Sunday, December 31, 2006

Vietnam snapping at the heels of Asian Tiger economies

BUSINESS trips to America, Russia and China during the past year offered me an intriguing glimpse into the three superpower nations that not so long ago differed markedly in ideology, culture and economic practice, but who are now all fully-paid up members of the capitalist club.

The Russians and Chinese, being new to the game, have adopted the American model to varying degrees and will soon be united in the only way that Europe is united: by the presence of Starbucks and Coca-Cola on every street corner. To that extent it is America that leads the triumvirate.

Yet America is arguably the most nervous and vulnerable of the three, its deficit spiralling ever upwards, the dollar under pressure and its markets fighting the new might of China which is stepping into the brave new capitalist world with methodical confidence, marshalling its vast population into a body of worker-consumers.

Russia's fragility is obvious, from its creaking infrastructure to the undisciplined way in which its wealth is in the hands of a few oligarchs, yet its sheer size and potential is equally obvious to British firms such as Scottish & Newcastle, which is exploiting the opportunities for growth. Surely, the only way is up.

China is the most likely winner as it gobbles up global manufacturing and 300 million of its countrymen who consider themselves middle class prepare to spend their money.

However, 2007 may yet belong to another rising Asian star, Vietnam, which provides another stark message for UK and Scottish forecasters about the true meaning of growth. Vietnam is the new China. Its gross domestic product expanded by 8.4% in 2005, the second fastest in Asia behind China. It fell slightly in 2006 due to a number of unforeseen problems, including disease and natural disasters, but is forecast to hit 8.5% in 2007.

The country's export volume is tipped to reach a record of almost $40bn, while foreign investment should hit $10bn. Both should get a boost from January 11 when the country ends an 11-year wait and joins the World Trade Organisation. Some 30 years after American troops fled the country, big companies are now queuing up to move in.

Intel chose Vietnam over China, Malaysia and the Philippines for a test and assembly plant employing 1,200 workers and marks a significant leap out of the low-tech box for the country. AES, another US company, is building a 1,000-megawatt power plant in the northern province of Quang Ninh that could cost as much as $1bn. Cisco Systems, Nortel Networks and Motorola are installing telecoms equipment.

The Japanese are also chipping in: Canon is spending $110m on an ink jet printer factory and Nidec Corporation has built two plants to make electronic components, at a cost of $940m. Fujitsu has invested $200m and employs 3,200 making circuit boards for PCs and phones.

Foreign investment into China actually fell slightly last year and as a percentage of gross domestic product, Vietnam's total was more than twice the level invested in China.

The reasons for Vietnam's rise include cheap land and low shipping costs, but it is mainly low wages. China is already becoming a victim of its own success with labour shortages in some places forcing up costs and wages being up to five times those of a Vietnamese worker.

Vietnam was targeted for an earlier round of inward investment only for corruption, red tape and poor infrastructure combining to see many lose their shirts. But with the WTO now governing its trade affairs and billions poured into its transport infrastructure, the next stampede is expected soon.

Shares to bank on

BANKS are not the most loved of institutions, but shareholders have had a good year, especially if they invested in HBOS, which enjoyed another year of outperforming the FTSE 100 and the FTSE banking index.

In fact, last year for the first time in a while, the banking index outperformed the FTSE 100.

Of course, it is not all good news. Over five years, Lloyds TSB shares are down 23.4%, even after accounting for a takeover premium. HBOS was up a whopping 42.2% over that time, proving perhaps that investors like banks that are committed to the UK, while the FTSE 100 as a whole managed 19.2% and the banking index a 17.2% rise.

Most pressure, however, will be on Stephen Green, executive chairman at HSBC, who was accused by one fund manager recently of "being asleep". The bank's shares are down 6% over three years and 0.2% over the past year.

The company may still be suffering some overhang from the unpopular move on US firm Household, which preceded Green's appointment. But he needs to respond quickly to sliding sentiment.


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