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

VIETNAM VIGNETTES^®
Copyright © 1997-2001 Vietnam Venture Group, Inc.^® All rights reserved. October 16, 2001

Issue No. 48
October 2001
Link to our Current Issue
Our 8th year in Vietnam & 4th year on the Internet
A Periodic Report to Our Clients

IN THIS ISSUE
COMMENTARY: Holiday time this month. Check here again in November, please.
Things are happening: infrastructure is still king, but private investment, and some interesting foreign direct investment, seems to be coming back. However, the world's problems don't avoid Vietnam, just the attention of the media and policy writers. See our dispatches (linked below).
U.S. Helmet Factory In Construction Vietkieu Send Less Money To Vietnam Now, Internet Based Long Distance Calling* New Gas Link Project Is Feasible* Investments Surge - Really!* BTA -Waiting For Final Approvals	Tourism Notes: Room to Grow Auto Industry Sales Climbs By 45% Viet Kieu Property Deals Allowed? A Chip Manufacturer Lays Off 500 Employees A $430 Million Power Station Agreed Upon. A $230 Million Phone Project Licensed*

US Senate approves Vietnam trade pact - The US Senate has approved a landmark trade pact with Vietnam with a vote of 88 to 12, sending the bill to President George W. Bush for his signature to seal the deal.

The House of Representatives approved the trade agreement last month, but also overwhelmingly endorsed a Vietnam Human Rights Bill alongside it. The human rights bill has sparked furious protests from Hanoi.

The timetable for consideration of both bills by the Senate has been delayed by the September 11 terror attacks in New York and Washington.

Seen as the high point of a long drive for rapprochement between two former enemies, the pact was concluded by the administration of former president Bill Clinton last year and subject to annual review.

Mr Bush supported the trade deal, an important step in normalizing relations between the two nations, which established formal diplomatic relations only six years ago, in 1995.

U.S. firm builds safety helmets - A wholly US-owned enterprise began construction on a $1.9 million factory to produce motorcycle helmets adapted to a tropical climate. Plant capacity is estimated at 750,000 helmets.

Remittances from Vietnamese Americans to their relatives in Vietnam are reported to have dropped by nearly two-thirds in the wake of last month's terrorist attacks in the United States.

The Tuoi Tre newspaper says remittances - mainly from the US - have declined from more than 20 million dollars in the month before the attacks to around seven million dollars.

Banks in Ho Chi Minh City predict the payments will continue to drop in coming months because of the economic downturn and rising unemployment in the US.

More than 2.5 million Vietnamese live overseas, including more than 1 million in the United States. Their unofficial contrabution to GDP has been in the range of $2.5 billion in prior years.

Vietnam starts Internet-based international calls* HANOI (Reuters) - A Vietnamese state-run telecoms company started providing cheaper international phone calls using Voice Over Internet Protocol (VOIP) technology from late September.

The Tien Phong (Vanguard) newspaper said Vietnam Posts and Telecommunications Corp (VNPT) would start the VOIP-based service at a fixed international call charge of $1.50 per minute from an average of $3 presently.

VOIP allows users to make much cheaper calls than those provided by VNPT, which earlier had a monopoly in telecoms, via its traditional land lines.

The World Bank has said Vietnam has some of the highest telephone call charges in the world, a negative factor for attracting foreign investment.

VNPT, the state-owned Military Telecommunications Co (Vietel) and the semi-private Saigon Post and Telecommunications (Saigon Postel) have all received licenses this year to provide VOIP-based domestic and international phone services.

VNPT and Vietel have so far activated the service for domestic calls, mainly between Hanoi and the country's commercial hub, Ho Chi Minh City. Saigon Postel has been running it on a trial basis.

Vietnam's government has approved a feasibility study by the state oil monopoly Petrovietnam to build a $230 million pipeline to bring gas ashore from a southern block shared with Malaysia, official media reported.

The Thanh Nien newspaper said the 332-km pipeline would take gas from block PM-3, about 600 km southwest of Ho Chi Minh City, to a gas, power and fertilizer complex in Ca Mau in the far south of Vietnam.

In a separate report, Thoi Bao Kinh Te Vietnam newspaper said a consortium led by a Petrovietnam firm had won two contracts valued at $116 million in tenders to build crude tapping facilities in block PM-3.

Malaysia's Petronas Carigali Sdn Bhd has a 46.06 per cent stake in Block PM-3, Sweden's Lundin Oil AB has 41.44 percent, and Petrovietnam has 12.5 per cent. The block is in overlapping waters between Vietnam and Malaysia.

Petronas Carigali is the exploration and production arm of Malaysian state oil firm Petronas.

The Vietnam Economic Times said a consortium headed by Petrovietnam's Petroleum Technical Service Co (PTSC) would build a central technology processing unit worth more than $100 million and five rigs worth $16 million for Lundin Oil.

The paper said PTSC's parties included the Vietnam-Russia joint venture, Vietsovpetro, and South Korea's Hyundai Corp 11760.KS, but it gave no stake breakdown for the consortium or a timeframe for construction

Surge of investment into Vietnam* HANOI - This year has witnessed a resurgence in foreign investment into Vietnam after a three-year slowdown coupled with regional and world economic downturns.

In the first eight months of the year, Vietnam licensed 265 new foreign direct investments worth US$1.18 billion. The figures represent a 37 percent increase in the number of projects licensed and a two-fold increase in value over the equivalent period the previous year.

More than 90 percent of the capital will go into industrial production, and comes from 12 countries and territories, including the Netherlands, Taiwan, Japan, the United States, Korea, Britain, Australia, and China.

An investment official said that a number of the projects - notably the Phu My 3 thermo-electricity plant, food processor Metro & Cash Carry, Canon printers and Sumitomo electronics - will make significant contributions to the nation's economy when they start operating.

Foreign investment in the provinces has also come alive. In the past eight months these have been 10 times greater than the whole of last year in the southern coastal province of Ba Ria-Vung Tau. In Hanoi and Long An the figure is three times greater, and in Hai Phong and Hung Yen two times.

Many provinces which in the recent past failed to be attractive have finally started luring investment this year. Foreign investors have flocked to Phu Yen, Hai Duong, Quang Binh and Ninh Thuan thanks to government policies involving lower land lease rates, simplified licensing and preferential tax rates.

In the first three years of the Law on Foreign Investment - from 1988 to 1990 - only a few dozen investment projects were licensed, and they accounted for only $1.5 billion.

Today the country has 2,800 projects worth $37 billion. Over the past eight months foreign investors disbursed more than $1.2 billion on these projects, up 30 percent from the same period last year. More than 1,200 projects have started production in key areas such as steel, cement, electronics, ship building, automobile and motorbike assembly and manufacturing.

Still, investment officials said the feasibility of projects remains unclear. Projects have often lacked careful surveys and project studies. To achieve the 7 percent target in annual growth over the next five years, various bodies are being urged to provide more favorable conditions for foreign investors, especially those engaging in exports and high-tech production.

Foreign direct investment now contributes 13 percent of the country's Gross Domestic Product, 25.3 percent of its total industrial value and 22 percent of export revenues and provided jobs for 360,000 people.

Economists said other key sectors such as aviation, tourism, telecommunications, banking and insurance have performed well thanks to foreign direct investments. (Asia Pulse/VNA)

Waiting For Approval of the BTA

Both houses of Congress have approved the historic agreement to normalize trade relations with former enemy Vietnam, boosting U.S. business access to a market of 80 million people.

The pact signed in July 2000 in Hanoi will remove one of last political vestiges of a bitter war that ended 2-1/2 decades ago with the defeat of U.S. and South Vietnamese forces and the establishment of the Socialist Republic of Vietnam.

Vietnam is one of just a few countries that do not have normal trade relations with the United States. As a result, U.S. tariffs on products from the country average 40 percent -- more than 10 times the level for most other nations.

The bilateral trade pact commits Vietnam to an ongoing process of economic reform and market opening in exchange for the United States' extending normal trade relations on an annual basis. It also brings a reconciliation process begun nearly 10 years ago between the two countries closer to completion.

But opponents of the Hanoi regime passed a separate bill in the House of Representaives which ties future US aid to Vietnam to improvements in its human rights record, passed the House on a 410-1 vote.

The Vietnam Human Rights Act also demands Vietnam halt jamming of broadcasts by congressionally funded Radio Free Asia, protect refugees and mandates US assistance to groups promoting freedom and democracy in the country.

In practice, the human rights legislation provided political cover for representatives who support expanding trade links with Vietnam, but were wary of being seen as soft on Hanoi's human rights record.

House opponents of the deal argued that by delinking human rights and trade, Washington loses valuable political leverage with Vietnam's communist government.

"Why, with a regime like this are we going to give our businessmen subsidies to invest over there, to create jobs over there, exploiting their slave labor?" said Republican Congressman Dana Rohrabacher. "This is ridiculous."

This ultra-conservative's ideas, whose constituents include many disenfranchised overseas Vietnamese in Westminster, California, are not mirrored by many in Congress or America.

The trade deal, which faced slight opposition among other activists critical of Vietnam's human rights record, has now been passed to President George W. Bush for expected approval, and then..., when Vietnam's National Assembly and Prime Minister approve it, the BTA and MFN (now called NTR) becomes law.

Even with current events in Central Asia taking much attention, there is no impediment forecasted that will block approval expected before the end of the year.

Visa Free Entry - not anytime soon for 150,000+ French (3^rd ranking) and 84,000+ Japanese (4^th ranking) visitors says VNAT for two reasons: no inter-government agreements or any belief the need for visas slows down traffic.

However VNAT should see how the number of tourists from Thailand and the Philippines both doubled since the need for visas on 30 day visits was removed. Given that the largest number of tourist come from China (449,000 in the first 8 months of this year) and America (152,000 over the same period), perhaps eliminating visas has less to do with promoting tourism than it has to do with screening out undesirable visitors. Not as bad a precaution as only recently thought, many people beyond Americans may now be heard to say.

Can Gio - not quite the tourist haven although located only 50 km (as the crow flies) from down town HCMC, say only those who have no financial interest in “developing” this coastal biosphere into a city with 500,000 residents in the next 20 years.

The absence of roads or bridges sufficient to handle major traffic aside, the 13 km long beach had been considered a possibly closer tourist location than Vung Tau. However, the planners simply overlooked the need to maintain the existing 30,000 ha of mangroves, recognized by UNESCO as a world biosphere, that also provides the only protection possible to HCMC from natural disasters such as 1997’s Typhoon Linda.

Numbers up, but not sharply. About 1.57 million international arrivals, or an increase of 8.1% was noted in the first 8 months of this year. However, domestic tourism (7.61 million) was up a meager 2 per cent over the same period. Almost 55% of international arrivals (often including business visitors but no doubt those numbers are down considerably) arrive by air. Last year there were 2.15 million international arrivals and the target for this year is a modest 2.2 million.

Automobiles show a 45% increase - With 10,230 vehicles sold in the first 7 months of this year, Toyota topped the list with 3,200 units sold. The numbers overall remain small against Vietnam’s annual capacity of 200,000 vehicles. In line of order of other sales are Mercedes Benz with a target of 2,300 sales for the full year, and Ford who sold 600 vehicles in the first 8 months.

The industry has little chance to grow, even with enforced measures requiring using domestic manufactured parts. There are 11 foreign invested auto makers and assemblers currently in Vietnam. This speaks volumes for Chrysler’s years old decision to pull out when it saw no chance to succeed in such heavily loaded industry with limited current market segments available.

In spite if the officially mandated need for domestic production of component parts, there is effectively no domestic component parts industry. What has been built are assembly plants for complete knock down units, and partial knock-down units.

Subsidiary businesses developed so far include welding, washing, and painting machinery, assembly technology and supervising instruments. The locally made parts industry covers batteries, seats, tires, inner tubes, as well as covers and frames for buses made by Vidamo and Mercedes Benz.

Claiming profits to date among the eleven are Suzuki, Toyota, and Hoa Binh Auto. The focus of these manufacturers is vehicles up to 16 seats that have higher import restraints (tariffs) imposed. Vehicles of larger passenger capacity and trucks have little tariff protection and face stiff competition form second-hand units both resold and imported.

Viet Kieu Property Deals? So far only 100 of the estimated 2.5 million overseas Vietnamese around the world are eligible to buy houses with land use rights attached. They quality either as permanent residents or long-term investors.

This was to have changed on 1October 2001 in urban areas alone when a proposal by the Land Administration Department submitted to the Ministry of Construction came into effect. However, we suggest that no one wait in line for the red certificates to be issued for house purchase rights or for the pink certificates for land use rights.

There is little early interest in these certificates as they are yet to be issued, and even when they are, there is still a need to create more favorable conditions such as long term visas.

In neighboring Thailand, any foreigner over 55 years of age who can show out of country pension income averaging $2,000 a month, or a bank account holding about US$25,000 in country may “retire” and have a full year visa. Three years later such retired visitors qualify for permanent residency and a Thai passport. Certainly in the three years intervening, internal security can assure itself on the caliber and quality of such long term residents, and winnow out undesirables.

Thailand does not have 2.5 million nationals wanting to return as does Vietnam. Certainly some lessons can be learned yet by Vietnamese Immigration authorities.

Fijitsu Trims Losses in Vietnam, and its pay roll. Owned by Japan’s FCV, it will cut 500 jobs from its work force in Vietnam, part of a world wide trimming operation. This $199 million factory is the nation’s largest high tech manufacturer, and is the largest staff reduction of any FDI project to date. Fifty per cent of FCV’s revenue comes from the production of hard discs for PCs. Also manufactured are printed wiring and circuit boards, with exports going to Asia and Europe.

$400-m deal with French-led consortium ~ A consortium of foreign companies led by France's Electricite de France signed four agreements with Vietnam on Tuesday and received a license to build a $400-million power plant in the south of the country.

The plant will be one of the biggest foreign-invested projects in Vietnam and could open the door to further investment by EDF, said its General Director.

This is not a recent or a new undertaking. EDF and its partners -- Japan's Sumitomo and Tokyo Electric Power International -- have negotiated since December 1998 to build the 715-megawatt gas-fired electricity plant, named Phu My 2.2.

The contracts include a set of government guarantees to protect profit repatriation and other business rights, and a sales and purchase agreement for the sale of electricity from the plant to national power company Electricity of Vietnam.

The consortium will operate the plant for 20 years and then turn it over to EVN. It will sell 4.7 billion kilowatts of electricity to EVN each year at 4.04 cents a kilowatt-hour. This and other recent deals signal a sea shift in EVN whose hard-ball negotiating tactics have stalled other key power projects for years, and killed some.

Construction of the plant is scheduled to start in September 2002, and begin commercial operations by September 2004. The reason for the delay is that it will take about one year for the consortium to raise the necessary capital before construction can begin.

Phu My 2.2 is part of the 3,600-megawatt Phu My power complex in Ba Ria-Vung Tau province, around 100 kilometers (60 miles) east of Ho Chi Minh City. Vietnam plans to complete construction of the entire complex by 2005. (AP)

And what if they can’t raise the funds? The concept of a Build -Operate -Transfer license is that the investors will be limited to an agreed profit that must be made in the agreed time. However, the pricing of power to generate a profit has rarely been a concept that is readily accepted by many who make these decisions in Vietnam. Watch these pages for more information.

Vietnam licenses US$230m phone project* By Reuters HANOI--Saigon Post and Telecommunications (Saigon Postel) received a license for a US$230 million project to develop Vietnam's third mobile telephone network with a Singapore-based South Korean joint venture, a 15-year project with SLD Telecom using Code Division Multiple Access (CDMA) technology.

SLD Telecom is a BOT joint venture between South Korea's SK Telecom, LG Electronics and Dong Ah Elecomm. The foreign partners will contribute US$219 million to the project and Saigon Postel the remainder. He said the partners would establish an affiliate to launch the network from mid-2002. They will transfer their ownership interest to the State in 2016 when the current license expires.

It is reported that tenders for equipment will open later this year. Installation will start from early next year in Vietnam's commercial hub Ho Chi Minh City and capital Hanoi. It will cover most of the country by its third year of operations.

The new system will challenge two existing nationwide mobile phone networks, Vinaphone and VMS-Mobifone, controlled by Vietnam Posts and Telecommunications Corp (VNPT). These use the Global System for Mobile Communications (GSM) technology.

Saigon Postel was once wholly-owned by VNPT, which now holds 18 percent of the 87 percent state stake in the firm.

Earlier this year, state media reported that VNPT had sought to prevent licensing of the SLD venture, arguing it could satisfy demand alone and saying telecommunications were a national security issue.

The Saigon Times Daily newspaper said the CDMA system would have a broader bandwidth than existing GSM systems, allowing for quicker data transmission and Internet access using the wireless application protocol (WAP).

It is projected that the CDMA project will face tough competition from Vinaphone and Mobifone. One disadvantage is that the CDMA technology is not compatible with GSM handsets, thus indicating their strategy of focusing on price and (amorphous) quality.

CDMA phones will either be imported or the partners will set up assembly lines in Vietnam to wrap CKD components.

Partners in the CDMA project have targeted 100,000 subscribers by the end of the first year of operations and double the figure by the end of the third year. They forecast a rise to between 700,000 and one million by the 15th year.

Currently there are 1.03 million subscribers to VNPT's Vinaphone and Mobifone networks. VNPT has forecast its users to grow to 2.2 million by 2005.

Under a trade pact signed with the United States last July and expected to be ratified later this year, Vietnam committed to gradually opening its telecoms market to joint venture services. Copyright © 2001 Reuters Limited. All rights reserved.