OPPORTUNITIES FOR VIETNAM IN 2003

By: Peter N. Sheridan

Vietnam remains blessed with a uniquely well-endowed work force among its 80 million educated (93% literacy) men and women, more than 50% of whom are under 35 years old.

For the most part Vietnamese cherish education and both the desire and ability to still learn more from all sources.  Here then is the challenge:

Vietnam once again faces a special opportunity: to take up the investment capacity from neighboring lands that are loosing investment dollars to China.

Coming from behind due to its long isolation from the worlds' community, the people of Vietnam have demonstrated their willingness to be trained, their capacity to learn, and their desire to earn.  The skilled and unskilled labor force of Vietnam, nine years after the long embargo was lifted, shows a loyalty to fair employers and a keen ability to overcome challenges when learning new techniques and technologies. This is the envy of the world.

Because these elements have a direct impact on profitability, levels of productivity, worker safety, and quality work product are key factors sought when Foreign Direct Investors look for and then place new manufacturing facilities.  Stability of the economic and political climate is also needed.

The placement of regional offices, the real key to sustainable economic growth, requires more.  Hong Kong has been loosing and continues to loose ground to Shanghai and Singapore as new centers for regional offices. However, it is Singapore's lack of manufacturing capacity due to a small and very costly worker population that makes it a second choice to any Southeast Asian location that has a strong, economically beneficial worker force and an equally stable business and political environment.

Indonesia, Malaysia, and Thailand have gained in Foreign Direct Investment (FDI) and the placement of new, regional offices because of Hong Kong’s malaise and the combination of high prices and small work forces in both Hong Kong and Singapore.  Both these two, previously exclusive centers of all FDI in the region have lost ground since 1997. 

In the past five years, the balance of foreign investment dollars has favored China due primarily to the immense scale of China’s internal market.  Today, more than 60% of all FDI in Asia goes to China.  While manufacturers recognize the risks of playing with a loaded gun, it is instructive to see how far they will go not to shoot themselves.

Therein lies Vietnam's unique opportunity to rival if not excel China as a leading manufacturing and financial center. And to move in a direction that will not ever be China’s -- to be the Southeast Asian center for Regional Offices.

There is a 2,000 year-long history of conflict that is renewed every few decades as drastic reminders of the ill wind that blows south from its huge northern neighbor.  Vietnam has not always received benevolent, or even friendly, handshakes from this not-always sleeping giant.

While both are Communist states to the core, complete with many recent examples of opaque and sometimes harsh policies that confound foreign investors, central command authority developed for different reasons in both lands. Vietnam has always had the ability but not the resolve to change its complexion and label, and great strides have been made to acclaimed success these past nine years. 

Earlier describing itself as a "new wine in an old bottle," others and we have long suggested to our Vietnamese friends that it's time to decant. Yet little real change has happened. Small measures have been taken (decreasing the cost and time to licensing as only one example), but the larger picture can and should be quickly re-drawn.

We are joined in this call by eminently respected offices from within and far outside the region.

According to Japanese experts, Vietnam's investment environment is not attractive enough to many foreign investors, especially Japanese businesses.  They opine Vietnam should do more to improve the investment climate,

At a forum recently (late 2002) initiated by the Japan External Trade Organization (JETRO) to form a link with local officials, participants said the business environment in Vietnam is still less attractive than in other regional countries. According to PricewaterhouseCoopers Vietnam (PCV), compared with other Southeast Asian countries, doing business in Vietnam is still difficult in terms of taxation, labor recruitment, land policies, copyright and others.

"Vietnam is lagging behind other regional countries regarding tax, the dual-pricing policy and regulations on land transfer and ownership," a PCV spokesman said at the fourth meeting of the Task Force.

JETRO in HCM City said Japanese investment capital inflow into Vietnam this year increased little and proposed Vietnam look into the issue to find remedies. Hikekazu Mita, director of Vietnam Japan Gas, pointed out that the biggest challenges to Vietnam now are how to develop the infrastructure and sharpen competitiveness ahead the accession to the ASEAN Free Trade Area (AFTA).

JETRO representatives proposed arranging a mission to China to learn the way the Chinese do to attract more investors. Japan's investment in China is 33 times bigger than in Vietnam.

Thailand’s business friendly Prime Minister Shinawatra (the nation’s wealthiest individual as well), yet struggles with challenges that include (i) a dominant border conflict with Burma that suffers too often repeated cross border battles if not open warfare for more than 400 years, and shows no sign of abating; (ii) an even older corrupt system of government that resiliently resists change, much less modification, (iii) an over-priced and under-performing employment population that suffers at all levels -- from unskilled workers to senior managers.

Malaysia benefited as a direct result as Thailand lost FDI that sought and still seeks a new home.  However, since the economic melt-down of 1997, the tightly wound spring that is Prime Minister Mahathir started to uncurl.  Mohammad announced plans to end his two-decade rule - but not until late in 2003. This creates a long and politically painful process.  While Mahathir has not been the darling of foreign investors, he earlier brought an air of stability. But even that predated the man’s personal credibility meltdown that begin in year 2000 when he jailed the very popular former deputy, Anwar Ibrahim.  Now, as the world worries about the expanding religious fundamentalist network, there are new and rising concerns over the safety of all foreigners and their investments in Malaysia, causing investors to look more openly for a more stable environment.

That will not be found in Indonesia, which poses a special and worrisome matter for the entire world, not just Southeast Asia and FDI.  Recent reports abound of only trouble ahead.  In spite of huge oil and natural gas reserves, a larger population base, and favorable wages, the nation has long faced productivity challenges from an expensive, under performing, and largely disloyal work force.  Now it also faces crippling power outages that are expected to continue for years to come. 

Investors say the absence of an honest and reliable legal system is a major reason they stay away from Indonesia.  Other complaints sound familiar to investors in Vietnam: arbitrary demands by the government officials, tax collectors, and domestic partners, with no recourse in the courts where bribery is rampant and favoritism is the legal standard for dispute resolution, and where judges routinely refuse to enforce contracts against domestic companies.

It is reported that Indonesia suffered a net capital outflow in year 2001 of US $ 5.7 billion and for the fist 7 months of 2002, a further erosion of more then 50% of all foreign direct investment.

The question that is not hard to answer is, “where to invest if not in Thailand, Malaysia, or Indonesia?”  For the past five years, the answer should have been “VIETNAM!”

It still can be. But a sea change is needed.  FDI in Vietnam experiences growth only in fits and starts. There is yet no sustainable growth seen. Vietnam FDI enjoys a step or two forward before suffering one or two steps back. Since 1986 Vietnam has charted a course of development and renovation called “Doi Moi.”  Since 1994 Vietnam has been accepted by the world’s nations as a viable trading partner in a “market-style economy.”  Since 2000 Vietnam has enjoyed Most Favored Nation (Normal Trade Relations) with America. 

And yet there is no great leap forward.  We were recently asked why we couldn’t find investors who want to put new money into Vietnam.  The answer is clear: Vietnam must first make the investment climate truly investor friendly. Then Vietnam will enjoy new and sustained growth.

This is especially true as there is now less competition from Vietnam’s neighbors than ever before.  Too many in Vietnam seem paralyzed by analyzing what and how to move forward. The path is clear, only the method of achieving success is not resolved. 

The core problems can quickly be cured. Vietnam retains that unique ability but not yet reached the resolve. Then Vietnam will become the regional economic power for high-end manufacturing, regional offices, and tourism that it always should have been since 1945.