Japanese investors favour non-manufacturing sectors

February 22, 2023 | 10:46
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While concerning cost risks increase for businesses, more Japanese companies are looking to expand in Vietnam in non-manufacturing sectors like education, healthcare, retail, property, and finance to tap into growing demands there.

On February 11, AEON Mall Vietnam began construction of a new shopping mall in the central province of Thua Thien-Hue, making it the first in the region and the seventh in the country as a whole. Costing about $170 million and to be operational in 2024, it demonstrates the Japanese retail giant’s ambition to expand its footprint here.

Japanese investors favour non-manufacturing sectors
AEON Mall Vietnam/ Photo source: aeonmall-vietnam.com

AEON Mall chairman Iwamura Yasutsugu said, “The project is an important milestone marking its 10-year presence in Vietnam. We will continue to develop more trade centres in all regions.”

Retail is one of the non-manufacturing sectors that Japanese firms are planning to expand further in the next 1-2 years in Vietnam, as outlined in an investment performance survey of about 4,400 Japanese businesses operating in roughly 20 nations in Asia and Oceania. The survey, which included 600 businesses in Vietnam, was released on February 13 by the Japan External Trade Organization (JETRO) in Hanoi.

Takeo Nakajima, chief representative of JETRO Hanoi, told VIR last week, “The reasons for expansion among Japanese firms are that they expect revenue growth thanks to market expansion and export growth, as well as high growth potential,” he explained. “They tend to look towards high added-value products and multi-functional ones.”

Nakajima elaborated that the average export to revenue ratio of Japanese enterprises in Vietnam was 51.4 per cent in 2022, up 0.5 percentage point from a year earlier. Their export markets are Japan (65.6 per cent), ASEAN (12.9 per cent), the US (4.9 per cent), and China (5.6 per cent).

Vietnam, where total retail sales and services revenues marked double-digit growth in 2022, is recovering and growing rapidly from previous years. As a result, the survey noted that 80 per cent of enterprises in the retail sector plan expansions into retail. The rate was also 80 per cent in real estate and 77 per cent in finance and insurance.

According to Vietnam Industry Research and Consultancy, with a high economic growth rate and rising middle-class, Vietnam is among the world’s most promising retail markets. It already attracts strong attention from global retail giants such as AEON, FamilyMart, K-Mart, Lotte, Central Group, Circle K, Mega Market, and others.

In the survey, remarkably, all Japanese businesses surveyed seek to expand activities into education and healthcare. Vietnam is faced with health challenges due to its rapid urbanisation, ageing population, climate change, and environmental health, and more people are requiring healthcare services and drugs. Meanwhile, Japanese businesses have strong expertise in these fields.

Market research firm IBM forecasts that the scale of the Vietnamese pharmaceutical industry could reach up to $16.1 billion by 2026 from $7.7 billion by late 2021, with a compound annual growth rate of 11 per cent.

Top Japanese names including Nipro Pharma Corporation and Taisho Pharmaceuticals. The latter holds a controlling stake in DHG Pharmaceutical JSC, Vietnam’s biggest publicly traded drugmaker.

Nipro Vietnam, meanwhile, has been boosting its presence in the country. General manager Hiroaki Sasaki said, “We will continue to focus on high-quality drugs with Japanese technology. Through our expansion, we are creating jobs for locals, and commit to long-term sustainable manufacturing.”

Similar attraction has been seen in the education sector, realty, and finance and insurance. Last year, all Japanese firms doing business in finance and insurance made a profit versus 91.7 per cent in 2021, according to the survey.

Japanese investors name advantages in the local market for their activities. They include growth potential, market size, the living environment for foreign employees, labour recruitment, social-political situation, and others. For instance, the number of Japanese businesses citing the advantages of market growth is 17.2 points higher than the ASEAN average. And those citing the advantages of market size is 7.2 points higher than the ASEAN average.

In general, 60 per cent of Japanese firms plans expansions in Vietnam in the next 1-2 years, up 4.7 percentage points from a year earlier. The rate is only behind India and Bangladesh and ranks first in ASEAN. In the non-manufacturing sector, the rate of businesses eyeing enlargement activities is 65.9 per cent, up 7.2 percentage points on-year.

Despite expansion plans and confidence, Japanese businesses are worrying about a number of risks from rising salaries, cumbersome administrative procedures, unofficial costs, and low localisation rates. As shown in the survey, two-thirds of groups name admin procedures as a business risk, compared to 47 per cent in ASEAN on average. The rate related to tax policy is 58 per cent versus 42.7 per cent in ASEAN; and the rate for completion of legal frameworks is 55.3 per cent versus 44.8 per cent in ASEAN.

“While low labour cost is an advantage for Vietnam in foreign investment attraction, fast salary rises have been causing difficulties for labour recruitment,” said Nakajima of JETRO. “Vietnam is now named in the group of nations with a higher salary increase. Other regional countries like Thailand, Singapore, and China have seen lower wage increases, thus narrowing the gap of labour cost between them and Vietnam.”

Regarding localisation rates, Nakajima added it has increased gradually since 2010, reaching 37.3 per cent in 2022, but it has been much slower than in China (68.4 per cent), Thailand (57.3 per cent), and Indonesia (47.2 per cent).

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