TRADE, THE WORLD TRADE ORGANIZATION (WTO), FOREIGN INVESTMENT, AND FOREIGN COMPANIES IN VIETNAM

FOREIGN INVESTMENT IN VIETNAM

Investment (gross fixed): 28.2 percent of GDP (2012 est.), country comparison to the world: 28. Stock of direct foreign investment at home: $75.45 billion (31 December 2012 est.), country comparison to the world: 46; $65.35 billion (31 December 2011 est.). Stock of direct foreign investment abroad: $7.7 billion (31 December 2009 est.), country comparison to the world: 57 $5.3 billion (31 December 2008) [Source: CIA World Factbook]

According to Bloomberg: Vietnam received $11.5 billion in disbursed foreign direct investment in 2013, a 10 percent increase from 2012, the Statistics Office said. Pledged FDI was $21.6 billion, a gain of 55 percent from a year earlier, it said. “The Mekong region, led by Vietnam, is evolving into a strategic manufacturing destination for multinational corporations,” said Eugenia Victorino, a Singapore-based economist at Australia & New Zealand Banking Group Ltd. “We see foreign direct investment as supportive of the export industry.” [Source: Bloomberg , December 22, 2013]

Foreign direct investment (FDI) approvals in 2006 surpassed US$10 billion, the highest since Vietnam began to receive this source of capital. New enterprise and investment laws The new Enterprise Law and Investment Law, which were approved by the National Assembly in December 2005 and took effect from July 1, 2006, marked a step forward in the reform process. The laws aimed to unleash the potential of the private sector and created a level playing field between domestic and foreign businesses and between the private and State sectors. [Source: The Saigon Times Daily, December 28, 2006]

Foreign investment figures tend to be inflated because the government approves more projects than actually go through with. By some measure the true investment figure in 2006 was $7 billion, which was nearly as much as went to India.

From 1988 to December 2004, cumulative foreign direct investment (FDI) commitments totaled US$46 billion. By December 2004, about 58 percent had been dispersed. About half of FDI has been directed at the two major cities (and environs) of Ho Chi Minh City and Hanoi. In 2003 new foreign direct investment commitments were US$1.5 billion. The largest sector by far for licensed FDI is industry and construction. Other sectors attracting FDI are oil and gas, fisheries, construction, agriculture and forestry, transportation/communications, and hotels and tourism. During the period 2006–10, Vietnam hopes to receive US$18 billion of FDI to support a targeted growth rate in excess of 7 percent. Despite rising investments, foreign investors still regard Vietnam as a risky destination, as confirmed by a recent survey by the Japan External Trade Organization of Japanese companies operating in Vietnam. Many of these companies complained about high costs for utilities, office rentals, and skilled labor. Official corruption and bureaucracy, the lack of transparent regulations, and the failure to enforce investor rights are additional issues impairing investment, according to the U.S. State Department. Vietnam tied with several nations for 102nd place in Transparency International’s 2004 Corruption Perceptions Index. [Source: Library of Congress, 2005]

Foreign investment rose from $6.5 billion in 1995 to $9 billion in 1996 and the fell to $4,2 billion in 1997 and $1.4 billion in 1999 and $600 million in 2000. The primary reason for the decline was the Asian economic crisis in 1997.

Attraction of Vietnam to Foreign Investors

Investors have been attracted to Vietnam by its location and labor costs that are significantly lower than China. Sean Turnell, an expert on Southeast Asian economics at Sydney's Macquarie University, Vietnam, told Associated Press multinationals have piled into Vietnam, keen to break ground on factories and hire some of Asia's cheapest workers. "In Vietnam, there may be problems with democracy, but that country has latched onto the Southeast Asian 'tiger' economy model which is about identifying external markets and investing in manufacturing with a view to employing lots of people and getting into the global production chain," Turnell said. [Source: AP, November 18, 2010]

In 2003 Pepe Escobar wrote in the Asia Times, “Because of its moderate labor costs, crucial geographical position between China and the Association of Southeast Asian Nations (ASEAN) - and lately because it's not on the map of Islamist terror networks, Vietnam is increasingly a magnet for Asian investors, and for some Western as well. Jacques Rostaing, president of the French Chamber of Commerce and Industry, is a great enthusiast: "Vietnam is a country of opportunities to be seized, many investments in energy, food and beverage, distribution, textile industry, insurance - France is the main Western investor in the country since 1988." [Source: Pepe Escobar, Asia Times, August 15, 2003 >>>]

“If Vietnam plays its competitive advantages well, it may be a big winner when the ASEAN common market, or "ASEAN economic community" emerges 2020, encompassing a population of 530 million: the "roadmap" is to be tabled for approval at the next ASEAN summit in Bali, in October. For the moment, the good news is that Vietnamese industrial production is up - almost 16 percent in the first seven months of 2003. But there are huge challenges: highly-competitive regional merchandise imported under AFTA, ASEAN's free trade zone; slow implementation of measures to cut the interference of middlemen; and diminishing exports. The Ministry of Plannning and Investment seems to have a cure: more investment in the domestic market; and let's bring more consumers on board. But it's hard to see where they are coming from when most consumers make less than $30 a month -and instead of spending prefer to save those few precious extra dollars under their mattresses.” >>>

Problems with Vietnam in the Eyes of Foreign Investors

Foreign investors have been turned off by the red tape, corruption, poor infrastructure and difficulty getting licenses. Some foreign investors have also complain that Vietnam is one of the most expensive countries in Asia to do business. Vietnam says it will lower costs, but over a period of years.

"Many people caution me about doing business in Vietnam," Vietnamese-American businessman Yuric Hannart told the Contra Costa Times. "All the major companies are doing business in Vietnam. Does that mean Intel believes in communism?" In fact, entrepreneurs worry more about the business climate in Vietnam—including lax intellectual property laws and inconsistency. Though the government offers a five-year tax break, the rules are vague and can change suddenly. "They are just coming out of a system in which it wasn't really necessary to think about a global economy," says David Dapice, chief economist at Harvard University's Vietnam Program. "It was a closed one, except to the Soviet Union. Those habits of thought change slowly." [Source: John Boudreau, Contra Costa Times, October 13, 2004 |^|]

For instance, Intel was charged a 5 percent value-added tax on imported microprocessors in Hanoi, but a 10 percent tax in Ho Chi Minh City. Intel won an appeal; a bureaucrat had misread the law. "I think Vietnam still has some way to go," says Intel's Than. "A lot of Viet Kieu are reluctant to come back. They are not sure of the law of the land." Thinh Nguyen, though, is betting about $500,000 on his belief the government is serious about building a tech economy. These days, officials are even willing to hear his criticism of their policies so long as it is in private. "I've put in a lot of money, a lot of time in there," Thinh Nguyen says. "They take it a lot better from me than someone who just gets off the plane. ... A lot of my friends ask me: Is this based from your heart or your head? I think it's both." |^|

Vietnam’s Attitude Towards Foreign Investment

In 2003 Pepe Escobar wrote in the Asia Times, the Vietnamese government “is nothing less than schizophrenic on foreign investment, suspicious one day, welcoming the next. It tells a lot about foreign investment in Vietnam to examine the list of what they don't seem so interested to invest in. There are more than a thousand investment projects worth a total of $17.5 billion, which although already licensed are still dead. These include crucial strategic projects capable of developing Vietnam's economy: a refinery; exploitation of an iron mine; a steel plant; exploitation of bauxite; and a few highway projects. A bold national plan is being considered whereby 20 percent of the state budget would be spent on education. This would mean, among other things, free primary education for all Vietnamese children by 2015. But such a plan cannot be implemented without the contribution of foreign donors. [Source: Pepe Escobar, Asia Times, August 15, 2003 >>>]

“Investors usually think that everything in Vietnam is under central control. That's not the case. Every province is king. The country is in fact a federation. Of course it's key to have Hanoi's approval. But the important piece of paper that really matters is to be delivered by each province's People's Committee. Foreign investors in Vietnam all demand the same things: reduction of business costs; the abolition of a dual pricing system; improvement of the legal structure (almost 75 percent of law students got their degrees in the former Soviet Union or in Eastern Europe); better labor standards; and protected intellectual property rights. They are all saying in essence that doi moi - the Vietnamese-style perestroika introduced in 1979 - has to go deeper. >>>

“But as doi moi goes deeper and the country becomes more attractive to foreign investors, the brutal inequality between urban and rural Vietnam is bound to explode, to the despair of the Vietnamese Communist Party. Some 51 percent of the population - roughly 41 million people - live in poverty, and the absolute majority is in the countryside. Provincial governments that are better off increasingly resent financing the poorer corners of the country, and blatantly ignore decrees from Hanoi. And to top it all, there are no indications at the moment that the Vietnamese Communist Party is contemplating the dismantling of the state sector. >>>

Impact of WTO Membership on Foreign Investment in Vietnam

Karl John wrote in the Asia Times, “Many economic analysts predict that Vietnam's accession to the WTO will facilitate faster foreign-trade and capital flows and push Vietnam's economic growth above that of China this year. Even before WTO accession, Vietnam presented stiff competition for manufacturing-oriented foreign direct investment (FDI) among its more established regional neighbors, including Thailand, Indonesia, Malaysia and the Philippines. Some economic analysts predict the investment-protection guarantees required of WTO members and recent anti-foreign investment signals from Thailand will accelerate FDI flows away from other Southeast Asian countries toward Vietnam. [Source: Karl John, Asia Times, January 12, 2007 /

"WTO is sort of the stamp of approval that many, many large American companies have been waiting for. They are just going to flood into this country," said Tim Tucker, country manager for Ford Motor, which already has one auto-assembly plant in northern Vietnam. Foreign financial firms have also expressed their interest in establishing more wholly foreign-owned financial companies in Vietnam. Many joint stock banks, meanwhile, have recently moved to raise their ownership capital through either share issuances to existing shareholders or by selling stakes to foreign strategic shareholders, a fast and easy way to get technical assistance and best practice management skills. /

Foreign Investors in Vietnam

In 2007, South Korea topped the list of foreign investors with $4.4 billion pledged, followed by the Virgin Islands, Singapore and Taiwan. U.S. investment in Vietnam, has generally lagged behind that of other countries. Some American investors rushed here in the 1990s, but got burned. [Source: Michael Sullivan, NPR, June 21, 2007]

The US was the third largest investor after Taiwan and Singapore in 2006. This included a commitment by semiconductor giant Intel to build a US$1 billion plant in Ho Chi Minh City, formerly known as Saigon. Only as recently as 1993, private sector investment was negligible. In recent years, it has made up around 50 percent of total investments. A shift from collecting farming to industrial farming has enabled the country to move from a situation of being a significant rice importer to become the world’ second largest exporter. [Source: Brian Gomez, The National, March 24, 2007]

Vietnam has largely grown without help from West. Most of investors have been from Asia, not Europe and the U.S. Leading investor in Vietnam (1988-1999); 1) Singapore ($5.9 billion); 2) Taiwan ($4.6 billiom); 3) Hong Kong ($3.6 billion); 4) Japan (($3.3 billion); 5) South Korea ($3.1 billion); 6) France ($2.1 billion); 7) British Virgin Islands ($1.7 billion); 8) Russia ($1.5 billion); 9) the United States ($1.3 billion); and 10) the United Kingdom ($1.2 billion). The biggest investors in Vietnam between 1988 and 1994 ironically were staunchly anti-Communist Taiwan ($1.9 billion) , Hong Kong ($1.6 billion), Korea ($855 million), Australia ($639 million) and Singapore ($621 million)

Pepe Escobar wrote in the Asia Times, “Vietnam's former colonial master, France is the sixth largest investor in Vietnam. The top five are all Asian: Singapore, Taiwan, Japan, South Korea and Hong Kong. The United States is 11th. Singaporeans are especially proud of the Vietnam-Singapore Industrial Park in the province of Binh Duong - home to 115 mostly foreign investment projects worth $600 million. The Vietnamese government regards it as a model as well. It is typically Singaporean. Most of its investment is in property - lots of hotels and serviced apartments. But now there's a move to invest in information technology services, education, distribution, food processing, logistics and infrastructure. [Source: Pepe Escobar, Asia Times, August 15, 2003/

“Vietnam has become a key base for South Korean companies keen on exporting to the US and also to ASEAN. It is South Korea's second investment destination in ASEAN after Indonesia. Oh Jae Ho, director of the Korean Trade Center, explains why: "Many Korean companies have recently moved their factories from Indonesia, Philippines and even China to Vietnam. Vietnam has the competitive advantage of a good labor force. The workers here all well-educated, hard-working and smart. Vietnam also has good natural resources like oil and seafood. In addition, the politics, society and economy are more stable than some other ASEAN countries." />/

“Thai companies are also very much interested in Vietnam. At a trade show in Ho Chi Minh City last week, the Thais brought consumer goods, food and beverage, building materials, cars, auto spare parts and tropical fruit. Bilateral trade was $1.18 billion last year, and it's already up more than 40 percent in 2003. And the Vietnamese Communist Party of course does not forget its old dear friend Fidel Castro. On a recent visit to Havana, the president of the Vietnamese National Assembly, Nguyen Van An, praised Cuban help in the areas of construction, biotechnology, sanitation and education, and stressed Cuba's role as Vietnam's door to the Latin American market. Not exclusively in the name of the revolutionary cause, Cubans can be sure of eating Vietnamese rice for a long time. Vietnam is the world's second largest rice exporter after Thailand.

Taiwan Is Largest Investor in Vietnam in the Mid 2000s

"As the largest foreign investor in Vietnam, Taiwan accounts for nearly 30 percent of new foreign investments in the country," said Huang Nan-hui, representative of Taiwan's economic and cultural affairs office in Vietnam. The China Post reported: “During the first eight months, the Vietnamese government has approved 110 Taiwanese investment projects worth US$167 million in total, roughly equivalent to 28.9 percent of all the approved foreign investment projects of the same period in terms of investment value, or 23.8 percent in terms of approved projected investments, Huang cited Vietnam's official figures as saying. [Source: China Post, October 27, 2004 /*/]

“The actual amount of Taiwan's investments may be much higher if it includes those made by the companies such as Vedan and Pao Chen Industrial, which made investments through their overseas-registered holding companies. The rapid growth of Taiwan's investments in Vietnam reflects the improved business environment in Vietnam, observed Huang. Meanwhile, he stressed, the macroeconomic control policies implemented in the Chinese mainland since late spring this year have more or less motivated Taiwan companies to seek alternative places for their overseas investments. Several big Taiwan companies such as Teco, Tatung, and Chi Mei Chemical all have been considering diversifying their overseas investments into Vietnam. /*/

“Currently, Taiwan's investors in Vietnam are mostly manufacturers of motorcycles, bicycles, textiles, garments, shoes, and furniture. "Teco, Tatung and Chi Mei may be the first Taiwan companies of the IT (information technology) sector to make investments there," Huang noted. "Their investments will help boost the IT industry in Vietnam," Huang believes. He predicted that Taiwan's investments in Vietnam might rise to another record high next year. /*/

“Roughly since late March this year, authorities on the mainland have announced a series of measures to curb excessive investments, which were blamed for leading to soaring prices of industrial raw materials. Meanwhile, tax officers on the mainland have also become much stricter in checking the financial reports of foreign companies. The worsening power shortages on the mainland are another major concern of Taiwanese companies for their mainland investments. Several big foreign companies suspended operations this summer due to the shortage of power. /*/

Since opening to foreign investors in 1986, Vietnam has seen accelerated growth in foreign investments. As of Sept. 20, the Vietnamese government has approved 4,800 foreign investment project, worth US$43.3 billion in total. Among them, 1,200 projects, worth US$7 billion or so, were filed by Taiwan companies. /*/

Chinese Investment in Vietnam

In 2005, Peter S. Goodman, Washington Post, “For now, China's investment in Vietnam remains in infancy. Since 1988, Vietnam has attracted more than $50 billion, with roughly half coming from Taiwan, Singapore, Japan and South Korea, according to state figures. Mainland China has injected only $734 million while competing for foreign investment. [Source: Peter S. Goodman, Washington Post, December 6, 2005 ***]

“But much mainland money is filtered through partners in Hong Kong, which has sunk $3.7 billion in Vietnam since 1988, according to state figures. Chinese investment has surged in recent years. China has become Vietnam's largest trading partner, with two-way commerce expected to reach $7.5 billion this year, according to government figures. ***

"We figure that China will develop faster in the future, and Chinese businesses will have more interest in investing outside of the country," said Nguyen Anh Tuan, vice director for Vietnam's Foreign Investment Agency in Hanoi. "The potential for Chinese investment in Vietnam is very great."***

Little Saigon Exports its Prosperity to Vietnam

In 2006, James Flanigan wrote in the New York Times, “An estimated $8 billion a year in cash remittances and trade in goods and services flow between ethnic Vietnamese in America and relatives and business partners in Vietnam. Sending cash to relatives through informal transfer agencies can be expensive for the families and a source of concern for bank regulators worried about irregularities. That is one reason state and federal authorities welcomed the new banks. [Source: James Flanigan, New York Times, January 19, 2006 />/]

“Jocelyn Tran, who worked in the fashion industry in Southern California for 20 years, now runs a subsidiary of Limited Brands in her native Vietnam and ships more than 200 million garments a year to the company's chains, which include Victoria's Secret, Limited and Henri Bendel stores. "China does large mass-merchandise orders, but for hand-beading and intricate needlework, Vietnamese workers' skills give us a good niche," Ms. Tran said. />/

“Vietnamese immigrants also found work in Silicon Valley in the 1980's and '90s and now are employing their expertise in the both the old country and the new. Thinh N. Nguyen, for example, founded Pyramid Development Software in 2001 after working for 20 years for start-ups in California. The firm has its headquarters and a small marketing staff in Milpitas, Calif., about 45 miles south of San Francisco, but 60 engineers in Ho Chi Minh City do software support for American companies including Novellus Systems and Motorola. />/

“Similarly, Nguyen Huu Le, who worked for 22 years in research and development for Nortel Networks, is today chairman of TMA Solutions, a company in Ho Chi Minh City that does software engineering for clients like Lucent Technologies, Nortel and NTT-Data of Japan. "Vietnam today is the most optimistic country in Asia for 2006," Mr. Le said, citing a CNN poll. />/

American entrepreneurs, too, see a lot of potential. Rick Bakanoff, of Capitola, Calif., on Monterey Bay about 25 miles west of San Jose, Calif., has built the Machinery Corporation of America over three decades by buying up cannery equipment, refurbishing it and selling it to the food processing industry in Thailand. Now Mr. Bakanoff is expanding operations in Vietnam. "It could be big in fruit and vegetable processing, if its small farmers formed cooperatives to combine crops and feed a processing plant," Mr. Bakanoff said of Vietnam. Walter Blocker, formerly of Louisville, Ky., has lived in Ho Chi Minh City for 12 years, representing global consumer product companies, including L'Oréal and Walt Disney. His company, the Gannon Group, has built a beverage processing plant and now is organizing the construction of an electric power plant. "Industry is growing here, and the greatest need is for electricity, roads and airports," Mr. Blocker said. />/

Viet Kieu Doing Business in Vietnam

John Boudreau wrote in the Contra Costa Times, “Nearly 30 years after the U.S.-Vietnam war ended, entrepreneur Thinh Nguyen does business in both countries and catches fire from both sides. Nguyen, a Vietnamese-American, started a software company in Ho Chi Minh City, Vietnam, about two years ago. But in Vietnam, the secret police have trailed him and given him the nickname "bald-headed scientist." And in the United States, where he has a Fremont office, relatives give him the "communism is evil" speech and Vietnamese-American customers will not say they do business with him. [Source: John Boudreau, Contra Costa Times, October 13, 2004 |^|]

“Nguyen is one of a small but growing number of Viet Kieu, overseas Vietnamese who are quietly exploring technology business possibilities in their former homeland. There are several reasons for the growth: Vietnam's tech infrastructure is improving, its government now wants a stronger tech sector and a new generation of Vietnamese-Americans has the capital and know-how to invest overseas. But wounds from the war have prevented Vietnamese-Americans from following in the steps of Indian, Chinese or Taiwanese immigrants, who have used their success in Silicon Valley to help build impressive tech economies in their countries of birth. "A lot of my friends see the opportunity," says Nguyen, who fled Vietnam when he was 17 in 1975. But, he adds, "They don't want to challenge the community. ... The backlash is real." |^|

"Vietnam is changing," Nguyen Manh Hung says. "The war is behind us. We have reconciled with the Americans ... There is no reason why we can't reconcile with each other." On average, 20,000 new companies are registered with the Vietnamese government every year. There are 114 government-licensed business ventures run by Viet Kieu, a jump of more than 40 percent from the previous year, according to the government. "Their intention is to come back and turn Vietnam into another India, China or Taiwan," says Than Trong Phuc, Vietnam manager for Intel, who grew up in Santa Clara, Calif. |^|

“Thinh Nguyen, who has about 70 employees, can quickly think of at least 25 tech companies headed by overseas Vietnamese. Most come from California, often the valley, home to the second-largest Vietnamese community outside Vietnam. One reason for the influx of techies is the reliable Internet connections now available in Vietnam, although at a high price. As with India or China, another attraction is a young, cheap and talented work force. "I believe that Vietnam has a great talent pool," says Quinn Tran, co-founder of KnowledgeTek Software, a Redwood City company with operations in Hanoi, Vietnam, and Ho Chi Minh City. "They have the capacity to compete. And I suddenly feel the connection and desire to help entrepreneurs there succeed." |^|

“But history still gets in the way—particularly for the generation that fought in the war. Older government leaders in Vietnam are wary of opening up to outsiders. And older Vietnamese-Americans point to continued human-rights violations and oppose those seeking business opportunities in Vietnam. "They just smell the money, not the blood of the people who were killed by the communists," says Vu Tru Nguyen, 57, a former South Vietnamese naval captain who spent three years in a "re-education" camp before fleeing by boat in 1981. "We don't do business with them. We don't talk to them." And so Viet Kieu do business with some secrecy. |^|

“The Vietnamese Silicon Valley Network of tech professionals recently organized a meeting with an executive from the Corporation for Financing and Promoting Technology, or FPT. The company was founded by the son-in-law of Gen. Vo Nguyen Giap, the famed commander who fought against the United States, and the government owns 10 percent of it. Fearing protests, organizers asked those invited to RSVP by e-mail and then call someone else for directions to the Mountain View, Calif., gathering. "It's not on the Web site," says Huy Do, president of VSVN, which is planning a December visit to Vietnam.Yuric Hannart is considering the FPT's invitation to do business in Vietnam he is looking for partnerships for his Santa Clara software and IT support start-up, Ontelix. |^|

Hot Money Pursues Vietnam Boom in 2006 and 2007

Bill Hayton wrote in Financial Times, “Vietnam’s main stock market is overvalued by about 30 percent because of a wall of hot money flowing in from abroad, leading foreign fund managers warned in Hanoi on Tuesday. The Vietnam Index of the Ho Chi Minh City Securities Trading Center has surged 38 percent this year, after rising 144 percent in 2006. [Source: Bill Hayton, Financial Times, January 23, 2007 |=|]

“However, Fiachra Mac Cana, head of research at Vina Capital investment fund, told a capital markets conference that most of the rise in the market was due to "intense speculation on the part of a new kind of foreign investor". Mr Mac Cana said these "hot money" investors were buying largely through large overseas investment houses which have started to issue participatory notes in the Vietnamese market. He said that price/equity ratios of 25-30 in Vietnam compared with a regional average of 18-20. "It is not sustainable, this market is overvalued," he said. |=|

:Peter Ryder, chief executive of Indochina Capital, and Alex Hambly, chief executive of Prudential Vietnam Fund Management expressed similar concerns. Mr Ryder said there was a risk that further market rises could trigger government intervention. "The worst thing the government could do right now is to step in. I don’t think what’s happening here is unusual for an emerging market. The government should allow the market to correct itself, as all markets which aren’t over-hindered with rules and regulations will," he said. However, officials said the government was prepared to delay further liberalisation of Vietnam’s securities rules until the market cooled down. Vu Bang, head of the State Securities Commission, ruled out raising the 49 percent limit on foreign ownership of listed stocks in the short term. "It does not mean that the government will not open the door, but it should not be done at such a hot time," he said. |=|

Figures on the amount of foreign money flowing into the Vietnam market are hard to calculate because most purchases in the past three months have been via participatory notes. A participatory note is an arrangement whereby an institution with stock trading rights in a particular country buys a basket of shares there and holds them on behalf of clients located elsewhere. Foreign investors are expected to continue to pour money into Vietnam’s markets because of the prospect of further privatisations in state-controlled industries |=|

Investors Attracted by Vietnam's Long-Term Promise Despite Shortcomings

In April 2011, AFP reported: “Despite Vietnam's persistent economic woes, a record deal has shown foreign investors are still lured to the frontier market by its young, growing population and rising disposable incomes.The sealing of the communist country's largest-ever private equity deal, at a time of soaring inflation and a struggling currency, has underscored faith in Vietnam's long-term potential, beyond its current macro instabilities. US-based investment firm Kohlberg Kravis Roberts & Co (KKR) is to pay $159 million for a 10 percent stake in Masan Consumer Corp, the leading fish sauce producer in Vietnam, the companies announced. [Source: AFP, April 25, 2011 \||\]

"KKR is bullish on Vietnam," KKR spokesman Ming Lu said. "In the past decade, there has been considerable economic progress, structural reforms and a notable increase in living standards." With annual GDP growth averaging 7.1 percent from 1990 to 2009, Vietnam's 87 million people -- about half of them under 30 -- are now a "ferocious" consumer force, according to Adam Sitkoff of the American Chamber of Commerce in Hanoi. "Now I walk around seeing a 10-year-old Vietnamese with an iPod and a Gucci hat -- it still shocks me," he told AFP, explaining that decades of limited choice, poor quality and high prices had generated pent-up demand. \||\

“Relative to Other members of the Association of Southeast Asian Nations (ASEAN) such as Singapore or Malaysia, Vietnam has struggled to keep up with its own expansion, suggested Marc Mealy of the US-ASEAN Business Council. "In Vietnam's case, the pace of liberalisation to global capital has in some ways outpaced the development of their institutions and human resources to manage their macroeconomy," he said. \||\

“The hurdles are formidable and persistent: inflation which hit nearly 14 percent year-on-year in March, a trade deficit of an estimated $12.4 billion last year and a weak currency, the dong, devalued four times since late 2009. Corruption and wasteful bureaucracy have also damaged Vietnam's global financial reputation, with the credit worthiness of state-owned enterprises further threatened by the near-bankruptcy of shipbuilder Vinashin. Economic stabilisation, rather than growth, has subsequently become the government's main focus, with the ruling Communist Party announcing an overhaul of its business growth model during a five-year congress in January. \||\

“While analysts have welcomed the moves, global credit ratings agency Moody's upheld a negative outlook for Vietnam in a report issued Wednesday. This "reflects concerns about the sustainability of the country's balance of payments despite the government's recent macro-stabilisation measures," the report said. Moody's analyst Christian de Guzman said the country was "fraught with risks" for foreign portfolio investors considering buying Vietnamese stocks or bonds, and interest had "dried up". \||\

“But he said long-term foreign direct investment (FDI) was "still very healthy and coming through at a steady pace".Such long-term investors "believe in the strong underlying potential and believe the current macroeconomic factors to be transitory," said economist Dariusz Kowalczyk at Credit Agricole CIB. One key attraction is lower labor costs, encouraging foreign manufacturers to relocate from China to Vietnam, or to use it in a "China plus one" strategy of adding a second production base outside the Asian giant. "Vietnam has very strong growth potential because of the entrepreneurship of the population," Kowalczyk added. "People seem to be really driven to improve their lives." He warned however that investors in a one-party state such as Vietnam will still want proof that it can follow China in competently managing key policy-making and thereby maintaining social stability. "In a centrally planned economy, there's a greater risk that the government will make a mistake that will lower investment returns," Kowalczyk said. \||\

Foreign Companies in Vietnam

As of the early 2000s, dozens of companies from 50 countries did business in Vietnam. They included IBM, Apple, Kodak, Pepsi, Coca-Cola, Mobile Oil, Hewlett-Packard, Sony, Samsung, Motorola, Citibank, Ford, Hughes Network Systems, Pizza Hut, Microsoft, General Foods, Citibank, Bank of America, Baker Mackenzie and Philip Morris. Stalls sell Marlboros, Salems, Johnnie Walker and Remy Martin. Other foreign products available in Vietnam include Baskin Robbins ice cream, Revlon cosmetics, Fisher-Price toys and Gucci handbags. For a while British- made "555" cigarettes were the most sought after brand of smokes in Vietnam.

An Asia-based American businessman told Time: "When I was here in the late '60s, the Vietnamese thought nothing would go right until the Americans got out. Now they say nothing will go right until the Americans come back. I thought they were wrong then, and I think they are wrong now." Before the lifting of the U.S. trade embargo in 1994, smuggled American goods entered Vietnam from Thailand via Cambodia, whose porous border is only 60 kilometers away from Ho Chi Minh City.

After the Vietnam War the Vietnamese seized over a 1,000 Caterpillar bulldozers owned by U.S. army. They have been used ever since and occasionally need spare parts. General Electric is located in a building two blocks form the former "Hanoi Hilton." Ford built a $102 million production plant outside Hanoi that produces 14,000 cars and light trucks a years. Chrysler pulled out of $192 million manufacturing plant near Saigon.

As of the early 2000s, more than 250 Japanese-affiliated firms did business in Ho Chi Mihn City. Matsushita (Panasonic) makes television sets and other items in Vietnam. Canon makes printers. Japanese automakers and motorcycle manufacturers produce and sell a variety of vehicles in Vietnam have various kinds or arrangements with Vietnamese partners. Bridgestone has a factory in Haiphong that produces about 50,000 tires a day.

Some foreign companies have stayed clear of Vietnam. The market in Vietnam is not all that big. During one period, the government made a propaganda show by tearing down all advertisements for Western products. Commenting on the Vietnamese economy in the 1990s, an American businessman told Stanely Karnow, "the head of the dragon knows where it's going but I'm not sure the tail does."

Higher costs and wages in China in the late 2000s and early 2010s prompted some companies to set up manufacturing in Vietnam. Samsung, the world’s biggest smartphone maker is making Vietnam a major manufacturing base for its smartphones. The company is building a $2 billion plant in Vietnam that may make 120 million handsets a year by 2015. Construction started in 2013. It has another functioning plant elsewhere in the north.

Coke, Pepsi and Nike in Vietnam in the 1990s

Coke sold for 10 cents a can in the 1990s. One Coke executive told Time: "We want to keep the price as low as we can. We think Vietnam with its hot, humid climate has the potential to become one of our major markets in Asia. Pepsi began producing bottles of cola hours after the trade embargo ended in 1994. A giant inflatable Pepsi can was hoisted over the downtown area in Ho Chi Minh City and over a million free samples of Pepsi were given out across the country. Coke responded by running television ads with happy people and uplifting music and sponsoring pop music concerts. A bottle of Pepsi sold for about 14 cents compared to 65 cents for smuggled can of Coke before the embargo.

As of 2000, Nike was Vietnam’s largest private employer. It had five factories in Vietnam that employed 45,000 people. The factories were run by Korean and Taiwanese contractors. Nikes were also manufactured in China, Indonesia and Thailand as they are today. see China

The biggest plant in Vietnam at that time was the Korean-owned. Tae Kwang Vina factory in Bien Hoa, 45 kilometers from Ho Chi Minh City. Built on a former U.S. military base, it employed 8,500 workers and churned out 6 million shoes a year. Shoes produced at factories in Vietnam took about six weeks to reach stores in the United States. After the were made the shoes were placed in 40-foot-long containers that were placed on ships in Ho Chi Minh City harbor. From there they were taken to Singapore were they were placed on larger ships. After 20 days at sea the shoes arrived at the port of Seattle and were then taken to Nike’s main warehouse in Wilsonville, Oregon. From there they were taken to stores on the West Coast of the United States.

In the 1990s workers at Nike plants were paid $2 a day to produce shoes that sold for $85 in stores in the United States. Some workers complained of headaches and other illnesses caused by breathing in fumes from glues used to bond the different pieces of the shoes together. Nike said the labor cost for a $85 shoe was about $2.50. If materials were included the cost was $16. If administrative labor is excluded the labor cost was only about $1.

At that time Nike was criticized for hiring underage workers, paying subsistence wages, hiring abusive managers and exposing employees to dangerously high levels of toxic chemicals. Responding the criticism Nike promised to raise the age of employment to 18, improve safety, use water-based rather solvent-based glues and use machines that did not cause serious injuries. Some factories offered free day care and health checks and provided continuing education for their employees.

One of the largest strikes in Vietnam in the 1990s occurred at a Nike factory, where 3,000 workers were upset by their contract. Nike has moved some of its business to China and other countries

Problems for Proctor & Gamble in Vietnam in the 1990s

Reporting from Ho Chi Minh City, Faith Keenan wrote in the Far Eastern Economic Review, "Imagine mold in your shampoo. Or a feather. These mishaps--known as "quality incidents" in corporatespeak--are a nightmare for consumer-products companies. If an entire batch of shampoo becomes contaminated by bacteria, it could mean disaster for a brand name and the waste of millions of dollars spent to develop it. No wonder, then, that American multinational Procter & Gamble tore down the new warehouses that its Vietnamese partner, Phuong Dong Soap & Detergent, contributed to their soap-products venture when it was formed in 1994. "They weren't the right size and not properly sealed; dirt and birds would get in," says Alan Hed, managing director of Procter & Gamble Vietnam. "You don't want feathers in your shampoo." [Source: Faith Keenan, Far Eastern Economic Review, December 18, 1997 /|\]

"Writing off the buildings and erecting new, airtight ones with epoxy floors to guard against bacteria meant unexpected costs for the joint venture. But the demolition wasn't the only thing that may have unsettled the Vietnamese partner, a local soap company with links to the Ministry of Industry's Vietnam National Chemical Corp., or Vinachem. Spending on advertising, promotions and expatriate employees exceeded the estimates of a feasibility study, and the venture, which sells mostly to the Vietnamese market, failed to make money within the three years the partners had predicted. /|\

"The project's Vietnamese partners question why spending has gone far beyond what was estimated in P&G's feasibility study. The American firm replies that a feasibility study is just that--a best guess--and that business circumstances often will cause a firm to stray from its plans. The problem is that Vietnamese law is ambiguous as to whether a company must strictly honour the terms of such a study, according to lawyers uninvolved in the project. "Traditionally, companies are not held to specifics," says a foreign attorney in Ho Chi Minh City. "But major items, like capital amounts and staffing, shouldn't vary significantly without informing the Ministry of Planning and Investment." /|\

"In the case of the soap venture, there were numerous areas in which reality diverged far from expectations. P&G originally said it intended to have five expatriates on staff, but as the project progressed, it ended up employing 5-20. One executive outside the company estimates the cost for each person at about $250,000, including benefits like education and home leave. Multiply that by 15 people over three years and that comes out to more than $11 million, or 39 percent of the venture's losses. (Hed declined to comment on expat salaries.) /|\

"The joint venture had also spent more than $7 million on advertising by September this year, research group Nielsen SRG Vietnam estimates. The early study called for it to spend 5 percent of its sales on ads, but the amount is actually 31 percent due to lower-than-expected sales. Neither side will comment on how far sales have fallen below projections. Local press reports have accused the venture of spending lavishly on consulting work ($1 million) and conferences and travel ($1.2 million). And Hed describes other areas where understanding is lacking: Machines with a book value of $50,000, he says, have actually ended up costing $200,000 because of the training and maintenance required to keep them running. " /|\

Perhaps the biggest question surrounding P&G's Vietnam venture is how a company with so much experience in emerging markets could have been so wrong about the prospects. P&G based its original sales estimates on the assumption that Vietnam's per-capita consumption of shampoo and soap products would be similar to that in the rest of the region. It's not. Vietnamese consumption of laundry detergent, for example,is just 20 percent of that in the Philippines.

Proctor & Gamble Racks Up Loses in Vietnam in the 1990s

Faith Keenan wrote in the Far Eastern Economic Review, In 1997, with the joint venture $28 million in the hole, P&G wanted "to increase capital by nearly two-thirds, to $96 million, to dig itself out and wait for more sales to materialize. But for that to happen, Vinachem would have to come up with $18 million to maintain its existing 30 percent share, and it is uncertain whether the state firm wants to--or even if it could. P&G previously helped Phuong Dong raise financing, but Hed says it won't do so again. [Source: Faith Keenan, Far Eastern Economic Review, December 18, 1997 >>>]

"The dilemma appears to be shaping up into a classic joint-venture clash: The foreign partner has the deep pockets to spend its way through years of start-up losses, but the local side wants to see a return sooner. It's a common tale in Vietnam, where many multinationals plunged into joint ventures in recent years, encouraged by enticing predictions of booming demand. When the expected sales didn't materialize, problems with local partners ensued. Now, many multinationals are questioning the whole joint-venture model of doing business. Although foreign investment is slowing, the number of fully foreign-owned ventures in the country is on the rise as multinationals learn they can navigate the system on their own, says Nguyen Bich Dat, head of the foreign-investment department at the Ministry of Planning and Investment. The authorities may also be loosening up on approvals. Dat says Vietnam now has 581 ventures that are 100 percent foreign-owned,with investment totalling $4.7 billion. That's 28 percent of the total number of foreign projects and 16 percent of the pledged U.S.-dollar amount of foreign direct investment. >>>

P&G has proposed that if Phuong Dong can't provide more capital, it should allow P&G to buy out its 30 percent stake--or, conversely, should let P&G get out. Vinachem, however, has said publicly that it doesn't want the venture to become 100 percent foreign-owned. Hed told the Ministry of Planning and Investment by letter that the venture may be forced to file for bankruptcy if the sides can't agree on the capital increase. P&G's deadline is July, after which it claims it will liquidate the venture. Some industry observers suspect it is trying to dump its partner so it won't have to share the revenues if and when profits begin to roll in. Hed denies it. "There's nothing wrong with the JV," he says. "The issue is capital. We need to bring in more money and we need a fair and equitable structure that allows us to do that." >>>

At issue, basically, is how to run a start-up business. P&G, with more than 100 years of experience, operations in 70 countries and $3.4 billion in net income in the year to June 30, believes it knows best. But Vietnamese authorities and business people repeatedly explain to foreigners that Vietnam is different--that models that work elsewhere may not be appropriate here. Hed says P&G should have taken more time to understand the Vietnamese market and its potential size, but it was blocked by the difficulty of obtaining solid information on the country when it set up the venture in 1994. "We probably would've had a more realistic feasibility study from the beginning, which would make our jobs a lot easier now," he says. Of course, P&G clearly isn't the only company to have misread Vietnam. Says a market researcher: "People looked at all the motorcycles and thought if it happens so fast, people must have the money for a premium product." >>> Vietnam and the “China Plus One” Multinational Strategy

In 2006 William Pesek of Bloomberg gave the “It Economy Award” to Vietnam” “the one nation that came close to out- China-ing China. Intel said it would build a US$1 billion plant, Microsoft chairman Bill Gates visited to tout its outsourcing potential, and outfits like Merrill Lynch and Credit Suisse Group tripped over themselves to make glowing assessments of its future. [Source:William Pesek, Bloomberg, December 19, 2006]

Reporting from Ho Chi Minh City, Don Lee wrote in the Los Angeles Times, “Just a couple of years ago, this city was among the hottest investment zones in Asia. Multinationals as large as chip maker Intel Corp. and smaller firms such as Ampac Packaging, a Cincinnati-based maker of shopping bags for Gap and Target, flocked here and to other parts of Vietnam. They set up plants to complement or, in some cases, replace facilities in China that were becoming increasingly expensive to operate. "China plus one," they called it. [Source: Don Lee, Los Angeles Times, April 11, 2009 \\\\]

“Over the last decade, Vietnam had looked more appealing as the U.S. imposed anti-dumping duties on Chinese-made products such as furniture and plastic bags. At the same time, Chinese wages soared, as did raw material costs. Labor laws stiffened. The Chinese yuan surged in value. And authorities thumbed their noses at labor-intensive businesses, eliminating export tax rebates and cracking down on environmental and safety laws. \\\\

"The era of China as a low-cost, manufacturing-for-export market has come to an end," the Shanghai American Chamber of Commerce declared in March 2008, noting that nearly one out of five companies surveyed had concrete plans to relocate some of their China operations to other countries, notably Vietnam. Vietnam's comparative advantages include its motivated workforce, political stability and young population. ////

“Liu Guizhong, deputy director of foreign trade for China's Galanz Group, the world's largest microwave oven producer, remembers visiting Vietnam last April. He and his colleagues liked what they saw. They got visas easily upon arrival. Ho Chi Minh City boasted several port facilities. Liu said production wages in Vietnam would be around $60 a month per worker, about half that of rural China and about one-third what Galanz pays workers in China's coastal cities. Galanz was considering three sites in Vietnam to build a $25-million plant, including the sprawling suburbs around Ho Chi Minh City near the Saigon River. ////

“Then Vietnam's economy went into a tailspin. Inflation soared to 28 percent last summer, fueled by soaring commodity prices and rampant speculation in real estate and stocks. Vietnam's currency sank. A series of labor strikes at garment and footwear plants added to the turmoil. Galanz retreated. Like others, it now wants to wait until the global financial storm passes. Vietnamese authorities have rolled out new tax relief and other incentives to lure back investors, but Galanz remains noncommittal. "Many companies are evacuating, so we decided to hold our plans," Liu said. At the moment, "there are too many negative aspects." ////

Multinational Companies Pull Out of Vietnam in 2008-2009

Don Lee wrote in the Los Angeles Times, “With the global downturn and China reasserting itself as the low-cost producer, Vietnam is feeling the effects of a different trend: "China minus one." In central Ho Chi Minh City, also known as Saigon, an apartment tower that would have been one of the city's tallest buildings has been draped in green for months. Pinched for cash, its owner, Daewon Group of South Korea, stopped work on the development even after reaching the top floor. It's one of many foreign projects in the region that have been halted or put off indefinitely. Taiwan's Wistron Corp. had planned to plow millions into building a laptop factory in Vietnam last winter, to supplement its main plant in the Shanghai area. "Right now it's just more or less on hold," spokesman John Collins said.[Source: Don Lee, Los Angeles Times, April 11, 2009 ////]

“Taiwanese investment in Vietnam in the first two months of this year was just one-fifth of what it was a year ago, said Catherine Chi, a senior director at Taiwan's Chamber of Commerce, one of the largest foreign groups here. The government in Hanoi is expecting foreign capital inflows to fall by more than half this year. Japanese companies such as Sony Corp. and Canon Inc. have closed or reduced operations in Vietnam. Chinese automaker Lifan Group suspended plans to make cars here. ////

“The last couple of years also have been sobering to foreign managers. They've learned that Vietnam, with a population of about 87 million, isn't a smaller version of China. Though it shares East Asia's Confucian values of education and family, Vietnam doesn't have China's command-and-control way of getting things done quickly. Businesses complain that, even after several years, workers still haven't finished the highway from Ho Chi Minh City's airport to downtown. Unlike China, relocation of families is painstakingly slow. Nor does Vietnam have the depth of skilled labor that some thought. While young Vietnamese show a penchant for learning, universities tend to be heavily theoretical. Many of their graduates lack the practical and technical training needed for careers at multinational companies. ////

“Intel found that out recently when it screened new hires for a $1-billion chip assembly and testing facility that it's building here. The Santa Clara-based company managed to recruit enough engineering and skilled labor for its first wave of staffing, but realized it would need to build a talent pipeline if it wanted to grow in Vietnam, said people familiar with the situation. Intel is now trying to help local universities develop curriculum and programs. "There's been some rethinking," said Sesto Vecchi, an attorney and consultant in Ho Chi Minh City for the last two decades. Although most foreign investors remain bullish on Vietnam over the long haul, he said, "there's probably a more realistic sense now of how many people are available to support a fast high-tech industry." ////

“In some ways, Vietnam's recent troubles have as much to do with China's improved business climate than with any particular failing of its own. But the global credit crisis and ensuing recession changed all that. The Chinese government revived export tax rebates and has beefed up infrastructure. China's commodity prices fell, the yuan stabilized and officials backed away from pressing employers too hard, lest more plants close and jobs disappear. The same chamber survey a year later found that the percentage of companies planning to relocate out of China had dropped by half, as had the number of respondents expressing concern about China losing its competitive edge. "The larger companies that have had the experience of looking elsewhere have returned to China," said Dean Ho, the Shanghai-based vice president of Unison International, an investment and consulting firm. Some of them couldn't find enough good workers, he said. Others found rival countries had their own challenges. ////

TRADE IN VIETNAM

Vietnam joined the World Trade Organization (WTO) in January 2007.

Current account balance: minus $457 million (2012 est.), country comparison to the world: 92 $201 million (2011 est.). The current account balance was negative US$1.4 billion in 2004. Vietnam last registered a slightly positive current account balance in 2001. In 2004 Vietnam ran a merchandise trade deficit of US$5 billion, or 16 percent of imports.

Given neighboring China’s rapid economic ascendancy, Vietnam’s economic relationship with China is of utmost importance. Following the resolution of most territorial disputes, trade with China is growing rapidly, and in 2004 Vietnam imported more products from China than from any other nation. In November 2004, the Association of Southeast Asian Nations (ASEAN), of which Vietnam is a member, and China announced plans to establish the world’s largest free-trade area by 2010.

Vietnam Joins the World Trade Organization (WTO)

In January 2007, The World Trade Organization announced: Viet Nam joined the WTO today, 11 January 2007, taking the organization’s membership to 150. Approval came after 10 years of tough negotiations. "In the WTO, when people work hard, things happen — and Viet Nam is a good example of that," WTO Director-General Pascal Lamy said. The political determination and technical quality of negotiators such as Viet Nam’s team can help to produce results in the WTO, he said. [Source: WTO, January 11, 2007]

Vietnam’s WTO membership was approved in November, 2006 after the Vietnam and the United States reached a pact on market access in late May 2006. The bilateral agreement set the terms for Vietnam's membership, laying out specific steps for deregulating its economy and further opening the way for foreign goods and services. In the lead-up to Vietnam's World Trade Organization (WTO) membership overseas firms increasing their presence in the country and foreign direct investment reached $10bn (£5.1bn) in 2006.

Karl John wrote in the Asia Times, “After nearly 11 years of protracted negotiations and intense horse-trading with the United States, Vietnam officially became the 150th member of the World Trade Organization (WTO), opening the way for more foreign trade and investment to speed the communist country's capitalist transformation. The new generation of communist leaders pushed hard to achieve WTO membership, and have quickly implemented various reforms to pave the way for more foreign investment. And all indications are that Vietnam has no intention of turning back. Over the past three years, leading up to final WTO negotiations, the pace of foreign-friendly reforms has increased. So, too, coincidentally, has Vietnam's total economic output, which has nearly doubled over the past five years. An average economic growth rate of 7.25 percent over the past decade has doubled per capita gross domestic product (GDP). Economic growth reached nearly 8.2 percent in 2006, the second-fastest clip in Asia, trailing only China. [Source: Karl John, Asia Times, January 12, 2007]

Impact of Vietnam’s Membership to the World Trade Organization (WTO)

The BBC reported: Membership will give Vietnam greater access to overseas markets but will also require it to cut import tariffs. Supporters of the move say it will help boost exports in key food and textile industries and attract investment. Critics have argued that the increased competition will damage local firms and producers such as livestock farmers. Joining the WTO was "a historic day for the country," said Le Dang Doanh, a key government economist. "In joining the WTO, Vietnam is accepting increased competition, and competition will make the economy more dynamic," he added. The government's positive outlook was not echoed by Nguyen Van Thoai, deputy manager of Saigon Cosmetics. He estimates that the maker of perfumes and toiletries will see its market shrink by 20 percent once Vietnam becomes a WTO member. [Source: BBC, January 11, 2007]

Alan Sipress wrote in the Washington Post, Vietnam is redoubling its efforts to look abroad. The country is making fundamental changes, from the halls of the national assembly to factory floors where row after row of sewing machines churn out tracksuits, pants and polo shirts for American shelves. WTO membership will open new markets abroad, but it also will commit Vietnam to reduce protections for its own companies. "The impact on us will be very heavy," said Doan Duy Khuong, vice president of the Vietnam Chamber of Commerce and Industry. "To be stronger, we have to learn how to compete." [Source: Alan Sipress, Washington Post, July 15, 2006 ==]

“Vietnam has adopted a pair of laws restructuring how enterprises and investment are regulated. For the first time, all firms must be treated equally, whether domestic or foreign, state-owned or private. Further laws are being drafted to overhaul the pharmaceutical industry, social security and taxation. "WTO seems to be motivating quite a considerable amount of change in Vietnam," said Jonathan Pincus, senior country economist for the U.N. Development Program. "The vast majority of that change has been positive. The vast majority of that change is still to come." Vietnamese business managers are bracing for potentially unsettling changes. Tariffs on imported goods, for instance, are to be slashed to 15 percent or less under the deal negotiated with the United States. Some local firms are trying to form alliances with foreign companies in order to stay competitive.” ==

Karl John wrote in the Asia Times, “The downside risk to Vietnam's ruling Communist Party is that WTO-inspired growth is not equitably distributed across the population and sparks widespread resentment among those displaced by freer trade. Already, economic development in Vietnam is not taking place in a balanced way. By all measures, Vietnam is still a poor country, with per capita GDP at a mere $620 and an economy less than half the size of nearby Thailand's. Vietnam's small and medium-sized enterprises (SMEs) still find it hard to access capital from the formal financial sector. According to Ministry of Planning and Investment statistics, only about 32.4 percent of SMEs have qualified for proper bank loans. If Vietnamese-owned businesses are to take advantage of the new access to foreign markets, they will need capital infusions from somewhere. Arriving at a financial mechanism that doesn't contravene WTO rules and regulations will represent a significant, if not daunting, challenge. [Source: Karl John, Asia Times, January 12, 2007. Karl D John is chief executive officer of the TCK Group, a Vietnam-based investment consulting group. He has more than a decade of involvement with Vietnam and lives in Hanoi. /

Impact of WTO Membership on Foreign Investment in Vietnam

Karl John wrote in the Asia Times, “Many economic analysts predict that Vietnam's accession to the WTO will facilitate faster foreign-trade and capital flows and push Vietnam's economic growth above that of China this year. Even before WTO accession, Vietnam presented stiff competition for manufacturing-oriented foreign direct investment (FDI) among its more established regional neighbors, including Thailand, Indonesia, Malaysia and the Philippines. Some economic analysts predict the investment-protection guarantees required of WTO members and recent anti-foreign investment signals from Thailand will accelerate FDI flows away from other Southeast Asian countries toward Vietnam. [Source: Karl John, Asia Times, January 12, 2007 /

"WTO is sort of the stamp of approval that many, many large American companies have been waiting for. They are just going to flood into this country," said Tim Tucker, country manager for Ford Motor, which already has one auto-assembly plant in northern Vietnam. Foreign financial firms have also expressed their interest in establishing more wholly foreign-owned financial companies in Vietnam. Many joint stock banks, meanwhile, have recently moved to raise their ownership capital through either share issuances to existing shareholders or by selling stakes to foreign strategic shareholders, a fast and easy way to get technical assistance and best practice management skills. /

Impact of WTO Membership on the Textile Industry in Vietnam

Joining the WTO freed Vietnam from textile quotas enacted worldwide as part of the Multifiber Arrangement (MFA) of 1974. The MFA placed restrictions on the import by industrialized countries of textiles from developing countries. For China and other WTO members, however, textile quotas under the MFA expired at the end of 2004, as agreed in the Uruguay Round of trade negotiations in 1994. Partially as a result, Vietnam’s textile exports stagnated in 2005.

Alan Sipress wrote in the Washington Post, “Executives in Vietnam's textile and apparel industry are especially upbeat about the WTO prospect because membership would eliminate quotas on the amounts they can ship to the United States. Vietnam has been one of the few countries that faced these restrictions after the WTO eliminated a worldwide quota system a year ago. Trade officials in Hanoi estimate that Vietnam now accounts for only 3.2 percent of U.S. imports of garments and textiles. WTO membership could also come at some cost to this industry because the government is undertaking to cut subsidies, including preferential loans for investment and certain trade promotion activities. Binh said her company is large enough to succeed without this support, adding that she is more worried about finding enough imported cloth to meet the projected growth in production.” [Source: Alan Sipress, Washington Post, July 15, 2006 ==]

“Hanoi Textile and Garment, known as Hanosimex, has recently installed new machinery in its spinning and knitting factories and begun retraining its sales staff. It is predicting sharp increases in exports. Already, slightly more than half of what the company produces is shipped abroad, with nearly two-thirds of the exports bound for the United States. Nguyen Thanh Binh joined Hanosimex 24 years ago, rising to become its managing director. Along the way, this state-owned company -- with its campus of two-story, ochre-facade factories tucked in the back streets of the Vietnamese capital -- expanded into an enterprise of 6,000 workers with an annual turnover of $80 million. Now, she and her fellow managers must relearn their business. ==

“The company has traditionally had little direct contact with buyers in the United States, Japan and Europe, even as exports came to dominate production. Instead, the firm was required by the government to turn to lumbering state-owned trading companies to sell its goods, she explained. This system is to be junked. "After we join WTO, we will be working very closely with our buyers," Binh said. "This will be very difficult for state-owned companies. Our staff has not been allowed to do this. We don't have the skill or the knowledge." ==

“The company plans to school its managers and international relations staff on how to become savvy salespeople. Several have already been dispatched to Japan or Hong Kong for training, she said. Anticipating better access to foreign markets, the company has invested this year in new equipment, including machinery to increase yarn production and manufacture more and higher-quality clothes. Textiles and garments are already Vietnam's second-largest export, after crude oil, and could expand substantially along with other industries that rely on cheap labor, such as footwear and electronics, analysts say. ==

Impact of WTO Membership on the Vietnamese State-Owned Industries

Alan Sipress wrote in the Washington Post, “The new trade system could fall much harder on state-owned industries that have depended on government protection to succeed and may now face strong competition from abroad. These include pharmaceuticals, cement and fertilizer. Vietnamese banking, dominated by inefficient, under-capitalized state institutions, could also come under pressure as limits on foreign ownership are lifted. But Pincus and other analysts said this sector remains small and of limited interest to large foreign banks, perhaps giving the domestic industry a few years to adjust before facing an onslaught from abroad. [Source: Alan Sipress, Washington Post, July 15, 2006 ==]

Karl John wrote in the Asia Times, “ Vietnam's economy is still very much in transition from a command to a free-market system. Many outward-looking local businesses and entrepreneurs, while excited about the prospects of WTO membership, are still struggling to comprehend international business practices. At the same time, more foreign imports and competition will inevitably lead to wrenching change and dislocation across many industries, creating potential social pressures on the government. [Source: Karl John, Asia Times, January 12, 2007 /

“WTO-mandated removal of subsidies and increased foreign competition will directly hit and potentially send into bankruptcy as many as 2,000 state-owned enterprises, which currently account for 38 percent of GDP and provide millions of jobs. The government has applied pressure to speed up the privatization process, which in Vietnam is referred to as "equitization". How the government handles dismantling these inefficient state industries will have huge implications for social stability and the country's future attractiveness as a destination for FDI. /

To deal with these weighty issues, the Communist Party-led government is already re-examining its now-meager social safety net, particularly in relation to income insurance and vocational training schemes. WTO accession will require not only a drastic overhaul of human resources, but retraining for thousands of stuck-in-their-ways state bureaucrats. That includes an overhaul of the agriculture sector, which accounts for nearly 20 percent of GDP and where more than half of the population is employed. Under WTO rules, Vietnam will be required to cut subsidies on a wide range of agricultural products, which will undermine the international competitiveness of many commodity exports. /

“Another area where WTO-encouraged foreign competition promises to be transformative is the banking sector. With the help of foreign banks, many Vietnamese financial institutions have already expanded their operational network, increased chartered capital and modernized their banking technologies, though there is no doubt still a long way to go. According to the State Bank of Vietnam, foreign banks have already established 34 branch offices, four joint ventures and 40 representative offices in the country. /

Vietnam Five Years After Joining the WTO

In March 2012, the Voice of America reported: “Five years after joining the WTO, Vietnam’s GDP per capita reached US$1,300, and its export market have been expanded to 149 WTO economies. Vietnam’s export turnover last year, over US$96 billion, was double 2007’s figure. According to economists, after five years of WTO membership, the number of enterprises has increased 2.3 times and 7.3 times in registered capital compared to 2007. Many local businesses have affirmed their foothold in regional and international markets by penetrating demanding markets. As of 2010, Vietnam has had 19 traditional markets with export turnover reaching more than US$1 billion. Export turnover grew by more than 19 percent on average from 2007 to 2011 compared to 18 percent before Vietnam's entry to the largest trade organization. [Source: Voice of America, March 9, 2012 <\\>]

“Economists also agreed that after WTO admission, Vietnamese businesses’ competitiveness has improved remarkably. However, they still reveal weaknesses such as small- scale operation, low capacity of applying science and technology, and limited market share. Many businesses have failed to work out a competitive strategy to affirm their prestige and quality in the region and the world. Cao Sy Kiem, President of the Vietnam Association of Small and Medium-sized Enterprises (SMEs), said that although SMEs have developed rapidly, they have not been fully equipped with capital sources, advanced technology, highly-skilled human resources and business administration experience, putting them in a fix to ensure the quality of product design and competitive prices, even in the domestic market. To improve the competitive edge of SOEs in the future, it is necessary to restructure state owned enterprises (SOEs) by eradicating weak enterprises, strengthening inspection and training qualified business administration managers. <\\>

In January 2011, the Voice of America reported: “Vietnam’s GDP average growth in 2007-2011 was at 6.5 percent, much lower than the recorded figure of 7.8 percent in the previous five-year period. According to recent reports on the assessment of the socio-economic situation five years after joining the World Trade Organization (WTO) by the Central Institute for Economic Management (CIEM), WTO membership has been a major factor in driving up inflation in Vietnam. This is largely due to price fluctuations in the global markets, complicated balance of international payments and supply-demand imbalances caused by import surplus. [Source: Voice of America, January 19, 2011 ^*^]

“In addition, Vietnam’s maintenance of economic stability and management of fiscal policy are still dependent too much on economic analysis and predictions. As a result, the financial crunch in three years (2007-2009) led to an economic slowdown in the next two years (2010-2011). In the face of tough competition from foreign-made products on sale, it seems domestic distribution chains are increasingly at the risk of losing ground. ^*^

“One reason, cited by Dr Pham Lan Huong from the CIEM, is Vietnam’s slow progress in opening the market for some services needed by foreign investors in a number of industries. So, foreign investment remains limited even in potential areas of Vietnam. Dr Huong says agro-forestry-fishery was the only sector that grew by 3.4 percent annually in the 2007-2011 period. In the same period, annual domestic industrial growth was 7 percent, much lower than in the 2002-2006 period at 10.2 percent. ^*^

“Huong puts this down to the failure of domestic businesses to use locally-sourced input materials in production and the underdevelopment of support industries. Dr Huong proposes improving the business environment and speeding up the restructuring of the national economy into a new pattern. For the industrial sector, she says, it is crucial to encourage businesses to apply advanced technologies, increase the added values of their products, and take advantage of free trade agreements (FTA) to penetrate foreign markets. ^*^

“Dr Huong emphasizes the need to cooperate with foreign-invested businesses and encouraged small- and medium-sized enterprises to integrate into regional supply chains. Commenting on the investment sector, Dr Nguyen Dang Binh from the Ministry of Planning and Investment says that total social investments grew by 8.3 percent on average from 2007-2011, much lower than the 13.4 percent figure recorded in the previous period. In the same period, only foreign investments showed an increase of 150 percent with total registered capital in projects rising 510 percent and additional capital 330 percent, Binh says. ^*^

Vietnam’s Trade and Trade Agreement with the United States

In July 2000, the United States and Vietnam agreed to a landmark trade deal. The agreement called for Vietnam to allow U.S. companies better access to Vietnamese markets in return for lowering the tariffs on Vietnamese goods imported into the United States. It also covered bank branches, customer fees, publications of laws. Among the goods affected by tariff reductions were garlic, onions, potatoes and cheese.

The accord took five years of negotiations to hammer out. After the accord was negotiated Vietnam got cold feet about signing it. The primary critics of the agreement were businesses that had an interest in keeping the economy closed and those who feared a liberalized economy would undermine Hanoi’s authority. The Vietnamese government was angered by a clause that required them to disclose their procedures on contracts, something that no other trading partner with the United States has to do.

The deal was formally agreed in December 2001. Although the agreement boosted Vietnam’s exports to the United States, disagreements over textile and catfish exports hindered full implementation of the agreement. Further disrupting U.S.-Vietnamese economic relations were efforts in Congress to link non-humanitarian aid to Vietnam’s human rights record. Barriers to trade and intellectual property are also within the purview of bilateral discussions.

Before the agreement the United States had import duties of 18 percent to 35 percent on goods made in Vietnam. After the agreement the export of textiles rose 18 fold in 2002 to $873 million. The sharp rise concerned American textile producers and a quota on textiles coming in from Vietnam was negotiated. In 2003, bilateral trade between Vietnam and the United States doubled to $6 billion, most of it Vietnamese exports. Two-way trade between Vietnam and the United States mushroomed from $1.5 billion in 2001 to $8 billion in 2005 to $12 billion in 2007

Trade between the European Union and Vietnam reached almost $10 billion in 2006, a leap of almost 50 percent from 2005. In March 2006, the EU imposed duties on Vietnamese shoes claiming their cheap prices were the result of breaking world trade rules.

Exports and Imports from Vietnam

Vietnamese Exports: $114.6 billion (2012 est.), country comparison to the world: 35 $96.91 billion (2011 est.). Exports - commodities: clothes, textiles and garments, shoes, electronics, seafood, crude oil, rice, coffee, rubber, tea, black pepper, cashew nuts, furniture, wooden products, machinery. Export partners: US 18 percent, China 11 percent, Japan 11 percent, Germany 3.7 percent (2011 est.). [Source: CIA World Factbook]

In 2004 Vietnam’s merchandise exports were valued at US$26.5 billion, and, much like imports, were growing rapidly. Vietnam’s principal exports were crude oil (22.1 percent), textiles and garments (17.1 percent), footwear (10.5 percent), fisheries products (9.4 percent), and electronics (4.1 percent). The main destinations of Vietnam’s exports were the United States (18.8 percent), Japan (13.2 percent), China (10.3 percent), Australia (6.9 percent), Singapore (5.2 percent), Germany (4.0 percent), and the United Kingdom (3.8 percent). [Source: Library of Congress]

Vietnam’s 2006 exports grew 22.1 percent from 2005 to a record high of US$39.6 billion. This led to gross domestic product (GDP) growth remaining robust, at 8.2 percent, nearly the same as in 2005. Consumer prices increased 6.6 percent, down from 8.4 percent in 2005. [Source: The Saigon Times Daily, December 28, 2006]

The United States is Vietnam’s largest export market. Clothing, shoes, furniture and seafood are among the products exported there. In 2007, the United States was the top export market for Vietnam with $10 billion in revenues, followed by the European Union with $8.7 billion, and the 10-member Association of Southeast Asian Nations with $8 billion. Exports to Japan reached $5.5 billion followed by China with $3.2 billion. Exports to China rose 76.2 percent between 2001 and 2003.

Vietnamese Imports: $114.3 billion (2012 est.), country comparison to the world: 33; $97.36 billion (2011 est.) Imports: machinery and equipment, petroleum products, steel products, raw materials for the clothing and shoe industries, electronics, plastics, automobiles. Import partners: China 22 percent, South Korea 13.2 percent, Japan 10.4 percent, Taiwan 8.6 percent, Thailand 6.4 percent, Singapore 6.4 percent (2011 est.). [Source: CIA World Factbook]

In 2004 Vietnam’s merchandise imports were valued at US$31.5 billion, and growing rapidly. Vietnam’s principal imports were machinery (17.5 percent), refined petroleum (11.5 percent), steel (8.3 percent), material for the textile industry (7.2 percent), and cloth (6.0 percent). The main origins of Vietnam’s imports were China (13.9 percent), Taiwan (11.6 percent), Singapore (11.3 percent), Japan (11.1 percent), South Korea (10.4 percent), Thailand (5.8 percent), and Malaysia (3.8 percent). Imports from China rose 44.1 percent between 2001 and 2003. [Source: Library of Congress]

Total imports in 1994: $1.3 billion, as much as U.S. companies ell to Japan in 10 days. Imports reached $4 billion in 1995.

Image Sources:

Text Sources: New York Times, Washington Post, Los Angeles Times, Times of London, Lonely Planet Guides, Library of Congress, Vietnamtourism. com, Vietnam National Administration of Tourism, CIA World Factbook, Compton’s Encyclopedia, The Guardian, National Geographic, Smithsonian magazine, The New Yorker, Time, Newsweek, Reuters, AP, AFP, Wall Street Journal, The Atlantic Monthly, The Economist, Global Viewpoint (Christian Science Monitor), Foreign Policy, Wikipedia, BBC, CNN, Fox News and various websites, books and other publications identified in the text.

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© 2008 Jeffrey Hays

Last updated May 2014

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