~ Le Viêt Nam, aujourd'hui. ~
The Vietnam News

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Korea swings to Vietnam

HO CHI MINH CITY, Vietnam - Faced with rapidly rising labor costs, garment manufacturer Hansea realized in 2001 that it had to move overseas, but instead of joining the stampede to China, it opted for Vietnam. Today, shortages of power and skilled labor, business disputes and corruption in China are prompting a re-evaluation of its business climate and small and midsize Korean manufacturers are increasingly following Hansea's footsteps. "Diverting overseas investment to other places like Vietnam can be a solution," said Kwon Yul, head of the Southeast and South Asia research team at Korea Institute for International Economic Policy.

Officially, nearly 700 Korean companies are operating in Vietnam. Unofficially, several hundred other companies with Korean capital and management are believed to be fronted by Vietnamese to avoid foreign investment rules, which require joint-venture operations. All are attracted to Vietnam's pull factors: low operating costs, political stability, an entrepreneurial spirit and a U.S.-Vietnam trade pact that provides a conduit for Korean-backed exports to the United States. They also see view Vietnam as a bridgehead to the rest of the Association of Southeast Asian Nations.

Potential factory sites in Vietnam are as much as 10 times cheaper than in Korea, and the average monthly wage for a Vietnamese worker is around $70, compared to $100 in China. Industry insiders also say the pace of wage increases in Vietnam is slower than other Southeast Asian countries or China. Last year, total foreign direct investment reached almost 8 percent of its gross domestic product, which exceeded China.

Korea was the second-largest investor after Taiwan between January and September this year, according to the Vietnamese Ministry of Planning and Investment. The number of licensed foreign direct investment projects was 116 with a total investment of $258 million for the period. Exports by Korean companies operating in Vietnam last year were estimated at between $2 billion and $2.3 billion. That accounts for 11.6 percent of the total exports in Vietnam.

"We expect Vietnam will remain a key export base which will help us keep up our competitiveness for the time being," said Lim Chul-ho, who is in charge of Hansea's Vietnamese factory located in Cu Chi district, 30 kilometers northwest of Ho Chi Minh City. The area was better known for its network of tunnels used by the communist Viet Minh during their fight against the U.S.-backed South Vietnam government in the 1960s and 1970s. Since the implementation of a bilateral trade agreement with the U.S. at the end of 2001, Vietnam's economic development has enjoyed a period of expansion, making advances into the U.S. market. Total exports last year topped $20 billion, up 20 percent from the previous year.

Wooree Lighting Co., a Kosdaq-listed lamp manufacturer, is another Korean trailblazer. Two years ago, the company began making 40 percent of its products in Hoh Chi Minh City, the most popular destination for multinational companies in Vietnam. "As the gap between China and Vietnam in terms of wages is widening, we're in a better position to compete with our Chinese rivals," said Kang Sung-hyun, of Wooree's investor relations staff. He expects Vietnam to become the company's sole production base over the next two years, with 60 percent of its lamps manufactured at its production lines in Ho Chi Minh City.

As Korean factories head to Vietnam for cheap labor, banks want a piece of the action. The Korea Exchange Bank opened a representative office in Ho Chi Minh City, followed by Woori Bank, which has branch offices in Hanoi. Chohung-Vina Bank in Ho Chi Minh City is a Korean-Vietnamese joint venture where outstanding corporate lending has grown to $73 million, up from $40 million two years ago. "The recent influx of Korean companies to Vietnam will bring abundant business opportunities to us," said Kang Shin-sung, the former head of Chohung-Vina Bank.

Until Vietnam joins the World Trade Organization, however, the textiles and apparel industry in which Korean firms have great interest will face difficulties. Quotas will be removed next year for all WTO members while they will remain in effect for Vietnam. Korean companies haven't received enough quotas for exports to U.S. and European markets. Vietnam hopes to join the WTO next year.

Hansea is currently filling orders for knits to be sold in the U.S. and the European Union. Vietnam is the company's largest production base after Saipan and Nicaragua. It employs 4,500 and its exports this year will reach $85 million, more than double last year's figure, according to company officials. "At present, we're only 70 percent of full capacity. We'll just have to wait, keeping our fingers crossed," said Lim.

By Kim Jung-min - The Korea Herald - October 27, 2004