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24.09.2019

VIETNAM: GOOD QUALITY AT LOW PRICES

Annual economic growth of 6.5 percent and a free trade agreement with China are boosting demand for machinery and systems.

By Monique Optez

It all began with a burial ground close to the town of Da Nang on the Vietnamese coast. 2,200 graves were located precisely where Groz-Beckert KG, the world market leader for machine needles and textile industry systems, planned to build a production facility. Before production began in 2010, the graves had to be relocated and weapons left from the war removed - an act that was almost symbolic of Vietnam's transformation from a war-torn country to one of Asia’s fastest-growing markets.

Groz-Beckert had begun planning to establish production abroad many years before. They eventually chose Vietnam - "not least because of the negotiation of a free trade agreement with China, the introduction of which was only a matter of time at that point," remembers Gerd Teufel, Managing Director of Groz-Beckert Vietnam Co. Ltd. The crucial factor was the setting of low barriers to market entry and trade, especially regarding China, a very important market for the company.

But before the production lines could begin to hum, suitable staff had to be found. Vietnam suffers from a shortage of specialist staff. Teufel chose to train Vietnamese colleagues within the company, with expats from Albstadt taking on the job. English lessons helped to overcome the language barrier. The company also found a solution to reduce the usually high fluctuation rate of around 10 percent: "We base our work on our domestic standards. We offer good working conditions with plenty of training opportunities and a good wage level. That works," reports Teufel.
Groz-Beckert now employs around 900 staff in production, sales, mechanical engineering and administration. A further building is now being added to the production plant in Ai Nghia, with production expected to begin in 2020.

Marko Walde, Chief Representative at the German Chambers of Commerce Abroad, confirms that interest among German companies is growing. "With annual economic growth of 6.5 percent and a young population keen to consume, Vietnam is seen as a market of the future." In addition, he says, Vietnam and Singapore are the only countries in the Association of Southeast Asian Nations, ASEAN, to be involved in all relevant free trade initiatives in the region.

Doi Moi – a policy of renewal

In order to kick-start the economy after reunification, in 1986 the Communist Party of Vietnam launched a set of economic reforms.
This "Doi Moi" policy represents renewal and liberalization of the market, moving away from the strictly controlled planned economy and towards a socialist market economy. The government began to privatize and reorganize state-owned companies, as well as opening the Vietnamese economy to foreign investors. Rapid growth followed. Joining the WTO in 2006 was seen as an important step in Vietnam’s integration into the international economic structure.

The consistently high economic growth is increasing the demand for mechanical engineering products. The value of the machinery delivered to Vietnam from Germany alone was 5.6 billion euros in 2018. As well as the textiles and plastics sectors, food processing and the agricultural sector offer further opportunities for mechanical and plant engineering companies. Imports of machinery and spare parts to Vietnam rose by 19 percent between 2016 and 2017. Foreign direct investment is also growing, with 35.9 billion US dollars flowing in 2017. According to the German Machine Tool Builders' Association (VDW), particularly high investment comes from the aerospace industry, medical technology, the electrical and electronics industry, metal production and processing, and mechanical engineering.

Germany Trade & Invest (GTAI), the economic development agency of the Federal Republic of Germany, confirms that Vietnam's demand for mechanical engineering products is growing. "Vietnam is an extension of China's workbench: The quality is not bad, costs are lower, and the regulations are less strict," comments Hansa Sales Representative Merlin Naisar, explaining the increased interest. The free trade agreement with the EU, expected to come into force this year, should also create numerous benefits such as eliminating tariffs. For Germany - Vietnam's largest trading partner within the EU - it is an important step.

Certificates are key

Hansa-Flex AG from Bremen is also active in Vietnam, and plans to expand its business activities in the country. The system provider for hydraulics currently delivers products to Vietnam from Bremen. Its goal is therefore to find local partners for collaboration, who know the market and the culture.

Hansa Sales Representative Merlin Naisar sees the economic development of the last few years, especially in the south of the country, as positive: "The country wants to disassociate itself from cheap goods from China and is instead focusing on good quality. That encourages exchange between Germany and Vietnam."

The Vietnamese want to ensure that expensive machinery from Germany can also be supplied with high-quality spare parts. This has given rise to the business of certification, which has now been established for several years. Product certificates are issued by the chambers of commerce in Germany and confirm the place of production as being within the EU. "Without these certificates, there is no business," says Naisar, speaking from experience.

Naisar has visited Vietnam 15 times in the last three years to see how and where Hansa-Flex could do business. One thing he has undoubtedly learned is that, for historical reasons, the north and south are different worlds. There are still noticeable traces of the country's 22-year partition and the Vietnam War. In practice, this means that "anyone opening a branch in the south urgently needs a representative office in the north," says Naisar. "Otherwise, companies do not have a chance in the south. In terms of administration, the obstacles are huge."

Different countries, different customs

Although Vietnam is now very open to the Western world, there are certain things to remember.

The Vietnamese New Year festival of Tet Nguyen Dan is the country's most important celebration. Although it officially only lasts three days, machinery is usually shut down for two weeks. The next New Year festival falls on February 25, 2020.

It is very common to combine a business meeting with a joint meal. But be careful: Very little business will be discussed. It is more important to get to know one another and find some common ground.

If you are handed a business card, do not put it in your pocket right away. Leave it on the table for a while or keep it in your hand. This shows that you value your business partner.

Although there are some cultural similarities, Vietnam's large neighbor is not particularly popular. Hold back on topics related to China. Delicate topics include anti-Chinese unrest (most recently in 2014) and China’s territorial claims off the coast of Vietnam.

Further Information

VDMA Foreign Trade Department     |     GTAI     |     HANSA-FLEX 

Contact
Klaus Friedrich, VDMA Foreign Trade Department.