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IIST e-Magazine (For the Japanese version of this article)

Series“Offshore Expansion by Small and Medium Enterprises” Part 2 The First Step in Offshore Expansion: Choosing a Host Country and Plant Location | Tatsuya Hoshino, Research Director Vietnam Economic Research Institute [Date of Issue: 27/May/2011 No.0195-0797]

Date of Issue:27/May/2011

Series“Offshore Expansion by Small and Medium Enterprises” Part 2
The First Step in Offshore Expansion:
Choosing a Host Country and Plant Location

Tatsuya Hoshino
Research Director
Vietnam Economic Research Institute


The countries currently regarded as the most promising for offshore expansion from a three-year, medium-term perspective are China, India and Vietnam. According to one survey, Vietnam is favored over China and India for its (a) political/social stability, (b) market scale and growth potential, and (c) cheap and abundant human resources. It is worth noting that political and social stability and market potential ranked higher than a cheap labor force. The increasingly marked management risks involved in moving into China are leading firms to look at India and Vietnam to spread the risk of concentrating operations in China. Many firms are choosing to build their factories in industrial parks. In selecting an industrial park, SMEs need to check whether they can secure the space they want, as well as the status of basic infrastructure facilities. Firms looking for lease factories should be prepared to work hard to find a factory that meets their needs. Consideration should also be given to special economic zones because of their significant government backing.


1. Offshore expansion aims

(1) Reasons why small and medium enterprises (SMEs) go offshore are as follows:
(a) In response to a request from a client (usually a large firm or an assembly manufacturer) that has set up operations offshore to move into the same area in order to continue the business relationship
(b) To cut personnel and other costs to boost competitiveness
(c) To manufacture in a country with a large and hard-working labor force, rather than in Japan where high-quality human resources/engineers/workers are hard for SMEs to secure
(d) To expand sales channels by moving offshore at the firm’s own risk
(e) To break out of a management crisis and ensure the company’s survival and advance

(2) Currently, even some SMEs which have experienced smooth progress and no major slumps are looking to the future in developing a two-pronged strategy, continuing to manufacture some products at home while also setting up operations offshore to make some products there.

The idea is to take the production of low-added-value, mass-produced and standard goods and simple assembly-line production, both of which are not cost-effective in Japan, offshore to East Asia where personnel costs are cheaper. Particularly those products which are high-added-value, involve complex processes, must respond to rapidly changing fashions, and have short delivery times, as well as new products and prototypes, are manufactured in Japan.

2. Choosing a location

(1) Many SMEs look at the following factors when they select a host country:
(a) Is there a large, cheap and competitive labor force?
(b) Will the firm be able to secure high-quality and hard-working human resources?
(c) Is the minimum necessary infrastructure available (electricity, water and sewerage, access roads)?
(d) Is there strong market potential?
(e) Is there political and social stability?
(f) Does the host country government have incentives in place for foreign investors?

(2) The countries which are currently regarded as the most promising for offshore expansion from a three-year, medium-term perspective are China, India and Vietnam (2009 JBIC offshore investment questionnaire). Vietnam is seen as more promising than China and India for the following reasons (multiple responses mean that the total is more than 100 percent):
(a) Political and social stability (65%)
(b) Market scale and growth potential (48%)
(c) Cheap and abundant human resources (38%)

Note that political and social stability and market potential scored higher than the availability of a cheap labor force.

(3) With the management risks involved in moving into China now ratcheting up, firms are looking particularly to India and Vietnam to spread the risk of concentrating all their operations in China.

3. Choosing a plant location

(1) In many cases, firms choose to locate their plants in industrial parks where infrastructure is comparatively well-developed. Power supply systems and wastewater facilities are particularly critical infrastructure elements. Key points in selecting an industrial park are as follows:
(a)(i) Can the firm secure the use rights for land of the size sought? Some SMEs are looking for a piece of land of around 1,000 square meters, but many industrial parks set 5,000 square meters as the minimum size.
(a)(ii) Some SMEs that don’t need big factories want to lease rather than build a factory. Many lease factories are between 500 and 1,000 square meters. Leases in the case of Vietnam, for example, cost around US$4.5 per square meter. Many firms are after leased premises, so it is not always easy to secure the right lease factory for your firm.
(b) What is the state of basic infrastructure like power and water? Some local industrial parks block off the land for use on a map and can show this to firms looking to move in, but many only begin infrastructure construction once tenants have been signed up and 10 to 30 percent has been paid up front.
(c) What is power supply like? This includes transmission lines into industrial parks, the capacity of industrial park auxiliary power facilities, and measures for handling power cuts. In some places, power cuts during operating hours because of power shortages have become a serious problem.
(d) What wastewater facilities does the industrial park have? Governments often impose wastewater conditions just as rigorous as those in the West. Wastewater flowing out from industrial parks must meet these standards. Companies in industrial parks release their wastewater in the first instance to the industrial park’s wastewater facilities, with the capacity of these facilities to clean water determining what wastewater facilities each company will need to set in place itself. The specifications of these facilities will have a cost impact.
(e) How good are access roads? How well is the industrial park connected to airports and harbors? Are there reliable freight companies?

(2) In recent years, ASEAN’s growing popularity with foreign investors has been pushing up the price for land use rights in industrial parks. In Vietnam for example, Japanese firms are paying US$70-85 per square meter for 45 years in some places. Five years ago, that price was U$30-40. The same upward trend in the price of land use rights can be seen across Thailand, Indonesia, Cambodia and elsewhere in East Asia.

(3) Special economic zones (SEZs) merit a look. Unlike conventional industrial parks, SEZ have government backing and offer various advantages and services, including government investment incentives as well as the availability within the SEZ of customs processing, banks and local government offices where investment applications can be made. Infrastructure is fairly well-developed. In countries with comparatively primitive infrastructure, such as Cambodia, Myanmar and Vietnam (provinces), SEZs are worth considering. Remember to look carefully into the same elements noted in relation to industrial parks.

(original article : Japanese)
(For the Japanese version of this article)


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