Burning issue: is Vietnam ready to take on Thailand's business?
The South East Asia Iron & Steel Institute must be pleased they held their annual conference in Ho Chi Minh City, and not in Bangkok.
Political unrest which left 52 dead on the streets of the Thai capital would almost certainly have cancelled the conference, which grew in strength and delegates this year as interest grows in the South-east Asian steel industry.
Most major steelmakers, especially in Asia, are trying to get a foothold in the region.
And the tragedy in Thailand also allowed the host country, Vietnam, to push its own investment credentials.
“There are many mills, [such as] Japanese mills, that want to invest in Thailand. But with the situation there, they change plans and look at Vietnam instead. Vietnam will definitely gain,” said Pham Chi Cuong, chairman of the Vietnam Steel Assn.
This may have been a regional conference with a pretence of unity, but the member countries are clearly still rivals.
Arguably the closest match to Thailand in terms of the low costs of operations and ready abundance of land and labour, Vietnam is already a potential steel powerhouse.
Two integrated steel mills with a total capacity of 10.5 million tpy are expected to come on stream within the next five years in Ba Ria-Vung Tau province southern of Ho Chi Minh City, and another 7.5 million tpy is in the pipeline.
But setting aside Thailand’s political difficulties, Vietnam may still have difficulties positioning itself to benefit from Thailand’s misfortune.
First up in the problems list is Vietnam’s notorious red tape and bureaucracy.
Getting land permit for a project in Vietnam is an extremely long and tedious process. Just ask Tata Steel.
The company had been trying to break into Vietnam for years to build a rolling mill plan. But site clearing problems have been long and unpredictable.
Even when the government has decided to award the land, it can still change its mind.
Again, Tata Steel is the illustration. The government withdrew the land in Ha Tinh province it had promised to Tata, and gave it to Taiwan’s Formosa Group instead as the latter was developing a project of a much bigger scale.
Formosa Plastics Group is building a 15 million tpy integrated mill in two stages of 7.5 million tpy each in Vung Ang industrial zone in Ha Tinh province, overshadowing Tata Steel’s 4.6 million tpy hot rolling mill.
Some would argue that land clearing problems to build a mill are a common hassle in many countries with developing steel industries.
But this is hardly the treatment one would expect from a government that has actively promoted itself as being pro-investment, especially in the steel sector.
There is also uncertainty in Vietnam of the government’s tendency towards protection.
Many times during the market downturn, the government and the Vietnam Steel Assn (VSA) would call for import tariff barrier, or threaten not to issue more steel project licences because of overcapacity.
Malaysia’s Lion Diversified was planning a 14.42 million tpy blast furnace in 2008, but faced the threat of having its licence revoked in the face of the country’s oversupply of long steel then.
The latest unforeseen delay in the project has been attributed to financial difficulties (MB May 19).
At the end of last year, the VSA warned about overcapacity in the industry, this time in the cold rolled coil sector.
This was right after Posco’s 1.2 million tpy entrance into the market, raising the country’s CRC capacity to 2.4 million tpy, well above local consumption of 1.1-1.2 million tpy.
Vietnam fails to see that steel capacity building is an important foundation before embarking on nationwide infrastructure projects and developing Vietnam as a manufacturing destination.
Compare this with Thailand, which has grown from strength to strength as a regional industrial and manufacturing hub.
There is a high concentration of foreign manufacturing companies, especially Japanese automobile and appliance companies, in the Rayong province of Thailand.
The Thai government rolls out the red carpet to foreign investors, introducing tax incentives and duty-free imports for steel products – many of which are for the automobile sector - which the country cannot produce.
While most South-east Asian countries worried about the free trade agreement with China enacted last year, Thailand actually thinks that the duty-free regime would benefit customers in the domestic market: many of them are manufacturing companies.
To be sure, this has something to do with Thailand’s inability to supply its own steel.
But at least it realises its shortcomings, has not closed off its doors to imports, and instead, allows and encourages the market to compete freely.
Thailand’s economic indicators such as balance of payments, national reserves and currency also remain strong, despite the ongoing political unrest.
Compare this with Vietnam’s weak dong (it already depreciated its currency twice at the end of last year and once this year), and depleted reserves due to ballooning trade deficit.
Vietnam is 93rd out of 183 countries in terms of ease of doing business in the World Bank’s 2010 rankings. Thailand is 12th.
Another factor that drags Vietnam down is the country’s lacking infrastructure such as electricity, roads and ports.
Posco-Vietnam said last week that it has received an investment licence to build a 3 million tpy hot rolled coil plant in its current plant complex in Ba Ria-Vung Tau province, and has initially planned for construction to start in October this year.
But lack of electricity and gas supply means that it has not been able to confirm when construction will start.
While Bangkok burns, Vietnam may seem the best bet to benefit from cheap costs and abundant land and labour resources.
But first, Vietnam’s government still has a lot of homework to do in terms of bureaucracy, red tape and infrastructure provision.
And, given the deep roots of its problems, one cannot help but wonder if Vietnam really can pull itself together quickly enough before the Bangkok ashes settle down.