Millennium Post

A clear choice

While an attractive investment location alternative to China, Vietnam has several underlying factors that make for a far riskier alternative for Japan as compared to India

Much ado was made when Japanese surveys were in a dichotomy in dedicating Vietnam as a better destination for investment than India in the event of an alternative to China after the Japanese government splurged incentives for quitting China. While a survey by NNA Japan Co — a Japanese based Kyodo News Group — decoded Vietnam as the most promising destination for Japanese investors, Japanese think tank JBIC (Japan Bank for International Cooperation) contradicted it. It elevated India to the top for investment destination for medium-term, leaving behind China and Vietnam at second and third position respectively, in its survey. So was American Harvard Business Review which focused on India as the most viable investment destination for US companies shifting from China. Pew Survey of USA cited the mega-investment by Facebook of USD 5.7 billion in India as a case in point. These sent Japanese investors into a tizzy.

According to METI, Japanese investment in India was twice that in Vietnam in 2019. Further, it was not a one time leap over Vietnam. It made a trendsetter by quadrupling in three years. It leapfrogged from USD 1.6 Billion in 2017 when Japanese investment in Vietnam was USD 2 billion to USD 5.1 Billion in India in 2019 when Japanese investment in Vietnam was USD 2.5 billion. These manifest the tenet of the Japanese reliance on India's potential.

Why was India then toppled by Vietnam in NNA survey? In popularity and reliability, JBIC is more pronounced since it has been surveying for three decades. What does it connote? Is the JBIC survey more reliable or should the NNA survey be trusted to determine the Japanese plan for an alternative to China?

No doubt, Vietnam has many attractive features: cheap input costs, stable politics, increasingly liberalised trade and investment policies and its FTA with Japan and other countries. But, it has limitations too. They are its high dependence on foreign inputs for production and exports, limited sectors for investment, the retreat of globalisation after COVID 19 and its much smaller population.

High dependence on foreign inputs limits the capacity expansion, embodies risks if the political relation rages into confrontation, the retreat of globalisation reduces import intensity in production and exports and small population limits the domestic demand.

One of the important lags for Vietnam is its overdependence on China for inputs. More than one-third of Vietnam's imports come from China. Given this, its gross exports include more of Chinese intermediate goods than domestic products. Eventually, it raises risks for sustainable growth in exports, in the event of any political upheaval. It is already in a political tiff with China in the wake of China's aggression in the South China Sea. India is a case in point. India's over-dependence on Chinese components and parts for mobile phone manufacturing caused a big headache for the Government of India. Even though it helped in building a new industry, the bitter political relation between the two countries in the wake of frequent border conflict forced the Indian government to put barriers on imports from China and decouple from it

Another weakness of Vietnam for overdependence on China is its integration with other Asian countries. Its imports witnessed a downturn from these nations with the increasing imports from China. In other words, Vietnam's rise in GVC participation rests more on foreign inputs, predominated by China. So far, it is conducive until the political relation is normal. But, China has lost its integrity as a good trade partner with its expansionism policy. After China defied the Hague arbitration rule, which blamed China's forceful assertiveness in the South China Sea, the sovereignty of Vietnam is at stake.

Vietnam has limited sectors to attract investment. The target industries are electronics, footwear and textile. This means firms looking to shift away from China will find that it meets only a subset of their needs. These limitations leverage more opportunities for India, which provides multiple sectors for investment. From the manufacturing of electronics, automobile and defence equipment to construction and embodying big investment in infrastructure, India can provide larger scope for Japanese investment in India.

Domestic demand is another important parameter, which edges out Vietnam. India's population is more than ten times that of Vietnam. Eventually, all's said and done, investors in Vietnam have to reap the benefit through exports, unlike in India where domestic demand becomes the determinant for sales. Many suggested Vietnam is an alternative to China for the supply chain. But, with the retreat of globalisation in the wake of the outbreak of COVID 19, the situation ignited a supply chain risk with the disruption in production in the world. It nudged countries towards having a second thought on import dependence in the GVC model and turn inwards for development of the domestic supply chain. In fact, since 2011, the global import intensity to production witnessed a downturn, according to OECD. The reasons attributed were trade tensions, protectionism and uncertainty in trade policies.

Locked into the quagmire of overdependence on China and limited scope for exports with the trade war engulfing the world economy, investment in Vietnam presents a greater risk than India. India's new strategic approach towards 'Make in India' to establish a strong domestic supply chain and a big domestic demand should pave the way for the dithering Japanese to take the right decisions in the near and medium-term.

The writer is an Adviser, Japan External Trade Organisation (JETRO), New Delhi. Views expressed are personal

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