Japanese SMEs keen to invest in Vietnam

Approximately 30% of Japanese firms with plans to expand their overseas operations unhesitatingly consider Vietnam as the top choice for conducting business, says Atsusuke Kawada, Chief Representative of the Japan External Trade Organisation (JETRO) Office in Hanoi.

Vietnam’s investment environment has and continues to improve day by day.   Provincial authorities throughout the country are pouring huge investment into industrial zones and infrastructure in a bid to attract foreign investment.

They are also aggressively developing attractive incentive packages designed to catch the eye of the most discriminating foreign investors and lure them to do business in their localities.

However, there are a number of obstacles to overcome in attracting huge inflows from Japan, says says Hirokazu Yamaoka, Director, Overseas Business Support Division under the JETRO.

Labour costs in some parts of the country are surging too rapidly (around 20% annually). Yet  the rise in labour costs is not resulting in a concurrent increase with productivity.

Without a corresponding increase in productivity, the overall price of the products increases, negatively affecting competitiveness in the global marketplace, Yamaoka says.
 

This phenomenon is leading many Japanese investors to pay more attention to newly emerging markets like Cambodia and Myanmar and, if wages continue to rise too rapidly out of alignment with productivity, it will more difficult to call on foreign investment, Hirokazu confides.

Some Japanese businesses are also finding it exceedingly difficult and costly to import input and other raw materials from outside the country as the support industry in Vietnam is in its infancy.

The need to import input and raw materials also push production costs up and lower business competitiveness and is a situation that Vietnam can rectify, if it pumps the necessary resources into support industry development. Unfortunately,  currently the development of the support industry is unfolding much too slowly.

The majority of Japanese SMEs also are not financially strong and lack adequate capital resources or ready access to capital resources, making it difficult for them to invest overseas, Hirokazu says.

There are far too many cumbersome administrative procedures and hoops that Japanese firms must jump through in order to do business in Vietnam.  Time is money and prolonged administrative procedures place a serious strain on already limited capital resources

The hope is that Vietnam will continue to simplify and streamline flexible policies for Japanese firms to operate more efficiently, he says.

Although 2013 and the first months of this year have witnessed an overall decline in Japanese investment in Vietnam, it is not necessary to raise the red flag of concern as of yet, adds Hirokazu.

The decline in investment is most likely the result of normal investment cycles, he says, adding that Japanese investment will most likely rebound and come on strong in the remaining months of the year and carry over into next year.

Recently, a delegation comprised of 26 Japanese SMEs operating in the support industry made a fact-finding tour of Vietnamese localities to seek investment opportunities. It is noteworthy that a few businesses operating in China joined the delegation.

These businesses which supply products to major groups are facing numerous difficulties at home, such as increased production costs and shrinking market. As a result, they  are eying shifting their investment overseas.

In this context, SMEs are looking for proper markets to invest in and Vietnam is a definitely a bright destination on the horizon for them.

As of the end of April 2014, Japan was the largest foreign investor in Vietnam with 2,266 projects totaling US$35.51 billion, according to the Foreign Investment Agency.

Japanese firms are operating in 18 fields, mainly the processing and manufacturing industry (1,227 projects worth US$29.9 billion), real estate (30 projects worth US$1.4 billion) and construction (56 projects worth US$1.06 billion).

Investment is spread throughout 49 provinces and cities. Thanh Hoa province tops the list with 9 projects capitalized at US$9.68 billion, followed by Binh Duong, Hanoi, Ho Chi Minh City, Haiphong and Dong Nai.