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Issue No. 3, January 1998

A Periodic Report to Our Clients

SECOND-HAND MACHINERY. The Ministry of Science, Technology and Environment in late December 1997 lifted the ban against the importation of used equipment. Foreign invested enterprises may now import such material provided (i) its quality is still equal to 80 percent of equivalent new equipment, (ii) fuel consumption does not exceed 10 percent as compared with fuel consumption of new equipment, and (iii) labor safety1 and environmental considerations with new equipment are maintained. Equipment quality must be established by authorized third-party certification to prevent disputes at ports of entry. See 2290VN1, 22Dec97.

NEW INVESTMENT INCENTIVES proposed from MPI include reduction on land rents and reduction of minimum ownership shares in joint ventures. Investors, who must be prepared to invest in remote, unfavorable areas to achieve these incentives, can also have the lowest possible tax rate. Region I are all remote and isolated areas. "Difficult" areas in Region II are in the Red River Delta and the Central Highlands.

Projects in Region I in agriculture, forestry or fisheries will be charged 10% of the minimum price for land rent, or $5 per hectare per year. Similar projects in Region II will receive a 30% reduction in rent. Projects in both regions will receive an 8 year exemption from all profits tax as well. Tourism and other projects in such areas will be charged 50% of the minimum rent and receive a 4-year profits tax exemption.

Investors in Region I can own as little as 20% (down from 30%) of the total capital share and will be given priority to sell their products in the domestic market. The State Bank is to guarantee that foreign currency is available for these projects.

Additional special encouragement will be given to projects for 100% export, high technology, those seen as key to the national economy and those involved in building infrastructure in remote and isolated areas. 2286 VN2, 18Dec97

AID DONORS SAY, "Give us action not words."   Following the meeting of ODA donors in Tokyo in November 1997 [and the grant of $2.4 billion in aid], major donors recently met with the fourth plenum of the Communist Party’s Central Committee and responded with skepticism to the country’s resolve to reform its financial sector and State-owned Enterprises. Australia Ambassador: "Word and plans are encouraging. Now we want positive action." ADB: "The resolution is good, but we need to see concrete actions." World Bank: "The government now needs to get everything moving forward."

The consensus is that economic targets, such as a 9% GDP and 25% growth in exports are very ambitious and require stronger reform policies. 327VIR4, 19-25Jan98

MINISTER REJECTS COKE'S PLANS FOR NEW JOINT VENTURE IN DANANG.  Citing the extensive use of imported materials for locally bottled beverages by Coke, the Ministry of Industry rejected the license application. This also coincides with the Government's temporary suspension of licenses to foreign invested joint ventures producing soft drinks without using domestic ingredients, such as fruits.   The $25 million proposed project was granted preliminary approval in principal by a Deputy Minister of Industry in November 1997, after which the project was submitted for full Government approval on January 6, 1998.

Coke's problem may not be long lived, for the Minister is seeking a meeting with the company to reconsider the portion of the domestic ingredients and raw materials used in Coca-Cola's existing establishments in Vietnam.   The purpose is to help domestic farmers boost their farm production. 2321VN11, 23Jan98

FOLLOW-UP:  Coca Cola says has permission to build its third plant. The new, $25 million plant is to be licensed for 25 years and will take about 9 months to construct in Da Nang City.  Two existing Coke projects include a $48.5 million plant in HCMC and one in Ha Tay Province in the north worth $24 million. 2325VN11, 31Jan98

PROCTOR & GAMBOL: Limit May Be Near. Hoping for a last minute resolution, there was no sign from the company, its bankers, US executives or the local partner of a positive outcome to Vietnam's latest major foreign investor debacle was in sight.  Problems surfaced in October when local press reported a $28 million loss in the venture's first two and a half years of operation.

P&G  offered to inject more capital or allow the joint venture to become 100% foreign owned, but the offers were not accepted.  The problem deepened when the State Bank, citing concerns over the ability of the venture to pay its debts, advised commercial banks to stop lending to it, leaving P&G Vietnam without funds to pay its 400 staff or buy manufacturing supplies.

Implications for Vietnam and its investors go beyond P&G's own problems. Says one, "The death of an enterprise is not a pretty thing, especially with you've got a company with no shortage of capital or willingness to invest."   This is also being closely followed by US Ambassador Pete Peterson, who wrote to the Prime Minister that "the failure of a company such as Proctor & Gambol, with a reputation in Asia, would further accentuate the economic turmoil in Asia, would damage the reputation of both" P&G and Vietnam, and might impact on the existing priority of "improving economic relations, including efforts to remove impediments to a trade agreement." 17IHT4Feb98

DREAMS OF PLASTIC PLANTS.   This cutting-edge industry has room for growth in Vietnam.  The first plastics factory was established in 1969. The number today is 250, with 80% of them privately owned.  This is one of the few industries in which the need is still not well developed.

Vietnam is a marketing dream.  In almost every sector the advertising campaign does not have to create a need, merely awareness of the product.   The use of plastics is different.  The average Vietnamese consumer purchases a stunningly small 3.6 kilos (almost 8 pounds) of plastic products each year.  This is in stark contrast to 23 kilos (50.6 lbs.) in Thailand and 31 kilos (68.2 lbs.) in Malaysia.

Product diversity (lack of it), reliance on imported raw-materials, low-quality forms and low-quality patterns also hamper the industry's growth.   Foreign investment has not been strong in this sector.  MPI figures show of the 83 foreign invested plastic projects with a Total Investment Capital of $660 million, 12 projects are fully foreign owned and their output accounts for 10% of the industry total.  For the most part, the plants are small projects, don't use advanced technology, and cannot meet fast-changing market demands.

Currently, brining in raw materials for plastic production is duty free. However, as more foreign companies set-up shop here, the government may reconsider. "The addition of an import tax will make the domestic industry more attractive for investors," says Le Quang Doan, production director for Vinaplas, the country's largest local plastic producer. [NOTE:  Really?  If there are no locally produced raw materials available, one may wonder about this reasoning.  However, it is clear that there is still room for growth by foreign investors in plastics under favorable conditions.]  47VET Industry Report2, Jan98.

PROFIT RE-DEFINED. A new law on the taxation of foreign-invested enterprises is Circular 74 TC/TCT.  It is applicable to all foreign invested enterprises, foreign parties to a Business Cooperation Contract, joint-venture banks, and others.

A company's "first year of profit" is clearly defined as the first tax year in which profit is generated, before taking into account losses carried foreword from previous years.  There should no longer be any doubt that it is the first year the enterprise generates any profit, and not the year when prior losses have been covered.  The prior practice under Circular 51 TC/TCT dated 3 July 193 treated prior losses as an item of expenditure for the purpose of determining the profit or loss for a tax year. This will not longer be the case.

Another new provision is that of Associated Companies.   Two companies are regarded as associated when one company contributes to the legal or share capital of the other, or where both companies are subject to direct or indirect control of another company.  Also when the two companies share legal or contributed capital by a third party, the are regarded as Associated. 47VET31, Jan98

VIETNAM IS NOW ON-LINE. The Internet connection was finally completed.  State-Owned Data Communication Company (VDC), the sole Internet Access Provider, was hooked up as of 15 November.  In early December, VDC, wholly owned by the Department of Post and Telecommunications, and one of three licensed Internet Service Providers (ISP) started hooking up its own customers.   More than 30 days later, the customer of the other ISPs were being hooked up.   Whether the cause of the delay was marketing practices or technical problems, we are now on line.

The cost per day is large, and growing.  At US$ 0.033 per minute (at the 25Jan98 official rate of exchange), it may seem cheap. However, as you are reading these pages over the Internet, many  know how grateful you are not to be paying for the time to upload and download files and programs.  The sign-up fee of VND450,000 ($36) and a monthly fee of about $15, might not be prohibitive to young, upwardly mobile, urban Vietnamese employed by a foreign invested company and earning over $100 per month.   But it will be a stretch if they want to learn how to surf, make a bundle of errors, and then face down-loading delays as we have.

In the first few days, we logged on nearly 5 hours per day.   One useless program we thought to download came in over our 33.6 modem (the fastest available here due to the ISP using a 64Kb line) at only 100 bs. That is 0.1 Kbs. After 20 minutes the speed picked up to 0.3 Kbs.  In all, it took a full hour to download 900 Mb of data at a cost of  $1.80. We tossed the program after one look.   At this rate, we anticipate a bill in the first full month exceeding $300 just to learn how to surf the net.

We have been exploring building our website at the same time. If you are reading this than we were successful in that endeavor.  Please let us know. We don't need any complements, just the name of your browser and how our pages look to you.   Of course an "atta-boy" would go a long way.

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 published  media reports from more than 17 industrial sectors that we at VVG follow and report upon for our clients.

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