August 2001 - VVG reports to clients on Vietnamese foreign direct investment.

Issue No. 46
August 2001
Our 8th year in Vietnam & 4th year on the Internet
A Periodic Report to Our Clients

IN THIS ISSUE Note: We are using a new, softer background to ease eye-stain for on-line readers. This will not effect B&W printing
COMMENTARY: One recent week out of eight consecutive years….
Time passes quickly - in retrospect. A good effort must be made to slow down and reflect on what we are really seeing. Two comments are offered this month. One on the appearance of the State, and another on the state of our appearance. See our commentary (linked above) and our dispatches (linked below).
Land Use Decree, No Boon to Development Vietnam Airlines Code Shares with American Postal & Telecoms are splitting in Vietnam Wider opening of Internet....?	Ho Chi Minh Highway - update Growth In Private Enterprise Noted Congress and the BTA Domestic Auto Sale Up 45%, but....

One recent week out of eight consecutive years…. We recently walked about down town Saigon. By taxis and motorbike we took longer drives further out and about. We photographed long dormant skeletons of buildings yet to be completed and longer vacant building sites.

We read news stories in the papers and magazines, both in English and Vietnamese, of plans to reform, of intentions to open the doors to foreign direct investment, and of infrastructure projects a-building: dams, refineries, power plants, and highways. There was no story about any FDI project opening, or even being licensed. There were a few articles about small domestic enterprises planning new reforms. One story concerned a 100% across the board stock market dip, but then there are only 5 holdings traded, plus a few bonds. There are so few bonds that on one of the three trading days, only one of four bond issues traded.

It is reported that since the opening of the Ho Chi Minh City stock market, it has conducted only about 150 trading sessions with 13 million shares worth 600 billion dong ($40.4 million) in only five companies traded among around 1,000 investors.

An analysis by another was that "The components of the Vietnam stock index fail to reflect the reality of the country's economy. A recent 10-fold increase in the price of shares in a paper company was not a result of corporate efficiency but simply the poor supply-demand balance and trader psychology. There is a rush to purchase shares by traders with a risky hope of bagging a huge profit from price hikes regardless of the efficiency of the real operations of the companies, and does not reflect the growth of the companies, nor that of the economy."

We sought appointments that week with old friends in government only to find they were too busy to meet. We sought meetings with old friends in domestic industry only to find that they were too busy as well. At the Fourth of July celebration we said our goodbye to the departing Counsel General and noted that the departing Ambassador was also too busy to attend. We openly wonder if the state of business "does not reflect the (actual) growth of the companies, nor that of the economy?"

In a sea of faces among the 1,500 revelers at America's 4th of July celebration we noted twenty round eyes. Yes, 20 round eyes = 10 black or white Americans. But for the entertainers, there were not many more Europeans or Aussies either.

“Once again, they just don't get it,” writes an American correspondent to VVG, once and perhaps later once again keen on doing business here.

Let's see how the Vietnamese in control think: Get the foreigner to invest in infrastructure (gas/oil pipelines, refineries, etc.), tell him that he can foot all the bills and we will take a percentage of the deal, and then add VAT to his profits and increases his tax rate to 50 per cent. Makes perfect sense, as we are Soviet trained economists [an oxymoron].

This latest fleecing of the foreigner is just too much. How can you, in good faith, advise someone to invest in ANYTHING in VN when such tactics are employed?

The small to medium enterprises certainly WILL NOT. While the large multi-nationals may be able to continue operations, I would not be surprised to see some of them say that enough is enough.

If VN wants to develop, let them do it with their own money. It reminds me of the old joke about how to leave VN with a million dollars---go to VN with ten million, invest nine million and leave just before you have lost it all.

We understand the concern but feel a bit differently. Small to medium sized enterprise can and will do very well in Vietnam. We still view this as a good potential for the larger investor as well, but as always, one must use the best of conservative business principals when proceeding, particularly in Vietnam.

Don’t fall for the hype, fancy plans, or strange schemes, or do so at your financial peril.

The reason for our continuing confidence lies wholly in the pragmatic strength of the good people of Vietnam. Of course power brokers and government-protected if not sanctioned criminals still exist. Power brokers can broker nothing, and the criminals have not ever intended for investors to succeed. Rather than nurturing a tree until it becomes a forest, these vultures keep snipping off the first buds until the tree dies.

In every nation there are unwise investments as well as unwise investors. It takes a wise and conservative investor to realize what he does not know, and then take the time to learn or hire the proper people to help him succeed. For certain, the number of unwise foreign investors in Vietnam has declined, but that is from the attrition of all foreigners and not from the growth of educated investors. However, there has been no decline in the area of opportunities for wise investors to succeed.

Years ago when we counseled foreigners on how to start up business, some very large multinationals laughed when we recommend fully foreign invested projects and urged them to stay clear of Joint Ventures. Companies with names that sound like (but are not) “blokeAmolla” and “t & z” went their own way. After years of suffering and more years of internal political strife, their joint ventures fell apart. Costs were beyond budget and profits are still elusive. But as their main objective was to gain market share.... Well, the big boys have the staying power and will hold out.

The small and medium investors generally know they must be more smart, quicker. They know they need help and generally listen. We recently assisted in the formation of a small enterprise that offers an essential service to the shipping industry. They provide worldwide contacts, retain a local service company who they are training and to whom they can sell imported specialty products. Thus the small foreign company fills a much-needed niche in current exports. More importantly, they are well prepared and positioned to take a commanding lead as exports increase with the advent of NTR (MFN) between America and Vietnam.

It is not just the foreign invested community that needs to act smarter. We saw advertisements for villas during our "walk-about" week. One offered a suburban riverside home @ US$ 28,000 unfurnished and US$ 25,000 furnished. While one might wonder how terrible the furniture (or English language) must be for that offer to be made, we wondered if the rental was on a monthly, annual, or decade-long basis? We know how terrible security is in those parts of town that are now virtually vacant of foreign visitors, and recommend that foreign folks stick closer to the city center for now.

On the facing page from that ad was another house rental ad from a smarter owner. He offered an in-town 4-bed room villa for only US$ 800 per month rental. Even if in perfect condition the wise shopper knows that there may yet be some wiggle room at that asking price. That same home in 1994 brought in US$ 6,000 per month, with an advance of 12 months rent.

For certain, the days of investors throwing money into the street to see if it will sprout and grow have ended… for most people. But it is also true that some of the leaders of Vietnam still don’t get it, as our quoted correspondent and others write to us.

But we also know Southeast Asia. We see and recognize well the strengths that Vietnam still offers that the neighboring lands cannot: intelligent, loyal and hard working people who want to learn, a stable government and one that is firm in its commitment to reform even if it is still weak in the completion of its goals. Isolated for too many years, still burdened with its past and a stubborn refusal to acknowledge that burden, and filled with a near stifling pride in its desire to do things the Vietnamese way, we find the ability to succeed in Vietnam needs only more patience, additional time, and extended flexibility.

Of course, having a needed product or service will also help the investor to succeed.

EQUALITY OF VVG REPORTING - We were recently taken to task about why we do not report enough if at all on the encouraging words offered by The World Bank, ADB, and State Ministries on projections for better economic growth.

For the most part, we report only on facts and not on speculation. We take from our own direct reports, digest or quote directly from State authorized media, and occasionally report from the international press. We write about events and projects that are authorized or commissioned. We try to avoid reports on impressions, both from the State and from industry.

Working in Vietnam for nearly eight years, VVG has seen too many reports on the impressions of opportunities and speculation about future success or failure. Some seasoned reporters do not know the facts about which they write and create hype - negative and positive. Other reporters have their own agenda and report that faithfully. Success and failure in Vietnam has always been more projected or perceived than actual.

We believe strongly in the future of Vietnam as a manufacturing and tourist center, but we also know that so much puffery has not helped that growth.

When we read that “Jemal-ud-din Kassum, World Bank Vice President for East Asia and the Pacific, wrapped up his trip to Vietnam …to discuss the strategy for increasing its economic stability, which has fallen steadily in recent years, and to evaluate programs already in place,” we are not impressed when he is quoted by The Earth Times as saying, “I have been deeply impressed with the commitment to accelerate development, reduce poverty, and deepen the effort.”

We have heard this from occasional visitors to Vietnam, and from the State, for nearly eight years. We also know that investors who are in Vietnam or interested in considering Vietnam for growth insist on much more than just repetitive commitments to change.

Of course we are pleased that as reported "Vietnam has a strong reform program in place that the World Bank is committed to supporting." However, in spite of significant opportunities here, we see the reluctance of growth from the international investment community, and the absence of real growth in the nation.

VVG suffers the same stagnation with our own projects as do our clients and the rest of the investor community in Vietnam.

There is a renewing need to re-educate old friends on the importance for the State to change and not simply talk about commitments to change. And when new personalities come to office, the opportunity to meet with them to start the education process is rarely ever easy. There has been no real change at all. Only when there is real change in Vietnam will investors come to Vietnam with real money.

There are still two major camps in the leadership councils of Vietnam that are opposed to growth: those who are yet to be convinced that reform will allow them to keep their positions, and those who are convinced that reform will end their control. These still powerful forces in Vietnam point to the apparent success that China has in mixing the old with the new as a reason to hold on their current ways.

But as in Vietnam, appearances in China are not often reality. More importantly, the markets in Vietnam are not those in China. While foreign investors can make due with the Chinese domestic market, that is not the case in Vietnam.

Even if the Vietnamese percentage of true middle class were equal to that in China (it is not. In China 1% to 3% of the population are true middle class while in Vietnam the number is less than 1%), China’s 13 million to 39 million middle class citizens form a sustainable market for domestic production of foreign designed goods. Vietnam’s middle class is a much smaller percentage, and the actual numbers (500,000 to 750,000) do not yet reach the level of a sustainable market for broad domestic production of consumer goods.

We see current signs of domestic strength in Vietnam: re-building of new local roads, clearance of old canals, home enlargements, and spending for consumer goods. One supplier we know has a monthly profit of $50,000, which has not yet been noticed or taxed by the State. We see opportunities growing for small and mid-sized business, both domestic and foreign, where that was not possible before.

And we note that thuggery, oppression, and intimidation by State officials against both domestic and foreign businesses are lessening. But they still exists; it is still wrong; and there is still no transparency to protect either the domestic or foreign sufferers of these criminal actions.

We take pleasure in reporting that Mr. Kassum said. "Achieving the agreed reform targets in the next 12 months will send the strongest possible signal to Vietnam's partners and the rest of the world that the country is serious about sound growth and poverty reduction."

It is also a pleasure to report that he concluded his visit by confirming the World Bank's support for Vietnam. "This is a great opportunity to have this work done in a coordinated and synchronized way with the Government and all our development partners so that the Bank provides Vietnam with the right kind of help in the right amount," he said.

But we once again call upon the leaders of Vietnam who believe as we do that reform will be the best salve for what ails Vietnam, to accept the right kind of help in the right amount, and not just tell us about your plans to do so.

Land-use decree no boon to Vietnamese development*

HANOI - Many capital-hungry enterprises in export processing zones (EPZs) and industrial parks (IPs) are unable to get secured loans from [domestic] banks, cutting off a potentially lucrative source of clients for the local banks.

The enterprises are hamstrung by Decree 178/CP, which says that land can only be used to secure a mortgage if the borrower possesses the land-use rights. But many new firms in EPZs have not acquired land-use certificates. All they have are their buildings and warehouses, but these, without land-use certificates, cannot be used as bank mortgage.

Their only other assets are their machinery and equipment. Since these are classed as moveable assets, they can only be used as collateral if the banks are given title over the equipment - something the firms are extremely reluctant to do. As a result, banks must either accept buildings as security, or classify the machinery and equipment as a fixed asset, which they, in turn, are disinclined to do.

Some bankers are allowing firms to use their land lease documentation as security for the mortgage. But it would be hard to turn these assets into cash if the borrower defaults. The banks would find it difficult to transfer land rents or sell the equipment outside the EPZ.

At the same time, few companies are eligible for unsecured lending. Most of them keep reporting losses in order to extend their tax concessions [NOTE: or don't make any profit due to the still extraordinary high cost of doing business in Vietnam], which will diminish as soon as the business starts making a profit. As a result, the businesses do well [?] out of the tax concessions but deprive themselves of the opportunity to take out unsecured loans.

Businesses in EPZs often take two or three years to work through all the cumbersome procedures and secure land-use right certificates. If a project is already under way before it moves into an industrial zone, it may be eligible for unsecured credits. But sometimes banks simply refuse loans without making a full examination of the project's viability.

According to the State Bank of Vietnam's Ho Chi Minh City branch, companies in EPZs and IPs have taken out only VND1.2 trillion (US$81.8 million) in loans, accounting for a mere 2.5 percent of the city's total outstanding loans. This stands in stark contrast to the overall business picture in the city's two EPZs and eight IPs, which host a great deal of investment. The capital flowing into the zones has reached US$1.067 billion and VND2.9 trillion, respectively. The two EPZs alone have recorded foreign trade turnover of about $1 billion.

Most of the foreign-invested businesses in the zones make their credit and payments transactions through foreign banks rather than domestic banks.

Guaranteed by parent companies, the businesses can easily get loans from foreign banks; but these charge a higher interest rate for dong-denominated loans than local banks. Short of Vietnamese dong for such loans, foreign banks tend to borrow dong from domestic banks. The domestic banks sometimes offer loans to businesses with a guarantee from their parent companies or banks. (Asia Pulse - atimes.com)

Vietnam Airlines code-share pact with American Airlines* Vietnam Airlines has entered into a code-sharing agreement with American Airlines. However, before it can come into effect, each government must first approve it.

The contract allows the two airlines to buy seats on each other's flights connecting Vietnam and the United States, either through Europe or Asia. The flights will be listed on both companies' schedules and in both reservation systems.

American Airlines currently flies from the United States to Taipei, Taiwan, which is also serviced by Vietnam Airlines. The code-sharing agreement will be implemented over the first 20 months after each government approves it.

Holding up the implementation of this agreement is that Vietnam and the United States are still negotiating a comprehensive civil aviation agreement that would allow airlines to fly directly between the two countries. In March 2000, the two governments agreed to permit code-sharing agreements on up to 21 flights a week.

Delta, Northwest and United Airlines have also made code-share proposals.

Vietnam Airlines has already signed a code-sharing agreement with Taiwan's China Airlines, through which its passengers fly to Taipei, then board a China Airlines flight to the United States. No other code-sharing agreements currently connect Vietnam and the United States.

The United States and Vietnam are waiting to ratify a wide-ranging bilateral trade agreement that was signed last July. Once it is approved, the agreement is expected to increase demand for flights between the two countries. (AP)

Vietnam to split postal and telecommunications services* In a move to boost its competitiveness as Vietnam deepens its regional economic integration, state monopoly Vietnam Post and Telecommunications said that it was planning to separate off its money-losing postal services.

For the remainder of this year, VNPT will experiment with the separation of the two services in 11 provinces, a VNPT executive said. Five provinces in northern Vietnam, four in the central region and two in the southern part of the country have been picked for the trial.

Under the plan, telecommunications will be separated from postal services in all 61 cities and provinces in Vietnam by next year, and by 2003 VNPT will be formally divided into Vietnam Postal and Vietnam Telecoms, he said.

The unidentified official said the plan would help the telecommunications company compete. Currently, the [monopolistic and] profitable telecommunications division subsidizes its money-losing postal service, he said. In the first years of separation, postal services will face difficulties and need government subsidies, the official said.

Vietnam's telecommunications charges remain among the highest in the world despite a series of recent rate cuts. The country plans to reduce its telecommunications charges to the level of other countries in the region over the next few years.

Earlier in July, VNPT raised the price of stamps for letters within Vietnam to 800 dong (5 cents) from 400 dong (2.5 cents) to reduce the need for government subsidies. (AP)

Vietnam Weighs Wider Opening of Internet Market* Vietnam's communist government is weighing a proposal to let all firms, including private businesses, provide Internet services, an official of the state telecommunications authority said in late July.

Vietnam hooked up to the Internet in 1997 but it has only about 150,000 subscribers, with access limited by high prices and government efforts to block politically sensitive sites, such as those run by anti-communist émigré groups.

"The government and various ministries are considering a draft of a new regulation that would allow all economic sectors to take part in Internet service providing," said an official of the Directorate-General for Posts and Telecommunications (DGPT).

Vietnam's strictly controlled official media said earlier this year anti-state forces were using the Internet to slander the country, exaggerate conflicts and fan religious tensions.

The official said a new government decree on Internet management was expected to be approved soon, but gave no details.

Vietnam now has five Internet service providers, or ISPs, four of them state run and one a semi-state firm. All have to lease gateways from the sole Internet access provider, state-owned Vietnam Data Communications Co.

The DGPT official declined to confirm a report in the state-run Vietnam Investment Review that the new proposal would pave the way for at least 10 new ISPs in the next five months, including some private firms.

The Review said 50 firms have applied for ISP licenses and a second Internet access provider (IAP) could be licensed in the next several months. It was unclear whether the draft proposed permission for non-state IAPs.

The paper said the proposal could take effect by the end of this month. (Reuters)

Ho Chi Minh Highway on the fast track - [VVG has been reporting on this project since November 1997 when we wrote, “There is well-voiced concern about Vietnam’s ability to finance large infrastructure projects that may fuel an inflationary spiral. These include plans for a $3.5 billion National Highway and the $1.5 billion refinery in Dung Quat.”]

Certain sections [of the first stage] of the controversial trans-national Ho Chi Minh Highway are due to be completed by the end of this year, according to project general manager Ha Dinh Can.

To this end, 10 million cubic meters of roadbed or 50 percent of the projected total will be rolled out, and the building of 60 large, medium and small bridges will be completed. Construction work on the Ho Chi Minh Highway is now about 40 percent complete after 15 months of intensive effort with 88 percent of site clearance work already accomplished.

Work is already under way on 25 large and 115 medium-size bridges, and the drainage system is 47 percent complete, Can said.

Work on the first phase of the highway construction began in April of last year, and is scheduled to last three-and-a-half years. When complete, the highway will serve as Vietnam's second national north-south backbone crossing the western mountains in a parallel track with the coast road, Highway 1.

The highway follows the route of the historic Ho Chi Minh trail, famous as a pivotal secret supply line for the southern liberation forces in the American war.

The Agriculture and Rural Development Ministry has decided to invest VND22 billion (US$1.5 million) in planting forests along the highway.

The total cost of the 1,690-kilometer highway is expected to hit VND 5,300 billion (US$ 357 million. [This must refer to the cost of the first phase alone as it is about 1/10 the cost of the overall project.] About VND 800 billion was invested in the project last year, mainly for design and surveys, technical preparation and ground clearance.

GROWTH IN PRIVATE ENTERPRISES NOTED* There is one sector that has been experiencing growth. A total of 3,330 private enterprises have been incorporated in Ho Chi Minh City in the first half of this year, an increase of 32 percent.

It brings the total to around 9,000 since the enactment of the Enterprise Law early last year, with a total registered capital of VND10,200 billion ($680 million). Officials from the city's Department of Planning and Investment (DPI) attribute this sharp increase to the simplification of licensing, tax incentives, reductions in land rentals, and easier access to bank loans. The DPI's launch of a website to grant licenses has also helped investors save time and money.

Many of the newly established enterprises are trading companies and service providers - funerals, animal burials, fashion model training and wedding ceremonies are some of the services offered. Except those in law practice, which require the approval of the Ministry of Justice, all other enterprises can obtain operation licenses with ease once they have a practice certificate.

The officials said that the new private domestic enterprises have made a significant contribution to economic growth, notching up impressive industrial production and export figures in the last six months. Exports rose 14 percent year-on-year to $3.25 billion in the first half. Of the enterprises established this year, 2,157 are limited liability enterprises, 939 are private concerns, 226 are share-holding companies and nine are one-member companies.

Ho Chi Minh City [with 10% of the nation's population] now contributes 20 percent of the national GDP, 40 percent of total exports, 30 percent of the nation's industrial production, and 30 percent of the government's budget revenue.

The city's plans will be helped by the construction of a $154 million water treatment plant, bankrolled by European and Malaysian export credit agencies. The plant, scheduled to begin operating in 2004, will be located in Thu Duc District and supply 300,000 cubic meters of water per day to the southern economic hub.

It will be built under a Build-Operate-Transfer (BOT) scheme and developed by France's Ondeo Company, formerly Suez Lyonnais des Eaux. Malaysian export credit agency Mecib, France's Coface and Belgium's OND will lend Ondeo the money for the project. Fortis Bank, Ondeo’s financial advisor, arranged the financing.

Prime Minister Phan Van Khai approved the construction of four water treatment plants in Ho Chi Minh City in 1998. These included the Thu Duc project, a plant at Binh An and a Malaysian invested plant.

The BOT projects were designed to raise the volume of water supplied to Ho Chi Min City from the current 750,000 cubic meters per day to 1,850,000 cubic meters by 2003. However the present water distribution network can only handle a maximum of 800,000 cubic meters per day. (atimes.com)

CONGRESS AND THE BTA: The House Ways and Means Committee in late July approved a normal trade agreement with Vietnam, a major step toward removing some of the last vestiges of political discord left by the Vietnam War.

The Senate Finance Committee earlier endorsed the normal trade pact with Vietnam.

The Vietnam agreement would normalize trade relations, meaning that both countries would lower tariffs and Vietnam would take steps to make it easier for American investors and better protect U.S. intellectual property.

The trade status of Vietnam, as a communist state, would still be subject to annual review until the country enters the WTO.

Earlier, the House voted 324-91 to reject a resolution that would have overturned the president's June 1 decision to extend for a fourth straight year Vietnam's current commercial relationship with the United States.

Under that relationship, Vietnam has access to U.S. government credits and other guarantees provided by such organizations as the Export-Import Bank and the Department of Agriculture.

Rep. Dana Rohrabacher, R-Calif., a conservative who offered the resolution to overturn the waiver, said he was against using tax dollars to subsidize American companies that want to build factories and take advantage of cheap labor in a ``corrupt, tyrannical dictatorship.'' [This former surfer turned congressman must have swallowed too much water or been hit on the head by his board a few times too many in his earlier days. We met him in 1996 when his campaigns against Vietnam seemed potent. It is important to realize that not a single one of his negative initiatives has ever had broad support in Congress.]

But Ways and Means Committee Chairman Bill Thomas, R-Calif argued that open economic relations were the best way to prod Vietnam toward improving its human rights record. The administration, in a statement, said U.S. business views Vietnam, the 13th-most-populous country in the world, as an important potential market.

Domestic Auto Sales Up by 45 Per Cent year on year. This is most probably due to the dramatic increase in numbers of domestic companies following last years implementation of the Enterprise Law. Such new enterprises can purchase cars at discounted rates where the individual company owners would not be able. Projections for current year sales indicate a range increase from 30% to 50 per cent over last years exceptional numbers. However, total vehicles produced to June 30 were 8,737.

Unexpected was the continued high sales following last years spurt. This is not expected to continue beyond the current year. More importantly, the current and projected growth is not seen as sufficient to bring auto assemblers out of the red.

Potential glee from Vietnam's year 2000 "impressive" production of 13,900 units brings sobriety when comparison is made to production in neighboring lands. The Philippines produced 89,000 units; Thailand produced 265,000 units; Indonesia produced 280,000 units; and Malaysia produced 370,000 units.