According to the Korea Chamber of Business in Vietnam (Kocham), since taking effect in late 2015, the Korea-Vietnam Free Trade Agreement (KVFTA) has been one of the main catalysts for growth in the Republic of Korea’s (RoK) investment and exports into Vietnam, thanks to slashed tariff cuts.
“Thanks to the KVFTA, the RoK’s investments and exports to Vietnam have and will continue to grow because many RoK firms are seeking to invest and expand their business in order to meet conglomerates’ demands in Vietnam like Samsung, LG, and CJ Group,” said Hong Sun, vice chairman of KorCham.
According to the General Statistics Office (GSO), in the first six months of the year, the RoK was Vietnam’s second largest import market (after China), with a turnover of US$22.5 billion, down 0.8% year-on-year. Vietnam suffered a trade deficit of US$13.9 billion, up from US$13 billion in the same period last year, and from US$9.8 billion in the first half of 2016.
Last year, the RoK was also the second largest import market for Vietnam (after China), with a turnover of US$46.8 billion, up 45.5% year-on-year.
“In 2017, Vietnam suffered its biggest trade deficit from the RoK, at US$31.8 billion, up 53.4% year-on-year, largely because Samsung strongly expanded its production in Vietnam, so the demand for importing machinery and equipment in service of its production increased drastically,” said the GSO.
According to statistics from Vietnam’s Ministry of Planning and Investment, at present, the RoK is Vietnam’s largest foreign investor. As of late June 20, 2018, the number of the RoK investment projects in Vietnam was more than 6,890, registered at US$59.5 billion. However, by June 20, 2017, the number had increased to 6,130 projects registered at US$54.5 billion.
Under the KVFTA’s commitments, Vietnam will have to completely remove its import duties on 89.9% of products from the RoK over a 15-year period following its implementation.
For example, Vietnam will remove its 30% and 20% tariffs imposed on the RoK’s air conditioners and rice cookers, respectively, over the next 10 years. The average tariffs for foodstuffs and consumer goods will be gradually reduced from the existing 16-17% to 0% over the next five years.
Over the past year, Vietnam has removed tariffs on about 30 lines of products shipped from the RoK. Items subject to the next round of tariff cuts include two-litre and larger engines for vehicles, auto parts, steel and petrochemical products.
Over the past few years, the RoK’s investments in Vietnam have been largely focused on the property, industrial, textile and garment sectors.
But Sun also placed a stress on the RoK’s investment in Vietnam’s foodstuffs and consumer goods sector, thanks to the KVFTA.
“Not only the RoK’s firms but also foreign firms generally are eagerly seeing Vietnam’s foodstuffs and consumer foods sector as a new investment attracter,” Sun said.
According to Sun, Vietnam is a populous market with a young population structure, and high and stable economic growth. Also, per capita income is increasing strongly.
“This has strongly spurred the development of the foodstuffs and consumer foods sector. Then the RoK’s enterprises will benefit from this through their growing investment,” Sun said.
In a specific case, CJ Group Vietnam under the listed RoK conglomerate CJ Group, will continue to expand its operations in Vietnam, which is “very important” to the group.
“We are trying to create a new culture by merging what we have done best in the RoK and what we see as best for Vietnamese people. CJ’s vision in Vietnam is making the food industry the basic business to create a new culture, which would best serve the lives of Vietnamese people,” said Chang Bok Sang, president and CEO of CJ Vietnam.
“We are finding the best ways to connect with Vietnamese consumers and the market in long-term investment. Merger and acquisition (M&A) is one way to reach it,” he said.
In January 2018, CJ established its animal feed mill in the northern province of Ha Nam, which has been invested VND561 billion (US$24.93 million). The 75,000 square metre mill has a designed capacity of 300,000 tonnes per year.
Having been in Vietnam for over 20 years, CJ holds a 65% stake in Vietnam-based Minh Dat Food for VND294.8 billion (US$13.4 million). Prior to Minh Dat, CJ acquired 47.3% stake in Cau Tre, another Ho Chi Minh City-based food producer.
In June 2017, Lotte Duty Free established a joint venture in Vietnam with a local partner. The first duty-free store has been opened on a pilot basis at a 1,000 square-metre site at Danang International Airport. The official opening is expected in August 2017.
It is expected that Lotte Duty Free will continue to open more stores in major cities such as Ho Chi Minh and Hanoi.
In another case, Ourhome, one of the top food catering service firms in the RoK has expanded its business operations in Vietnam, where it provides meals for workers at LG Innotek’s production facility. Ourhome, owned by LG Group, serves an average of 500 meals per day and expects to expand the number to 1,000 by end of 2018.
Other top food catering companies such as Samsung Welstory, Hyundai Green Food, CJ Freshway and Shinsegae Food, and many retailers like Emart are also expanding their business overseas to Vietnam.
Lee Hyuk, former Ambassador of the Republic of Korea to Vietnam, said that there are already many companies in the RoK which are well-equipped with capital, state-of-the art technology, and strong management abilities that are paying special attention to Vietnam in their search for new markets. “Therefore, with the KVFTA in full swing, I am certain that the RoK’s companies’ investments will grow both in quantity and quality in the years ahead.”
According to Lee, the KVFTA is also having a positive effect on investment. In comparison with the Korea-ASEAN FTA or the Korea-Vietnam Bilateral Investment Treaty, the KVFTA provides a higher level of investment liberalisation and investor protection. “This creates a favourable business environment for the RoK’s companies, thereby making Vietnam an even more attractive investment destination.”