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Intersect Magazine

Long isolated by a U.S. trade embargo and restrictions on Japanese development assistance, Vietnam now looks poised for an economic boom.

By Peter S. Crosby

March, 1993

Ho Chi Min City, Vietnam. The opulent yellow-and-white town hall of what was once called the "pearl" of French Indochina is currently dominated by a simple bronze statue of Ho Chi Minh. His placid smirk, wispy goatee and Mao-style jacket rise above the flowers, floodlights and tourists posing for photos in the city that bears his name. His right arm reaches out as though to soothe the pain of the populace he was so determined to unify. But in the last three years, the Republic of Vietnam has come far in pleasing its 70 million people. And in ways "Uncle Ho" never imagined. Now, on the buildings that surround his immortalized bust, 40 gigantic billboards project the future into the socialist sky: advertisements for Panasonic, Kenwood, Fuji, and Sony.

On the surface, Japanese companies appear to be leading the commercial charge into Vietnam. Visas issued to Japanese visitors have doubled every year since l989 to more than 10,000 in 1992. Last year, Japan Airlines (JAL) initiated a charter service with Vietnam Air. Half of the 200 rooms in the famous Rex Hotel -- now run by state-owned Saigon Tourist instead of the U.S. army -- are rented long-term to Japanese businessmen. Karaoke (sing-along) bars are all the rage in downtown Ho Chi Minh City -- still known locally as Saigon. The apparent bottom line: with $910 million in bilateral trade in 1991, Japan is Vietnam's largest economic partner.

But trade is not investment. In fact, Japan presently ranks seventh or eighth in total capital investment iii Vietnam, far behind Taiwan, Singapore, Hong Kong, and South Korea. Not because of the U.S. trade embargo, either. Rather, it is due to the difficulty of operating there, a cautious attitude among the corporate ranks, a lack of Japanese government aid / trade guarantees, and the evolution of a pan-Asian hierarchy of industrial development that favors more developed countries.

Yet this hesitancy to invest in Vietnam may backfire, since all of Asia is hammering at its door.

First The Bad News
The Socialist Republic of Vietnam remains a daunting place to do business. Besides an infrastructure that is among the worst in Asia, health and security risks abound. Malaria is endemic and muggings are epidemic. Legal protection for foreigners is weak at best. For in-stance, if foreigners are involved in a traffic accident, it is always they who end up paying damages regardless of whose fault it is because local people, including the police, gather around the accident site to adamantly support the Vietnamese.

Although recent amendments to the constitution guarantee "the ownership of invested capital and other lawful estates, and the rights of foreign organizations and private individuals investing in Vietnam," legal experts believe that not enough protection currently exists for foreign investors in Vietnam. Ironically, one Japanese trader said he was "hoping for the Americans to bring in the law."

Domestic accounting systems, or lack thereof, cause headaches and stop deals as well. Accurate operating results and total revenues as well as profits and losses are difficult to get. The value of assets that Vietnamese companies bring to joint ventures are out of this world: "dream values" they are being called. As an example of the absurdity: a grimy, cracked, machine-made teacup is valued at $1.00 when a new one sells on the street for only 10 cents. Yet many Vietnamese companies cling to these asset inflations as a matter of national pride and expect foreign businesses to negotiate with them.

Dr. Pham Khak Chi is the general director of Foreign Investment Service Company (FISC), one of six Vietnamese government "consultancies assisting would-be foreign investors with market research, joint venture recommendations and government contacts -- for a fee.

He explains that Vietnam's Ministry of Finance has specific accounting principles, but they are designed to preserve the status quo. This exemplifies what Pham calls the biggest hurdle he has in attracting foreign investment: fear. "Businessmen, especially the Japanese, are afraid of the Vietnamese government," says Pham.

In Vietnam, the government is everywhere, and its servants often have their hands out. Despite an official unemployment rate of 20 percent (the actual rate is estimated at more than 30 percent), the government limits the number of local employees in a foreign firm. Moreover, getting a license to open an office can take up to two years. Yet, 20 foreign offices were closed last summer because their licenses were illegal. The most common way through the red tape? Bribery.

"We are very nervous about the corruption," says Shuichi Yamamoto, deputy general manager of Sumitomo Corporation in Ho Chi Minh City. Although locals consider baksheesh (bribery) a cost of doing business, Sumitomo's policy is no bribes. "Yet Yamamoto is confident about foreign companies' ability to succeed in the long term, thanks to the legal, economic and political reforms now being made by the government. And with so many overseas Vietnamese coming home, it is impossible for the government to go back."

In 1989, Nissho Iwai was the first Japanese shosha, or trading house, to reenter the Vietnamese market. Then came Mitsubishi, Meiwa, and Tomen. Sumitomo and Mitsui arrived last year, seduced by low-sulfur Vietnamese oil so close to home. The 80,000 barrel-a-day oil production volume now accounts for more than 75 percent of bilateral trade. The rest consists mostly of Vietnamese sea products, fruit, and coal, in exchange for Japanese machinery, chemicals, and consumer goods.

In technical deference to the United States' 17year-old trade embargo on Vietnam, however, the shosha have only set up "representative offices." Most of their trade is labeled "trial orders," and large-scale contracts (except oil) are routed through Hong Kong, Taiwan or Singapore. As a result, Vietnam's fastest growing trade partner is currently Singapore -- not Japan. Because representative offices are supposed to forego direct investment, they mainly do feasibility studies, make preliminary deals and production agreements, and wait for the risks to subside and the market to ripen.

Current Japanese investment takes many forms. Japan Victor Corporation (JVC), a Matsushita subsidiary, has been successfully assembling television sets at four factories in Vietnam. One of their contractors, the state-owned Hanel Corp., has been putting together complete knock-down color TV kits since 1987. They also assemble TVs and video cassette recorders for Korean-owned Daewoo, and manufacture rheostats and robot parts for Nissho Iwai. Hanel's production is up 50 percent from 1991, amounting to 60,000 units annually, and with a new factory opening soon to handle semi-knock-down units, it has plenty of capacity to expand. If any Vietnamese company seems ripe for investment, Hanel does.

Yet, when Vietronimex, a state-owned electronics council, approached JVC last spring about a joint venture to manufacture color TVs with Hanel, the response was cautious. "We are considering the proposal now," says Musaki Murakami, the WC head of public relations, but it may take a few years."

Hanel is not alone. To date, there are no Japanese investments in Vietnamese electronics. With growing impatience, Hanel is currently negotiating a joint venture with Daewoo to produce television picture tubes. As Hoan Van Nghien, the director of Hanel, sees it: "If JVC doesn't invest, others will."

FISC's Pham attributes the lag in Japanese investment to the Japanese proclivity for "doing business very slowly" and their demand for control "They prefer 100 percent foreign-owned corporations," he says. But until last year's constitutional amendments, these were almost impossible to get licensed. Says Pham, "Japanese always want to do everything themselves."

One popular way of avoiding an investment commitment is a production agreement. "Much simpler than joint ventures," confides Osamu Nakayama, general manager of Nissho Iwai in Ho Chi Minh City. New equipment is lent or leased to a Vietnamese factory for five to ten years. Japanese technicians are brought in to train workers who are paid per piece for their work. This is especially effective in the garment industry, where the fabrics may also be imported from Japan.

Production agreements are safe because the ownership of the relatively inexpensive machinery never changes hands. And they are profitable because the average Vietnamese factory worker is paid just $35-$40 per month, or less than two percent of the wages of their Japanese counterparts, and receive no benefits. "We now have ten of these deals," says Nakayama.

Arabian Oil Company's Energy Development Company (AEDC Vietnam) is another example of strategic business tactics at work. This Japanese oil company, founded in the Middle East, will soon get its first drilling lease in Asia next to a productive SovPetrol field off the coast from Vung Tau. AEDC Vietnam managers are calling it a "sure thing," so they are preparing the logistical and seismic surveys fur test drilling that will begin in May. Because most of their work is offshore, interference from the authorities is expected to be minimal. The company recently built an office in the Floating Hotel, Ho Chi Minh City's most expensive lodgings, and among the few facilities with direct telecommunications in Vietnam.

In the oil business, exploration is not considered capital-intensive per se. Besides, 80 percent of the funding is coming from Japan National Oil Corporation. By the time production begins in two to four years, Japan's Export-Import Bank will be able to insure the investment. Although the production-sharing agreement (with options for up to 24 years) gives the majority of profits to the Vietnamese government, the repayment for exploration is first deducted from any oil revenue produced.

Other companies are sticking to the safest path -- services. Nippon Koei Company, Japan's largest engineering consulting firm, is being paid $1 million for advising the Vietnamese government on a $340 million project to build electric transmission lines between Hanoi and Ho Chi Minh City. Construction bidding and financing are not part of the deal.

"'Promises, promises' is Japan's tune these days," says Hoang Ngoc Nguyen, chief of staff at the Vietnam Investment Review, the semi-independent English-language weekly. "The Japanese want to know the impact of the lifting of the U.S. trade embargo before they invest in anything big."

Respecting the embargo is a long way from adherence, however. Most business people say Japan's real reluctance toward investment has stemmed from the lack of its Overseas Development Assistance (ODA).

In 1991, Japan granted Y894.1 billion ($7.6 US billion) in ODA, mostly in the form of ultra-low-interest (2 to 3 percent) loans for infrastructure improvements that often end up going through Japanese contractors. ODA bypasses the U.S.-dominated World Bank, International Monetary Fund and Asian Development Bank, with their political entanglements and market-level interest rates.

But ODA to Vietnam was stopped in 1979, when Vietnam invaded Cambodia. The Vietnamese retaliated in 1981 by ceasing to repay an estimated Y22.2 billion ($176 US million) of accumulated debts. However, the Japanese government recently restored Y45.5 billion ($370 US million) in economic aid to Vietnam. Since high-level political visits have also been exchanged, and Japan's prime minister may include Hanoi on his ASEAN pilgrim-age this year, ODA to Vietnam will increase, no doubt.

Other government aid, such as trade guarantees and import-export insurance, will kick in, too. As an official in the Asian Affairs Section of Japan's Foreign Ministry puts it: "The American trade embargo is only a problem for the Americans now."

Untapped Resources
While approaches to doing business in Vietnam differ, one opinion is unanimous: the opportunity is enormous. Vast mineral resources, the keystone Asian location, a population touted as 88 percent literate, and a strong Confucian-dominated work ethic make the long-term prospects enticing. Some believe that Vietnam is more attractive than the People's Republic of China because of the immediate needs, the manageable scale and the relative political stability. Says Hisashi Nakatomi, First Secretary at the Japanese Embassy in Hanoi: "All of Vietnam is like one Special Economic Zone in China."

Nakatomi believes that Japanese companies won't lose out by waiting because "the needs won't go away." In fact, he says, Japanese companies are ceding many short-and medium-term investments to the Newly Industrialized Economies (NIEs). He labels this a strategy of "industrial development" instead of "merchant capitalism."

By refraining from the nitty-gritty work-building roads, providing housing and training workers, Japanese companies avoid the risk, hassle and labor drain involved in assisting their developing neighbors until bigger, more capital-intensive / mega-profitable projects are available.

Enterprises from the NIEs and the ASEAN "tigers" (Thailand, Malaysia, and Indonesia) are already squeezed by increasing costs in their own economies, and must move quickly to less-developed countries such as Vietnam to preserve their lower labor prices and to remain as subcontractors for Japanese industrial development.

The danger that some perceive in this "Real-Economik" strategy is that it creates a hierarchy within the pan-Asian economy, in which Japan means to be calling the shots. When dealing with Asian businesspeople, one shosha director soft-pedals it this way: "We are in the same boat together. We just have more experience."

But it seems to some as though Japan will only come ashore if it owns most of the boat. And that chauvinism is starting to be felt. "The Japanese are afraid to get their hands dirty," says the managing director of a Thai food-processing concern in Vietnam. "They don't want to do the work Southeast Asia needs." Dr. Pham of FISC takes it one step further and echoes a sentiment heard in many Asian circles: "The Japanese are not interested in our people."

So a historical challenge is looming for Japan's bureaucratic and commercial chieftains. In order to avoid near-term resentment and long-term reprisals in their own backyard, their industrial development strategy needs to be combined with humanitarian leadership and grassroots cultural exchange.

The billboards around Ho Chi Minh City should signal more than a desire for profits. They need to proclaim that Japan is investing in the land, the people and their lives. Because the Vietnamese have fought for their independence for 2,000 years, they won't surrender it now.

Peter Crosby is a Japan-based writer and photographer who reports on events throughout Asia.