Is Vietnam the gold mine of Korean companies?

While the China Market, South Korea's largest trading partner, is increasingly saturated, Korean companies have found a more sustainable alternative: Vietnam.

Korean companies have entered Vietnam since the 1990s, mainly in Hanoi and Ho Chi Minh City. Since the mid-2000s, Korean investment in Vietnam has changed from light industries, such as textiles, to heavy industries such as electronics.

The demand for an alternative destination has risen, as many companies trying to gain a foothold in China have begun to face problems with acquisitions and other deals.

The global value chain is changing because the ongoing trade war between the US and China has also motivated companies to accelerate their investments in Vietnam.

"Korean companies are increasingly opening offices, establishing joint ventures and building factories in Vietnam, when they want to look for opportunities in the region", said Lim Jae-hoon, South Korean Consulate General in Ho Chi Minh City. "They are promoting Vietnam's rapid development."

Vietnam's economy has grown from 6% to 7% annually in recent years, while Korea's economic growth has only fluctuated within 2%.

Korea is the largest foreign investor in Vietnam, with trade volume between the two countries reaching 63.9 billion USD in 2017. "After Korea and Vietnam signed the free trade agreement (FTA) in 2015, the volume of trade between the two countries increased by 40%," said Mr Lim.

Attractive investment destination

Large corporations such as Samsung Electronics, LG Electronics, Hyosung Group and Kumho Asiana Group have invested in large manufacturing complexes in Vietnam. In 2018, Hanwha Group invested 400 million USD in Vingroup. Meanwhile, SK Group invested 470 million Won in Masan Group.

Lotte Group has expanded its hotel and real estate business with the development of Lotte Hotel Hanoi and acquisition of Legend Saigon Hotel in Ho Chi Minh City. In addition to real estate developers, the company has set out a plan to increase the number of discount stores (Lotte Mart) to 60 stores by 2020.

Another giant retail group, CJ Group, has increased its presence in many areas including food, entertainment and logistics. This year, CJ Cheiljedang completed the construction of a food processing factory in Hiep Phuoc Industrial Park in Ho Chi Minh City to produce Bibigo dumplings, Kimchi as well as other frozen foods.

CJ CGV, the largest cinema chain in Vietnam, is currently operating 78 cinemas across Vietnam.

CJ Logistics acquired a majority stake in two transportation and logistics subsidiaries of Gemadept in 2017. The company has also cooperated with a low-cost airline in the air freight business in 2018.

Not only corporations, but commercial banks have flocked to Vietnam to attract customers to open cards and provide loans to local borrowers.

Shinhan Bank Vietnam currently operates 36 branches across Vietnam and has strengthened its presence by launching commercial investment bank headquarters and introducing personal asset management services.

Advantages and disadvantages

Analysts explained that Vietnam is an attractive investment destination for companies because the country has a favorable business environment.

Most of the administrative procedures have been reformed, to provide the best conditions for production and business activities, according to the Korea Trade-Investment Promotion Agency (KOTRA)

Vietnam also has geographical advantages in the region located on the sea route connecting Europe and other Asian countries. Its labor market with young workers is an attractive destination, KOTRA commented.

"A few years ago, the Vietnamese government simplified customs procedures and taxes to encourage more investment from foreigners," said Yoon Joo-young, General Manager at KOTRA Ho Chi Minh City.

"Low wage is certainly a factor in bringing Korean companies here, but the main reason is for quality assurance, as well as logistics activities"

Mr. Yoon also mentioned Ho Chi Minh City, with an average GDP of USD 5,538 which is higher than the limit of USD 3,500 in Hanoi and the country’s average limit of USD 2,215.

"Because Ho Chi Minh City is richer than other cities and has a middle class, the city has been able to attract some high-end companies," he said. "In addition, Vietnamese consumers' behavior is very similar to that of Koreans."

The 8X and 9X generations are the main consumers here, and so the service sector is also booming.

"Currently, the majority of high-spending people are in their 40s. They spend money on education, daily necessities and electronics," Yoon said. "People from the middle and upper classes tend to pay for cars and real estate, just like Koreans."

According to him, the participation of Korean companies into Vietnam has contributed to the transformation of Southeast Asia's industrial structure.

"We are seeing a transition from light industry to heavy industry. Whether Vietnam can continue rapid economic growth in the future, it depends on how the transition will take place. "he said.

However, Yoon pointed out that Vietnam's business context also has some disadvantages, such as lack of infrastructure or incomplete public sector reform.

(According to Nhip Cau Dau Tu)