September 1999 - report to clients on Vietnamese business, investments & solutions to problems

A Periodic Report to Our Clients
(higher numbers indicate more recent dispatches)

IN THIS ISSUE

1) Hopes vs. Reality - Trade Agreement

2) US Consulate in HCMC "Open"

3) Power Surplus?

4) Vietnamese Pottery: a cash trade

5) Trade Agreement Update

6) Investment inflows still inadequate

7) Eased opportunities: Full Foreign Investments

HOPE vs. REALITY - The Bilateral Trade Agreement between the United States and Vietnam may be signed when leaders from the two countries meet in Asia during September. While the travel schedule is busy for them all (Hanoi, Ho Chi Minh City, New Zealand), and the program is full, there is less hope in the American Business Community of Vietnam for a significant boost in either investment or trade than there is exhibited by our Vietnamese counterparts.

For their part, elements in the Vietnamese government are also exercising and preaching caution. Officials in the Ministries of (i) Finance, (ii) Planning and Investment, (iii) Trade, and (iv) the Vietnamese Chamber of Commerce and Industry are all aware of the difficulties that lie ahead. They include:

Unrealistic expectation of Vietnamese businessmen of quickly breaking into the US distribution system. There is a need far beyond quality control, but that too is a major point of contention. Selling practices in Vietnam are based on getting the most that can be milked from a customer, rather than building good, long-term relationships. Trade practices are to sell the worst products first to unsuspecting customer so they do not clog inventory. Export practices claim to favor duty free sales to foreign lands while still keeping up huge customs tariffs and other non-tariff trade barriers.

Unfavorable business climate fostered by difficult visa controls is a major hurdle that could be the most easily corrected. That it is not indicates the inherent inability of the nation to meet its neighbors. Thailand, for instance, with all its problems, will grant a 6 month multiple entry visa to any American with a business letter of invitation within 24 hours of the filing of an application for a cost of only $50 that allows two entries. In Vietnam, the secret nature of the entire procedure causes delays that go unexplained that can often take weeks. And the cost to pick up the visa in the Consulate of Vietnam in Hong Kong is a whopping $200.

Talk that does not become action. The sad, old tunes that once rang so clearly include "one stop shopping," "striving for the future," and "renovation of the economy." The words fall on deaf ears when the system of the government is still burdened by old-line thinking that seems more inclined to fear the economic growth of the common man. It is as if the success of the nation will only spell the loss of the control by some of their own small are of control.

We are told that the economic police in some provinces can no longer compel "tea money" (otherwise known as bribes) from local, domestic businessmen. The domestic businesses have grown so strong, both economically and therefore politically, that the number of complaints from such action have risen to a deafening level.

That is not the case in all parts of the nation. Many small gears who want to be considered great wheels look with despair on the success of the state employees with foreign business deals, and domestic, private businesses.

The traffic cop "believes" that absent his "permission" to drive, road traffic will not flow. So he extracts his own toll by stopping vehicles for cash payments. Customs officials believe the value of their work lies in the ability to slow down the entry of goods. Why should they be denied the opportunity to make money by just letting legal goods in quickly, they ask?

Other officials with the responsibility for the flow of information and people, those who should be helping forward movement, too feel left out. Their response is to slow the movement down as a means of extracting their "rewards." The doctor who will not release a medical report claiming it is a "state secret," the post office official who will not authorize a new telephone line claiming there is a back-log of orders when installation crews are sleeping in their trucks, and others in similar positions of authority or control, impede progress, and discourage foreign investor.

The reality of doing business in Vietnam remains the same as it was back in 1990. This is a nation with great potential that can be realized in the stroke of a pen if only the nation's apparent leaders would exercise that control. The old maxim's hold no place in today's economy. They are (i) "patience three times the three most important principals for doing business in Vietnam;" or (ii) "we are simply a new wine in an old bottle."

Investors have lost patience, and neighbor lands have reformed their old ways to show off the great wines in new decanters. The solution may be as some are now whispering in the hallways of the nation:

Retire the old guard. Buy them out as would the Board of Directors "elevate" an interfering executive of an established corporation. Use their services as "consultants," but remove them from all positions of control that they use only for interference. Buy them a beach-front or golf-course home, give them a healthy pension to invest in Vietnam's soon to be stock market. Give them a limousine to be driven about town in.

US Consulate in HCMC "Open." While some services were being handled for the past year at the small outpost on Nguyen Dinh Chieu Street, the new building at 4 Le Duan, to the left of the old Embassy building so ingloriously demolished only 18 months ago, is now fully open and operational.

Secretary of State Madeline Albright will visit the spot in September where just 18 months before she placed the first brick. Beautiful, open-aired, and spacious, filled with both Vietnamese and American art, and easily accessible to all, the new Consulate General is already an instant success.

While business services are limited, the official opening now means that there is a formal home for all Americans in the southern part of Vietnam. That can be a very comforting resource when in need. It can also provide the same US government frustrations as back home. Where else could one hope to find a notary public service that charges a huge $55 to authenticate one page.

Worse is that they no longer use the great seals and fancy ribbons we used to get for a mere $10. We are all glad to see them in place, in spite of the mixed blessing.

POWER SURPLUS? Given the tremendous growth of electrical power stations in the past six years (hydro, thermal-gas, thermal-oil, and thermal-coal), the news recently published of a concern of a surplus is not good news.

The Electricity Company of Vietnam (EVN) recently announced a concern that if new projects are not scaled back, Vietnam will waste large amounts of money completing them and will not be able to recover the capital to repay debt to build them.

Power demand in the first seven-months of 1999 grew 7% from the same period last year. This is the slowest level of growth since 1990, and less than half the growth projected for year. With more capacity due to come on-line in year 2000, this could spell real trouble for all of Vietnam.

The decrease in demand is due to only one factor: substantially slower growth in industrial need, due to the slow down of the entire economy.

The worst predictions in 1998 were that the year 2000 would show a quickening recovery, behind that of Vietnam's neighbors, but a recover non-the less. This is a situation that must be watched carefully. It may be an indication that the year 2000 will be substantially worse for Vietnam then the very slow 1999 in the first 8 months.

VIETNAMESE POTTERY: a cash trade. The ceramic sector of Vietnam, particularly that in the southern provinces of Dong Nai and Binh Duong, is growing to meet the current and expected demand for its distinctive wares. They are both artfully produced, and with the proper buying attitude, can be realistically priced.

While the State may despair about domestic price wars, the reality of the market place is that the low-cost producer of quality goods will win the day.

Several distribution firms in Europe and the US are owned by overseas Vietnamese who are already exporting container loads for international distribution. A few local producers are using investment proceeds from foreign lands to help increase their production capacity to meet the growing demand. Such alliances are both favored and needed.

While NTR (formally MFN) will not happen until the Bilateral Trade Agreement has been approved by both the Vietnamese National Assembly and the US Congress, it is expected that the reduction in tariff barriers will encourage investment in local pottery factories.

Absent such investment, the relatively small Vietnamese operations will not be able to handle the demand. Already in the north, the Bat Trang pottery factories will not process orders of less than full container loads. As their products are relatively small, a typical order is in the thousand count.

In the south, where the larger pots and planters are found, full container loads are weighty, but not a high volume item in either dollar sales or numbers per container. The usual sale is in the low to middle hundred count. However, market conditions do not currently favor simple sales. Many manufacturers still try to make each sale as if there will be no return buyers.

Building long-term relationships is indeed the key to success here. However, the traditional Vietnamese seller will not count on building such a relationship with a new buyer. It indeed takes time.

When the market ripens, Vietnam can be well positioned to be the low cost producer of the finest grade of ceramic pots and planters. The time to consider that future is now, while the market is yet new. The consideration is of course a two way streak: the prices must be realistic, and the buyers must be committed.

Trade Agreement Update - Something is happening in Vietnam, and even those who are on the scene dont know for certain what is happening. Living and working in a system that is not transparent requires the ability to read between the lines in the print media. More important is the rumor network that is often far more accurate. We cannot read tea leaves, nor do we believe that is a good method for projecting corporate forecasts, but

There is no monolithic method of decision making in Vietnam. Very much as do the Swiss, the Vietnamese go great lengths to insure there is a consensus before a decision is made. However, there are often rumors that leak from the progressive elements that indicate impending favorable actions that too often must be overridden by overt actions, or refusals to act in order to achieve a consensus with the conservative elements.

Any change in routine, even on matters of a simple nature, is not to be discounted when trying to understand local developments in such a situation. The absence of transparency thus often creates the appearance of an absence of stability to those who are more accustomed to living and working in a transparent environment.

Some recent signs to be aware of in order of events: (i) the American and Vietnamese Bilateral Trade Agreement (BTA) was agreed to in principal (led by the progressive Ministry of Trade, and supported by the progressive Ministries of Planning & Investment and Finance) after more than three years negotiations; (ii) Senior members of the conservative Customs Bureau in Ho Chi Minh City (importantly not Hanoi where the actions/violations of their counterparts are openly as serious) were sentenced to death or life in prison; (iii) Secretary of State Albrights visit to Vietnam was confirmed by the progressive Ministry of Foreign Affairs; (iv) Secretary of Defense Cohen was denied permission to enter Vietnam (by the conservative Ministry of Defense); (v) progressive elements supported US Embassy-supported rumors that the BTA would be signed in Auckland during the APEC meeting between President Clinton and Prime Minister Pham Van Khai; (vi) a long term, locally prominent American business community leader in Vietnam was denied permission to remain in Vietnam (by the conservative Ministry of Interior); (vii) the State organs are effectively silent concerning the BTA but rumors are that the Politburo has no consensus; (vii), according to President Clintons office, the official status of the BTA is that the BTA off the ground, just not yet signed.

In this game of tit-for-tat, foreign businesses and lives are being played with in the absence of respect. This is remindful of events in 1995 when a false rumor was intentionally circulated by the conservative Ministry of Culture and Information that billboards and advertising signs in foreign languages were illegal. Within 24 hours, the world witnessed Coca Cola signs costing thousands of dollars being dismantled by shop owners who, when interviewed by the domestic media, smiled and told the world how happy they are to comply with the law to make Vietnam a better place in which to live.

Investment inflows still inadequate - In a recent report, the MPI stated that foreign investment inflows into Vietnam are still on the decline, despite a handful of government incentives to attract more overseas capital for the countrys development.

The report shows that Vietnam has licensed 157 foreign-backed projects with a total registered capital of $871.2 million since the beginning of the year, a decline 10.3 per cent while total registered funding saw a decline of 48.8 per cent over the same period last year

Since the beginning of the year, estimated realized capital of FIEs stood at $993 million, which meets 55 per cent of the annual target a fall of 18 per cent over the corresponding period last year.

Over the same period, although FIEs earned an aggregate revenue of $2.6 billion an increase of 21 per cent over the first eight months of last year FIE enterprise contributions to the state coffers amounted to $175 million, a decline of 17 per cent.

Eased opportunities: Full Foreign Investments - Two key lines from an official from the Ministry of Planning and Investment (MPI) at a recent meeting with Taiwanese investors: (i) Wholly owned foreign firms will become increasingly familiar in Vietnam as the government bids to improve the investment environment; and (ii) the government is soon to consider a draft ruling easing the way for foreigners who want to go it alone, which should facilitate transformations of foreign-backed joint ventures into 100 per cent foreign entities and allow more sectors to have wholly foreign owned firms.

He added that he believed the number of 100 per cent foreign companies in the country would increase once the government narrows restricted areas to wholly foreign owned companies. Difficulties of foreign investors are our difficulties, Vietnams investment environment still process a lot of constraints and risks, conceded the official.

Under the BTA with the USA, in a specified time, several (as yet not announced) sectors must be opened to direct foreign investment. Under Vietnams current legislation that will need to be updated over time, sectors still restricted to joint venture or a business cooperation contract (BCC) investment forms that may need to be opened include: telecommunications, production of cement, steel, iron and industrial explosives, travel and tourism, culture, sport and entertainment, and the exploitation and processing of oil, gas and rare mineral resources.

Infrastructure facilities of industrial zone and export processing zones must also result from at least some domestic investment.

Foreign investors in a number of joint ventures have recently applied to acquire their local partners stakes, but those wishing to go single are often loss-making joint ventures bogged down in prolonged financial woes or those in which the local partner cannot fulfill their obligations as far as capital contributions are concerned.

Foreign investors also often cite difficulties in negotiations with the local partner as the reason why they wish to go 100 per cent. However, due the lack of a legal framework for divorces, the government has so far considered such proposals on a case-by-case basis.

The foreign-backed sector presently contributes one third of the countrys total investment, a quarter of industrial value, one fifth of exports value and one tenth of the countrys gross domestic product (GDP), the MPI calculates.

VVG ~ VIETNAM VIGNETTESŽ

VVG ~ VIETNAM VIGNETTES^Ž