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Tax Cuts – Enough to Make India a Global Manufacturing Hub?

India has recently announced an unprecedented reduction in its corporate tax rates. Not only is this a respite for domestic and existing foreign companies, but it is also expected to boost India’s position as a preferred investment destination for international companies looking to diversify their manufacturing footprint. Amidst the ongoing trade war between China and the USA, many companies, such as Apple, are looking to relocate a chunk of their manufacturing facilities away from China as part of a de-risk strategy. This presents the perfect opportunity for India to swoop in and encourage manufacturers to set base there instead of other Asian countries. However, tax reduction alone may not be enough to score these investments as the government needs to provide additional incentives apart from improving logistics and infrastructure, as well as land and labor laws in the country.

For the past three decades, India had one of the highest corporate tax rates in the South Asian region standing at 30% (effective rate of about 35% including surcharge and cess), making it one of the biggest sore points for investors looking at setting up a shop here.

However, September 2019 brought an unprecedented move, as the Indian government slashed the corporate tax rate to 22% from the existing 30%. Moreover, new manufacturing units established after 1 October 2019, are eligible for even lower tax rate of 15% (down from 25%) if they make fresh manufacturing investments by 2023.

The effective tax rate in these cases (subject to the condition that companies do not claim benefits for incentives or concessions) will be 25.75% (in case of 22% tax rate) and 17.01% (in case of 15% tax rate). These companies will also be exempt from minimum alternate tax (MAT). The tax cuts in effect are believed to have improved India’s competitiveness among investment destinations in the region.

The tax cuts in effect are believed to have improved India’s competitiveness among investment destinations in the region.

To put this into perspective, India’s new tax rate is lower than the rate in China (25%), Korea (25%), Bangladesh (25%), Malaysia (24%), Japan (23.2%), however still a little higher than that of Vietnam (20%), Thailand (20%), Taiwan (20%), Cambodia (20%), and Singapore (17%). However, for new companies/MNCs looking to set up a unit in India, the country offers the most competitive rates in the region.

This tax break by India is also well-timed to exploit the degrading US-China relationship, which is resulting in several US-based companies, such as Apple, Google, Dell, etc., to look for manufacturing alternatives outside of China. Currently, Vietnam, Taiwan, and Thailand have been the prime beneficiaries of the trade war, with the three countries attracting about 80% of the 56 companies that have relocated from China during April 2018 to August 2019. However, India’s recently introduced tax cuts may act as a major stimuli for companies (that are looking to partly move out of China or are already in the process of doing it) to consider India for their investments.

While the tax reform stands across all industries, India is looking to boost investment in the labor-intensive electronics manufacturing sector including smart phones, televisions, etc. To achieve this, the government recently scrapped import tax on open cell TV panels, which are used to make television displays. In addition to large brands such as Apple, India is also targeting component and contract manufacturers for such companies (such as Wistron, Pegatron, and Foxconn) to shift their business from China and set a shop in India.

India's Tax Cuts Not Enough by EOS Intelligence

Is a tax break enough?

While this is a big step by the Indian government to attract foreign investments in the manufacturing space, many feel that this alone is not enough to make India the preferred alternative to its neighbors. Companies looking to relocate their manufacturing facilities also consider factors such as infrastructure (including warehousing cost and set-up), connectivity (encompassing transportation facilities and logistical support), and manpower (such as availability of skilled manpower and training costs) along with overall ease of doing business, which covers the extent of red tape, complexity of policies, and transparency of procedures.

The Indian government has to work towards improving the logistical infrastructure, skilled labor availability, and cumbersome land-acquisition process, among many other aspects. As per the World Economic Forum’s Global Competitiveness Report 2019, India ranks 70 (out of 141 countries) in terms of infrastructure. While India heavily depends on road transportation, it needs to invest in and develop modern rail and water transportation and connectivity if it wishes to compete with China (rank 36).

India also ranks poorly with regards to skilled workforce and labor market, ranking 107 and 103 on the indices, respectively. To put this in perspective, Indonesia ranks 65 with regards to skilled workforce and 85 for labor market, and Vietnam ranks 93 for skilled workforce and 83 for labor market. Other than this, India also struggles with complex land acquisition laws and procedures, and must look into streamlining both to position itself an attractive investment destination.

Apart from this, the government also needs to provide additional incentives for investments in sectors that are its key priorities, such as tech and electronics manufacturing for export. As per industry experts, electronics manufacturing in India carries 8-10% higher costs in comparison with other Asian countries. Thus the government must provide other incentives such as easy and cheaper credit, export incentives, and infrastructural support, to steer companies into India (instead of countries such as Vietnam, Indonesia, and Thailand).

Several experts and industry players suggest that the government should provide the electronics manufacturing industry incentives for exports that are similar to those under the ‘Merchandise Exports from India Scheme’, which provides several benefits including tax credits to exporters.

In August 2019, the Ministry of Electronics and Information Technology (MeitY) proposed incentives to boost electronics manufacturing in India. These include a 4-6% subsidy on interest rates on loans for new investment, waiver of collateral for loans taken to set up machinery, and the renewal of the electronics manufacturing cluster (EMC). EMC creates an ecosystem for main company and its suppliers to operate in a given area (the previous EMC scheme ended in 2018).

Apart from this, industry players are also seeking an extension of another scheme, Modified Special Incentive Package Scheme (MSIPS), which also ended in 2018. MSIPS provided a subsidy of about 25% on capital investment.

EOS Perspective

India’s tax break came at an extremely opportune time, with several MNCs having expressed their plans to branch out of China (for at least 20% of their existing manufacturing facilities). From imposing some of the highest corporate taxes, India has now become one of the most tax-friendly markets, especially for new investments.

This is likely to put India in the forefront for consideration, however, it is probably not enough. The government needs to work on several other facilitating factors, especially infrastructure, land laws, and availability of skilled labor, which are more favorable in other Asian countries.

Moreover, the appeal of some countries, such as Vietnam and Thailand, seems to remain high, as several of them introduced a ‘single point of contact’ facilities for investors. Under these facilities, in various forms, investors are provided with investment-related services and information at a single location, and/or are provided with single point of contact within each ministry and agency they have to deal with. This makes the access to information and investment procedures much easier for foreign investors, and increases the perception of transparency of the whole process. India on the other hand struggles with bureaucracy, fragmented agency landscape, and red tape. Despite initiating a single window policy, multinational representatives need to visit multiple offices and meet several officials (also in many cases offer bribes) to get an approval of their proposals and subsequently get the required permits. Bureaucratic and procedural delays, as well as poor work culture remain to be considerable deterrents for foreign investors.

India struggles with bureaucracy, fragmented agency landscape, and red tape. Bureaucratic and procedural delays, as well as poor work culture remain to be considerable deterrents for foreign investors.

Also in 2018, India only managed a mere 0.6% of its GDP from manufacturing FDI, indicating a low confidence level among foreign companies to make medium to long-term commitments in India. However, large part of the reason for this were also the high tax rates. Therefore, the recent tax reduction is a major step in the right direction, while the government still has some distance to bring India to replace China in the position of manufacturing giant of Asia, especially in the electronics sector.

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Infographic: Vietnam Tourism Sector Taking Off

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Tourists are flocking to Vietnam to admire its natural beauty and cultural heritage. With record-level tourist arrivals in 2017, Vietnam is rising among the fastest growing travel destinations in the world.

This sector growth can be attributed to several government initiatives, including strengthening of tourism regulations, financial stimulus, and technology integration. However, some of the pressing issues such as unavailability of qualified workers for hospitality industry, natural disasters, or polluted tourist attraction sites may affect the growth momentum.

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Garments and Textiles In Vietnam – Is The Future As Bright As The Past?

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Recording a positive growth year after year since 2001, Vietnam’s garment and textile industry is now banking on a potential TPP and some FTAs to continue its journey on the success path. However, as some of the already existing problems, such as heavy reliance on imported raw materials, become a bigger concern, and new problems such as increase in production cost and threatened interest of domestic players come to surface, will the industry be able to secure its future?

Vietnam’s garment and textile industry has been one of the country’s leading sectors, recording growth of more than 15% annually between 2001 and 2014, remaining the chief contributor to Vietnam’s economy. 18% year-on-year growth was registered by Vietnam’s textile and garment exports in 2013, which took exports value to a whopping US$20 billion.

Garment and textile exports also accounted for a significant proportion of Vietnam’s GDP (approximately 15%) and total exports (about 18%), in the same year. The industry provides jobs and salaries to over 4.5 million workers, out of which approximately 2.5 million are direct workers in 4,000 textile and garment enterprises. Products of the industry get shipped to more than 180 countries across the world.

Vietnam - Major Garment and Textile Exports Markets

A lot of optimism is budding around the industry’s performance for the year 2015 and ahead, part of which is arising from the market’s consistent positive growth trajectory traced during the past several years.

Another reason for the optimism is Vietnam’s potential Trans-Pacific Partnership (TPP) with 11 countries (Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, the USA) and FTAs with the EU, South Korea, and the Eurasian Customs Union of Belarus, Kazakhstan, Armenia, Kyrgyzstan, and Russia.


Vietnam - Exports of Garment and Textile

The TPP and the FTA with the EU are in last stage of negotiations, while the FTAs with Eurasian Customs Union and South Korea were signed in December 2014 and May 2015, respectively. Industry stakeholders are relying on the TPP and the FTAs to steer the sector into the future.

Completion of the TPP is estimated to increase Vietnam’s garment and textile exports to the USA to US$30 billion by 2020, as compared with US$8.6 billion exports recorded in 2013, recording growth of approximately 250%.

With the EU being the second largest importer of Vietnam’s textiles and garments, a FTA between the two would further boost Vietnam’s garment and textile industry. It is expected that exports from Vietnam to the EU would increase by 20% during 2013-2020 as the value of textiles and garments exports is projected to increase from US$2.7 billion to US$3.2 billion.

Vietnam’s FTA with South Korea is expected to almost triple bilateral trade value during 2015-2020, to reach US$20 billion by 2020. Garment and textile industry is expected to be amongst several Vietnamese industries, which are likely to be positively impacted by the FTA. Also under the FTA between Vietnam and the Eurasian Customs Union, Vietnam’s exports, including textiles and garments, as well as seafood, wooden furniture, and agricultural products, are benefiting from preferential tariffs and are expected to increase by 30% during 2013-2020.


Opportunities for Vietnam’s Garment and Textile Industry from the TPP and the FTAs

Further expansion of the industry’s exports share in the USA
Even though the USA has been Vietnam’s largest garment and textile exports market (as of 2014), the industry’s exports account for only 8-9% of total textile and garment imports in USA. TPP offers a chance to increase Vietnam’s textile and garment’s share to 12-13% in the US market as the tariff would be reduced from 17% to 0%
Increase in the number of foreign direct investments in the industry
Number of foreign investments is likely to increase in Vietnam’s garment and textile industry with the completion of the TPP and the FTAs with the EU, the Eurasian Customs Union, and South Korea. The industry might further develop (e.g. in terms of infrastructure) through utilization of additional revenue generated from increased exports. This can perhaps become a key reason for foreign investors to initiate new investments in the industry
Becoming one of leading nations in global garment and textile production chain
Vietnam has a chance of becoming a truly global player in the world garment and textile industry if it starts manufacturing high-quality textiles and garments by upgrading and maintaining its production standards and adopting advanced production technologies with the help of FTAs
Boosting Vietnam’s local garment and textile players’ position in the market
FTAs can boost restructuring process among Vietnam’s garment and textile companies and offer a new array of opportunities arising from preferential or 0% tariffs, cheaper supplies, and loosening of other trade barriers. Vietnam’s government can also promote local players further by offering garment and textile industry related subsidies (for example, charging lower taxes on garment and textile manufacturing plants). Such subsidies would further encourage Vietnam’s local garment and textile industry players to expand their operations and help the industry in a positive way

Roadblocks for Vietnam’s Garment and Textile Industry Growth

Heavy Dependence on Imported Raw Materials

According to VINATEX (Vietnam National Textile and Garment Group, Vietnam’s state-owned largest garment and textile corporation which manages Vietnam Textile Garment Group), in 2013, the country’s domestic cotton production satisfied only 1% of the industry demand while domestic fabric production fulfilled 12-13% of the demand. Materials from China account for almost 50% of the total raw materials imported by the industry. As of 2013, cotton worth US$7.5 million, yarn worth US$350 million, and fabric worth US$3 billion were imported from China to Vietnam.

Raw material development in Vietnam is challenged by environmental protection laws implemented by Ho Chi Minh City Garment and Textile Association (HCMC, a government association) wherein limited licenses have been awarded to Vietnam’s garment and textile dyeing and weaving plants as they cause heavy pollution. Moreover, farmers have been earning higher profits through plantation of crops other than cotton which further hampers local cotton production.

Vietnam - Garment and Textile Raw Material Imports

The potential TPP is likely to be based on the yarn-forward principle. The principle mandates every stage of garment and textile production (such as sourcing/developing of raw materials, weaving, dyeing, finishing, and sewing) to be executed in Vietnam or 11 other TPP member countries. Only if this requirement is met, the products will be eligible for a duty-free export to other TPP member countries. Since China accounts for almost 50% of the total raw materials imported by Vietnam’s garment and textile industry, the yarn-forward principle would further compel Vietnam to locally produce raw materials to manufacture garments and textiles to be exported to other TPP member countries.

Increasing Production Costs

Growing prices of electricity and transportation, along with an increase in minimum wages are also becoming new causes of headache to the industry players. In Vietnam, minimum wages witnessed a hike of 15.2% in 2014 (while it is generally assumed that already a 10% increase in minimum wages pushes up a company’s salary costs by almost 17% due to increased allowances and other social benefits).

For the year 2015, Vietnam’s garment and textile manufacturers believed that if the increase in minimum wages goes beyond 12%, the impact of the increase will be noticed in terms of higher market selling prices of Vietnam’s garments and textiles. Such a situation would reduce total revenue generated by the industry as higher selling prices might adversely affect exports and thereby, take away some FTA-related potential revenue. In order to avoid the situation, Vietnam’s garment and textile manufacturers attempted to cap the increase in minimum wages by a maximum of 12%, in 2015. However, Vietnam’s government decided the hike for the year 2015 to be 13-15%, which is bound to adversely affect selling prices of the industry’s products.

Interest of Domestic Market Players at Risk

FTAs such as those with the Eurasian Customs Union, the EU, South Korea, and the TPP would open doors of Vietnam’s garment and textile industry for foreign players. Foreign companies have already accelerated their investments in the industry. This is leading to higher number of foreign firms, which are usually technologically advanced and capital rich, sidelining local industry players (as per Viet Nam Chamber of Commerce and Industry report published in 2014, as of 2013, 96% Vietnamese companies operated on small scale and lagged behind on capital and technology fronts).

Some examples of foreign players planning to enter the industry include Kyung Bang Vietnam (a 100% South Korean invested enterprise), which is in the process of establishing a spinning plant with a capacity of 6,000 tons per annum in Vietnam’s Binh Duong province. Another example is a Hong-Kong based company, Texhong, which is also planning to build a spinning plant in the country’s Quang Ninh province. The entry of foreign players in the industry is likely to intensify competition among all the industry players (both local and foreign).


Future Outlook

For the period 2015-2020, Vietnam’s garment and textile industry targets a production growth of 12-14% on an annual basis, 3 million people additionally employed in the industry, and export revenues valued at US$25 billion by end of 2020.

In the light of challenges faced by the market, the industry has started to take efforts in order to have a roadblock-free path ahead to achieve its targets.

Reduce heavy dependence on imported raw material
Localization of Raw Material Development

After realizing the importance of localizing raw material production for the industry, initiatives to increase domestic raw material production are being undertaken. A cotton manufacturing plant, known as “Rang Dong Industrial Park” (infrastructure development expected to complete by end of 2015), at a size of 1,500 hectares and worth US$400 million is being established in Vietnam’s Ninh Thuan province. The park is expected to record production value of US$3 billion on an annual basis.

In addition to this, Vietnam is urging for inclusion of “weak rule of origin” or “single transformation rule” in the TPP agreement. Inclusion of the rule will mandate only cutting and sewing aspects of garment and textile manufacturing process to be performed in one of the TPP member countries. This would allow Vietnam to export garments and textiles manufactured with imported raw material to other TPP members.


Lower production cost
Lowering Production Costs

Since the production cost is bound to increase due to growth in minimum wages, it is of paramount importance for Vietnam’s garment and textile manufacturers to look for ways to control and minimize the overall production cost hikes. This might be possible through adoption of more efficient and advanced technologies.

To make the adoption possible, the government in channeling its efforts to attract higher number of FDIs in the industry.

The industry plans to host “Vietnam Garment and Textile Forum – 2015 edition” in June 2015 in Hanoi. Major garment and textile companies such as H&M, Adidas, Puma, and Li & Fung are expected to participate in the forum.


Protect the interest of domestic market players
Protecting the Interest of Domestic Players

The government undertook attempts to help domestic raw materials producers as it noticed that certain raw materials utilized by the Vietnamese industry are being imported without any tax.

As such imports tend to hurt domestic producers, in May 2015, Vietnam’s Ministry of Textile and Garment proposed a 2% import tax on polyester staple fibre, which is presently enjoying no import tax.

Objective of the proposal is to safeguard the interest of domestic fibre producers, who were found not to be running at full capacity while imports of the fibre were being recorded at around 150,000 tonnes on an annual basis



All these initiatives will have to stand the test of time, and whether they prove themselves to be sufficient to help Vietnam’s garment and textile industry grow while deriving maximum benefit from the potential of the TPP and various other FTAs, is to be seen.

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Universal Health Access in Southeast Asia – Bridging the Coverage Gap

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Affordable and accessible health care service is a common objective for governments across developed as well as developing nations.

Global trends suggest that generally countries, as they attain prosperity, tend to move towards a Universal Health Care (UHC)/ Social Health Insurance (SHI) regime, in which 100% population is provided with health care coverage (scope varies from country to country). There are some exceptions in the developed world, with the USA being an example.

In the Southeast Asian region, each country is at a different phase/stage regarding the implementation of universal health access. Several of these countries, such as Indonesia, Philippines, and Thailand, have implemented UHC (as a policy). The remaining countries in this region have various types of health insurance schemes to cover certain sections of the population, and are experimenting with some schemes to judge their effectiveness. It is expected that these countries will eventually work towards the common goal of achieving 100% UHC.

The following illustration captures the current health care sector situation (from UHC/SHI perspective) in four Southeast Asian countries (Cambodia, Indonesia, Philippines, Vietnam), and highlights few areas that require immediate attention in order to successfully manage universal health access for their citizens.


ASEAN UHC



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Details on country-specific social health insurance design and infrastructure:

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Vietnam’s Social Health Insurance – Strong Foundation, Lacking in Support Infrastructure

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Vietnam is a lower-middle income country (GNI per capita US$1,550 as of 2012) with a population of about 89 million (14th most populous country as of 2012). Entitlement of healthcare to every citizen is imbibed in Vietnam’s constitution, and the country has taken steps to achieve it. National Strategy on Protection and Care of the People’s Health (2001) increased the state’s role in ensuring basic healthcare services to all Vietnamese. The Law on Health Insurance (2008) was formulated with the objective of achieving universal health insurance coverage.


This article is part of a series focusing on universal healthcare plans across selected Southeast Asian countries. The series also includes a look into the plans in The Philippines, Cambodia, Vietnam, Indonesia, and Thailand.


As of 2011, more than 60% population were covered under the Social Health Insurance (SHI) scheme. The government is aiming to cover rest of the population (primarily the people from the informal sector) by 2014.

If achieved, Vietnam would be among few Asian countries with 100% Universal Health Care (UHC) coverage for its citizen. For a private sector player (pharmaceutical company, medical device manufacturer, or a healthcare service provider), this should materialize in to increased sales, as the number of customers (which otherwise are faced with financial constraints to avail healthcare services/products) grow.

Vietnam UHC

However, from a long term perspective, sales prospect are likely to depend on the government’s ability to maintain service levels, to tackle emerging healthcare challenges within UHC mandate, and to ensure availability of finances for SHI. The current design and the support infrastructure would determine the long term success of SHI (and hence the prospects of the companies from healthcare industry).

 

INFRASTRUCTURE
Key Stakeholders
  • The Ministry of Health (MOH) is responsible for developing programs and policies, budgeting, personnel allocation, direction and supervision of national institutions

  • The Provincial Health Bureau administers the provincial healthcare care system. Each province consists of District Health Bureau responsible for district level administration of the healthcare services

  • The Commune Health Station (CHS) in each district provide healthcare services at Commune Level. District People’s Committee is responsible for the funding of the healthcare services in each district

Healthcare Service Delivery
  • CHS providing primary healthcare services is the entry point in the public healthcare system in Vietnam

  • District hospitals offer basic inpatient treatment, emergency services, and pre-natal and delivery services. Provincial hospitals (including specialty clinics) provide outpatient and inpatient services

  • National hospitals are the most advanced with specialties such as oncology, endocrinology etc.

  • Current hospital infrastructure:

    • HC: ~11,000
    • District Hospitals: ~1,300
    • Provincial Hospitals: ~ 500
    • National Hospitals: ~ 45
    • Private Hospitals: ~ 1,00
KEY CHALLENGES
Regulatory Framework for Private Healthcare

  • Private healthcare infrastructure has flourished in Vietnam as the government intended to reduce burden from the public healthcare system. However, due to lack of regulations, the private system has failed to complement the public one as expected

Burdened Public Healthcare

  • People mostly rely on private system for outpatient care, though they may prefer to visit the public system for inpatient services. Therefore, healthcare at primary level has not developed as expected, putting more pressure on secondary and tertiary healthcare infrastructure

Uneven Concentration of Healthcare Personnel

  • Distribution of human resources is not even, as most of the doctors and support staff is concentrated in the urban centers. Due to it, rural population may not be able to avail the benefits of social health protection, despite being under coverage

 

DESIGN
Beneficiary Classification

SHI members are classified in to the following six groups:

  • Civil servants and formal sector workers
  • Pensioners, meritorious people, beneficiaries of social security/protection allowances, and veterans
  • The poor and near-poor
  • Children under six years of age
  • School children and students
  • All remaining population
Healthcare Insurance Financing
  • SHI is funded through government budget, employer and employee contribution, and Vietnam Social Security (VSS). The ‘Healthcare Fund’ for SHI is managed by the VSS.

  • SHI premium is fixed at 4.5% of the salary/pension/protection allowance/unemployment benefit wherever applicable. The government pays for the premium of poor, children under six years, and meritorious people. For unemployed and pensioners, VSS pays the premium. Group 5 (from above) is eligible for 30% subsidy in the premium, fully paid by the government

Payment System
  • SHI member are enrolled either at CHS or district hospitals. Capitation system covers all the costs incurred by CHS and district hospitals for providing healthcare services to SHI members.

    • There is a provision for the refund of capitation payment in case the funds are not fully utilized by CHS/District Hospital in a particular year.

    • In case of deficit of funds (i.e. more SHI members than planned avail services in a particular year), the provincial social security office reimburses CHS/District Hospitals

  • Secondary and tertiary hospitals are covered by fee-for-service payment system.

Benefits
  • Inpatient Service – Birth Delivery, Emergency Services, Other inpatient Services (nursing, tests, catering, pharmaceutical)

  • Outpatient – Public health services, primary care services, specialist services, pharmaceuticals, tests, and scans

  • Other Services – Dental care, mental care, dialysis, and transplants

Co-payment (Reimbursement) System
  • For Inpatient Services – Pensioners, poor, and members receiving social protection allowance (5%), others (20%)

  • For Outpatient Services – No co-payment for services at CHS; for others, same as applicable for inpatient services

  • Other Services – Same as applicable for inpatient services

Reimbursement System for Drugs
  • Drugs specified under the reimbursement list (consisting of more than 800 pharmaceutical products as of now) qualify for co-payment system (mentioned above).

  • SHI members can avail co-payment benefit only if the required drug is available at the CH/Hospital they are registered at. There is no reimbursement if the drug is purchased from a private drug store

KEY CHALLENGES
Enrollment of People still Outside the SHI Coverage

  • While there is clarity in the Vietnamese social health insurance beneficiary classification system, a large population still remains outside its ambit. The government needs to introduce a better mechanism to ensure enrollment of the section of the population (e.g. informal sector) who have less incentives to join the scheme (at present), as compared with other groups

Corruption

  • Due to rampant corruption in the public hospitals, the patients have to pay extra despite a well defined payment mechanism, or else the services are alleged to be unavailable despite being under social health insurance coverage.

Adequate Funding Mechanism to Ensure Long-term Viability of SHI

  • As the population under coverage increases, the government may need a better taxation policy to fund the services or else the Health Fund is expected to fall short to meet expenses. In 2013, VSS proposed the government to increase health insurance premiums from 4% to 6%, which the government declined in view of the weak economic condition.

Opportunities for Healthcare Companies

Healthcare Service Providers

  • Contractual healthcare services are not a popular trend in Vietnam; however, subjected to a robust regulatory framework with respect to its linkage with the social healthcare insurance system, private players have considerable opportunities to complement the overburdened public healthcare system in the country

Medical Device Manufacturers

  • There is a critical shortage of medical devices, such as MRI, Tomography scanners, mammography, etc. in public hospitals. With the SHI, public hospitals would need to purchase such equipment, to cater to the increasing demand, this providing a platform for medical device manufacturers in the country

  • There is a provision for private investment in public hospitals for the purchase of medical equipment. Greater opportunity lies in provincial hospitals, which lack medical equipment despite witnessing a large number of patient visits every year

Pharmaceuticals Companies

  • Vietnam is among few countries, which cover outpatient cases under the social health insurance system

  • Pharmaceutical companies have significant potential to increase sales as a result of wider coverage (once SHI is implemented), and by focusing marketing and sales efforts on the inclusion of their drugs in the reimbursement list

A Final Word

One of the key priorities for the Vietnamese government is to meet the target of 100% population coverage. For a populous country, such as Vietnam, the public healthcare system is hamstrung by the lack of infrastructure (a crucial factor in determining the success of UHC in the long term), which is aggravated by the concentration of healthcare in specific regions (e.g. urban centers). Design of Vietnamese UHC appears to be robust in terms of clarity in beneficiary classification and wider coverage of healthcare services (e.g. outpatient services). However, to ensure success, the government would be required to bring the informal sector population within the UHC ambit.

For healthcare industry participants, there are opportunities for pharmaceutical as well medical device manufacturers, with the expected expansion of public healthcare services in Vietnam. There may be a case for healthcare service providers as well in case the government decides to experiment with contractual healthcare services (to compensate for the lack of public healthcare infrastructure).

A comparative with other countries in the region should provide a better perspective on the actual potential of Vietnam as a prospective destination for devices and drugs companies alike.

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A Dragon Unfurls its Wings – How China’s Economic Slowdown Is Rippling Through Emerging Markets

Almost 10 years ago, Goldman Sachs published a report, in which it predicted Chinese GDP to overtake the USA’s GDP by 2020. Today, this prognosis looks like a far-fetched dream as China has recently been riding a wild economic horse. When Chinese economy was growing, its demand for various products and services contributed to the economic growth of emerging markets across the world. The deteriorating performance of Chinese economy over the past few years appears to have started adversely affecting these markets. Will the emerging markets be able to successfully sustain in future?

China witnessed a spectacular and continued rise of its GDP during major part of last three decades. However, end of 2007 saw a turning point, and the country’s economic growth rate cooled off from 14.2% still in 2007 down to 9.6% in 2008, reaching mere 7.4% in the first quarter of 2014. This single digit growth would be more than satisfactory for a lot of economies. However, for China, which regularly recorded double digit rates, this extended period of slower growth is disappointing, with some calling it as ‘an end of an era’.

For years, China was enjoying relentless economic growth through massive investments, exemplary rise in exports, as well as abundance of labor force which was available at low wages. Due to these factors, economists started referring to China’s economic growth model as an investment-and-export driven model. This model has played a key role in driving exports also from emerging markets such as Latin America, Asia, and Middle East, as there was substantial demand for commodities from China’s end to support its domestic consumption as well as export requirements. With the weakening of foreign demand and internal consumption, China’s export demands have considerably weakened, leading to declining prices of export-related commodities and resulting in an adverse impact on emerging markets’ GDPs.

Is the Slowdown for Real?

China’s economic slowdown has not only been reflected in its modest GDP growth figures, but also in several other negative trends that have been observed. These include a continuous decline in the percentage of fixed-asset investments as a part of China’s GDP. Investments contracted from 24.8% in 2007 to 19.6% in 2013. Reduction of fixed-asset investments is likely to negatively contribute towards a country’s economic slowdown by adversely affecting sectors such as real estate, infrastructure, machinery, metals, and construction.GDP

Moreover, yuan has depreciated against US dollar (with average exchange rate of 7.9 in 2006 down to 6.26 in April 2014). In addition to this, Purchasing Managers’ Index (PMI), which is a composite index of sub-indicators (production level, new orders, supplier deliveries, inventories, and employment level), has plunged from 52.9 in 2006 to 48.3 in April 2014, below the middle value (50), thus indicating some contraction of China’s manufacturing industry. This industry contributes significantly to China’s GDP, therefore, the industry’s deterioration has a direct adverse effect on China’s economy.

This negative twist in China’s economic growth story is believed to be a result of a synergetic effect of various internal and external factors, some of which include:

  • Over-reliance on abundant supply of low-cost labor. For decades, China has based its growth on production of goods requiring high amount of cheap manual labor. However, as the economy continued growing, the demand for higher wages has increased, pumping up the labor cost. This cost is contributing to the inflation of products’ export prices, which is ultimately translating to a lower demand of Chinese goods.

  • The focus of Chinese workforce has been shifting from rural agriculture to urban manufacturing. The government has been taking steps to propel this transition in order to boost economic growth, prosperity, and industrialization. As more and more Chinese moved to urban areas, gradually, the transition has started yielding diminishing returns mainly due to saturation in the manufacturing industry.

  • Europe has also played a villainous role in China’s story. It has been one of China’s largest export markets but has recently been extending a significantly low demand for commodities and products from China. In 2007, the European Union accounted for 20.1% of all the exports from China. This percentage has fallen to 16.3% in 2012.

Chinese Leaders React

The Chinese government is in a reactive mode and has been unveiling a plethora of actions to bolster growth. The overall approach looks conservative in nature with a targeted GDP growth of 7.5% for this year, after recording a growth of 7.7% in 2013.

In an attempt to improve the situation, some of the expected financial and fiscal reforms are in the pipeline. Liberalizing bank deposit rates and relaxing entry barriers for private investment are some of the moves to be implemented by 2020. Various property measures (such as relaxing home purchase rules, providing tax subsidies, or cutting down payments) are planned to be introduced (based on local demands and conditions prevailing in a particular city) in order to balance the property market as a whole. A target of creating 10 million new jobs in Beijing has also been set for 2014. The underlying motive of all the rescue measures is strengthening the Chinese economy’s reliance on domestic consumption and services.

Influence on Emerging Markets

Undoubtedly, swing of the Chinese economy towards consumption and services is expected to considerably affect all the connected economies, several of them being emerging markets economies (EMEs). Commodity producing emerging markets such as Latin America, Middle East, parts of Africa and Asia are likely to be affected. Within this group, metal producers will probably suffer the most, as China had a significant demand for iron ore, steel, and copper during its investment boom phase. Within this subgroup, economies which are running current account deficits are forecast to be more susceptible to the ill-effects of China’s economic slowdown.

As China tilts towards domestic consumption, Latin America has started to witness a dawdling growth as the region’s growth rate dropped from an average of 4.3% in the period of 2004-2011 to 2.6% currently. For instance, as Chile depends heavily on copper exports to sustain its economic expansion, the country has been regularly reporting sluggish growth rates (5.8%, 5.9%, and 5.6% in 2010, 2011, and 2012, respectively) due to the decline in the price of copper, largely fueled by a lower demand from China. In addition to this, Brazil and Mexico are struggling to survive through falling benchmark stock indexes. The fall is mainly due to declining prices of commodities, as exports to China from Brazil and Mexico have weakened.

Middle East will probably register both positive and negative effects of China’s economic slowdown. One of the ill-effects could be reduction in oil prices, from US$140 per barrel in 2008 to approximately US$80 per barrel by the end of 2014, due to China’s lower demand of oil. On the positive side, Middle East is strengthening its position as an attractive region with long-term growth since China is being considered as a slightly less attractive option for investment by a majority of investors. This is mainly due to Middle East’s good infrastructure and accelerated development of industries such as defense, chemical, and automotive, and not only traditionally developed energy and petrochemicals.

The impact on African countries is expected to be negative primarily due to declining commodity prices. As Africa’s growth substantially depends on its exports to China, some African commodity exporters, such as Zambia, Sudan, and Angola, have started to feel the strain as China’s demand for commodities is weakening. This weakened demand has led to lower prices of commodities such as aluminum, copper, and oil, which registered a y-o-y decline by 4%, 9.5%, and 5.4%, respectively in January 2013. Zambia is likely to receive the strongest hit as copper constitutes almost 80% of the country’s total exports and reduction in copper prices could make its current account deficit to account for almost 4% of GDP in 2014.

Effect of China’s economic slowdown will vary from country to country in case of Asia. Countries such as Indonesia and Philippines, which have significant domestic demand, would be less adversely affected as they are less dependent on commodities exports to China. China’s unstable economy has spurred new investments in other growing Asian economies such as Cambodia. India is also likely to benefit from the ability to import oil at lower prices, which are pushed down by China’s weakened demand for oil. At the same time, however, export of cotton and metals such as copper and iron ore from India to China is dampened, adversely affecting India’s economy.

While EMEs have already been witnessing a lower demand from their traditional trading partners such as European Union and the USA, China’s slowdown will be an added burden to their economies.
China's Impact


It’s Touch and Go

It is rather evident that Chinese economic slowdown is having an adverse impact on emerging countries across Africa, Asia, and Latin America. One can hope that the measures taken by the Chinese leadership to curtail the slowdown will soon start taking effect and gradually lift up the economy, and in doing so, control the extent of damage spilling over many emerging countries and their economies.

In the event that the Chinese economy is unable to recover from this period of slowdown soon, it will continue to be a terrible blow to the economic ambitions of several emerging markets, especially those in Africa and parts of Asia-Pacific, which are heavily reliant on Chinese investment and trade relations.

Simultaneously to absorbing fewer production inputs imported from emerging countries, it is worth noting that China’s role in world economics might start to alter as it transforms to a consumption-led economy. This transformation is likely to slowly increase China’s appetite for imports of products and services, apart from traditional commodities-focused imports. It will be interesting to observe whether and how some of the emerging economies will attempt to satisfy this new Chinese hunger for goods extending beyond simple commodities.

by EOS Intelligence EOS Intelligence No Comments

Vietnam’s Macroeconomic Environment: FDI Paving the Way for Growth

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2013 was the sixth consecutive year since Vietnam first witnessed macroeconomic instability. With high inflation levels, a collapse of the banking system, and relatively lower growth levels compared with its Asia-Pacific peers, the economy faced immense pressures. However, thanks to continuous efforts by the government to uplift the economy as well as the presence of several inherent benefits that Vietnam offers to foreign corporations, the economy has been resurging, largely on the back of soaring FDI.

Vietnam has faced several economic pressures since 2008, which resulted in high levels of inflation, stagnated growth, and a crumbling financial system primarily led by rising bad debts and loss of liquidity. This also brought a negative impact on the real estate sector and its periphery industries. Over the past few years, the country has struggled to find its ground and has undertaken several policy measures to instigate investor interests. In fact, the Vietnamese government is largely focusing on increasing FDI investment levels and exports as the key tools to pull its economy out of stagnation.

The government made substantial moves with regards to economic policies. These initiatives, which led to a boost in the country’s FDI in 2013, included:

  • Equitization of 573 state-owned enterprises (SOEs), wherein foreign investors are eligible to hold stake in SOEs with few conditions

  • Tax allowance that reduces corporate income tax from 25% to 22% from January 2014 and further to 20% in January 2016

  • The approval of a scheme to enhance FDI management in Vietnam

These efforts by the government appear to have started yielding results, as the registered FDI rose by 95.8% to US$13.1 billion during the first 10 months of 2013, and the disbursed FDI rose by 6.4% year-over-year to $9.6 billion for the first 10 months of the year.

In addition to these initiatives, the government has stepped up to strengthen the country’s banking sector since 2012. Over the past two years it has significantly reduced average lending rates, equitized four state-owned commercial banks, and set up Vietnam Asset Management Company, a state-owned company created solely to purchase bad debt from existing banks in order to clear their books. This company purchased bad loans worth about US$1.6 billion in 2013. In an effort to further speed up the restructuring of the banking system, the government announced that it would increase the allowed limit for foreign strategic investors to invest in a domestic financial institution from 15% to 20% in February 2014.

VietnamInvestmentEnvironment


The government efforts to stimulate FDI have also been supplemented by the existence of several positive intrinsic factors that Vietnam boasts off. The country remains an attractive investment destination thanks to its abundance of natural resources and cheap labor availability (according to JETRO report, monthly pay for general workers in Vietnam is about 32% of levels in China, 43% of that in Malaysia and Thailand, and 62% of that in Indonesia). The country also offers a young and dynamic consumer base domestically, as well as favorable conditions and location to supply within the subcontinent. It also enjoys a stable political environment, a significant advantage over several of its neighbors.

The resurfacing of negotiation talks regarding Vietnam becoming a member of The Trans-Pacific Partnership (TPP) is also positive news for the export sector, which is expected to receive a significant boost with the signing of the agreement (especially in the area of garments, footwear, and wooden furniture). This will also ease investment inflow in Vietnam from other TPP members.

Backed by the aforementioned factors and a robust young population, several sectors in the country are registering a double digit growth and intensified attention from foreign investors.

  • Vietnam’s aviation sector, for instance, is expected to be the third-fastest growing sector globally with regards to international travel and freight, and the second-fastest with respect to domestic travel in 2014.

  • The electronics sector has also witnessed keen interest from foreign players. Nokia, a leading telecom handset player, opened its first factory in Vietnam in 2013. Samsung and LG have announced plans to build factories in the country primarily for export purposes.

  • Retail, consumer goods, and tourism are some of the other best performing sectors with strong growth potential in the near future.

  • Moreover, in anticipation of the TPP agreement, Wal-Mart is also exploring investment opportunities in Vietnam that would entail sourcing of several products, such as clothing and footwear, entertainment, home appliances, toys and seasonal goods.


It is clearly visible that Vietnam is on the right path of growth and expansion, nevertheless, there is still a long way to go. While the FDI levels rise, the government has to channelize this investment to develop support industries and high-quality workforce to sustain growth. Moreover, while Vietnam enjoys abundant natural resources and cheap labor that attracts FDI, these factors remain exhaustible, especially in the light of new investment hotspots (such as Myanmar) emerging. Therefore, in addition to just focusing on economic policies, Vietnam must work towards creating better investment climate to lure FDI. The country’s legal framework still presents several hurdles to foreign investment and the country ranks very poorly on the global corruption index (114 out of 177 countries). While it is almost certain that Vietnam will continue to see an inflow of foreign investments, it is to be seen if it can use this to achieve sustainable growth for its economy.

by EOS Intelligence EOS Intelligence No Comments

The ASEAN Pharmaceutical Market – Measure of Attractiveness

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The ASEAN region, home to more than 600 million people, has historically been an attractive market for international pharmaceutical companies. With the exception of Indonesia, all other countries in the ASEAN region rely heavily on pharmaceutical imports, with Myanmar importing up to 80% of its annual demand. Relative attractiveness of each country in the region also depends on several other factors, as highlighted in the following illustration.


Market Attractiveness of ASEAN Region Countries for International Pharmaceutical Manufacturers

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