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

IN THIS ISSUE

House Supports Changes in MFN

Local Currency ... Supreme?

Land Rents (some) Slashed 50%

ODA still firm at $10.9 billion

Charlie Ray - US Consul General

Full Foreign Investment - Encouraged

Russian Refinery - The Real Story

VVG's New Contact Numbers

WASHINGTON (AP) As Congress prepares for another bruising debate over China's
trade status, House lawmakers are moving to change the way that status is defined, saying the present way is misleading.

Since 1962 the United States has granted most-favored-nation tariff treatment to
almost all of its trading partners. The House Ways and Means trade subcommittee voted Tuesday to change that designation to "normal trade relations," saying that is a more accurate description.

It also voted to support the Clinton administration's efforts to open up trade with Vietnam.

The most-favored-nation measure, said subcommittee Chairman Philip Crane, R-Ill., "is needed to correct a misnomer under U.S. law." In the annual debate over whether to extend most- favored-nation status to China, which will take place in the coming weeks, lawmakers in favor of China trade frequently point out that they only want to renew "normal," not favorable, trade relations with China.

Only six nations Afghanistan, Cuba, Laos, Serbia, North Korea and Vietnam are denied most-favored-nation status.

The vote on Vietnam supports efforts to open up trade with that country by waiving a 1974 law that denies normal tariff treatment to countries with restrictive emigration policies.

Vietnam is not eligible for most-favored-nation status because it is still negotiating a bilateral commercial treaty with the United States, but President Clinton, by granting a waiver in March and again in June, opened the way for Vietnam to get government credits or investment guarantees.

Congress has authority to reject that waiver, and Rep. Dana Rohrabacher, R-Calif., arguing that taxpayer dollars should not go to a dictatorship which has blocked emigration, has proposed legislation that would do so.

The administration says Vietnam has made considerable progress on POW-MIA cases and that 480,000 Vietnamese have been allowed to emigrate to the United States over the last 15 years.

The panel, by a voice vote, decided to report Rohrabacher's bill "adversely" to the full committee, meaning it opposes its enactment.

Crane said information on POW cases and progress on emigration have run parallel to steps to normalize diplomatic and trade relations, and ongoing bilateral commercial talks would be "derailed" if the waiver was overturned.

Local Currency ... Supreme? The speculation on how to bolster Vietnam's growing (but at a slower rate) economy continues. This topic will headline the news over the next few months. It remains our view that Vietnam is different from the region. This nation merits closer attention for investment opportunities in contrast to Indonesia, Korea, Malaysia, the Philippines and Thailand. While the risks are not as great in Vietnam as elsewhere, there are still investment problems to be overcome as in any frontier. However, many are still looking and waiting for distress sales.

In the face of a projected 1998 GDP down from 9% to 6.8%, exports rose by 12.6% and total domestic revenues rose by 4.5% over the first half of last year, while inflation was steady for the past two months at an annual rate of 6 percent.. Vietnam is one of only four nations in East Asia to show a positive growth (China, Singapore and Taiwan being the other three).

Vietnam has, since the late 1980s, pegged its local currency (Vietnamese dong) on the US dollar. Many State owned enterprises and official policies from that time promoted the US dollar as the currency of choice. In the face of the (currently waning) popularity of gold, the Vietnamese dong is the reluctant third-currency of choice. That helped the dong to decline in the past five years, from VND 10,000:$1 to VND 13,000:$1 (constant since early 1998).

In early 1998 there was a short-lived glitch when black market rates briefly slid to 14,400:1 against the dollar.. The government responded by permitting a 10% float bringing the dong to its current, seemingly stable, position. In spite of often repeated public declarations that the dong will not slide further (although speculation remains it will go to 15,000:1 against the dollar by year end), costs and fees for foreigners and foreign invested enterprises are still stated in, not merely pegged to, US dollars.

Vietnam Is Different. With Japan heading towards a recession, some economists predict an Asian Depression lasting until mid-1999. While many view Vietnam in the same picture as its neighbors, the economic climate here is not yet in difficulty to that same degree. Unemployment is up as Asian markets for Vietnam's products decline, and foreign currency is in shorter supply. However, the driving force on Vietnam may be the speculated devaluation by China of its yuan (also called renminbi). Should that occur, Vietnam's hand (as well as all other regional nations) may be forced in the same direction.

Recent local headlines proclaim: "It's Official: US dollar to be outlawed." To combat inflation, the loss of hard currency and the temptation to slide the dong down from the dollar, a new regulation is promoted as making the use of US dollars in domestic transactions illegal. As reported, that would include restaurants, shops, hotels and other retail and service outlets. One is left to wonder if this will indeed be a universal change. Only last month the Party and Government leaders emphatically rejected a plan to peg minimum wages for domestic hires in foreign invested companies to the dong. The minimum wage remains stated in dollar terms ($35-$45 per month).

Air fares, house and office rents, taxes to foreigners, customs and license fees remain stated in dollar terms. And we find withdrawals of dollars from dollar accounts are now being paid in lower denominations ($10 notes in amounts over $3,000 recently) in lieu of the higher valued $50 and $100 notes.

Clarification is always important, and all the more so here. As always, one can only speculate on the effect this new law will have on existing contracts stated in dollars. It also remains to be seen what effect the enforcement will have on foreign currency accounts. Will US dollars still be released to the foreign investor community from their own accounts, and will domestic Vietnamese still be permitted to hold foreign currency accounts? Stay tuned.

Land Rents (some) Slashed 50 percent. In the late 1980s, the price of land was set to the "international" standard by Vietnam. The purpose was to halt early, unfavorable land deals that disadvantaged Vietnam by reflecting upon Vietnam's poor bargaining position. When the desire to consider investment in Vietnam grew, because State companies had no (and still have little) hard currency to contribute to joint ventures, the State boosted the official cost of real estate rights beyond market rates. In a demand economy of the early 1990s, this accomplished a better position by decree then what could be achieved in negotiations.

Vietnam was not the first or only nation to take this route. South Korea, Thailand, the Philippines, China and others led the way. But Marxist-holdovers, bureaucracy, corruption and a degree of xenophobia still restricts foreign invested companies from making respectable profits in a joint venture.

The plan ... worked? Vietnam achieved a minimum holding of 30% of all joint ventures, and received up-front cash payments in foreign currency for the early costs. However, the minimum joint venture 30% ownership forced up the valuation previously unproductive land on the speculation of a successful venture in an always expanding economy.

Consider that a foreign invested joint venture with a total capital contribution by the foreign entity of $1 million, made the minimum contribution by the Vietnamese partner $428,000. The total "value" of the enterprise became $1.482 million. As the sole contribution by the Vietnamese State partner was the value of the land, that value became $428,000.

The arbitrary valuation of land use rights were thus burdened the venture to recover sufficient revenues to meet the presumed value of the land (which became a debt to the Vietnamese partner and the joint venture), and also return a profit to the partners.

Urban land and property deals, following the high cost of land use rights as well as the early market demand for 20 to 70 year leases, drove the per-meter cost of real estate to heights rivaling and often exceeding rents in Hong Kong, Singapore and Tokyo.

Special export and domestic industrial zones were priced at "international" rates that were to be paid up-front, or at least in five-year segments. Without infrastructure (roadways, power, transportation, skilled labor, secretarial and other support) comparable to the truly international cities of the region, it was only a matter of time for the reality of the situation to effect the market.

This false cost structure would not have been sustained even in an expanding market. Foreign companies recoiled from the high land use costs in the face of the difficulties in making a profit. Then the regional turmoil created a down-swing in the market. Coupling the growth of available space with a decreased demand as the growth of foreign investment slowed, the first to fall were costs of houses and apartments. Then office rents fell. Land use fees were slashed 20% but that left them still overpriced by up to 300% according to some commentators on the true international market conditions.

Recently, the Dong Nai Industrial Zone Management Board approved rent reductions by as much as 55 percent. Land in some IZs without any prior infrastructure will be offered at an annual rent of $0.75 per meter, and $0.90 if the land has infrastructure development, down from earlier proposals of $2.25 per meter. Other zones charging $1.25 per meter will offer a 50% reduction for the first five years and a 25% reduction for the next 5 years. Still other zones are offering a 45% reduction for all leases in excess of 3 hectares (30,000 sq. meters) per year.

The land use fees are all open to discussion and negotiation. Investors take heed. If you are blessed with either cash or financing, and should you know (or know someone who knows) how to bargain Vietnamese style (without angering the local forces), good opportunities are available today in Vietnam.

Let us be more explicit. When VVG's former landlord recently sought to raise our rent (as his bargaining chip to stave-off an anticipated request for a rent reduction), we located more elegant and spacious quarters in a better and more convenient part of town, at less than our former rent, and 25% of the prior tenant's rent for the same space. We are achieving the same result for our clients on larger transactions, as well.

$10.9 billion aid is firm, say ODA donor nations. Following the June (the first in Hanoi) mid-year meeting of donor nations, the earlier pledge of $2.4 billion made in December stands firm, in spite of the economic turmoil in other nations of south east Asia. Added to the prior $8.5 billion in Overseas Development Aid pledged since 1993, the whopping sum of almost $11 billion must now be fully utilized.

Donor countries called upon the government of Vietnam to be more transparent in its reporting of financial matters, and particularly called for an earlier reporting of the National Budget. Normally issued one full year late, the National Assembly is expected to vote on the 1997 budget when it meets later this year. The call for more transparency is due, say the donor nations, to the need for Vietnam to avoid the problems caused by the lack of transparency in neighboring lands that contributed to, if not caused, the current turmoil.

Charles A. Ray, US Consul General, has come to Vietnam, and in particular Ho Chi Minh City, with a storm of deserved praise. A scholar, retired Army officer, veteran of the war between our nations, long-time career Foreign Service Officer with world-wide service, Charlie (as he prefers to be called) is as well an accomplished raconteur and strong supporter of the American business community in Vietnam.

"Ideas are sometimes as important as is money," said Charlie in recent interviews. In other developing lands American assistance has focused on "an effort to create civil institutions. The money we gave had less of an impact. Vietnam needs a lot of foreign direct investment, and they need our support for funds to build infrastructure. We have to build people-to-people relationships. If you don't have that, the money doesn't get used properly."

Ray estimated there are from 400 to 1,000 US citizens in Ho Chi Minh City who will place a great demand on his staff of 12 (planned to grow to 20 by next year). Currently supervising the demolition of the old embassy and many smaller out-buildings to make way for the new Consular Offices and gardens on the site, Charlie will also oversee the Fourth Of July Celebration later this month .

The new, more efficient Consulate structure is needed to service American citizens, as well as desires of domestic Vietnamese. Charlie said that visas will not issue in HCMC until the new consulate building is completed, perhaps as soon as early next year.

Favor Full Foreign Investment. Ho Chi Minh City has launched a drive to promote 100 percent foreign owned businesses. Chairman of the City People's Committee, Vo Viet Thanh, said in early June that fully foreign owned investments will be encouraged in all fields except telecommunications and defense-related industries.

"Differences in management styles and expectations have led to many boardroom showdowns.... Due to a lack of capable representatives in joint ventures, the Vietnamese side is often cheated on, leading to losses," the reports quote from the Chairman's speech.

Those unfortunate choice of words, sounding defensively combative, are well understood here for local consumption only. However, the world's press reports them, and they have a damaging effect on some who are sitting on the fence trying to decide if Vietnam has a truly friendly investment climate.

The Chairman's words were paying homage to the Vietnamese side in disputes both Proctor & Gambol and Coca Cola had with their local joint venture partners. The disputes stemmed from the continuing lack of understanding by many Vietnamese in authority on how to manage a growing business in a budding market economy, and what to say about local failures to understand how to be effective managers.

Foreign firms, master in marketing, found their minority invested partners sought to take out early profits in lieu of investing more in growing the early business in the face of stiff competition for market share. These minority partners whose main investment was overvalued land, had veto rights over major business decision and were blocking necessary expansions. It is difficult for many to admit mistakes: the Vietnamese mistake of not knowing how to grow a business; the foreign mistake for taking on a Vietnamese partner.

VVG has never recommended joint ventures unless mandated by law. Interesting is that joint ventures have not been mandated by law but for land and property development. However, many foreigner investors were either misguided or themselves did not understand the system. Some may not have been confident to proceed alone, or the misplaced their confidence in seeking a "well placed local partner," to insure their profits.

From Vietnam's early perspective, the plan worked. It is reported that 90% of all foreign invested projects had been joint ventures, until recently.

However, there has been a 19% drop in new foreign-invested projects in HCMC in the first five months of the year. The necessity to over-value land to make up a mandated 30% contribution in a joint venture was the main source of friction later on in the foreign direct investment projects.

Russian Refinery - The Real Story. It is a remarkable change of past practices that the new joint venture between Russia and Vietnam has publicly acknowledged what all industry insiders (and most of the world) already knew. What is remarkable is that Vietnam appears to be comfortable in becoming more transparent in this key sector.

Oil Zarubezhneft Group, already in partnership with PetroVietnam (VietSovPetro) producing Vietnam's commercial crude 100 km off shore from Vung Tau, commented on its biggest capital investment project abroad. The exploration and production agreement began in 1981. The refinery at Dung Quat is the second stage of that first successful venture.The volume of crude currently being churned out by VietSovPetro is sufficient to feed two refineries, claims the Russian partner.

General Director, O.K. Popov, in a recent interview published in Vietnam, proclaimed, "We do not actually believe Dung Quat is the ideal location for the project, and we agree with other foreign oil companies who suggest that he refinery be built somewhere in the south of Vietnam. This project has little economic reward for the Vietnamese side in general. But for our part, the site is still economically viable because we can use the crude oil exploited by VietSovPetro at the White Tiger field to supply the refinery.

Funds will come from those generated by the VietSovPetro venture and external sources. If Russian firms are selected (in an open bidding process) as design and technology suppliers, Russia will supply equipment of international standard at a price of 25 percent lower than can be obtained from other countries. The venture has the support of the Russian government in all its details.

Meeting the projected year 2000 start-up "will be difficult. We will have to call for tenders to select the best contractors available to meet the strict quality requirements of the project.

To Reach VVG: Our move has been completed, successfully. We lost only one full day, which is a good indication of how well things can work here. We now await the installation of our additional telephone lines.

Our new street address is : 30 bis Lam Son F2 TB, HCMC, Vietnam. The house is on a tree-lined, quiet street, conveniently located near the International Airport (Tan Son Nhat), and only minutes from down-town HoChiMinh City.

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. * Due to the importance of certain topics of key importance to trade with Vietnam, we will occasionally include some wire reports.

VVG - VIETNAM VENTURE GROUP, Inc.

VIETNAM VIGNETTES