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Vietnam Today

Ideal fit

Released at: 07:58, 23/09/2018 Vietnam - Japan Relations

Ideal fit

Photo: VET Magazine

Bilateral investment and trade between Vietnam and Japan can only grow given the complementary nature of the relationship.

by Ngoc Lan & Nghi Do

Vietnam and Japan have become increasingly important partners in many fields since they established diplomatic relations 45 years ago on September 21, 1973. The two upgraded the relationship to a “Strategic Partnership for Peace and Prosperity in Asia” in March 2014, which itself was also a significant development. “Overcoming the ups and downs of history, the two sides have worked together to bring strong development relations in all fields and now are not only extensive strategic partners but also sincere friends,” Deputy Prime Minister and Minister of Foreign Affairs Pham Binh Minh told a ceremony during the State visit to Japan in June by State President Tran Dai Quang and a high-ranking Vietnamese delegation.

Key milestones

Japan is now one of Vietnam’s leading economic partners and was the first country in the G7 to recognize its market economy, in October 2011. Since 2010, annual FDI inflows from Japan to Vietnam have averaged almost $3.9 billion, according to the Japan External Trade Organization (JETRO). The figure was about the $1-billion mark during the 2005-2009 period (except for 2008). 

As at July, Japan was Vietnam’s second-largest foreign partner with total investment capital of $55.8 billion in 3,835 projects, the Foreign Investment Agency (FIA) at the Ministry of Planning and Investment (MPI) reported. Japan took the lead among 115 countries and territories investing in Vietnam last year, with total registered capital of more than $9 billion, accounting for 25 per cent of all FDI. A host of billion-dollar projects in thermal power helped Japanese investors regain the “throne”, such as the Nghi Son 2 BOT (build-operate-transfer) project, the Van Phong 1 thermal power plant BOT project, and the Nam Dinh 1 thermal power plant BOT project.
Japanese investment projects in Vietnam have mainly been in the form of 100 per cent foreign capital, with 2,829 projects and total investment capital of $24.84 billion, accounting for over 57 per cent of total capital. The second most common form of investment is joint venture, with 555 projects and $15.66 billion. The remainder are business cooperation contracts and BOT, BT (build-transfer), and BTO (build-transfer-operate) projects. Japanese investors have invested in 53 of Vietnam’s cities and provinces. 

Northern Thanh Hoa province has attracted the most investment capital from Japan, in 14 projects with $9.73 billion. Second is Hanoi, with 894 projects and $4.92 billion, followed by the cities and provinces of Ho Chi Minh City, Binh Duong, Hai Phong, Dong Nai, and Hung Yen.

Local insiders commented that Japanese enterprises are considered “pioneers” in pouring capital into the manufacturing and processing sector and Japanese investment in Vietnam was previously directed mainly to this sector, by major manufacturers such as Toyota, Honda, Canon, Mitsubishi and Toshiba. As at 2017, Japanese investment projects in Vietnam were found in 19 industries, of which manufacturing and processing had attracted the most capital, with $33.82 billion in 1,568 projects, and accounted for nearly 80 per cent of total registered capital, according to MPI.

As one of the first Japanese investors in Vietnam, in 1964, Toshiba sees it now has a young and vibrant workforce and a growing middle-class as more people attain higher education. “As the country continues to strengthen its export-oriented and open economy, it presents more opportunities to companies like Toshiba to operate in this environment,” Mr. Tatsuo Doko, Corporate Representative - Asia at the Toshiba Corporation and Managing Director of Toshiba Asia Pacific Pte. Ltd., told VET.

Of a similar mind, Mr. Masaaki Yanagiya, President of Fuji Xerox Vietnam, said the government is striving to implement policies to maintain macroeconomic stability, control inflation, accelerate growth, and promote private sector development. “These are good signs for Japanese investors, as Vietnam has potential and stability,” he said.

The Japan International Cooperation Agency (JICA) recently said that more and more Japanese enterprises wish to invest in Vietnam’s agriculture sector. The Kato Group, for example, began to cooperate with south-central Binh Dinh province on investing in a $770,000 tuna fishing project to 2020, while the Shudensha Company has been implementing an $820,000 project to improve water quality at aquaculture farms and the Nikko Foods Company has been active in the central highlands province of Lam Dong with an $820,000 project to develop high-quality tomatoes. 

“The diversification of investment and rising capital in Vietnam from Japanese investors are related to Vietnam’s participation in many bilateral and multilateral free trade agreements (FTAs), including the TPP, the FTA with the EU, and the ASEAN Economic Community (AEC),” Dr. Nguyen Mai, Chairman of the Vietnam Association of Foreign Invested Enterprises (VAFIE), told VET.

To promote investment relations between Vietnam and Japan, the government has also conducted many activities to promote investment cooperation. After talks between State President Quang and Japanese Prime Minister Shinzo Abe, they issued a joint statement establishing a major direction for bilateral relations in this new stage of development. The two sides signed and exchanged four cooperation documents between ministries and branches of the two countries in the fields of the environment, construction, and training, and 17 investment licenses and cooperation documents were issued between businesses and localities in the fields of aviation, retail, agriculture, information technology, energy, and support industries worth nearly $2 billion. 

“With such achievements, I believe investment from Japan into Vietnam will certainly be much higher in the years to come,” Dr. Mai said. “Together with South Korea, Japan also attaches great importance to Vietnam’s strong development and helps it not only in terms of capital but also in technology and human resources training.”

Bilateral trade ties

Japan is Vietnam’s fourth-largest trade partner, behind China, South Korea and the US, according to the General Department of Vietnam Customs, and is among its largest partners negotiating the Regional Comprehensive Economic Partnership (RCEP) and the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP).

Figures from the department show that Vietnam enjoyed a trade surplus with Japan between 2011 and 2014, of $380 million, $1.45 billion, $2.02 billion, and $1.77 billion, respectively. The trend made a sharp turn in the following three years, as Vietnam incurred a trade deficit of $119 million, $228 million, and $393 million from 2015 to 2017. In the first seven months of this year, two-way trade stood at $20.9 billion, of which Vietnam’s exports to Japan were $10.4 billion, representing 7.8 per cent of its total exports, while imports from Japan were $10.5 billion, accounting for 8 per cent of the country’s total imports. 

According to the Ministry of Industry and Trade (MoIT), the trade structure between the two countries is complementary and non-competitive. Japan is a major importer of seafood, textiles and garments, leather and footwear, and processed foods, while Vietnam mainly imports machinery, equipment and materials for production. Vietnam’s export prospects to Japan are huge, based on the two people’s cultural similarities and the strong diplomatic relations. 

In particular, Vietnam can benefit from commitments in the Vietnam-Japan Economic Partnership Agreement (VJEPA) and the ASEAN-Japan Comprehensive Economic Partnership (AJCEP), according to MoIT’s Department of Asia-Pacific Markets.

Under the VJEPA, in force since October 1, 2009, Vietnam will abolish 90.64 per cent of tariff lines by 2026 and Japan will abolish 94.53 per cent within ten years. Japan has committed to cutting its average tariff on industrial products - a major Vietnamese export to the country - to 0.4 per cent by 2019. Meanwhile, Vietnam’s textile and garment exports to Japan have benefitted from a zero per cent rate (down from 7 per cent) under the VJEPA.

Vietnam’s leather and footwear exports to Japan will also enjoy a zero per cent rate for five to ten years from 2019 while seafood exports will be subject to a rate of 1.31 per cent, down from 5.4 per cent. Shrimp and crab exports to Japan have been exempt from tariffs since 2009. While the AJCEP offers less attractive tariff preferences than the VJEPA, its rules of origin for Vietnamese businesses trading with Japan are more favorable.

Local analysts commented that with such advantages, the agreements play an important role not only in Vietnam’s exports but also in attracting Japanese investors. Japanese investors looking for efficiency will produce goods and services in Vietnam for export to markets Vietnam has signed agreements with.

Many Japanese enterprises have selected Vietnam as the destination of their investment rather than setting up in China. Major Japanese corporations in the manufacturing and processing sector include Canon, Honda, Toyota, Toshiba, Hitachi, Sharp, Kyocera, and Kai Vietnam, a subsidiary of the Kai Group. 

“Vietnam’s infrastructure has developed quickly and local procurement is also expanding,” Mr. Yoshinari Kawai, Factory Manager at Kai Vietnam, told VET. “It has signed many FTAs and such things help our business to grow. Most of our products are made by hand, so we need skilled workers. In Japan, meanwhile, there is a shortage of labor.” 

Starting with one factory and 75 employees in 2005, Kai Vietnam has expanded to two factories and 800 employees. Revenue increased to $13 million in 2017 from $500,000 in 2005. Its factories manufacture 10,000 products, such as razors, nail clippers, industrial blades, knives and scissors, which are exported to Japan, the US, the EU and a number of Asian countries. 
With a population of nearly 100 million and rising incomes, Vietnam also holds great potential as a consumption market for Japanese enterprises like Kai. “We set up a sales division in 2016 to sell to the local market,” Mr. Kawai went on. “We see that Vietnamese consumers like Japanese products and their incomes are rising.” Though faced with increasing labor and other costs in Vietnam, the company’s turnover is expected to rise 8 per cent this year compared to 2017. 

Greater cooperation

Growth in bilateral trade has come from Japan having huge consumption demand for apparel, means of transport, machinery and equipment, and agriculture, forestry and fishery products. According to the Vietnam Trade Promotion Agency (VIETRADE) at MoIT, this presents an opportunity for Vietnamese enterprises to begin or boost exports to Asia’s second-largest market. 
2017 marked a breakthrough in Vietnam’s agriculture exports to Japan, with the first batch of chicken and perilla leaves heading to the country. These were milestones in the country’s efforts to access the discerning Japanese market, according to the Ministry of Agriculture and Rural Development.

Having partnered with Japanese enterprises since 2010, Mr. Le Van Cuong, Director of the Da Lat GAP Co., told VET that the Japanese market is tough and demanding but if requirements are met then the Japanese side are loyal partners and offer broad support. “Vegetables exported to Japan must have Global GAP certification,” he highlighted. “Japan also updates the types of fertilizers and plant protection chemicals that are permitted, so Vietnamese exporters need to comply with any new requirements. If they do well, they will have major opportunities to expand in the market.” 

According to MoIT, Vietnam has exported red dragon fruit, mangoes, lychees, perilla leaves, parsley, and others to Japan. Fruit and vegetable exports have seen strong growth over the past few years, according to the Vietnam Fruit and Vegetables Association, but still only occupy a small portion of total import revenue in Japan for such products. Japan’s agricultural sector is facing difficulties due to an aging population and a disinterest among young people about the industry, creating tremendous opportunities for Vietnamese exporters to promote exports of fruit and vegetables to the country.

Through the national trade promotion program conducted by VIETRADE’s Export Promotion Center (PROMOCEN) in 2013-2017, many Vietnamese enterprises in support industries, apparel, consumption, and agriculture were able to find Japanese partners. “This year we have launched an annual program to be held in Tokyo and Osaka in late October,” said Ms. Nguyen Thi Thu Thuy, Deputy Director of PROMOCEN. “Vietnamese enterprises can find information on the program and register to participate. Through promotional activities, more Vietnamese enterprises will be able to directly approach Japanese enterprises and the country’s market.”

“To further expand exports to Japan, Vietnamese enterprises should continue to invest in new technologies in order to improve product quality,” Mr. Cuong emphasized. “To conquer the discerning Japanese market, Vietnamese enterprises must pay special attention to food hygiene and safety.” Da Lat GAP plans to export 1,000 tons of Da Lat bell peppers to Japan early next year, which will greatly contribute to the company’s revenue growth. 

Kai Vietnam also plans to expand its production capacity in Vietnam because of high demand from the parent group’s customers. “Our customers have proposed moving the factory in China to Vietnam because import taxes are lower,” said Mr. Kawai. “We need to build a third factory here in the near future.” 

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