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.
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