2023 OCTOBER ISSUE
GLOBALIZATION
NEEDS REINVIGORATION
PART 10
By : Andrew Sia
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From the Desk of the Publisher
In this issue we have brought back our memory as how the globalization happened forty years ago. China benefitted the most in its thirty years after it had been admitted into the WTO in 2001. The Covid-19 came with the wakeup call and now all developed nations are looking for their alternative solutions. The replacing of China has becoming an inevitable solution.
Today the biggest beneficiary country is Vietnam and our writeup can be used as the country report for taking Vietnam going forward as the most ideal country for investment.
Globalization Needs Reinvigoration
Five years ago, globalization looked very promising and was considered the way to go. The time was in 2018, Christine Lagarde, Managing Director of the International Monetary Fund, was with the world’s business and political leaders at the World Economic Forum in Davos, and the mood was upswing.
Five years today, the outlook has changed and it is not difficult to understand. The three decades of growth of the world economy is now facing all the challenges that we are facing. We are looking at: a global pandemic that began in 2020 and it is not over yet; a war in Ukraine started in February 2022 by Russia is still continuing; tensions between the U.S. and China since 2019 is still erupting.
This led to inflation, high interest rates, market mismatch and change of consumer’s behavior. This has led the globalization into an unpredictable manner.
Globalization was the making of China when Chinese leader Deng Xiaoping started the economic reform in 1978 by opening the special trade zones. His policy was followed by Jiang Zemin, Li Peng and Zhu Rongi during the 1990s and Hu Jintao and Wen Jiapao until 2002. The combined leadership for 24 years was considered as China’s “golden age.” Together they transformed the Chinese economy.
The Western world was overwhelmed first by the collapsed of Soviet Union in December 1991, and prior to that it was undermined by President Ronald Reagan and followed by George H.W. Bush. It was the time when they thought that they could declare the collapse of communism and it was also the end of mankind’s ideological evolution.
They thought that the Chinese communists have bite the bait of the free market capitalism where worldwide free market capitalism would be inevitable as the new world order of goods, money and information could link China to a free world market and drawn the Asian giant toward democracy.
The economic reform in China turned those struggling farmers into urban factory workers and the Western world was scavenging for the cheapest labor they could find. This also helped China, along with those developing countries and lifted hundreds of millions of people out of poverty and created tremendous technological advancements. Along also came the admission for China in the WTO in December 11, 2001. It was the omen, as the Chinese leader, Deng Xiaoping said in 1992, “the capitalist tools in the socialist hand.”
China’s astonished growth transformed the country into the “world factory” and made it the world’s second largest economy and became a major engine of global growth.
What it brought along are also the environmental fallout and inequality of the workers, even the impact of democracy were never thought of.
They didn’t count the deforestation in Brazil, overfishing in Southeast Asia, global warming caused by greenhouse emissions and lack of better planning for the wealth distribution.
In the developed world, we have seen the loss of many industrial jobs causing the diminishing of the middle class; the price dropping for all kinds of goods but the increase of healthcare; housing and higher education are increasing and put them out of reach for the many.
COVID-19 pandemic came as a wakeup call. The world has never seen the lockdown in such a scale that both the food and fuel prices went through the roof. The interest rates made it worse and the world went into crisis. And over the years, the reckless lending caused defaults in debt repayments, currency fluctuation led to bankruptcy of the under developed countries. All of a sudden, the World Bank has been caught with its pants down as there were not enough returns to pay off the debts. At the same time the “Belt & Road” from China also tanked in the third world.
After the war as declared by Russia on Ukraine, the world came to know that Russia was supplying 40% of the natural gas to Europe. They tried to use that dependency to pressure the bloc to pull away from their support to Ukraine.
Likewise, China has retaliated against its trading partners by restricting access to its enormous market. It has successfully brought Wall Street to its knees. The West started to realize that over concentrations of critical suppliers and information technology networks has weaken them.
Right now, China is manufacturing 80% of the world’s the solar panels, it is controlling the car batteries used in the EV and by 2030 it will be so much ahead that it has more than twice as many batteries as every country combine. And its cost is only half. This is all because of its gargantuan subsidies for EV, batteries, wind farms, solar plants and push for the speed for renewable energy.
Security concerns have led the U.S. to block Chinese investments in American businesses and restrict its access to the microchips. With its Infrastructure Act, Chips Act and Inflation Act which would probably bide some time but to work with EU as the ally would perhaps the only way out for the free world.
We have not to forget to mention that geopolitical movements has overtaken globalization as preferences and ideological desires should once again put into consideration.
The Importance of Vietnam in the Global Supply
Although it is a socialist country, the world has taken Vietnam into their trading partner because they would need to find a manufacturing country which can counterbalance their dependence on China.
Vietnam is a country with a population of 103,808,319 in according to the World Almanac 2023. It has a relatively young age population of <15 at 23.7%, together with Indonesia’s 24.7%, Cambodia’s 30% and Malaysia’s 22.7%, it has made the Southeast Asia the ideal hub for manufacturing.
China’s young population of <15 is only at 16.7% and this figure is declining.
It is a long and narrow country with the total area of 127,881 square miles and a 1,400 miles long coastline.
It has an industry consisting of food production, garments, footwear, machine building, mining, coal, steel, cement and chemical fertilizer. It has the world’s second largest rare earths mining waiting to be developed.
It’s GDP is $1.1 trillion and its GDP per capita is $11,553 with the growth of 2.6%.
Its distribution of labor force is: industry 33.1%; agricultural 29% and services 37.8%. Unemployment is only 2.2%.
Its import according to 2019 was $261.7 billion, of which it is distributed to the following countries: China 35%; South Korea 18% and Japan 6%.
Its export according to 2019 was $280.8 billion, and it is distributed to the following countries: U.S. 23%; China 14%; Japan 8% and South Korea 7%.
Its 2023 Q3 GDP growth accelerated to 5.33% from a year ago is quite impressive. It is also due to the recovery in tourism which in 2019 it was a $11.8 billion industry. It is likely to miss its target of 6.5% annual growth and the 5.33% is still below the 6-7% growth recorded before the COVID-19 pandemic. Its economy slowed down in the second half of 2022, and it became 3.28% GDP growth in 2023 Q1. It was due to the deterioration in its domestic real estate market and a decline in exports due to the slowing of the global demand.
The recent economic data shows that the manufacturing sector is recovering. It began to turn positive since May and marked its fifth consecutive month of expansion in September. But its GDP growth is still lower than expectation and the economists have cut the 2023 growth forecast for Vietnam to around 5% from its original 5.3%.
Its garment exporters have felt the challenge from weak demand in traditional markets like Europe and the U.S. Garment factories are feeling the weak demand and have to turn to new buyers from the Middle East and other Southeast Asia countries for business.
At this time of the year, especially before the Holiday season, the global business expectation has lowered the forecast resulted Vietnam’s downturn in a decade. Originally the shifting of the supply chain from China has not benefited Vietnam this time.
We have seen shipments of Samsung phones and Adidas shoes, two of the hot items for export from Vietnam has slowed down. An overall export plunged 10% of the year in January through August which is a sharp contrast to the growth of 17% growth recorded a year earlier.
Companies like the fashion retailer Uniqlo and chip software maker Synopsys have been gearing up their operation in Vietnam amid worries about geopolitical risks with China and the adoption of “China Plus One” strategy. But the weak economy has not brought the result as expected.
Vietnam has also geared up its crackdown on corruption and smooth out the approval for business permits. This helped the public investment to reach 33% of the year’s target in the first six months.
Factory wages in Vietnam have been going up in order the manufacturers can retain its labor. They are also putting in more trainings and initiatives to make the work more interesting and promising. The days of the low wages and strict doctrines are out to retrain workers and not practicable.
They are looking for automation and to train the workers to become capable of operating computer-aided manufacturing. To training of managers on the factory floor as mechanical engineering and redesign the workplace to become more modern and have more windows to bring in the natural light.
The recent visit of the U.S. President Biden in Hanoi helped to focus manufacturing more on high-value technologies. It is already mentioned that Washington will help funding to develop the rare earths which is the world’s second-largest deposits after China.
Washington will also donate $2 million for training of the workers in the assembling line for testing and packaging of semiconductors.
Amkor Technology, a global leader in the Outsourced Semiconductor Assembly and Test (OSAT), with its headquarters in Tempe, Arizona and operations in China, Japan, Malaysia, Taiwan, the Philippines and Korea, will open a $1.6 billion chip factory in Bac Ninh, Vietnam.
With Marvell, it will establish a semiconductor design center in the country, and together with Nvidia, who will work on artificial intelligence, and Amkor Technology’s investment in producing chips, this will make Vietnam to become an important hub for the semiconductor industry.
Washington already announced using its CHIPS and Science Act to support Vietnam in developing skills, regulation and infrastructure for the sector. It has opened the greenlight to allow Americans to focus on higher-value chips and Intel is going to open the biggest global test and assembly site in the Ho Chi Minh City.
Vietnam Airlines will purchase 50 Boeing 737 Max jets worth $7.8 billion and will receive financing from the U.S. private equity investor Carlyle Group. Last year Vietnam Airlines already signed for 200 such aircrafts for the total of $25 billion.
Its carmaker, VinFast, is going to focus in making electric vehicles for the export market. It is making China very uncomfortable as the U.S. has already announced that with the importation from China and their very competitive pricing of the EV has make the car industry very agitated. They are going to investigate with the carmakers and to find out if they have been subsidized by the state-fund. They would impose heavy import-duty if they have violated the trade rules.
Washington is thinking of giving Vietnam the status of “market economy” which can come together with trade benefits. If this can take place, it will provide Vietnam to foster with the U.S. the defense ties. The U.S. can approve weapon sales to Vietnam in the future and can also stop them to buy from Russia for instance.
All along this time, Vietnam took great effort not to anger Beijing by getting too close with the U.S. especially they are sharing border with China. Also the long coast line of 1,400 miles that is located in the disputable South China Sea where China claimed for its sovereignty. In some instance we can feel that Vietnam is threading on ice.
