Indian Investment in Vietnam – How to Structure Operations for Success
By India Briefing
Posted: 8th August 2017 08:34
India and Vietnam relations have been marked by growing economic, commercial, and strategic engagement in the last few years. India ranks amongst the top ten trading partners of Vietnam. By 2020, both countries aim to achieve trade worth US$15 billion. Major areas of focus include hydrocarbons, power generation, renewable energy, infrastructure, tourism, textiles, footwear, medical and pharmaceuticals, ICT, electronics, agriculture, agro-products, chemicals, machine tools and other supporting industries.
Foreign entities may establish its presence in Vietnam as a limited liability company with one or more members, a joint-stock company, a partnership, a branch, a business cooperation contract or a representative office.
It may take the form of either:
- A 100% foreign-owned enterprise; or
- A foreign-invested joint-venture enterprise between foreign investors and at least one domestic investor.
A joint-stock company is a limited liability legal entity established through a subscription for shares. By law, this is the only type of company that can issue shares. A joint-stock company either may be 100 percent foreign-owned or a joint venture between both foreign and domestic investors.
A partnership can be established between two individual general partners.
Foreign companies with investment projects in Vietnam may apply to open representative offices in Vietnam. A representative office cannot conduct commercial or revenue generating activities. This is the most common form of presence in Vietnam for foreign companies, particularly those in the first stage of a market entry strategy.
Business Cooperation Contract (‘BCC’)
A BCC is a cooperation agreement between foreign investors and at least one Vietnamese partner in order to carry out specific business activities.
Public and Private Partnership Contracts
A Public and Private Partnership (‘PPP’) contract is an investment form carried out based on a contract between the government authorities and project companies for infrastructure projects and public services.
Indian companies and government funded projects in Vietnam
India has 132 projects with total investments of about US$1.1billion including investments routed through other countries. Major sectors of investment are energy, mineral exploration, agro-processing, sugar manufacturing, agrochemicals, IT and auto components.
In the oil and gas sector, ONGC Videsh Limited (OVL) and Essar Oil are already providing oil and gas exploration services in Vietnam along with PetroVietnam. In 2013, Tata Power, part of the Tata Group, was awarded a US$ 2.1 billion thermal power project in Soc Trang Province, which is the largest Indian investment project in Vietnam till date. Another company under the same group, Tata Coffee, announced setting up a greenfield instant coffee facility in Vietnam at a cost of US$ 50 million in December 2016. Other Indian firms include Reliance Industries, Gimpex, J K Tires, and Glenmark Pharmaceuticals Ltd.
Along with the private sector, the government is also pushing for an increase in trade and investment. The Indian government has recently approved for a Project Development Fund of Rs 500 crore (US$ 77 million) for supporting Indian companies to build production and supply chains in Cambodia, Laos, Myanmar, and Vietnam. This will benefit India’s industries in terms of business expansion, maintaining cost competitive supply chains, along with increased integration with global production networks.
In 2014, the Indian government also offered a US$300 million line of credit to Vietnam as an impetus to accelerate textile trade and investment between the two countries. The credit is to be disbursed through the Vietnam Exim Bank, is to be used mainly to set up a textiles and garment industrial park close to the Ho Chi Minh city as well as to help Indian and Vietnamese companies to forge joint ventures.
Bilateral agreements and trade
Both India and Vietnam are members of the ASEAN–India Free Trade Area (AIFTA), which came into effect in 2010. The FTA includes tariff liberalization of over 90 percent of products traded between the two regions. The last period for tariff reduction or elimination under the various tariff categories for Vietnam is set for 2024.
India is also currently negotiating the Regional Comprehensive Economic Partnership (RCEP) trade agreement between member states of ASEAN, Australia, China, Japan, South Korea, and New Zealand.
Key imports from Vietnam include electrical and electronic equipment, rubber, machinery and instruments, coffee, tea, and spices.
Key exports include meat and edible meat offal, fish, crustaceans, and mollusks, iron and steel, cotton, and cereals.
Reasons to invest
Increased market access
Both governments are currently working on key issues to facilitate trade and investment such as increasing air connectivity and direct containerization. In addition, FTA’s signed by Vietnam along with ASEAN provides Indian firms access to greater markets like China, Australia, and the Eurasian Economic Union, and the European Union. Vietnam’s FTA with EU, one of its top trading partners is expected to be in force by 2018.
Favorable investment policies
To encourage FDI, Vietnam has put in place a series of incentives for foreign investors. These include preferential corporate income tax rates, import duty exemptions, exemption from taxes on royalties, exemption or reduction of land use or land rental fees, and privileges awarded to build-operate-transfer (BOT), build-transfer-operate (BTO) and build-transfer (BT) projects and projects in special economic zones. The incentives are meant to promote FDI in the high-tech sector, underprivileged regions, labor-intensive industries, and other priority sectors such as education and health.
Vietnam has a number of special economic zones that offer greater incentives and fewer restrictions. There are currently 18 economic zones, with incentives such as lower taxes, reduced rent, and reduced tariff. In addition, there are over 325 state-supported industrial parks in the country. The economic zones tend to be closer to main roads, ports, and airports for easier movement of goods. Most of the foreign investments in such zones are from the manufacturing and export-oriented sectors.
Stable and growing economy
Economic and political reforms under Đổi Mới, launched in 1986, have spurred rapid economic growth and development and transformed Vietnam into one of the most dynamic emerging economies in the region. Last year, the country achieved a GDP growth of 6.2 percent and is predicted to be 6.5% in 2017 and 6.7% in 2018. Despite uncertainties in the global environment, Vietnam’s economy remains resilient.
Rise in global rankings
In terms of ease of doing business, Vietnam has made numerous amendments to their regulations to make investing in Vietnam more transparent, which led its rankings to rise by nine spots to 82 amongst 190 economies. India ranks 130 in the Doing Business rankings.
In the recent Global Innovation Index 2017, Vietnam jumped 12 places to 47th among 127 economies, its highest ranking in the last 10 years. The country’s impressive growth is being attributed to its improved business environment and competitiveness. India ranks 60th amongst the 127 economies.
The median age in Vietnam is 30.8 years and the workforce is not just young but skilled with 60 percent of them being of working age. Government expenditure on education is around 6 percent of the GDP, more than the average for low- and middle-income countries.
In contrast to many other countries, there are no minimum capital requirements for most business lines in Vietnam. This provides a wide range of possibilities for new businesses in Vietnam. However, note that the amount of capital declared must be fully paid within 90 days of the date of company registration.
In terms of labor, despite the yearly increase of minimum wage, Vietnam is still a country with low labor costs. Although in the long term, low wage rates might become unsustainable for now low wages will complement the growth of its manufacturing sector.
Agriculture provides a number of opportunities especially in rice, coffee, and tea production, which are major exports of the country. Investments in new science and breeding technology, irrigation technology, storage facilities, and development of the value chain offer a huge market for investors. In addition, Vietnam has the natural advantage of climate condition, soil with high yield from the central highlands suitable for coffee plantations. Tata Coffee has recently decided to invest in a US$50 million coffee facility in Vietnam.
Huge potential lies for Indian seafood processing companies to establish value chain in exploration, processing, and trade units in Vietnam, especially the Mekong Delta region. Although Vietnam’s seafood exports are huge, they also import large volumes of seafood products for export processing because of lack of due to limited production from domestic sources. Indian companies can take benefit of several incentives for investments, credit, insurance and preferential tax available for organizations operating in the fisheries sector. These tax incentives include tax exemptions for natural marine resource extraction, excise exemptions for aquaculture farming and fishery logistic services and offering free land and water use for aquaculture and seafood production, among many others.
Vietnam’s automotive manufacturing industry is growing rapidly, but the development of supporting industries providing spares and parts have been slow. This offers an opportunity for Indian auto components manufacturers, who are already amongst the top exporters in the world. Last year, automobile components industry exports constituted 4 percent of India’s overall exports and expanding overseas will help firms in diversification.
Assembling and manufacturing of agriculture machinery
With the country giving greater importance to agriculture sectors and various incentives, assembling and manufacturing of the agricultural machinery and farm implements are potential areas to be explored for investment.
There are huge investment opportunities for setting-up support industries in Industrial Parks and Indian firms can take advantage of various trade agreements that can provide a greater market access. Industries in focus include textile, leather, footwear, and food processing.
With a growing economy and urbanization, Vietnam’s infrastructure needs are on the rise. Indian firms can support and explore opportunities in projects such as road, power generation and transmission, and rural electrification.
Other sectors of interest include IT/ITES, Hospitality, and Healthcare.
This article was first published on Vietnam Briefing.
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