With Vietnam’s typically-low localisation numbers currently increasing at its highest-ever rate, Japanese investors in particular are now becoming more attracted to the country’s manufacturing potential. However, regulatory risks remain a top concern. Bich Thuy reports.
A number of Japanese businesses are planning to move investment from China and Thailand to Vietnam to ease risks from the ongoing US-China tensions.
“Production cost increases because of the import of spare parts. This is a big concern for an exit,” said Takaharu Oyama, general director of A&D Vietnam Ltd., one of the Japanese companies which have previously shifted investment from China to Vietnam.
A&D’s concern is also that of other Japanese companies. However, some of the worry is now being partly eased as the country’s low localisation rate improves.
Improvements in localisation
As the government takes bold action and creates programmes to develop supporting industries in order to increase the localisation rate, good news has come from the latest fiscal year (FY) 2018 survey on the international operations of Japanese companies, released last week by the Japan External Trade Organization (JETRO) Hanoi Office. The survey was conducted over 13,415 Japanese businesses at the end of 2018, including more than 1,500 with operation in Vietnam.
As it stands, Vietnam’s localisation rate has tended to gradually increase since 2010, and in 2018 it rose to 36.3 per cent from 33.2 per cent in the previous year, making it the highest rise among the surveyed countries. Impressively, for the first time, the country’s localisation rate has surpassed Malaysia (36.1 per cent).
The improvement is expected to add attraction to Vietnam, where manufacturing is the most impressive sector, making up over 80 per cent of the country’s total pledged capital amid stiffening competition in foreign investment attraction.
According to JETRO Hanoi, manufacturing retained the most attention of Japanese investors in Vietnam last year, accounting for 35 per cent of total number of projects, and rising by 10 per cent on-year. In terms of registered capital, this sector made up 77 per cent of total Japanese-registered capital during the year.
“Japanese groups still have high interest in the Vietnamese manufacturing sector. It is known that the more the economy develops, the more the third industry of service develops compared to the second industry of manufacturing, and Japan is not an exception. Thus Vietnam should have policies to attract investment in manufacturing in its targeted areas,” JETRO Hanoi’s chief representative Hironobu Kitagawa told VIR.
According to the 2018 survey, 1.5 per cent of Japanese businesses in China said that they want to move to third countries, while 5.1 per cent want to narrow operations. Meanwhile, 69.8 per cent of Japanese businesses in Vietnam are planning to expand operations in the country in the next one to two years, up from 69.5 per cent in the 2017 edition. The rate is higher than in Thailand (52.2 per cent), and China (48.7 per cent).
Kitagawa said that Vietnam has advantages to attract Japanese investment, such as improvements in labour costs, tax procedures, licensing procedures, and infrastructure.
He also attributed market size, revenue growth, and high growth potential as advantages. As laid out in the latest survey, 64.9 per cent of Japanese investors said that they want to invest because of revenue increase in the country, while 42.8 per cent cited high growth potential.
Despite improvements, Vietnam’s localisation rate from domestic businesses remains lower at 14.4 per cent, and far lower than China (66.3 per cent) and Thailand (57.2 per cent).
More regulatory concerns
Regulatory risks remain high among Japanese firms in Vietnam. A few days ago, a group of Japanese businesses gathered at a conference to give comments to drafts of the new Law on Investment and the Law on Enterprises. Mitsubishi, Japan Airlines, Taisei Corporation, and Inkel Vietnam were among the notable names.
The gathering came right after the first New Year meeting held by the Vietnam Chamber of Commerce and Industry and the Vietnamese Ministry of Planning and Investment (MPI) to seek comments for the first amendment of these laws, showing how significant legal changes to Japanese investors is.
It is easy to understand why this move was made rapidly. Japanese investors have seen improvements in Vietnam’s legal framework, but solutions to outstanding business concerns remain in the distance.
Japanese legal concerns are once again reinforced by the JETRO FY 2018 survey. While Japanese perspectives about risks over labour costs, cumbersome tax procedures, complicated licensing procedures, and infrastructure all fell, regulatory risks went in the opposite direction.
While 46.9 per cent of interviewees named regulatory framework as risks in the 2017 edition, the 2018 result now stands at 48.2 per cent, a rise of 1.3 percentage points.
Kitagawa of JETRO Hanoi, blamed the poor result for incompletion of a legal framework and lack of transparency in performance.
“This is particularly proven by the lack of pre-studies about legal contents, as shown in the regulations in used machine imports; late issuance of guiding documents; inconsistency in legal performance as shown in changes in contents of investment licenses; and lack of transparency in regulation performance, as shown in the fund of natural disaster fight and waste rules, among other factors,” he attributed.
Currently, the MPI is actively working on the amendment of the Law on Investment and the Law on Enterprises to prepare for the upcoming discussions at the National Assembly. Thus, Japanese concerns come as a significant factor.
Evidently, A&D Vietnam and other Japanese businesses are keeping their eyes on the discussions and expecting positive changes.
Hanoi-Japan investment promotion conference
The Hanoi-Japan investment promotion conference will be held on March 29 with the participation of over 120 Japanese delegates. This annual event aims to introduce investment opportunities in highly-potential projects to Japanese businesses.
Vietnamese representatives include leaders of ministries, Hanoi, cities, and provinces, the Vietnam National Administration of Tourism, Vietnam Airlines, and other Vietnamese businesses. As part of the event, a number of memoranda of understanding will be announced.