TOKYO -- Vietnam appears poised for a surge of investment following the country's move to lift restrictions on foreign ownership of companies, as Asian multinationals realize the benefits of having a presence in one of the region's fastest-growing economies.
The planned reform comes as the growing trade war between Washington and Beijing turns Vietnam into a haven for businesses wary about maintaining or expanding production in China.
In a move that continues Vietnam's attempts to woo foreign investment, the Finance Ministry is drafting changes to the country's securities law that will let foreigners acquire a majority stake in companies operating in sectors not considered critical to national security. This marks the first major amendment to the law since 2010.
Foreign ownership now is capped at 49% in general, with critical sectors like banking and aviation limited to 30%. Though the cap on these latter sectors might also be raised, they are likely to remain so-called "conditional businesses," where full ownership by foreigners is prohibited. The planned amendments will be submitted to the National Assembly for approval in 2019.
Removing the ownership ceiling could transform Vietnam's capital market through an increase in mergers and acquisitions, while also boosting gross domestic product.
Citibank's Tsuyoshi Yamashita, who deals with Japanese businesses expanding into Vietnam, said "getting rid of the 49% restriction will enable foreign companies to gain further management rights, which will be a big incentive to enter Vietnam and expand their business."
Japanese companies have flocked to Vietnam in the past few years. Japan became the Southeast Asian country's biggest foreign direct investor in 2017 at $9.11 billion, triple the year-earlier figure. The $7 billion worth of Japanese inflows to Vietnam over the first nine months of 2018 led among 104 countries and territories and represented 28% of the total investment capital.
In June, Japanese trading house Sojitz bought Saigon Paper for about $90 million. Working with Vietnamese real estate company BRG Group, trader Sumitomo Corp. and machinery maker Mitsubishi Heavy Industries along with about 20 other companies have teamed to build a "smart town" in Hanoi that will feature self-driving buses. Retailers like Japan's Aeon will come there to do business eventually.
"Vietnam's urbanization is progressing rapidly," Yamashita said. "Sectors like real estate and infrastructure-related businesses, such as thermal power generation, will probably see a higher demand from foreign companies to do business together."
South Korea and Singapore are also major dealmakers in Vietnam.
"Asian countries dominate the M&A market in Vietnam," said Roy Zuin Forney, an analyst in international business advisory at pan-Asia consultancy Dezan Shira & Associates.
Forney named pharmaceuticals and banking as industries that will attract more foreign investment as state-owned companies look to divest. Vietnam's rising income helps more people afford health care, contributing to rapid growth in the pharmaceutical sector. Because Vietnamese law forbids foreign companies from distributing pharmaceutical products on their own, more will likely seek M&A deals with local companies to reach into this market.
One source familiar with M&A deals in Vietnam said Indian drugmaker Renova Global is "looking for opportunities." Renova has an office in Vietnam but seems eager to raise its profile in the country further.
Japan's Taisho Pharmaceutical Holdings has recognized the potential of the Vietnamese market. In 2016, the company acquired 24.5% of Ho Chi Minh City-listed DHG Pharmaceutical. Taisho purchased another 7% stake in August after the drug distributor removed its foreign ownership cap. It was revealed in October that the Japanese company planned to increase its stake again with a 2.3% purchase.
Ernst and Young Vietnam notes that the Southeast Asian country boasts a high percentage of smartphone ownership and potential for growth in e-commerce and businesses tied to information technology, which could lead to "industries like logistics becoming more attractive to foreign investors."
Vietnam remains off the radar for many U.S. and European companies. An investment banker on Wall Street says "a lot are looking at companies that are transparent and have fewer risks. They want companies that are already earning a significant amount of profit, which narrows down their options."
However, that might change soon, too. Heightened trade tensions between Washington and Beijing are causing "more companies to move production out of China," Ernst and Young Vietnam said. And with China's rising labor costs also becoming a disincentive to invest there, foreign companies are likely to accelerate their shift to Southeast Asian countries like Vietnam. However foreign bidders for Vietnamese companies will still need to win shareholder approval to take 100% ownership.