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Unknown quantity

Released at: 09:15, 15/09/2015

Unknown quantity

The recent decline in FDI flows from Japan to Vietnam are expected to recover but the future remains something of a mystery due to instabilities in the global economy and Japan's monetary and fiscal policies.

by Tran Minh

With a few million dollars at his disposal, Mr. Matsuda, a Japanese entrepreneur in the field of information technology, is considering starting something in Vietnam, just as many of his business acquaintances have done successfully over the last few years, especially as Japan’s economy is growing at quite a slow pace. However, with the devaluation of Japanese Yen (JPY) and the government spending more and more on public investment, he has reasons to hesitate as there are perhaps more opportunities at home and domestic costs are more affordable than previously. Giant Japan-headquartered multinational corporations may have a lot more financial power and may want to diversify their business portfolio with some production bases in Vietnam, but their general mindset may not be too far from Mr. Matsuda’s.

Foreign direct investment (FDI) from Japan flowed swiftly into Vietnam in the period from 2011 to 2014. According to figures from the Foreign Investment Agency (FIA) under the Ministry of Planning and Investment (MPI), Japan remained the top investor in Vietnam until mid-2014, with accumulated registered capital of $35.57 billion. In the last 12 months, however, the country has been surpassed by South Korea, with nearly $40 billion, while Japan’s was just a touch over $37 billion.

Looking at FDI flows into Vietnam as a whole, there have only been 1,068 new projects with registered capital of $6.92 billion in the first seven months of 2015, up just 1 per cent compared to the same period of 2014. The figure is quite modest compared to previous years and raises concerns over whether it is indicative of a deceleration of FDI flows into Vietnam, especially from Japan.

Losing its footing

Fifty-three countries and territories had investment projects registered in Vietnam in the first seven months of this year. South Korea took the lead, with new and additional registered capital totaling $1.91 billion, accounting for 21.7 per cent of the total. The UK followed, with $1.24 billion, representing 14.2 per cent, then the British Virgin Islands and the US, both of whom had around $800 million in investment, or 10 per cent of the total. Hong Kong rounded out the Top 5, with $790 million and 9 per cent. Japan found itself outside of the Top 5, ranking sixth with only 176 new projects and 82 expanded projects, with combined capital of $716 million.

Back in the golden days Japan was either champion or runner-up in the Vietnam investment game, with billion-dollar projects such as the $9 billion Nghi Son Oil Refinery in north-central Thanh Hoa province, the $1.22 billion Bridgestone Tire Manufacturing Factory in northern Hai Phong city, and the $1.2-billion Tokyu Garden City project in southern Binh Duong province, among others. But over the last year Japanese FDI to Vietnam has been marked by an absence of mega projects, falling 65 per cent to $2.05 billion in 2014, according to figures from the Japan External Trade Organization (JETRO).

Japan’s macro-economic situation (with economic growth of just 0.004 per cent in 2014 and a “not very optimistic” forecast for 2015) and the public investment mentioned above may well lie behind Mr. Matsuda’s hesitation and the overall decline in Japanese FDI coming to Vietnam. However, Mr. Nguyen Van Toan, Deputy Chairman of the Vietnam Association of Foreign Investment Enterprises (VAFIE), believes that this is only a short-term trend and that Japanese enterprises will continue to invest in Vietnam over the longer term.

Getting up 

Japan has provided the highest level of ODA to Vietnam, exceeding $23 billion and accounting for more than 30 per cent of the total committed by the international community. Twelve per cent was grant aid and the remainder preferential loans. Japanese ODA projects have made significant contributions to Vietnam’s rapid socio-economic development, which is a necessary requirement of investors when looking into a new investment destination. More importantly, though, the financial source plays a key role in attracting Japanese enterprises to come and bid for contracts, and consequently creates a spillover effect on the Japanese business community to focus more on Vietnam. 

Tariff barriers are being reduced and eliminated gradually and Japanese companies operating in Vietnam receive substantial benefits when importing raw materials for processing and manufacturing. The Ministry of Finance (MoF) announced new preferential tariffs for the period of 2015-2019 on April 1, with 3,200 tariff lines being eliminated on machinery, equipment, electronic devices, spare parts and accessories, and others being imported from Japan. This is expected by authorities to encourage more Japanese enterprises to come to the country.
With a rising number of Japanese enterprises contacting JETRO for information on Vietnam’s investment environment and consultation, the Japanese Business Association of Ho Chi Minh City (JBAH) recently told Mr. Toan that falling Japanese FDI flows to Vietnam are unlikely to become a trend. According to JETRO, 62.3 per cent of Japanese enterprises in Vietnam were profitable last year, up from 59.2 per cent in 2013 and, as a result, 70 per cent have expressed a desire to continue to invest in the country.

A delegation of 30 businesses from the Japan Business Federation (Keidanren) attended the 2015 Vietnam-Japan Trade and Investment Promotion Forum in Ho Chi Minh City on July 31 to explore the country’s investment and business environment. According to Keidanren’s Senior Managing Director, Mr. Mukuta Satochi, Vietnam is considered a gateway for Japan to enter the ASEAN market. “As the ASEAN Economic Community will be formed at the end of the year Vietnam’s role as a business venue in global supply chain strategies will increase,” he said.

Meanwhile, Mr. Hirotaka Yasuzumi, Managing Director of the JETRO office in Ho Chi Minh City, said a study by JETRO revealed that Vietnam is chosen by a majority of Japanese businesses operating in Thailand and China as a place to locate their manufacturing facilities within their “Thailand+1” and “China+1” strategies. “The trend of shifting to a third country from China is increasing, mostly targeting ASEAN countries, especially Vietnam,” he said.

Abundant human resources and low costs are among Vietnam’s attractive characteristics, Mr. Yasuzumi said, noting that salaries for well-trained workers with good foreign language skills in Ho Chi Minh City are about $440 per person per month; half the cost in China’s Guangzhou province. Moreover, the electricity price is about $0.09 per kilowatt hour and water is about $0.43 per cubic meter, which are two or three times cheaper than those in the Philippines’ capital of Manila or in Guangzhou.

A large number of giant Japanese enterprises in Vietnam are following this investment trend. Mr. Tadahito Yamamoto, President and Chairman of the Board of Fuji Xerox, recently revealed his plans to turn Vietnam into Fuji Xerox’s global production base. In 2018 the import tax rate from ASEAN to Vietnam will be eliminated and so Fuji Xerox is investing in production in Vietnam and opening more branches in Myanmar, Cambodia and Laos to take advantage of the upcoming opportunities, he said. Many experts in the field of foreign investment have expressed faith that Vietnam is likely to see a new wave of investment from Japan as its investors have shown continued interest in the Southeast Asian market.

  • TAGS
  • Vietnam
  • FDI
  • Japan
  • ODA
  • investment

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