

Welcome to the new Vietnam. From an economy in shambles a few decades ago, it has transformed itself into a hub for exports for products ranging from mobile devices, electronics, garments, footwear and a range of agricultural goods — which include coffee (it is the world’s largest exporter after Brazil), cashew nuts (number one), and rice (productivity is double India’s). And with per capita GDP nearly going up by around 70 per cent to around $2,173 (2016) in the last six years, the domestic market has expanded with Vietnamese buying more two-wheelers, cars, pharma products and consuming more electricity. 

The obvious sub-text is the huge opportunities for Indian business. Yet, though Indian businesses invested overseas at a faster pace in FY2018 —foreign direct outflows doubled to $11.3 billion – total FDI from India to Vietnam is below $1 billion, and the trade between the countries was just $ 7.6 billion, not even 1 per cent of the trade done by the two countries. Yet both countries have grown at a respectable pace — Vietnam at 6.8 per cent saw its highest growth in a decade, and India at 6.7 per cent.

The good news is that the winds are changing. The Modi government has, as part of the government’s “Look East policy”, set an ambitious target with the Vietnam government to hit $15 billion in trade by 2020.  Indian pharma companies, despite concerns on low quality, which forced the blacklisting of 39 companies in 2016 by Vietneamese regulators, are amongst the top three countries from which Vietnam is importing medicines. 

In other sectors, the Tatas have been the first off the block with investments of over $ 120 million, of which some projects are under implementation. It is currently completing its investments in a freeze-dried coffee processing plant, which would be ready by March next year. But the overall investment numbers could jump up substantially if it is able to close a $ 2.2 billion power plant deal (the government has to provide some guarantees for which negotiations have been going on for a while) which it won a few years ago.  

Says Indronil Sengupta, chief executive of Tata Sons in Vietnam: “Vietnam being part of Trans Pacific Partnership, with a free trade agreement with the EU, ASEAN and South Korea, offers an attractive destination to set up manufacturing as it will cover 60 per cent of the global market in the near future”.  Apart from the coffee project, Tatas have set up a rolling mill in the country. 

The country also offers an attractive domestic market to tap.  One such market is for two wheelers. According to Vietnam Association of Motorcycle Manufacturers, as much as 3.2 million motorcycles were sold in the country in 2017. And it is the world’s fourth largest market for two wheelers (China, India and Indonesia being the top three). However, it is dominated by Honda with an over 60 per cent share of the market followed by Piaggio and others. 

Given the potential, Indian companies are interested. Bajaj Auto is one of them. Unlike in many other global markets that are dominated by low-cost Chinese bikes with low margins and high volumes, Vietnam has matured, with consumers looking for value for money rather than just price.  Says managing director Rajiv Bajaj: “Yes, we will soon be in this market. Our analysis shows it is an attractive destination for our products.”

Another Indian company, Eicher Motors, is a step ahead. It set up a store late last year in Ho Chi Min City to tap the mid-sized bike segment with three models — Bullet, Classic 500 and Continental GT 535. Says Arun Gopal, head international business, Royal Enfield: “Despite being one of the biggest two-wheeler markets in the world, Vietnam opened up for higher displacement motorcycles only three years back. Given the presence of a huge commuter base, Royal Enfield entered Vietnam to offer consumers a compelling upgrade from the existing options. In the past nine months, Royal Enfield has received great feedback from the market.” 

CEO Siddharth Lal in an earlier interview had pointed out that in these markets both per capita income as well as average two-wheeler prices are higher than in India (an entry level bike in Vietnam will cost around Rs 68,000 compared to Rs 30,000-Rs 35,000 in India).  Lal says the company could consider setting up an assembly plant in the region if demand picks up. 

The IT services space is another big opportunity. Alok Bhardwaj, a former Canon senior executive and consultant for companies looking at Vietnam, says, “With their earlier focus on manufacturing, there is need for Vietnamese companies to upgrade their IT systems, which are far behind in banking and financial services sector, for instance. This provides opportunities for smaller Indian IT companies to tap.” 

Bharadwaj, who is currently helping an Indian company offer IT services to a bank, says that a key advantage Vietnam offers is that it has been able to keep its labour costs stable and lower than in India. “An average salesperson is available for $250-300 a month, in India the starting point would be $400 a month. And they are also disciplined,” he adds. 

Some small and medium companies have also found a niche and set up export base in the region.  Many Indian marble manufacturers, for instance, have set up plants to process high quality white marble from Vietnamese mines for export across the world. 

India has also intensified talks with Vietnam on defence cooperation. Last month, a delegation of defence companies organised by Ficci had detailed discussions with local players. Defence Minister Nirmala Sitharaman, who led the delegation, announced that there was immense scope for co-production of platforms, spares and overhaul services for Indian companies. 

Some companies have taken the first steps. Public sector Bharat Electricals Limited opened an office in Hanoi, and L&T has broken into the market by winning a $100 million contract to design and construct high-speed patrol boats for the Vietnam Border Guard. All these new moves could change the perception of Indian business to the country. Much depends on how far Indian business will capitalise on it.