A Tale of Two Exporters

Over the last two decades, India and Vietnam took two very different paths to reach similar levels of total merchandise exports in 2019. At around $320B, both countries rank in the top 20 exporters -- however in 2001, India exported almost 4 times what Vietnam did, around $45B to Vietnam’s $12B. As both economies liberalized and industrialized in the late 20th and 21st centuries, they have moved higher up global value chains into products requiring greater technical expertise, capital investment and relevance in the modern age. However, this process has not proceeded identically in both countries. While Vietnam’s key 2001 export industries (mineral products, agricultural products, precious stones and metals and mining exports) have been dwarfed by its $150B technology manufacturing industry, India’s dependence on mining, petrochemicals, and precious stones and metals have maintained their outsize influence on the total value of exports coming from Indian industry.

As global commodity prices whipsawed during the Global Financial Crisis, the 2013 Taper Tantrum, the 2014-2016 crash in metals and oil prices, and more recently, the COVID-19 shock to the global economy, the value of India’s exports has likewise fluctuated. India has a high capacity for mining operations, with significant stores of copper, iron, and other industrial metals, but has limited domestic extraction capacity for oil and natural gas. In order to satisfy the immense demand afforded by an economy the size of India’s, India has the world’s fourth largest refining capacity for crude oil. As a result, India exports significant amounts of chemicals, synthetic textiles and plastics. High prices boost margins for mining companies, at the expense of those for refiners. Another key export industry for India is that of precious metals and stones, with a significant amount of the global cutting, setting, and design work occurring in India. However, with this dependency on commodity prices, Indian exports do not exhibit a consistent growth trajectory and swing heavily based on prevailing conditions.

Total Value of Exports - India and Vietnam 2001-2019

Fig 1: Total Value of Exports: India and Vietnam 2001-2019 (Source: ITCTrade Map)

Moving People Onward and Upward

When looking at the macroeconomic picture, it is apparent that there are a number of trends that link India and Vietnam together in this phase of development. As recently industrialized, emerging economies, Vietnam and India have followed incredibly similar trajectories as relates to average incomes. Both countries display net national income per capita that hovers around $1,750, and in turn, incomes that compare with China fifteen years ago, and the beginning of that country’s meteoric rise. As a place to locate a manufacturing plant, or an assembly hub, both countries display relatively even competitiveness on this front. Both countries also have reasonably strong links with their former colonial powers, and have use of Western languages like English for India and French for Vietnam. The Asian Development Bank found that increased trade had a positive effect on employment for Viet Nam, but with some caveats. The lowering of trade barriers globally have led to the disintegration of supply chains, allowing lower-skilled work to be conducted in regions with lower incomes. However the ABD found that the kinds of jobs that were being moved to developing countries like Vietnam tended to be low-to-moderate skilled, repetitive actions like assembly line work. However, they also did find that increased investment in the 21st century from informational technology firms, coupled with the emergence of a young, increasingly educated, English-speaking working class was creating the conditions for improving competitiveness. This education has come from a series of government policies aimed at harmonizing educational levels with global standards, with a heavy emphasis on transitions to vocational and technical skills, given the nature of the job market and employers in the country.

On the other hand, India sees a myriad of regulations and archaic labour laws that make business conditions difficult for companies. In 2019, the World Economic Forum’s Global Competitiveness Report dropped India 28 places to 103 in their ranking of the country’s labour market, characterising it by “a lack of worker rights’ protections, insufficiently developed active labour market policies, and critically low participation of women.” India’s ratio of female to male workers ranks 128, among the lowest from the countries surveyed, and while women’s access and participation in higher education is rising, their share in the workforce is not. When looking at the entire country, India also ranks low (107) in terms of skills development, with a broad gulf between the small number of high-skilled workers and the large amount of low-and-semi-skilled workers being left behind by innovation and technological changes.

Adjusted Net National Income per Capita 2000-2018 - India, Vietnam and China

Fig 2: Adjusted Net National Income per Capita 2000-2018: India, Vietnam and China (Source: World Bank Data)

A Rising Tide Lifts All Ships

Over the last two decades, both countries have also allowed their currencies to enter “managed floats”, where the central bank only intervenes in the case of serious market panic, or capital flight. As a result, both currencies have depreciated from the artificially managed rates of the 20th century, to a more natural rate for countries with heavy import bills.

USD- LCU (Local Currency Unit) Exchange Rates - Vietnam & India

Fig 3: USD- LCU (Local Currency Unit) Exchange Rates: Vietnam & India (Source: World Bank, fxtop data)

While Vietnam’s currency has almost halved in value versus the dollar in the 21st century, India’s has fallen about 70%. In practical terms, given the multiple relationships that currencies have with each other, this difference in depreciation should not indicate a major difference in export competitiveness between India and Vietnam, but would absolutely boost competitiveness versus the rest of emerging Asia. However, developing countries continue to be vulnerable to monetary policy decisions made in the developing world, as was evidenced by the 2013 “Taper Tantrum”, in response to the US Federal Reserve signalling its intent to wean the American economy off the quantitative easing (QE) policies that had been a part of the recovery from the Global Financial Crisis. On larger timescales, developing countries have always been susceptible to capital flight from rising interest rates in the West, although in this era of rock-bottom interest rates, this may not be a factor for a while.

First We Have To Get There

A key factor in long-term decision-making for a foreign company planning to set up a manufacturing or export-oriented business in a country relates to the efficiency and practicality of the port system. Due to geographic constraints, distances between countries and major ports across the world vary, and when comparing a simplistic model of one of India and Vietnam’s largest ports, Kandla (IN) and Hai Phong (VN), we see that Vietnam’s geographic advantage extends across major economies. When using an average container ship speed of 20kn, these distances impose serious constraints on the export competitiveness of a region. In fact, of the major trading partners for India and Vietnam, the latter exhibits almost half the shipping time to China, Japan, and the US, while India retains an advantage for Europe.

According to the International Transport Forum, the ability of ports to ensure efficient cargo transfers is one of the central dimensions of their overall functions as transport nodes. As a result, factors like the number of berths, turnaround times, and labour expenditures have a huge impact on the attractiveness of a country as an export hub. Data from the PIB and the ITF shows that India displays an average turnaround time per call of around 60 hours, while Vietnam displays around 24 hours. This represents the amount of time that a ship is in port waiting to be loaded or unloaded, with the ideal being under 24, i.e. the ship arrives and leaves within the same day. While both countries have improved since the mid ‘90s, when India’s turnaround times exceeded 100 hours and Vietnam’s exceeded 120 hours, in order to compete globally, effective ports are a key part of merchandise trade. In April 2020, at the height of the COVID-19 induced lockdowns in India, the FICCI Infrastructure Committee estimated that about $1B worth of imported machinery, spares, and steel were stuck at foreign and Indian ports, and that goods in the transit area were lying for upwards of 45 days. Steve Felder of Maersk South Asia mentioned that a shortage of truck drivers and labourers at the ports were also hampering the logistics ecosystem. While the COVID-19 shock was an unprecedented event, the ability to rapidly return to operations will be key for both countries in order to maintain export competitiveness.

Policy and Agreements

After deregulation, both Vietnam and India have pursued a number of market reforms including trade liberalization, corporate tax reduction, harmonized tariff and sales tax regimes, labour quality improvement, and government reforms aimed at boosting their attractiveness to foreign investors. According to the Global Manufacturing Competitiveness Index, their 2020 report coming out later this year is projected to show India as the 6th best place to manufacture, and Vietnam as the 12th. Vietnam has also made heavy strides in the arenas of trade agreements -- as a member of the ASEAN, RCEP, and the recent 2018 EU - Vietnam Free Trade Agreement eliminating the vast majority of tariffs on exports.

Some of this growth in manufacturing has also come from permissive government policies in Vietnam. The share of the FDI sector increased from 37.3% to 41.8% between 2005-11, at the height of the global recession. In doing so, Vietnam was able to add significant manufacturing capacity to take advantage of some of the technological shifts that occurred in the 2010s, including the incredible penetration of smartphones, the increasing prevalence of IoT devices, and the increased access to laptops, tablets, and other computing devices. The Vietnamese government also made major strides to provide medium-and-long-term credit (such as investment loans and export credit guarantees), as well as short term instruments (loans, bidding guarantees, etc.) It’s 2007 accession to the WTO aligned domestic trade and industrial policies with international standards, harmonizing the two and reducing the barriers for firms to compete. A common policy between India and Vietnam has been the offering of tax incentives for hi-tech, industrial, and special economic zones in order to attract foreign investment.

A key factor to consider for Vietnam moving forward is the high prevalence of FDI in the country’s manufacturing sector. LG has moved its entire smartphone production to Hai Phong near the port, while Apple produces its AirPods earphones, and Nintendo produces the Switch Lite in Vietnam. In general, the majority of high-end FDI is led by larger companies rather than domestic manufacturing units. An analogous situation is found in India, where 2019 data shows that 48.1% of the total value of exports were products related to MSMEs, representing 90% of exporting companies in their totality. However, it is likely that as the workforce develops, more domestic units along the lines of China’s Foxconn will develop, bringing more of the global technology value chain in-house. In this respect, Vietnam has a head start on India, as India has only recently started to see major companies move manufacturing to the region, such as Apple’s Bengaluru iPhone assembly plant.

COVID and the Responses to it

The COVID-19 pandemic has thrown a spanner into the works of policymakers worldwide. Instead of the expected slowdown as the normal boom-and-bust cycle of the markets ended the post-recession bull run, we have seen the bottom drop out of the global economy as simultaneous supply shocks, and a sustained implosion of demand reduce economic output worldwide. While private businesses suffer, governments too are scrambling to finance COVID-19 related stimulus packages and healthcare measures in an environment with lower activity leading to lower tax collections. While external conditions will likely be out of control of all but the developed nations, one can look to the internal performance of the country in order to ascertain some idea of their continued competitiveness through the pandemic. In this regard, Vietnam has far outperformed India. Perhaps due to its greater proximity, higher position in the value chain, and closer economic ties with China, Vietnam was able to lock down the country far sooner than India did, and was able to control the spread of the virus to a greater extent. As a result, Vietnam saw several orders of magnitude lower cases than India did, and the death count there is a rounding error on that of India. As of September 2020, Vietnam has had less than a thousand cases and fewer than a hundred deaths, in total. India, on the other hand, discovered above seventy thousand cases a day on average in the last week of August, and close to a thousand deaths a day. As a result, Vietnam has been able to keep internal economic engines like retail, restaurants, entertainment, and other sectors that were closed in the rest of the world, open, thereby reducing the economic damage caused, at least domestically.

Manufacturing Purchasing Managers Index (Aug 2019- Aug 2020) - India & Vietnam

Fig 4: Manufacturing Purchasing Managers Index (Aug 2019- Aug 2020): India & Vietnam (Source: IHS Markit)

While both countries have seen steady progress on returning to pre-COVID-19 levels of economic activity, the relative competitiveness of the regions cannot exclude measures of each country’s handling of the pandemic. As we have seen across the world, spiking cases lead to lockdowns, shutdowns, reduced mobility, increased barriers to business, higher costs, and greater uncertainty. In this environment, handling the external and internal COVID shocks to the economy have to be secondary to the handling of the pandemic, but the economic effects are undeniable. While vaccine development and deployment timelines are unknowable, and as the colder weather of the Northern Hemisphere winter brings greater risk of the spread of the coronavirus and influenza diseases, it is difficult to predict whether past performance will continue.

Research & Analysis

Pranjal Dubey Associate, Research pranjal@dripcapital.com

Prabhod Mudlapur Summer Analyst prabhod.mudlapur@dripcapital.com

For media-related queries, contact: corporatecommunications@dripcapital.com.

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