Japanese, Chinese and Korean, Companies Flocking to Lower Mekong Sub Region

 

The economic zone in the basin of the Mekong River is starting to thrive as a key location for businesses pursuing so-called “China or Thailand Plus One” strategies.

Japanese, Chinese and South Korean companies are flocking to the area to take advantage of inexpensive labor, raising a question of whether they and other foreign companies will leave the zone for the sake of “Mekong Plus One” strategies if local wages rise.

Attractive integration

Ando, a well-established maker of small articles for Japanese kimono in Kyoto, manufactures in Pakse, a major city in southern Laos. To the sound of local popular music, some 60 young women weave braided cords with Japanese looms, sew drawstring purses and examine the quality of products at the Ando plant.

Operation manuals are written in Japanese. The women workers include nine who have completed a three-month training program in Japan and speak basic Japanese.

Ando built the Laos plant at a cost of some $500,000 and began operating it in 2014. Founded in 1923, Ando already had plants in Kyoto and China but added the Laos plant because, as third-generation CEO Ichiro Ando put it, “We’d be in trouble if something happened in China, and we find the integration of Southeast Asia attractive.”

The comment symbolizes the “China Plus One” strategy. Japanese companies have grown wary of operations in China due to rising wages and anti-Japan sentiment and begun seeking “Plus One” locations.

Ando picked Laos as his company’s Plus One location because factory workers in major cities there earn around $100 a month, compared with more than $500 in Beijing.

He also found the integration of Southeast Asia attractive because of Laos’s geographical features.

Laos is an inland country that borders five countries, including China, Thailand and Vietnam.

When the ASEAN Economic Community starts up at the end of 2015, customs duties will be lowered within the Association of Southeast Asian Nations. Exporters will be able to choose convenient ports, whether in Thailand, Vietnam or other ASEAN members, depending on their products’ destination.

As labor expenses are also rising in Thailand, many businesses recognize the need for a “Thailand Plus One” strategy. Located on the opposite side of the Mekong River, Laos is an attractive alternative to Thailand for companies that want to cut payroll costs.

A plant operated by Nikon, the Japanese manufacturer of optics and imaging products, in Savannakhet, Laos’s second largest city only four hours’ drive from Pakse, is a typical Thailand Plus One operation.

While the plant is responsible for labor-intensive production of parts for single-lens reflex cameras, Nikon brings them to its plant in Thailand for assembling into advanced cameras for sale as popular made-in-Thailand, rather than Laos, products.

The inland location of Laos has been a major disadvantage preventing the country from having sea routes to establish ties with the rest of the world. But the disadvantage will quickly turn into an advantage after the integration of the region.

Recognizing Laos’s strategic location, Toyota Boshoku, Mitsubishi Materials, Aderans and many other Japanese companies have begun operating in the country in recent years.

Drawbacks too

But not everything is rosy in Laos. Unlike Japan, Laos is a socialist country, which poses problems that Japanese companies sometimes struggle with.

According to the 2014 corruption index compiled by Transparency international, a German nongovernmental organization that monitors corporate and political corruption. Of the 174 countries in the ranking, Laos came 145th, much lower than China’s 100th place.

The widespread corruption makes it difficult for foreign businesses to operate smoothly. But Laos’s attractions more than offset its disadvantages.

A large number of South Korean companies have set up shop in Laos. The Kolao Group, for example, has a noticeable presence in Savannakhet. The group’s name combines “Korea” and “Laos” and both countries’ national flags fly in front of its plant’s main entrance.

Kolao was founded by a South Korean and has grown by importing products such as automobiles from Hyundai Motor. Motorcycles produced by Kolao carry a label that says proudly, “Korean Technology.”

Like Japan, South Korea is struggling with a dwindling birthrate and aging population. With domestic demand stalling, South Korean companies need to develop overseas markets for growth.

In a sense, Kolao symbolizes the situation of South Korea, as it was founded in 1997 when the country was caught in a currency crisis.

The toughest competition involving Japanese and South Korean as well as Chinese companies in the Mekong economic zone is down the river in the Cambodian capital of Phnom Penh.

Cambodia is a leading Plus One candidate as its wage level is almost the same as that of Laos. Japanese retail giant Aeon opened a large-scale shopping center in Phnom Penh last year. Next to the center, hotel chain Toyoko Inn operates a big hotel for businesspeople, reflecting Japanese companies’ entries into Phnom Penh.

Located 20km from the center of the capital is the Phnom Penh Special Economic Zone, featuring corporate and export tax breaks.

Japanese investment firm Zephyr has a 22% interest in the SEZ and 42 of the 78 companies operating there are Japanese companies including Ajinomoto and Denso.

The SEZ will offer shares for training on the Cambodia Securities Exchange this summer and use funds from its initial public offering to develop a new SEZ near the border with Thailand in a bid to lure companies promoting Thailand Plus One strategies.

The CSX, which is owned 45% by the Korea Exchange, has created its trading system and trained the necessary personnel thanks to support from the South Korean bourse. South Korean companies are trying to benefit from Cambodia’s economic growth by establishing close ties with the Cambodian government and business community.

A Korean restaurant facing Phnom Penh International Airport is called Dok Do, the Korean name of South Korea-controlled but Japan-claimed Takeshima island. Though the name of the restaurant was initially believed to be a sign of anti-Japanese sentiment in Cambodia, it more likely suggested the presence of economic tensions between South Korea and Japan.

Cambodian operations

Chinese companies, as the push ahead with overseas business expansion in the face of rising costs at home, are also entering Cambodia. They account for the majority of companies operating in the Sihanoukville Special Economic Zone 210km from the capital’s center. The zone competes with the Phnom Penh SEZ, which is led by Japanese companies.

The competition between Japan and China is symbolized by two big bridges over the Tonle Sap River in Phnom Penh. The Japan-Cambodia Friendship Bridge, originally built in the 1960s, was destroyed during Cambodia’s civil war. It was later rebuilt with Japanese aid. Right beside it is a similar bridge, recently completed with Chinese support.

Workers recently demonstrated in Phnom Penh, calling for higher wages. The minimum wage in Cambodia has more than doubled over the past three years and will rise further in view of foreign companies’ strong interest in the country.

Laos is in a similar situation. Given its population of nearly 7 million, less than half of Cambodia’s, wages may rise sharply as a result of intense competition for workers.

One is what foreign companies operating in Laos and Cambodia will do when labor cost rises sharply.

Over the past half century, the sewing industry has shifted operations from the U.S. to Japan, South Korea, China and Southeast Asia in a bid to secure inexpensive labor. If companies pull the plug on operations simply because of wage increases, they will meet fierce protests from societies wishing to protect employment. Businesses cannot thrive unless they coexist in the societies where they operate.

Hiroshi Uematsu, CEO of the Phnom Penh SEZ, referred to one Japanese manufacturer’s strategy as an intriguing outlook for the future. The company has no choice but to make products with low added value in the zone for now, but it plans to increase mechanization by stages to manufacture higher value-added products. The company will “never retreat” from Cambodia, Uematsu quoted it as saying.

According to the strategy, the company will transfer the production of low value-added products to countries having inexpensive labor but can justify the payment of high wages in Cambodia on its economic development and maintain employment.

The strategy of contributing to long-term economic growth offers an important clue to companies operating globally as well as countries that accept companies with Plus One strategies.