Vietnam on Monday invited Indian pharmaceutical companies to set up shop. Imitating Delhi’s “Make in India” policy, Hanoi’s “Make in Vietnam” campaign aims to cut down on foreign imports in favor of domestic production. Drugs are a major import, and India is the largest supplier to Vietnam, but only 3 or 4 Indian pharmaceutical firms currently have a presence in-country.
Ton Singh Thanh, Ambassador of Vietnam in India, acknowledged that Indian pharmaceuticals were of lower quality than those from Europe. In fact, in early 2014 the Drug Administration of Vietnam (DAV) banned at least 45 Indian pharmaceutical firms from selling medicines because they were found to be substandard. (That wasn’t the first time, either; in 2012 the DAV banned 19 Indian drug companies on the same grounds.)
However, Thanh noted that Indian drugs are cheaper. (Pharmaceutical products are included in the FTA between ASEAN and India and entitled to a preferential tax rate of 0-9% percent.) Hanoi wants Indian exporters to establish drug-producing units in Vietnam, but it remains to be seen whether Indian firms would be willing to transfer knowledge in any FDI to Vietnam, lest low-cost competitors arise.
And the Indian government may endorse such a move, since it has offered a credit line of $300 million for trade diversification and strengthening of commercial ties between the two countries. Bilateral trade between India and Vietnam was $5.6 billion in 2014, but the governments’ target for 2020 is $15 billion.
Furthermore, Vietnam’s booming population of over 90 million means major growth opportunities for the pharmaceuticals industry. Increasing wealth, an aging population, and the steady extension of public health insurance (which reached 77% of the population by the end of 2015) have all contributed to double-digit growth in the industry over the last few years. Growth is expected to accelerate, reaching 20% by 2017, according to a report by Decision Resources.
Expanding into drug-production in Vietnam would likely be more expensive for Indian firms in the short-term, compared to scaling up production from existing plants in India. However, by delivering FDI and creating local jobs (in line with Vietnam’s low wages), Indian drug firms might be able to negotiate tax incentives and win supply contracts that would result in hefty long-term profits. That’s the strategic play here.