From a manufacturing base to industry diversification and decarbonization: The changing economy of Vietnam

With 8% economic growth and expanding domestic consumption, Vietnam is no longer a “cheap manufacturing base”

Stretching 1650 kilometers from north to south, Vietnam is home to about 100 million people, 35% of whom live in urban areas, including the capital Hanoi, and Ho Chi Minh City, the largest city. “Construction work is going on everywhere in Hanoi, and you can tangibly sense that the country is in the midst of economic development,” says KAMITSUJI Haruna of the JBIC Hanoi office, who assumed her post six months ago.

Many people may have an image of a city full of motorcycles, but car ownership is also on the rise. According to IKENAGA Azusa, who works with KAMITSUJI at the representative office, “On Saturdays and Sundays, the Aeon Mall is crowded with locals, and its parking lot is packed with Japanese and Korean cars, as well as cars made by the local private conglomerate Vingroup.” She explains that the Aeon Mall contains stores such as UNIQLO and MUJI, with the selection of goods comparable to that found in Japan, and some items even priced higher.

Motorbikes are still the main mode of transportation for the residents of Hanoi, but automobiles are increasing (left). Completed in 1911, the Hanoi Opera House boasts a history of over 100 years. In the developing city of Hanoi, it is one of the remaining structures conveying the charm of old Vietnam (right).

“While the gap between rich and poor still exists, the economy is strong with rising income levels. Last year, the economy grew by 8 percent, the highest among the ASEAN countries. People believe that tomorrow will be better than today, and they are passionate about investing in education for their children,” says IKENAGA.

In terms of the perspective from Japan, there may still be a deep-rooted image of Vietnam as one of ASEAN’s manufacturing hubs that wields inexpensive labor to its advantage. However, such preconceptions need to be drastically updated—Vietnam is changing in a big way.

Ambitious aim of becoming a developed country and carbon neutral. FDI is increasing, and attention is rising

Under Prime Minister Pham Minh Chinh, who took office in April 2021, Vietnam is pushing economic reforms with the aim of becoming a developed country by 2045, the 100th anniversary of the nation’s establishment.And at the 26th Conference of the Parties to the United Nations Framework Convention on Climate Change (COP26) in November 2021, Vietnam announced its goal of achieving net zero greenhouse gas emissions (carbon neutrality) by 2050.

Pursuing both rapid growth and carbon neutrality would appear to be ambitious goals for a middle-income country like Vietnam.

According to AGUIN Toru, chief representative of the JBIC Hanoi office, “To become a developed country by 2045, Vietnam will need to keep its annual economic growth rate around 6 percent or more. Despite this difficult situation, the government of Vietnam has shown commitment to achieving carbon neutrality. This is precisely why momentum is growing in the international community to support Vietnam’s efforts to avoid the ‘middle-income trap’ (failing to reach the level of high-income countries due to slow growth), and foreign investors are also seeking new opportunities.”

Looking back on the evolution of foreign investment in Vietnam, three major turning points can be seen: the start of Doi Moi (market opening policy) in 1986, the lifting of U.S. economic sanctions against Vietnam in 1994, and Vietnam’s accession to the WTO (World Trade Organization) in 2007. Moreover, due to expansion of Vietnam’s economic partnership agreements and its growing geopolitical importance, the country is now also benefiting from the realignment of regional supply chains including relocation of manufacturing plants. Spurred on by such circumstances, it could be said that a “fourth investment boom” in Vietnam is underway.

Amid such a transition, while focus had initially centered on ODA (Official Development Assistance), there was a rapid increase in FDI after Vietnam joined the WTO. In 2008, the cumulative amount of approved FDI exceeded USD100 billion, and in the following decade it surged to nearly USD350 billion. The range of industries entering the country has expanded from manufacturing companies to service sector industries, and from large enterprises to smaller enterprises.

“Medium to long term relations” desired by 97% of Japanese companies. Industries are also changing, including the entry of retail

Japanese economic cooperation with Vietnam began in earnest when it resumed ODA in 1992, ahead of other nations. Then in 1993, JBIC assisted Vietnam’s return to international financial markets. At the time,Vietnam’s debt arrears to the World Bank and Asian Development Bank were ballooning. Since new funds could not be brought in until these were repaid, JBIC provided a USD22.5 million bridge loan prior to the lifting of U.S. sanctions.

The 2010s saw a significant increase in FDI by Japanese companies. “Japan ranks top in ODA to Vietnam, but it also ranks third in cumulative FDI,” notes KAMITSUJI.

According to an overseas business development survey conducted by JBIC on Japanese manufacturers (released in December 2022), Vietnam ranked fourth after India, China, and the U.S. as a promising destination for medium-term business development (first among ASEAN countries for three consecutive years). In a special 2021 survey of Japanese companies in Vietnam conducted by the JBIC Hanoi office, of the 195 companies that responded, 97 percent replied that they would like to expand their investment in Vietnam in the medium to long term, indicating high expectations. Although labor costs in Vietnam have begun to rise in parallel with economic growth, no trend was seen for “moving to cheaper countries” because of this.

In the center right of the photo is the Vincom Center Metropolis, a large shopping mall (upper floors are high-end residences) operated by the local conglomerate, Vingroup. Around it, the old cityscape with its low-rises still remains, as if symbolizing the uneven development of Hanoi (left). Hanoi’s Vincom Center Metropolis has many Japanese restaurants that enjoy popularity (right).

According to AGUIN, “We see many Vietnamese people who are hard-working and skillful. The country’s education level is high, and people are quick to master a range of things.” It must also not be forgotten that bilateral relations are deepening with a flow of human resources from Vietnam to Japan. And above all, Vietnam’s domestic market is expanding as its economy grows.

Due in part to these changes, Japan’s FDI in Vietnam, which used to be dominated by manufacturing and infrastructure-related investment, has also been diversifying in recent years. Looking at the number of newly approved investments, about 30 percent of the total in 2021 was in the retail industry. Consulting and IT, which provide side support for this industry, were also high on the list.

Meanwhile, in manufacturing industry investment as well, the strategy of “Vietnam plus one” is spreading, in which investments previously concentrated in China are being shifted to Vietnam, and production bases, which tended to be located around Hanoi or Ho Chi Minh City, are starting to spread to other regions in Vietnam.

Expectations on the decarbonization sector. JBIC focuses on policy dialogue as well

As of the end of January 2023, JBIC has provided financial assistance to Vietnam for 315 projects, amounting to JPY848.1 billion. One of the pillars of this assistance is enhancing the resilience of the above-mentioned manufacturing industry’s supply chain, but another area of focus is the energy business. JBIC has financed projects that account for 13 percent of Vietnam’s total power generation capacity.

Now, with the Vietnamese government’s announcement of its commitment to carbon neutrality, there will be an increasing number of areas in which Japan can cooperate, such as renewable energy, expansion of the power grid, and zero-emission thermal power generation.

Against this backdrop, JBIC engages in policy dialogue and individual project support while also utilizing the framework of its newly established Australia-Japan-United States Trilateral Infrastructure Partnership. The JBIC Hanoi office, which is in charge of local operations, thus has a wide range of duties to perform. The way Vietnam’s legal system operates on the ground can be sometimes unclear to overseas companies, and difficulties also arise when obtaining FDI approval and other permits. The JBIC Hanoi office supports companies expanding into Vietnam in these matters. It also focuses on policy dialogue with the Vietnamese government and agencies to recommend further institutional improvements.

One such effort is the “Vietnam-Japan Joint Initiative,” a framework for public-private dialogue that was launched in 2003 for both countries to work on improvement of the investment environment. The JBIC Hanoi office has been serving as the leader of the initiative’s working team in the energy sector, and works actively in organizing meetings and making proposals to the Prime Minister of Vietnam and relevant ministry officials.

“It is difficult for each company to act individually, by making requests to the authorities that have the power to make approvals for that company’s business. Therefore, we think that it is important for a governmental organization such as JBIC to successfully summarize and represent the views of Japanese companies as a whole, and to demonstrate Japan’s presence,” says AGUIN.

Prime Minister KISHIDA Fumio, who places great importance on Japan-Vietnam relations, has met with Prime Minister Chinh three times so far. At their meeting in May 2022, Prime Minister Chinh presented Prime Minister KISHIDA with a calligraphic scroll inscribed with the words “Sincerity, Friendship, Trust” in Japanese and Vietnamese. The two countries, which are hailed to now have “the best relationship in history,” celebrate the 50th anniversary of the establishment of diplomatic relations this year.

AGUIN, IKENAGA, and KAMITSUJI, who are very familiar with the situation on the ground, feel that the relationship between the two countries is no longer that of a donor and a recipient. KAMITSUJI notes that there are also many excellent Vietnamese IT engineers, “I feel we can learn from Vietnam in areas where they are more advanced than Japan, such as the penetration of online payment systems.”

The future of Japan-Vietnam relations is “future-oriented” and “co-creative.” The two countries are about to begin the next 50 years of their complementary relationship.