Day: June 22, 2017

Every 45 seconds or so, a neatly wrapped VanHeusen dress shirt destined for a J.C. Penney store in the United States drops off a new production line at a factory north of Vietnam’s capital.

Next door, rice paddies the size of 40 football fields have been filled for the $320 million textile mill which Hong Kong based TAL Group plans to build so it won’t need to import cloth for the shirts.

As elsewhere in Vietnam, there has been no sign of an impact on investment plans since U.S. President Donald Trump abandoned the proposed Trans Pacific Partnership (TPP) trade deal which had been expected to benefit Vietnam more than any country.

In fact, foreign direct investment rose 6 percent year-on-year to $6.15 billion in the first five months of 2017.

Cheap labor is an obvious lure for foreign investors. TAL’s chief executive, Roger Lee, said Vietnam also scores highly on middle management, work ethic and government policy.

Though the removal of U.S. import tariffs under a TPP pact would have been a bonus, Lee said he had no second thoughts about investment plans after Trump pulled out of the deal soon after taking office.

“Vietnam is a very compelling proposition,” said Lee.

The wage for garment workers is $250 a month in Vietnam, compared to $700 in China, where TAL recently shut a factory for cost reasons.

The removal of tariffs of up to about 30 percent would have made clothing firms particular beneficiaries of the TPP deal, which had been forecast to add 28 percent to Vietnam’s exports and 11 percent to its gross domestic product over a decade.

Other clothing firms were also not discouraged by the scrapping of the deal. Lawsgroup’s chief executive, Bosco Law, told Reuters it was now seeking to expand from its three factories with 10,000 workers.

Vietnam’s trade surplus over the United States – the sixth biggest last year – has come under scrutiny as a result of Trump’s “America First” policy to bring manufacturing jobs back to America. But it hasn’t discouraged investment.

“We have started working for a couple of American manufacturing companies that contacted us after the TPP’s demise and that are willing to relocate part of their operations from China,” said Oscar Mussons, Senior Associate at Dezan Shira and Associates professional services firm.

Cheaper than China

Vietnam has been a big winner as Chinese manufacturing costs have risen and China itself is now one of the three biggest investors in Vietnam.

The TPP deal would have further improved access to U.S. and other markets for manufacturers based there, but also bound Vietnam to reforms meaning everything from opening up food import markets to strengthening labour rights.

Investment and Planning Minister Nguyen Chi Dung told Reuters that Vietnam planned to go ahead with its commitments under TPP anyway – both to strengthen the economy and because of other trade deals, such as one with the European Union. The 11 remaining TPP members are also still trying to keep it alive.

Dung said Vietnam had a target of $10 billion a year in foreign direct investment over the next five years — compared to nearly $16 billion in 2016 alone — as it sought a change in the type of investment it wants to draw.

“Before we focused on quantity, now we switch to quality,” Dung said. “Higher technology, higher added value, less use of energy, less use of raw materials, less cheap labor.”

That is where Vietnam has a greater challenge. It lags competitors for top skills. The proportion of secondary school leavers going on to further studies is a third higher in China and over three times higher in South Korea.

“Vietnam is still a very attractive country, but companies might not invest as much as expected because they find the employees lack the skills for that added value,” Mussons said. “Companies have been too focused on reducing costs and not enough on training.”
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Military conflicts and growing threats around the world continue to underpin demand for weapons, but industry and government leaders from the United States, Europe, Russia and the Middle East say they don’t see a huge near-term spike in arms orders.

Executives report being busier than ever at this year’s Paris Airshow, the oldest and biggest aerospace expo in the world, which featured aerial acrobatics by Lockheed Martin Corp.’s F-35 fighter jet.

But they caution that foreign arms sales take years to complete, and NATO governments must get through lengthy budget and bureaucratic processes before they can raise military spending to meet a NATO target for members to spend 2 percent of gross domestic product (GDP) on defense.

No big spurt seen

“We’re seeing some growth, but I like to be pragmatic. I’m not seeing a big tick up in defense spending across the board,” Leanne Caret, who heads Boeing’s defense business, told Reuters in an interview. Her division generates about 40 percent of its revenues overseas, a big change from just several years ago.

Boeing officials expect steady gains in weapons sales, but warn against expectations for any kind of “gold rush” despite U.S. President Donald Trump’s pledge to boost military spending, saying there may be more of a shift in what platforms and weapons programs are in demand.

Recent increases in tensions between Russia and the United States have raised concerns about another arms race, but top officials in both countries agree that there will not be a mad rush to bulk up on weapons.

Moscow’s top arms trade official, Dmitry Shugaev, told reporters at the show that Russian weapon makers remained competitive despite Western sanctions, but the cyclical nature of the business and budget constraints are dampening prospects for a big surge in global arms sales.

He also expressed skepticism that NATO members would rapidly increase their military budgets, despite pledging to move toward the 2 percent goal.

Trump position

Trump’s public declarations that NATO members are not pulling their weight may have had some impact. Lockheed Martin’s Aeronautics business leader, Orlando Carvalho, said national security budgets and military systems’ demand outside the United States are beginning to increase, “especially with the focus that the president has put on NATO.”

In 2016, total world military expenditure rose 0.4 percent to $1.69 trillion, according the Stockholm International Peace Research Institute (SIPRI).

The European Union’s economic and financial affairs commissioner, Pierre Moscovici, also cited that risk, warning that European countries needed to match political pledges to boost military spending with actual resource commitments.

“There is now a window of opportunity for investing more in European defense … but as with all windows, a window closes if you don’t go through it,” he said.

Gradual increases in Europe

Germany and other European countries are boosting military spending, concerned about terrorism and Russia’s increasingly assertive military stance after its annexation of Crimea and its support for separatists in eastern Ukraine, but the increases are likely to be more gradual than dramatic.

In the missile defense arena, Western concerns about rapid advances in technology by North Korea, China and Iran, as well as Russia’s increased military activities, are driving orders for a range of defensive systems, according to U.S. and European executives.

“The threat is absolutely increasing and it’s increasing rapidly,” said Tim Cahill, vice president of air and missile defense systems at Lockheed. “In every region around the world, the level of interest in integrated air and missile defense has been going up in the last few months.”

Wes Kremer, president of Raytheon’s Integrated Defense Systems, said he was meeting with officials from countries that had not shown any interest in missile defense systems just four or five years ago.

“Back then, they didn’t see a ballistic missile threat, or they didn’t see Russia as a threat, but now that has changed,” he said.
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