~ Le Viêt Nam, aujourd'hui. ~
The Vietnam News

Year :      [2003]      [2002]      [2001]      [2000]      [1999]      [1998]      [1997]

Vietnam: new and improved

In the early 1990s, it was hailed as the place to make money in Asia, but by 1996 foreign investors were fleeing. Now, after making some concrete improvements, Vietnam is resurfacing with fresh appeal

DONG NAI, HANOI and HO CHI MINH CITY - On the lookout for the best place to build a massive $20 million factory for Reebok sneakers, Baek Dae Hyun spent six months combing northern and southern China. But his scouting expedition ended with a startling decision. Baek convinced the top management of South Korea's Hwa Seung group to build the factory in Vietnam.

Long submerged beneath a tide of investor malaise dating from late 1996, Vietnam is finally resurfacing with fresh appeal. The newfound lustre is not only due to woes elsewhere in Southeast Asia such as fears of terrorism, political discord and sluggish growth. The country has also won points for dramatic improvements in foreign-investment laws and sustained spending on infrastructure. In one significant shift, the government in Hanoi has turned more decision-making on foreign investment over to the provinces. Local officials, competing to attract companies and boost local employment, are creating new investment incentives and issuing licences more quickly than before.

In the past, Hanoi bureaucrats tried to push potential investors into certain locations and make them shell out big bucks for development. "In '96, you were told where to invest, and you also had to build the road, the school, the hospital and everything else," recalls one foreign businessman. "You said, 'Thank you very much, my new address is Malaysia'." Vietnam has yet to unravel many knotty problems including steep taxes, a shallow management pool and a dearth of feeder industries. But the overall reform process is palpable.

"In Vietnam, there are a lot of hidden benefits," says Baek, president of Hwa Seung Vina Co., which began churning out sneakers last July in an industrial park in Dong Nai province, 60 kilometres northeast of Ho Chi Minh City. Baek says he's pleased by the tax holidays and rental discounts offered by Dong Nai officials. He also cites the benefits of political stability, sparse competition, low-cost labour, good roads and increasingly efficient port facilities.

"There has been a sea change between '96 and now," says Pankaj Aurora, Vietnam country manager for Healol, an Indian pharmaceutical marketer with plans to build a factory in Vietnam this year together with Cipla, a leading Indian maker of generic drugs. One fundamental difference lies in the increased freedom given to foreign investors to set up wholly foreign-owned firms. In the past, the Vietnamese government saddled foreigners with recalcitrant state-owned firms as joint-venture partners. Now many sectors, notably manufacturing and processing, can go in on their own. (Foreign companies are still restricted to joint ventures in the telecoms industry, oil and gas, mining, forestry, tourism, "culture," and air, rail and sea transport.)

Seasoned players note a significant shift in official mindset. "They have the experience now. They are less suspicious. There is willingness to help," says Christian De Ruty, managing director of Ho Chi Minh City-based investment consultancy Openasia and a nine-year resident of Vietnam. There has yet to be a replay of the early 1990s, when Vietnam was hyped as the hot new business destination. But there are signs of heightened interest in a country that was widely written off just seven years ago as a frustrating, unprofitable sinkhole.

Analysts at Credit Suisse First Boston and JP Morgan Chase Bank recently issued glowing reports on Vietnam's economic performance and prospects. Fund managers are scouting out institutional Vietnamese clients as treasury assets mount. "We're convinced that down the road, there will be great opportunities in Vietnam for fund managers like ourselves," says Brian Baker, CEO of PIMCO Asia, an affiliate of the world's biggest bond-management firm.

More foreign direct investment interest has been expressed by Asian companies than by investors from Europe or the United States. Some investments are brand new, while some abandoned projects are being revived. Taiwan's Formosa Plastics Group announced this month that two of its affiliates would invest $289 million in Vietnam to produce polyester chips and yarn. Japan's Canon Inc. began manufacturing and exporting printers from Vietnam last May. India's Ranbaxy Laboratories just completed a $10 million factory for generic drugs. Singapore's Keppel Land is pouring $31 million into a complex of Ho Chi Minh City villas, while Singapore's Asia Pacific Breweries has revived construction of a second Vietnam brewery. Indonesia's Ciputra Group is now forging ahead with the first phase in a vast real-estate development on the outskirts of Hanoi, spanning high-rise apartments, villas, shopping malls and schools. The Indonesians plan to spend up to $400 million in the next seven years on the $2.1 billion project.

Asian-invested subcontractors in Vietnam are increasingly supplying major labels such as Reebok and Nike sneakers, blue jeans for The Gap, Lee and Wrangler, and home products for Ikea, thanks to lower tariffs and good publicity conferred by a year-old bilateral trade agreement with the U.S. Since 2001, for example, Hong Kong-based Winmark International Holding has built five factories producing jeans and sweaters, says Vietnam group chairman Teddy Tan. Even within that short period, Tan notes, officials have simplified investment procedures and worker productivity is rising rapidly.

Vietnam hasn't proven itself to be the promised land for all investors. Foreign companies hankering for a piece of the action in infrastructure, including water, power and telecommunications, still face major bottlenecks. And foreign firms are still better off inside industrial zones to avoid the legal and political headaches of getting land outside them. The best bets for foreign investors in Vietnam have been export-oriented manufacturing and processing in industrial parks, and the sale of consumer goods and services viewed as affordable to Vietnamese.

Of course, many companies are flocking to China for its huge domestic market and low-cost export base. But some firms that are happy in China turn to Vietnam when they are looking to diversify risk and find an additional low-cost and stable export base. Canon made the decision in 2001 to invest $76 million in a Hanoi industrial park even though it already has 10 bigger factories in China. Shigyuki Okamoto, manager of Canon Vietnam's planning department, says he was struck by the ease of recruiting skilled Vietnamese engineers and other local staff who think creatively.

"I really do believe that Vietnam can produce better quality ideas, products and services compared to China," says Luigi Galimberti, general manager of candy company Perfetti Van Melle Vietnam, which converted from a joint-venture to a wholly foreign-owned firm last year. Galimberti notes that his company has invested five times as much in China as in Vietnam, but has reaped only twice the returns.

Another indicator: In a late-2001 survey conducted by the Japan External Trade Organization, 61.9% of Japanese companies in Vietnam said they were profitable, approaching the 70% recorded in China. Baek counts himself among investors who believe that Vietnam's workforce has the potential to outshine China's. "In Vietnam, 10 workers can spend eight hours to make 100 pairs of sneakers. But in China, those workers would only produce 70 pairs of sneakers," Baek maintains. Baek says he plans to hire 15,000 workers by 2004. He says he is also pleased by the low wages: He pays ordinary workers $46 per month and Vietnamese middle managers $160 per month, rates among the lowest in Asia. In Indonesia, Baek notes, wages are rising steadily at Hwa Seung's factories and political instability is worrisome. To support Baek's Hwa Seung Vina sneaker factory, 20 smaller Korean companies will set up shop in the Dong Nai industrial park to supply shoelaces and other materials.

Woori Bank, South Korea's second-largest bank, opened an office in Ho Chi Minh City in December, to scoop up clients from among the host of South Korean companies in the south. But bad memories of the troubled 1990s remain, compounded by more recent controversies. Japanese motorcycle assemblers howled in protest last September when Vietnam suddenly imposed stricter quotas on imported parts. Then in December, foreign car makers were shocked when Vietnam announced it would double tariffs on imported parts to 40%. Although both decisions were subsequently rescinded, they reinforced the image of an unpredictable investment climate.

As a result, some investors may be showing a bit more caution. Vietnam licensed 669 foreign-invested projects last year--a 32% rise over 2001 in terms of the number of projects. But the year showed a 41% drop in terms of registered capital, to $1.3 billion. A slightly more positive trend can be seen in disbursed FDI, which has grown incrementally to $2.34 billion in 2002 from $2.1 billion in 1999. During the peak year of 1996, foreign investors committed capital of $8.6 billion, but only $2.9 billion actually arrived due to unfulfilled plans and bureaucratic wrangling.

Many companies are looking beyond hard numbers to weigh the quality-of-life factors for foreign executives and their families. In that respect, Vietnam is moving up the rankings. These days, Hanoi and Ho Chi Minh City both offer international schools and health care, sports facilities, concerts, well-stocked supermarkets and diverse restaurants. In southern Vietnam, with year-round warm southern temperatures, Baek can indulge in his favourite hobby: golf. A 90-minute drive to Ho Chi Minh City gives him a choice of 50 Korean restaurants. While some foreign embassies still classify Vietnam as a hardship post, the business community knows better.

By Margot Cohen - The Far Eastern Economic Review - January 23, 2003.