It’s a bit longe, but interesting to (re)discover how Japan can do business with Vietnam,..
Japan Inc smitten by Vietnam
By Hisane Masaki TOKYO
– After a lengthy investment spree in China, many of corporate Japan’s biggest names are making inroads in one of the world’s few remaining communist states: Vietnam. Since last year, Vietnam has seen a spate of big investment projects by prominent Japanese firms such as Yamaha Motor Co and Mabuchi Motor Co, which invested US$48 million and $40 million, respectively. Nippon Sheet Glass Co’s $145 million joint-venture factory with a local firm is also under construction, as is work on Canon Inc’s new $70 million printer factory. Honda Motor Co has also announced that it will pour $60 million into a local auto factory within the next five years. Small and medium-sized Japanese firms are also flocking to Vietnam. According to some analysts, in 2000, Vietnam ranked eighth among destinations for Japanese investment. However, in 2005, Vietnam was in fourth place, just behind China, India and Thailand. For Japan’s small and medium-sized enterprises in particular, Vietnam was the second option, just after China. In 2005, Japan invested about $400 million in a record high of 97 new FDI (foreign direct investment) projects in Vietnam on an approval basis. In terms of the value of investments made that year, Japan was the third-biggest foreign investor in Vietnam after South Korea and Hong Kong. In fact, it is possible that Japan was the biggest foreign investor in Vietnam last year, because some of the investments registered as originating in Hong Kong are believed to have actually been made by Japanese-funded firms there. Furthermore, Japan is seen by Vietnam as its most effective foreign investor in terms of the percentage of promised investments that actually materialize. Japan made $6.2 billion worth of investments in Vietnam between 1988 and 2005 on an approval basis. Of that amount, about 74%, or $4.5 billion, was actually realized – by far the highest realization rate among foreign countries and regions investing in Vietnam. Going by realized investment amount only for the 1988-2005 period, Japan was the biggest foreign investor in Vietnam. The current boom of Japanese and other foreign investment in Vietnam is the second. The first one occurred in the mid-1990s after the lifting of US economic sanctions against the Southeast Asian country in 1994 and the establishment of full diplomatic ties between Washington and Hanoi the following year. Japan’s annual FDI in Vietnam peaked at $1.13 billion in 1995. ‘China plus one’The comparison of China to Vietnam is instructive. China is gobbling up about $60 billion worth of FDI annually, the largest amount of any developing country. In addition to being a lucrative market with the world’s biggest population of about 1.3 billion, China has increasingly become the world’s manufacturing center. The rapidly ascending global economic power superseded Japan as the world’s third-largest trading nation after the US and Germany in 2004. With its exports booming, China’s overall trade surplus surpassed $100 billion last year, causing friction with major trading partners such the US and Europe, although well over half of Chinese exports are produced by foreign-funded companies. China remains by far the most powerful magnet for Japanese and other foreign investors in Asia. Vietnam’s total FDI currently is roughly a tenth of China’s, at about $6 billion annually. Vietnam’s economic size and population also pale before China’s. But the Southeast Asian nation has cheaper labor. Its per capita gross domestic product (GDP) is still about $480, less than half China’s, which has already exceeded $1,000. Vietnam has become an increasingly popular investment destination for Japanese firms seeking to reduce their excessive dependence on China and spread their business risks in Asia more evenly. According to a survey conducted early this year by the Japan External Trade Organization (JETRO), Vietnam has become the first choice for those Japanese firms that are operating in China and want to shift their investment to a third country. Lying behind what some people describe as the “China plus one” attitude among Japanese investors are concerns about the risks involved in doing business in China. These concerns were fed by Beijing’s slow response to the outbreak of severe acute respiratory syndrome (SARS), and also by the anti-Japanese riots that swept through China in April 2005. More important is the currency factor, since a stronger Chinese yuan weakens the advantage exporters derive from operating in China. In the face of strong international pressure, especially from the United States, China revalued the yuan against the US dollar last July, albeit by a meager percentage. A further rise in the value of the yuan is anticipated in the medium and long terms. Also, labor costs are on the rise and shortages of power and water supplies have emerged as headaches for foreign firms with operations in China as well as for their local counterparts. With its relatively large population of about 82 million, Vietnam also has decent potential as a lucrative market in its own right. But for now, most Japanese manufacturing businesses are looking to Vietnam as a production base for exports, primarily to the rest of Asia, including Japan itself. Tailwinds for VietnamThis year marks the 20th anniversary of Vietnam’s doi moi policy of free-market reforms and external opening. Vietnam was not immune to the fallout from the Asian financial crisis that first erupted in Thailand in the summer of 1997 and quickly swept through the region. Because of a sharp decline in foreign investment from its neighbors and a slump in exports to them, Vietnam’s economic growth slowed to 5.8% in 1998 and 4.9% in 1999, after posting growth of between 8% and 9% for the preceding several years. But the slowdown is now a thing of the past, with the Vietnamese economy fully recovered and on a solid growth track. In fact, Vietnam has been one of Asia’s fastest-growing economies in recent years. The Asian Development Bank predicts that the country’s economy, buoyed by brisk foreign investment and firm domestic demand, will grow 7.8% this year and 8% next year. Tailwinds are blowing for Vietnam – and for Japanese and other foreign investors there. Japanese firms’ investment spree in Vietnam comes amid an increasing number of free-trade agreements (FTAs) being concluded or negotiated in East Asia. Until several years ago, the ASEAN Free Trade Agreement (AFTA) was the only such trade arrangement in East Asia, but one after another FTA has since popped up in the region. To take advantage of the FTAs, Japanese manufacturers in the Association of Southeast Asian Nations member states are stepping up the realignment of their production networks in the region by moving production bases from one ASEAN country to another, as well as from China to ASEAN. The investment pact between Japan and Vietnam took effect in late 2004. Japan and Vietnam are also to open FTA negotiations late this year; Japan is separately negotiating an FTA with the ASEAN as a whole. In another significant recent development, Vietnam and the US signed a trade pact at the end of May, paving the way for Hanoi to realize its long-cherished goal of becoming a member of the World Trade Organization late this year. WTO membership, which obliges Vietnam to open its markets wider to foreign competition and make its trade and investment rules and regulations fully compatible with international norms, is expected to fuel Japanese and other foreign investment further in the country. China gained WTO membership almost simultaneously with its hosting of the Asia-Pacific Economic Cooperation summit in late 2001. Although it may be just a coincidence, Vietnam will host this year’s summit of leaders from 21 APEC member economies in November, further highlighting its higher profile in the regional economic arena. US President George W Bush is expected to attend the political extravaganza. Pump-priming effectsIn 1992, a year after the warring factions in Cambodia signed a peace agreement in Paris to end years of deadly civil war, Japan became the first major industrialized country to resume full-scale economic aid for Vietnam. Japan has been Vietnam’s top aid donor since 1995. Japanese official development assistance (ODA) for Vietnam totals nearly 100 billion yen ($869.5 million) annually. Vietnam is now one of the largest recipients of Japanese ODA money. Vietnam is also a potential important supplier of oil and natural gas for energy-resource-poor Japan. Vietnam is the second-largest after Indonesia among the ASEAN members in terms of population and also has geopolitical importance because it borders China. Vietnam joined ASEAN in 1995, followed by Laos and Myanmar in 1997 and then Cambodia in 1999. The four countries on the Indochina peninsula are the least developed of the 10 ASEAN members. For ASEAN, correcting the so-called “ASEAN divide” – the huge gap in wealth between rich and poor members – is a high priority as the grouping accelerates its economic integration with an ultimate goal of creating a fully integrated “ASEAN Economic Community” by 2020. For countries outside ASEAN, such as Japan and China, assistance in the development of the poorer ASEAN nations is becoming a very important avenue to strengthened ties with ASEAN as a whole – and greater political clout in the region. The bulk of Japanese ODA money for Vietnam has been provided in the form of soft loans to finance infrastructure projects, and the rest in the form of grants-in-aid and technical cooperation. Japan has also implemented a “comprehensive policy-assistance project” as part of its technical cooperation for Vietnam, which is aimed at helping Vietnam switch to a free-market economy from communist-style central planning by means of a joint study on Hanoi’s economic development policies by experts from both sides. It marked the first full-scale “intellectual assistance” project to be implemented by Japan for a developing country as part of its ODA. Early this year, the two countries extended the two-year joint action program launched by their leaders in 2003 to improve Vietnam’s business environment, strengthen its economic competitiveness and accelerate the inflow of FDI. At a workshop held in March to review the joint initiative, Hanoi officials highly valued the joint program, saying it had enhanced FDI in Vietnam. This program, along with the 2004 investment pact, has contributed to increased Japanese confidence in Vietnam and thereby to a sharp surge in Japanese investment there. Of course, there remain many negatives associated with operating in Vietnam. Existing and potential foreign investors have criticized the country for its poor infrastructure, excessive bureaucracy, a dearth of skilled workers, underdeveloped support industries and widespread corruption. In a recent seminar on Vietnam investment held in Tokyo, Vietnamese Planning and Investment Minister Vo Hong Phuc pledged to improve his country’s investment climate constantly to attract more foreign investment, particularly from Japan. Attractive manufacturing baseThe Japanese firms doing business in Vietnam include such giants as Toyota Motor, Sony, Canon and Honda. Many Japanese firms have made forays into Vietnam or have boosted investment there in recent months. In one of the highest-profile Japanese investments lately, Canon began construction of its second inkjet-printer factory in Vietnam, at Tien Son Industrial Zone in the northern province of Bac Ninh. The factory, with an investment capital of $70 million, is to come online next April. It will turn out 700,000 printers per month, all of which will be exported. Canon plans to funnel an additional investment of $40 million into the factory. Canon’s first inkjet-printer factory in the country is in Hanoi’s Thang Long Industrial Zone. The group also owns a laser-printer plant in Bac Ninh province’s Que Vo Industrial Zone that became operational last year. Among other investments by big Japanese firms, Nippon Sheet Glass Co’s $145 million joint-venture sheet-glass factory with a local firm, now under construction in the southern province of Ba Ria-Vung Tau, will go online this autumn. Honda Vietnam (HVN) recently announced plans to pour $60 million into an auto factory within the next five years. Over the past 10 years, HVN has invested nearly $194 million in the production of motorbikes of various models and has been a pioneer of the motorbike-manufacturing sector in Vietnam. Suzuki Motor’s new $20 million motorcycle plant opened early this year in the southern province of Dong Nai. Among smaller firms, Nidec Corp started production at its new fan-motor factory in Saigon High-Tech Park on June 1. The factory is run by Nidec’s newly established, wholly owned subsidiary with a paid-in capital of $11 million. Kokuyo Co plans to establish a plant at the Nomura-Haiphong industrial complex in the northern city of Haiphong in August to produce, for the time being, stationery and paper products for exports to Japan. Tokyo Seiko Co is building a $90 million factory in the Vietnam-Singapore Industrial Park in the southern province of Binh Duong to manufacture steel-wire cable. A $3 million printing-ink factory of Dainipon Ink and Chemicals Inc went on stream at the same industrial park in March. Mitsuwa Electric Industry Co is constructing a plant at Que Vo Industrial Zone in the northern province of Bac Ninh to produce plastic products and paint. That plant is expected to be put into operation in October. Sumitomo Electric Industries Ltd (SEI) was licensed recently to establish a company to produce electric wire for cars in the northern province of Hai Duong. Sumiden Vietnam Automotive Wire, which will have an investment capital of $100 million, is SEI’s 11th automotive-wire company overseas. SEI has set a target of making Vietnam the largest automotive-wire producer in Southeast Asia. Kaneka Group began construction of a $2 million high-grade medical-equipment factory at Binh Duong’s Vietnam-Singapore Industrial Park recently. Garment manufacturer UNIQLO Co reportedly will reduce its production in China to less than 70% of the total, from more than 90% currently, by 2009. UNIQLO reportedly will boost the percentage of Southeast Asian output to more than 30% by starting production in Vietnam and Cambodia. Pentax Corp will establish a new plant in Hanoi by October to boost production of camera lenses. Terumo Corp recently announced plans to build a medical-equipment production plant in Vietnam at a cost of about $24 million. That plant, the firm’s fourth outside Japan, is to be put into operation around the middle of fiscal 2007. Yokohama Rubber Co plans to put into operation a new $9 million tire plant for trucks and two-wheeled vehicles in Vietnam next June. Nakashima Propeller Co plans to open its first overseas production base in Vietnam next February. Its wholly owned subsidiary to run the $6 million propeller factory in Haiphong was set up recently. Yakult Honsha Co announced recently that it will set up a joint venture in the southern province of Binh Duong with Danone Group of France to produce and sell lactic-acid-bacteria beverages (previously, Yakult products, being imported, have been very expensive in Vietnam). Danone Group is the biggest shareholder of Yakult, with a 20% stake. The joint venture in Vietnam will be the two firms’ second overseas after one in India. EXEDY Corp will set up a joint venture firm with a Taiwanese maker in Vietnam to produce and sell clutches for two-wheeled vehicles. The joint venture will build a $1.1 million assembly line in Hanoi. And jewelry seller Sadamatsu Co announced recently that it will build its first factory – both at home and abroad – in Vietnam at a cost of between 10 million and 20 million yen primarily to manufacture rings. High-tech industry links burgeoningEarly this year, computer-chip leader Intel Corp announced it would build a $300 million factory at Saigon High-Tech Park. The plant, now under construction, will initially employ 1,200 people. It is believed to be the biggest investment yet by a US company in Vietnam. Microsoft chairman Bill Gates visited Vietnam in April. After meeting the country’s top leaders, Gates received a star’s welcome at the Hanoi University of Technology from about 7,000 students. Gates’ visit came less than a year after he signed agreements to provide training for computer-technology teachers and support Vietnam’s technology sector. These highly publicized developments involving the two US high-tech giants have raised Vietnam’s profile as a promising high-tech business location. Meanwhile, Vietnam is rapidly emerging as one of the top choices for Japanese information-technology (IT) businesses in software outsourcing, after India and China, some experts say. At present, there are some 600 software-related firms in Vietnam, mostly in Hanoi and Ho Chi Minh City. The Vietnam Software Association forecasts Vietnam’s export of software products to Japan could reach about $350 million by 2010. To attain that figure, the country needs more than 14,500 IT engineers, they say. In June 2004, the governments of Japan and Vietnam signed an IT-cooperation agreement for Tokyo to help organize IT training courses conducted in Japanese at Vietnamese universities and enterprises and also to provide experts and equipment to Vietnam. Among other cooperation projects between Japan and Vietnam, the first Vietnam-Japan joint training project allowing Vietnamese IT engineers to work with Japanese partners became operational at Ho Chi Minh City-based Quang Trung Software Park last autumn. The UK Brain IT Engineer Training Co is a $1.2 million joint venture between Japan’s Unico Technos and Vietnam’s Kobe Co. It was established with the aim of developing a Vietnam-Japan IT training center, as a bridge for exchanging IT engineers between the two countries. FPT Software, Vietnam’s largest system integration vendor with about 900 engineers, plans to open a vocational school for IT engineers in September with the support of Tokyo’s Keio University and a similar Japanese vocational school. Nihon Unisys set up an offshore software-development firm in Hanoi on June 1. The wholly owned subsidiary USOL Vietnam Corp is capitalized at $100,000. The firm gets full support from FPT Software, which sends engineers on loan, among other things. NEC Soft and Singapore-based NEC Solutions Asia Pacific Pte (NECSAP) also established a joint-venture firm in Hanoi recently to promote their software-development and system-integration business in Vietnam. NEC Solutions Vietnam Co, capitalized at $1 million, began operation on June 1. Fujitsu’s Vietnamese subsidiary also plans to increase its staff. Cybozu, a leading Japanese groupware firm, also started software development in Vietnam on June 1 in collaboration with another Japanese firm, CS Systems Co. The development is being made at the local subsidiary of CS Systems in Ho Chi Minh City. The flow of investment in the IT sector is not always one-way. FPT Software set up its wholly owned Japanese subsidiary, FPT Software Japan, in November to land software outsourcing deals with new Japanese customers. Among major Japanese customers FPT Software has dealt with since setting up the Japanese subsidiary are IT vendors TIS Inc and Hitachi Software Engineering Co and mail-order firm Nissen Co. Banks as go-betweensJapanese banks are ready to cash in on booming Japanese investments in Vietnam. Bank of Tokyo-Mitsubishi UFJ signed a cooperation agreement with the Vietnamese Ministry of Planning and Investment in February to promote Japanese investments in Vietnam. Under the agreement, the leading Japanese bank will hold periodic conferences on investment procedures in Vietnam for Japanese investors. For its part, Vietnam has agreed to inform the bank of amendments to investment regulations and Japanese businesses’ operations in Vietnam. More recently, another major Japanese bank, Sumitomo Mitsui Banking Corp, signed a similar agreement late last month to promote a better understanding of policies and laws in Vietnam by holding seminars and organizing investment missions for Japanese companies that are keen to expand into Vietnamese markets. The Tokyo metropolitan government has teamed up with Japan’s three biggest financial groups – Mitsubishi UFJ Financial Group, Mizuho Financial Group and Sumitomo Mitsui Financial Group – and about 10 public organizations to provide paid advisory services to local small and medium-size firms keen on making inroads into foreign markets. The services, to be launched as early as late June, will advise such firms on market conditions and legal systems, mainly in Asian countries, utilizing information networks of the three financial groups. For the project’s first year, the metropolitan government has selected Vietnam as its main target country. Among the approximately 10 public organizations participating in the project are JETRO and the Japan Bank for International Cooperation. Meanwhile, Dai-ichi Mutual Life Insurance Co officially launched its representative office in Hanoi early this year, becoming the first Japanese life-insurance company to operate in Vietnam. NIPPONKOA Insurance Co recently forged a business alliance with Bao Viet, Vietnam’s biggest insurer. Under the tie-up, Bao Viet will sell insurance products to NIPPONKOA’s customer firms with operations in Vietnam, where foreign insurers are still allowed only a limited market access. Hisane Masaki is a Tokyo-based journalist, commentator and scholar on international politics and economics. His e-mail address is email@example.com. (Copyright 2006 Asia Times Online Ltd. All rights reserved. Please contact us about sales, syndication and republishing .)