Mexico Versus Vietnam: Where Will US Investors Diversify

0, 0
0
81
  • The US-China trade war has upended supply chains, forcing businesses to rethink business strategies and expansion plans.
  • With Covid-19 added to the mix, investors have felt a stronger need to shift and diversify their operations from China.
  • Both Mexico and Vietnam are ideal destinations for investors looking to relocate or supplement their China operations.

Foreign companies outsourcing operations to reduce costs and improve market share is nothing new. The only things that seem to change are the companies changing the way that operations are relocated, and the countries that manage to attract capital inflows.

Instead of abandoning the Chinese market, investors are choosing to supplement Chinese operations with low-cost inputs sourced from production facilities in markets such as Vietnam and Mexico. While the structures of these operations differ greatly depending on the country in question, this production model has become widely known as China+1.

Navigating this geopolitical landscape can be difficult for most businesses but more so when moving business activity out of China. Mexico and Vietnam, both feature high on the radar for US businesses choosing alternate sites due to their success and flexibility in creating an adaptable production base.

Both countries offer a suitable business environment. While most can appreciate China’s well-oiled supply chain network and business environment, both Mexico and Vietnam are making strides to bridge this gap. Both countries have a different set of strengths, respectively, and multiple factors need to be accounted for when considering a manufacturing shift. Investors should consider the following factors if planning to move operations to either of these potential candidates.

Mexico
Mexico is the second largest economy in Latin America. It has a current gross domestic product (GDP) of US$ 2.7 trillion and has been growing at an annual average of 2.6% for the past 20 years. Mexico has a large diverse economy that is linked to trade with the US. Mexico is an upper-middle-income G-20 and OECD member with a per capita GDP of US$10,405.

In 2018, Mexico was the third largest trading partner with the US after Canada and China. Mexico is the first or second largest export destination for 27 US states. Top US product exports include electronics, vehicles, fuels, minerals, plastics, and machinery. In addition, Mexico is the second largest agricultural export market for the US and imported US$ 19.5 billion worth US agricultural products in 2018.

Mexico is also a member of the World Trade Organization (WTO) and has 13 free trade agreements (FTAs) that cover 50 countries, including the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP). Due to these FTAs, Mexico’s market is one of the most competitive and open in the world. The advantages of investing in Mexico is that Mexican companies and suppliers are familiar with US products and services. US businesses typically find it straightforward to market their products in Mexico. Promising industries for US businesses in Mexico are agriculture, auto parts and services, aerospace, education services, energy, environment technology, information technology, transport infrastructure as well as tourism, among others.

Manufacturing
The above factors make Mexico a viable option for businesses looking to supplement or relocate their manufacturing options. Mexico offers similar labour rates as China’s and offers a highly-skilled workforce. Due to a diverse labour pool, companies from almost all industries can look to manufacture their product there.

Manufacturing in the country continues to grow and Mexico remains the 12th largest exporter in the world. Major manufacturing industries in Mexico include automobiles, aviation, apparel and textile, consumer products, and medical devices with raw materials coming from the US, China, Japan, Germany, and South Korea among others.

Mexico is also attracting large and multinational manufacturers from all industries. The country has become the fourth largest automobile producer in the world. While Mexico still relies on the US and China for inputs, its supply chain is well established. Given the high concentration of manufacturing operations in several industries, businesses can make use of established infrastructure and supply chain networks.

Mexico’s information technology (IT) sector is well established. Due to Mexico’s proximity to the US, it has made manufacturers shore operations to the country to cater to US demand. Conglomerates such as GE, IBM, Oracle, and Intel have several offices, HR functions, and innovation centers in Mexico. The industry is said to be pulling more than US$ 12 billion a year with around 4,000 companies across the country contributing to the industry.

Also Read  Italy To Have Its First Staged Digital Fashion Week In July

Nevertheless, the supply of computer graduates does not meet demand, with some states outperforming others. The lack of a skilled workforce remains a challenge for the IT industry in Mexico.

Mexico’s taxes
Mexican resident taxpayers are subject to corporate income tax from worldwide sources and foreign residents are taxed on the income attributed to their permanent establishments in Mexico. Corporate income tax (CIT) is at 30% in Mexico.

Foreign businesses established in Mexico are subject to the same tax system as national enterprises, though they do benefit from certain exemptions. Although various states have started to offer competing tax incentives to attract foreign investors, the majority of taxes in Mexico are levied at the federal level.

Indirect taxes such as value-added tax (VAT) are 16%. A zero percent VAT is also applicable to some items, such as magazines, newspapers, the export of certain goods and services, medicines, and agricultural goods.

Personal income tax (PIT) varies depending on earnings, deductions, and other factors and ranges from 1.92% to 35%. Non-residents pay between 15-30%. Residential individuals are subject to income tax on their worldwide income, while non-residents are taxed only on their Mexican sourced income.

Mexico’s free trade agreements
Mexico is a trading partner to more than 50 countries, with several FTAs with Europe, North and South America as well as Africa. Mexico has around 13 FTAs, but despite this, more than 80% of Mexico’s exports are to the US, focusing on industries such as automotive and electronics. The US Mexico Canada Agreement (USMCA), the updated version of the North American Free Trade Agreement (NAFTA), will ensure Mexico remains a key trade partner of the US. The deal will help industries such as automobiles, garment and textiles, energy, mining and agriculture and will also streamline customs clearances between the three countries. This will be done by reducing costs and implementing a single-window system. The USMCA is scheduled to take effect on July 1, 2020.

Vietnam
As has been the case for several emerging Asian countries, Vietnam has followed an export-led growth model, combining trade liberalisation and foreign direct investment promotion to spur exports.

Vietnam’s growth has accelerated in recent years in part due to the US-China trade war. Vietnam’s exports to the US rose by 28.8% year-on-year in the first quarter of 2019, making the US the largest importer of Vietnamese goods. Vietnam’s GDP growth rate hit a 10-year record high of 7.08% in 2018, making it one of the top growth performers in the region and the world and continued with a 7% growth in 2019. The growth was led by strong manufacturing and exports, rising domestic consumption, investment, and agriculture. Top exports to the US included computers, electronics, textiles and garments, footwear and agricultural products.

Vietnam joined the WTO in 2007 and has been busy signing several FTAs since then. It is part of 13 FTAs, with another four either signed and yet to be ratified or under negotiations. Vietnam’s friendly FDI policies, strategic location, a stable political and business environment make it a perfect concoction for firms ready to move or supply their China production to the country. Promising industries include high-technology and IT, processing and manufacturing, supporting industries, tourism, services, and high-tech agriculture.

Manufacturing
Vietnam has emerged as a destination of choice for its low costs, receptive governance, and increasing integration with key trading partners. Cumulatively, these factors have and will continue to grow Vietnam as a hotbed of manufacturing and position the country as an ideal location for China-plus one oriented production. Thanks to its central location in Asia and proximity to regional shipping routes, many manufacturers entering Vietnam are export-focused.

Foreign investors can benefit from many incentives and under many circumstances can be exempt from import duties on goods brought into the country for their own use if they cannot be procured locally. This includes all equipment, machinery, components, and spare parts for machinery and equipment, raw materials, inputs for manufacturing and construction materials. It should be noted that most export duties are also exempt.

Also Read  How Covid-19 Has Changed Consumer Spending Around The World

Nevertheless, Vietnam relies on China for raw inputs for its industries. Its supply chain is constrained by this, though the government has encouraged businesses to diversify their supply chains. The Covid-19 pandemic has accelerated this process, with several business owners looking at countries such as South Korea, Japan, and India for raw inputs. In addition, Vietnam is looking to scale up its capabilities from low-value production towards high-end manufacturing.

The US-China trade war has given further impetus to this with several companies, such as Apple, Samsung, Nintendo, and Google moving production in parts to the country. In addition, Universal Alloy Corporation, which makes airplane parts for Airbus and Boeing, unveiled its aerospace components factory in Vietnam in 2019, displaying Vietnam’s progress towards becoming a high-tech manufacturer.

As Vietnam moves from low-tech manufacturing to a service-oriented economy, the country’s IT market is increasingly gaining traction, giving competition to firms in China and India. This has partly been encouraged by the growth of Vietnam as a regional market for domestic enterprises and global technology vendors.

Vietnam is moving to adopt Industry 4.0 across all industries. Most of the IT industry is foreign-invested, with multinationals funding projects to build electronic components in the country. At least 86% of total IT revenues in 2017 were derived from hardware. Due to strong growth trajectories, strategic advisory and global outsourcing firm Tholons has rated Vietnam as the eighth leading provider of IT services and products globally.

Vietnam’s free trade agreements
Vietnam is a party to 13 FTAs with the European Union Vietnam Free Trade Agreement (EVFTA) set to take effect sometime in the second half of 2020. Vietnam’s Ministry of Planning and Investment forecast that the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), which Mexico is a part of, could increase Vietnam’s GDP by 1.3 percentage points by 2035, while the EVFTA could boost GDP by 15%. These trade deals along with already signed and upcoming FTAs are likely to ensure that Vietnam remains competitive in the long term.

In addition, the US and Vietnam are likely to forge an FTA sometime in the near future. Already, Vietnam has become one of the fastest-growing sources of American imports in the first quarter of 2019. If this keeps up, Vietnam could surpass the UK as one of the biggest suppliers to the US, according to Bloomberg. In the first five months of 2020, the US became Vietnam’s leading export market with an export turnover of US$ 24.6 billion, an annual increase of 8.2% despite the pandemic.

Vietnam’s taxes
Taxes in Vietnam are imposed at the national level. Compared to Mexico, Vietnam’s CIT rate is 20% though businesses in the oil and gas industry are subject to rates between 32% and 50%. There is no concept of tax residency for CIT. Businesses established under Vietnam laws are subject to CIT and taxed on worldwide income.

VAT is imposed on the value added to goods and services arising from production, distribution, and consumption in Vietnam. All organisations and individuals conducting business and deriving income in Vietnam related to goods or services are subject to VAT and have to pay VAT regardless of whether they have Vietnam-based resident establishments or not. VAT is imposed at three different rates: zero percent, five percent, and 10 percent.

Personal income tax (PIT) in Vietnam ranges from 5% to 35%. Tax residents are subject to PIT on their worldwide income and employment income is taxed on a progressive basis. Non-residents are subject to a flat tax rate of 20% on their Vietnam-sourced income.

Choosing your China+1 location
Both Mexico and Vietnam are great options for US investors.. Both have their advantages and disadvantages; however, crime rates in Vietnam are low compared to Mexico, which deals with drug-related violence, cartels, and kidnappings, particularly in the northern states such as Baja California, Chihuahua, Nuevo Leon, and Tamaulipas. While violent crime is low in Vietnam, opportunistic crime and petty theft are prevalent in the major cities of Ho Chi Minh City and Hanoi.

Also Read  Cotton Market Insights: Limited Demand, Lower Price - Big Challenge For CCI To Reduce Its Stock

Besides, Vietnam’s business and political environment is stable being a socialist republic with only one party. The government provides strategic direction and decides on all major policy issues. Vietnam’s greatest challenge is to manage its growth responsibly.

Further, Vietnam has set up several industrial zones that are popular with foreign investors due to their competitive facilities, infrastructure, government incentives, and logistics. While Mexico only recently signed decrees designating certain regions as special economic zones, the government in November 2019 eliminated them citing no real benefit to the economy.

Covid-19: How Vietnam and Mexico reacted to the pandemic
One of the most significant factors supporting investment into Vietnam is the way it has been able to handle the coronavirus pandemic. As of June 3, Vietnam had a total of 328 cases of Covid-19, with no deaths. It lifted its social isolation measures at the end of April 22, with most businesses resuming and schools reopening. Vietnamese carriers resumed all domestic routes by the end of May with most flights at full capacity. This is despite Vietnam sharing its northern border with China.

While Vietnam has been hit hard by the pandemic, the World Bank has noted that Vietnam’s economy remains resilient and benefits from numerous FTAs and favorable labour market conditions. The Asian Development Bank (ADB) has also forecast Vietnam to be one of the fastest-growing economies in Southeast Asia despite Covid-19 and forecast its economy will bounce back to 6.8% growth in 2021, provided the pandemic is contained. With Vietnam containing the virus, it has gained an early advantage in reopening its economy benefiting businesses and investors.

In contrast, Mexico’s Covid-19 toll on June 3 was over 97,000 with more than 10,000 deaths reported. The US-Mexico land border remains closed to non-essential travel until at least June 22. Mexico reopened limited non-essential businesses from June 1, and some more on June 15. The pandemic has had a significant impact on Mexico’s economy and a detrimental effect on its security environment.

Potential shortages of medical supplies in certain areas remain a concern. Fiscal experts estimate the pandemic may decrease the country’s GDP by 4-12%. Ratings agency Moody’s has forecast Mexico’s GDP to grow 2.2% in 2021. However, much will depend on how Mexico is able to contain the pandemic, along with the reopening of borders and trade.

The US-China trade was already making businesses rethink their investment and expansion plans. However, the pandemic has battered the global economy, changing the way how most investors will do business as consumer demand and preferences change.

Those countries that are able to control the pandemic and engineer a speedy economic rebound will be seen as a safe bet to do business by investors and are likely to benefit from further investment. In light of this, Vietnam is better poised to take advantage of a transformational shift in consumer behaviour, shifting supply chains, and a new normal following Covid-19.

LEAVE A REPLY

Please enter your comment!
Please enter your name here