Vietnam Becoming Potential Outsourcing Base

The Japan External Trade Organisation (JETRO) affirmed Vietnam as a potential production base, at the Vietnam Business Forum jointly held by the International Finance Corporation (IFC), the World Bank (WB) and the Ministry of Planning and Investment in Hanoi.

This is based on a survey of 1,332 Japanese companies operating in China, Hong Kong, India, South Korea, Taiwan and six ASEAN countries. Surveyed companies are mainly engaged in electrical - electronic parts, automobile and auto parts, machinery, electronics equipment, chemicals and metal products.

 

According to the survey result, more than 70 per cent of Japanese production companies in Asia hope to make profit in 2007 (down 4.1 percentage points against 2006) and 45.1 per cent expected 2007 profit to be higher than in 2006. Only 18.3 per cent expected worse business in 2007 than 2006, and 35.8 per cent foresee a similar outcome.

 

Mr Kenjiro Ishiwata, head of JETRO in Hanoi, said Japanese companies in Vietnam are hopeful of higher profit in 2007 than 2006. Specifically, 66.7 per cent of Japanese companies in Vietnam pin high hopes on increasing revenue, thanks to improved exportability and productivity, higher than the ASEAN average of 42.9 per cent.

 

Up to 75.4 per cent of Japanese production companies operating in Asia voted Vietnam the best place to invest in the next 5-10 years. This is currently the highest rating for any country from Japanese investors. This shows satisfaction with business conditions in Vietnam. “Vietnam and Thailand are seen as potential exporting production bases. The industries of interest in Vietnam are electrical and electronic parts, automobiles and auto parts, and steel,” said Kenjiro Ishiwata. Japanese companies plan to select Vietnam as a production location for export to third countries.

 

Asked about business strategy and plans for the next 1- 2 years, over half of interviewees said they had expansion plans. However, Japanese companies tended to be more prudent as the rate dropped from 62.4 per cent in 2005 to 58.2 per cent in 2006. Meanwhile, the ratio of companies wishing to keep production scale unchanged increased from 32.1 per cent in 2005 to 36.8 per cent in 2006.

 

Although the business environment in Vietnam has been improved and is attractive to Japanese companies, the infrastructure system, administrative procedures and legal system raise their concern.

“Both surveys, in 2005 and 2006, received complaints about undeveloped infrastructure systems, like electricity, transportation and telecom. In Vietnam, in addition to incomplete infrastructure systems, investors are displeased with cumbersome administrative procedures, unclear and loosely enforced policies, undeveloped economic law system as well as arbitration regulation,” added Kenjiro Ishiwata.

The main difficulties include production matters, especially the purchase of local raw materials and components, labour matters, with difficulty recruiting managers and engineers, and external trade matters like complicated customs procedures.

 

On purchasing raw materials and components, nearly 40 per cent of surveyed Japanese production companies relied on local supply sources, but the ratio for companies in Vietnam was merely 23.6 per cent, only higher than the Philippines. In the future, over half of Japanese companies planned to increase local supply purchase, while nearly a third expect to purchase within ASEAN countries.