A Chemical Industry Emerges In Vietnam

The streets of Vietnam’s Hanoi and Ho Chi Minh City are crowded with motorcycles. Numerous private cars—many of them luxury models—also prowl the cities, where it’s become easier to get around thanks to newly enlarged roads and recently built bridges and highways. Grade A office buildings and luxury apartment towers rise toward the sky. Major hotels are adding floor space to handle the influx of tourists, businesspeople, and conference attendees.

Vietnam is prospering, and along with that prosperity a chemical industry is fitfully emerging. Considering its population of 90 million and the steady growth of its manufacturing sector, Vietnam has a curiously tiny chemical sector. But things are changing. Slowly but surely, international players, led by Japanese firms, are setting up in the country. New chemical plants that are already operating or being built will help the country keep growing by providing materials its manufacturing sector needs.

“Now is the best time to be in Vietnam,” says Jack Ye, managing director of Hangzhou Viwa, a Chinese company that trades active pharmaceutical ingredients (APIs) and finished-drug formulations. Viwa has an office in Ho Chi Minh City where it employs seven people. “The business environment in Vietnam is similar to that in China 10 years ago,” Ye says.

Few would debate that it’s the best time for the country’s economy, at least since the Vietnam War, which ended in 1975. Manufacturers in labor-intensive industries are lining up to build plants in Vietnam, where factory workers earn roughly $350 per month, about one-third as much as their Chinese counterparts. Japan has become particularly active in the Southeast Asian nation, not only because of lower costs but also as a reaction to an anti-Japanese sentiment rising in China. Japanese development aid helps explain the new roads and improved infrastructure in Vietnam.

“Vietnam is going through the same process that we’ve seen before in China,” says Paul Harnick, chief operating officer for chemicals and performance technologies at KPMG, an auditing and tax consulting firm. “As manufacturing and investment grow, a middle class emerges that breeds an attractive consumer market.” The chemical industry, he says, is along for the ride.

In the past 18 months, Vietnam has begun to win the attention of senior managers at major chemical companies, according to Harnick. Their Asian strategy, he says, used to be China first, India second, and no time to think about anywhere else.

But the economy has been slowing in China, and India remains a tough place to do business, making Vietnam and the rest of Southeast Asia look attractive by comparison. And it helps that in September 2013 Vietnam’s government adopted a master plan for development of the country’s chemical industry. It’s a plan that encourages foreign firms to invest.

The priorities of the Vietnamese government are food production, health, and industrial development, in that order, says Nguyen Thi Ha, director of convention and international cooperation at the Vietnam Chemicals Agency, also known as Vinachemia. So the chemical industry sectors likely to enjoy the most steadfast government support are fertilizers, pharmaceuticals, and basic chemicals and petro­chemicals, she tells C&EN.

At the moment, fertilizers don’t require a lot of support because Vietnam has almost achieved self-sufficiency on its own, Nguyen says. But it’s a different story for other chemicals. Vietnam imports more than 90% of the APIs and excipients local companies need to produce formulated drugs, she says. And the country is almost entirely dependent on imports for basic inorganic chemicals such as chlorine, sulfuric acid, and hydrochloric acid.

Vietnamese authorities put a high priority on developing an API industry because it’s unsafe to be at the mercy of foreign drug suppliers, Nguyen says. On a case-by-case basis, Vietnam will provide incentives to companies that invest in plants that produce basic antibiotics, drugs for heart disease, and HIV treatments, she notes. “And through our national health insurance scheme, we will give priority to drugs that are made in Vietnam,” Nguyen says. “So companies that invest in this country will have preferential access to a large and growing market.”

The Vietnamese pharmaceutical market is indeed an attractive one, reports Trang Van Tot, chief executive officer of Glomed Pharmaceutical, a manufacturer of finished-drug formulations that operates two plants in an industrial park outside Ho Chi Minh City. Trang, who got his start as an importer and distributor of drugs, set up Glomed in 2007. The firm recorded $19 million in sales last year and employs 850 people. It launches 10 to 20 new products annually, according to Trang.

“Many foreign drug companies are attracted to the Vietnam market now,” he says. “They typically want us to make their products under license or distribute their products, or they want to invest in Glomed.” Trang says he’s turned down several offers by foreign buyers that wanted a majority stake in his company.

Patients in Vietnam prefer to buy generic drugs that are domestically produced, Trang observes. They don’t have as much faith in pills from China or India, and branded drugs from major international companies are too expensive for most of them, he says.

Although the government encourages local manufacture of APIs, the prospect doesn’t appeal to Trang. “It might please Hanoi if I did, but I don’t feel capable of producing APIs,” he says. Viwa’s Ye, who supplies APIs to Glomed, says he once explored building a plant in Vietnam but concluded it couldn’t compete against imports. “Only a few countries in the world can competitively produce APIs,” Ye says. “The market is too small in Vietnam.”

Foreign companies are more active in other parts of the chemical industry. BASF and Dow Chemical operate specialty chemical plants in the country producing construction chemicals and acrylic-based polymers, respectively. Japan’s Asahi Glass owns a 78% stake in a polyvinyl chloride plant that is currently expanding capacity by 50% to 150,000 metric tons per year. Taiwan’s Formosa Plastics owns several plants that mostly make fibers and fabricated plastics. And Japan’s Shin-Etsu Chemical recently started up separation and refining operations at a rare-earth magnets plant.

The largest investment in the Vietnamese chemical industry is by a consortium of Japanese companies building, with the help of Japanese trade finance, an integrated refinery and petrochemical complex in the northern part of the country. With a 5% stake in the $9 billion project, Mitsui Chemicals will buy basic aromatics for export. Once operational in 2017, the complex will be able to supply Vietnam with large quantities of polypropylene and the polyester intermediate p-xylene.

Despite the upsurge in investment, Vietnam’s chemical industry is still small for a country with a fast-growing manufacturing sector and rising middle class. About 18% of Vietnam’s gross domestic product is provided by manufacturing, and chemicals are only a small slice of that.

Private and state-owned Vietnamese companies have not invested in the chemical industry because of lack of capital, according to Vinachemia’s Nguyen. As for foreign firms, they have had little motivation to invest because the country has the reputation for being a tough place to operate, KPMG’s Harnick says. Industry growth has been hampered by lack of infrastructure, lack of feedstock, and hard-to-follow regulations, he says.

A 2014 World Bank study ranked Vietnam 78th out of 189 countries in ease of doing business, compared with 90th for China and 142nd for India. But riots and strikes last year at Chinese- and Taiwanese-owned companies in Vietnam—triggered by China’s establishment of an oil-drilling platform in disputed waters—provided a hint of the difficulties foreign firms might encounter.

International chemical companies operating in Vietnam are reluctant to discuss the country’s business climate. C&EN contacted Asahi Glass, BASF, Dow, Mitsui, and Shin-Etsu for this article, but only Shin-Etsu provided comment. By e-mail, spokesman Tetsuya Koishikawa wrote that “the cost of electricity [in Vietnam] is lower compared to that of neighboring countries, and engineering staff are easy to recruit and their skills are good. Furthermore, the related governmental authorities are cooperative, and it is easy to operate in such an environment.”

Shin-Etsu’s positive comments notwithstanding, chemical companies will likely find a challenging business climate in Vietnam. Yet a growing number of them are willing to give the country a serious look because it’s an increasingly attractive market. For companies that missed the boat with China, Vietnam offers a chance to get on board at the right time.