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
Vietnam This 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 effects In 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
base The 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 burgeoning Early 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-betweens Japanese 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 yiu45535@nifty.com.
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