Manufacturing activities at Denso Vietnam

According to the General Statistics Office, total registered FDI reached 27.72 billion USD in 2022 (down -11% YoY) due to two newly registered projects with a sudden capital (LNG I&II Power Plant Project with 3.1 billion USD and O Mon II Power Plant Project with 1.31 billion USD) during the same period, while FDI disbursement reached 22.4 billion USD (up 13.5% YoY) - the highest level in the last 5 years. In comparison to January 2022, the number of newly registered FDI projects in Vietnam reached 153 (up 48.5% YoY), with the amount of newly registered capital being 3.1 times higher.

The reopening of China's economy raises hopes that the global supply chain rebalancing process will move more quickly. Unexpected geopolitical events, such as China's strict disease control policy, harmed the global supply chain in 2022. Manufacturing firms have recognized the importance of diversifying their value chains and not relying too heavily on a single country for the entire supply chain. Apple and Foxconn have relocated some of their manufacturing to India, while Dell has asked its component suppliers to have production capacity ready in countries other than China, specifically Vietnam. According to Lam Viet, an analyst at BSC, this trend will continue to accelerate in the near future, and Vietnam still has a lot of room to capitalize on its competitive advantage.

Aside from low labor costs, Vietnam's main competitive advantages in attracting FDI enterprises are its stable macroenvironment and favorable geographical location. According to JETRO, labor costs in Vietnam are expected to remain stable with a 4.8% increase, lower than the regional average, particularly India with an 8.4% increase and Indonesia with a 5.3% increase. Furthermore, China has been developing its manufacturing ecosystem for more than 40 years, and it is difficult for a country to replace. As a result, Lam Viet believes that a small portion of production shifted from China will be sufficient for Vietnam to absorb, and the industrial sector's long-term prospects are promising.

According to Lam Viet, a lack of supply in industrial center locations continues to be a challenge for the industry, and it is also a major factor in maintaining high rental prices in the face of high rental demand. After a period of booming supply with a series of industrial zones approved for investment policies in 2021- 1H.2022, the industrial park market has almost no new projects in 2H.2022.

According to the Housing and Real Estate Market Administration (Ministry of Construction), the filling rate of industrial zones across the country is increasing, reaching more than 80%, with the Southern region accounting for approximately 85%. The rental price of factories and industrial real estate increased by about 10% year on year, reaching an average of 100-120 USD/m2/lease term, and tended to rise further due to limit   ed supply, particularly in the southern market.

The legal environment is gradually clear and complete, which is expected to shorten administrative procedures and develop sustainably thanks to the coordination between ministries/departments and provincial People's Committees. In 2022, Vietnam has officially adopted 3 documents directly related to the development of industrial zones including (1) National Land Use Plan for the period 2021-2030, (2) Official Dispatch 2514/CV-TCT, (3) Decree 35/2022/ND-CP and is aiming to adopt (4) the Amended Land Law (Prospect Report 4Q.2022 - Industrial Real Estate Industry). However, Lam Viet said in the short term, the work of "untangling supply" would continue to be slow due to the change of senior leadership in the southern provinces and the general planning of localities is in the adjustment period for synchronous development in the future.

The industrial center focuses on the Southern Region, with plans to expand into Ho Chi Minh City's satellite provinces/cities. BSC believes that the southern industrial real estate market will remain "unlocked" in 2022, particularly in Binh Duong and Dong Nai, where the filling rate is over 90% and no more IPs will be approved for investment policies in the period 2020-2021.

Connected transportation infrastructure will be promoted beginning in 2023, alleviating the bottleneck of "logistics" and directly supporting the industrial real estate industry. Logistics costs account for approximately 16.8% of the value of goods in Vietnam, while this cost is only approximately 10.6% globally. Logistics costs have been a "minus point" for Vietnam in attracting global manufacturing enterprises. As a result, a number of factors contribute to high infrastructure costs, including (1) poor infrastructure quality, particularly road and rail transport infrastructure, and (2) a limit   ed infrastructure connection system with a lack of synchronization.

“Most industrial real estate enterprises have a healthy financial foundation, especially those belonging to Vietnam Rubber Group (GVR) when there is no net debt, no bond debt, most of the short-term loans are used to supplement working capital and pay dividends. For enterprises with high bond debt/total debt ratio such as BCM and KBC, we realize that the debt/total assets ratio is still at a safe level, all debts have collaterals. Moreover, the asset quality is relatively good while the bond maturity value in 2023 is not much (VND 1,000 billion for BCM and VND 2,900 billion for KBC)”, said Lam Viet.