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Japanese Firms Flock to Vietnam
[Analysis] Vietnam is 'China plus one' for Japan Inc.
Hisane Masaki (hmasaki)     Print Article 
Published 2006-08-26 15:22 (KST)   
Amid a lengthy investment spree in China, many of Japan Inc's biggest names are making inroads into 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. 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 percent, 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 U.S. 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.

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 U.S. 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 U.S. 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 U.S., China revalued the yuan against the U.S. dollar in July last year, 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.

Garment manufacturer UNIQLO Co. provides a good example of the "China plus one" attitude. It reportedly will reduce its production in China to less than 70 percent of the total, from more than 90 percent currently, by 2009. UNIQLO reportedly will boost the percentage of Southeast Asian output to more than 30 percent by starting production in Vietnam and Cambodia.

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. 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.

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 percent in 1998 and 4.9 percent in 1999, after posting growth of between 8 percent and 9 percent 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 percent this year and 8 percent 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 FTA after another 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 later this year. Japan is separately negotiating an FTA with the ASEAN as a whole.

Early this year, Japan and Vietnam 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.

Japan and Vietnam also inaugurated this month a new forum to promote trade and investment, in a Hanoi ceremony attended by visiting Japanese minister in charge of science and technology policy, Iwao Matsuda. Immediately after the debut of the Vietnam-Japan Business Forum (VJBF), representatives of 400 Vietnamese and Japanese businesses -- out of the total 600 enterprises which have registered for membership -- attended a symposium on bilateral economic cooperation.

In a meeting this month with a visiting high-powered delegation of Japanese parliamentary members, including Tsutomu Takebe, the secretary general of the ruling Liberal Democratic Party (LDP), new Vietnamese Prime Minister Nguyen Tan Dung said he plans to visit Japan in October.

The planned Japan trip by the premier, who took office just two months ago, highlights the importance Hanoi attaches to relations with the world's second-largest economy. Japan is also Vietnam's largest single aid donor.

In another significant recent development, Vietnam and the U.S. signed a trade pact in late 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 further fuel Japanese and other foreign investment 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.
Hisane Masaki is a Tokyo-based commentator and scholar on international politics and economy. This is a slightly updated and expanded version of an article that originally appeared on Crisscross recently. A much longer version appeared earlier on Asia Times.
©2006 OhmyNews
Other articles by reporter Hisane Masaki

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