Vietnam offers outsourcing potential for China

For years, the Chinese motorcycle boom was good for companies like Chong-qing Dongli Manufacturing Ltd, but by the late 1990s, the Chinese clamour for motorbikes was giving way to automobiles.

So the company, which has four factories in southern China, made the decision in 2001 to go south of the border into Vietnam.

The move has paid dividends. Since investing 10.3 million dollars to build its first factory outside China, the Chong-quing Dongli factory near Hanoi has become one of Vietnam's leading suppliers of motorbike assembly kits.

"Doing business here is pretty much the same as in China, except for the language difference," says Yang Dewei, the 42-year-old manager of the factory known as United Motor Vietnam Co.

Yang's company was one of the early Chinese companies to invest in Vietnam, but hundreds more have followed.

Chinese investment in its southern neighbour has soared from 66 million dollars in 2005 to 312 million dollars last year.

In 2006, Chinese companies invested in 57 projects in Vietnam, up from 40 the previous year.

"Chinese investment is increasing fast," said Jonathon Pincus, lead economist for the UN Development Programme in Vietnam.

At least 250 Chinese investment projects have been established in the last five years, according to the Vietnamese Ministry of Planning and Investment.

China is still a relatively small investor in Vietnam - ranking 13th behind top investors South Korea, Singapore, Taiwan and Japan.

What's interesting, Pincus says, is where the Chinese money is going.

China is still known as the "factory of the world," but Chinese companies are now building factories in places like northern Vietnam - where wages are up to 30 per cent cheaper than in China's Pearl River Delta - to tap into the growing Vietnamese market.

In essence, China is outsourcing its own manufacturing success to its southern neighbour. There are also Chinese-owned plants in Vietnam, mostly garment factories, that export to Western countries.

For Chinese investors, Vietnam's economic climate has the advantage of familiarity: a fellow communist country implementing economic reforms and an emerging middle class eager to consume basic and luxury goods.

While China's newly monied middle class is now moving into cars, in Vietnam the motorbike is still king, and that's good news for kit-makers like Chong-quing Dongli.

In 1992, Vietnam had only 500,000 registered motorbikes. Fifteen years later, thanks to increased prosperity from economic reforms, that number is 20 million and growing by more than 1 million per year.

"The economy is growing much like China's was 10 years ago," Yang said.

In 2005, the last year for which detailed figures were available, about 35 per cent of Chinese investment in Vietnam was in manufacturing, although during the previous year that sector represented 83 per cent of Chinese investments.

The balance of investment - and the other pillar of China's move into Vietnam - reflects its priorities elsewhere in the world: natural resources.

Investment in projects such as coal extraction and bauxite mining made up 44 per cent of Chinese investment in 2005, up from just 3 per cent the previous year.

Still, for Chinese manufacturers, Vietnam's low wages, geographical proximity and cultural similarity make the country an attractive place to export factories, according to Yang.

"Its not exactly the same - for instance, in my province (Chong Qing in southern China), the people eat spicy food and I have a hard time finding good food here," Yang said. "But I am here for the business, and so far its worth it." dpa kj pj tl pw