Previously viewed as a manufacturing base for Japanese companies, Vietnam's property market and services sector now attract increasing interest.
Japan’s Sumitomo Corp. is planning to develop a large industrial park in northern Vinh Phuc province, complete with factories for lease for smaller Japanese businesses wanting an easy entrance into manufacturing in Vietnam. The corporation expects to spend a total of $120 million to construct the 200 ha site, which may be opened in 2018. About 10 per cent of the site will be dedicated to small-scale factories for lease.
This will be Sumitomo’s seventh overseas industrial park and its third in Vietnam, following one each in Hanoi and northern Hung Yen province, which have a combined area of 620 ha and house 150 companies.
Sumitomo is not alone in the business of industrial parks. Sojitz, another Japanese conglomerate, also plans to develop at least three more in Vietnam, following the Loteco and Long Duc Industrial Parks in southern Dong Nai province. The upward trend of Japanese investment in Vietnam is the reason behind the expansion plans of both Sumitomo and Sojitz.
Although Japan’s FDI fell in 2014 as the weakening Yen and other factors encouraged some Japanese firms to focus on domestic production, the industrial park investments by Sojitz and Sumitomo herald a new wave of Japanese investment into Vietnam.
Out of China
In April the Japan External Trade Organization (JETRO) released a survey on the international operations of Japanese firms, underscoring the increasing number of Japanese companies moving away from China. ASEAN countries were the most popular transfer destinations, accepting 47.9 per cent of all relocations.
Japanese companies blame increasing production costs and personnel costs for their relocations. “Among respondents selecting transferring from China to ASEAN countries, almost half of them (57 in 129 cases) selected Vietnam as the destination,” JETRO stated in the survey report.
Nearly half of Japanese companies operating in China cited rising labor costs as one of the biggest barriers to them expanding their investment in the country. Meanwhile, the number of Japanese enterprises saying Vietnam’s labor costs are too high is just 12 per cent. This reflects the difference in labor costs between the two countries and explains why more and more Japanese companies want to transfer their operations to Vietnam. In addition, nearly two-thirds of Japanese companies operating in Vietnam want to further expand their investment in the year to come.
Kyocera, for instance, will build a new plant in Vietnam this year to significantly increase its output of multifunction printers. The investment aims to improve its price competitiveness by relocating some production from China. The new plant, capitalized at around $57.8 million, can manufacturer metal molds and form plastic parts. By 2018 it will turn out 2 million units a year, or four times as many as now. Accompanying the expansion, its workforce will be tripled to around 5,000 employees.
Japanese stationery supplier the King Jim Co. has also announced it will build a third plastic paper file factory in Vietnam by late 2016, to reduce its production in Vietnam’s northern neighbor.
“Vietnam’s labor costs are one-third of China’s and new factories in Vietnam will help improve Japanese companies’ competitiveness,” said Mr. Hideo Okubo, Chairman and CEO of investment consultants the Forval Corporation. He added that the good relationship between Vietnam and Japan is a key factor in attracting investment from Japanese companies. Vietnam and Japan have signed a free trade agreement, both are involved in negotiations over the TPP, and Japan is Vietnam’s biggest bilateral donor.
As an investment advisor, Mr. Okubo sees a growing appetite among Japanese companies for service sectors and consumer products in Vietnam. “Ten years ago most Japanese companies eyed Vietnam as a manufacturing base for export, but now I see a lot of companies coming here to exploit growing demand in the local market,” he said. “This is because of Vietnam’s young population and an emerging affluent class.” He pointed out that service sectors, including financial services, IT, and retail, are especially attractive.
Recent investment activities by Japanese companies also reflect this trend. Japanese credit card company Credit Saison this year entered Vietnam’s consumer finance market by buying into a subsidiary of the Ho Chi Minh City Development Bank (HDBank), spending around $41.4 million on acquiring a 49 per cent stake in HDFinance, Vietnam’s third-largest consumer finance business. “As Vietnam’s economy has grown, rising incomes have boosted demand for appliances and motorcycles,” Credit Saison said in its announcement. “But loans are used for only 20 per cent of such purchases. Credit Saison saw considerable room for growth compared with such markets as Indonesia, where the figure is 80 per cent.”
While Credit Saison sees opportunities for consumer finance products in Vietnam, Japanese retailers have also found their own opportunities. Just last month, Japanese convenience store chain Ministop teamed up with Sojitz in an effort to reinvigorate its stalled operations in Vietnam. Ministop at one time planned to open 500 stores in Vietnam, in cooperation with local coffee giant Trung Nguyen. The arrangement came to an end this year, but its deal with Sojitz, a sister company of FamilyMart, indicates that Ministop’s plans to enter the market haven’t come to an end.
The AEON Group, the biggest retailer in Japan, has set Vietnam as its hub in the Southeast Asian region. The retailer is now running two stores in Binh Duong and Ho Chi Minh City and a new store is about to open in Hanoi. But this is not enough. To enhance its foothold in the market, AEON in January entered into a capital and business tie-up with Vietnam’s Fivimart and Citimart.
The partnership is part of the Japanese retailer’s strategy of “Shift to Asia” under its Medium-term Management Plan during the 2014-2016 period. “In order to achieve rapid growth in the Vietnamese market, we believe the partnerships with Fivimart and Citimart, companies with strong business foundations in two of the largest cities in the north and the south of the country as well as knowledge about varying regionally-oriented customer needs, are of great significance,” AEON noted in its announcement.
Vietnam’s property sector, which Japanese companies used to largely ignore, is also attracting more attention from Japanese investors.
Following the investment by the Tokyu Group, which joined hands with Becamex IDC to develop a $1.2 billion township in southern Binh Duong province, many other Japanese real estate developers have jumped into Vietnam. Mitsubishi and Toshiba will partner with South Korea’s Lotte Group to develop a $2 billion complex with a luxury trade center, hotels, office blocks, and apartment blocks on a 10 ha site in Ho Chi Minh City.
Haseko, meanwhile, will develop an apartment block in Hanoi in cooperation with local giant the Him Lam Group. The two have set up a joint venture, with Haseko holding a 95 per cent stake. This marks the first overseas expansion by the Japanese company since 1988. And the Tokyo-headquartered investment fund the Creed Group last month inked a deal to invest $200 million in An Gia Investment, securing a 20 per cent stake in the Vietnamese real estate company. This is the second investment by the Creed Group in Vietnam this year, after its investment in 577 Investment Corp. to jointly develop 1,100 apartments in Ho Chi Minh City.
“Although Vietnam experienced a severe bubble in its real estate market from 2006 to 2007, it is the only country with continuously falling property prices among all Southeast Asia countries,” the Group said. “Vietnam’s property value could be underestimated given its condensed population and industrial segment’s prosperity.”