European business confidence in Vietnam falls, more firms move operations from China to nation

European business stakeholders' perception of Vietnam's business climate fell to 48.0 in Q4/2022, but up to 41% of surveyed respondents said their companies are shifting operations from China to Vietnam, according to EuroCham.

The 48-point result was a drop of 14.2 points compared to Q3 and 25 points from Q1 of the year, the latest EuroCham Business Climate Index (BCI) shows.

Though Vietnam's economy grew by 5.92% in Q4 and 8.02% for the whole year, this data comes amid continued global economic volatility resulting from a perfect storm of factors including a slowdown in global growth, interest rate hikes, sustained inflation, and bruised consumer confidence.

The BCI is the leading indicator of the European business and investment community in Vietnam. EuroCham invites its 1,300 members, who represent virtually all sectors of the Vietnamese economy, to provide quarterly feedback on Vietnam's business environment and forecasts for their own businesses in Vietnam.

Economic outlook

Just 27% of respondents anticipated economic stabilization or improvement in Q1/2023, the report said. Compared to projections for Q4/2022, when 42% shared this sentiment, this is a 15-point decline. Over the past quarter, the number of people who anticipated an economic downturn also doubled.

Vietnam a global investment destination

Up to 41% of respondents stated their companies are moving operations from China to Vietnam, up from 13% in Q3. Furthermore, approximately 35% of respondents ranked Vietnam among the top five global investment destinations for their companies, with 12% saying that Vietnam was their firms' top investment site internationally.

FDI attraction and retention

The three most significant regulatory barriers to foreign companies operating in Vietnam were identified as a lack of clarity regarding rules and regulations (51%), administrative issues (41%), as well as visa and work permit difficulties (30%).

Despite these difficulties, 58% of BCI respondents were satisfied with the attention policymakers pay to business needs when setting relevant policies.

In terms of what Vietnam should do to improve its FDI attraction prowess, reducing administrative difficulties (70%) retained the top spot. This has been the case since this question was first raised with BCI respondents in Q2/2022. Meanwhile, the issue of reducing visa difficulties for foreign experts has become increasingly pertinent, increasing 8 points from Q3 to Q4.

EU-Vietnam Free Trade Agreement

According to the survey, 63% of respondents believe they are sufficiently knowledgeable about the agreement (EVFTA). Moreover, nearly half of the respondents maintain that the EVFTA is relevant to or very relevant to their business, indicating no significant change from Q3/2022.

BCI participants also reported that the new-generation agreement had a positive effect on the growth of their businesses, their financial health through tariff reductions, and the strength of their supply chains.

This latest BCI shows that concerns regarding the EVFTA's administrative procedures, a lack of understanding of the agreement, and technical barriers to trade have all decreased.

Commenting on the BCI, EuroCham Chairman Alain Cany said: “Things were definitely less positive in the fourth quarter of 2022 than they were earlier in the year. Although the situation is very likely to continue in this direction in 2023, this shouldn't be viewed as a cause for concern.

“In fact, Vietnam's economic opportunities continue to exceed those of its regional and international peers. This is evident from the fact that so many of EuroCham's members consider Vietnam central to their global investment strategies.”

He added: “It is also encouraging to see that foreign direct investment from Europe and around the world remains high and continues to grow, especially in Vietnam's green industries and manufacturing.

“It is clear that, with this FDI, Vietnam's strong economic fundamentals, and its commitment to sustainability, the country is still among the top investment destinations in the world. As a result, the European business community remains confident in the Vietnamese market.”

Some quotes from respondents regarding the benefits their businesses have derived from the EVFTA.

“As our clients are notably importers and exporters, all direct benefits on their side are indirect benefits for my company.”

“We can save material costs due to import tax exemptions.”

“Customers benefit from reduced duties, hence there is a preference for placing orders in Vietnam.”

“We work in transportation and logistics. The EVFTA supports our customers with taxes and duties, which increases their import-export volume and affects our business.”

“Manufacturing investors can now start operations in Vietnam easier.”