Located in the east of the Indochinese Peninsula, stretching from North to South, bordering China, Laos, and Cambodia, Vietnam has had outstanding economic growth in recent years and is one of the “VIP” countries, expected to become the next high-growth market. Ho Chi Minh City is the commercial center and is known as the “Paris of the East”, while Hanoi is the political and cultural center.
More than 2,000 Japanese enterprises have expanded into the country, and not only manufacturing but also IT-related industries are growing rapidly. Based on the survey results “Survey of Japanese companies expanding abroad in Asia and Oceania”, we will explain the situation of expanding to Vietnam, the causes and forms of expansion.
1. What is the real situation of Japanese companies expanding to Vietnam?
More than 55% of Japanese enterprises investing in Vietnam said they would expand their investment within the next 1 or 2 years.
On January 19, 2022, the Japan External Trade Organization (JETRO) released a survey report from 4,600 Japanese enterprises operating in nearly 20 markets in the Asia-Pacific region. Among them, 700 enterprises are operating in Vietnam.
According to the survey results, although the economy was hit hard by the 4th COVID-19 outbreak in nearly a year, the percentage of Japanese companies willing to increase investment in Vietnamese enterprises is also high – 10 points more than ASEAN Masu countries.
The 2021 profit forecast is more than 54%, up 4,7 percentage points from the previous year. Notably, more than 55% of surveyed Japanese enterprises said that they wish to expand their production and business activities in Vietnam within the next 1-2 years, compared with Japanese enterprises in Indonesia, Malaysia, and Thailand which are also expensive – respectively 45.3%, 43.2% and 40.4%.
Japanese investment M&A deals in Vietnam focus on finance, renewable energy, information technology services, food production, and distribution fields. And if the world opens its borders, an increase in investment in Vietnam is expected to be boosted, starting with the expansion of motorbike and automobile manufacturers such as TOYOTA, HONDA, and YAMAHA into Vietnam in the late 1990s, many Japanese companies have expanded into Vietnam.
Following the expansion of large manufacturers, there are also component manufacturers (suppliers) that have expanded into the country to increase the rate of domestic raw material procurement, and EPE enterprises have expanded independently to produce for export outside Vietnam. Moreover, small and medium enterprises have penetrated Vietnam and are expanding their business in this country.
2. Why do Japanese companies expand to Vietnam?
Currently, the shortage of human resources in IT and other fields in Japan is considered more and more serious. Future estimates of the shortage of IT human resources by the Ministry of Economy, Trade and Industry (from the White Paper on IT Human Resources 2020): In the context of promoting digital transformation at all enterprises, the IT workforce shortage is expected to continue. By 2030, there will be a shortage of between 160,000 and 790,000 people. Additionally, overseas costs for operations have increased significantly and we expect these costs to remain high for some time.
There are probably more startups interested in knowing more about local trends among Japanese companies than large companies. Vietnam’s investment environment is still attractive to foreign investors.
- One of the rapidly growing countries
In the context of a difficult economic global, rising prices, and escalating inflation, Vietnam’s achievements are what other countries are aiming for. Making Vietnam the fastest-growing country in Asia will be one of the greatest targets. Vietnam’s GDP growth rate is expected to reach 5.8% this year. While post-coronavirus economic growth is expected in 2022, soaring global prices and shopping difficulties are weighing on the economy.
- Young workforce and abundant human resources
When choosing a destination to expand abroad, you may be worried about how the economy will develop in the future. It is assumed that there are three components of the quantity supplied:
- Population growth: labor input
- Equity: the amount of equipment held by the society and the company
- Productivity: Product output
Above all, “population” is a very important factor.
Vietnam’s population is about 98 million people, the average age is low, and the country is entering a period of “gold” population, good opportunity for economic development. Compared to Japan’s average age of 46, the average age of Vietnam is 31 and more than 50% of the population is under the age of 25. In addition, Japanese companies also pay attention to the fact that Vietnamese people’s salaries are lower than those in other countries. They have a relatively high level of education and are diligent and skillful.
Due to low wages, we are active in the fields of garment sewing, footwear, and electronic component processing, which use a lot of labor. But that is not the only thing, so it is attracting attention as a basis for software development overseas
- Preferential tax system
The corporate tax rate in Vietnam is 20%, lower than Japan and ASEAN countries, for example, Japan 23.2%, Philippines 25%, Indonesia 22% (2021). One of the attractions of expanding into Vietnam is its low corporate tax rate, but IT companies can also apply for corporate tax breaks.
Such as there are tax incentives for software and game production in addition to applying corporate tax of 10% for 15 years, tax exemption for 4 years, and a 50% tax reduction for the next 9 years.
- Geographical advantage
Let’s look at Vietnam from a geopolitical perspective.
In recent years, cross-border infrastructure development in the Mekong region, including Vietnam, has made much progress by Japan and the Asian Development Bank, the largest ODA donors. One of the characteristics of Vietnam is that it stretches from North to South, there are many coastal areas facing the sea, and the amount of container goods passing through Vietnamese ports such as La La Quyen Port and Da Nang Port in the North are developing.
Vietnam is an important transportation hub of the Asian Highway Initiative and is also the maritime gateway to the Indochina Economic Zone (Vietnam, Thailand, Laos, Cambodia, and Myanmar). Additionally, three of the four major corridors connecting China pass through Vietnam and progress in infrastructure development is expected to stimulate the movement of people and goods, facilitating trade. and has a pervasive impact on the tourism industry.
- Working experience based with Japanese companies
A variety of industries are expanding into Vietnam, including optical office automation equipment, components for mobile phones, electronic components, food, mechanical equipment, chemicals, automobiles auto, toiletries, pharmaceuticals, cosmetics, real estate (general contractor), heavy industry, and energy. About 50% of Japanese companies expanding into the country operate in the manufacturing industry, and service industries such as software are also prominent.
In the survey conducted by JETRO in 2019, “Survey of Japanese Companies Expanding into Asia and Oceania”, regarding “collaboration with local startups”, Vietnam had the number of companies that responded that they have cooperated or are planning to cooperate with 56 companies. For this reason, it can be said that the need for future startup cooperation and events for this goal is increasing.
- Stable politics
Everyone knows that Vietnam is a socialist republic and is mostly ruled by the Communist Party of Vietnam. Therefore, the state has great power and influence and is politically stable.
In addition, although Vietnam is a socialist country, it is different from other socialist countries in that this country is based on Marxist-Leninist ideology and Ho Chi Minh’s ideology: independence, freedom and happiness
Political stability is also a bonus factor for economic growth.
3. How to expand your enterprise to Vietnam?
When Japanese companies expand business in Vietnam, there are several models and stages. First of all, without a facility, we can sell products, provide services, license domestic companies, or sign franchise contracts with Vietnamese businesses, with a period of business development, business based on this arrangement.
Next, when setting up a base in Vietnam to develop a business, there will be options such as representative offices, branch offices, and joint stock companies. Broadly, cases of establishing a facility in Vietnam and developing a business can be divided into cases of establishing a new company, etc., and cases of acquiring an existing Vietnamese company. In addition, there are many cases of entering Vietnam through a franchise contract with a business operator in Vietnam.
At our company NAL, there is a service called “Active Labo”, which develops a lab-type revenue sharing model, and a related service called “Support for establishing local development facilities in Vietnam”.
“Active Labo” is not an ordinary laboratory-style development but a model that can ensure stable and long-term resources, speed up product development, and support overseas expansion. In the past 5 years, we have supported the establishment of development subsidiaries of 4 Japanese companies (with a total of 600 engineers).
At the review stage before scaling up in Vietnam, it is advisable to research Japanese companies expanding into Vietnam as a competitor, potential customer, or supplier. At NAL, we offer Active Labo service that helps companies reduce recruitment costs and eliminate engineer shortages.
Remove location restrictions, treat overseas IT staff as if they were your own employees, hire remote engineers, and ensure resources for continuous development, Please contact NAL for more details!