Vietnam's Investment In Laos Surges Before AEC

Includes: VNM
by: Reid K.

By Reid K.

Laos, despite being the smallest economy in Southeast Asia, has a large amount of potential that has defined it as one of the most promising markets in ASEAN for investors.

Deregulation has drawn an increasing amount of FDI (foreign direct investment) to Laos. The government has decreased the amount of time it takes to set up businesses in Laos, lowered taxes and tariffs, strengthened infrastructure and broken down barriers to investment.

In addition, Laos has a strategic location in the very center of ASEAN. The country, while landlocked, is the only in Southeast Asia that shares a land border with five others.

Because of this, there are several projects being planned that will help turn Laos into a rail and transportation hub while making it play a critical role in connecting ASEAN to China.

Some of the largest investors in Laos are Vietnam, Malaysia, Thailand and South Korea. Firms from these nations have been some of the first to expand into Laos, sell their products to local consumers, and introduce new technologies.

The ASEAN Economic Community, or AEC, is set to come into effect in December of 2015. The union seeks to transform the Southeast Asian region into a single integrated market with a free movement of goods, services, skilled labor and investment between all ten members.

However, the deadline later this year is fast approaching. Businesses are moving quickly and expanding into new markets in order to gain a lead on and outplay their competitors.

Vietnam Leads the Charge

Vietnam, a growing emerging market in its own right, is one of the biggest investors in Laos. Vietnamese exports in the first two months of 2015 jumped by 25.7% year-on-year to US$90.18 million.

These items included steel, iron, oil, vehicles, cement, and coal, among others. Oil and steel were the largest of these exports.

The items that experienced the highest growth in January and February were cereals (up by 108.54%), iron and steel (up by 57%), heavy machinery and manufacturing equipment (up 39.27%), and vehicles, transportation and spare parts (up by 27.93%).

Vietnam's Ministry of Industry and Trade (MoIT) has set a goal for domestic businesses to achieve annual export growth of at least 14% during the five year period of 2015 to 2020. However, many Vietnamese firms still face a large amount of difficulty and despite rapid growth, lag behind those from many other countries in the region.

Thai companies, for example, achieved US$4 billion in revenue in 2014 from exports to Laos and total revenue from Chinese totaled US$1.9 billion. Meanwhile, Vietnamese exports were far behind at only US$448 million last year.

Growing Investment in Laos

Investors in Vietnam have pumped almost US$5 billion worth of capital into 413 different Laotian companies mostly involved in the energy, mining, telecommunications, services, infrastructure, and agricultural industries, according to the Vietnamese Ministry of Planning and Investment.

Vietnamese outward FDI contributed to 12% of all investment in Laos last year. The largest investing countries were Laos' larger neighbors - namely Vietnam, China and Thailand, followed by France.

Right now, Vietnam is going through an agricultural boom which had led to businesses expanding into Laos. Many of these ventures have prospered, for example, a sugarcane plantation by the Hoang Anh Gia Lai Group (HAGL) that has done especially well.

In 2015, the group invested in a cow breeding business along with investments in rubber, palm oil, petroleum and mining.

"Our recent business results show that we are on the right track investing in agriculture," said Doan Nguyen Duc, HAGL's chairman, adding ASEAN's agricultural sector holds "significant potential for the company's future development."