This article first appeared in The Edge Malaysia Weekly, on October 26 - November 1, 2015.

Back in 2008, when US investment bank Lehman Brothers collapsed, Vietnam was among the first emerging markets in Asia to be affected adversely by the US subprime mortgage-induced global financial crisis. The Asean member country was hit by a sharp currency depreciation, which resulted in hyperinflation and mounting non-performing loans (NPLs) in the banking sector.

The economic malaise, which continued until 2012, saw many of Vietnam’s state-owned enterprises (SOEs) caught in a debt trap and NPLs peaking at 8.6%, the highest level in Southeast Asia.

The country’s great economic potential, which was helped by a large young population and relatively low labour costs compared with those of its neighbours, just evaporated. Things turned ugly as the government battled macroeconomic issues while workers demanded higher wages to mitigate the depreciating value of the dong.

Malaysian companies that had flocked to invest there, hoping to ride the country’s economic boom, were hard hit.

That was the situation between 2008 and 2012. Vietnam’s gross domestic product (GDP) growth bottomed out at 5.2% in 2012, the slowest among the Asean-5 (see Chart 1).

Some Malaysian companies cashed out of Vietnam at the time while others scaled down their projects as domestic demand for their products withered. Vietnam was very much eclipsed by its larger neighbours Indonesia and the Philippines as the next promising growth markets.

IGB Corp Bhd disposed of its equity interest in New World Saigon Hotel in 2011 and Berjaya Land Bhd reduced the size of its Vietnam International Financial Centre project in Ho Chi Minh City and withdrew from the US$2 billion Nhon Trach New Development City in 2013.

Parkson Holdings Bhd, through its subsidiary Parkson Retail Asia Ltd, shut down one of its department stores in Hanoi in 2013 due to a continued contraction of same store sales and divested 30% of its stake in Parkson Hanoi Co recently.

However, for those who stayed on in the Indochina nation, their perseverance is probably paying off now.

Vietnam’s economy staged a silent rebound last year, growing 6% year on year compared with 5.4% in 2013. It also recorded the highest amount of foreign direct investment (FDI) among the Asean-5 in the last 24 months (see graphic).

While the ringgit and Indonesian rupiah have lost 16.6% and 8.14% respectively of their value against the US dollar so far this year, the dong has slid only 4.32%. In fact, the dong has appreciated 15% against the ringgit.

Vietnam’s GDP too grew at a faster clip of 6.3% in the first half of this year compared with 5.2% previously.

Berjaya Land, Ireka Corp Bhd, Poh Huat Resources Holdings Bhd and Tan Chong Motor Holdings Bhd are among the Malaysian companies that remained invested in Vietnam despite its macroeconomic challenges.

Poh Huat’s decision to not exit Vietnam has borne fruit — its operation there has overtaken its Malaysian operation as the group’s biggest contributor to sales and profit before tax since 2008.

The Vietnam unit’s sales made up about 60% of the group’s total in the financial year ended Dec 31, 2014 (FY2014), while its pre-tax profit of RM22.3 million accounted for about 79% of the group’s total.

However, not all the benefits are obvious. Like other emerging markets, Vietnam’s regulatory environment is opaque and it lacks skilled workers. On top of that, communications remain a problem for foreign investors operating in Vietnam.

“When we decided to set up shop in Vietnam, our main objective was to benefit from its low labour cost. However, as the workers are largely unskilled, we had to spend a significant amount of money and time on training them.

“But as the workers learnt useful skills from us, they tended to look for better-paying jobs at other companies. Thus, we had to keep hiring new people and training them,” says a Poh Huat spokesman when contacted by The Edge.

On why it set up two furniture-making facilities in Vietnam, the spokesman says the company was looking to expand its operation, especially in a lower-cost country, so that it could compete better with other furniture manufacturers.

“It is our ambition to become a global player in the furniture manufacturing industry. But we cannot become a global player if we continue to produce only in Malaysia because the labour cost is rising and competition is stiff.

“Vietnam was the best place for us to invest in back then because of the low cost advantage it provided. It is not just labour cost that is lower but also land and construction costs for factories.”

Indeed, it is its abundant supply of cheap labour and low land cost that has attracted businesses from the world over to Vietnam. As an upper-middle-income country striving to achieve high-income status by 2020, Malaysia cannot compete with its Asean neighbour on those aspects.

It is estimated that land cost in Vietnam is only a third of Malaysia’s while construction cost is about 30% cheaper. At the same time, construction can be completed in half the time in Vietnam, says a Malaysian businessman with a Vietnamese operation.

While Poh Huat and Tan Chong Motor started their operations from scratch in Vietnam to take advantage of the low production cost, Ireka’s venture was to get a slice of the property pie. Ireka later parked the Vietnamese assets in Aseana Properties Ltd and listed it in London. Ireka owns a 23% stake in Aseana.

Aseana’s flagship development in Ho Chi Minh City is the 37ha International Healthcare Park, where a 320-bed hospital — City International Hospital — has been completed and is being run by Parkway Pantai Ltd since January last year.

According to Ireka managing director Lai Voon Hon, Aseana started investing in Vietnam’s property projects back in 2006 but the returns have not been impressive, especially in the last four to five years, due to the economic problems faced by the country. “However, since late last year, it has been a different story. Vietnam has been doing very well, both in terms of market growth and FDI. It has received a lot of FDI and liquidity in the banking sector has improved.”

Aseana is planning to launch the residential component of International Healthcare Park soon, Lai says, adding that Japan-based AEON Co, the operator of Asia’s largest retailer, is building Ho Chi Minh City’s biggest mall in the development.

Aseana also owns a 6% stake in Nam Long Investment Corp, a Vietnamese property developer with a niche in the affordable home segment. According to Nam Long’s website, the company has 572ha in the major cities such as Ho Chi Minh City, Binh Duong and Da Nang.

Vietnam’s property market recovered as its economy regained strength, says Lai. However, the recovery has not been across the board with the affordable and landed properties doing much better than the high-end, high-rise market, he adds.

“The government made the right move by opening the property market to foreign buyers,” Lai points out. “The office market is also doing very well because of the shortage of office space, especially in Ho Chi Minh City.”

With Vietnam a party to the Trans-Pacific Partnership Agreement, economists reckon that the country will be among the biggest beneficiaries, alongside Malaysia, if the pact is ratified.

While there are still a lot of areas that the Vietnamese government needs to work on to make the country more conducive to investors, there is little doubt that it will become an investment hot spot again, at least while its peers face a slowdown in tandem with the decelerating growth in China.

Will Malaysian companies that had given short shrift to Vietnam previously want to reconsider their stance now?

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