vietnam the new asian tiger

8/13/2019 Vietnam the New Asian Tiger

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In recent years, increased foreign investment in Vietnam has shown that a wealth of

emerging opportunities exist in the country. Vietnam continues to be an important

investment destination for Japan, particularly further to the March 2011 earthquake and

nuclear disaster as well as the recent territorial stand-offs with China, which have seen

many Japanese companies looking to identify alternative markets. In this White Paper, FTI

Consulting takes a deeper look at this growing relationship, outlining the potential

growth prospects driving Japanese investment strategy, as well as the risk factors that

should be considered prior to entering the Vietnamese market.

VIETNAM:THE NEW ASIAN TIGER?


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3 http://ryutsuu.biz/abroad/e022924.htmlNihon Keizai Shimbun, 11 December 2012

4 http://www.emeye.jp/disp/VNM/2012/0704/stockname_0704_015/0/http://www.bridgestone.com/corporate/news/2012070202.html

5 http://global.lixil.co.jp/pdf/20121129_vietnam.pdfhttp://www.bcc-jp.com/member/business/foreign/20120416-1546.html

6 http://www.emeye.jp/disp/VNM/2012/0814/stockname_0814_014/0/

http://www.nipro.co.jp/en/news/2012/document/120110.pdf

Top 10 Investments in Vietnam approved in 2012 (Japanese investments in bold)

Company Approx. amount (USD)

1 Tokyu Corporation 1.2 billion

2 Bridgestone Corporation 570 million

3 LIXIL Corporation 440 million

4 Alltech Telecoms 380 million

5 TexHong Textile 300 million

6 Nipro Corporation 250 million

7 Kyoei Steel Ltd. 180 million

7 Oshima Shipbuilding Co. Ltd. 180 million

9 Lock & Lock 150 million

10 Fuji Xerox Co. Ltd. 120 million

Source: Vietnam Foreign Investment Agency/Jetro

Some major recent Japanese investment projects include:

Tokyu Corporation:The Tokyu Binh DuongGarden is a 71 hectare development project to

build a Japanese-style residential city, and

includes the development of transportation

infrastructure, IT networks, water, power,

and educational facilities.3

Bridgestone:A new passenger car tyre

factory in the Dinh Vu Industrial Zone in Hai

Phong City. It is reported that this is the first

tyre production facility in Vietnam for

Bridgestone. Operations are due to commence

in March 2014 and will employ approximately1,900 by the first half of 2016.4

LIXIL Group:A construction plant in Long

Duc Industrial Estate, Dong Nai Province. The

plant is scheduled to produce aluminum

products and will be an integrated

production system plant (i.e. includes the

molding, processing, and assembly of

products).5

NIPRO Corporation:The construction of a pharmaceutical factory by Nipros Vietnamese

subsidiary, Nipro Pharma Vietnam in the Vietnam Singapore Industrial Park in Hai Phong. The

factory will produce medicines for drug markets in developing countries including Japan. Test

production will start between March and September 2014, and full production is scheduled for

April 2015.6


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7 http://www.cpv.org.vn/cpv/Modules/News_English/News_Detail_E.aspx?CN_ID=526107&CO_ID=301058 JETRO Global Eye World Topics 4 February 2013, http://www.jetro.go.jp/9 Mizuho Research Institute10 http://english.thesaigontimes.vn/Home/business/financial-markets/19566/

11 http://english.thesaigontimes.vn/Home/business/financial-markets/27158/

Vietnam offers amore open andtransparentmarket,abundant naturalresources andfavorablegeographicpositioning.

Oshima Shipbuilding:A new shipyard in the southern Vietnamese city of Cam Ranh. The

shipyard, to be built in two phases, is planned to operate for 50 years. In Phase 1 (the first four

years of the project), Oshima Shipbuilding will construct a shipyard that produces 12 vessels a

year. Phase 2 will increase that number to 24. This project is reportedly set to create 3,000 new

jobs.7

RATIONALE FOR INVESTING IN VIETNAMThere are several key drivers to Japans current surge of interest in Vietnam. The strong yen has

been a major factor behind the recent increase in Japanese overseas investment activities.

Diversification into Vietnam for geopolitical reasons is a further driver. Combined with the broad

push into emerging markets, backed by a Japanese government concerned about lack of growth

and an ageing population at home, there are also emerging opportunities in the country.

POLITICAL ATTRACTIONS

Vietnam is increasingly viewed as a viable alternative to reliance on China where the currency is

strengthening and wage costs are rising rapidly.

The competitive workforce in Vietnam is particularly attractive; unskilled workers in Vietnam aretypically paid half to one third of the US$300 a month their counterparts might receive in the

manufacturing clusters of southern China.8The growing young population, diligent workers and

a willingness to learn are further plus points.

In addition, corporate taxes are rising on foreign firms in China and tax incentives are being

reduced. In contrast, Vietnam offers a myriad of investment incentives and schemes such as tax

breaks to encourage foreign investors in to the market. Recently, the central bank governor has

even urged banks to cut loan rates by 2-3 percentage points to help boost the economy.

Moreover, there are significant unresolved political issues between Japan and China, whereas

Vietnam provides political stability, free of historical animosity and present-day rivalry. This is a

major factor corporations tend to consider when investing in infrastructure projects.

Partly as a result of the above factors, there is also high-level political backing. Japan is one of

Vietnams largest aid donors, with political and security ties between the two countries growing

in reaction to Chinas assertiveness. Much of Japans aid is focused on infrastructure and projects

that directly benefit Japanese companies, such as the recent Lach Huyen port in Haiphong,

northern Vietnam.

STRATEGIC ADVANTAGES

The Asian Development Bank cites Vietnam as having one of the fastest expanding middle classes

in the region, attracting the retail industry for reasons of both access and supply.

Food and beverage companies such as Kirin Holdings, Nippon Ham, Ezaki Glico and Nichirei have

been investing in Vietnamese companies through M&A in response to the potential growth in

domestic demand.9Mizuho Corporate Banks recent investment into Vietcombank10and

Sumitomo Life Insurances acquisition of an 18 percent stake in Vietnamese insurer Baoviet

Holdings,11 demonstrate that non-manufacturing industries are also looking to develop and

expand coverage in the country. In addition, Japanese motorcycle manufacturers such as Honda,


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12 Mizuho Research Institute13 JETRO Global Eye World Topics 4 February 2013. http://www.jetro.go.jp/

14 JETRO Global Eye World Topics 4 February 2013. http://www.jetro.go.jp/

Yamaha, Suzuki and Kawasaki hold around 80 percent market share in Vietnam leading to further

investment in this sector.12

It is not only the large corporations but also SMEs that are keen to establish themselves in the

market. The Japan Business Association has seen a steady increase in the number of companies

registered in Hanoi and Ho Chi Minh over the last two years as detailed below:

Registered Japanese businesses in Vietnam

Registered Businesses Hanoi Ho Chi Minh City

April 2011 353 446

April 2012 465 567

Latest figures (March 2013/September 2012) 510 584

Source: Japan Business Association

Focused on fostering strong relations with the Vietnamese government and sustaining a good

investment environment, the Japanese Business Association in Ho Chi Minh is noted to be the

third largest in terms of membership within ASEAN countries, after Bangkok and Singapore.

Vietnam offers a more open and transparent market, abundant natural resources and favorable

geographic positioning. It also has a long coastline with an increasingly modern and

sophisticated port infrastructure in comparison to other emerging markets.

In addition, Japanese companies have been identifying alternative manufacturing bases and

markets to reduce risk and dependence since the 2011 earthquake and tsunami in Japan, and the

recent flooding in Thailand. This vulnerability and the ensuing impact on the regional supply

chain demonstrated the risk of industry reliance on one region. Infrastructure, while still a

challenge, is gradually being developed.

KEY ISSUES TO CONSIDERWhile Vietnam remains of growing interest to Japanese firms for the reasons outlined above,

there are various risk factors that should be appropriately considered prior to market entry.

WAGES HIKE

Wages in Vietnam are currently at an attractive level, but as in other regional countries, they are

on an upward trend.

In 2012, salaries rose 19.7 percent on an annual basis, and this year, they are forecast to increase

17.5 percent. Industry breakdown provides further areas of caution. In the manufacturing

industry salaries are double those of Cambodia, while labor cost accounts for 18.3 percent of

production cost, versus the average 16.8 percent in ASEAN and 17.6 percent in China.

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MATERIAL AND COMPONENT LOCALIZATION

The costs of materials and components should also be noted. These expenses contribute 62.4

percent of the total production cost in Vietnam,14and Japanese firms are having difficulties

cutting back on the payments. Moreover, component supply for manufacturing-processing in

Vietnam has not met the demand.


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Comprehensiveon-ground duediligence isessential toensure thesuitability of anyinvestment

and/or potentialbusiness partner.

LOCAL WORKFORCE SKILLS AND RECRUITMENT OF SENIOR STAFF

Vietnams labor pool is plentiful and people are willing to learn. However, according to the

Ministry of Education and Training, the quality of the Vietnamese education system is inadequate

and at odds with the needs of the economy. The educational system suffers from an unbalanced

structure, where it is not linked with industry needs or employment opportunities, rendering it

impractical and largely ineffective. Additionally, teaching capacity is limited and infrastructure

is insufficient, despite improvements to the curricula, teaching manuals and methods of delivery.

Given the high demand for skilled workers, those who are well-educated and/or who have the

relevant work experience will invariably have more options and will often seek a job with better

working conditions and/or pay. Skilled workers will simply not show up for work on a given day,

having found employment elsewhere.

WORKFORCE TENSION

Vietnam witnessed a record number of labor strikes last year, as average annual inflation

exceeded 18 percent, the highest rate in Asia. Canon witnessed an incident at their Thang Long

Industrial Park operation in June 2012 when assembly workers protested against stagnant wages,

the installation of new machines without further resourcing of the workforce, and insufficient

break times between shifts; meanwhile team leaders were awarded salary increases.

More recently, in January 2013, approximately 2,000 employees at Nihon Seimitsus factory,

located in Ho Chi Minh City, went on strike after their Tet (Vietnamese New Year) bonuses were

cut. The factory employs around 2,600 employees and mainly manufactures glass frames and

watch parts. The company released a statement attributing the bonus cut to a decline in sales,

but factory workers refuted that statement, claiming that business continued to thrive, and the

company had no legitimate reason for the reduction.

INFRASTRUCTURE

Vietnams infrastructure is still underdeveloped and remains a major priority for investment. The

Global Competitiveness Report of 2012-2013, by the World Economic Forum awarded Vietnam 3.2

points (out of 7) and ranked it 144 out of 199 on overall quality of infrastructure. Vietnam scores

low compared to other Southeast Asian countries, such as Malaysia (29), Thailand (49), Cambodia

(72), Indonesia (92), and the Philippines (98). In particular, the roads and ports are cited in the

report as being underdeveloped.

It should be noted that infrastructure has been gradually improving since the Global

Competitiveness Report of 2007-2008 in which Vietnam received 2.7 points (out of 7) for overall

quality of infrastructure.

In addition, the Japanese government recently pledged to provide Vietnam with ODAs for

infrastructure development. In January 2013, Prime Minister Dung of Vietnam addressed the issue

of infrastructure when he stated that both countries will work closely on projects such as theNorth-South Expressway, the development of Lach Huyen Port and the Ninh Thuan 2 nuclear

power plant.

CORRUPTION, RED TAPE, PROCEDURES, BACKLOGS

There is currently limited transparency and predictability with regards to bureaucracy, customs,

investment requirements and legal rights in Vietnam.

When Transparency International issued their annual Corruption Perception Index (CPI) for

2012, Vietnam ranked 123rd out of 176, dropping 11 spots from the position it occupied in 2011.


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Country Name2012

Ranking2011

RankingRanking movement between

2011 and 2012

Japan 17 14 -3

United States 19 24 +5

South Africa 69 64 -5

Brazil 69 73 +4

China 80 75 -5

Vietnam 123 112 -11Russia 133 143 +10

Myanmar 172 180 +8

* The 2012 ranking is based on surveys of 176 countries and territories, while the 2011 ranking is based on 183 countries andterritories.

The Global Competitiveness Report of 2012-2013 stated that some of the top ten most problematic

factors for doing business in Vietnam, according to business executives, included policy

instability (5th), tax regulation (6th), tax rates (8th), corruption (9th), and inefficient government

bureaucracy (10th).

SABOTAGE

Sabotage is reported to be perpetrated by both competitors and locals who protest the exclusion

of communities from particular projects or their negative environmental effects. Acts of

sabotage typically include false reports of crimes to the authorities and full-scale industrial

sabotage, such as the damaging of equipment. One case in particular involved both types of

interference when saboteurs damaged a pipeline that started spilling hazardous chemicals into a

river. These activists subsequently turned to the local authorities, claiming that the project was

ecologically unsound, resulting in a government investigation.

MARKET ENTRY AND BUSINESS PARTNERS

Given these potential issues, it is crucial to have a thorough and broad reaching understanding

of the political climate, the consumer environment and the competitor landscape in order to best

identify and decide on the opportunities to be had in Vietnam. Another challenge is identifying

appropriate business partners that are both suitable in terms of financial viability and

reputation. Many local companies may not have a full understanding of brand value and/or legal

regulations that apply to Japanese businesses.

Establishing fluid communication, setting clear expectations and achieving mutual understanding

should not be taken for granted. Often there is only limited public access information available

with regards to official filings or corporate records. There can also be questions raised over the

veracity of the limited data available. The adequacy of traditional financial and legal due

diligence is also limited by the lack of adherence to international standards, and practices in

accounting and corporate reporting.

Comprehensive on-ground due diligence is essential to ensure the suitability of any investment

and/or potential business partner. While it is crucial to obtain a copy of the companys business

license, this exercise should go beyond the standard financial and legal review. A wide-ranginginvestigative due diligence exercise is needed to confirm actual business operations, any previous

experience with foreign entities, official connections, and potential reputational issues that

could emerge. In the case of Vietnam these may include political interference, corrupt activity

and apaque operations or ownership, all of which could cause significant reputational damage.

Moreover, global anti-bribery and anti-corruption regulations can often challenge what is viewed

as a traditional and cultural way of doing business in Vietnam, and ensuring compliance while

securing relationships with local business partners and supporters will mean investors are under

close scrutiny. Adequate steps should be taken to demonstrate transparency in business

relationships.


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About FTI ConsultingFTI Consulting, Inc. is a global business advisory firm dedicated to helping organizations protect and enhance enterprise value in an increasingly complex legal, regulatory and economicenvironment. FTI Consulting professionals, who are located in all major business centers throughout the world, work closely with clients to anticipate, illuminate and overcome complex businesschallenges in areas such as investigations, litigation, mergers and acquisitions, regulatory issues, reputation management and restructuring. More information can be found atwww.fticonsulting.com

2013 FTI Consulting, Inc. All rights reserved.

ABOUT FTI CONSULTING

FTI Consulting, Inc. is a global business advisory firm dedicated to helping organisations protect and enhance enterprise

value in an increasingly complex legal, regulatory and economic environment.

In Asia Pacific, FTI Consulting is the largest specialist advisory firm with a team of over 500 professionals situated in 15

business centres across the region. FTI Consulting provides advice on issues in the areas of finance, risk, governance,

performance, reputation, intelligence, compliance and liability.

Clients benefit from the firm's 30 years of extensive Asia Pacific experience, no matter how challenging or complex the

assignment. Clients that require a sophisticated combination of financial, technical, business and industry experience rely on

our experts to provide strategic advice on critical issues at critical times.

GLOBAL RISK AND INVESTIGATIONSThe Global Risk and Investigations practice of FTI Consulting is the leading provider of comprehensive business risk solutions

in Asia. We help clients determine the reputation and suitability of a business partner, untangle complex fraud schemes,

investigate allegations of bribery, contain a business crisis and much more.

Our team of seasoned professionals is drawn from backgrounds in senior law enforcement, regulatory compliance, academic

and economic research, information technology and investigative journalism. We provide clients with critical information,

insight and timely solutions in the areas of: reputational due diligence, business intelligence, fraud and corporate

investigations, FCPA and other corruption-related investigations, asset searching, data forensics and electronic evidence

recovery, brand integrity and business crisis containment services.

For more information, please contact:

Ben Fouracre Ryo Fujita

Director Senior Consultant

+813.5369.3933 +813.5369.4145

[email protected] [email protected]

vietnam the new asian tiger

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