Foreign investment, tech and ESG in ASEAN: a spotlight on Thailand and Vietnam
Thailand and Vietnam stand out as two of the ASEAN region’s burgeoning markets, both attractive locations for international corporations looking to set up business and take advantage of the opportunities that abound here. However, given current global volatility, both countries must remain competitive while addressing some of their own challenges.
Franz Murr, Regional Head of Asia-Pacific, Ha Bach, Chief Representative in Vietnam, and Thira Nuntametha, Senior Representative in Thailand, explore emerging trends in two of ASEAN’s fastest-growing economies.
Vietnam’s recent development and the opportunities for foreign investment
Ever since the US embargo was lifted and Vietnam opened its doors to Foreign Direct Investment (FDI) almost 30 years ago, it has remained an attractive location for multinational corporations looking to take advantage of low-cost labour and favourable government policy. Since then, it has become a prolific manufacturing hub, accounting for 70 percent of the country’s exports. Currently, it is the main production centre for global brands like Samsung, LG and Intel. And with the tensions around China, major suppliers for big US firms like Apple are setting up in Vietnam too.
Sitting at the crossroads of other major ASEAN nations, bordering China, and with a long coastline that makes it a natural hub for shipping, Vietnam is uniquely positioned both geographically and logistically. The country boasts a fast-growing and young population, reaching almost 100 million, resulting in a strong labour force. It is also one of the few nations to experience positive GDP growth since the pandemic. Politically, Vietnam is also considered quite stable compared with its neighbours.
Big areas for FDI in Vietnam include manufacturing, processing, real estate, electronics, pharmaceuticals, the automotive industry, fast-moving consumer goods (FMCG) and, increasingly, renewables. There remains a lot of foreign interest in Vietnam’s infrastructure too, particularly from the EU, such as the new metro lines and international airport developments.
When it comes to attracting FDI within the ASEAN region, the competition between markets is fierce. The EU is an essential trading partner for Vietnam. It is the third largest partner for exports and the fifth for imports. Vietnam has built special, long-standing relationships with various individual nations within the EU over the years. This includes Germany, which is by far the country’s largest trading partner, responsible for a third of all exports coming out of the EU and into Vietnam.
Thailand’s changing trading relationships with the EU
As another of ASEAN’s rising stars, Thailand is a popular location for foreign investment in the region for many of the same reasons as Vietnam. In its international trading partnerships, particularly with the EU, the relationship has recently evolved from a one-way arrangement to one in which Thai businesses are looking to invest in EU-based projects. Notable examples include investments in department stores in Italy and offshore wind farms in Germany.
Germany is also Thailand’s largest EU trading partner. In the last decade, however, Thailand has consistently lost out to Vietnam when attracting investment from the likes of China, Korea, Japan and the US. While the Thai labour force remains skilled – especially in electronics and automotive parts – and the government continues to support these areas, costs have become much higher. Combined with increased political instability in recent years, foreign investors are now wary.
Developing infrastructure and shifting to a skills-based economy
In a bid to shift away from labour-intensive industries to a more skills-based economy, Thailand is now focusing on developing its infrastructure and embracing new technologies. Through the construction of a high-speed rail link, Thailand aims to connect its ports and industrial areas with the rest of the country and allow it to better compete with Vietnam as well as other ASEAN powerhouses such as Indonesia and Malaysia.
The Vietnamese government, meanwhile, has introduced appealing tax incentives to encourage more businesses within ASEAN to set up there. Vietnam recently began a strategic partnership with South Korea, which would bring billions of dollars of investment for the country. Samsung, for example, has already pumped nearly US$18 billion into Vietnam.
Japan is also one of Vietnam’s long-standing trading partners within the region. In the past ten years, Japanese companies have moved factories and production capabilities to Vietnam as part of the popular ‘China plus one’ diversification strategy. Canon, for example, has since tripled the size of its factory near Hanoi. Japan also provides finance for some of the big infrastructure projects in Vietnam.
More about the emerging trends in Thailand and Vietnam
SMEs need support to meet international ESG standards
The ESG requirements of international companies operating in this major ASEAN manufacturing hub have a big part to play in setting the region’s own standards. The Vietnamese government, for example, is aggressively pursuing its own net zero targets, but the country remains in the early stages of implementing an ESG framework for local businesses. The Stock Exchange of Thailand, meanwhile, now requires all listed companies to publish a sustainability report alongside their annual financial reports.
The challenge for governments and regulators across the region will therefore be to address the needs of SMEs and independent businesses that form an important part of the region’s economy. Unlike larger companies that have the resources to do so, these smaller enterprises will need additional support to comply with European or US standards to ensure they don’t lose out on lucrative contracts.
Investing in renewables locally and abroad
As well as influencing standards, international partnerships are driving investment into greener industries, such as renewables. Complementing its own ambitious net zero targets, Vietnam has taken major steps to reform its energy market. The country is now at the forefront of Southeast Asia’s transition to cleaner energy, making it an interesting prospect for European investors.
In Thailand too, the renewable transition has been a hot topic for several years. Not only is it transforming its own energy network, but Thailand is also a big investor in renewable energy around the world. Thai investors have been involved in projects in neighbouring countries such as Laos, Myanmar and Vietnam, as well as further afield like Japan, Australia and even Europe.
While the capital and the appetite to support development goals in the region both exist, the challenge for both Vietnam and Thailand will be to upgrade existing infrastructure. It is imperative that this is developed in parallel with advances in the renewable energy sector. This needs to come as a joint effort between governments, power companies and foreign investors.
Banks invest in technology, driving cooperation with fintechs
The pandemic prompted many banks in ASEAN’s member states to embrace digitalisation. Thailand and Vietnam are no exception. Both are becoming increasingly cashless as a result – investing heavily in technology in order to optimise historically cumbersome transactions and processes. The smartphone penetration rate is quite high across the region and there is a lot of focus on mobile banking services. This is driving cooperation between banks and fintechs, particularly in the field of payments and peer-to-peer lending.
An association of Thailand’s top banks has announced a long-term strategic plan to invest a further US$3 billion in innovation, a move that essentially transforms conventional banks into tech companies. The Vietnamese fintech sector, meanwhile, has become an attractive market for foreign investment raking in close to US$400 million in funding last year, placing it just behind Singapore in terms of market size.
Through data, banks offer services beyond traditional remit
A notable trend in the region is that FIs are beginning to invest in areas that are not traditionally associated with banking. A leading Thai bank, for instance, launched a food delivery platform in 2020 which became an active marketplace for small, local businesses. For banks, the real impetus behind this kind of investment is data. By analysing the information gathered from consumer spending habits or a business’ cash flows, for example, a bank can tailor small loans for restaurant owners or delivery drivers. Data incentivises banks to enter a market that would otherwise be prohibitively risky and not within their traditional lending appetite, therefore providing more funding solutions for corporates in ASEAN. This serves to plug the finance gaps that exist in the region and is a top priority for central banks, governments and businesses.
A large portion of the population in both Thailand and Vietnam cannot access a bank and do not have the knowledge to take out a regular loan. Driven by data, microfinancing can provide a viable and accessible solution for these businesses and individuals. It’s a great example of how banks, together with governments, are using the latest technology to address societal issues and the needs of corporates in ways not previously imagined. Innovations such as these could be applied to addressing some of ASEAN’s other challenges, such as upgrading infrastructure and meeting ESG targets.
As of February 2023