COMMENTARY

The Door Remains Open.

The first seven months of this year have seen taxes and phone bills reduced, some admin procedures streamlined, licenses issued in as quickly as 7 days in some cases, and yet the rate of foreign direct investment keeps plunging.

The past still haunts Vietnam, both in perception and reality.  While there is no longer any regional financial crisis, the American and Japanese economies are on the skids, thus causing the wealthiest foreign investors to look more carefully than ever at where their funds go.  

Yet China still captures almost 60% of every FDI US$ invested in Asia as reforms started almost 25 years ago take hold with a provincial difference. Vietnam's FDI programs are still locked under tight central command and control.  

Among the targets for reform remain the continued crack downs in corruption and bureaucracy, allowing direct foreign investment in the budding stock exchange, and land use issues.  

Permitting true competition between the industrial provinces might work as incentives if competition was a sought after goal.  This may be happening as, with the consent of the Ministry of Finance, many cities and provinces have slashed land use rents.  If this were allowed on a more universal scale, down to the local levels, it might spur and even boost overall development.  However, the central authorities do not yet seem willing to take the chance, perhaps concerned that the south will more greatly eclipse the north. 

More reforms, perhaps a more central desire for real change, is needed.  Foreign investors must still rent land from the State while buildings may be rented directly from economic institutions and individuals who hold land use rights.  Why must land use owners still first cede their rights to the State if land is to be rented to foreigners? 

The answer appears to be greed, as rates for compensation remain what the State presumes and not as a free market sets.   Domestic and State partners are still cash and technology poor. They are restricted to contributing land use rights to a joint venture, thus making this form of investment vehicle unacceptable in most instances.

Trying to mortgage land use rights rather than titles in fee simple absolute is another challenge to the diminishing investor pool, and one that is not likely to receive a warm reception from foreign banks. 

While the door is open to investors, those who have peeked in are not attracted to what they see, particularly when opportunities in other lands are so much more appealing.

Vietnam's leaders have taken bold steps in the past. This is not the time for them to be squeamish.  

Smart investors with cash know that this is the time to step forward, before the economy really booms and prices only climb higher.

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DISPATCHES

Doubts Raised on Highway Funding.

Without surprise it has been announced that the huge VND 23 trillion (US$ 1.5 billion) north south expressway called the Ho Chi Minh Highway, intended to trace along the former HCM Trail used during the war years, has funding troubles.  The surprise if any is that the troubled financing is, relative to the overall scope of the project, so small.

The Ministry of Transportation quietly stated that VND 1.6 billion (a bit more than US$ 100,000) is needed to "ensure the 3,260 km (2,037.5 mile) construction safety and save on the final cost.  

The  money is needed to cover current costs of "extending the road's surface, building two more bridges, and a house and facilities for the road management board." 

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Number Of New Internet Subscribers Decline

The first seven months added 8,000 new subscribers as the numbers of new subscribers appears headed for its third year of dramatic decline.  In year 2000 there were 100,000 new subscribers which dropped to 60,000 last year. Given the crackdown on use of the Internet in cyber cafes and the continued high cost of getting and staying on line from private households, the government policy of allowing but not encouraging internet access appears to be working.

The propaganda value for the State to claim it's policies allow for ready access to the world's information looses ground in the fog of reality.  While there are 12 authorized  ISPs, only four are operating.  See earlier dispatches on Vietnam's access to the Internet by using our search function at the top of this page.

Cultural authorities have launched inspections into Internet access points throughout the country to restore order and handle infringements. According to the Ministry of Culture and Information, many cyber cafes have not adhered to regulations on supplying information via the Internet, especially the dissemination of bad information and pictures. Authorities will tighten management over Internet access points. STW

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Refinery No. 2 Plans Move Forward

The nation's second planned refinery, that at Nghi Son about 200 km south of Hanoi, has a projected opening of 2007.  Specific investment forms are now being considered.

Where the State prefers a joint venture over either a solo PetroVietnam or a BOT project, one wonders where the State will achieve its preferred 51% share of the investment capital?

While the pre-feasibility study has not been made public, it is claimed the American, Japanese, and Vietnamese team all declared the project is both feasible and profitable.  The reported Internal Rate of Return is 19% while the claimed Net Present Value of the project was set at US$ 1.3 billion.

Total Investment Capital is pegged at US$ 2.5 billion with the first $ 2 billion going to build the refinery and a petrochemical plant (for the production of polypropylene and polyester).

While PetroVietnam is alone allowed to market the production capacity of Refinery No. 1 at Dung Quat (still far from having any steel in the ground), reportedly the State will allow foreign investors to sell products from Refinery No. 2 at market industrial wholesale prices.

The planned capacity is 7 million tonnes per year of refined crude, and associated with the petrochemical plant, the ability produce 50% of the nation's need for polypropylene and 100% of the needs for polyester by year 2010.

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Bank of America Goes Home.

Not the best sign of real growth was the closing last month of the Bank of America in Hanoi.  Proclaimed part of its global restructuring, if a strong economic future had been projected in Vietnam, surely BOA would have remained.

This was the first American bank to return to Vietnam when the American embargo was lifted in February 1994, and the first US bank closing since the implementation of the US -Vietnam Bilateral Trade Agreement.  The growth anticipated by BOA in the nation's economy and its own position did not materialize.

Two major US banks remain active, Citibank and Chase.  Investment banks that had a presence in Vietnam closed their doors in the late 1990s during the start of the regional economic problems. 

While the State media proclaims the banking industry is "very competitive," current regulations favor domestic and State banks that have a long way to go to reach Top 100 Bank status or even recognition for being world class operations.

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Advertising Totals - For What It's Worth

[VVG Note:  We presume the numbers reported are in US$ and that the numbers reflect something important.  We broke the list down as published by the State media to form the chart below.  It is interesting to see (1) the manner of the original report (a mass listing of names and numbers) makes reading difficult and understanding nearly impossible; (2) the totals given do not correspond to the totals drawn from the numbers presented; and (3) not included are overall marketing expenses normally taken as a business tax deduction but still disallowed in Vietnam. These are the promotional costs that normally dwarf mass media advertising costs and include: sponsoring local events, give-aways including costly signage, contests, and the cost of giving product away to help capture market share. It is a common practice in the soft drink and beer industry to form exclusive agreements with key vendors who receive the substantial portion if not all product free for a "break-in" period.]

Mass Media Expenditures in Vietnam Jan.-Oct. 2001 (Source: AC Nielsen) Reported by STW

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Vietnam's water system in crisis - An Investment Opportunity. Vietnam's water supply system is unsustainable and in desperate need of an overhaul, claims the head of the Vietnam Water Supply and Drainage Association.  Across the country, the average water loss stands at about 37 percent, but the loss is up to 50 percent of water supplied in Hanoi, Hung Yen, Da Nang and Ca Mau. The loss is due to old, broken and outdated infrastructure as well as wastage and inefficiency.

In many densely populated cities, the water-supply network simply cannot cope with demand. Networks in Hanoi, Ho Chi Minh City, Can Tho and Nha Trang are already way overstretched, with predictions of severe water shortages in the coming years. And these networks are still not even serving the entire population.

Only 67 percent of residents of big cities have access to clean water, and that figure drops to just 11 percent in district towns. On the other hand, many water-supply networks in small and medium provincial towns are far too large, as they were built without reference to demand.

Rather then continuing with the current fixed fee for all users, it is believed that a sliding fee scale in which corporate customers paid more than households would encourage people to use water wisely. But that is not the only problem.

The government has poured about US$1.3 billion into doubling the water-supply network in the past decade. The bulk of that capital, $1 billion, came from foreign investment, predominantly from official development assistance funds.

In 1991, the average Vietnamese resident received between 40 and 45 liters of water a day. Last year, that amount reached 85.1 liters and in large cities residents got 104.1 liters per person.

Water authorities want all city dwellers, who make up 30 percent of the nation's population, to have access to piped water by the end of the decade. But experts say the development plan must take into account differences between regions and must be based on real demand.

In large cities such as Hanoi, Ho Chi Minh City and Da Nang, increasing the supply capacity and upgrading the decrepit pipe network could avoid water severe shortages.

Experts have urged the authorities in 500 district towns to assess the real level of demand before mapping out their solutions. Currently, residents in only 290 district towns have access to clean water. Vietnam has 600 cities and towns.  (Asia Pulse/VNA)

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Auto tariffs test Vietnam's free-market commitment.  Vietnam is not scheduled to implement fully the second stage of tariff cuts on imported products under Southeast Asia's free-trade area until 2006, but local authorities are already in a dilemma over how to prepare the market for this.

As Vietnam gears up for deeper economic integration with its Asian neighbors, attention is focused on how the government will handle the case of the automotive industry, now under heavy tariff protection.

What Hanoi does in the case of this important sector will be a test case not only of its implementation of its commitments under the Association of Southeast Asian Nations (ASEAN) Free Trade Area or AFTA, but its determination to embrace market reforms, analysts say.

Should Vietnam open the automotive market wide to competition or should it go on with its policy of market protection is a question often asked. Now there is even talk that Vietnam is considering extending AFTA tariff barriers for automobiles to 2010. Vietnam began its tariff-dropping schedule in 1996, when it signed on to AFTA. In the next four years, Vietnam slashed tariffs on certain products imported from ASEAN, but this hardly disturbed the local market. But deeper tariff cuts are expected in coming years, and Vietnam is to bring down tariff rates on imports to 0 to 5 percent by 2006.

This is expected to be the period when the tariff reduction will have an enormous impact on the economy, because the goods to be covered by liberalization include major products considered "strategic" by the state such as fertilizers, ceramic tiles, household electric equipment, television sets, automobiles and motorcycles.

Vietnam has so far put heavy import tariffs on these products to protect local production and give manufacturers enough time to adjust and prepare for an impending flood of cheap imports.

Imported vehicles such as over-24-seater buses are taxed 50 percent, 15-24-seater buses 100 percent, the five-to-15-seater vans 150 percent, and under-five-seater cars 200 percent.

Currently, Vietnam has 11 joint venture enterprises assembling automobiles for the domestic market, but their combined production is a mere 20,000 vehicles, or 10 percent of their total capacity. This is due to low demand.

In the first quarter of this year, only 5,456 vehicles were sold, mostly in the deluxe category and beyond the budget of the average Vietnamese consumer. These cars are often priced higher than the same models produced abroad because manufacturers have to import parts and components, which are subject to high taxation.

"The price of a car assembled in Vietnam is double that of one made in the United States due to our policy of protecting local products," Industry Minister Dang Vu Chu told reporters during the Vietnam Motor Show in Hanoi recently.

To make automobiles cheaper, the government has urged the industry to use more locally produced parts and components. The Ministry of Industry has in fact issued a localization policy that provides incentives to vehicle assemblers with the highest local content rates in the cars, buses and trucks they assemble here. However, to date no automotive joint venture has succeeded in raising the local content rate above 15 percent. At the same time, no foreign direct investment has been injected into factories producing the automotive parts and components because investors still consider the market too minuscule.

Says Minister Dang, "The government should reconsider its automobile policy so as to protect consumers' rights. "We should not let Vietnamese customers buy autos [priced] several times more than in other countries."

To put the automobile industry on track toward competitiveness by the 2006 deadline for its being covered by AFTA, the Industry Ministry has thought up a two-pronged strategy: bring in more competition and develop a "made-in-Vietnam" car.

"Vietnam will develop two kinds of automobiles at the same time. Joint ventures will produce luxury cars as import substitutes, while local manufacturers will produce affordable vehicles that popularize four-wheeled transport in Vietnam," said Deputy Industry Minister Nguyen Xuan Chuan.

Under the category of cheap or affordable vehicles are small compact cars or low-priced utility vans and trucks with locally assembled engines.

Experts at the Japan Economic Research Institute (JERI) here say that in the long term, Vietnam's automobile industry will not be able to develop and compete with other countries if it concentrates only on manufacturing small-engine and low-priced cars. The country should instead draw up liberal policies to attract foreign direct investment to fund local production of automobile parts and accessories, they say.

"We will speed up the localization policy by using import duties to enforce local content," another ministry official said, but did not give details as to how the government intended to go about it.

Some observers believe that in the first stage Vietnam will open the market to cheap component imports to help local manufacturers produce non-luxury cars and special-purpose vehicles. In the next stage, it will give tax incentives to manufacturers of components.

Licensed local companies will assemble automobiles for local consumption with cheap components sourced from countries in the region, but at the same time will join forces to produce more parts and accessories locally with the ultimate goal of developing "made-in-Vietnam" vehicles, officials say.

Industry experts forecast that compact cars equipped with small and locally assembled engines (less than 1.3 liters) that retail for less than US$10,000 would amply fill the needs of the average customer in Vietnam. In a market crowded with luxury cars, smaller, low-priced cars that are made in Vietnam stand a better chance of carving a niche. (Inter Press Service)

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Business Development - A Sleeping Market  Business development services are essential in supporting market entry and start-up operations in many countries. In Vietnam as elsewhere, these services are still unpopular.  The miss-perceptions of this important service industry must change as their services are still needed by foreign investors in Vietnam.
 
With the goal of surveying the demand of small and medium Vietnamese enterprises and developing support programs, two German and Swiss technical support agencies, financed a study for the business development service market in Vietnam. Investconsult from the middle of last year conducted the study and the results were announced in May. According to the survey of six cities and provinces with the strongest economies in Vietnam, their business development service market is estimated at only VND400 billion [US$26 million] a year. HCM City has the strongest business development service market, accounting for 59% of the amount, Hanoi is ranked second with 33%. Other localities, including Danang, HaiPhong, Dong Nai and Binh Duong, each make up only 1-3%.

Of the 14 groups of services surveyed, advertising and promotion are services most popular to businesses, with spending of more than VND84 billion annually. The second most popular service is organizing fairs and exhibitions with revenue of over VND58 billion. Next are seeking information on the Internet, accounting and auditing, software, computer, and design services.
Businesses pay little attention to most important services such as management consulting, technology consulting, market survey, management and technical training, and product design. Only 2-9% of the businesses use these services.

Among the several reasons for businesses' indifference to business development services is that many businesses have inadequate awareness of the importance of business development services. Researchers interviewed representatives of 1,200 businesses to learn their views on and demand for services. Only one out of 10 respondents one thinks that the services are important for business operations.

Domestic and State Owned businesses are not familiar with outsourcing services. Since they do not have full evaluation of the efficiency of outsourcing services, most businesses tend to do every thing by themselves. In addition, they think services are very expensive.

Another reason is the quality of services usually does not win businesses' confidence.  A particular trait of the Vietnamese market is the presence of unofficial service providers. They are officials working at government agencies that provide consulting and perform some legal services for businesses. Many business executives say they often hire officials working at relevant government agencies to deal with legal procedures, especially tax statements. "It's safest to ask tax officers to prepare tax statements," a businessman in HCM City says.

The presence of these unofficial service providers are not beneficial for the growth of the business development service market as it creates an unequal playing field and restricts the development of official service providers, while Vietnam badly needs professional, quality service providers.

Development potential. According to Ms. Alexandra Miehlbradt, project analyst, the business development service market in Vietnam has great potential. Businesses have begun to realize the importance of outsourcing services, evidenced by their increasing employment of the services, especially since 1998. Their use of accounting, auditing, legal consulting, advertising, promotion, information research on the Internet and computer network services last year increased nine fold compared with the mid-1990s.

Businesses currently have great demand for human resources training but the demand has not yet been met, mainly because they have not found quality service providers and do not have confidence in the quality of existing training centers.

Besides training, they also need other services such as information necessary for their production and trading activities, promotion, marketing, product design, technical consulting, import-export assistance, tax consulting, transport, forwarding, insurance, and machinery and equipment repair and maintenance. Again, service providers are not yet able to meet their demand.

Business development service market
HCM City 59%
Hanoi 33%
Danang 3%
HaiPhong 2%
Dong Nai 2%
Binh Duong 1%
(Source: GTZ and Swisscontact)

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New Hotels and Offices A-building.  Along with a flock of foreign tourists into Vietnam, many investment projects in hotels and resorts are being carried out - a new sign of development for the Vietnamese tourism industry. Large, existing projects revived include

Asiana Plaza. Kumho Saigon Joint Venture advises it will submit plans to build a multi-use tower located at 39 Le Duan, District 1 to the MPI in September. See Photo.

According to a senior official of the JV, the Asiana Plaza complex, a US$223-million JV between Korea's Kumho Construction and Engineering and Vietnam's Saigontourist and District 1 Housing Development, will include a luxury apartment building, a 5-star hotel and retail shops. 

Construction of the project, licensed in 1996, was to start in October 1997 and to complete in three years. However, the Korean partner asked for permission to delay due to financial difficulties.

The JV leased the project site in 2000 to commercial establishments on a contract due to  expire in September. The partners will discuss how to proceed with the project. The current demand for office space now is higher than that for hotels. STW

Park Hyatt Hotel.  See Photo. Five local banks in HCM City agreed to provide the Grand Imperial Saigon with US$ 22.5 million to continue work on the half-finished 5-star Park Hyatt Hotel on Hai Ba Trung Street, District 1.

Under a loan agreement, Bank for Investment and Development of Vietnam (BIDV) will provide US$ 9 million, Bank for Agriculture and Rural Development US$ 6 million, Bank for Foreign Trade of Vietnam US$ 4 million, Industrial and Commercial Bank US$ 2 million and Saigon Thuong Tin Bank US$ 1.5 million. The loan will be repaid in 12 years, including a two-year grace period, and half will be disbursed in U.S. dollars for the import of equipment.

Work on the 259-room hotel project will resume this month and is expected to be completed in 2004. A Malaysian bank previously financed the US $ 44-million project but the lending was interrupted due to the regional financial crisis in 1997. Park Hyatt, an experienced hotel management company, will manage it.

Grand Imperial Saigon, which has an authorized capital of US$19 million, is a joint venture between Industry Construction Company (30%), Hong Kong's United Concord International (19%) and Malaysia's Radian Investment (51%).

 PetroVietnam became the new owner of a long unfinished government-owned building at 1-5 Le Duan Boulevard, District 1, HCM City. See Photo.  The company will spend US$ 30 million on the half-finished project and use it as a petroleum administration center for the southern region. The Government originally planned to build the high-rise to house all the rep offices of ministries in HCM City, but later scrapped the plan. Another reported projected use as an exclusive hospital for Party Members was also put off.  All PetroVietnam's subsidiaries will be housed there and the unused space will be leased.

On the small side, with an investment capital of VND50 billion [US$3.3 million], the Saigon-Binh Chau Shareholding Co. put  the Binh Chau Resort’s Phase 1 into operation as a three-star spa in Vung Tau.  Offering a beach at Ho Coc, the former Binh Chau Resorts mud soaking, mineral water baths, hot water soaking for feet therapy, and camping, the Binh Chau Resort is in the middle of a rare primitive forest in southern Vietnam.

Another new resort is Siva Tourist Village in Mui Ne, Phan Thiet, Binh Thuan Province. The Binh Thuan Food Co. spent VND10 billion [US$ 656,000] constructing the hotel-restaurant complex after the ancient Champa architecture. Ocean swimming, fishing, flying kites, and scuba diving are among the services offered.

Some southern localities have focused on building new recreational areas or upgrading existing ones. Ba Ria-Vung Tau Province has upgraded National Highway 55 linking local resorts from Vung Tau to Long Hai and Binh Chau to attract more visitors to these sites. - STW

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Investment road show in the U.S. Deputy PM Nguyen Manh Cam witnessed the signing of a cooperation agreement between Vietnam's Ministry of Planning and Investment (MPI) and Texas during his 10-day June tour of the U.S. to attract investment in Vietnam.

The agreement aimed to boost economic and investment cooperation between Vietnam and Texas that possesses strong advantages in petroleum, agriculture, telecom and information technology.

Cam’s  mission toured Texas, Washington, Massachusetts, Pennsylvania and New York. Meeting with senior U.S. officials and big companies (Motorola, Dell, Conoco, Unocal, Boeing, Credit Suisse-First Boston, New York Life Insurance and AIG), he urged the U.S. to clear hurdles to bilateral relations and cooperation, especially the Jackson/Vanik Amendment for Vietnam and the Vietnam Human Rights Bill. He also asked the U.S. to support Vietnam's bid to join the World Trade Organization (WTO) and to set up a mechanism to settle disputes arising in the course of the bilateral trade agreement (BTA) implementation.  - STW

USA Investment structure in Vietnam by sector in 2001 (%)
Agriculture, forestry & fisheries 10.37
Industry 41.85
Transport, post 15.14
Science, technology 0.34
Education, training 1.96
Health, society 1.29
Culture, sports 1.17
Total 100.00
(MPI)

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HEAVY INDUSTRY REPORT:

The coal industry sold 7.4 million tons in the first half of this year, up 21% over the same period last year. The figure includes 3 million tons for export, up 46%, and 4.4 million tons for local sales, up 8%. Sales totaled VND3,500 billion, up 23% and 57% of the year's target. The industry expects to sell 14.5-15 million tons this year and export 5-5.5 million tons. 

Steel demand in Vietnam is estimated at 3.5-4 million tons this year, including two million tons of construction steel, 1.5-2 million tons of steel sheets and alloy steel. According to Vietnam Steel Corporation, the amount of construction steel stockpiled by the end of May was 149,000 tons, the lowest in four years due to high demand. Domestic production capacity amounts to 3.5 million tons a year, 1.5 million tons higher than demand. 

Cement demand for this year is estimated at 20 million tons, up 3.7 million tons against last year and two million tons higher than the original estimate. Consumption in the first half of this year is put at 9.5 million tons, up 1.5 million tons on a year ago. 

An official from the ministry's Construction Materials Department says a cement shortage will likely occur in the fourth quarter of this year and early next year. The ministry asked cement producers to increase production to prepare more stocks. Additional clinker imports will be allowed with some 2.5-3 million tons for this year, 0.5-1 million tons higher than expected.

At present, all cement plants are running near full capacity. While several cement projects are prepared to get off the ground, low-quality Chinese cement continues to penetrate the local market via the border and the sea in the North. According to Vietnam Cement Corp., the illegally imported poor quality cement is sold at cheap prices, often as much as US$ 13/tonne lower than local cement posing dramatic losses to local industries and safety concerns for construction works.

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