Fidinam Podcast: Global FDI & Tax Updates

Vietnam: Exploring the Investment Landscape in Vietnam

• FIDINAM • Season 1 • Episode 1

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Vietnam, a land of breathtaking landscapes, rich culture, and a dynamic economy, has emerged as a prime investment destination for foreign companies and visionary entrepreneurs.

In the first episode of our podcast series, we will explore Vietnam's attractiveness for foreign direct investment (FDI) and delve into the investment opportunities it offers. To discuss these topics head-on, we invited the CEO of Dragon Capital, the largest offshore independent asset manager and investor in Vietnam's equity markets, Beat Schuerch.

We'll examine the country's remarkable economic growth and development over the past two decades and provide insights into its cultural, political and economic evolution. We'll discuss the opportunities and challenges of doing business in Vietnam and help you understand why this Southeast Asian nation is capturing the attention of global investors. Finally, we'll consider the great potential Vietnam holds for the future.

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Thao:

Hello everyone. Welcome to the Fidinam podcast, Unlocking Vietnam, a podcast aimed at sharing the experience of foreign companies and entrepreneurs in doing business in Vietnam. I'm Phuong Thao.

Francesca Severoni, Fidinam Vietnam:

And I'm Francesca Severoni. We are Fidinam Vietnam, a Swiss business and tax consulting firm dedicated to helping foreign businesses and entrepreneurs navigate the exciting landscape of Vietnam. Throughout our podcast, we will explore Vietnam's appeal as a prime investment destination for foreign companies and visionary entrepreneurs. In this first episode, we will explore Vietnam as an investment destination for foreign direct investments. By going through the economic growth and development of the country over the past decades, we will talk about challenges and opportunities, and we will end with a quick outlook for the coming years. To do that, I invited the CEO of Dragon Capital, the largest offshore independent asset manager and investor in Vietnam's equity markets, Beat Schuerch. Welcome, Beat, and thank you for joining me. as you have been living here and working in Vietnam since the late 90s, could you briefly introduce your career in Vietnam?

Beat Schuerch, Dragon Capital:

Well, thanks for having me. I've worked in Asia since 30 years, started in 93, and of those 30 years, 23 were in Vietnam. I started my Vietnam career in 96 as a country manager of DKSH, which is a market expansion service provider in healthcare, consumer goods, specialty chemicals, and technology. During my time at DKSH, we obtained the first 100 percent foreign investment license for logistic services in Binh Duong province at the VSIP Industrial Park. After 2002, I spent four years in Thailand in B2B consulting, but then the allure of Vietnam was too big. I returned in 2006 into the financial services industry and since 2010, I have been with Dragon Capital, which is a privately owned, Vietnam focused asset manager.

Francesca Severoni, Fidinam Vietnam:

Thank you very much. I think you will give us very practical insights during our discussion. So many thanks again for, for being here. Before delving into today's topic, I would like to briefly introduce some, context, some macroeconomics and historical facts. I would like to do that because I think this is important to better understand today's situation, in Vietnam. So first, I think it is very important to remember that Vietnam, has a long and complex history marked by periods of Chinese domination, feudal dynasties, French colonial rules, and of course, of the Vietnam War. In this context the struggle for independence and reunification under the leadership of Ho Chi Minh marked a very important part of the recent history of Vietnam. following the, reunification of North and South in 1976, which actually marked the result of the Vietnam War. Following this period, Vietnam embarked on a path of multiple economic reforms. And this reformed marked a significant shift from a previously, centrally planned economic system to a socialist oriented market economy, which concretely laid the ground, the foundation for the economic growth of over the past two decades. Also, what is important to mention about these reforms is that they triggered the liberalization of multiple economic sectors, the promotion of and an encouragement of private entrepreneurship, the attraction of foreign direct investments, and also the openness to the world. So the promotion to, to the integration with the rest of the global economies. In all these aspects, these reforms laid to a significant growth and transformation of the country, making Vietnam one of the fastest, growing markets in Southeast Asia. now, considering all these developments and this growth over the past decades, could you please mention In your opinion, what are the major changes, the major events that actually have had a positive impact on the FDI inflows?

Beat Schuerch, Dragon Capital:

The biggest impact was in 94 when the US trade embargo was lifted. Was lifted because that allowed all foreign directly investors to come here and actually start dealing with Vietnam without fear of retribution from the us. That's the very first one. The second one, I would say the signing of the US Vietnam bilateral trade agreement in 2001. Paved the way for a series of. agreements that enabled Vietnam to start to trade and integrate into the world, which was then, I would say, enhanced by the joining of Vietnam with into the WTO. Now, those were enablers. Separately, there were definitely a couple of other events that helped Vietnam to get onto the map. One, notably in my book, 2018, when Trump commenced the US China trade war, and subsequently, the COVID pandemic, where people started to wake up to the fact. That globalization has gone really far and that the world as a whole is completely dependent on the factory of the world, which is China. That's when an awful lot of flows started to go Vietnam's way. So those are the key drivers from an FDI perspective that helped.

Francesca Severoni, Fidinam Vietnam:

Thank you very much. And if you have to think about your personal experience, so as I said, you have been living here since many years. Did you have any specific anecdotes that show and confirm this, quick growth of the country?

Beat Schuerch, Dragon Capital:

On the political front, so when I came here in 96, external relationships were confined to China and ex Comecon countries like Russia and so on. Today, Vietnam has a very broad list of external relationships. When I arrived, none of my staff would ever touch the topic of politics. Today, politics is daily conversation. You have public no confidence votes where leaders such as the PM get publicly reprimanded. That is big compared to 96. On a more anecdotal level, when I joined in 96, my staff never had a passport because it wasn't allowed. People had to specifically apply for passports. When they came back, they had to return the passport. and they needed an exit visa. for me to train staff in Singapore, I needed an exit visa, a passport, and an entry visa, so my lead time was three months to get people to travel. Now, economically, just to give you a sense, in 96, daily power cuts. You want to go out after 12 o'clock, there is nothing. No taxi. Almost no high rise. Yes, bicycles, few cars, and today we are any, like any other normal city in Asia, bustling, traffic jams, pollution, that shows progress. Now, not all of it is good, of course.

Francesca Severoni, Fidinam Vietnam:

During the daily life do you still have some struggles?

Beat Schuerch, Dragon Capital:

No, I think it has really improved significantly. The Vietnam that I know, in the early days, it was really not particularly easy. But what struck me, despite coming out of a war, the country was always extremely receptive to foreigners, even US citizens, which, to me, was mind boggling. Because what they are is immensely pragmatic. And as long as there's a win win, they welcome you. And that I find amazing. Coming from Europe, having neighbors in the north, called Germany and others, they still talk about the war today. And here is, war? What war? We talk about business, we talk about the future.

Francesca Severoni, Fidinam Vietnam:

Thank you very much. I do agree, especially for, for about the last point. So thank you. Now going on, so we are, have just spoken about the past. Now talking about the, the present, so the, the current business environment. but before going into the current opportunities and challenges, I would like to briefly mention some of the, the strengths that the country has nowadays. So I would like to start by mentioning the strong relations with the rest of the world, what I mentioned before. At the moment, Vietnam is an official member of the World Trade Organization, has more than 15... Free trade agreements and more than 80 double tax agreements in place. So this facilitates a lot the cross border activities. And also this is, this plays a, a role in attracting foreign direct investments in, in the country. The second point is the GDP growth rates. if we think about the last 10, 20 years, the GDP growth rates was many times in excess of six, seven percent, and if we think about last year, 2022, which was a very complicated year for, for the global economy, Vietnam could really emerge as a strong economy, strong markets, especially in the Southeast Asian region, and the country reached a 8.2 percent of GDP growth, which was an outstanding result. The third point is the demography. So you have to think about Vietnam at the moment has approximately 100 million people with a median age of 32 years. Just combining these two factors it is easy to understand how the consumer market is booming, how the middle class is growing. So the demand for high quality products and services is increasing. And also, and this is also connected with the globalization with the FDI inflows, the labor force is getting more and more skilled. The fourth point I would like also to mention is the geography. In terms of position, Vietnam is in the center of Southeast Asia and very well connected with all Asian Pacific and ultimately with the world. So from a logistic point of view, the position is really strategic. Also in terms of biodiversity, it has a lot to offer. So for many industries, many factors, Vietnam has a lot of potential. Lastly, what is important, especially at the moment, is that Vietnam has become, over the decades, a hub for manufacturing and export. Not only for the lower labor cost, but also for the geopolitical tension with China. Vietnam has become one of the best options when it comes to China plus one strategy. All of these are the strengths that we can count at the moment when talking about Vietnam. And of course I could also talk about political stability, the tax incentives, and any other incentives that the government is giving to FDI. But for this, I hope you will enjoy the next episode, which will be more focused on that. So at the moment, I don't want to go any further. And I would like to ask you, Beat, based on these strengths that I have just mentioned, and if you have any other, please feel free to, to add, where do you think there are the major opportunities for Vietnam?

Beat Schuerch, Dragon Capital:

So when we look at investment from our end, we see, I would say, four key themes that are. The first one is what we call urbanization. You spoke about demographics. in a country where for the next 15 years, the labor force will continue to grow, and then it will start to stagnate, means there is an enormous potential for real estate, for, cars, this and the other. The second one that links to urbanization is obviously infrastructure. Now, if you look across Southeast Asia or even South Asia, all countries struggle with infrastructure. Vietnam struggles a little too but I think they have recognized that it is time to invest. So urbanization infrastructure, and you mentioned it before, consumption. With a growing population, young, ambitious, consumption is not just consumer goods, it's financial services, banking, and other things like education. The last one I would say is more moving up the value chain, which is in the areas or area of services. education is big. vocational training, scientific and I would probably put software in that space. So there's a number of Swiss companies who have invested here, and when I look at how many people they have here, compared to their total headcount, in one case, 80 percent of the workforce is here, and develops the software for the Swiss tax and for the Swiss banks. So there's definitely skill set here. So those are the four core areas that we see as prospective that play to the strength of the country.

Francesca Severoni, Fidinam Vietnam:

Thank you. So actually the, the, there is a lot of potential because you mentioned only four areas, but our macro areas. there are a lot of sectors that can benefit of coming in Vietnam and doing business here. But of course, when we talk about opportunities, we also have to talk about challenges. So in these regards, where do you think there is area of. Improvements and, and where do you think that the government is already working on it

Beat Schuerch, Dragon Capital:

So I did mention infrastructure. That is definitely presently the biggest challenge. But coming out of the COVID time, they have first, implemented policies on the monetary front that are encouraging the growth and the stability of the market. Now, that is good, but it goes only thus far. What they still need to do is what we call fiscal spending, so public infrastructure. They have recognized the need, they have set out the plan. Now, in the past, every time they promised fiscal spending they delivered a disappointing proportion of what they promised, but this time around looks to be different because the Long Thanh Airport in the south, which has been in discussion for probably more than a decade, is finally breaking ground. Expansion of the Ho Chi Minh City Airport is taking place. The North South Corridor, they're investing into 5000 kilometers of roads. And more is coming. So I think they have recognized that fiscal spending is absolutely essential to benefit from the demographic dividend that they have. They have a window of opportunity, and I think they are keenly aware that they need to shape up. Where they struggle a little bit, or where it takes probably a little bit longer, is on, in certain laws, in certain policies. if you think of FDI, FDI has gone through different phases. Primary products, Miscellaneous manufacturing like textile, clothing, shoes, and now electronics. They need to move up, and what that means, they need to start to create linkages into the domestic economy. Because today what you find is a dual economy. FDI very strong, but it's not really... interlinked and connected to the domestic economy. the next generation of FDI should have policies that encourage, basically, the domestic linkages. I think that's really important for the country to avoid the middle income trap. So that has to happen. And of course, in our business, in the financial markets, there's plenty they still can do, but they are keen students of the world. They looked at the global financial crisis, they looked at Asian financial crisis, and they can see what hot capital flows can do. So this is why they have still relatively stringent capital controls, which I understand where they come from, but over time, an area that to address as well.

Francesca Severoni, Fidinam Vietnam:

So the trade of opportunities, challenges is still positive, right?

Beat Schuerch, Dragon Capital:

absolutely. That's why we are here. We're not going anywhere.

Francesca Severoni, Fidinam Vietnam:

Very good. This is, this is good to hear. About the culture because of course we come from, the Western countries. So when we come to Vietnam, there is a sort of cultural clash. Which is not necessarily bad, but I would like to ask you, what foreign investors should pay attention when coming and entering Vietnam?

Beat Schuerch, Dragon Capital:

I think there's, in my book, three core elements. The first one is respect. So when you come, don't think you know best. Get down from your high horse, walk besides the horse. And work with the local team. Now, the local team may not think very strategic at times, so you give the direction, but I bet you, they will find the best way to reach the target, much better than we can. The second one, I would say, is patience. This is a country for marathon runners, not sprinters. We have to play the long game. You cannot expect to come in and win and walk out. It takes time. And the third one I would say is flexibility. There are plenty of laws, but implementation isn't precisely clear, and the laws keep changing. So what you need is, you need to be flexible, find your way through the maze of laws and decrees and implementation, and still stay true to your values. I think those are the three things. Respect, patience, flexibility.

Francesca Severoni, Fidinam Vietnam:

Very straightforward. Thank you very much. I do agree. Also, in my experience, I think these are really key. And now, moving on, so we have just talked about the past with some microeconomics and historical facts. We have just talked about the current opportunities and challenges. Now, I would like to ask you about your opinion. How do you see these coming years in terms of, you have just mentioned the strengths and the opportunities that we can have right now, do you think this will change over the coming years? And if yes, how? Which trend, which sectors will be the leading ones?

Beat Schuerch, Dragon Capital:

if you look into the future, the key consideration is, are the drivers there for the country to continue delivering? from what we can see, you have all the, the, the factors in place, demographic dividend. You have political stability, you have macroeconomic stability. You have a government that under pressure makes really good decisions. You have the people, and I think that's one that not many speak about. The country itself is very homogeneous, 85 percent belong to the same ethnic group. There's no unfriendly religion, business unfriendly religion, that prevents them from being business savvy. The mentality here is work hard, get rich, be successful. That's not in every country in Southeast Asia like this. And so that is a really strong feature, so this ambitiousness. is a key driver. So you have a stable environment, you have the people, and you have the market that is growing. Look, the longer term is heading in the right direction. Will it be straight line? I doubt. But the trend is clear. Absolutely. And this is why, for the next 15, 20 years, I can't see this country failing. Quite frankly, I think the leadership has done enormously well since I've been here in'96. they get criticism because they don't go as quick as we like, but the fact is they know best what's best for the country.

Francesca Severoni, Fidinam Vietnam:

Perfect. So now, if we have to wrap up, because you mentioned a lot of points and messages, that actually foreign investors should also take into consideration. If you have now to summarize and mention only two or three, which key messages would you give to the foreign investors?

Beat Schuerch, Dragon Capital:

anyone coming here needs to play the long game. Build relationship with stakeholders. government, customers, staff, because also with staff, if you take them in at an early stage of the career and you develop the career, you get loyalty. Yeah, so that's really important. Play the long game. The second one, I think, is because it's a fluid environment, adaptability, the willingness to adapt is key. Keep changing, keep adapting because it's a moving target. And I would say the last one is, despite all this flexibility needed, stay true to your values. Don't take a shortcut, because shortcuts come back to bite you. So if you have certain ethics, follow those. Don't take a shortcut, it doesn't pay off in the long run. Those would be my three core messages I would like to give.

Francesca Severoni, Fidinam Vietnam:

Thank you very much. Very wise, very, very straightforward. So many thanks for being here. I think you could give to us a lot of valuable insights. And thank you for, for listening. I hope you could, get enough information to better understand the business environment in Vietnam. And if you have any questions, please just let us know. In the description. You will find all the details to contact us. We will be very happy to contact you and also to have an introduction call. You will also find the link to download our business guide where you will find many insights on how to do business in Vietnam. In this regard, the next episode will be exactly on that. My colleague will host a startup and they will discuss about the day to day business in Vietnam. So stay tuned and bye!