DISPATCHES

Signs of Real Change, but.... Vietnam!  Comfort is not a natural happening when meeting any change. With the implementation of NTR and the shifting winds towards WTO entry for Vietnam, gone is the excitement from false starts in the middle 90s and in its place is a sturdy awareness of tasks to be completed. 

What we see on the surface of Vietnam has not changed since the financial crisis began in 1997: a lot of self promotion, some improvements of infrastructure and distressing plans for grand projects, talk of business and legal reforms, easing of licensing, conversions of failing joint ventures to full foreign owned enterprises, and fewer foreigners than in the past.  Holiday tourism is growing, hotels are raising room rates but still far below "rack rates," and office space for large organizations is almost tapped out.  A few building skeletons stand unused, and  empty high-rise lots have been filled with low-rise retail outlets.

The best sign yet: Taiwan's Formosa Plastics Group won a license at year end to build a US$ 245 million textile spinning complex in Dong Nai, a province just north of HCMC.

Other projects can be expected to follow, but below the surface lurk the old devils: red-tape, corruption, lack of practical experience, a slow learning curve for a few in high places, and fear of success.  The largest, and not often discussed, concern is Vietnam's million plus youth who graduate universities each year and need good jobs.  No one lives on US$25 per month  who has a responsible job, but that yet remains the official salary for may State officials.

The State continues to blame investors for making payments to officials when it is in fact the officials themselves who refuse to timely complete their assigned tasks absent such payments.  This this is the Asian way, the unspoken "Asian Value" in most lands.  Visit any other country in Southeast Asia and receive a menu list of over-the-counter services for under-the-counter fees.   In America it is the lawyers who get the fees to resolve problems when the government is slow or incorrect. In Asia, payment is far more direct and often far less.

Yet we Americans are still prohibited from putting $50 in an envelope, $100 in a cookie box, or $500 in hand when visiting the home of many officials for the most mundane or complex matters. Greater payments are sought and made; few larger payments are needed.  But no promise can be believed unless you work with the ultimate decision maker. Locating that person is the real art of the deal in Vietnam.

Improvements are coming and we have confidence that in time business in Vietnam will be more progressive.  But the early scouts and trail blazers have nearly all gone.  As our ranks dwindle, we wonder who among the early pioneers will remain as settlers and not simply fade from view as dinosaurs.

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What's Hot In Vietnam - This has been updated. Please see February's Edition.  Honda announced the introduction of a new model motorbike to be made in country.  With annual sales expected to reach if not exceed 200,000, this is a very hot item. The Wave is a 110 hp four stroke "racer."

Typically outfitted with exhausts that point up at a 45 degree angle, the bike does not make the familiar buzzing sound or produce the stream of pollutants as do the 2-stroke racer models from Honda and others.  With the more sedate hi-rise handle bar, flat seat, and electric starter, this is seen as the first model produced to challenge if not replace the ever-popular dream.

The Honda Dream, first popular in 1951 in Japan and more recently in the early 1990s in Vietnam (replacing the still present Honda '68s), is the most popular form of  solo transport, putting the make-on-a-date during  early evening rides about town, and family transport (we've seen as many as 7 on one motor bike), the Wavel is already the new fashion in ever-fashionable urban Vietnam.

A well recognized Thai import for the past 4 years, competition from Chinese imports has placed a strain on domestic producers to do some re-tooling of their own to go beyond the locally produced Dream. This is the result.

The pity is that Thailand produces these bikes only for the lower worker class as it is not popular to be seen on (or safe to drive) a motor bike of any kind. Even students prefer 4-wheel vehicles, including busses, if they can't afford to purchase a car. Thailand could use a advertising blitz campaign to lift the image of the humble motor bike and driver. 

Mean while, Vietnam could adapt lower prices and enforce on-the-book helmet laws to protect its own citizens as is already the custom in Thailand.

However, Vietnam still classifies motor bikes as a luxury item so that imports are subjected to a whopping 100% to 160% import tariff and domestic sales tax. Locally produced models that are completely constructed or even partially constructed in Vietnam are subjected to lower tariffs.

And authorities are reluctant to enforce the law on helmets for reasons that are not ever properly explained.

Soon the well heeled young professionals well be giving their used Dreams to younger siblings or elder parents as this form of transportation, the life blood of Vietnam, takes a more modern turn. 

Locally produced models  will be sold for about $2,000. In a nation with a per capita income still under $400 a year, overseas Vietnamese will soon be getting requests for more funds to purchase these new, more readily available status symbols. It makes a lie of the excuse offered by some in control that bike riders can't afford to purchase a helmet that often costs less than $30.

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Exporters To America Under the BTA -- Beware!

 “Caviet emptor,” a Latin phrase meaning “buyer beware” was the rallying cry of manufacturers to the dismay of buyers left without any remedy in the period of the early western industrial revolution and for 100 years after, beginning in the mid 1800s. 

“Exporter beware” should be the phrase echoing around the Vietnam as this nation on the frontier of world commerce continues its dream that entering the US market will cure all that ails it. 

Manufacturing Defects vs. Reasonable Expectations 

"Buyer Beware" is a now outdated principal but once a solid fixture of common law legal cases that involved disputes between manufactures and vendors on the one side, and consumers and commercial customers on the other who bought poorly made goods. 

If one purchases an item under the concept of “buyer beware,” it is the buyer's obligation to make a careful inspection to insure that he receives the benefit of his bargain. Walk away with the item and the risk of loss or damage passes to the buyer alone. Never mind that the buyer can’t see or readily discover either hidden defects or intentional errors that save manufacturing costs.   Never mind that the seller issued his "guarantee of quality."

This commercial and legal concept died a fretful common-law death beginning in the mid 1960s with the advent of consumer awareness and the subsequent growth of consumer protection laws, as well as laws enforcing a manufacturer's strict liability for the foreseeable consequences arising from the manufactures intentional acts or even negligent errors. 

Only then did meaning come to the words “guarantee” and “warranty.”  If the maker of shoddy goods refused to offer a warranty or refused to honor one, the courts imposed implied warranties and compelled their enforcement not only to protect the direct purchaser, but a remote buyer who was in the chain of purchase and was injured. 

Later, when injuries arose to persons who were not in the chain of purchase, they too were given legal recourse against the shoddy, or simply negligent, manufacturer.  This is still the law in America, Europe, and Japan.

There is no such protection in Southeast Asia or China. The concept of being responsible for one’s own negligent or even intentional acts in the sale of consumer or commercial products remains as foreign as does the thought that habitual lies destroy trust.  The conventional wisdom in the region is that every one lies. Therefore, even a direct buyer in Vietnam does not expect a guarantee or warranty to be honored. 

If a poorly manufactured item should catch fire and burn an infant because it was made from highly flammable fabrics when non-flammable fabrics are available, Asian custom is to say it was simply the child’s fate to die or be permanently scared. This is changing in more developed Asian states, but is still the effective general principal in Vietnam. 

When personal injury,  loss of life or loss of property arises due to poorly made goods, the cry in Vietnam is, “what do you expect? It’s made in Vietnam!” Whether it’s a shirt sleeve that separates due to poor stitching, cheap thread, or both, or a motor bike that needs the same parts repaired every few months, Vietnamese consumers learn to seek out foreign manufactured goods from neighboring Southeast Asian nations and China that are often not much better made. 

Even when such regional imports are not made any differently, and often not at all better, than domestic goods, domestic buyers still prefer the higher priced goods, presuming higher cost means better quality. 

Market surveys we conduct nation wide confirm that seller and buyers alike list quality among the top three values sought in all purchases and sales, but when the actual sales numbers are tallied it is always the least expensive item that sells the most. Quality is a commodity that does not yet exist as a valued item in Vietnam.

This must change.

Adding Value To Increase Sales. 

Does the consumer want more product or better quality?  A rule of thumb in Vietnam is for local merchants to tout the quality of their products - and do little more than that.  Quality control is most often misunderstood and misused as an excuse to increase production.  

It was so on Japan in the early 1970s. Following several fatal crashes of a Toyota model in the States, the courts ordered the manufacturer to instill the QC concept (Quality Control) immediately.  One of our early tasks in a new legal career was to inquire of the results of the court ordered change.

"We have QC," proclaimed the boss.  "We have erected a statue to the memory of the souls lost in Toyota motor cars and all our executives have been ordered to bow and pray to this monument as the enter and leave our Corporate Headquarters."

In Vietnam, little emphasis is given or time devoted to increasing the intrinsic value of a product through workmanship.  That is because labor traditionally has little value. The cost of a product or service depends on the amount of hardware delivered, and not the quality of manufacture or service provided. 

That is why gold is sold nation-wide at up to 25% above world market prices. There is no other way to make a profit, as the added cost of labor is often less than 10% -- sometimes far less. 

Every product manufactured in and sold to the domestic Vietnamese market faces the same challenge: have a State mandated markup or be unable to make a profit. 

A motor vehicle repair shop will not charge a customer for the time it takes to make a repair. The only recognized value for which a customer will pay is when a part is replaced.  That is why parts are often made new, even when only a simple repair is needed.

Repairing a part is simply a function of labor.  Never mind that the new part is rarely if ever made to manufacturer's specifications. A new part may not even be needed. But if it fits, and if the device works, no matter how briefly, the shop can charge for the “service” performed. 

A manufacture of handsome dolls tells us that to increase his price he must make the dolls larger and put on fine threads made of silver and gold.  To him that is added value for which he can charge and collect from his customers.

Never mind that every appearance of detail work disappears on the larger items. There here is no attention given to the fact few people have room for, and fewer even want, a doll that exceeds one meter (39 inches) in height.  

Our advice is ignored when we counsel to concentrate on the quality of each element of the doll. We are ignored as we urge the manufacture to refine the appearance of the feet and hands, use more hard folds and thin-brushed designs on the body in lieu of real cloth, and improve further on the details of the face and hair. 

The manufacturer laughs at our suggestion that foreign buyers will pay much more for small, finely crafted objects than large ones. We counsel that bookshelf-sized dolls not exceeding 20 cm are the largest he should make, with a heightened concentration on miniatures less than 8 cm tall.

We know his carvers have the needed skill but, “after all,” the manufacturer tells his aides not aware that we understand Vietnamese, “what does a foreigner know about quality when he counsels that smaller is better?” 

What we know is what the manufacturer can’t imagine or even believed when he is told that Japanese Netsuke carvings of wood that often are less than 4 cm (1 ½ inches) tall sell for hundreds, thousands, and tens of thousands of US dollars. Gold cufflinks for shirts are made into finely crafted detail by European artisans using material with an intrinsic value of US$ 100 that sell for upwards of a thousand dollars. Porcelain crafts from Japan, China, and Europe that have an intrinsic value of almost nothing sell for hundreds of dollars due to the skill of the craftsmen and the design. 

Demands Of Retailers In America 

There are many pratfalls to be overcome by domestic manufacturers entering the USA markets for the first time.  Leslie Kaufman, reporting for the New York Times as reprinted by the International Herald Tribune (Monday, January 07, 2002 at page 9) describes the textile trade in America. This should be a primer course for all Vietnamese exporters.  See Slowdown Rips Holes in the Apparel Industry .

USA Domestic apparel makers are middle-tier private businesses, often family affairs that lack the resources and muscle to fight back when retailers knock them about.  Imagine the plight of the Vietnamese manufacturer who now darts off to sell his goods into this market. 

As told in the linked article, one manufacturer had been a good client, paying in full and on time for four years when, two weeks before an order was due to be delivered, it received a call from the store's buyer, saying that if the apparel maker did not cut its price by 33 percent, the retail store would cancel the order.

The manufacturer protested that such a cut would wipe out its profit margin. The buyer apologized, but insisted that extraordinary times called for extraordinary measures. With no choice but to discount or let the made-to-order knitwear sit in his warehouse, the manufacture cut its price and sold at cost.

As retailers become more demanding, creditors - usually factoring companies, the financial middlemen that finance manufacturers and collect payment directly from retailers - have become less forgiving, too, especially in dealing with family-owned makers.

Macroeconomic conditions, meanwhile, are worsening. Prices paid to producers of apparel have been falling since 1999; since November 2001 alone, the index of those prices is off almost 1 percent, according to the Labor Department.

"The success of discount retailers like Wal-Mart, Kohl's and Target has helped drive prices down," said Carl Steidtmann, chief economist at Deloitte Research. "It means if you are a midlevel manufacturer, life is not very fun."

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Textile Plant Licensed at US$ 245 Million. Taiwan's Xing Ye Formosa, Ltd, the wholly owned arm of Formosa Plastics Group in Vietnam, received formal approval to commission a huge textile for export facility in the south of Vietnam.  Located in Dong Nai province, just north of HCMC, legal capital is $73.5 million.  

The facility comes close on the heels of the BTA between America and Vietnam, and is thus poised to gain advantage of reduced tariffs on exports to the States, as low as 4% down from 50 per cent.

The project calls for a polyester yarn mill for $142 million, a $14 million spinning mill, a power plant at $85.5 million, and a $3.4 million water plant.

Export revenue from the two mills is expected to top $64 million annually.

Time from submission of all documents to approval was in just three (3) weeks.

While the project is not large for Formosa Group, it is among the largest manufacturing facilities in Vietnam, and may in fact be the largest manufacturing for export facility.

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Shrimp Exports to the USA Double.  January to November volume leaped to 27.2 tonnes against 13.65 tonnes for the same period in year 2000.

America is the second largest importer of Vietnamese shrimp following Japan.  However, earnings from shrimp exports to America ($317 million) at 42% of total exceeded earnings from sales to Japan.($268.5 million) were 

Vietnam is America's 3rd largest foreign source of shrimp for year 2001, up from sixth place in the prior year.  

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Significant Economic Events of the Year 2001. 

• Bilateral Trade Agreement with the USA. Expected is US$1 billion in export earnings in the first year.
• Strong growth in the face of global slowdown.  GDP is estimated at 7.1% by the State and 4.8% by the World Bank, but in both cases second only to China in regional growth. World Bank estimates for 2002 are for a GDP growth rate of 5.5% over year 2001.
• Enterprise Law Impact.  Over 18,000 new domestic companies formed in 2001, double the growth in the first year of its operation with combined registered (total) capital of US$1.5 million.
• Drop in farm commodity prices.  In a nation of 80 million where 64 million are poor rural farmers, the increase in productivity came when world prices fell, striking a sever blow to overall performance. 
• Government Pledges Continue; Progress Remains Slow.  The CPV pledged a continuation of the Renovation Policy; State-Owned Sector restructuring continues at its same slow pace; HCMC receives power over its own planning and development; and new policies are implemented to improve the business environment.
• ODA pledges reach $2.2 billion based on progress made to elevate poverty, however as most has been pledged by Japan, the final number is still open.

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ODA Disbursement Increases Slightly.   The United Nations Development Program in Hanoi said total official development assistance (ODA) disbursement for Vietnam in 2001 might reach US $1.75 billion.

Disbursement figures for 2000 and 1999 are US $1.6 billion and US $1.3 billion, respectively. Disbursement of ODA committed by Japan and the Asian Development Bank in major infrastructure projects and other projects, is estimated to reach 60% of the total disbursement.

Since the first donor conference for Vietnam held in 1993, ODA committed for Vietnam has reached US $14 billion so far, an average of US $2.2 billion a year.

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FDI Wages Based On Exchange Rate. Reminder: The Ministry of Labor, War Invalids, and Social Affairs issued an official dispatch to guide payment of wages for Vietnamese employees working in foreign-invested enterprises.

The document states that foreign businesses who have agreed to pay Vietnamese workers a set USD wage, which they will then convert into VND, must follow the current exchange rate at the time of payment.

There is no requirement that domestic workers must have dollar denominated wages beyond the minimum wages that still range from US$ 35 in undeveloped locations to US$ 45 in the two major urban locations.

Wages denominated and paid in VND are not subject to this provision.

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Foreign doctors allowed to set up clinics.  They still don’t understand:  Overseas Vietnamese and foreign doctors with professional certificates granted by the Vietnam Health Ministry are allowed to set up clinics, consulting rooms, maternity home, and services to take patients to foreign countries for treatment.

 However, this is permitted only in the field of medical examination and treatment. The circular makes clear that the medical centers of foreigners or Overseas Vietnamese are only permitted to give first aid to casualties, treat common diseases and carry out simple operations.

 Contrast this to neighboring Thailand that permits full scale hospitals to be run by foreign investors. This raises the standard of medical care nationwide where the foreign hospitals become teaching institutions for domestic physicians, provide international standards of care to both the domestic and foreign population, and helps to encourage both foreign business presence and tourism. The authorities in Vietnam still don’t understand!

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First Refinery Financing Reportedly Completed.    Russia extended a 250 million-dollar loan to Vietnam, presumably completing the financing arrangements for the State's long-awaited first oil refinery.  Under the credit agreement signed in late December, a concessionary interest rate of 1.5 percent will be charged on first 150 million dollars of the Russian loan. The balance will be charged at five percent over the 12-year loan period.

The balance of a half-billion dollar funding shortfall which has dogged the 1.3 billion-dollar project will reportedly be met by the Vietnamese government through a loan from the state-owned Vietcombank.

The planned refinery at Dung Quat on Vietnam's central coast is a joint venture between state-owned PetroVietnam and Russia's Zarubezneft, each with a 400 million-dollar stake in the project.

Until it comes on stream, Vietnam will remain dependent on imports for all refined petroleum products, even though it is a significant exporter of crude.

French oil giant Total pulled out as long ago as 1995 saying it made no economic sense to locate the refinery in central Vietnam, far from the country's oil fields off the southern coast and the main consumer markets in Hanoi and Ho Chi Minh City.  Vietnam later turned to the Russians to build the long-mooted refinery after lengthy negotiations with US and Asian partners broke down in 1997.

Delayed construction of the refinery is costing the Vietnamese economy around a million dollars a day in interest payments and continued subsidies for imported products.  However, the new capital injection is not expected to bring an immediate end to the project's problems.

Even the design work for the refinery is facing missed deadlines and cost overruns. A planned breakwater, to form an essential part of the refinery's protection against the tropical storms of the South China Sea, is already a year behind schedule.

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Statoil is fully withdrawn from Vietnam.  BP and Conoco are to purchase Statoil’s portion in Nam Con Son natural gas project.  Thus ends a ten year investment in Vietnam by Norway’s national oil company that will now shift its focus to the China market and others in the region. 

Located 400 km offshore Vietnam, the $1.3 billion project includes the Nam Con Son pipeline, a 240-mile delivery system that will transport natural gas from Nam Con Son fields to the Phu My industrial complex near Ho Chi Minh City. The project projects completion by October this year, with commercial gas delivery is scheduled to begin before year end 2002. 

With an estimated reserve of 59 billion cu. m, the project’s life span of 35 years will bring in about 18-19 million cu. m of gas every day.

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Vietnam: Safe but Very Stressful   November's  report on the relative sense of safety placed Vietnam on top, as the place expatriate business people felt the most security in Asia. 

This month the second half of the equation is that Vietnam remains one of the top three most stressful lands as a high-pressure country for expats. This is an improvement as last year Vietnam was rated the most stressful location, now held by Indonesia, followed by South Korea in second slot.

At the other end of the scorecard is Japan, again rated the least stressful land but more stressful than it was last year.

It is important to note that high degrees of stress alone are not bad for business.  Many American companies internally drive up stress levels to increase productivity. Getting the balance right between stress and growth is the key.  China and South Korea seem to have found the correct formula, as they both continue to draw more direct foreign investment that countries with better marks on the survey.

The most stressful nation in Asia is ranked 1 with a rating of 7.33: Indonesia.

The least stressful nation in Asia is ranked 10 with a rating of 2.00: Japan.

The full list of ranks and ratings follows: Maximum stress rating level is 10; minimum is 1

Most foreigners in China and Vietnam enjoy a good life, particularly when contrasted to the life styles of most domestic nationals.  Expat frustrations deal with bureaucracy, language, and cultural barriers, and some relatively minor living inconveniences.  Where police actions in China are mostly directed towards native and expat Chinese, and while police actions are on the wane in Vietnam, Vietnamese expats must deal with a government not yet accustomed to world-level business.

Most investors still consider the cost of doing business in Vietnam as too high, particularly the cost of utilities, transportation, and communications.  Further frustrating growth in Vietnam is frequent changes on the laws and regulations, lack of uniformity in enforcing the laws and regulations, and the relative lack of experience of new administrations at every level of government thus necessitating returning to square one on major foreign investor undertakings with almost every new Chair to a local, district, or provincial people’s committee.

Vietnam enjoys the benefits of those nations raking less stressful, but through frequent missteps, cannot sustain those feelings in a consistent manner. Singapore does better perhaps in part because there is greater confidence in the leadership there then in the nations rated below it.  The Philippines seems to suffer from an inexhaustible sense of optimism, and Malaysia (but for its outspoken leader) is one of the least confrontational societies in Asia. Thailand’s success appears to be based on the absence of extremism and the willingness of most Thais to seek a rapid accommodation.

The effort to and the fact of compromise among Thais go a long way towards creating a comfortable environment among expats.  Vietnamese make the effort but are shy in actual acts of compromise.

Perhaps next year will be less stressful in Vietnam as NTR takes hold and brings both more hard currency and new business to this expanding nation.

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