Home Brokerage To Build a Sustainable Future: Vietnam and Thailand Court International Investment

To Build a Sustainable Future: Vietnam and Thailand Court International Investment

by internationalbanker

By Franz Murr, Regional Head Asia-Pacific, Ha Bach, Chief Vietnam Representative and Thira Nuntametha, Senior Thailand Representative, Commerzbank

 

With Southeast Asia’s strategic position at the heart of international trade routes, there is no shortage of international investors seeking to engage with the region. At the crossroads between China and the rest of South Asia, the ASEAN region is particularly attractive to international corporates looking to relocate production and optimise supply chains. Vietnam and Thailand, two of the region’s fastest-growing economies, have been vying for foreign trade and investment.

One of Vietnam’s key strengths is its young population of almost 100 million. It has exhibited political stability in recent years, and the World Bank forecasts Vietnam to have the fastest growth in Asia-Pacific in 2023. Neighbouring Thailand, with a larger economy but slightly smaller population, has also posted positive growth figures in recent years, displaying resilience in the face of global economic headwinds.

Building tomorrow’s industries on strong foundations

For years, the region’s manufacturing industries have attracted strong levels of foreign direct investment (FDI). Ever since the US embargo was lifted in 1994, Vietnam has developed a particular focus on the pharmaceutical, fast-moving consumer goods (FMCG) and automotive industries. The country has hosted production facilities for large European pharmaceutical manufacturers such as B. Braun, DKSH, GSK and SANOFI. It is also home to the large-scale manufacturing plants of FMCG giants Unilever and Nestle, as well as Mercedes-Benz – which assembles its AMG sports cars in Ho Chi Minh City.

Similarly, Thailand’s skilled labour force has enabled it to establish a competitive edge in the production of electronics and automotive parts. The country’s private sector, meanwhile, is making advancements in the sector of agricultural technology. But increasing labour costs, as well as ongoing political instability, have made some foreign investors wary. Indeed, for at least the past five years Thailand has been losing out to Vietnam when it comes to attracting investment from markets such as Japan, Korea, China or the US.

As a result, the Thai government is keen to promote a more forward-looking industrial strategy. The Thailand 4.0 programme aims to pivot from labour intensive industries towards a more skills-based economy through infrastructure, innovation and technology. Indeed, Thailand is currently constructing its high-speed rail link that will better connect its ports and industrial areas with the rest of the country.

Vietnam is adopting a similar approach – looking to shift away from heavy industry and becoming more selective in the sectors it promotes for foreign investment. Building upon its status as a manufacturing hub for global brands, it is orienting itself towards technology, embracing more technical industries. Nevertheless, the country continues to be a key hub for textile manufacturing, and this industry is likely to remain a major national employer.

Strengthening ties with global trade partners: South Korea, Japan, EU

As manufacturers look to diversify production – many are now embracing the ‘China plus one’ strategy – the Vietnamese government has made a concerted effort to attract investment through a variety of incentives. Vietnam is already well-connected internationally – within ASEAN, it ranks behind only Indonesia and Singapore in terms of international trade relationships. One of the most promising recent developments has been its strategic partnership with South Korea, which has already brought in nearly US$18 billion in investment from Samsung alone.

Japan is a longstanding trading partner of Vietnam, and in the past decade, Japanese corporates have relocated production to the country en masse. Indeed, companies such as camera giant Canon have tripled the size of their local operations. Japan has also been financing many of Vietnam’s large infrastructure projects.

But interest is coming from further afield too. The EU is a major partner for Vietnam – the country’s third largest export market and its fifth largest partner for imports. Germany is by far Vietnam’s largest European trading partner, accounting for a significant share of its exports to the EU. But Vietnam also boasts good trading relationships with individual European nations, including the UK. European companies, attracted by favourable policies and incentives, have shown keen interest in Vietnam’s infrastructure development projects, including its metro lines and potential new international airports.

In Thailand, Germany is also the largest EU trading partner. Historically, the relationship was one-way – with EU companies investing in machinery and automotive manufacturing while Thailand primarily exported agricultural goods. However, the relationship has shifted in recent years, with Thai companies looking to invest in the EU. For instance, Thai financiers are now funding projects such as department stores in Italy and offshore wind farms in Germany.

Vietnam and Thailand embrace the shift to sustainability

International companies, prompted by government regulation and industry-wide ESG commitments, are increasingly applying sustainability standards across borders through their supply chains. In the ensuing ripple effect, markets such as Vietnam and Thailand are raising their own ESG standards accordingly to maintain their valuable trade relationships.

Vietnam, for instance, is investing in the renewable energy sector as it moves towards its own set of net zero targets. Indeed, Germany-based industrial technology conglomerate Siemens and Danish wind-turbine company Vestas have recently established a presence in the country. But progress may take some time – Vietnam remains at the very early stages of implementing its own ESG framework for local businesses. While some local banks are working with international advisors – like the International Chamber of Commerce (ICC) – to develop their ESG frameworks, state-owned banks are yet to issue any guidance.

Meanwhile, Thailand’s Stock Exchange released ESG disclosure guidance in 2022, and now requires all listed companies to publish a sustainability report alongside their annual financial report. Yet while larger corporations have enough resources to dedicate to sustainability reporting, the bulk of the region’s economy is made up of SMEs. Governments and regulators therefore have an important role in supporting smaller businesses to comply with international standards.

But of course, the shift towards sustainability is not motivated solely by international standards – the region is also embracing the transition on its own terms. For four consecutive years, Thailand has topped the rankings for Southeast Asian nations in its progress towards the UN’s Sustainable Development Goals. Thailand is also an investor in renewable energy overseas, and has been involved in projects in neighbouring countries like Laos, Myanmar and Vietnam, as well as further afield like Japan, Australia and even Europe. Vietnam – which has set ambitious goals to achieve net zero by 2050 – has also ramped up its clean energy production, increasing its share of solar power to 11 percent from virtually zero just four years ago.

Foreign investment will be crucial if the region is to achieve its goals

International interest in financing Southeast Asia’s energy transition is certainly there. Inevitably, large amounts of renewables will be added to the grid as the region’s power demand grows. The challenge – for Vietnam, Thailand but also other ASEAN nations – is upgrading and optimising existing infrastructure. Levelling up the region’s infrastructure will be a costly endeavour, and one that will take time. Of course, international financial institutions will have a crucial role to play in facilitating the shift – not only through financing, but also by leveraging their global networks and extensive technical expertise.

The region’s integration into global trade routes, and the global financial system, is therefore crucial. Not only to guarantee that industry flourishes today, but also to enable the transition to new sectors and cleaner energy for tomorrow.

 

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