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It's been a long road back.

DOING BUSINESS IN

VIETNAM

By Barbara R. Farrell, James R. Downing, and Patricia Healy


In Brief

An Almost Untapped Market

Nine months after Americans scrambled from rooftops to flee Saigon, American companies began to investigate the possibility of doing business in Vietnam. The companies like what they see there-- close to 80 million in population, most of whom are literate and ready for opportunity. Since then, both the Vietnamese and American governments have taken steps that make doing business there more and more attractive.

With President Clinton at the helm for a second term, many believe he will move to granting most favored nation status to Vietnam, which will increase the interest in this resource rich country. As with most emerging countries, doing business there is different than doing it in the U.S. and not without considerable risk. Business is conducted in several forms including business cooperation contracts and the very popular joint venture. Foreign investors get to put in the capital, but
Vietnamese operating partners have a strong say in what the business does. Business opportunities there, however, are substantial.


The Vietnam War ended with a scene that may live forever in the minds of those old enough to remember: Americans scrambling from rooftops in Saigon, desperately clinging to helicopters that would carry them to safety, the city overrun by the North Vietnamese. Incredibly, in January 1976, a mere nine months after this appalling flight, U.S. companies began to investigate business prospects in Vietnam. One major reason behind this seemingly unimaginable occurrence was oil. The 1970s saw oil embargoes that left Americans waiting hours on line to fill up their gas tanks. Major U.S. oil companies estimated that Vietnam had four billion untapped barrels of oil sitting just off its shores, and they led the push toward forming U.S.-Vietnamese joint ventures to exploit this precious resource.

Many companies had begun to investigate the potential of oil in Vietnam as early as 1973, backed by both the U.S. government and the old Republic of Vietnam. Two years later, in 1975, the North Vietnamese would not honor agreements made with the old South Vietnamese government. The new government did, however, seem eager to make their own arrangements with U.S. companies. Until the mid-1970s, the North Vietnamese had been getting most of their oil free from their Russian allies. Beginning on October 31, 1976, Russia changed its policy toward Vietnam and told the Vietnamese they would have to begin paying for their oil.

In seeking to make arrangements with U.S. companies to search for oil, it appeared the North Vietnamese were hoping to use the potential profits from such joint ventures to rebuild their economy that was left devastated by their long war.

Mobil Oil Corporation discovered Vietnam's largest oil field in the South China Sea in 1975. After being occupied throughout the 1970s exploring for oil and natural gas off Vietnam's shores with Japanese and Vietnamese partners, it soon became apparent early estimates of the oil potential in Vietnam may have been too hopeful.

American businessmen meanwhile saw oil as just the first step in trading with the North Vietnamese. Directly following the oil and gas companies were opportunists from all areas of commerce, from banking and tourism, to consumer goods and heavy machinery.

Vietnam's Troubles of the
1980s and Early 90s

By the mid-1980s, Vietnam's economy was in dire shape. The country was unable to produce enough grain to feed its own people. Manufacturing accounted for less than 20% of the gross national product. Government subsidies, which had been designed to aid state-owned businesses, created inefficiency and low productivity. Budget deficits grew, causing the expansion of private businesses in Vietnam to suffer.

In 1986, the Vietnamese government introduced a new system of economic reform, called doi moi (pronounced "doy moy"). The program was designed to move the country away from its state of isolationism and central planning toward an open-market economy. Initial goals were to improve the standard of living and encourage foreign investment. For the first five years after doi moi was introduced, however, there was little impact on life in Vietnam.

In 1991, the Soviet Union collapsed, delivering a nearly fatal blow to the unstable economy in Vietnam. The country lost nearly $2 billion in trade agreements and aid from their ally, and the country's leaders were forced to take further action to boost the economy. Government officials rushed to make agreements with Asian neighbors such as China, Hong Kong, Japan, and Singapore. Their success in this first step away from isolationism led Vietnam's leaders to look elsewhere to form new arrangements. This was the first step: The Vietnamese began to look west, toward America's shores.

Since 1991...

Since 1991 and the collapse of the Soviet Union, the turnaround Vietnam has experienced has stunned many observers. Almost all price controls have been removed, encouraging higher production and a greater equilibrium between supply and demand. Government subsidies were eliminated, freeing up 20% of government expenditures. As a result, the budget deficit began to shrink. GDP grew 8.8% in 1994, as compared to a dismal 2.7% in 1986 and 1987. Inflation was at only 9.9% in 1994, down from a crippling 108% in 1990. Foreign investors pledged only $366 million to the Vietnamese in 1988; by 1994, that number had risen to $3.5 billion.

After such incredible change in the early 1990s, where does Vietnam stand today? It is still one of the world's poorest countries, but has the potential to enjoy strong economic growth.

Vietnam has a population of 74 million people, making it the 13th largest country in the world. More than half the population is under the age of 25, giving Vietnam a large pool of workers from which to draw for all industries.

The gross domestic product of Vietnam in 1995 was $15 billion, yet the annual per capita income only $221. Annual inflation currently lies at approximately 15%.

The Vietnamese are an educated people, with a literacy rate of 88%. Yet, life in Vietnam seems to lag decades behind today's industrialized nations. For example, there are only two telephones for every 1,000 Vietnam citizens. The composition of the Vietnamese population, however, may be perhaps the biggest draw for foreign investors. A large, young, educated, inexpensive workforce seems available for those who can enter into this largely untapped country.

Vietnam enjoys a wide variety of natural resources, including oil, natural gas, coal, minerals, agricultural land, forests, and marine resources. The economy suffers, however, because of a lack of raw materials needed for industry.

Aside from weak exports and a shortage of raw materials, the Vietnamese economy continues to struggle because of a chronic shortage of machinery and parts, and rampant unemployment, estimated to be as high as 40%. Finally, the country is still suffering from the blows of the Vietnamese war, which devastated the infrastructure of the country.

Enter the United States

By the mid-1990s, the U.S. began to respond to the changes occurring in Vietnam. On February 4, 1994, President Clinton ordered an end to the 18-year long trade embargo on Vietnam. American businesses were happy; many American citizens, however, specifically those that fought in the war, were not.

Two decades after the end of a bitter war, many questions about the fate of missing American servicemen remain unanswered. The President, in an effort to quell the anger of those opposed to lifting the embargo, said "It was now time to acknowledge the cooperation Vietnam has shown in the search for evidence of the 2,238 Americans still officially listed as missing . . . Opening the door to trade would benefit that still-unfinished search. . . I am absolutely convinced it offers us the best way to resolve the fate of those who remain missing and about whom we are not sure."

Lifting the trade embargo, however, was just the first step toward improving relations between America and Vietnam. The two countries were then allowed to open liaison offices in each other's capitals. A U.S. office in Vietnam began to aid Americans and to pursue talks with the Vietnamese about human rights issues. The Trading with the Enemy Act was left in place, however, ensuring that assets frozen by the U.S. remain under American control until the two countries can reach an agreement about their disposition. Also, restrictions against selling weapons and some high-tech goods to Vietnam were also left in place.

Seventeen months later, President Clinton took yet another step toward facilitating trade and business with the Vietnamese. On July 11, 1995, Clinton normalized relations with
Vietnam. Normalization of relations created many diverse opportunities for both countries. It meant the exchange of ambassadors between America and Vietnam would be allowed and embassies could be established in both Vietnam and the U.S.

Normalization put in motion trade talks that may lead to Most Favored Nation (MFN) status for Vietnam, and lower tariffs on trade between U.S. and Vietnamese companies. Normalization would also allow Clinton to waive restrictions on the Export-Import Bank (Ex-Im) and the Overseas Private Investment Corp. (OPIC), although he has not yet done so. OPIC offers financial and political risk insurance for U.S. businesses setting up operations in other countries. Ex-IM provides financing and loan guarantees for U.S. companies exporting products abroad. President Clinton has said he will consider waiving these restrictions only after he has reviewed human rights and labor issues in Vietnam.

Most Favored Nation Status

The next step to ease trade between Vietnam and the U.S. would be the granting of MFN Status. What would this mean for American businesses?

MFN status grants countries that trade with the U.S. the lowest tariffs on exported goods. Most analysts say this is desperately needed to spur investment and development in Vietnam. Without MFN status and government financing, U.S. companies are losing business to European and Asian competitors.

Granting MFN status appears to be an emotional issue for our politicians. Aside from the human rights issues that have been raised, many Americans are unable to forget that 58,000 Americans were killed in the Vietnam War. Perhaps politicians are unwilling to risk losing votes because of such a sensitive issue. Others feel that until the U.S. is given answers to its many questions concerning the 2,200 American POWs still considered missing in Vietnam, granting MFN status is unthinkable.

Opportunities in Vietnam Today

What opportunities exist in today's Vietnam that make it such an attractive investment prospect to foreign businesses? There are two major areas of opportunity: agriculture and industry.

Agricultural endeavors currently employ roughly 70% of the Vietnamese population and generate 50% of GDP. Rice is the top product; in fact, Vietnam is the world's third-largest rice exporter, with 1.7 million tons exported in 1993. Other major exports include rubber (80,000 tons exported in 1993), coffee (more than 100,000 tons), and tea (20,000 tons).

Vietnam currently imports 400,000 tons of wheat per year. It is estimated that
this will rise to 1,000,000 tons in the
near future.

The current value of Asia's highly populated food market is estimated to be $450 billion, which makes agriculture a highly desirable area for foreign investors.

Ironically, it is Vietnam's long history of war that has caused many of the agricultural problems it is experiencing today. During the Vietnam War, the U.S. dumped approximately 72 million liters of herbicides, such as Agent Orange, over roughly 16% of Vietnam's land. Some ecologists estimate that the deforestation caused by this chemical warfare would have supplied Vietnam's timber industry for about 30 years. In addition to the chemical warfare, large tracts of land in Vietnam were bulldozed during the war, destroying both vegetation and topsoil. Finally, the nearly 25 million deep craters left behind from the war have left many rice paddies
unusable.

Industry. A second area for investment opportunity is that of industry, which accounts for 30% of Vietnam's GDP. Coal mining, food processing, and textile production are well established, and oil exploration, its fastest growth area, is up 56% from 1990-1991. Vietnam exported 6.5 million tons of oil in 1993 and hopes to increase exports to 21 million tons by the year 2000. The country's first oil refinery is expected to be operational by the year 2000, run by a consortium involving PetroVietnam and companies in France and Taiwan.

Construction opportunities abound in Vietnam. As the country struggles to rebuild itself from long decades of war and economic uncertainty, the need for new factories has grown proportionately. An increase in efforts to attract tourists to Vietnam has led to a boom in the hotel industry. Also, as Vietnam tries to lure more foreign investment, the
need for modern office facilities has created massive opportunities in the
construction field.

Another area of opportunity for investment is found in the rich mineral deposits of Vietnam. Most common are iron, chromite, copper, tin, lead, zinc, tungsten, and rare earths. Most mineral deposits lie untapped, which may lure yet more investors to the country. Vietnam is currently the world's largest exporter of scrap metal, most of which is shipped to Japan and transformed into motorcycles, which are then sent back to Vietnam.

Telecommunications is a growth industry in Vietnam, as the government tries to improve communications systems throughout the country. Airplane purchases and airlines are growing as Vietnam tries to build its tourism industry. Shipping has become a major investment prospect, as both imports and exports have increased.

Problems Facing U.S. Businesses

Legal Structure. Conducting trade with Vietnam does have its share of risks and problems associated with it. Many foreign investors point to the hurdles involved when considering trade with Vietnam, including, for example, the lack of a viable legal structure in Vietnam. There are poorly defined laws, no independent judiciary, few qualified lawyers, and a lack of experience in international business. One legal problem facing potential investors is that currently in Vietnam there are few protections for copyrights and intellectual properties, which have the potential to create huge risks in any investment.

The high cost of doing business in Vietnam is another deterrent to some investors; many are unsure the potential return on investments will be sufficient enough to cover the huge start-up and maintenance costs U.S. companies face as they enter the Vietnamese marketplace.

Government regulations imposed on foreign investors by the Vietnamese are yet another obstacle facing many businesses. Complaints have arisen concerning the slow pace with which the Vietnamese leaders approve foreign investments. Recently, for example, new rules were imposed on branch offices for foreign law firms. The government may require that offices report on their finances, and impose restrictions against hiring associates with fewer than five years experience. Barriers also exist to limit foreign ownership of land in
Vietnam.

Vietnam's inadequate infrastructure also creates problems for foreign investors. Insufficient transportation systems make it expensive and time-consuming to ship goods. Everyday tasks, such as placing phone calls and sending faxes, are not always easily done in Vietnam. Power outages are frequent, causing costly delays in business operations.

Possible Public Reaction. American investors also face problems at home, because of lingering attitudes of resentment toward the Vietnamese. Some American companies are fearful of public reaction to ties with Vietnam.

Despite the risks and problems associated with trade in Vietnam, however, many American businesses point to the benefits involved. Many companies savor the opportunity to invest in and trade with a country of 74 million people who appear to be highly educated, hungry for work, and eager for goods carrying American brand names.

Investing in Vietnam

Once an investor has made the decision to look toward Vietnam, he must then deal with the sometimes confusing logistics of foreign investment imposed by the Vietnamese government. Vietnam law provides for four forms of foreign investment.

100% Foreign-Owned Enterprise. An investor may choose to propose a 100% foreign-owned entity, which would take the form of a limited liability company with 100% foreign capital. Although this form of investment is available to foreign investors, it is, in fact, largely discouraged by the Vietnamese government.

Business Cooperation Contract. A second form that a foreign investor may choose is a business cooperation contract. These are most often used for large projects: For example, a U.S. company may get oil exploration and production rights in exchange for sharing a percentage of the oil with the Vietnamese government. A business cooperation contract is a non-equity, contractual joint venture between a Vietnamese partner and a foreign partner to jointly conduct one or more production or business operations in Vietnam. A business cooperation contract is not recognized as a distinct Vietnamese legal entity. Therefore, the foreign investor is not protected from the entity's liabilities. The foreign investor cannot directly hire Vietnamese workers; this must be the responsibility of the Vietnamese partner. The entity is managed by a committee established in the terms of the contract between the Vietnamese and foreign investor. There is no requirement of unanimity among committee members for key decisions, however, so that a foreign partner can exercise a certain amount of control over both the Vietnamese partners and the entity as a whole.

Build-Operate-Transfer Project. The third form of foreign investment allowed by the Vietnamese government is known as a build-operate-transfer project, or BOT. There is relatively little experience with such projects, however, as they have been permitted only since late 1993. BOT's were specifically designed to attract investors for infrastructure projects. Under the terms of a BOT, the foreign party agrees to build a project and operate it for a specified period of time. At the end of the contract period, the project is transferred to the Vietnamese government for no consideration. In return for the investment, the foreign investor receives beneficial tax incentives, as well as preferential treatment in the use of land, roads, and utilities, etc.

Joint Venture. The fourth and most widely used form of foreign investment in Vietnam is the joint venture. Many view this structure as the only realistic way to get a foot in the door; joint ventures currently make up about 70% of foreign investment projects presently in Vietnam.

A joint venture is a limited liability company formed in Vietnam by Vietnamese and foreign partners. They are beneficial for the foreign investor since the Vietnamese partner should have local expertise and knowledge necessary to conduct business within the territory. Also the Vietnamese partner can provide access to local resources such as land that may be unavailable to a foreign partner.

Unlike a business cooperation contract, a joint venture is considered a distinct Vietnamese legal entity. To form a joint venture, the foreign partner must provide at least 30% of the required capital in the form of money, plant and equipment, or intangible assets. The foreign partner may, however, provide as much as 99% of the capital.

Under Vietnamese law, at least two members of the venture's board of management, including either the general director or first deputy director, must be Vietnamese. Therefore, even if the foreign investor has a majority interest in the venture as determined by capital contributions, it may not have control. Finally, a unanimous decision by the board of management is required for all issues of planning and production, which may again limit the amount of control the foreign investor may exert over the Vietnamese partner. Many U.S. companies have turned to joint ventures with other foreign investors to start doing business in Vietnam. The Vietnamese officials appear to prefer such proposals over the other three forms foreign investment may take.

Because there is no private ownership of land in Vietnam, a joint venture may be the only way to get access to land needed for business projects. Otherwise, the foreign investor must rent the land it requires from the Vietnamese government. However, many experts note a word of caution to potential investors: It may be difficult to find a good Vietnamese partner. It is important to determine beforehand that if the Vietnamese partner makes claims to land rights, those rights do in fact exist.

Applying to Do Business in Vietnam

The arduous application process is yet another hurdle to face on the road to conducting business in Vietnam. All foreign investors must receive approval by the Vietnamese government, and the process can be lengthy, frustrating, and expensive.

All applications must contain a feasibility study and copies of contracts with Vietnamese partners, as well as petitions for preferential tax treatment. The State Committee for Cooperation and Investment (SCCI) is primarily responsible for reviewing and approving applications, although other government groups may become involved in the decision process. Large projects may require the approval of the prime minister.

In addition, local permits may be required for such items as land, power, and water supply, as well as the construction and installation of communications systems. It may take years to get all of the required permits to begin conducting
operations.

In early 1994, the SCCI vice chairman, Dr. Nguyen Mai, noted the necessity of simplifying the application process to attract more foreign investors. In a statement, he said this would become a government priority, so that the government may work in conjunction with potential investors to ease the application process.

As an example of the formidable task of receiving government approval, it is perhaps best to examine the joint ventures, since they are the most common form of foreign investment. An application for a joint venture must contain four essential documents.

Contract. Required first, is the joint venture contract, which contains the nationalities, addresses, and representatives of proposed partners. It also must list the name, address, and business activities of the joint venture. The contract must divulge the capital structure of the joint venture, specifying the contributions made by each partner, as well as procedures for assignment of capital. A list of equipment and materials needed for the joint venture, the ratio of foreign currency to Vietnamese currency to be collected, and the methods of payment for imported goods must also be included in the contract. The duration of the joint venture, including plans for termination and dissolution, must also be submitted. Finally, the contract must include an outline of procedures for settling disputes between the partners, including a summary of the arbitration process and applicable laws. The responsibilities of the individual parties to the joint venture must be stated, and a statement as to the validity of the joint venture contract completes the contract requirements.

Charter. The second document to be submitted in the application process is the charter of the joint venture, which includes the composition of the board of management, general director and deputy general directors, their responsibilities, and the length of their terms. Also, the legal representative of the joint venture in Vietnam courts of law must be listed in the charter. The financial principles, insurance, and accounting systems of the joint venture are also included in the charter, as well as the profit- and loss-sharing arrangement between the partners. Finally, the charter must outline specific plans for labor relations and training of employees.

Other. The third document required for the application process provides information on the legal status and financial capacity of the joint venture partners. The final requirement is an economic-technical description of the operations of the proposed joint venture.

Once an application for a joint venture has been received, accompanied by the documents listed and outlined above, the SCCI has three months to make their decision. If the SCCI approves an application for foreign investment, they issue an investment or business license. The license includes a stated time duration, which is usually a maximum of 50 years, although exceptions have increased the limit to 70 years. The SCCI may also set tax rates for the foreign investor; the standard profit tax is 25%, although this may vary for each individual investment proposed.

Some joint ventures may be exempt from taxes on profits for the first four years of operations, with a 50% reduction in taxes for the following two to four years. The cumulative effect of taxes on foreigners makes it essential for foreign investors to petition the government during the licensing process for special tax incentives.

Cooling Off Period

Recent experience by U.S. investors has caused some to pause and reflect on the realities of doing business in Vietnam. As is not uncommon for nations emerging from autocratic and military controlled governments, red tape, controls over prices and distribution, and bureaucratic delays are a way of life. American businesses in their typical fashion have arrived on the scene expecting to do business the "American way." They have demonstrated a lack of patience and understanding of doing business in a culture such as Vietnam's.

In April 1996, the Central Committee of Vietnam's ruling Communist Party gave added pause to all foreign investors when it called for "strengthening the role of the state sector in the economy, particularly in areas such as banking, insurance, and other service industries."

The overall result is the initial enthusiasm enjoyed in the early part of this decade appears to be dying down. Until now, investors may have been blinded by the enormous potential of investing in Vietnam. As more and more companies have examined this new marketplace, however, the realities of doing business in Vietnam have turned many investors away.

Of the more than $3 billion pledged by U.S. investors in signed contracts, only a small fraction has been invested. Foreign investment declined sharply over the first four months of 1996, ($1 billion, as compared to $2.58 billion for the same period in 1995) as investors became more and more aware of the reality of doing business in Vietnam. The total number of licensed projects also declined by 65 percent for that same period, although the Vietnam Ministry of Planning and Investment claims that that number will pick up quickly as a backlog of applications are processed.

Any investor considering Vietnam as a potential area for growth faces enormous hurdles; completing the application process may be the culmination of years of investigation and effort. Although the governments of both the U.S. and Vietnam have made recent attempts to spur foreign investment in Vietnam, there are still huge obstacles to overcome before a business can open its doors in this new market.

Many investors are encouraged by recent admissions by the Vietnamese government that they are partly to blame for the waning investment enthusiasm.

On January 13-15, 1997, the Ministry of Finance of Vietnam and Euro TAP Viet, sponsored an international accounting conference in Hanoi, "The Role of Accounting and Auditing in a Developing Economy." The conference was a platform for Vietnam to present its progress and objectives toward establishing viable accounting and auditing institutions and for participants to exchange views and experiences that will assist Vietnam in meeting its objectives. The conference seems to be a strong indication of Vietnam's desire to create a stable investment environment.

It will most likely take a significant amount of time, however, before remaining restrictions in both countries are lifted that currently inhibit investment by American companies in Vietnam. Now that President Clinton has begun his second term in office, MFN talks may soon become a Washington priority, since Clinton has shown a past pattern of easing trade restrictions.

It seems almost inevitable that Vietnam will eventually be granted MFN status. American businesses are anxious to enter an almost untapped market, especially one in the Pacific Rim, where business opportunities are substantial. Geographically, Vietnam is ideally situated; it is located in the center of Southeast Asia, further enhancing its potential as a foreign investment opportunity.

As the governments in both Vietnam and America take more steps to ease the process of investing in Vietnam, more U.S. companies will join the stampede to enter such a vast, thriving market with the potential for enormous future growth. According to many investors, the Vietnamese consumer may be the most valuable resource for foreign investors. American brands enjoy high recognition among the Vietnamese people, and income levels are rising among the Vietnamese, so that an increasing number of consumers may be able to afford American products.

Finally, although American businesses may lag behind other foreign investors because of government restrictions, the market is still young enough, and ample opportunity exists, to make investing in Vietnam a highly profitable opportunity. Although the path to success in Vietnam is not always a smooth one, some recommendations may help ease the way for potential investors.

By following some of the suggestions of those who have gone before them, while remaining aware of the potential pitfalls that they may encounter, American businesses may be able to enjoy further success as they increasingly look toward the Vietnamese potential. Although the initial euphoria seems to have faded, the future still holds many investment possibilities for the firm that is willing and able to face the roadblocks that lie ahead. *

Barbara R. Farrell, EdD, CPA and Patricia Healy, CPA, CMA, are assistant and associate professors, respectively, at Pace University. James R. Downing is president of the International Trade Group.


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