VIETNAM: THE NEW ASIAN TIGER?

In recent years, increased foreign investment in Vietnam has shown that a wealth of emerging opportunities exist in the country. Vietnam continues to be an important investment destination for Japan, particularly further to the March 2011 earthquake and nuclear disaster as well as the recent territorial stand-offs with China, which have seen many Japanese companies looking to identify alternative markets. In this White Paper, FTI Consulting takes a deeper look at this growing relationship, outlining the potential growth prospects driving Japanese investment strategy, as well as the risk factors that should be considered prior to entering the Vietnamese market.

THE NEW ASIAN TIGER VIETNAMS GROWING BILATERAL RELATIONS WITH JAPAN
Vietnam has the potential to become Asias next tiger, following in Chinas footsteps. The country is an attractive location for foreign investors due to its political stability, high-growth economy and abundant low cost labor pool, and currently plays host to more than 8,000 foreign investment projects. On the ground, however, it faces challenges to overcome various operating risks, including fraud and integrity issues at an internal level and brand protection in the wider market. Despite these obstacles, Prime Minister Shinzo Abe chose Vietnam as the first overseas trip of his new term after only twenty days in office, demonstrating his support for continued Japan/Vietnam bilateral cooperation. INCREASED JAPANESE INTEREST IN VIETNAM 2013 has been assigned as the Japan-Vietnam Friendship Year, the culmination of over 40 years of bilateral economic relations. Vietnams Ministry of Planning and Investment rank Japan first in Vietnams 2012 foreign investor list with 1,827 investment projects and US$29.14 billion in registered capital. Meanwhile, in 2012, Japanese Foreign Direct Investment (FDI) commitment accounted for approximately 40 percent of total FDI commitment to the country, with the major sectors of interest being information and communication technologies (ICT), mining, tourism, manufacturing, education, and infrastructure (including energy).

Vietnam is increasingly viewed as a viable alternative to reliance on China where the currency is strengthening and wage costs are rising rapidly.

Specifically in 2013, Prime Minister Abe made the following pledges to Vietnam: To continue to assist the country in realizing its national industrialization and modernization goals through an Official Development Assistance (ODA)1 provision of US$500 million, and further reaffirming commitment to the Vietnam-Japan Cooperation Framework until 2020 looking even further ahead to 2030. To bring more Japanese investment opportunities into Vietnam and provide a supportive environment for Japanese investors and enterprise in the region. To promote cooperation and coordination between the countries for peace, stability and prosperity in the region and the world. A recent survey conducted by JETRO (Japan External Trade Organization)2 showed that Japanese companies are very positive about the outlook for Vietnam. In 2012, over 60 percent of Japanese firms in the country recorded profits, while more than 65 percent of Japanese companies in Vietnam are keen to continue expanding. New companies are also entering the market; in 2012, Japanese firms represented a quarter of the total number of new investment projects in Vietnam and half of total investment capital. (See tables below and on the following page.) FDI figures in Vietnam (new approved investments in 2012) Country 1 2 3 4 Japan South Korea Hong Kong Singapore Amount (USD) 4.01 billion 760 million 550 million 490 million Previous year comparison +116.7% -13.3% -81.4% -75.6%

Source: Vietnam Foreign Investment Agency/Jetro

1 ODA is a term coined by the Development Assistance Committee (DAC) of the Organisation for Economic Co-operation and Development (OECD) to measure aid 2 JETRO is a government-related organization that works to promote mutual trade and investment between Japan and the rest of the world. Survey on Japanese investment into Vietnam: JETRO Global Eye World Topics 4 February 2013 http://www.jetro.go.jp/

Top 10 Investments in Vietnam approved in 2012 (Japanese investments in bold) Company 1 2 3 4 5 6 7 7 9 10 Tokyu Corporation Bridgestone Corporation LIXIL Corporation Alltech Telecoms TexHong Textile Nipro Corporation Kyoei Steel Ltd. Oshima Shipbuilding Co. Ltd. Lock & Lock Fuji Xerox Co. Ltd. Approx. amount (USD) 1.2 billion 570 million 440 million 380 million 300 million 250 million 180 million 180 million 150 million 120 million

Source: Vietnam Foreign Investment Agency/Jetro

Some major recent Japanese investment projects include: Tokyu Corporation: The Tokyu Binh Duong Garden is a 71 hectare development project to build a Japanese-style residential city, and includes the development of transportation infrastructure, IT networks, water, power, and educational facilities.3 Bridgestone: A new passenger car tyre factory in the Dinh Vu Industrial Zone in Hai Phong City. It is reported that this is the first tyre production facility in Vietnam for Bridgestone. Operations are due to commence in March 2014 and will employ approximately 1,900 by the first half of 2016.4 LIXIL Group: A construction plant in Long Duc Industrial Estate, Dong Nai Province. The plant is scheduled to produce aluminum products and will be an integrated production system plant (i.e. includes the molding, processing, and assembly of products).5 NIPRO Corporation: The construction of a pharmaceutical factory by Nipros Vietnamese subsidiary, Nipro Pharma Vietnam in the Vietnam Singapore Industrial Park in Hai Phong. The factory will produce medicines for drug markets in developing countries including Japan. Test production will start between March and September 2014, and full production is scheduled for April 2015.6

3 4 5 6

http://ryutsuu.biz/abroad/e022924.html Nihon Keizai Shimbun, 11 December 2012 http://www.emeye.jp/disp/VNM/2012/0704/stockname_0704_015/0/ http://www.bridgestone.com/corporate/news/2012070202.html http://global.lixil.co.jp/pdf/20121129_vietnam.pdf http://www.bcc-jp.com/member/business/foreign/20120416-1546.html http://www.emeye.jp/disp/VNM/2012/0814/stockname_0814_014/0/ http://www.nipro.co.jp/en/news/2012/document/120110.pdf

Oshima Shipbuilding: A new shipyard in the southern Vietnamese city of Cam Ranh. The shipyard, to be built in two phases, is planned to operate for 50 years. In Phase 1 (the first four years of the project), Oshima Shipbuilding will construct a shipyard that produces 12 vessels a year. Phase 2 will increase that number to 24. This project is reportedly set to create 3,000 new jobs.7

RATIONALE FOR INVESTING IN VIETNAM

There are several key drivers to Japans current surge of interest in Vietnam. The strong yen has been a major factor behind the recent increase in Japanese overseas investment activities. Diversification into Vietnam for geopolitical reasons is a further driver. Combined with the broad push into emerging markets, backed by a Japanese government concerned about lack of growth and an ageing population at home, there are also emerging opportunities in the country. POLITICAL ATTRACTIONS Vietnam is increasingly viewed as a viable alternative to reliance on China where the currency is strengthening and wage costs are rising rapidly.

Vietnam offers a more open and transparent market, abundant natural resources and favorable geographic positioning.

The competitive workforce in Vietnam is particularly attractive; unskilled workers in Vietnam are typically paid half to one third of the US$300 a month their counterparts might receive in the manufacturing clusters of southern China.8 The growing young population, diligent workers and a willingness to learn are further plus points. In addition, corporate taxes are rising on foreign firms in China and tax incentives are being reduced. In contrast, Vietnam offers a myriad of investment incentives and schemes such as tax breaks to encourage foreign investors in to the market. Recently, the central bank governor has even urged banks to cut loan rates by 2-3 percentage points to help boost the economy. Moreover, there are significant unresolved political issues between Japan and China, whereas Vietnam provides political stability, free of historical animosity and present-day rivalry. This is a major factor corporations tend to consider when investing in infrastructure projects. Partly as a result of the above factors, there is also high-level political backing. Japan is one of Vietnams largest aid donors, with political and security ties between the two countries growing in reaction to Chinas assertiveness. Much of Japans aid is focused on infrastructure and projects that directly benefit Japanese companies, such as the recent Lach Huyen port in Haiphong, northern Vietnam. STRATEGIC ADVANTAGES The Asian Development Bank cites Vietnam as having one of the fastest expanding middle classes in the region, attracting the retail industry for reasons of both access and supply. Food and beverage companies such as Kirin Holdings, Nippon Ham, Ezaki Glico and Nichirei have been investing in Vietnamese companies through M&A in response to the potential growth in domestic demand.9 Mizuho Corporate Banks recent investment into Vietcombank10 and Sumitomo Life Insurances acquisition of an 18 percent stake in Vietnamese insurer Baoviet Holdings,11 demonstrate that non-manufacturing industries are also looking to develop and expand coverage in the country. In addition, Japanese motorcycle manufacturers such as Honda,

7 8 9 10 11

http://www.cpv.org.vn/cpv/Modules/News_English/News_Detail_E.aspx?CN_ID=526107&CO_ID=30105 JETRO Global Eye World Topics 4 February 2013, http://www.jetro.go.jp/ Mizuho Research Institute http://english.thesaigontimes.vn/Home/business/financial-markets/19566/ http://english.thesaigontimes.vn/Home/business/financial-markets/27158/

Yamaha, Suzuki and Kawasaki hold around 80 percent market share in Vietnam leading to further investment in this sector.12 It is not only the large corporations but also SMEs that are keen to establish themselves in the market. The Japan Business Association has seen a steady increase in the number of companies registered in Hanoi and Ho Chi Minh over the last two years as detailed below: Registered Japanese businesses in Vietnam Registered Businesses April 2011 April 2012 Latest figures (March 2013/September 2012)
Source: Japan Business Association

Hanoi 353 465 510

Ho Chi Minh City 446 567 584

Focused on fostering strong relations with the Vietnamese government and sustaining a good investment environment, the Japanese Business Association in Ho Chi Minh is noted to be the third largest in terms of membership within ASEAN countries, after Bangkok and Singapore. Vietnam offers a more open and transparent market, abundant natural resources and favorable geographic positioning. It also has a long coastline with an increasingly modern and sophisticated port infrastructure in comparison to other emerging markets. In addition, Japanese companies have been identifying alternative manufacturing bases and markets to reduce risk and dependence since the 2011 earthquake and tsunami in Japan, and the recent flooding in Thailand. This vulnerability and the ensuing impact on the regional supply chain demonstrated the risk of industry reliance on one region. Infrastructure, while still a challenge, is gradually being developed.

KEY ISSUES TO CONSIDER

While Vietnam remains of growing interest to Japanese firms for the reasons outlined above, there are various risk factors that should be appropriately considered prior to market entry. WAGES HIKE Wages in Vietnam are currently at an attractive level, but as in other regional countries, they are on an upward trend. In 2012, salaries rose 19.7 percent on an annual basis, and this year, they are forecast to increase 17.5 percent. Industry breakdown provides further areas of caution. In the manufacturing industry salaries are double those of Cambodia, while labor cost accounts for 18.3 percent of production cost, versus the average 16.8 percent in ASEAN and 17.6 percent in China.13 MATERIAL AND COMPONENT LOCALIZATION The costs of materials and components should also be noted. These expenses contribute 62.4 percent of the total production cost in Vietnam,14 and Japanese firms are having difficulties cutting back on the payments. Moreover, component supply for manufacturing-processing in Vietnam has not met the demand.

12 Mizuho Research Institute 13 JETRO Global Eye World Topics 4 February 2013. http://www.jetro.go.jp/ 14 JETRO Global Eye World Topics 4 February 2013. http://www.jetro.go.jp/

LOCAL WORKFORCE SKILLS AND RECRUITMENT OF SENIOR STAFF Vietnams labor pool is plentiful and people are willing to learn. However, according to the Ministry of Education and Training, the quality of the Vietnamese education system is inadequate and at odds with the needs of the economy. The educational system suffers from an unbalanced structure, where it is not linked with industry needs or employment opportunities, rendering it impractical and largely ineffective. Additionally, teaching capacity is limited and infrastructure is insufficient, despite improvements to the curricula, teaching manuals and methods of delivery. Given the high demand for skilled workers, those who are well-educated and/or who have the relevant work experience will invariably have more options and will often seek a job with better working conditions and/or pay. Skilled workers will simply not show up for work on a given day, having found employment elsewhere. WORKFORCE TENSION Vietnam witnessed a record number of labor strikes last year, as average annual inflation exceeded 18 percent, the highest rate in Asia. Canon witnessed an incident at their Thang Long Industrial Park operation in June 2012 when assembly workers protested against stagnant wages, the installation of new machines without further resourcing of the workforce, and insufficient break times between shifts; meanwhile team leaders were awarded salary increases. More recently, in January 2013, approximately 2,000 employees at Nihon Seimitsus factory, located in Ho Chi Minh City, went on strike after their Tet (Vietnamese New Year) bonuses were cut. The factory employs around 2,600 employees and mainly manufactures glass frames and watch parts. The company released a statement attributing the bonus cut to a decline in sales, but factory workers refuted that statement, claiming that business continued to thrive, and the company had no legitimate reason for the reduction. INFRASTRUCTURE Vietnams infrastructure is still underdeveloped and remains a major priority for investment. The Global Competitiveness Report of 2012-2013, by the World Economic Forum awarded Vietnam 3.2 points (out of 7) and ranked it 144 out of 199 on overall quality of infrastructure. Vietnam scores low compared to other Southeast Asian countries, such as Malaysia (29), Thailand (49), Cambodia (72), Indonesia (92), and the Philippines (98). In particular, the roads and ports are cited in the report as being underdeveloped. It should be noted that infrastructure has been gradually improving since the Global Competitiveness Report of 2007-2008 in which Vietnam received 2.7 points (out of 7) for overall quality of infrastructure. In addition, the Japanese government recently pledged to provide Vietnam with ODAs for infrastructure development. In January 2013, Prime Minister Dung of Vietnam addressed the issue of infrastructure when he stated that both countries will work closely on projects such as the North-South Expressway, the development of Lach Huyen Port and the Ninh Thuan 2 nuclear power plant. CORRUPTION, RED TAPE, PROCEDURES, BACKLOGS There is currently limited transparency and predictability with regards to bureaucracy, customs, investment requirements and legal rights in Vietnam. When Transparency International issued their annual Corruption Perception Index (CPI) for 2012, Vietnam ranked 123rd out of 176, dropping 11 spots from the position it occupied in 2011.

Comprehensive on-ground due diligence is essential to ensure the suitability of any investment and/or potential business partner.

Country Name Japan United States South Africa Brazil China Vietnam Russia Myanmar

2012 Ranking 17 19 69 69 80 123 133 172

2011 Ranking 14 24 64 73 75 112 143 180

Ranking movement between 2011 and 2012 -3 +5 -5 +4 -5 -11 +10 +8

* The 2012 ranking is based on surveys of 176 countries and territories, while the 2011 ranking is based on 183 countries and territories.

The Global Competitiveness Report of 2012-2013 stated that some of the top ten most problematic factors for doing business in Vietnam, according to business executives, included policy instability (5th), tax regulation (6th), tax rates (8th), corruption (9th), and inefficient government bureaucracy (10th). SABOTAGE Sabotage is reported to be perpetrated by both competitors and locals who protest the exclusion of communities from particular projects or their negative environmental effects. Acts of sabotage typically include false reports of crimes to the authorities and full-scale industrial sabotage, such as the damaging of equipment. One case in particular involved both types of interference when saboteurs damaged a pipeline that started spilling hazardous chemicals into a river. These activists subsequently turned to the local authorities, claiming that the project was ecologically unsound, resulting in a government investigation. MARKET ENTRY AND BUSINESS PARTNERS Given these potential issues, it is crucial to have a thorough and broad reaching understanding of the political climate, the consumer environment and the competitor landscape in order to best identify and decide on the opportunities to be had in Vietnam. Another challenge is identifying appropriate business partners that are both suitable in terms of financial viability and reputation. Many local companies may not have a full understanding of brand value and/or legal regulations that apply to Japanese businesses. Establishing fluid communication, setting clear expectations and achieving mutual understanding should not be taken for granted. Often there is only limited public access information available with regards to official filings or corporate records. There can also be questions raised over the veracity of the limited data available. The adequacy of traditional financial and legal due diligence is also limited by the lack of adherence to international standards, and practices in accounting and corporate reporting. Comprehensive on-ground due diligence is essential to ensure the suitability of any investment and/or potential business partner. While it is crucial to obtain a copy of the companys business license, this exercise should go beyond the standard financial and legal review. A wide-ranging investigative due diligence exercise is needed to confirm actual business operations, any previous experience with foreign entities, official connections, and potential reputational issues that could emerge. In the case of Vietnam these may include political interference, corrupt activity and apaque operations or ownership, all of which could cause significant reputational damage. Moreover, global anti-bribery and anti-corruption regulations can often challenge what is viewed as a traditional and cultural way of doing business in Vietnam, and ensuring compliance while securing relationships with local business partners and supporters will mean investors are under close scrutiny. Adequate steps should be taken to demonstrate transparency in business relationships.

ABOUT FTI CONSULTING FTI Consulting, Inc. is a global business advisory firm dedicated to helping organisations protect and enhance enterprise value in an increasingly complex legal, regulatory and economic environment. In Asia Pacific, FTI Consulting is the largest specialist advisory firm with a team of over 500 professionals situated in 15 business centres across the region. FTI Consulting provides advice on issues in the areas of finance, risk, governance, performance, reputation, intelligence, compliance and liability. Clients benefit from the firm's 30 years of extensive Asia Pacific experience, no matter how challenging or complex the assignment. Clients that require a sophisticated combination of financial, technical, business and industry experience rely on our experts to provide strategic advice on critical issues at critical times. GLOBAL RISK AND INVESTIGATIONS The Global Risk and Investigations practice of FTI Consulting is the leading provider of comprehensive business risk solutions in Asia. We help clients determine the reputation and suitability of a business partner, untangle complex fraud schemes, investigate allegations of bribery, contain a business crisis and much more. Our team of seasoned professionals is drawn from backgrounds in senior law enforcement, regulatory compliance, academic and economic research, information technology and investigative journalism. We provide clients with critical information, insight and timely solutions in the areas of: reputational due diligence, business intelligence, fraud and corporate investigations, FCPA and other corruption-related investigations, asset searching, data forensics and electronic evidence recovery, brand integrity and business crisis containment services. For more information, please contact: Ben Fouracre Director +813.5369.3933 ben.fouracre@fticonsulting.com Ryo Fujita Senior Consultant +813.5369.4145 ryo.fujita@fticonsulting.com

About FTI Consulting FTI Consulting, Inc. is a global business advisory firm dedicated to helping organizations protect and enhance enterprise value in an increasingly complex legal, regulatory and economic environment. FTI Consulting professionals, who are located in all major business centers throughout the world, work closely with clients to anticipate, illuminate and overcome complex business challenges in areas such as investigations, litigation, mergers and acquisitions, regulatory issues, reputation management and restructuring. More information can be found at www.fticonsulting.com 2013 FTI Consulting, Inc. All rights reserved.