Diversification crucial for Japanese

The investment trend of Japan has changed since the China+1 policy was established, and now COVID-19 is another landmark event. According to your new survey, how has the pandemic affected investing decisions?

Ikenaga Azusa, representative for the Japan Bank for International Cooperation (JBIC) in Hanoi

Due to the outbreak of coronavirus, Japanese manufacturing companies have started to strengthen their supply chains in Asia.

The manufacturing network in the ASEAN region is extremely important to Japanese companies. In this year’s survey, on the impact of COVID-19 on the supply chain, we asked the question: “Which country/region of your overseas business (production side) was most affected by the COVID-19 outbreak?”.

Among the impacted areas, ASEAN (264 companies) ranked second, following China (283 companies) with a very small difference in the number of votes. This result indicates the importance of the supply chain in ASEAN to Japanese companies, but also shows how vulnerable the supply chain in the region is to external shocks.

In the survey result, 28 companies said they were considering “relocating existing overseas production bases to other countries” as one of the solutions to strengthen the supply chain in ASEAN (as of September 2020). As noted, the China+1 strategy has been discussed for nearly 10 years, but China maintains its vital role as the main production base in Asia.

However, with the outbreak of a specific and real crisis, more companies have actually started to restructure their supply chains within ASEAN, by setting up production bases near the market or decentralising productive capacity. It seems natural for these companies to focus on Vietnam as a shifting destination for investment, and a country which has swiftly controlled the spread of COVID-19, without shutting down the economy for a long time.

As a way to support the companies affected by COVID-19, JBIC established a new financial facility in April 2020, and we are supporting many Japanese companies’ direct investment into Vietnam.

According to the survey, Vietnam ranked third in most promising countries over the mid-term, maintaining the vote rate compared to the previous survey. What is the significance of this result?

This result shows that the Japanese companies’ interest in Vietnam is very concrete. This is the fifth consecutive year that Vietnam ranked third among potential countries/regions in the medium term.

Although the ranking is still the same as previous years, the rate of votes has increased slightly to 36.8 per cent (up 0.4 per cent compared to the previous year), and it is now top among ASEAN countries, leaving Thailand further behind. So it is more accurate to say that Vietnam is strengthening its position, rather than viewing this result as a status-quo.

Vietnam has been seen as more promising during the COVID-19 outbreak, as seen in the detailed version of the “promising reasons” section of the survey. For Vietnam, 19 companies chose “Good for risk diversification to other countries” as their reason for choosing Vietnam, the highest number among all the countries in the rankings.

What are the advantages of Vietnam in attracting Japanese investment, in comparison with other neighboring countries?

The top five reasons of Japanese manufacturers for choosing Vietnam were future growth potential of the local market, inexpensive source of labour, qualified human resources, size of local market, and the base of export to third countries. These aspects have been and are bright spots in attracting foreign investment.

As for the issues that the Japanese companies have been feeling towards Vietnam, an unclear execution of the legal system has been felt widely, next to India and China.

Improving the transparency and clarity in related laws and administrative procedures will be an important factor for enabling more stable inflow of foreign direct investment in the future.

JBIC is working closely with the Vietnamese government and related ministries on this point, for instance on legal framework for public-private partnerships, and we truly appreciate their eagerness in listening to the Japanese companies’ voices.

Regarding future business expansions, the idea of maintaining present levels has increased significantly, while the ratio of strengthening/expanding in overseas business fell across all sectors. Could you explain how this has come about?

We asked companies about their mid-term (next three years) prospects relating to their overall domestic and overseas businesses. The result shows that in overseas business, the ratio of “maintaining present level” increased (26.7 per cent of responders in 2019, 37.8 per cent in 2020) and “strengthen/expand” decreased sharply (from 74.1 per cent in 2019 to 59.3 per cent in 2020) in all industries. This trend is understandable due to the impacts of the COVID-19 outbreak.

However, there is a difference among major industries. General machinery and electronics industries have a strong stance of expanding, and the degree of decline was small. On the other hand, the status quo attitude increased significantly in both automobiles and chemicals industries.

Especially in automobiles, it seems that the idea to scale back or withdraw is slightly higher than in other industries. In the interview section, one Japanese automobile parts company said they will minimise overseas investment because of COVID-19, while the textiles industry has also been widely affected.