Next phase of Japan ties kickstarted

Both nations continue to build up on their long relationship by moving towards the Vietnam-Japan Joint Initiative VIII

Last week, Koji Shibata, representative of Japan’s largest airline ANA Holdings – which holds an 8.77 per cent stake in national flag carrier Vietnam Airlines – joined the final evaluation meeting of the Vietnam-Japan Joint Initiative Phase VII to discuss opportunities in aviation.

“We want to contribute more to the development of the airline (VNA) and the local aviation sector. In recent years, Vietnam’s aviation has enjoyed strong growth at 15 per cent on-year. We expect that the Vietnamese government has plans for the development of airports to serve the sector,” said Shibata.

VNA’s 2016 stake sale was among the most sought-after in the aviation industry at the time, with ANA Holdings now expected to be the first to increase its holding in the airline.

Under the 2019-2020 divestment plan, VNA will have to divest 35.2 per cent of state stakes to pare down state holding to 51 per cent from the current 86.2 per cent. This seems likely due to improvements in the reform of state-owned enterprise (SOEs) thanks to the strong performance of the Vietnam-Japan Joint Initiative, which is about to enter its eighth phase.

Fresh improvements

The reform of SOEs was one of the aims carried out in the seventh phase since August 2018. The phase witnessed 38 legal dialogues between Vietnamese ministries and agencies, and Japanese businesses and units.

Together with the reform of SOEs, topics included services, legal improvements, the Law on Land, the public-private partnership (PPP) legal framework, development of supporting industry, labour and wages, a legal framework on construction of gas pipelines in urban areas and outlying districts, and the securities market.

Japanese Ambassador to Vietnam Umeda Kunio said, “The implementation of the seventh phase has produced good results, making up 87 per cent, up from 81 per cent in the sixth phase.”

In particular, amendments to the Law on Investment 2014 and the Law on Enterprises 2014 include the development of incentive policies in line with recent development changes. Moreover, legal reform and reform of accounting are being promoted, while policies on development of the supporting industry, construction of data centres, and amendment of tax policies have also received more attention.

In regard to labour, the decision that the state will not intervene in salary increases is highlighted. The draft law on PPP also includes some concerns over the government guarantee and risk-sharing allocation.

As co-chair of the meeting, Minister of Planning and Investment Nguyen Chi Dung said that bilateral relations have developed well. “Through the joint initiative, many business barriers have been solved, thus helping improve the business climate over the past 16 years,” said Dung.

The satisfactory implementation has contributed to Vietnam being acclaimed as the eighth best country in which to invest this year, surpassing neighbours such as Malaysia, Singapore, and Indonesia. The country’s competitiveness also rose by 10 places compared to its 2018 ranking, sitting at 67th out of 141 countries in the Global Competitiveness Report 2019 released by the World Economic Forum.

Over the past 16 years, the Vietnam-Japan Joint Initiative has contributed significantly to increasing Japanese investments in Vietnam, while helping competent Vietnamese agencies fine-tune laws and policies. Japan is Vietnam’s biggest official development assistance provider, second-biggest foreign direct investment partner, third-largest trade partner, and fourth-largest tourism partner.

According to statistics from the Ministry of Planning and Investment, Vietnam attracted $3.33 billion of Japanese investment in the first 11 months of 2019, thus increasing accumulated Japanese investment to nearly $59 billion to date.

More Japanese businesses have been expanding to and in Vietnam by dipping further into digital technology, healthcare, and the Internet of Things. For example, Sumitomo is interested in the National Innovation Centre model, which will have special incentives for high-tech investments.

As shown in the latest survey on the performance of Japanese businesses in Asia and Oceania in 2018 by the Japan External Trade Organization’s (JETRO) Hanoi office, 69.8 per cent of Japanese businesses in Vietnam are planning to expand operations in the country in the next one or two years, slightly up from the 2017 edition. The rate is higher than in both Thailand (52.2 per cent) and China (48.7 per cent).

New phase, new hopes

Despite the advances, some issues are yet to be solved heading into the next phase including the government’s capital contribution, settlement of disputes, and other related issues to government guarantees in the draft law on PPP.

The Japanese Business Association of Ho Chi Minh City proposes further joint working on justice reform and improvement of services. According to a representative of the JETRO’s Hanoi Office, to increase Japanese investment inflows into Vietnam, several issues require focus. The first is that there are now more Japanese small- and medium-sized enterprises (SMEs) investing into Vietnam, instead of powerful firms as was the case in the past. Thus, it is necessary to increase transparency and building of more friendly regulations for SMEs.

The second issue is the low localisation rate. About 60 per cent of Japanese firms in Vietnam experience some difficulties in ensuring a supply of materials and spare parts.

As more Japanese enterprises are mulling over shifting investment from China and Thailand to Vietnam to benefit from the Comprehensive and Progressive Agreement for Trans-Pacific Partnership and to ease risks from US-China trade tensions, it is urgent to further develop the supporting industries.

The final issue according to JETRO is the lack of accurate and in-depth information. Japanese businesses investing in Vietnam aim for exports, and they want to partner with both foreign-invested enterprises and local counterparts. However, there is still a shortage of information about such firms.

The quality of human resources should also be improved to meet growing demands among increasing Japanese investment.

Currently, this represents a challenge for Vietnam, where trained individuals account for just under a quarter of the total workforce.

At the final evaluation meeting of the Vietnam-Japan Joint Initiative Phase VII, the Ministry of Planning and Investment along with the Japanese Embassy in Vietnam and the Vietnam-Japan Economic Committee under the Japan Business Federation of the Joint Committee, signed an MoU to kickstart the eighth phase of the Initiative, focusing on new approaches in line with current changes and demands.

In addition to concerns among Japanese businesses, the new phase will concentrate on the macro issues linked with important and feasible policy recommendations and contributing to improving the business climate, thus leveraging more Japanese investment into Vietnam and strengthening bilateral ties.

With more challenges expected to be dealt with in the near future, there may be more exciting prospects for ANA Holdings, Sumitomo, and other Japanese firms to explore in the local market.

This will also pin high hopes of a new wave of Japanese investment in Vietnam in the future.