Jetro annual survey on investment -related cost comparison in Asia in 2006

The Japan External Trade Organisation (JETRO) releases its 17th annual survey on investment-related cost comparison in Asia. Conducted in November 2006 in 30 major cities and regions in Asia, the 2006 survey covered almost all major costs incurred by foreign investors, such as labour cost (wages, bonus and social security burden), land price and office rent, telecommunication expenses, public utilities, transportation charge and taxes. The report below mainly compared investment costs in Asean, China and India, and a country figure represented the average of major cities of that country. Local currencies were all converted to US dollar on the exchange rate of November 15, 2006.

Besides, investment-and business-related costs were also evaluated in another annual survey on Japanese-affiliated manufacturers in Asia conducted by JETRO in November and December 2006. Both surveys showed that in 2006, the whole region observed an increase trend of almost all investment costs, especially wages and real estates. Not being excluded from the common trend, but in general Vietnam still had advantages of lower investment costs compared with neighbouring countries, particularly with China.

II.Vietnam Major findings

1.Labour cost

Monthly wages for workers, engineers and mid-level managers all tended to increase in 2006 compared with 2005. According to JETRO survey on Japanese-affiliated manufacturers in late 2006, worker wage increase was the most frequently cited as employment problems among respondents in all countries covered by the survey.

In Vietnam, the legal minimum wage was raised for the first time in the last 7 years. However, the average wage of 155.75US$for Vietnamese workers still lied in the lower level of 4 wage groups categorised in the 2006 survey (100US$or less, 100-250US$, 250US$-500US$, and over 500US$). Increasing at a lower rate (16% compared with 28% on average in the region), wage for Vietnamese workers remained competitive.

However, monthly wage for mid-managers in Vietnam increased drastically, especially in Hochiminh City mainly due to difficulty in recruitment. While countries surveyed were recorded to have mid-manager’s monthly wage increase by 7% on average compared with 2005, Vietnam saw a drastic increase by 40%, and this was considered one of most uncompetitive factors to attract foreign investment in Vietnam.

2.Office rent

Office rent in the region continued to increase by 25% on average in 2006, and the rent in Vietnam also increased but at a much higher rate of 39%. In 2005, though office rent in Vietnam increased just by 4.5% compared with regional average of 14%, cities in Vietnam were more expensive due to already higher rents in previous years, so the sharp increase in 2006 made offices in Vietnam much more expensive. Particularly, office shortage in Hanoi made the city the 4th expensive, just after advanced cities named Seoul and Singapore, and Mumbai. Moreover, increasing demand for houses for foreigners in Hanoi also contribute to cost increase.

3.Container transportation charge

This is the freight to transport a 40-foot container from the nearest port in the surveyed country (e.g. Hai Phong seaport in the North and Saigon seaport in the South of Vietnam) to Yokohama seaport in Japan. Compared with 2005, in 2006 the whole region enjoyed transport charge reduction by 13% on average thanks to lower price of crude oil in late 2006.

With this regards, Vietnam’s charge also reduced in 2006, but more than that, for the first time after years ranking at the most expensive level, Vietnam could control its transport cost much closer to regional average because of higher reduction rate of nearly 30%.

4.Other related costs

There were not major changes in charges for international call and electricity on regional basis, and unit prices of both services in Vietnam were also kept stable and slightly lower than regional average. In a country-to-country single comparison, international call charge in Vietnam was particularly lower than China’s and Indonesia’s.

III. Investment-related costs and business direction in Vietnam

In brief, despite some higher costs, both JETRO surveys on investment-related cost comparison and Japanese-affiliated manufacturers evaluated investment-related costs in Vietnam in 2006 in general lower than those in other countries surveyed, especially over 60% of those in Vietnam regarded Vietnam as 100% or less cheaper than China the country that most Japanese manufacturers in Asean regarded as their strongest business competitors mainly in terms of price (see chart below: Manufacturing costs in Asean and India in comparison with costs in China).

Lower costs was one of significant conditions for Vietnam to attract existing investors through their business expansion plans in the next 1-2 years (82.4% of Japanese companies in Vietnam planned to do so compared with regional average of 58.2%), new investors (Japanese FDI in Vietnam in 2006 surged by nearly 2.5 times from only 437 million US$in 2005 to over 1 billion US$in 2006) as well as those planning to transfer a part or expand production from China to a third country. It also partly reasoned why Vietnam was once again voted as one of two optimal production bases in Asia (together with Thailand) in medium-and long-term viewpoint (next 5-10 years).

Note: Manufacturing costs mean total costs incurred at a factory and is comprised of costs for materials, labour, other direct costs and factory overheads (including indirect materials, indirect labour and other indirect costs). Sales price is determined based on these costs and also sales and administrative expenses and profits.

Source: JETRO survey on Japanese-affiliated manufacturers in Asia, 2006

It is noted that in order to compete with China, the most common countermeasure taken by Japanese manufacturers was not to reduce price but to increase added value to their products. In addition, PhnomPenh and Vientiane were added in the 2006 investment cost survey because of their lower wages and increasing attraction thanks to the opening of the 2nd Mekong international bridge in late 2006, and in fact some Japanese labour-intensive manufacturers in Thailand and Vietnam are considering these two cities potential locations for their new production bases. These facts suggested that in order to call for foreign investors, competitive investment costs are necessary but not enough and not sustainable especially when the region has seen continuous cost increase. It is more important to create favourable investment environment for investors by improving the quality of services provided by both governmental offices and businesses, improving the investment-related structures like legal system, infrastructure, labour training etc., and offering new services with high quality.

JETRO Hanoi Representative Office

3F., 63 Ly Thai To street, Hanoi

Tel: 844-8250 630, Fax: 844-8250 522

E-mail: vha@jetro.go.jp

 

Category: Economy