November 1998 - report to clients on Vietnamese business, investments & solutions to problems

IN THIS ISSUE

Foreign Exchange - Watch Out!

Current Economic Assessment

Land Rents On the Move... Down

Investment Decisions & Discussions

Supermarkets: An Update

Growth, but at a slower pace

Joint Ventures to Fully Foreign Owned

Cashews: An Investment Opportunity

American Success Story

Seafood Exports to America: $56M

Foreign Exchange - Watch Out!* Foreign Currency Exchange (ForEx) practices are closely monitored in Vietnam. None do so more closely than foreign invested companies, or domestic (both private and State Owned) that have income in or debt due in foreign currencies.

Never shy to create, modify, re-write, or enforce decrees (both prospectively and retroactively) on monetary matters (formerly tax and now ForEx practices), Decrees 63 and 173 from the State Bank, effective in October, are compelling to read.

They compel certain "resident" organizations to sell 80% of their foreign exchange holdings within 15 days of deposit. They also require all foreign currency carried into the country before it can be deposited in a bank. to be accompanied by Customs Clearance form. It is openly written this is for two reasons: both to supporting that the funds have not been smuggled in by the depositor, and to show it has not been stolen by customs agents, still too common a practice.

"Most of the local exporters are trying to avoid the regulations of the Central Bank," concedes Truong Van Phuoc, a deputy director at Vietcombank's HCMC branch. The only way to change the psychology of these companies, Phuoc says, is to keep a stable dong-dollar exchange rate or to offer new products to help clients hedge currency risk, such as forwards, shorts and options. Business anyone?

Time will tell where this practice leads. However, events are happening fast, so it won’t take long for another development to occur.

Current Economic Assessment. Many off-shore experts believe 1999 will be a substantial challenge to Vietnam as well as the rest of the region. The world economy is slowing. Excluding Thailand, the Mekong Region is growing at only half its previous rate. Further slowdowns are predicted in the first half of 1999 before a modest recovery and gradual growth into the year 2000.

In spite of pessimistic assumptions for the next 12 to 18 months, Vietnam's overall growth should remain positive. The State predicts real GDP growth at 5% to 6% for 1999. Other views are for real GDP growth of from 2.8% to 4 % in the next year.

Inflation, 3.6% in 1997, in Vietnam will remain high (10%). Exports will grow 10% this year, contrasted with 22% in 1997, and the currency will remain relatively weak. As disappointing as these predictions may be, the prospects are not for the disaster experienced elsewhere in Asia.

Vietnam has a greater dependence on exports for its hard currency growth than do its stronger neighbors. There is a similar stronger reliance in Vietnam on foreign investment and borrowing. The response of the government to date is not seen as adequate to relieve the nation from this crisis. Bad debts in Vietnam's state bank will also cause a prolonged (but not dangerous) liquidity squeeze.

The government is spending $300 million to create up to 1.4 million new jobs each year, and reduce the urban jobless rate to 5% from the current 7%. However, it is generally accepted that it is the private sector which is providing the bulk of new jobs.

Templeton first restructured and the re-oriented its Vietnam Opportunities Fund, but has now closed its HCMC office. However, UK's Prudential Corp. reversed that course and opened a $10 million fund to focus on private sector agricultural, domestic distribution, and banking. Prudential is also seeking a license to enter the life insurance field.

Land Rents On the Move... Down. In Ho Chi Minh City and Hanoi, the rents are being reduced. While the Hanoi reduction came first in the reduction on the tax to be collected on foreign rents, the effect will become same: a reduction in actual rents paid.

The change in Ho Chi Minh City is a further example of the dynamic and leadership effort by the People's Committee to try to directly meet some of the realistic needs of the foreign investor community.

By reducing the tax table on rents to be collected, Hanoi will allow current and prospective tenant to argue with landlords that rents should be reduced to not be higher than the rent-tax tables. However, as some large villas under the formula still call for tax to be paid on a minimum presumptive rent often in excess of $3,000 per month, there is no realizable benefit yet seen. Realtor and State Market reports of a larger demand than supply for such housing may be true in Embassy Row. However, evidence and personal accounts indicate rents are far lower due to substantial decreased demand and currently increased supply.

Ho Chi Minh City has specifically lowered rents it will collect from six enterprises, including an Export Processing Zone. Rents will be reduced from 9% to over 50 percent. In Tan Thuan Export Processing Zone, the rent will be reduced from $4.3 per square meter per year to $1.76 per square meter per year. The amended land rental will be applied retroactively.

The truly remarkable nature of this change is apparent only when one considers that it was tax increases imposed in early 1997 that were last applied retroactively.

Investment Decisions & Discussions. Two seminars in two months have drawn substantial attention from the investment community. Two leading speakers, US Ambassador Pete Peterson and Vietnam's Deputy Prime Minister Ngo Xuan Loc, appeared first in Hong Kong and than last week in Ho Chi Minh City. They both took a hard look at the present and near-term future of investment in Vietnam.

Both meetings were organized by the American Chamber of Commerce. Hong Kong's interest in Vietnam is telling. The local AmCham attracted almost 100 business people, economic and industry experts to highlight the opportunities and challenges that exist in Vietnam.

The Ho Chi Minh City Division of Vietnam's AmCham sponsored the second meeting. More than 350 business leaders were in rapt attention as the two main speakers were proceeded by American and Vietnamese government leaders. Their frank talk was about the impact business and government have on each other.

Deputy Prime Minister Loc was forthright on both occasions. "The investment path ahead of Vietnam is fraught with difficulties and challenges," he said. Ambassador Peterson addressed the mistakes of both the initial American Investors and the Vietnamese government. "The fact that Vietnam has put out the hand of friendship to 120 nations is really quite significant," he said. The Vietnamese are "remarkable people, they're hard workers, they persevere, they want a piece of the action and a better quality of life."

Many understand Vietnam's value to investment that yet bear repeating: its long coastline, its strategic location in the heart of Asia, abundant natural resources, and a youthful population (70% of which are under 40 and 60% are younger than 25 years old). Membership in ASEAN and current negotiations with the US for Normal Trade Relations are also positive indicators.

Reforms still needed include equitization of loss-making state-owned enterprises, and banking reforms. The comments of some investors and experts also prove worthy of consideration. One, an early developer of major projects stated, "A lot of people invest in Vietnam expecting it to be the next great Asian tiger. But you should invest in Vietnam for what it is today and not what you expect it to be in the future."

The Taiwan developer of South Vietnam, a major land development project, predicts "Vietnam will become the manufacturing center for Southeast Asia within the next 15 years. The people here are intelligent, diligent, cost-effective and willing to learn. Not only are their hands capable, but their minds are capable too.

Greig Craft who is helping to establish heavy manufacturing facilities here pointed out that "Vietnam is the 12th most populated nation in the world. On top of many geopolitical reasons, there are also the people. They are marvelous people to work with, and I believe Vietnam is still a dynamic place to be. Changes are needed, the government is trying to make change, and the changes are needed to be made quickly."

Supermarkets: An Update. In Ho Chi Minh City, by the end of October there were 42 supermarkets in operation. This does not include two that recently, and mysteriously closed suddenly. Fraud is suspected but that may be only public (State controlled) media speculation.

The success of supermarkets in Vietnam is driven by local, domestic demand. Foreign visitors provide only limited support. Estimates are that many of the Supermarkets have gross daily sales (turnover) of from VND 200 million to VND 1 billion ($14,285 to $71,428). Further estimates are that the high grossing Supermarkets have over 1,000 suppliers who deliver mostly domestic, but also a good variety of imported products.

These Supermarkets include large grocery and dry-goods shops, as well as many smaller stalls rented to independent vendors. This formula provides a mix of the traditional market with the new Supermarket concept. The Supermarket shelves often tower above local shoppers, many of whom crowd into the buildings to enjoy shopping in air conditioned comfort.

Many of the larger Supermarkets also combine video arcades, small food stalls and other attractions to make the shopping experience more pleasant.

Owners and representatives report they can stabilize their prices due to stocking large inventories and by using loss-leaders in order to attract the large numbers needed to sustain growth.

Growth, but at a slower pace. As the government's National Assembly contemplates the targets to be set for 1999, it seems clear that the year will be a challenge. GDP is projected to reach 5% to 6% or slightly under that as now projected for 1998. That does not seem realistic to many foreign observers who believe it will be lower yet. Industrial growth projected at 10% for 1999 seems similarly over optimistic. However, while signs continue to show a slow down, at present all segments still show growth.

Even more importantly, while some speculate Vietnam will look inwards to the detriment of foreign investment, the reality is that Vietnam welcomes foreign investment and is making matters easier in order to attract more. Agricultural growth is projected to reach from 3.5% to 5.25 percent. Policy makers in the Central Government have chosen to mobilize all domestic resources for development investment. However, recognizing limited resources, the government will not try to improve all sectors. Instead, it will target reasonable and practicable areas.

Meanwhile, headlines continue to reflect the damage already sustained to the economy, and point the way to the larger challenge ahead in 1999. Mekong Corporation, the nation's first automobile assembly joint venture will essentially shut down one of its two assembly plants. Selling almost 1000 vehicles in 1996 and less than half that in 1997, figures for the first 10 months of 1998 are estimated at 350 vehicles. Its break-even point is 1500 vehicles.

International arrivals are down, having received 1.12 million in the first 9 months of 1998 against a projected target arrivals of 1.8 million . Yet Britain's Cable and Wireless telecom giant reportedly sees no difficulties for is huge, $207 million project to set up a 15 year Business Cooperation Contract with VNPT (Vietnam's state owned post and telecom company).

Rounding out the late headlines is the dismal news that steel production is down, with 200,000 tonnes of steel stockpiled due to a slowdown in consumer spending. Prices are currently running at VND 200 to 400 ($0.014 to $0.028) per kg. Vietnam Steel Corporation reports in the first 9 months of 1998 having produced 768,350 tonnes of steel in its various ventures, or from 60% of its planned targets. Of the total market demand of 1.7 million tonnes per year, VSC expected to provide 1.3 million tonnes or 75% of the total.

Joint Ventures to Fully Foreign Owned. Colgate-Palmolive is now a 100% foreign owned enterprise. And Coca-Cola's joint venture in DaNang is applying for dissolution, the second of three joint ventures making this application for this American beverage leader. The first Coca-Cola JV,that in HCMC, was reformed into a fully foreign invested company less than 30 days ago.

ColgatePalmolive's 1995 Joint Venture established a manufacturing and distribution network nationwide with hundreds of dealers. Caitalized at $10.7 million, the US company owns a 70% stake for a 25 year term. Current capitalization is at $40 million of which $12 million is Legal Capital. Its product list includes dental care products, chemicals, cosmetics, washing powder, soap and shampoos. It is a licensed obligation that the company must export at least 30 per cent of its soap products. In a stark contrast to the clamor raised when Coca Cola and Proctor & Gambol sought a split up with their joint venture partners, the authorization for this dissolution came quietly and with speed.

Coca-Cola's DaNang Soft Drink Company, a joint venture with an investment capital of $25 million and $13.7 million in Legal Capital, seeks to buy out its 30% Vietnamese partner. The local partner began, as had others before, suggesting that the foreign manufacturer cease unlisted "unnecessary expenditures to reduce losses." In the past, such expenses include marketing costs and salaries to foreign workers. Coca Cola reject that suggestion.

From the domestic side, working with a foreign partner who insists on spending unearned income on marketing expenses neither understood nor seen as reasonable, and paying foreign workers higher salaries than domestic workers, has been a challenge to Vietnamese companies in joint venture agreements.

From the foreign side, working with domestic partners who are seen as (i) non-performing and non-productive, and (ii) contributing little beyond land use rights which is an obligation to the joint venture to the extent it may exceed the minimum 30% share "contributed" by the domestic partner, has not been a formula for success. As those domestic partners have veto control over major business decisions as well as often demand to receive their minimum 30% share of non-existent profits, it is more than simply a challenge for a joint venture to succeed.

Current plans are for both parties to seek dissolution by making application to the MPI.

Cashews: An Investment Opportunity. There are 50,000 hectares (123,555 acres) of land in Dong Nai province dedicated to cashew production, or one fifth of the nation's cashew crop. Established as a cash crop for more than 20 years, as many already know, cashews are not really nuts but vegetables. The are the seed that projects from the base of an "apple" that to date remains inedible.

Husked, baked and lightly salted, the largest and finest of the crop that are available for sale in Vietnam cost VND 70,000 per kilo ($2.27 per pound) at the local markets. Smaller, burnt or broken stock goes for less. The wholesale price is based on world pricing.

Along with rice, coffee and rubber, cashews is one of Vietnam's main export products. Acreage is increasing at an average rate of 3,000ha to 4,000ha (7,413 acres to 12,355 acres) per year. The State owned Donafood in 1997 exported 5,000 metric tons of processed cashews with an export value of $23 million. This was one-sixth of Vietnam's total export volume of cashew nuts. See a related story on U.S. Export Opportunities.

The lack of investment in new technology (know-how and machinery), lack of proper care to the plantations, and weather, have contributed to a decrease in annual nut yield. The nation suffered a 40% drop in production due to severe weather in 1998 alone. At the close of the 1998 crop year, Donafood's exports stood at 2,000 metric tons with earnings of $10 million.

Plans are to increase yields from the current 0.4 metric ton per ha to 1.0 metric ton per ha. The same picture is painted for the entire nation's cashew crop. In the first nine months of 1998, Vietnam exported 19,000 metric tons of processed cashew nuts. Plans are to increase the plantation size and import 50,000 additional metric tons of raw cashews for processing.

Existing processing factories in Vietnam have the capacity to handle 160,000 metric tons of cashew, annually.

American Success Story. US builder De Matteis Construction's director, Al De Matteis, is not complaining too loudly about the local economy. Having recently landed the contract to build the new US Consulate in Ho Chi Minh City, this is merely on of 29 construction projects his joint venture firm has put together.

Arriving in Vietnam in 1993 from Brooklyn, New York, the company received one of the first licenses granted to American firms following the lifting of the American Embargo on February 3, 1994. Forming the first ever American-Vietnamese construction joint venture, Al recently told how he placed a heavy emphasis on building an experienced engineering staff.

Technology is also of key importance. The firm has its own independent materials testing laboratory to test quality of construction and transportation materials to help guarantee success for their clients.

Seafood Exports to America: $56M. In the first 9 months of 1998, Vietnam exported almost $56 million. This is a major increase over 1997 exports to America of almost $40 million in sea products. The US is now the fourth largest importer of Vietnam sea products, following Japan, EU and Hong Kong.

The U.S. frozen shrimp import market alone reached $2.557 billion in 1997. Tiger shrimp are the most profitable. There are about 5,100 firms in the U.S. seafood industry with nearly 900 firms importing shrimp. See a related story on U.S. Export Opportunities.

Recognized as the largest market for Vietnam's sea products, America also imposes the highest hygienic standards. In December 1997, the US Food and Drug Administration (FDA) permitted importation of sea products only if processed by factories meeting FDA's Hazard Analysis Control Critical Point conditions.

A recent 12 member delegation from the US Marine Fisheries Agency, after a week long visit, concluded several agreements with Vietnam. One is that the two nations will exchange fishery specialist and managers to help Vietnam to improve is fisheries.

Vietnam Vignettes is a periodic report distributed since early 1994. It is NOT a newsletter although for the ease of linkage we have called it that. It is a summary of domestically published media reports from more than 17 industrial sectors that we at VVG follow and report upon for our clients. * Due to the importance of certain topics of key importance to trade with Vietnam, we will occasionally include some wire and other media reports.

VVG - VIETNAM VENTURE GROUP, Inc.

VIETNAM VIGNETTES^Ž

VVG - VIETNAM VENTURE GROUP, Inc.

VIETNAM VIGNETTESŽ

VIETNAM VIGNETTES^Ž