Seeking Alpha
Profile| Send Message| ()  

Vietnam's high tech exports, including mobile phones, are on the rise and have left the garment industry behind due to the local expansion of leading technology firms, such as Intel (INTC), Samsung and Foxconn. Until the end of October this year, Vietnam earned $16 billion through exporting electronic equipment and devices which represents a 91% increase over 2011. The biggest buyers of Vietnamese phones have been the European Union, U.A.E. and Russia. Vietnam's economy is represented in Market Vectors Vietnam ETF (VNM).

Vietnam earned $2.3 billion from the export of Mobile phones just two years ago and since then it has realized its high growth potential as this item was later added to the list of "key exports." Samsung Electronics Vietnam is the biggest contributor to that total and is expected to earn ~$12 billion in revenues this year from exporting phones which will represent a 50% increase over ast year's $6 billion. Besides Intel, Canon (CA), Foxconn, and Compal have also made significant contributions.

The country's shipments of electrical machinery to the U.S. increased by 58% annually through August 2012, which represents by far the biggest jump when compared with similar exports to the U.S. by China, Malaysia, Thailand and Indonesia . However, a truly made-in-Vietnam phone has not been produced yet, as most of the operations are purely assembly of parts built in other places.

The decreases in shipments from Thailand and Indonesia imply that the value proposition for extremely low-cost labor is very strong. This is one of the few benefits from profligate credit expansion, the inevitable currency devalution brings with it lower relative wages. The minimum wage levels in China, often considered as the hub of low-wage skilled workers, have in the past few years on the back of a strong economic growth and a gradually strengthening Yuan. This has created a strong labor arbitrage that is manifesting itself in shifting export numbers. Manufacturers now have to pay at least $137 per month in the relatively frontier Jiangxi province whereas in Vietnam's capital of Hanoi, comparable labor can be found for $95 per month.

This shift is also evident in Jabil Circuit's (JBL) decision to double its investments from $50 million to $100 million over the next three years in its facility located in Ho Chi Minh City. Jabil's expansion is expected to create more than 3,500 new jobs. Similarly Samsung is constructing a $700 million facility in Thai Nguyen in the North, which will be its second in the country and will take its total investment to $2.2 billion. So far, its existing plant at Bac Ninh accounts for about 25% of the company's total annual production. On the other hand, Intel had opened its massive billion dollar assembly plant in Ho Chi Minh City a little more than two years ago, which is also the company's biggest assembly and test facility in the world.

However, these developments are important as the situation in Vietnam is economically tenuous. Foreign investment in 2012 has contracted as the regulatory environment is challenging while access to capital is minimal. This is the other side of the boom/bust cycle. While the labor may be cheap the unstable financial system and unbalanced infrastructure growth complicate what should be a simple investment thesis. But, as Vietnam's neighbors like Thailand, Malaysia and Indonesia deal with their versions of the middle-income trap there will be great opportunities for substantive change to the investing rules with foreign investors holding a lot more leverage now than they did during the boom.

Ultimately, the authorities are now hoping that rising costs in leading high-tech producers such as Thailand and the conflict between China and Japan means that Vietnam will be attract more investments in its high tech sector. It will be an interesting bit of tug-of-war to watch play out over the next 2-3 years.

IDX

EWM

VNM

Price Change YTD

1.51%

10%

7.76%

Fund Flows ($ Mill)

-54.93

37.81

50.2

Fund Flow (% AUM)

-12.0%

+3.9%

+24.6%

P/E

15

15

10

Yield

1.55

3.56

1.01

Since the beginning of this year, looking fund flows, for U.S. investors the single country ETF's are your best direct tool. VNM, after beginning the year on fire, as pulled back to a more modest 7.8% gain, while the Market Vectors Indonesia ETF (IDX) and iShares MSCI Malaysia ETF (EWM) have seen similar anemic index growth. But for ETF's fund flows can be used as an indicator of investor sentiment and VNM has been able to retain much of the investment demand from the Q1 rally as investors may believe that the worst is over for Vietnam's economy. I'm not convinced it is, from what I see here in Ho Chi Minh City, but we are certainly closer than we were at the beginning of the year.

Source: Vietnam's High-Tech Exports Reveal Regional Shifts