Mounting Debts

HCMC workers seek authorities’ help as firms fail to pay wages

No question that economic problems are starting to bite and we will see more stories of companies in financial difficulty, unable to get credit and meet their payroll and other expenses.

Vietnam will not be immune from the broader global crisis and to think otherwise is foolish.

On the other hand, Vietnam's position as an attractive base for low wage manufacturing remains safe. Vietnam continues to pick up low wage manufacturing business from China. Trouble is that the size of the pie-- the volume of orders to the main consumer export market (the US) is shrinking.

Here is how Vietnam looks from the perspective of Chinese competitors:

Is China Too Expensive?

Vietnam is often considered a viable alternative. Indeed, the Dong is one of the few currencies that depreciated against the dollar over the past several years-- a definite plus for firms sourcing from Vietnam. Though the compensation of Vietnamese workers is still quite low compared to their Chinese and Southeast-Asian neighbors, rising costs of living are inciting greater wage demands, which have already manifested themselves as large-scale strikes at foreign-owned companies. Besides, with inflation of over 25%, Vietnam finds itself on the doorstep of a broader economic crisis that could challenge the commitments to reform and trade liberalization.

Furthermore, Vietnam lacks the infrastructure to supplant China as a sourcing powerhouse. China has been funneling around 12% of its GDP into infrastructure development and is forecasted to invest close to $10 trillion more over the next decade. Indeed, Shanghai alone supports over five times the shipping volume of all Vietnam's seaports combined.

On the labor front, China's workers outpace Vietnam's in terms of both education level and productivity. In fact, the productivity gap is so large that Vietnam's unit labor costs do not fall far below China's, despite the significant wage differential. Only low value-added industries like furniture and apparel can fair well in such a skill-starved environment. To various degrees, these arguments apply to all of China's Southeast-Asian alternatives.

Factories and businesses here will certainly face significant challenges and pressures over the coming year and some will not make it. Some factories will close and some workers will not get paid.

But Vietnam's main weakness here is not wages or even productivity but infrastructure and transportation costs.

This is what could really hurt the country's long term competitiveness...