Over 90% of Japanese-owned businesses in Vietnam said they plan to expand their business in the country, although only 60% of them made a profit in 2013, according to a recent survey on the operations of Japanese companies overseas announced on Monday.

The advantages the local market offers to Japanese firms includes social - political stability, an abundant and cheap hiring pool of laborers, and increasing market size, the survey on the operations of Japanese companies in Asia - Oceania conducted by the Japan External Trade Organization (JETRO) showed.

The results were collected from the annual 27th survey conducted at the end of 2013 at 400 Japanese enterprises operating in Vietnam.

Among the companies that profited, the business situation of export-oriented enterprises is somewhat better than those that focus on the domestic market, Atsusuke Kawada, Chief Representative of JETRO, told Tuoi Tre.

The number of unprofitable enterprises increased by 25.6%, a 5.3 % increase from 2012.

The reason for such losses, according to Mr. Kawada, may be that many of the companies are newcomers to Vietnam, so they need to spend more as extra investment costs for their new establishments or they are affected by the economic situation in Vietnam.

However, Japanese companies also cited many other disadvantages like difficulties in transportation, synchronization in telecommunications, the power network, supporting industries, communication, and the lack of language skills of local laborers.

In addition, a number of issues that remain to be considered are the risks that companies may face in the investment process, such as cumbersome administrative procedures, non-transparent policies, taxation, and customs procedures with 60% of polled firms stating that these are large issues for them.

One problem that the Japanese companies are interested in is the fact that the degree of localization in Vietnam is still very low, at 32.2% - a 4.3% year-on-year increase, compared to Thailand (52.7%), China (64.2%), Malaysia (42.3%) and Indonesia (40.8%).

Only about one third of the raw materials for Japanese-owned factories is supplied locally, while the rest need to be imported. The rate of purchase from Japanese enterprises in Vietnam was 42.6% - up 5.9%, while that from local firms was 41%, down 4%.

“Thus, to enhance the cost competitiveness, boosting the purchasing of materials and supplies from Vietnam is now essential. However, the supporting industry of Vietnam has not developed adequately,” said the JETRO survey.

Mr. Kawada said the possibility of Japanese export and processing enterprises continuing to relocate in Vietnam is high given the fact that a lot of Japanese companies are diversifying production bases to avoid concentration risk in one place, especially in China.

Moreover, the domestic market is growing and Japanese companies can boost exports to other regional markets through Vietnam. In particular, Mr. Kawada noted that previously most Japanese firms setting up their production bases in Vietnam were labor-intensive enterprises, but a new wave of Japanese firms relocating production facilities with higher added value to Vietnam has already begun.

‘Minimum wage’ risk

According to the JETRO survey, one of the risks Japanese enterprises face in Vietnam is that the minimum wage rate is still high.

In 2012, 149 enterprises surveyed in the manufacturing sector showed that growth rates of minimum wages in these companies rose 21% compared to 2011. The ratio in 71 companies surveyed in the non-manufacturing sector is 16.9%.

The rates topped many other regional markets including Indonesia, Myanmar, India, Laos, China, Thailand, Philippines, Cambodia, Malaysia, and Singapore.

However, in 2013, after surveying 212 companies in the manufacturing and non-manufacturing sector, JETRO found that the growth rate of the minimum wage was 14% and 8.9% compared to 2012, respectively. The latest results make Vietnam the third and fifth overseas market with a high growth rate of minimum wages in the region.

At the enterprises operating in the manufacturing industry, the average wage of a worker is $3,000 per year, equivalent to $250 per month (approximately VND5.2 million). The wages of Vietnamese workers are thus more than those of workers in Laos, Cambodia, and Myanmar.