China put capital into the wood industry, worry about illegal investment from it

Illegal investing with no strict control will have serious consequences for the entire wood processing and export industry in the future. Photo: Nguyen Thanh

Domination of FDI enterprises

The report "Foreign Direct Investment in the Vietnamese Wood Industry: Current Situation of 2020 and Development Trends is a Product of Cooperation" by a research team including: Forest Trends Organization, Vietnam Timber and Forest Products Association (VIFOREST), HCMC Association of Handicraft and Wood Processing (HAWA), Wood Processing Association of Binh Duong Province (BIFA) and Binh Dinh Timber and Forest Product Association (FPA Binh Dinh) has just been announced.

Accordingly, by the end of 2020, the industry received 63 new projects with total registered investment capital of nearly US$327.7 million; 52 times of capital increase with total additional capital of US$193.6 million; 122 times of capital contribution and share purchase, with the capital contribution value reaching US$244.8 million.

A total of 63 FDI projects investing in the wood industry in 2020 come from 14 countries and territories. Topping the list are markets including China, Hong Kong, Taiwan, Seychelles and Singapore.

In general, the average investment per project is small and the investment activities focus on the production of wood products such as furniture, beds, wardrobes, tables and sofas, kitchen cabinets and plywood. Notably, China has a large number of investment projects with 23 projects, but the investment for each project is only about US$2.27 million, a decline of 37% compared to 2019 (an average of US$3.62 million per project).

Exports of FDI enterprises in 2020 continued to show their superiority compared to domestic enterprises. This sector has 653 FDI enterprises directly participating in exporting, accounting for 18% of the total number of exporters with a turnover of US$6 billion, and accounting for 51% of the total export turnover of the industry.

Compared with the figure of 2,676 enterprises and US$5.9 billion in export turnover of domestic enterprises, FDI enterprises have outstripped domestic enterprises in terms of export scale.

This superiority can be attributed to the differences in the production scale, technology and management level, the size of investment capital and market access of FDI firms compared to domestic firms.

“So far, there have been no reviews or studies looking at these aspects. This shows the need for research in order to capture information about the factors that create superiority and share it with domestic businesses,” said To Xuan Phuc, an expert from Forest Trends.

Worry about "hiding” investment

Many experts say that although FDI is now an integral part of the wood industry, some FDI activities create great risks, and this has been hurting the industry. In recent years, especially since the US-China trade tensions started, the situation of "under investment or in other words illegal investment” has taken place in the industry.

The report by the research team showed that this situation occurs when some companies with capital from China import wood products from China to Vietnam, take the labels of origin of Vietnam and then export to the US.

This will help Chinese businesses avoid tariffs that the US Government imposes on these products originating from China.

Illegal investment occurred in the form of Chinese businesses renting factories, workers, managers from Vietnam, importing parts of wooden furniture from China and then assembling these parts in Vietnam before exporting them to the US.

In fact, realizing the seriousness of illegal investment, Vietnamese authorities have tried to control the situation and propose mitigation measures to reduce the risk.

Most recently, in February 2021, the Ministry of Planning and Investment sent a document to the People's Committees of provinces and cities to call for strict control of anti-origin fraud acts with wood products.

Document to request the authorities of provinces and cities to check FDI projects to reduce the risk of origin fraud prioritize the selection of projects with outstanding technology consult with wood associations on investment projects, careful consideration of investment projects in the production of products with risk factors for fraud.

Mr. To Xuan Phuc said that effective implementation of this requires provinces and cities to pay proper attention to local FDI activities, establish inspection and supervision mechanisms with the participation of stakeholders.

In this context, coordination with national associations and local associations, domestic enterprises as well as genuine FDI enterprises, are critical to effectively carry out inspection and supervision in order to eliminate risks of illegal investment of FDI in the industry.

Besides, the superiority of FDI enterprises currently operating in Vietnam should also be summed up and create a spillover effect in the industry. "The current policy mechanism for the industry needs to change; it is necessary to allow FDI enterprises to become official members of associations. This will create opportunities for FDI enterprises to give opinions and contribute to building the industry," said Mr. To Xuan Phuc.