Country focus Vietnam: Riding the Japanese factory investment wave

Jens Kastner reports on how demand for both powder and protective coatings is being boosted by foreign companies establishing factories in Vietnam

Vietnam’s production of powder coatings and liquid protective coatings has in the past been a small part of the country’s paint and coatings output but foreign investment maybe about to change that.
The country has around 80 coatings manufacturers, who have together manufactured a relatively meagre 30,870t of these specialist products, generating US$91M’s worth of revenue in 2012, according to the most recent data made available by market researcher Frost & Sullivan. But domestic demand for powder coatings and protective coatings, which, the Vietnam Paint & Printing Ink Association (VPIA) reports, together makes up less than 10% of Vietnam’s total output of paints and coatings, is now being boosted foreign companies establishing factories in the country. Japanese manufacturers fleeing China’s rising labour costs play the most prominent role in this growth in foreign direct investment.
"Cheap labour and production costs are the primary attractions for foreign investors in Asia, including Vietnam, which help to boost the coatings market,” Sharmila Subramaniam, Research Analyst for chemicals, materials & food, Frost & Sullivan Asia Pacific told APCJ.
Japanese shift
Among these foreign investors, the Japanese are making the running. Last year, Japanese foreign direct investment (FDI) in China for all sectors dropped by 32.5% yr-on-yr and rose by a whopping 122.2% in the Association of Southeast Asian Nations (ASEAN) countries in the same period.
China’s rising wage levels and increasing wealth in south east Asia creating markets for Japanese products, as well as improving infrastructure and maturing supply chains in the ASEAN region have all encouraged this shift. Japan was Vietnam’s largest FDI source in 2012 and last year. Among the Japanese-invested projects have been plants and developments consuming significant volumes of protective paint and powder coatings. These include new outdoor metal structures and machinery, including petrochemical refineries, tyre plants and industrial machinery manufacturing factories.
"Our business has been lacklustre until fairly recently but now we are returning to stronger growth because the coatings consumption of these new Japanese-invested factories is very high,” says Kenny Vu, Overseas Sales Executive of fully Vietnamese-owned Tan Nam Phat Co Ltd, a producer and supplier of powder coatings in Ho Chi Minh City.
"We expect the trend to hold for at least a few more years because our experience shows that other Japanese firms will most likely follow in the pioneering ones’ footsteps, setting up factory clusters in Vietnam.”
Mr Vu adds that the Japanese-invested factories demand very high quality, high resilient paints and coatings, for which they would have always turned to Japanese brands in the past, according to him. But, he says: "now they are increasingly accepting also paints and coatings made by local companies because their quality is improving.”
He adds that now the quality reputation of Vietnamese coatings companies has improved, they are able to compete with Japanese brands on price.
Multi-nationals optimistic
Optimism about the future is also being felt by multi-nationals such as Dutch coatings giant AkzoNobel, which is among Vietnam’s 30 foreign-invested paint and coatings companies. It is looking to progress after "a few years of tough time in Vietnam with the prolonged slowdown of the economy and the construction sector,” says David Teng, General Director of AkzoNobel Paints Vietnam, in Ho Chi Minh City.
The manufacturer of the popular Dulux and Maxilite brands regards Vietnam as an important growth market with "its young and vibrant population that is moving towards better quality products as the standard of living increases,” he told APCJ.
Mr Teng confirms that Vietnam’s booming new factory landscape is helping to rapidly expand the country’s coatings market: "Vietnam is increasingly a centre for industrial production of goods for export such as furniture and consumer electronics,” he says. "The coatings industry reflects this development and has been particularly strong in coatings for these items.”
One example of new coatings plants tapping into this growth is run by Nippon Paint’s NIPSEA, which opened a paint and coatings factory in northern Vietnam province Vinh Phuc in February 2014 – its third factory in Vietnam. The factory specialises in marine coatings and resins.
Meanwhile, AkzoNobel employs 800 people in its four manufacturing sites across Vietnam, one of which makes powder coatings; the remaining ones produce decorative paint products, wood finishes and special finishes.
Looking ahead, another positive prospect for Vietnam’s paint and coatings manufacturers will emerge next year (2015), says Mr Vu – the onset of the ASEAN (Association of Southeast Asian Nations) Economic Community (AEC). This, he says, will not only facilitate Vietnam’s paint and coatings exports to fellow ASEAN members but also hasten integration of regional supply chains.
"The current import tax rate for coatings is zero in Vietnam but we are a manufacturer and import raw materials from Thailand, Indonesia and China, for which import tax rates of between five to 10% apply,” he says.
"We have long wanted to switch sourcing from China to ASEAN countries and the AEC will help doing that even though there will still be some raw materials that we can only get from China.”
Mr Vu predicts that Vietnam’s upstream chemical industry will not be able to supply many paint and coatings ingredients, even in the longer term. So the country’s paint and coatings manufacturers will continue to source most chemicals (other than resins) from abroad.