“60 Pct of Japanese Companies Are Making Profit in Vietnam”

With the cooperation of the Development Strategy Institute (DSI), based on the results of JETRO’s 26^th survey on business conditions of Japanese-affiliated firms in Asia and Oceania, we are very happy to host the press conference to announce the results of the survey: Business situations of Japanese-affiliated companies in Vietnam and increased Japanese investment in Vietnam. The basis of this JETRO survey is the analysis of business situations of the more than 4,000 Japanese-affiliated companies operating in Asia and Oceania, including about 250 companies in Vietnam. I think this will be the true voice of Japanese enterprises.

 

In addition, Japanese companies made record investment values in Vietnam in 2011 and 2012. I think that Japanese investment in Vietnam is high and formulating the third boom. However, we also need to identify other aspects, such as signs of Vietnam’s economic instability like the investment environment, incomplete infrastructure, and lack of skilled workforce. Given global economic uncertainties, Japan’s investment into Vietnam in 2013 will be more difficult, according to some experts.

 

I also share my viewpoint with the Vietnamese Government that the current investment mismatches Vietnam’s potentials. It is important that [Vietnam] should set the target for new projects at US$20 billion each year and point out directions to increase beneficial elements and minimise bad elements.

 

To date, according to the JETRO survey results, there are positive signals in the investment situation in Vietnam. Specifically, 65.9 per cent of Japanese companies plan to expand their business operations in Vietnam in the coming 1-2 years, higher than the overall rate of 57.8 per cent. Although this rate declined over the past two years, the rates in Thailand and China even dropped more sharply.

 

On operating profitability, 60.2 per cent of respondents in Vietnam reported a profit, lower than the average of 67.5 per cent in all ASEAN countries, but higher than the 57.2 per cent recorded in China. However, 34.2 per cent of Japanese firms in Vietnam believed that 2013 would be better for them, an increase of 13.8 per cent over the previous year.

 

Besides, Japanese companies also pointed out investment weaknesses in Vietnam. While appreciating economic outlook and market potentials, they did not appreciate that Vietnam's current labour costs hit 18.3 per cent, higher than the ASEAN average of 16.8 per cent. Wage rise is also a burden for Japanese firms. In 2012, wages increased 19.7 per cent and were expected to add by 17.5 per cent in 2013 although the wage in Vietnam is still low in absolute value in comparison with other countries in the region. Another weakness is the localisation ratio of only 27.9 per cent, much lower than the overall medium rate of 47.8 per cent, 60.8 per cent in China, 52.9 per cent in Thailand, and 43.3 per cent in Indonesia.

 

Indeed, Vietnam is competing fiercely with other countries in the region to attract Japanese investors. According to the JETRO survey results, 81.5 per cent of Japanese companies worried about wage increases for workers. Meanwhile, the pay for Cambodian manufacturing workers is equal to only a half that in Vietnam. So, if only payroll is taken into account, Cambodia will be a heavyweight rival for Vietnam. This gives rise to pressures on increased personnel expenses in Vietnam. Therefore, Vietnam should have an appropriate wage increase plan to ensure both worker rights and maintain a competitive advantage in foreign direct investment attraction. In addition, capability and awareness of local workers, quality of employees, and difficulty in managerial personnel recruitment are also major existing problems in Vietnam. As many as 60.5 per cent of Japanese firms complained about the capacity and awareness of local workers; and 54.7 per cent faced difficulty in recruiting talented managers. Another barrier that Japanese investors expect to be lifted is the supply of raw materials and components in Vietnam. Procurement of materials, components and parts account for more than half of production costs of Japanese companies; thus, trimming down this type of expenses is common challenge for Japanese firms. Meanwhile, the localisation rate of raw materials and components was only 27.9 per cent in Vietnam, much lower than the weighted average of 47.8 per cent, 60.8 per cent in China, 52.9 per cent in Thailand, and 43.3 per cent in Indonesia.

 

Vietnam’s FDI attraction is quite different from other countries. The typical example is FDI attraction in Thailand, a relatively developed nation in the ASEAN region. In 2011, its FDI capital was US$9.1 billion for 904 projects. Compared with Vietnam, Thailand had 20 per cent fewer projects and lower value. But, if only FDI capital from Japan was taken into account, the projects in Thailand were more than 2.3 times greater than in Vietnam, while the value was 2.8 times higher. These figures help us to understand why Thailand is so strongly attractive to FDI from Japan. This is the reason why JETRO always recommends that the Vietnamese Government learn from the example of Thailand in order not to reduce capital flow from Japan.

 

Another address is Indonesia, which is very active in attracting FDI capital in recent years. Compared with Vietnam, the amount of FDI capital in Indonesia was 4 times bigger and the number of projects licensed was 1.7 times greater. If only Japan’s investment capital was taken into consideration, the amount in Vietnam was 20 per cent higher, but the number of licensed projects in Indonesia doubled Vietnam. Unlike Thailand, Indonesia does not have any investment incentive regime for FDI projects. I think the worldwide FDI capital for Indonesia primarily focuses on resources and the huge market of more than 200 million people. The FDI capital-receiving environments of Indonesia and Vietnam will vary widely due to contextual differences in each country.

 

Therefore, in the long term when it identifies its strengths and weaknesses, Vietnam should establish FDI attraction policies to overcome other ASEAN countries.