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Copyright © 1995-2008  Vietnam Venture Group, Inc. All rights reserved.   Updated March 26,2006

GETTING STARTED - An Insider's Guide to Starting a Business in Vietnam
By Peter N. Sheridan

Caution and patience are watchwords when thinking about starting a business in Vietnam.  However, don't be so cautious or so patient that you miss the opportunities.

The regional monetary crisis and Vietnam's own home-grown challenges continue to keep foreign investment and infrastructure development from taking off as they both would in a truly free market economy. 

The Bilateral Trade Agreement is now operative, tariffs are down from 60% to 4% or less.  The first to succeed are the textile exporters from Vietnam to America.  Others will follow.  America can now purchase handicrafts directly, rather than paying high transshipping costs from Taiwan and Japan.

Direct foreign investment is growing as are exports, ODA grants, and domestic prices since the start of 2004.

Inflation is again on the march, reaching 7% in 2004. While recession haunted the local economy at the start of the new century, Vietnam's growth in terms of GDP continues to be among the highest the world.  GDP was 7.5 % in 2005, rivaled only by China's own phenomenal growth.   Projections for growth in GDP for 2006 are in the range of 8 per cent.

Foreign managers are no longer leaving in droves, because those who were to leave left already. Some are starting to return. There are no current plans to replace those that have left with Americans or Europeans.  If there have been replacements, most have been with domestic Vietnamese or other less costly Asian managers.

However, modest growth in Foreign Direct Investment has brought with it a new waive of expat managers as well.

Domestic Vietnamese, young men and women hired to replace the diminished foreign managerial force, are being hired.  Some at the still astounding salaries averaging over $300 per month which is near to the per capita annual income level of the nation. Modest growth is seen; office towers are at or near capacity, hotel room rates are inching towards long distant rack-rates, and the hard times seem to be left behind with the old calendars.

Before the Tsunamis in late December 2004, Southeast Asia was making a remarkable recovery.  No major cities were hit and Vietnam escaped it all. 

Thailand struggles to keep the baht, frozen for decades at 26, at close to 40 to the US dollar.  Indonesia tries to keep from going up in flames. The haze from burning forests blocks the sun from Malaysia, but does not mask the ever-present political strife that seems to have cooled in 2004. The Philippine peso will drop as a stone in calm water if there is a hint of trouble elsewhere.  The increasing value of the Japanese yen to the dollar will hurt Japan's export fever and open the way to far less costly goods from America.

It is only China and Vietnam where the sun really seems to be shining and blue skies can be seen in the economic future, both short term and long term. There tremendous pressure on China to re-value the Yuan is  heating up in early 2006.

More and more, Vietnam becomes the appealing alternative to doing business in Southeast Asia when considering civil, economic, and political stability, as well as growth potential.

This is clearly the time to move forward.   The wise and successful investor does not sell his stocks when prices are low,  but he chooses new projects wisely.  Certainly this is not the time to put savings under the pillow.  Those with capital know that this is the time to be wise with investments.  So why should Communist Vietnam be in the picture?

Because Vietnam has not ever left the eyes of major investors.  Vietnam in year 2006 is on the brink once more of rapid expansion.  In 2001 the stock market opened and is expanding as well as the State will allow it.  In 2002, the value of the VND recovered with the expected increase of trade following the BTA.  Real estate becomes ever more tight as available space for large companies dwindles and hotel rooms are nearly 90% occupied.  

In spite of all the regional and local concerns in 2003 over SARS,  the more recent bird flu, and just doing business in "corrupt, Communist Vietnam," construction on  major projects continues in Vietnam.   There are new major hotels and office towers going up; room rates and monthly rents are rising.  New tenants in the towers are growing domestic Vietnamese companies that continue their move out of their own villa space to more prestigious addresses in the sky.

The government's projections have generally been rosier and more accurate than even well informed sources such as the IMF.  Vietnam grew at the annual rate in the range of 7% for the first five years in this new century.  State projections mimic IMF and WB that predict a range in 2006 of from 7.5 to 8.0% growth in GDP.  Others may question, but Vietnam maintains a projected GDP of 15% growth over the years 2001 to 2010. 

While even the most pessimistic outsiders look to smaller growth rate, everyone sees actual growth and there are no longer predictions of anything like a collapse. 

From our own history, others can read the past and see the future of Vietnam.  We first went on line in 1996 when we were told to expect 'success' if we reached 1,000 visitors a month. We surpassed that level before the new Century.  Today, we receive more than 1,000 visitors a day and well over 1,000 inquires every month.

Business inquiries are increasing, and we find many new visitors willing to take a fresh look at Vietnam.   In fact, we are seeing a more realistic appraisal by domestic enterprises and foreigners, alike.  Perhaps this is in due to the realization that NTR (formerly MFN) is upon us.

The USA alone does almost US$ 4 billion in total trade with Vietnam, still greatly favoring Vietnam, but that is to be expected.

We expect many things will happen in the remainder of this decade in large measure due to the slow growth in neighboring lands and the implementation of the BTA.  For a review of the Bilateral Trade Agreement between America and Vietnam current to year 2003, click here.  

The State is taking active measures to strengthen the nation in the areas in which it is able: land use rents have been reduced, licensing procedures are still being eased, the struggle against bureaucracy and corruption is an on-going major effort, and some of the leaders are listening to the needs of the foreign investor.

In US dollar terms, in 1997-2008 attracted nearly US$ 5.83 billion in foreign investment for new projects and capital adjustment projects. The country licensed 850 new projects (total investment capital of $ 3.9 billion), permitted 458 others to add a total $ 1.935 billion to their existing capital projects.

Vietnam is a dynamic location. Contrast Vietnam's FDI picture today from when we first published this series of articles in March 1996:

  Total number of Invested Projects Total Invested Capital Steel in the Ground
2006 6,086 51.548 billion 27.986 billion
1996 1,354 45.368 billion approximately 6 billion

See the current picture at Economic Indicators.

Some older projects with unrealized capitalization needs have closed down.  The trend continues to convert unworkable joint ventures (with non-performing domestic JV partners) into fully foreign invested enterprises.

Dong Fluctuation. In early 2006, the value of the VN dong to the US dollar is close to 16,000 to one. 

The Vietnamese currency (began to fluctuate widely in December 1997. At that time it dropped sharply against the US dollar from 11,500 to 14,200 on the free-trade, black market as against the official rate of 12,200. The national bank permitted the dong to be traded at up to 10% above State rates, and it held at 13,000 until early summer 1998 when the State Bank permitted another float, that time to 14,000. The dong is not in free fall but rather free to adjust to the true value vs. the US dollar.   See Economics Indicator for a full report and the current rate of exchange.

Open speculation keying Vietnam's next move to anticipate or follow that in China continues.  Some were predicting the dong would make a steep drop to 21,000 or lower if the Chinese permit their currency to drop. However, China continues to be on the same upwards roll as is Vietnam.  Pressure on China to allow the Yuan to float due to the major imbalance in trade between the two giants reverberates in Vietnam and all of Southeast Asia.

A drop in the dong will both aid Vietnam's competitiveness for the export and tourist markets,  and heavily burden long-standing dollar debt for the state owned sector, but with the influx of trade and the strengthening of Vietnam's dollar reserves, the burden may not be as great as once feared.

Several important indicators can be seen to support continued growth, close to the 9% per annum of the middle 1990s. One leading, favorable indication of international confidence was the grant in 2005 of over $2 billion in Overseas Development Aid even though the Asian currencies supporting that aid are still down from the mid 90s.  As Vietnam is still slow in implementing such grants, there is some concern that Japan may reduce the total package due to its own continuing concerns.

That will only help foreign direct investment for which ODA is no friend but a arch competitor.

The balance of trade for 2005 is in the negative numbers again (-US$ 7.9 billion), as it has been since a small surplus in 1999.   The year started and ended with negative numbers.  The trade picture will improve as trade with the US continues to improve and should have a stronger effect on year 2006 numbers. 

Inflation has been reduced from a staggering 774% in 1988 to an attractive 2.3% in 1997, only to drop to or under negative 2% for 1999.  In year 2001 that recovered to negative 0.3 and as of December 2005 the recovery took on a solid positive 5.4 per cent. 

Deflation remains out of the 2005 picture but all bets are off for 2006 due to strife in the world and the demands on its oil supplies.  

Some may argue there is not as much steel in the ground as the Total Implemented Capital figures would seem to indicate.  However, we publish photographs of recent construction in Ho Chi Minh City and discuss the growth of this major hub at Monday Morning In Saigon There is actual growth on the ground and the list of major projects that still call for investment make Vietnam a good place to be.

The rise of a real middle class and the expansion of a real consumer oriented market is driving sales of domestic and imported products. Read more about Vietnam's middle class and its comparison to that in China.

To see a project that had an existing customer pool able to push it far into the black and sustain growth for many years, visit the CUA LAP RESORT. This has now been assigned to others but the numbers show a clear need and strong demand by an existing domestic consumer base.  When you see the potential growth still expected, you will understand better the opportunities awaiting the committed investor with both foresight and cash.

Investors from Taipei, Singapore, and Korea have not been daunted. They stayed the course knowing the advantages in buying low in high growth areas such as Vietnam , expecting to take advantage of the regional crisis by buying up assets at fire-sale prices.

Still More Patience: as we are all looking to a good Return-On-Investment (ROI), be prepared to wait for up to five years from start-up in some cases. If you achieve better results, you will still need patience in expatriating funds. It is not always impossible or always difficult.  But you must follow the rules.  

A preferred investor for Vietnam today is one who seeks to grow his market share and/or develop other products in Vietnam. She is the investor who will soon repatriate investment funds but is content to leave her profit in the project to help it and the project both to grow. 

American normalization of relations continues.  High-level delegates from America are discussing normal military protocols.  TDA, OPIC and ExIm Bank are now in full operation in Vietnam with all their services.  Insurance against sovereign risk is available but there is no concern that it will ever again be needed in Vietnam.

A Civil Aviation Agreement is in progress. United Airlines started the first USA to Vietnam direct flights in late 2004.  Many ancillary agreements will also be coming soon. Code share agreements are in effect and the battle is on between the many US carriers vying for access to these lucrative markets.

Exit Strategies for foreign investors do exist.   Skilled and seasoned advisors with these markets can help you develop the strategy that is best for your needs.  As with periods of development and growth in other regions, there are industry and regional glitches that can prove to be advantageous to the receptive investor.  Many cash-rich companies made some of their best  purchases in the United States and Europe during the oil embargo of 1976 when cash was tight for others. 

In Vietnam, many of the apartment, hotel, and office structures recently completed are once again full.  Rentals, once reduced from the 1995 heights to almost reasonable levels in HCMC, are back on the rise.  Rents in Hanoi have come down, but yet remain unrealistically high.  Hotels are succeeding in filling their rooms and are using many different promotions that make some packages very attractive.  Most hotels are still making costs by generous contracts with tour operators making deep discounts off of rack rates. But they are also making profits by fully utilizing their F&B operations.  There are bargains for the shopper with cash and patience, but beware of fire sales. Some may be purchasing only ash and dust.

Lack Of Transparency. Business transactions and legal sophistication found in the developed world are not yet at those levels in Vietnam. The often-quoted phrase, "The laws of Vietnam are not transparent," means that:

  1. The laws are NOT based on common laws;
  2. There is NO available public history to help a researcher understand the rationale behind particular laws;
  3. There is NO comprehensive history of prior interpretations, either by executive order or by judicial tribunals of particular laws;
  4. Laws once enacted by the Stale can and have been changed by the ministries in the form of circulars that are legally binding; and
  5. The National Assembly and the ministries an NOT bound to uphold even their own earlier enactment's or even their earlier interpretations of the laws of Vietnam.

However, that too must change.  As part and parcel to the BTA with America, Vietnam must change its leading laws that effect direct foreign investment within the next four years.  Those laws are changing and will continue to change over the next 3 years.

Favorable Conditions exist for the informed investor.  Informed investors are banking on the future and are not being hampered by traditional constraints.

Good and competent legal advice is being provided to Vietnam from many international sources. The State is taking its pick of the best laws from Europe, America and Asia as concerns its particular needs. The process is an evolving one. That the law is not static is a measure of hope, and as well as a cause for some confusion.

General Business Principles.  As general business principles, foreign investors should

(i) understand that as in other countries unsophisticated in legal affairs, many traditional concepts such as lengthy contracts seeking to cover all conceivable possibilities with "traditional" covenants and warranties will not be understood or well received, and may NOT be enforced even if executed;

(ii) be flexible in their approach but not abandon their history of careful, conservative, informed decision-making or transaction undertaking;

(iii) avoid sharp traders, those who promise the "insider's advantage" when you are clearly an outsider; and

(iv) don't paint every nation in Asia with the same colored brush.  Vietnam is different from other lands in the region, and in many ways a superior location for investment for all the traditional values:

  1. A large (82 million), literate (93%) population
  2. A known, hard-working, easily trainable and loyal work force
  3. A geo-politically important location
  4. A strong, stable government
  5. A favorable monthly ($35 - $45 minimum) wage.
  6. A still favorable average wage in foreign invested projects (under $100/month)

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