Mid - June ’98 - report to clients on Vietnamese businesses, investments & problems

IN THIS ISSUE

Oil Refinery - Now A Russian Deal

Coca-Cola To Go It Alone

Recent Changes in Foreign Investment

Exports down; Inflation up

Agricultural Industry Opportunities

VVG's New Offices

Oil Refinery - Now a Russian Deal. First discussed in 1988 and later a French-driven project of giant Total, Vietnam's first refinery was initially to have been constructed in oil capital Vung Tau, on the coast and down-river from the financial and industrial center of the nation, called the Second City, Ho Chi Minh (Saigon). The first feasibility studies showed the project would be profitable with an investment of approximately $1.2 billion. However, elements of the government desired to boot-strap development of the undeveloped central region of this physically long and thin nation. When the government elected to switch the site to Dung Quat, just south of DaNang, Total pulled out.

Claiming the refinery project would need an additional $300 million to cover costs of development in the effective wilderness of the central coastal region, Total also pointed out that the project would not be able to effectively compete with imported refined fuels. This was due to the added transport costs of: taking the crude from the southern oil fields 900 km north to DaNang, and then taking the refined product north or south an additional 900 km to Hanoi or HCMC.

Vietnam balked, claimed they had "dozens" of investors interested in replacing Total, and in fact within the year allowed a consortium lead by Malaysia's Petronas and US Conoco to conduct a new feasibility study. To the surprise of no one in the industry, the consortium pulled out when its new study came to the same conclusion as Total, and the government would not agree to free pricing and restricted imports to permit a profit. However, the press began to report the project at Total's earlier figure, a $1.5 billion investment, to no surprise.

Late in 1997 Vietnam announced its new joint venture with its existing Russian partner. The contract has now been signed. This is the same partnership that has been and are still after more than ten years flaring 3 million cubic meters of associated gas annually from the Bach Ho oil fields. They have not been able to capitalize on a use for the gas, although many quality suggestions have been offered by outside third parties. The cost to the nation for this loss alone exceeds $10 billion.

Recent headlines now proclaim in the State controlled press of "Signs good for early refinery profitability." Early is defined as 7 years out, possibly a soon as 5 years after first production.

The scope of the project has not changed: a planned capacity of 6.5 million tonnes per annum, in a project now "reduced" to $1.3 billion, in which Vietnam and Russia will each contribute $400 million in Legal Capital, and seek financing of the remaining $500 million. The question of whose technology would be used was answered that "international bidding will be held for equipment." Perhaps ODA funding will be allowed if the project really can show a profit.

Not accounting for inflation, the drop in the value of the Vietnamese dong (from 10,888 /US$ in 1994 to 13,000 in 1998) shows in VND terms, the earlier Total figure is still correct: 16.2 trillion VND in 1994 increased to 16.9 trillion dong in 1998. It is strongly suspected the projected profitability by the two prior partners has not favorably changed either.

Coca-Cola To Go It Alone. In a move that is no surprise, the joint venture partnership between Singapore-based Coca-Cola and its local HCMC based Chuong Duong joint venture partner is changing. What is a surprise is the potential relative ease of the break-up. In early June it was reported a split was recommended by the Ministry of Planning and Investment and the Ministry of Industry. This is in marked contrast to the earlier, months-long agony caused by these same ministries, and fueled by State owned media that agonized over the redistribution of the Proctor & Gambol joint venture (Vignettes Issue 4, March 1998).

The battle then and now involves a basic difference between the goals of a free-market vs. a central controlled market. State-owned companies, accustomed to receiving subsidiaries without need for accounting for market share or profits, look to foreign partners to reduce advertising, marketing and promotional expenses to 5% to 7% of gross sales.

Larger expenses are not deductible for tax purposes. Free market giants such as Coke and P&G often spend in excess of 50% of gross sales for marketing and promotion. The domestic companies did not understand this need, and balked at the large expenses. The allegations raised and flown for months were anything but friendly. In the case of P&G, the State refused to yield and imposed a minimum 7% ownership share to the State owned company.

According to press reports, the Coke partners agreed to make the enterprise fully foreign-invested. Conditions set for dissolution reportedly include that Coke Singapore absorb all the JV's losses ($12.4 million as of March), make all land use fee payments ($8.3 million) over the next 28 years, and presumably be responsible alone for existing loans ($25.9 million). Still open are requests by Chuong Dong for the "value" of its brand name ($8 million), and that Coke continue to use Chuong Duong to bottle product and make bottle caps.

Foreign Investment: Changes in laws, procedures and people. The State is trying to correct an imbalance, moving from a central controlled to a market economy. Trying to encourage foreign investment and build the nation has created disparities between haves and have-nots. But some of the leaders do not yet seem certain the imbalance is for the best. Some at the highest level of leadership, who still proclaim "communism now and forever," either do not understand the chilling effect that cry has on foreign investors, or do not care. They are the ones who laugh when reminded that only two years ago many foreign language signs were destroyed as a "social evil."

Contract or Co-manufacturing. Negotiations between Vietnam and the United States leading towards a bilateral trade agreement (and therefore MFN) are proceeding. But there is no rush by Vietnam to conclude the negotiations that have exceeded a full year. When Cambodia had the opportunity to negotiate its bilateral trade agreement with America, elected to not drag out the process. Some may claim Cambodia signed-on too fast ( in a matter of weeks). However, Cambodia's bilateral trade agreement and MFN are facts of economic life.

In a recent series of talks between Cambodia and Vietnam, the two nations are "cooperating" to encourage manufacturers in Vietnam to contract or co-manufacture in Cambodia. The openly stated purpose is to take advantage of favorable tariffs now enjoyed by Cambodia. The legality of avoiding punitive tariffs still imposed upon Vietnam by the US by using this procedure should be carefully looked into by any interested manufacture. In Vietnam, Department of Commerce officials to inquire of are Ken Moorefield in Hanoi and Herb Cochran in HCMC.

Encouraging theft. It is not just the border guards and traffic police who openly engage in extortion and theft. The State telephone monopoly encourages the theft of mobile phone services. Owners, many of them foreign, are charged the full costs of stolen services even after the monopoly has been notified of the theft and fails to terminate the service. Under such a system, there is no encouragement for the State to discourage thefts of service.

The leadership may talk of the need for change but they appear to be doing little that has a practical effect. In one case of theft of telephone services in which we have detailed information, the cost of stolen calls during a two day period between the theft and termination of service exceed $1,500. Few if any Vietnamese owners could pay such a charge, no matter how much pressure were brought to bear. However, no foreign person seeking to remain in Vietnam could afford to fail to pay such an huge charge.

Propaganda. The evil in that word, as viewed from the non-communist world, is not recognized here. The State openly views the working press as a tool to propagandize the needs of the Party. It uses the press to bitterly complain about foreign investors "cheating" domestic partners. Recent examples used are the claims are that foreign companies desire to spend heavily on marketing expenses to build market share, in lieu of making early distribution of profits to domestic partners.

The basic fundamentals of capitalism, the need to build and protect a market, and then to sustain a profitable core business, are not yet present or even understood in much of Vietnam.

Given the regional economic turmoil, some foreigners have lost patience. While recognizing the problems, we yet encourage those with resources and technology to not turn away.

There is room for growth, and the investment climate is clearing. Those who find it is not happening fast enough include many who came early and were not adequately prepared. Certainly some came to Vietnam in the early 1990s with the intention of milking a new and unsophisticated market. They brought few resources with them and leave little behind of value.

Others came with the necessary enthusiasm but received improper advice or guidance. Others were not able to garner sufficient resources to stick it out. They provide worthy role models of what to do and not do.

Some of the earlier folks were the scouts, the trail blazers. They now leave to go to new frontiers. They came with few practical skills but lots of pluck and spirit. They are always seen in such places when new markets open. Two such firms attracted many large clients because they were the only folks in town who claimed an ability to help. The firms did well, but not many of their famous clients.

The second wave were the pioneers. Arriving with wagons filled with needed skills, they provide the building blocks for economic growth and change. However, the dangers are many, and resources scarce. Many of the pioneers have and will fail. But a few will make it.

The third wave will be the more established crowd. Some have already come and settled. Those from the third wave who can build upon the strength of the few successful pioneers will make a strong showing as the economic climate first settles and then improves. Those that arrive too late will find themselves foreclosed from entry.

Building a nation takes more than a short time. It takes time for the State to change, and it takes time for the early settlers to build out: from wagons to cabins, farms and then estates.

The time for patience and sympathy for local problems is wearing thin. The State must now undertake the sea changes needed for economic growth. These changes must be made before the regional turmoil ends and the earlier strong markets return to dominance.

In spite of the problems, not because of them, we continue to encourage Vietnam as a good place for strong and well informed investors to locate. Foreign invested opportunities are present, and need work.

Exports down; Inflation up. As of May 23, the General Department of Statistics reports the total trade deficit is down, but due to dwindling imports, not expanding exports. Inflation for May was 1.4% making the annual rate of inflation 8.8%, the highest in the past few years.

Over the first five months of the year, exports grew, but not at their former rate. Earning $3.859 billion, exports made a 13% increase over last year, down from the earlier growth rate of 25 percent. Imports grew 1.8% to $4.663 billion. Accordingly, as of the end of May, the total trade deficit shrank 27% to $840 million. HCMC bore the brunt of the current slump, growing just 5.9% or half of the growth experienced in 1997.

Food prices accounted for the largest jump in inflation, up 7.8% from the same period last year. The dollar was up 12.4% from last year. The State has held this to a near constant rate for the past few months.

Agricultural Industry Opportunities. The Ministry of Agriculture and Rural Development (MARD) has issued a call for more than 400 separate projects in which Vietnam is seeking foreign direct investment. Presented in early June by the Hanoi government as part of the Agromart '98 trade show, the list of projects is impressive:

Total prescribed capital for these projects is estimated at $2.152 billion, that represents 6% to be added to the existing $30 billion in foreign invested projects currently licensed in Vietnam.

The European Union is a major market for Vietnam's agricultural produce. Agreements between EU and Vietnam provide for about $50 million worth of help to strengthen the veterinary industry, social forestry and conservation, rural development, and preserving natural resources.Total British investment in agriculture, fisheries and forestry exceeds $150 million. France is number two in this area with $123.5 in projects, and Holland is third with $101.3 million in development projects.

Our New Offices. Following four years tenancy in the same location, we are moving. The hustle and bustle of this proletarian center will be missed. We are only 2 km from the New World Hotel, which is in plain site on a clear day. However, as this street is among the longest in the city, and is by certain the most narrow, it is always the most congested. The traffic too often crowds to a complete standstill for periods of an hour, at least once monthly.

Giving Up Local Color. Street vendors provide a colorful challenge to our first-time arriving clients and friends. If our sign cannot be seen, we blame the lady who sells hatchling ducks still in the eggs she boils hard; or the cigarette lady who dispense gasoline and wisdom to new arrivals on the street. The clothiers who set up shop after 5 PM are her latest pupils. The hat vendor won't listen to her, or to us, when we patiently ask her not to block are very busy drive with her colorful display of "designer" labeled baseball caps that sell for less than forty cents.

We will not miss the local authorities. It took them almost two years to learn we would not contribute to their private welfare. We do not consider being left alone for the past two years a blessing. In stead we tell them such is normal behavior. Police should be keepers of the peace and not collectors of bribes. We discuss this with them openly, with a smile and laughter all around. But we believe our message is getting across. Foreigners can do business in Vietnam without being cheated. Of course we too are always learning.

The Art of Negotiation. The moving industry is no different than the rest. We could not understand why the bids we received were so high. Until Hao, our HCMC manager, asked me to wait on the roof terrace during the visit of the folks we eventually hired. Not seeing a foreigner we believe caused the price to be less than half of the first bid, and 40% below the rest.

Our new offices are almost too elegant. They are available at the same rent we are paying for the current shop only because we both know the market and bargain hard. A former partner at Ernst & Young is a neighbor. She just renegotiated her lease and proudly told us the rent was reduced by 30 percent. Her home is half the size of ours, on an equally pleasant street, and costs her 20% more than we are paying.

Airport and SuperBowl. Our new neighborhood is less than 1 km from the international airport, but away from the flight path. With tree-lined streets, without vendors, bus or truck traffic, our house keeper was worried she would be lonely. Then we showed her the supermarket and other shops less than 500 meters away. Fresh meats and vegetables will be purchased from the morning market, but staples will be an up-scale experience in the nation's first mall shopping area. Now Mrs. Huong is concerned all her friends will visit and never leave her alone, just to be near such elegance.

Communications: our contact address and numbers We anticipate some problem for the first few weeks, as we try to move our existing phone lines. As Vietnam has a mostly new, digital network, it may be easier then we fear. If not, we have a temporary line already in place. It is 848-842-0529. The street address is : 30 bis Lam Son Street, Dist. TB, HCMC, Vietnam. For more contact information, please refer to Our Offices.

Vietnam Vignettes is a periodic report distributed since early 1994. It is NOT a newsletter although for the ease of linkage we have called it that. It is a summary of domestically published media reports from more than 17 industrial sectors that we at VVG follow and report upon for our clients.

VVG - VIETNAM VENTURE GROUP, Inc.

VIETNAM VIGNETTES