February 2003 - VVG reports to clients on Vietnamese foreign direct investment.

Overcoming Inertia II - Thailand produces and sells over 400,000 automotive vehicles a year; China is heading to double that number; and Vietnam with a manufacturing capacity to produce 200,000 vehicles, now looks to re-tool to the lowest cost vehicle as it struggles to grow beyond producing 10% of its current capacity.

Protectionism drove hefty duties on foreign imports but failed under pressure from Japan. Japan seeks MFN treatment and was in open rebellion when imports of foreign motorbike parts was imposed. Now, Vietnam hoping to sate this sleeping Giant of the East, removed excess tariffs on foreign car imports as well. But what about the protection for Vietnam's 11 FDI manufacturers?

China confounds our friends in Hanoi who can't yet seem to grasp that while Vietnam's markets are attractive, Vietnam will always be a smaller alternative and is not able to follow its northern neighbor as it would like.

With Party members now allowed to work for capitalist organizations, Vietnam seems to remain Communist in name only other. But there are some unpleasing hold-over practices as well, such as the nearly complete absence of transparency in business, elections, planning, politics, and reporting. If not then a proper Communist nation, does that make the government a "benevolent one-party democracy?"

The US Department of commerce recently declared (in the catfish war) Vietnam to be a non market economy. That is no surprise to anyone working here, but it goes against the propaganda spin preferred by those in charge who refer to Vietnam as "a market style economy under Vietnamese Socialistic principals."

"Call it what you will," says the US Government to Vietnam. "But when you ship goods to America and are charged with dumping, we will judge you as a non-market economy and then apply the costs used in Bangladesh (Bangladesh?) by which to assess your true costs and not the central driven figures you would have us believe."

The state controlled Stock Market is suffering its first slump, but that was not supposed to happen. More difficulty is ahead as we know of other government driven commercial practices that will come to light in time and cause even more consternation to Vietnam.

Being in a free market does not bring with it the freedom to do as one pleases. That is a common error made by recent immigrants to America who, on first arriving, mistakenly feel a sense of freedom to stop work or turn from petty larceny to grand larceny or worse. Freedom brings with it responsibly. Great freedom carries the obligation of greater responsibility.

On the bright side, foreign investors are still willing to give Vietnam some benefit of the doubt and additional time to adjust its practices. As we said last month, "Perhaps this will be our year? We've felt that for ten years now. Many things change, some matters improve, but for foreign direct investors, too many of the old songs (still being) sung by those who can make things happen.... just sound tired.

"We add our small, friendly voice to those others who are helping to persuade our partners in the direction of success by continuing not just to promote but to effect change and growth."

Japan’s Trade Agreement - The Investment Protection Agreement being negotiated between Japan and Vietnam is … proceeding. Recently rattled by what some describe as “Hanoi’s erratic policy making,” Japanese investors seek similar access to the nation’s markets as America achieved, but in less time and on easier terms than the American team suffered.

With Prime Minister Phan Van Khai scheduled to be in Japan this April, old hands recall similar anticipation preceding the PM’s earlier trip to Auckland in 1999. At that time it was hoped that the PM would ink the BTA with America’s President Bill Clinton. However, the Politburo clipped the PM’s hopes but not his wings. While the PM went to Auckland, all he managed was a stand-up, in-the-hall meeting, not quite the session or the results desired by the more progressive leaders in Vietnam.

As if déjà vu, reports abound that Japan is now disappointed by the slow pace of the dialog with Vietnam, and warn that further delays could have a negative impact on potential investors if the details are not in place by the time of the PM’s visit.

Japan is Vietnam’s top donor nation and third largest foreign investor nation. It has a lot more potential power to play if Vietnam cannot get its own priorities in shape.

Bilateral talks began between Japan and Vietnam in May 2002. If Vietnam expects Japan to follow the four-year US model, we will not see a deal until 2006. However, as the nations now grant project approvals on a case-by-case basis, Japan seeks rapid agreement on MFN treatment and will be content with nothing less.

Japan has reason to be cautious of the recent and bitter two-month dispute concerning import quotas imposed by Vietnam over motorbike parts supplied by Honda and Yamaha. This resulted in the two companies suspending their operations in Vietnam until the quota was removed.

As if on cue, Vietnam just announced a rule to relax import restrictions on imported new cars, the majority of which come from Japan. This hurts the almost stillborn domestic auto industry with 11 manufacturers able to from 20,000 to 50,000 vehicles a year (against a 200,000 annual capacity) due to existing foreign competition.

The next 3-4 years will be crucial to Vietnam. Japan needs markets and is not inclined to waste time seeking to build opportunities here while engaged in protracted talks. There are far easier and larger markets to approach elsewhere.

As always, it remains Vietnam’s choice to move forward or be doomed to being a lower tiered nation along the lines of Cambodia and Laos.

Results of trade liberalization. Exports in 2002 went as a roller-coaster ride. It is doubtful any were thrilled, however. In the first half of the year exports plunged 5.9% compared with the same period in 2001. However, Vietnam overcame many challenges, especially in prices, to recover strongly in the fourth quarter, bringing the growth rate for the whole year to 7%, according to the World Bank's estimate.

A new factor in export last year was the American market. After one year of implementation of the Vietnam-U.S. bilateral trade agreement, Vietnam's export to the States was estimated at US$ 2 billion, double the 2001 figure. However, disputes over catfish and now shrimp have blurred the fact that garment export, which increased 16 times in 2001-2002, contributed significantly to the good achievement.

The business environment in Vietnam improved further in 2002, evidenced by the increasing number of newly established domestic businesses, averaging 1,600 a month.

Newly established enterprises
(US$ millions - based on a constant US$1: VND 15,400, the current rate of exchange)

Year	2000		2001		2002 Up to Oct		Total As of Oct 2002
Form of enterprise	Number	Capital (US$ m)	Number	Capital (US$ m)	Number	Capital (US$ m)	Number	Capital (US$ m)
Private business	6,412	182.9	7,087	251.5	4,871	201.0	18,370	635.4
Limited liability company	7,304	517.4	11,038	914.3	9,162	873.6	27,504	2,305.3
Shareholding company	726	199.1	1,534	7,552	1,565	461.8	3,825	1,151.3
Total	14,442	899.4	19,659	490.4	15,598	1,563.4	49,699	4,091.9

Repaying Russian Oil JV - PetroVietnam claims to have already re-paid about US$ 230 million for Russia's group Zarubezhneft, which last November pulled out of a joint venture with PetroVietnam to build the Dung Quat oil refinery.

The Russian group said it would spend part of the re-paid sum investing in other oil and gas projects in Vietnam, particularly oil development projects in Bach Ho (White Tiger) and Thanh Long (Blue Dragon) oil fields off Vietnam's coast.

According to PetroVietnam, Zarubezhneft explained that the pullout mainly resulted from its lack of experience in building oil refineries. Others doubt that is how the Russian’s view the dispute, but good partners, the Russians are holding their tongues. PetroVietnam said that it would press ahead with the refinery construction on its own.

The Dung Quat refinery, the first in Vietnam, is still to be built at a published cost of about US$ 1.3 billion, with a designed capacity of 6.5 million tonnes/year. Ground clearance work started in early 1998, but to date there is no steel in the ground.

Vietnam has not yet changed the projected commissioning date of late 2003. While no one expects this date to be met, the claim that it will is not expected to adversely effect the State’s credibility.

Transparency is called for, particularly when the facts are as plain to see as here. Eventually the authorities will get the message and learn how to build and sustain credibility.

More Viet Kieu but low investment. More than 340,000 overseas Vietnamese returned to Vietnam in 2002, a rise of 10 % over 2001, according to a report from the Overseas Vietnamese Committee.

The amount of money sent by overseas Vietnamese to relatives in Vietnam also increased in 2002, to a claimed US$ 2.4 billion. Almost half of this sum went to HCM City. [Note: As this is the officially reported sum, we estimate the number may be $ 1 billion or $ 2 billion higher.]

In contrast, however, investments by overseas Vietnamese have only reached a modest US$ 300 million spread over 50 projects in trade, tourism, the service sector, and a few large oil and gas projects. The chairman of HCM City's Overseas Vietnamese Business Association, Phan Thanh, has said that this level of investment falls far short of potential.

[Note: A logical reason may be the success of the Domestic Enterprise Law allowing the local families of VK to directly use the funds themselves, in lieu of needing a VK to front for them, particularly as capitalism is no longer a foreign or dirty word in Vietnam.]

Over 2.5 million Vietnamese live and work abroad, mainly in the US, France, Canada, Australia, the Netherlands, and Belgium.

Higher Government Salaries. The government now allows businesses and agencies to pay salaries higher than the minimum rate set by the Government.

According to Decree 114/2002/ND-CP dated Dec.31, 2002 guiding the implementation of the Labor Code, overtime on weekdays will be paid at least 150% of the standard rate, and 200% on weekends. The decree took effect on Jan. 1, 2003. [Note: We were not aware that mandated minimums were by the act of law maximums, while in practice they are still treated by domestic and state-owned sector management that way.]

Repatriation procedures - Decision 875/TTg dated November 21, 1996 by the Prime Minister on repatriation of overseas Vietnamese abroad and Joint-circular 06/TTLT issued on January 29, 1997 by the ministries of Foreign Affairs and Interior, stipulate Repatriation Procedures.

Overseas Vietnamese wishing to return to Vietnam must meet the following conditions:

The procedure for repatriation includes the application for repatriation (as per form), and papers justifying the reason, purpose and eligibility for repatriation as stated above. These documents can be sent to one of the two agencies:

Returnees may bring with them foreign currency and property as stipulated by the Vietnamese law. Within 30 days from the date of entering Vietnam, they must show identity papers to the police in provinces or centrally-governed cities where they will live to register for permanent residence and apply for identity cards. Returnees with permanent residence registration in Vietnam can have all the rights and obligations of Vietnamese citizens.

New Helmet Regulations - Again. Motorcyclists across the country are now required to wear helmets on certain roads, under Ministry of Transport regulations, which came into effect January 15, 2003.

The law applies to all motorcyclists and their passengers. The ministry has said it will put up road signs reminding drivers to wear helmets by the end of January, and those found violating the new law would be strictly penalized.

According to HCM city’s Traffic Police Department, motorbike accidents have accounted for 75 percent of traffic accidents in the city and about 70 percent across the country.

The National Committee on Traffic Safety, as well as reminders of severe punishments will conduct several awareness-raising campaigns on traffic rules and compulsory helmet use for those for break the law.

Intel to Set Up Chip Factory - Intel Corp is studying the findings of a pre-feasibility project into building a chip plant in Vietnam.

Intel initially planned to build its first chip factory in HoChiMinh City's 800-hectare hi-tech park, but later elected Hoa Lac Hi-Tech Park, near Hanoi, in the north of Vietnam.

Craig Barrett, president and CEO of Intel Corp, said on a recent visit here, "Vietnam to us remains a potential production base for Intel." Barrett also met a number of Vietnam's leaders while here. Among the points discussed is the need for the promotion of Internet usage as quickly as possible. To date, there are only 200,000 Internet subscribers in the country.

Intel anticipates investing around US$500 million into the three development phases of the chip-manufacturing plant. The factory, which will manufacture Pentium 4 chips, will occupy 600,000 sq m inside the Hoa Lac Hi-Tech Park.

Barrett said, "The country, with a population of more than 80 million, is a large market. I prefer to come and see myself what's happening, and what the government's attitude and business attitude is, rather than just listening to what people tell me."

"For Vietnam to become the rising dragon in Asia, the country must develop world-class technological capabilities," said Barrett. "The challenges that Vietnam is facing are an incomplete infrastructure, stagnant Internet and PC penetration rates, and the need for advanced math, science and engineering education."

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The U.S. was the second largest investor in HCM City last year with projects totaling US$73 million licensed. Most projects are small scale concentrating on telecom, software, construction, garment, and handicrafts. The largest is 21st Century International Development, a US$48-million JV to build a recreation park in District 2.

IN THIS ISSUE
COMMENTARY: Overcoming inertia II
Prior reports about the demise of Vietnam were all premature; so may the current concerns. But with the US economy not yet on the rebound, with the Dong pegged to the US Dollar that is shrinking compared to the Euro, and now catfish and shrimp pricing violations found against Vietnam...? What is going on? To gain a better perspective, see our commentary (linked above) and our dispatches (linked below).
Japan's Trade Agreement Vietnam's Trade Liberalization Dung Quat - Repaying the Russians Vietkieu and Their Level of Investment	Increased Government Salaries Repatriation Procedures Helmet Regulations - Again Intel's Chip Factories - US$ 500 million? FDI in HCMC

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