JETRO has released the results of its annual survey on Japanese-affiliated manufacturers currently operating in six ASEAN countries (Indonesia, Malaysia, the Philippines, Singapore, Thailand and Vietnam) and India. Conducted in January and February 2006, the survey received responses from 966 companies.

A majority of respondents was operating in top 5 industries: transportation equipment parts (15.4%), electric/electronic parts (14.8%), metal products (7.8%), chemicals (7.7%), and electric/electronic equipments (7.5%).

Vietnam the first choice

The survey shows an increasing trend of Japanese manufacturers’ realignment of their production bases from one ASEAN country to another, and between ASEAN and China.

Among 6 ASEAN countries in the survey, Thailand - receiving 83 transferred manufacturers – appears to be the first destination for Japanese enterprises when considering realignment; followed by Indonesia (82), Malaysia (80), the Philippines (79), Vietnam (66) and Singapore (6). On the contrary, Vietnam has become the first choice of Japanese investors who have increasingly considered alternative investment sites in the region other than China.

The survey shows an increasing trend of Japanese manufacturers’ realignment of their production bases from one ASEAN country to another, and between ASEAN and China.

Among 6 ASEAN countries in the survey, Thailand - receiving 83 transferred manufacturers – appears to be the first destination for Japanese enterprises when considering realignment; followed by Indonesia (82), Malaysia (80), the Philippines (79), Vietnam (66) and Singapore (6). On the contrary, Vietnam has become the first choice of Japanese investors who have increasingly considered alternative investment sites in the region other than China.

However, the survey also pointed out that weak supporting industries and infrastructure are Vietnam’s biggest obstacles against foreign investment.

Vietnam is particularly advantageous with its political and social stability, lowest production cost, labor management and exchange rate volatility (higher than the region’s average). However, it is noted that the advantage of labor management has been, to some extend, worsened by recent strikes.

With regards to investment attraction by industries, in the mid- to long-term viewpoint, Thailand and Vietnam are seen as optimal production bases in the region. Among six major industries, Thailand and Vietnam are especially popular in four industries: Electric/electronic parts, Electric/electronic equipment (Vietnam ranks 1^st), Transportation machinery and Plastics (Vietnam 2^nd). Vietnam is also in top three countries in the Parts for transportation machinery industry; however, Chemicals – one of the six major industries – remains Vietnam’s weakness.

Then why Vietnam ranks 5^th in the ASEAN competition to attract realigning Japanese investors? Besides the above positive factors, there remain other major factors adversely affecting Vietnam’s investment environment. These are common negative factors of all ASEAN countries against China, such as level of researchers and engineers, and supporting industries. Especially, supporting industries in Vietnam has the lowest capacity compared with not only China but also all other countries. Additionally, Vietnam’s infrastructure is not only 74.6% worse than China but is almost in the worst condition, just slightly better than India. Other considerable obstacles against investment in Vietnam are customs procedures (7% worse) and IPR protection (6.9% worse). It is noteworthy that only Vietnam and Indonesia still face with both of the last two factors, while ASEAN and India on average have improved them much better (table).

Investment attraction factors in ASEAN/India, which are superior (+%) or inferior (-%) to that of China (Unit: %)

Under such circumstance, Vietnam as the first choice in Japanese investors’ consideration to offset risks associated with intensive business in/with China is a great opportunity for Vietnam. In particular, the ratio of Japanese manufacturers considering to expand production in a third country in stead of China is highest in Vietnam (20.5%), nearly 2.8 times higher than that ratio in the following destination (Thailand 7.4%). Similarly, the ratio of Japanese manufacturers planning to transfer production functions from China to Vietnam is 6.8%, more than double that ratio in the following country (Malaysia 3.1%).

The main reason for the “Vietnam choice” is lower production costs, which are evaluated by more than half (56%) of Japanese investors. This highest reply ratio implies Vietnam’s advantage of lowest production cost compared with other countries in the survey.

Another main reason is Vietnam’s high economic growth rate in recent years, which is similar to China’s situation when Japanese enterprises started huge investment in China. Bright economic prospects in Vietnam are promising big business opportunities, and Japanese investors transferring/expanding from China to Vietnam have recently focused most on transportation equipment parts (23%) and electric/electronic parts (18%).

However, Vietnam should care for fierce competition from neighbouring countries, specifically competition with the Philippines in transportation equipment parts, and in electric/electronic parts with Malaysia and Thailand.

Expectations for 2006

Compared with business results in 2004, performance in 2005 was improved for 49.6% of Japanese manufacturers in the surveyed countries, and worse for other 29.7% (the remaining experienced no change).

The situation in Vietnam was similar with 50% achieving improvement and 30% suffering deterioration. With that performance, 75.7% of total respondents expected profits in 2005, and 14.9% predicted loss. However, Vietnam was not in equally positive case where 70.6% expected profitable (less than average) while 22.4% predicted loss (the highest ratio among surveyed countries). But Japanese investors still expect better situation in Vietnam in 2006 compared with 2005, specifically 54.1% expect improvement (2005: 50%) and only 17.6% predict deterioration (2005: 30%).

Business expectation in Vietnam (and India also) in 2006 is most attributed to increasing domestic sales (56.5%), while increase in exports is the dominant factor in the remaining countries. Other basis for expectation for better operating performance in Vietnam in 2006 are improvement in production efficiency (47.8%), increased exports (41.3%), and commencement/expansion of production of high-value added products (32.6%), etc.

In one-two year terms, Japan investment will be likely to expand in the surveyed countries in general and particularly in Vietnam and India. Specifically, Vietnam ranks 1st among ASEAN economies and 2nd to India where 78.6% of Japanese investors here tend to expand business.