Connecting continents via close multi-sector cooperation
October 3 will mark the 32nd anniversary of Germany’s reunification. Marko Walde, chief representative of the Delegation of German Industry and Commerce in Vietnam (AHK Vietnam), writes about how important the Vietnamese market is to German investors.
Relations are shaped by many different intersocietal contacts. Germany and Vietnam regard themselves as partners in endeavours to uphold the rules-based order, respect international law, multilateralism, global free trade and investment, and environmental and climate protection. Presently, there are 120,000 Vietnamese living in Germany and around 120,000 other Vietnamese were trained in Germany, live in Vietnam, and often work in key positions in business, administration, and politics.
In terms of economic cooperation, Germany is the most important partner of Vietnam in the European Union. In addition, the establishment of the Vietnam-Germany Strategic Partnership in 2011 was a historical milestone, opening a new chapter in the relationship between the two countries. After a decade of implementation, the two countries have made great strides in many fields, and there is still plenty of room to develop bilateral relations. Political relations continue to be consolidated through delegation exchanges at all levels and high-level contacts at multilateral forums.
Bilateral trade volume has quadrupled in the past 10 years, reaching €14.4 billion ($14.1 billion) in 2021, making Vietnam Germany’s second most important trading partner among ASEAN countries. Thanks to the free trade agreement with the EU, we expect the German-Vietnamese trade volume to increase to around $20 billion over the next two to three years. Germany is one of the top three EU investors in Vietnam, with 422 effective projects, registered at a total of more than $2.3 billion until May, according to a report by the Ministry of Planning and Investment. This created around 50,000 jobs in Vietnam, and about 500 German companies are currently doing business in Vietnam, with over 4,000 German companies already exporting to Vietnam.
Regarding manufacturing investment, there are 83 manufacturing sites of German companies located in Vietnam. Although Germany is the country of car and machinery manufacturers, most companies in Vietnam are active in apparel.
Furthermore, 18 chemical companies are invested in Vietnam. While many other industries mostly use Vietnam as an export and manufacturing hub, these chemical enterprises typically supply local customers, with family-owned Messer Group being the largest one.
Because Vietnam did not have local car producers until recently, German companies have so far not developed a broad supplier base. However, with Schaeffler, Bosch, and Mercedes-Benz, the industry contributes some of the biggest German investments in Vietnam.
The most significant German investments have been implemented by Bosch (automotives), Stada-Pymepharco (medical equipment), and Messer Group (chemicals). Bosch is deploying a major manufacturing complex for push belts in the southern province of Dong Nai while also operating a research and development centre in Ho Chi Minh City. Stada-Pymepharco manufactures pharmaceuticals in its factory in south-central province of Phu Yen. Messer is supplying gas to local customers such as Hoa Phat from its main production hub in Hai Duong and Quang Ngai provinces.
Business barriers and trends
German businesses are still facing challenges due to global instability. This makes businesses more concerned about business development in the coming year. This has been shown in the AHK WBO Spring 2022 report, according to which the biggest risks are raw material prices, energy prices, and a shortage of skilled workers. As a result of the Russia-Ukraine conflict, rising energy and raw material costs along with supply chain and logistics disruptions are the most concerning problems. Additionally, although the workforce in Vietnam is young and abundant, many of them are lacking needed essential practical skills in the market.
Understanding this, since 2013, AHK Vietnam has been assisting German companies to establish a comparable, quality-assured German Dual Vocational Education and Training programme in Vietnam based on the German DIHK standards. This initiative aims to impart practical skills that meet the businesses’ desired hiring and production requirements.
Moreover, there is a shortage of local enterprises in the supporting industry to strengthen cooperation with German enterprises. According to economic experts, the supporting industry in Vietnam is only in its infancy and has not met the requirements of the manufacturing and assembling industry, especially for enterprises and corporations with foreign investment.
In addition, the number of enterprises specialising in supporting industries is small and the level of ability is only average compared to the region and many countries in the world. This is a big obstacle to the stable and sustainable development of Vietnam’s economy in the process of deepening integration.
Regarding the China+1 trend, Vietnam is expected to be an ideal investment hub for German businesses since the country holds many advantages. Due to its proximity to China, along with low export tariffs implemented by the EU-Vietnam Free Trade Agreement (EVFTA), Vietnam has become a promising destination. Additionally, supply chain diversification is a crucial element. German investors can reduce manufacturing costs while minimising disruption or delays to current supply chains and managing risks by localising production close to traditional hubs in China.
Catching up with the trend, Kurz – a manufacturer of pressed coating products based in Fürth – has just broken ground on a new production facility in Quy Nhon city of the south-central province of Binh Dinh.
Meanwhile, tape manufacturer Tesa, a subsidiary of Beiersdorf Group, announced an investment of €55 million ($54 million) in 2020, with a new factory in the northern city of Haiphong expected to open next year.
Free trade and sustainability
The EVFTA took effect in 2020, opening great opportunities in the bilateral relations between both partners. It is anticipated to significantly increase bilateral trade and open new opportunities for German companies to access markets in Vietnam for goods, services, and investment by eliminating bilateral tariffs and export taxes and reducing non-tariff barriers affecting cross-border exchanges of goods, services, and investment.
Trading between the two parties has witnessed steady growth and is expected to continue in the future, which will be advantageous for German and Vietnamese exporters in various industries. Traditional commodities like machinery and measuring equipment will probably benefit German exporters the most. Due to a generalised system of preferences, many positions on the Vietnamese side already had low tariff rates. However, more tariff reductions will take effect, further opening chapters for processed foods, footwear, and agricultural products.
After two years of implementation, the import-export rate of Vietnam and Germany has reversed and grown strongly compared to the previous years. Many key export products of Vietnam have also taken advantage of opportunities from EVFTA, such as machinery and equipment, transport vehicles and spare parts, iron and steel, and computers and electronics.
In the opposite direction, enterprises are also considered to have advantages when importing German products thanks to the EVFTA, especially vehicles, electrical machinery and equipment, pharmaceuticals, plastic products, and milk and dairy products, among others.
Sustainable energy is a global movement. In the past 10 years, cooperation in the field of sustainable energy has always been one of the top priorities in the relationship between Vietnam and Germany as the former has shown a strong determination for the development of renewable energy with a long-term vision of sustainable energy transition. Vietnam is also regarded as a global partner under the new Green Growth Strategy of the German federal government.
Additionally, the German Supply Chain Due Diligence Act, passed in June 2021, will come into force in 2023 and includes stricter standards for businesses participating in the German supply chain. The objective of this act is to improve human rights protection in global supply chains and prevent child labour, forced labour, and the prohibition of substances harmful to humans and the environment.
Anti-discrimination, living wages, and decent working hours are also at the heart of the act.