Why Japanese Firms Have a Huge Competitive Edge in Vietnam

TAPEI, Taiwan ( TheStreet) -- Japanese companies are taking advantage of their government's growing economic aid to Vietnam and snaring lucrative contracts in the Southeast Asian nation. 

Investment in Vietnam totaled $2.05 billion in 2014, including 298 new projects, according to data from a Japanese trade promotion agency. Vietnam is an inviting partner for multinational companies because factory worker wages are among the lowest in the region at $243 per month, economic growth easily tops 5% per year, and the government in Hanoi is moving to make business easier.

The trend has brought in Japanese firms such as U.S.-listed tire maker Bridgestone  (BRDCY) and Nasdaq-traded electronics giant Panasonic (PCRFY). Bridgestone runs a $1.2 billion factory in Vietnam, and Panasonic has spent $175 million on an industrial devices project. Automakers Honda Motor (HMC) and Toyota Motor (TMmake cars in the same country.

Singapore, South Korea and Taiwan rival Japan for levels of direct investment in Vietnam, but Japanese firms will go further due to the lavish amounts of money donated by their government. That boost from Tokyo for the country's military and infrastructure opens unique contracts for Japanese firms.

"As the relationship between two nations is going from strength to strength, it is no doubt that Japanese firms will have more opportunity to enter and invest in the Vietnam market," said Hoang Thu Huyen, country manager with business consultancy Dezan Shira & Associates.

Japanese investors, like others from abroad, push Vietnam to make its bureaucracy quicker and more transparent as just 60% of the 585 Japanese companies there are profitable. To be more business-friendly, this year Hanoi has devalued its currency twice, a boon to exporters, and opened 45 new sectors to foreign investment.

In what may be its most persuasive push, Japan has become Vietnam's top source of development aid for the past five years, including $1.8 billion in 2014. Much of it goes to infrastructure such as a new terminal in the Hanoi international airport, a multi-lane highway in northern Vietnam and the first subway line in the country's financial center Ho Chi Minh City.

Nasdaq-listed Japanese construction firm Taisei  (TISCF) won the $210 million airport project bid, and the conglomerate Hitachi (HTHIY) is heading up construction of the $332.2 million subway line.

"Japanese investors...are also the contractors for big infrastructure projects, as Japan is amongst the biggest ODA lenders to Vietnam," said Pham Luu Hung, an associate director with SSI Securities Service in Hanoi.

Vietnam, impoverished and racked by wars in the late 20th century, needs the highways, airports and subway to sustain growth. Military aid is also considered politically motivated as Japan tries to help Vietnam defend itself against China, a country that has clashed with both over maritime disputes.

Seventy percent of 435 Japanese businesses surveyed in Vietnam were planning to expand their operations in the country and make the market a hub, the government-funded Japan External Trade Organization found in 2013. Over the past decade, Japan has ranked among the top five foreign investor nations in Vietnam, along with Singapore, South Korea and Taiwan.

Direct investment reached $5.87 billion two years ago and dropped in 2014 because of economic issues in Japan including depreciation of the yen, Vietnamese media say.

But the two sides expect business only to grow. They signed an economic partnership agreement in 2008 and are now finishing a bilateral deal that lets both join the U.S.-led Trans-Pacific Partnership trade zone, meaning import tariff barriers would fall on both sides.

"The Vietnamese government always sees the importance in strengthening the comprehensive strategic partnership between the two nations," Hoang said.

This article is commentary by an independent contributor. At the time of publication, the author held no position in the stocks mentioned.

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