2006 COMMERCIAL COUNSELLORS REPORT ON 2006 COMMERCIAL COUNSELLORS REPORT ON VIETNAM

EUROPEAN UNION ECONOMIC AND COMMERCIAL COUNSELLORS 2

4 Each year the Working Group of Economic and Commercial Counselors of the publishes a Report on the . This “Green Book” aims to provide the private sector as well as European institutions and governments with an analysis of the recent economic performance of Vietnam as well as an overview of the development in certain sectors of the Vietnamese economy. The “Green Book” is not an official publication of the EU. It is a joint initiative of the EU Embassies and the Delegation of the European Commission in Vietnam.

The publication is covering a wide range of issues and consists of two parts:

The first part is dedicated to a general overview of the most important economic developments in Vietnam in 2005. Section I features an overview over the economic performance of Vietnam as well as an analysis of major economic indicators such as foreign , , employment as well as sectoral and monetary policies. Section II covers legal developments while Section III presents the EU at a Glance.

The second part of the report provides eleven Sections packed with abundant information on the development of important sectors of the Vietnamese economy: Garments and , Footwear, Fishery Products, Agro-Industry, , ICT, Pharmaceuticals, Alcoholic Beverages, Energy, Machinery and tools and Financial Services.

In the year 2005, Vietnamese and EU economies have again moved closer to each other and have become a mainstay of the overall relationship. The “Green Book” provides ample information in this respect and we trust that it will be supportive in the continuing improvement of relations between Vietnam and .

5 PAGE

Foreword 5

GENERAL OVERVIEW 12

I. Overall economic performance in 2005 13 Main growth drivers and components 16 Foreign trade 17 Investment 19 International integration – WTO and AFTA 22 Primary sector 23 Industry and services 24 Employment 25 Monetary Policy and Financial Sector 26 Currency 27 Economic Reforms 28

II. Legal developments 29

III. European Union at a Glance 31

6 PAGE

ANALYSIS BY SECTOR 41

I. Garments and textiles 42

II. Footwear 51

III. Fishery Products 58

IV. Agro-industry 63

V. Transport 66

VI. Information and Communication Technology (ICT) 70

VII. Pharmaceuticals 79

VIII. Alcoholic beverages 84

IX. Energy 90

X. Machinery and tools in other sectors 95

XI. Financial Service 100

7 PAGE 2006-2010 Socioeconomic Development Plan – Key targets Poverty among Kinh and Ethnic Minority Population 15 GDP growth by sector – GDP share by sector – GDP share by ownership 16 Vietnam’s foreign trade 17 Share in VN – Share in VN 18 EU-Vietnam trade 19 Structure of investment 2001-2005 20 FDI commitments and disbursements 20 EU FDI commitments 2000-2005 21 Registration and licensing 30 EU trade with Vietnam – EU Imports – EU Exports – Total Trade 33-34 Vietnam’s trade with major partners - Vietnam’s Imports – Vietnam’s Exports – Total Trade 34-35 FDI in Vietnam 36 Table 1.1. Vietnam and Garment Turnover 43 Table 1.2. Vietnam Current Production Capacity 48 Table 1.3. Vietnam Current Textile and Garment Machinery and Equipment 48 Table 1.4. Vietnam Garment & Textiles Machinery and Equipment 49 Table 1.5. Vietnam Textile and Garment Export Markets 49 Table 1.6. Vietnam and VINATEX Total Investment Capital 2005 – 2010 50 Table 1.7. Vietnam Textile & Garment Export Value by Markets 50 Table 1.8. Key Textile & Garment Projects Calling for Foreign 50 Chart 2.1. Vietnamese Footwear Export Turnover 52 Table 2.2. Production of Vietnam footwear industry 53 Chart 2.3. Top ten export markets 54 Table 2.4. Export turnover of Vietnam footwear industry by economic sectors 57 Table 3.1. Vietnam’s Export of 1996-2005 59 Chart 3.2. Vietnam’s Export of Seafood in 2005 59 Chart 3.3. Vietnam Pangasius Export 60 Table 4.1. Statistic on the export of agricultural products in 2005 64 Table 6.1. Number of telecom service providers 71 Chart 6.2. Mobile communication service market share (Dec 2005) 72 Table 6.3. Vietnam’s Internet subscription 73

8 Chart 6.4. Internet market share (Dec. 2005) 73 Table 8.1. Alcoholic beverages - Export to Vietnam between 2000 and 2005 87 Table 8.2. Wines - Export to Vietnam between 2000 and 2005 87 Table 8.3. Spirits - Exports to Vietnam between 2000 and 2005 88 Table 10.1. Vietnam’s production of machinery 96 Table 10.2. Leading mechanical engineering companies of Vietnam 97 Table 10.3. Vietnam import of machinery 97

9 ADB Asian Development ADSL Advanced Digital Subscriber Line AFTA Asean Area AIA American Insurance Association ASEAN Association of South East Asian Nations BCC Business Cooperation Contract BOT Build-Operate-Transfer BP British BTA Bilateral C/O Certificate of Origin CDMA Code Division Multiple Access CEPT Common Effective Preferential CIEM Centre for Institutional and Economic Management CIF Cost, Insurance, Freight CNC Centre of Numeric Control CPI Consumer Price Index DANIDA Danish Agency for Development Assistance DGPT Department General of Post and Telecommunications DSL Digital Subscriber Line EC European Commission ETC Electricity of Vietnam (EVN) EU European Union FAO Food and Organization FDI Foreign Direct Investment FIE Foreign-Invested Enterprise GDP GoV Government GSO General Statistics Office GSP Generalised Scheme of Preferences HCMC HSBC Hongkong Shanghai Banking Corporation HP Horse Power IAP Internet Access Provider IDA International Development Association IEP Internet Exchange Provider IFI International Financial Institution IL Inclusion List IMF International Monetary Fund IMI Institute of Machinery and Industrial Instruments IP International Post IPR Rights ISP Internet Services Provider IT Information Technology JV Joint Venture KT Korea Telecom LDC Less Developed Country LEFASO Vietnam Leather and Footwear Association

10 MFN MPI Ministry of Planning and Investment MPTIT Ministry of Post, Telecommunications and Information Technology NGN Next Generation Network NGO Non-Governmental Organization NPL Non-Performing Loan NRP Normal Rate of Protection NTB Non-Tariff Barriers ODA Official Development Assistance OLAF European Anti-Fraud Office PLC Programmable Logic Controller PNTR Permanent Normal Trade Relations PRGF Poverty Reduction and Growth Facility PRSC Poverty Reduction Support Credit R&D Research and Development ROK Republic of Korea SBV SCB Standard Chartered Bank SER Special Economic Region SME Small and Medium Enterprises SOCB State Owned Commercial Bank SOE State-owned Enterprise SPT Saigon Postel SRV Socialist Republic of Vietnam TBT Technical Barriers to Trade TEL Temporary Exclusion List TRIPS Trade Related Aspects of Intellectual Property Rights UCLAF Anti-Fraud Coordination Unit UNCTAD United Nations Conference on UNDP United Nations Development Programme US USBTA United States Bilateral Trade Agreement VAT Value Added WB VINATEX Vietnam Garment and Textile Corporation VITAS Vietnam Textile and Apparel Association VINACOAL Vietnam Corporation VNPT Vietnam Post and Telecommunications Corporation VIETTEL Vietnam Military Telecommunications Company WTO YOY year-on-year

Currencies:

EUR or Euro USD United States Dollar VND Vietnam Dong

11 12 I. OVERALL ECONOMIC PERFORMANCE IN 2005

Vietnam’s economy performed well in 2005, despite the return of avian influenza in the autumn and unfavorable weather conditions (droughts in the North in the first semester, leading to lack of water for crop irrigation and power shortages, and 5 typhoons hitting the Central region in the second semester). According to the government, real GDP grew by 8.43%, up from 7.8% in 2004, the highest growth rate in the past 9 years and just below the official target of 8.5%. However, pressure to report success in reaching the 7.5% yearly average target of the 2001-05 Five-Year Plan at the 10th National Party Congress in April 2006, as well as anecdotic evidence on flagging demand and consumption in some economic sectors in the second semester, cast doubts on official statistics. International financial institutions estimates of GDP growth range from 7.5 to 8.1%, which remains very respectable, and is surpassed in the region only by .

Consumer price (CPI) in 2005 was 8.4% at the end of the year, well above the 6.5% target, but below the 2004 peak of 9.5%. However, the CPI average over the period hovered around the 2004 mark of 7.7%. Avian influenza and the domestic knock-on effect of rising international commodity prices pushed up food prices, which account for 48% of Vietnam’s CPI basket, by 10.8%. Higher world market prices for petroleum products and other key products for which Vietnam is highly import-dependent (such as fertilizer, cement, and ), as well as the announcement of another payroll increase also contributed. Government measures to curb inflation, but also credit growth, yielded only limited effects. They included the lowering of import tariffs on petroleum products, efforts to reign in lending by state-owned , and price freezes for commodities such as power, coal and cement. The government aims to cap consumer inflation at 8% in 2006. Reaching this target will depend of the government’s willingness to temper its expansionary macroeconomic policies, now that the 5-year plan-related growth imperative is out of the way, and apply stronger monetary restraints.

Most other macroeconomic variables remain stable. The budget deficit is projected at 3.8%, down from 4.5% in 2004, and below the official 5% cap. The government maintained a cautiously expansionary fiscal stance. Major deficit factors are heavy infrastructure investments, increased expenditure for public sector salaries, and the progressive reduction of customs revenues resulting from Vietnam’s AFTA and other international commitments. However, tax revenues, especially from corporate income tax and VAT, increased due to a rationalisation of the tax structure. Public external debt is moderate at about 32% of GDP (41% if off-budget expenditure and on-lending are included), and its service costs manageable, in particular given the high share of concessional ODA loans in overall debt.

Despite high inflation coupled with a stable USD exchange rate, exports grew strongly, and the trade deficit narrowed to USD 4.7 billion, down from the 2004 peak of USD 5.5 billion. This translated into a current account deficit of around 4.4% of GDP. As in the past, imports related to infrastructure investments and export-oriented production account for much of this, which should lead to higher production and exports later on. Moreover, foreign exchange reserves, including , increased by 8.6% to USD 7.7 billion, corresponding to 8.6 weeks of imports of goods and non-factor services. Reserves were buoyed by rising flows of ODA and FDI (USD 1.7 billion and 3.4 billion respectively in disbursed capital), but above all of remittances from expatriate workers and other (USD 3.8 billion)1 as well as record revenues from crude oil exports. In view of increasing forex reserves combined with investment-driven imports, the current account deficit is not a major concern at this juncture.

Under its new Five-Year Plan for 2006-2010, Vietnam aims to reach 7.5-8% GDP growth in the coming five years, and 8% in 2006. Independent forecasts for 2006 range from 7-8%. A growth rate of around 7.5% in 2006 seems realistic, given that Vietnam is still on the upturn of a business cycle, and can expect continuing momentum in domestic demand based on sustained growth in FDI inflows, remittances and receipts. However, reaching these targets will also depend on the government’s ability to maintain current levels of growth impetus to the economy, which may be difficult given the already high levels of spending and rapid bank credit growth seen in 2005, and related concerns about a possible overheating of the economy and a significant misallocation of resources.

1 Remittances through official channels. When informal transfers are included, the figure could be double as high. 13 2006-2010 Socioeconomic Development Plan – Key targets

- GDP: 2.1 times higher than 2000. Annual average growth rate 7.5-8%. GDP/capita to reach USD 1,050-1,100 by 2010. - Economic structure by 2010: agriculture, forestry and fisheries 15-16% of GDP (from 21.8% in 2005); industry 43-44% (40.2%), services 40-41% (38%). - Universal junior secondary education by 2010; 2% rate of tertiary education. - Skilled labour to reach 40% of labour pool by 2010. - Population growth 1.14% by 2010 (1.3% in 2004). - Poor households reduced to 10-11% (2005: 22%).

Despite the stability of the economic situation, Vietnam continues to face important medium-term challenges. Its transition to a remains incomplete, with many of the more difficult and politically or socially sensitive reforms still ahead. The pace of reform notably of the state-owned sector of the economy, as well as of the banking system, has been slow in recent years, although some progress was made in 2005. These issues need to be tackled urgently, if the country is to avoid significant negative shocks due to increased internal and external competition, and shortcomings in the financial sector. 2006 will be an important juncture in Vietnam’s economic development. The country will have to defend its competitiveness in key export segments such as textiles and footwear, notably vis-à-vis its big neighbor China. At the same time, it will have to strive to diversify its economy further into higher added value market segments. Under its AFTA commitments, Vietnam will also have to reduce import tariffs for ASEAN members to 0-5% by 20062. The country will have to step up the pace of reforms and preparedness to face these challenges with- out dislocations. This will also be crucial to realize its ambition to join the WTO this year, after missing the official 2005 accession target.

Shortage of power constitutes another potential constraint to economic expansion. Demand for power grows by around 15% per year. The country’s high level of dependence of hydropower, which accounts for some 56% of the 11 GW installed capacity, leaves the country vulnerable to droughts. This was witnessed already in 2005; low water levels in key reservoirs already now indicate that acute power scarcity is likely to return in the North in May/June. To address the chronic power shortage, Electricity of Vietnam in April 2006 launched of a 1,500 MW gas-fired power plant; in the longer term, further supply diversification is planned through the development of nuclear power (a 2 GW nuclear power plant is to be completed by 2020).

Another serious challenge for the coming years remains to spread growing wealth more evenly, as current public policies are proving insufficient to keep economic growth inclusive. Vietnam’s reforms, in particular private sector development and agricultural diversification and integration of rural areas with the market, have allowed it to make great strides in reducing poverty, with the poverty rate declining from 58.1% in 1993 to below 19.5% in 20043 . Budget transfers to poorer provinces and public investment programs with greater emphasis on remote areas were stepped up during the 2001-2005 five-year plan. Despite this, the bulk of public investment mostly benefits the richest regions, and income disparities in Vietnam continue to grow. The relation of expenditure between the poorest and richest population quintiles increased from 4.97 in 1993 to 6.27 in 2004. Poverty is concentrated in the countryside, which has a poverty rate of 25%, against a mere 4% for rural areas, which creates mounting migratory pressures on urban centers. In addition, despite some positive trends, poverty itself and the poverty gap remains very high for ethnic minorities in the mountainous North West, as well as in the Central Highlands. The poverty gap, measuring the average spread between actual consumption of the poor and consumption needed to get out of the poverty measures 19.1 in the North West, which is 9 times more than in the Red River Delta. Moreover, the gap between certain regions, as well as between ethnic Vietnamese and minorities continues to grow.

2 For all tariffs on products on Vietnam’s Inclusion List (IL) under AFTA’s Common Effective Preferential Tariff (CEPT) scheme. The IL in March 2005 covered 96.15% of all tariff lines. Currently, about 20% of IL product tariffs remain outside the 0-5% range. 3 World Bank, based on international poverty line and latest (2004) Vietnam Household Living Standard Survey

14 Poverty among Kinh and Ethnic Minority Population

Source: GSO

15 MAIN GROWTH DRIVERS AND COMPONENTS

GDP growth in 2005 was led by strong domestic demand, in particular domestic investment and FDI (new licensed capital +37.2% year-on-year), resulting in a strong performance of industry (output up 17.2%), of exports (+21.6%) and of FDI, but also by levels of credit growth which are considered excessive by many analysts (39% in the year to May, after 42% in 2004)..

The industrial sector contributed 10.7% to GDP growth and increased its share of GDP from 36.7% in 2000 to 410.8%, on the back of a strong performance of the non-state sector (see Industry). A continuation of strong growth in foreign tourism (+18.4%) as well as in retail sales, banking and telecoms contributed to an 8.5% increase in the output of the services sector. The sector’s share of GDP increased by half a percentage point to 38.5%, but remains four percentage points below its high point before the Asian Financial Crisis and the 41-42% target in the 2001-2006 5-year plan, as well as far below the 50% average for developing countries. Agriculture, which represents 20.7% of the economy 4, once again remained underperforming, with a growth contribution of 4%, due i.a. to the impact of avian influenza and adverse weather conditions.

GDP growth by sector GDP share by sector

The foreign-invested part of the economy with growth of 13.2% outstripped the domestic private (8.2%) and the state-owned sector (7.4%). The share of foreign-invested enterprises in GDP has increased by 8 percentage points since 1995; however, growth has largely been at the expense of the domestic private sector, rather than of the state sector.

GDP share by ownership

4 Including forestry and fisheries.

16 FOREIGN TRADE

Vietnam’s foreign trade in 2005 once again performed impressively, with a total turnover of USD 69.1 billion5. Exports grew at 21.6% - below the 2004 post-Asian Crisis record rate of 31.5%, but still very robust – reaching USD 26 billion. Export growth was led by the foreign-invested (+20.7%) and the domestic private sector (+19.4%).

Imports rose by 15.4% (well below the 2004 and 2003 rate of 26.7% and 27.8%), and were worth USD 36.9 billion. The trade deficit, which reflects the needs of an expanding economy, fell to USD 4.7 billion, due mainly to slower growth in imports by domestic players (+12.7%). The largest imports were in petroleum products (up 39% to USD 5 billion), machinery and equipment (up only 0.1% to USD 3.3 billion), steel (up 16% to USD 3 billion) and other capital goods and production inputs. This flags a weakness of Vietnam’s economy, namely the dependence on imports for the lion’s share of the inputs needed for key export industries. It is estimated that domestic value added is only around 20% in the footwear sector and 30% in the textiles sector, with balance made up by the costs of imports of raw materials and intermediate inputs.

Vietnam’s foreign trade

2000 2001 2002 2003 2004 2005

Exports 14,483 15,029 16,706 20,149 26,504 32,230

% change 25.5 3.8 11.2 20.6 31.5 21.6

Imports 15,637 16,218 19,746 25,227 31,954 36,880

% change 33.2 3.7 21.8 27.8 26.7 15.4

Total trade 30,119 31,247 36,452 45,376 58,458 69,110

% change 29.4 3.7 16.7 24.5 28.8 18.2

Trade balance -1,154 -1,189 -3.040 -5,078 -5,450 -4,650

Export growth was led by Vietnam’s traditional sectors: Crude oil (up 30.3% in value terms, due to high world market prices, to USD 7.4 billion), textiles and garments (up 9.6% to USD 4.8 billion, but below the USD 5.2 billion target), and footwear (up 11.7% to USD 3 billion). Exports in four other product groups also netted over USD 1 billion each – seafood (USD 2.7 billion, +14.2%), products (USD 1.5 billion, +33.2%), electronic goods (USD 1.4 billion, +34.1%) and, the latest addition to the ‘big ticket’ items, (USD 1.4 billion, +47.3%), signaling Vietnam’s partial success in diversifying its export structure and, to some extent, moving up the value chain. Nonetheless, labour-intensive and low value-added production continues to dominate the export sector, and the economy at large. Moreover, agricultural, forestry and fisheries and crude oil together still account for around half of total exports (their share actually increased by two percentage points, shored up by high world market prices), and Vietnam’s exposure to fluctuating world market prices thus remains considerable. Another risk factor is the competitiveness of Vietnamese industry, which could decline as a result of increasing trade openness in the WTO and AFTA context (see below) and tardy government reactions. Textiles and footwear, which face fierce competition notably from China, are a

5 Unless stated otherwise, trade statistics are preliminary figures provided by the Ministry of Trade

17 case in point. Another example is electronics , where the cut of AFTA tariffs to 0-5% dented the profitability of locally manufactured electronics products. The government responded only belatedly to industry complaints, by lowering the tariffs for components imported from ASEAN and other partners. (More details on key export sectors below, in sections on Agriculture and Industry.)

The EU in 2005 lost ground in Vietnam’s external trade, dropping from its long-held 1st place to 3rd position in two-way trade, after China and (not counting ASEAN). It was also overtaken by the US in terms of largest export market. Vietnam’s trade with both the EU and the US underperformed (+7.1% and +11% respectively), while trade with ASEAN boomed (+29.1%). Trade with China grew at a healthy 21.5%, partly reflecting growth in agricultural exports due to steep tariff cuts under the ASEAN-China Early Harvest Program, but mainly a steep rise in imports (+29.7%). At the current average income level of the Vietnamese individual (around USD 650) and given the burgeoning of the country’s SME sector, diversified and cheap products from China are increasingly popular both as production inputs and with consumers.

In exports, the US, which had been roughly tied with the EU for 1st place in 2004, took over the top position in 2005. While exports to the EU were below par at +12.3%, the US performed better (+18.8%). The US is the most significant market for Vietnam’s textile and wood-based products, while the EU continues to be the largest outlet for footwear. Despite the removal of textile quotas by the EU, revenues from textiles exports to the EU remained below average (+8.7%, against 9.6% av.). US exports performed a bit better, reflecting the tougher US textiles on competitor China (and despite the continuation of US quotas for Vietnamese textiles). The biggest increase in exports was achieved with ASEAN partners (+44%), due probably to the progress in realising AFTA, and making up partly for ASEAN’s declining share in Vietnam’s exports over the past decade. The new dynamic in exports to Asia continued in 2006: Asian partners in the first four months accounted for almost half of exports, against 20.5% for Europe (+34%) and 21% for the US (+40%). Share in VN exports (%)

Source: GSO

In imports, China already in 2003 had overtaken Japan to become Vietnam’s No.1 partner (ASEAN excluded). Its strong performance continued (+29.7%), and ASEAN also gained ground (+21.9%). In contrast, imports from the EU shrank by 2.7%, relegating the EU to 4th place (after China, Japan and ROK), with a further diminished share of 7% of total imports, from a pre-Asian Crisis record of 11.5%. US imports faltered, decreasing by 23.3%. Japan’s performance was average. These trends are indicative of encroachment by emerging Asian economies in product sectors hitherto dominated by exports from OECD countries. Share in VN import (%)

Source: GSO

18 Vietnam’s trade was in deficit with all regional trading partners, namely ASEAN (USD 4 billion), (USD 3 billion) and China (USD 2.8 billion). Among the developed countries, only Japan maintained a small surplus vis-à-vis Vietnam (USD 318 million), while the US and the EU were in deficit (USD 5 billion and USD 2.9 billion, respectively).

According to Eurostat figures6, overall EU(25)-Vietnam trade shrank by 1.5% in 2005 to EUR 7.4 billion, with EU exports to Vietnam down by 15.8% to EUR 1.9 billion (imports grew by 4.6%). The EU trade deficit with Vietnam reached a new historical record with EUR 3.6 billion (up from EUR 3 billion). Trade with the EU continues to be concentrated on a limited range of products. Around of EU imports from Vietnam are traditionally concentrated in just five product groups: footwear (about 38% in 2005), textiles and garments (14%), (7%), furniture (10%) and seafood (4.7%). The EC antidumping investigation on footwear with leather uppers originating in Vietnam (and China) contributed to a 2% reduction of imports in this sector; the proportion of footwear in total imports from Vietnam fell from 43% in 2004 to 38%. Textile imports grew by a respectable 10%7 . On the other hand, improved compliance with the high EC food safety standards allowed the licensing of a larger number of seafood producers for exports to the EU (now 171). As a result, EU imports of seafood grew by 75%, and the share of seafood in total EU imports from Vietnam more than doubled, from 2% to 4.7%.

The same is true conversely for EU exports to Vietnam, where five categories account for a large part of the total. However, exports in four of these categories declined in 2005, and their share fell from two thirds to around half of total: machinery (-31%, with now a 20% share of total exports), electrical equipment (-18%; 14% share), pharmaceutical products (stable at 8.4%), optical and medical equipment (-10%; 4% share), and aircraft and spare parts (-78%; 3% share). The last category had been shored up in 2004 by a large contract for Airbus planes. In the other categories, high quality CE-marked products were challenged by growing competition with similar Chinese products.

EU - Vietnam trade (Source: Eurostat)

INVESTMENT

Overall, the 2005 ratio of investment to GDP is estimated at 38%, 2 percentage points higher than in 2004. Total social investment in 2005 stood at around USD 20.6 billion. The non-state share (domestic and FDI) continued to rise, and now accounts for almost half of total investment.

6 EU and Vietnamese trade data historically have shown considerable divergences in particular as regards Vietnamese exports to the EU – in 2005, the difference is about USD 1billion. The main reason for this is different accounting for transhipments. A large part of Vietnamese exports arrive in the EU via third countries/territories such as , or South Korea. While Eurostat bases itself country of origin of the product (Vietnam), Vietnamese customs registers the nationality of the importer, not the final destination. 7 Eurostat; the Vietnamese figure is slightly lower, see above.

19 Structure of investment 2001-2005 (%)

2001 2002 2003 2004 2005 (est.)

Total 100.0 100.0 100.0 100.0 100.0

State capital 59.8 56.3 54.0 53.6 51.5

State budget 2.7 25.0 24.0 25.1 22.7

Credit 16.8 17.6 16.9 1.5 9.2

SOE capital 10.6 7.8 9.3 9.1 15.3

Other mobilised capital 5.6 6.0 3.9 2.9 4.3

Private capital 22.6 26.2 29.7 30.9 32.2

FDI 17.6 17.5 16.3 15.5 16.3

Source: GSO

According to the Ministry of Planning and Investment, Vietnam attracted USD 5.9 billion in new FDI commitments, +36% year-on-year and the highest figure since the Asian Crisis. USD 4.1 billion of this was in over 800 new projects, with the remainder representing additional capital injections into existing ventures. Implemented FDI reached an estimated USD 3 billion.

FDI commitments and disbursements

Source: World Bank, based on GSO and MPI

Aggregate FDI commitments now stand at USD 50.5 billion, with industry, as well as oil & gas and mining accounting for 60%. Only USD 27 billion of commitments has been implemented.

In terms of aggregate implemented capital, the EU in 2005 lost its No. 1 position, and is now trailing Japan (USD 4 billion against USD 4.5 billion). Third-ranked is Singapore (USD 3.6 billion), followed by (USD 2.9 billion), ROK (USD 2.5 billion), Hong Kong (USD 2 billion) and the British Virgin Islands (1.2 billion). Taiwan ranks 1st in terms of commitments, but has implemented less than one third of committed capital, against an above-average 58% for EU investors.

However, 2005 also saw an encouraging EU comeback in terms of commitments for new projects, where EU investors ranked 1st with USD 889 million, due namely to two ‘mega projects’ by Hutchinson (mobile telecoms) and a skyscraper project by Coralis (France). China and the US also registered high growth rates, albeit from a low level – although the true level of Chinese FDI is not known, as much of it is filtered through Hong Kong.8

20 EU FDI commitments 2000 - 2005 (USD million; new commitments, excluding additional capital injections in existing projects)

Source: Foreign Investment Agency, Ministry of Planning and Investment

The low level of FDI utilization – only around half of commitments – reflects a certain gap between investors’ hopes and reality. However, both the 2005 growth rate in fresh commitments as such, and the balance between new projects and capital expansions (these had been almost at an equal level in 2004, pointing to a ‘wait and see’ attitude regarding potential new investments), are indicative of a new bullishness in investor sentiment. This may in part be motivated by the wish to diversify investment away from China, and Vietnam’s pivotal geographic position vis-à-vis ASEAN and China – although it is striking that other Asian economies have not recorded similar growth in FDI in 2005. It is therefore more likely that domestic factors such as Vietnam’s impending WTO accession and – most importantly – changes in domestic investment legislation made in the accession context are playing a role. 9

In particular, FDI into Vietnam is expected to receive a boost from the new Common Investment Law (CIL), a cornerstone of legislation preparing for Vietnam’s WTO entry, which will enter into force on 1 July 2006. Together with the new Enterprise Law, the CIL which takes account of many comments from the business community goes a long way toward leveling the playing field between foreign-invested and domestic economic operators, and addresses a number of other concerns of foreign investors (i.a. option of international arbitration, diversification of investment forms, and abolition of local content, export performance and forex balancing requirements). However, some important questions related to the new legal regime remain open; they include the practical implications and costs of re-registering existing FIEs under the new Enterprise Law, as well as the majority requirement for board decisions, which seems to have been raised from 51% to 65% for all decisions – which would severely dilute the value of some of Vietnam’s WTO market access commitments. 10

8 Measuring, and assigning ‘flags’ to FDI remains a very inexact science. This is illustrated by the above-mentioned project: Hutchinson is a Hong Kong-based company, but the investment project is counted as European since it is carried out by the firm’s subsidiary. On the same token, Metro Cash and Carry, which has a major and expanding retail presence in Vietnam, is seen as Dutch (although the mother company is German). Moreover, part of EU investment (as well as FDI from other sources, such as China) may not show up in the statistics because it is channelled through subsidiaries in Singapore, Hong Kong or the British Virgin Islands (all major sources of FDI into Vietnam). Finally, the EU’s leading position (albeit now reduced to new commitments in 2005) does not show up in statistics, and thus does not translate into practical visibility, due to the lack of an “EU” entry in official statistical FDI tables. 9 This contrasts with yet another downgrading of Vietnam’s competitiveness ranking by the in 2005, from 77th to 81st (after a downgrading from 60th in 2004, based in particular on Vietnam’s weaknesses in relations to public institutions and technology). However, Asian assessments – such as surveys by the Japan Bank for International Cooperation and by the Korean Organisation of Trade Promotion, presented at the December 2005 Vietnam Business Forum, tend to be much more upbeat. A survey conducted by the Japanese External Trade Organisation (JETRO) in early 2006 found that 78.6% of investors already present in Vietnam intended to expand their operations in the country in the 2006/07, the highest rate for any ASEAN country. 10 E.g. the possibility for FIEs to hold equity stakes of up to 51% in telecom ventures.

21 On the other hand, risk factors such as eroding Vietnamese competitiveness may keep new FDI inflows in check. One issue which has caused considerable concern among investors was the increase in official minimum salaries at foreign-invested enterprises in early 2006 (in the context of extended wild-cat strikes), which is likely to have a knock-on effect on all salaries. The possible increase of overall wage bills could erode Vietnam’s margins vis-à-vis e.g. competition from China (where salaries remain higher, but productivity is also superior).

The level of domestic private investment, which has grown substantially since the introduction of the Enterprise Law in 2000, continued to rise. Since 2000, 161,000 new companies, mostly small and medium-sized, have been created, which now account for some 27% of aggregate social investment and 45% of GDP. Some 40,000 new firms were established in 2005 alone, with a registered capital of USD 6.8 billion, a 41% increase in private sector capital.

Domestic private investment accounted for 32.2% of total in 2005, with USD 6.6 billion worth of new capital, up by around 28%. However, the true potential of Vietnam’s private investment will not be tapped unless most of the current 5,650 state-owned enterprises (SOEs), many of them loss-making, are restructured or wound up, and the private sector is granted access to all economic sectors, as well as to banking credit, on equal terms (see “Economic Reforms”). In 2005, the share of SMEs in outstanding bank loans reached 30% (+17%); however, 70% of SMEs remain without access to bank finance. Ironically, the new CIL, whilst bringing improvements for foreign investors, might make the lives of domestic investors more difficult, notably by a new requirement to register domestic investment projects or seek approval for large or “sensitive” projects.

Vietnamese FDI abroad is on the rise, although it remains minor in absolute terms. Vietnam has now invested USD 320 million in 140 projects in 30 countries, with the main destinations being Iraq (USD 100 million in oil and gas ventures) and Laos (USD 84.5 million), as well as . The government is considering easing procedures for outward FDI licenses, with a priority on Vietnam’s “backyard” – Laos and Cambodia – where FDI is i.a. seen as an important political tool to counter growing Chinese influence.

INTERNATIONAL INTEGRATION – WTO AND AFTA

Vietnam made good progress in its WTO accession process in 2005, although it failed to reach its target of acceding at the December 2005 Hong Kong Ministerial, due to unfinished business both in bilateral negotiations – which could not be wrapped up in time with a number of partners, including the US and – and on the multilateral front. Delays are due notably to the insistence by the US and others that Vietnam should implement the bulk of its accession commitments already prior to entry, due to the bad experience made i.a. in the context of China’s recent WTO accession. Despite the adoption of dozens of pieces of related legislation in 2005, some key instruments are yet to be promulgated; these i.a. include the important implementing decrees of the Common Investment, Intellectual Property and Unified Enterprise laws.

No new official target date has been set for accession, but Vietnam looks likely to become member by the end of 2006, as it has already concluded bilateral talks with all partners in the first months of 2006.

A number of issues remain to be resolved in the multilateral talks in Geneva. Discussions at the mid-March session of WTO Working Party on Vietnam’s accession focused i.a. on Vietnam’s investment regime (including the allowed ratio for foreign shareholding in Vietnamese companies) and export subsidies, where Vietnam is asking for a 5-year transition period for phasing them out. In addition, Vietnam still needs to adopt legislation and submit it to WTO members for consideration in a number of areas, and the Working Party Report will require considerable redrafting on this basis. Two working party meetings, one in July and the second possibly after the summer, will be needed to wrap up the negotiations.

The bilateral agreement between Vietnam and the US was signed at the APEC economic ministerial meeting on 1 June 2006. Following this, US Congress will have to vote on granting Vietnam permanent “normal trade relations” (MFN) status to allow for adoption of the bill before the summer recess.

Vietnam’s regional integration in the ASEAN Free Trade Area (AFTA) framework is also not free from

22 problems. Under the extended implementation periods for tariff reductions granted to less developed members under AFTA, Vietnam should have brought most tariff lines into the “inclusion list” (IL), making them subject to preferential tariff rates of 0-5%. By mid-2005, over 96% of lines had been included in the IL. However, as in other ASEAN countries, industrial policies, in Vietnam’s case notably in support of domestic automobile and motorcycle assemblers, are causing delays in integration. Vietnam has proposed to its partners to reduce rates for 14 tariff lines in these areas gradually, reaching the 5% rate only in 2009/2010, from current rates which are as high as 90%. This would have to be negotiated with ASEAN partners, and compensation granted.11 Reports on Vietnamese misclassification or incorrect application of AFTA preferential rates at customs point also remain frequent.

PRIMARY SECTOR

The agricultural, forestry and fisheries sector in 2005 once again underperformed vis-à-vis the other parts of the economy, with its output growing at a modest 4.9%. Nonetheless, this was a bit better than the sector’s dismal 2004 showing (+3.5%), and agricultural exports (with the exclusion of fisheries products) increased by 29% in value terms to USD 5.8 billion. This was due notably to upswings in export prices for Vietnam’s top four agricultural export products, namely rice (+15.7%), rubber (+17.9%), coffee (+24.6%) and nuts (+13.5%), as well as a bumper rice crop (exports up 27.3% in quantitative terms). The impact of avian influenza, which returned in 2005, remained limited, subtracting only around 0.1% from GDP, due to the higher level of preparedness which allowed the government to bring outbreaks under control much more rapidly than in 2004. Vietnam officially has been free of AI since early January 2006, although at least some limited recurrence of the disease is likely in the current year.

The fisheries sector also performed well in exports, which grew by 14.2% to USD 2.7 billion, boosted mainly by export growth of aquaculture exports such as and catfish. Exports were, however, hampered by controversial antidumping duties imposed by the US on these two categories in 2004. Vietnam’s efforts to diversify its export markets for fisheries products were partly successful; the EU has now become the main market for catfish, accounting for some 80% of exports.

Given the high degree of its dependence on only a handful of commodities – rice, rubber, coffee and cashew account for 57.5% of overall non-marine agricultural exports, and seafood is another top money spinner – Vietnam’s agricultural sector remains very vulnerable to world market fluctuations. This is a problem partly of Vietnam’s own making. The country in recent years has suffered times and again from its own success. Massive government promotion of a given commodity – first rice, followed by coffee, black pepper, cashew nuts, and aquaculture – has invariably led to very high increases in output (although often of low quality due to poor post-harvest processing). Outputs have flooded international markets – Vietnam ranks among the world’s top exporters for all these products – and depressed prices. The latest example, in 2005, was catfish, world market prices for which plunged below the cost of local production, driving many farmers out of business.

Moving beyond the post-doi moi successes in agricultural renovation will require moving away from reliance on low-value, low-quality commodities, and opening up new source of agricultural productivity gains – away from bringing additional physical factors of production into use, and towards technical changes which in turn depend on advances in agricultural research, extension and technology transfer, as well as farmers being able to better adjust their use of resources to market opportunities. As in other parts of the economy, this will i.a. require a diversification of investment sources; however, agricultural investment remains stagnant and dominated by the state. Vietnam’s agricultural diversification efforts – into fruit and , and other commodities such as cocoa – thus have so far had limited success. Given these weaknesses and also in view of an expected softening of world market prices for some commodities, external forecasts are that agricultural expansion will slow further in 2006 and 2007, to about 2.7%. The – still quite upbeat – official target for agricultural export growth in the 2006-10 period is 7.7% p.a., with the share of agriculture (incl. forestry and fisheries) in total exports decreasing from around 20% to 13.7% by 2010.

11 Agreement has already been reached with , whereby Vietnam has lowered rates for 36 tariff lines in compensation since 1 April 2005. This formula is now being applied also to other ASEAN countries for 2006 and 2007.

23 Production of crude oil, the largest single position in Vietnam’s exports (22.9% of total), declined by 7.7% to 18 million tonnes, and export volume by 7.3%. However, due to the sharp increase in world market prices, export value grew by 30.3% to USD 7.4 billion. But gains in export revenues were largely offset by the higher costs of imported refined products (+40%, USD 5.1 billion), as Vietnam has virtually no refining capacity of its own. Its dependence on these imports will continue, due to the delays in the construction of the USD 1.3 billion Dung Quat refinery – widely considered a “white elephant”. Coal production increased by 21.7%, over half of this was exported, generating revenues of USD 658 million.

In mineral extraction, Vietnam is also setting its future hopes on large-scale mining of . The country is thought to sit on reserves of over 8 billion tonnes of the mineral, used for aluminum production, ranking it 4th behind Australia, Guinea and Brazil. Reserves are located mainly in the Central Highlands, but there is no significant extraction so far. Preparatory work is now starting, and Vietnam hopes to be able to produce 1.7 million tonnes of bauxite and 600,000 tonnes of alumina per year from 2009 onwards.

INDUSTRY AND SERVICES

Industrial output growth in Vietnam in 2005 – 17.2% overall – was led, as in previous years, by the private domestic sector with a 24.1% increase. The foreign-invested sector rebounded to 20.9% (from a 2004 low of 15.7%), while industrial state enterprises increased output by just 8.7%, continuing their downward trend. In a continuation of longer-term trends, the private sector increased its share of production to 30.2%, while SOEs fell back further, to 32.4%. The foreign-invested sector for the first time took the lead position, with 36.8%.

Production of textiles and garments, Vietnam’s main export article after crude oil, increased by 14.8% to 1,026 million units. Exports netted USD 4.8 billion, up 9.6%, but below the USD 5.2 billion target. This was due mainly to fierce competition from WTO members such as China following the lapse of the WTO Agreement on Textiles and Clothing on 1 January 2005, whilst Vietnam continued to be constrained by quotas in many major markets as a non-WTO member – notably in the US, the destination for around half of Vietnam’s global textile exports.

Vietnam is therefore keen to diversify its export destinations for textiles. It had high hopes in particular for the EU market, following the conclusion in December 2004 of an EC-Vietnam “Early Harvest” agreement in the WTO accession context. The deal secured quota-free access to the European market since 1 January 2005. However, Vietnam’s hopes to more than double exports to the EU (to USD 1.5 billion) were dashed by fierce international competition; actual growth was only 8.7% (against 47% for the Chinese competition). Vietnam has also secured quota-free access to and Japan, but Vietnamese overtures towards the US have been rejected. The country is now setting his hopes on the expansion of production of higher quality textiles and garments as well as on increased brand building, with the aim of becoming the 10th global exporter by 2010. Given the constraints, this target, as well as the 2005 export target of USD 5.5 billion might however prove hard to reach.

Footwear production, mostly for exports, also increased, with exports up 11.7% to USD 3 billion (but remaining below the USD 3.4 billion target). The EC antidumping investigation launched in July 2005 hindered rapid export expansion to the EU (which absorbs around three quarters of total footwear exports); exports nonetheless grew at around the global average rate. Following the imposition of provisional EC anti- duties of 16.8% in April, Vietnam now fears that European orders will shift to third countries such as India or Pakistan (China is also affected by the anti-dumping case, with a rate of 19.4%), leading to factory closures and massive job losses in Vietnam. These fears may be overblown; despite the ongoing investigation, global footwear exports grew by 23% in the first quarter of 2006.

The contribution of the services sector to GDP growth rose from 7.3% in 2004 to 8.5% in 2005. According to official figures, Vietnam earned USD 5.6 billion from services exports in 2005 (against a USD 4 billion target), although no details are available.

Tourism remained one of the main growth drivers in the services sector. It already represents 4% of GPD and 2% of employment. Tourist numbers grew by 18.4% to reach a new all-time high of 3.4 million (doubled since 1999). Tourism revenues increased by 15.4% to USD 1.9 billion. China, the US, Taiwan, Japan and

24 South Korea accounted for most international arrivals. This was due not least to visa exemptions for Japanese and Korean tourists (as well as some other ASEAN countries including Singapore and Thailand), and, since 2005, for the Nordic countries. An extension of the visa waiver to other EU Member States is under consideration. Despite being hampered by a still sub-par tourist services infrastructure and the lack of trained tourism professionals, tourism is set to grow further in the future, notably because of perceptions of Vietnam as a stable country with a low risk of terrorist attacks. The World Travel and Tourism Council expects Vietnam to rank 6th in global tourism growth in the coming decade, with annual sectoral growth of 7.5%. Vietnam itself hoped to receive an annual target of 6 million visitors by 2010.

The government has set ambitious targets for the development of the services industry in the next five years, with an export target of USD 12 billion for 2010. It i.a. has high hopes for emulating India’s success in the software sector, targeted to reach USD 1.2 billion turnover (domestic + exports) by 2010. The software industry grew at 34-40% p.a. in recent years, albeit from a very low level. Expansion is hampered by lack of qualified software engineers, as well as stiff competition from China and India, and insufficient IPR protection.

For the realization of its goals for the expansion of the tertiary sector, Vietnam will – as in other sectors of the economy – have to unleash the productive energy of the private sector. SOEs still account for around half of the services sector as whole, and continue to dominate key sectors – financial services, telecommunications and transport. There is considerable potential for a larger role of non-state enterprises in these, but as in other sectors, such as distribution and retail trade, IT and professional services, it remains largely untapped.

For industry and services in general, Vietnam’s medium-term aim is to attract FDI into more sectors, and towards outputs with higher added value, such as IT, electronics, chemicals, , machinery, pharmaceuticals and cosmetics, but also shipbuilding, where Vietnam has been making inroads in some market segments, earning almost USD 500 million in 2005 (which made the country the 11th largest shipbuilder). Several key sectors for future FDI and economic diversification in general are mentioned in the 2006-2010 5-yearplan. However, there is no clear prioritization or the formulation of a coherent industrial policy. Bottlenecks Vietnam will have to face are productivity and quality issues (both remain low), the shortage of skilled labour, and the acquisition of state-of-the-art technologies.

EMPLOYMENT

The official urban unemployment figure at the end of 2005 was 5.3% (slightly down from 5.6% in 2004). However, this does not account for the substantial underemployment in the cities, and especially in the countryside. According to official figures, the “rate of utilized working time by economically active population in rural areas” in 2004 (latest available) stood at 79.1%. As Vietnamese baby boomers born after the war (population growth stands now at 1.5%) come of age, the need for job creation – 1.2-1.4 million new jobs are required per year – will become more acute. How to generate sufficient employment, avoid unrest and control migration to urban centers, is one of the main challenges facing the government. With the SOE sec- tor accounting for only 6-7% of the workforce, SMEs are the main driving force in employment creation. The Enterprise Law helped create some 2 million new jobs since 2000, mostly in the SME sector.

Another outlet, of little significant in numbers, but of high financial importance, is Vietnam’s increasing success as an exporter of labour. 70,500 workers were sent overseas in 2005, bringing the total number of those working abroad – mainly in and Taiwan, but also in other countries in the region, and, increasingly, in the Middle East – to around 400,000.Although only a third of these are skilled or professional employees, remittances from overseas workers accounted for USD 1.7 billion in 2005. Vietnam’s wishes to further expand labour exports have been bedeviled by illegal migration concerns, not least in the EU which so far has not become a significant market. An UK pilot scheme which allowed for the contracting of a limited number of workers from Vietnam and other developing countries was suspended in mid-2005, shortly after its inception, due to high levels of workers who broke their contracts and stayed on illegally.

25 MONETARY POLICY AND FINANCIAL SECTOR

In a bid to stem inflationary pressures, the State Bank of Vietnam (SBV) continued to tighten monetary policy in 2005. The SBV in July raised the reserve rate from 2% to 5% for VND deposits and from 4% to 8% for foreign currency deposits. After initially ruling out the use of other monetary policy tools, fearing that these could drive up interest rates, and lead to reduced production and investment, higher unemployment, and slower economic growth, the SBV in January 2005 increased the refinancing rate from 5 to 5.5% and the discount rate from 3 to 3.5%. To justify this measure, it pointed at rising interest rates for deposits which the SBV fears could stunt domestic demand. The prime lending rate was raised twice, increasing from 7.5% to 8.25% in early 2006. The SBV also expanded its open market operations, pumping in over USD 3.2 billion in the first semester of 2005.

These measures manifest the SBV’s efforts to reassert control over credit growth at commercial banks. This had mostly eluded the SBV in recent years, despite the fact that the banking sector itself remains largely in the hands of the state, with a credit market share of around 70% concentrated in five large state-owned commercial banks (SOCBs). The other banks mostly specialise on smaller niches. The 29 foreign banks cater mostly to foreign-invested companies, and hold only some 10% of the country’s loans and 15% of its deposits. The 36 joint stock banks (JSBs) and 4 joint venture banks specialise in credit to the domestic private sector.

SOCBs themselves remain puny in international comparison, with a combined capital of only around USD 1.1 billion; lending remains their major source of income, in the absence of more sophisticated financial products. SOCBs suffer from government-directed lending for large infrastructure projects and for propping up unprofitable and inefficient state-owned enterprises (SOEs). This has led to high levels of bad debt at SOCBs, estimated at some 20% of outstanding loans.12 SOCBs’ capital equity ratios at an estimated 3.5-4.5% remain far below the Basel II standard of 8% which Vietnam has committed to the IMF to fulfil by 2008 despite massive capital injections by the state (some USD 700 million in the year up to May 2005; the IMF estimates that almost USD 8 billion in further capital expansion would be required by 2010 to reach the international benchmark). Bad debts are only the most visible sign of the persistent misallocation of capital. Many more loans do not go bad, but yield only low returns, to the detriment in particular of the cash-strapped private sector.

SOCBs will thus face an uphill struggle when faced with increased international competition after Vietnam’s WTO accession. In the medium term, SOCBs are to be equitised and listed on the stock market, not least to increase their capital – pilot projects for the equitisation of and the Mekong Housing Bank are already underway, although they have been long delayed. This would also open the way to participations by foreign banks, which would help to bring in international experience and technologies. However, under the current draft legislation, foreign banks would be limited to 30% of chartered capital (10% max. for individual stakeholders, and 20% for “strategic” investors), would require government approval on a case-by-case basis when investing, and the SBV would retain a majority stake in SOCBs – restrictions which could discourage investors and stymie the desired technology transfer.

In contrast, other domestic banks, notably the joint stock banks have advanced further than the SOCBs in developing new services and products, and have made outstanding progress with average annual returns on equity of 15-17% and capital adequacy ratios of 8%. The four largest JCBs now have charted capital of over VND 1 trillion (USD 63 million), with the largest two – Asia Commercial Bank and Sacombank – at around double this amount. Sacombank in April 2006 became the first JSB to apply for listing on the HCMC bourse, hoping to raise additional capital.

Vietnam’s non-bank financial sector remains underdeveloped. The Ho Chi Minh City stock exchange is still in its infancy. With a mere 34 listings – 29 of them equitised SOEs (partly privatised), and one investment fund.

The HCMC exchange’s role as a financial intermediary has so far remained rather marginal. Its future development is closely interlinked with the process of SOE reform which has been slow in recent years, as

12 Estimates vary wildly, due to weak accounting standards: IMF 15%; Standards & Poor 50-75%. Official SBV figure: 4.6% (2004).

26 well as with its opening to foreign-invested enterprises (FIEs). The raising of the cap for foreign ownership of joint-stock companies from 30 to 49% of total listed and registered shares in September 2005 would also provide a boost to the HCMC exchange, not least by making it more attractive to institutional investors.

The stock market has seen a surge in activity in 2005, due i.a. to the freeze in the Vietnamese real estate market following the implementation of legislation to cool down speculation in this sector (which resulted in 70% drop in transactions) prompting investors and banks to shift investment into the stock market. The VN Index has reached an all-time high, soaring by 63% in the first 4 months of 2006. Much of this trading seems to be short-term and speculative, with many stock purchases financed by lending against previous purchases. This is increasingly raising concerns about an overheating of the stock markets and resulting volatility in the banking sector. However, the engagement of foreign investors in the stock market is also increasing – they now hold some 25% of listed stocks and almost 40% of listed investment certificates.

Market capitalisation represents a mere 3 % of GDP with only one company - recently privatised Vinamilk - accounting for half of it. The government’s target is to reach 10% of GDP by 2010. Forthcoming flotation will test the water for further development of the stock market as they will feature some big names including mobile operator MobiFone and the biggest state owned commercial bank Vietcombank. This should give Vietnam’s hitherto shallow financial markets a much-needed boost. A Taiwanese company will be the first foreign invested company to be listed in the recently inaugurated Securities Trading Centre, which the government is keen to promote as a second stock market specialized in IT companies.

Vietnam launched for the first time USD 750 million of dollar denominated sovereign bonds for the international market in October 2005, obtaining good market ratings. The spread over the US treasuries is higher than that obtained by China and Malaysia but lower than or the . Vinashin - a state owned shipbuilder - will fund its expansion plans out of this funds. Other state owned companies such as Electricity of Vietnam and are also considering following suit with their own bond issuance.

Vietnam’s insurance market, although it has been growing at an average rate of 29% over the last decade, also remains relatively small in regional comparison. Premiums in life insurance – the sub-sector with the highest growth potential, given Vietnam’s high rate on the one hand, and its underdeveloped social security system on the other – accounted for USD 497 million. Life insurance suffered a setback in 2005; the number of new subscribed policies with around 900,000 was only half the 2004 figure, and the number of all premium-paying policies dropped by over 1.4 million to 5.1 million. Inflation, soaring prices of the stock market and gold (a traditional alternative investment), rising deposit interest rates and yield from government bonds, and the complexity of insurance policies which remain poorly tailored to the local market all took a bite out of industry income.

However, the insurance sector is held back by the lack of investment options; around half of premiums are invested in government bonds. Vietnam now has 31 insurance firms, including one re-insurer, 8 life insurers, 7 insurance brokers and 16 non-life insurers. 12 of these are foreign-invested, and one – Prudential – has a 40% market share in life insurance; in the non-life sub-sector, state-owned enterprises continue to dominate (79%). Life: 4 100% FIEs, 1 JV; non-life: 2 100% FIEs, 3 JVs, 9 domestic; brokers: 3 foreign with 83.8% of market.

CURRENCY

The Vietnamese Dong (VND) depreciated by a mere 0.9% against the USD in 2005 (slightly above the 2004 level, 0.8%). The SBV exchange rate policy is one of a crawling peg of the VND against the USD, allowing the VND to move within a band of +/-0.25% vis-à-vis the reference rate for the previous day. The VND has become gradually more stable in recent years, despite a very low level of State Bank intervention to support the currency’s value. The government is considering widening the band within which the VND is traded, to help improve the competitiveness of Vietnam’s exports in international markets; this may result in a slightly faster rate of depreciation. Moreover, the increase of VND supply in the economy, due i.a. to decreased credit expansion, is taking its toll. Despite a global weakening of the USD and an abundant USD supply resulting from strong flows of remittances and FDI and a trade surplus in the first quarter 2006, this caused the USD to jump over the psychological barrier of VND 16,000, and black market rates surged to VND 17,000.

27 Despite the VND’s relative stability, Vietnamese citizens continue to hold large amounts in USD and gold, with the USD used routinely in many day-to-day transactions, and almost all real estate business handled in gold. Although known dollarisation over the past years decreased from 40%, it remains high, at currently at 24%, to which considerable amounts hoarded in cash have to be added. The soaring price of gold is changing the traditional habit to conduct certain monetary transactions in gold. 60% of real estate transactions, once carried out almost exclusively in gold, are now dong-denominated; loans and home-pur- chase schemes denominated in gold are also on the retreat. However, many rural residents continue to hoard their in gold. Cash transactions share in total financial transactions fell down from 24% to 21% in 2005. A new ordinance on foreign exchange is expected to curb dollarisation by reducing internal use of USD, while liberalising currency transactions in international payments.)

ECONOMIC REFORMS

The pace of state-owned enterprise (SOE) reform, whose centrepiece is “equitisation”, the transformation of SOEs into joint stock companies and their partial divestment, accelerated in 2005. Since 2001 out of the 5,655 SOEs, 3,349 were restructured, of which 2,188 were equitised, 252 dissolved, 416 merged, 184 allowed to go bankrupt, 124 transferred to individuals and 182 disposed of. The whole equitisation process is expected to be completed by 2007 or 2008.

SOEs still represent a substantial part of the economy – 40% of GDP, 37% of industrial output and 35% of non-oil exports (but only 6-7% of employment). A mere 10% of state capital in SOEs has effectively passed into private hands, since most equitised SOEs are relatively small, and the state in many cases has retained considerable equity stakes in them holding the majority of shares in over 30%, equivalent to 12% of all enterprise holdings.

The state will retain 100% ownership in “sensitive” fields such as public utilities and power transmission, as well as in large and profitable SOEs in industries such as oil and gas, aviation and railways; 900-1,000 SOEs fall into these categories. The state will also retain a controlling (>50%) stake in SOEs in energy, mining, telecommunications infrastructure, cement and steel production, sanitation and water supply, and banking and insurance. While the decision provided more clarity on which SOEs are subject to equitisation, the long exclusion list of sectors and types of enterprises remains disappointing.

The SOE sector’s continued central economic role is a concern, in view of its negative implications for private sector development and the stability of the financial system. SOEs absorb a good third of the bank credit available and enjoy other types of preferential treatment from the authorities, e.g. as regards land allocation. They thus deprive the private sector – which consistently outperforms the SOE sector, despite the latter’s improvements in profitability – of growth opportunities. SOEs also account for the lion’s share of Vietnam’s non-performing loans, and thus weaken the position of the banking sector, notably of the four large state-owned commercial banks (SOCBs). SOE reform, and, linked to it, reform of the banking system to ensure that credit is allocated in accordance with market principles, are therefore of crucial importance for the future of the economy.

Preparations are still under way for an eventual equitisation of Vietcombank, one of the big four SOCBs, and Mekong Housing Bank, another, smaller SOCB as well as VMS (MobiFone) a mobile phone operator. However, it should be noted that similar announcements have been made on a number of occasions in the past, without being realised. The equitisation of Vietcombank in particular has been mooted for years, but repeatedly run into difficulties over the valuation of the bank’s assets, notably over loan classification and loan loss provision.

28 II. LEGAL DEVELOPMENTS

The Unified Enterprise, Common Investment and Intellectual Property laws were adopted by the National Assembly in November 2005, with substantial contributions from the private sector, including foreign law firms. The laws are generally considered to be in line with Vietnam’s WTO obligations, hence eliminating discriminatory regimes applicable to foreign and domestic owned companies.

Unified Enterprises Law (UEL)

The UEL was approved in November 2005 and is seen as a benchmark in granting more level playing field with regards to corporate governance for both domestic and foreign enterprises. The UEL provide the corporate governance mechanism and common provisions for 4 types of business including limited liability company, joint stock company, partnership company and private enterprise.

Two improvements of the UEL are: Firstly, the UEL does not set the restriction on foreign ownership in the local joint stock companies but leaves it to later regulations. Secondly, the abolition of the unanimous consensus which used to cause deadlock for a lot of business decision in the joint ventures is a positive step as it is not restrictive and business friendly. In the former Foreign Investment Law, if only one member in the JV board of management disagrees, the decision can not be approved. However, in the UEL, by creating three meeting mechanism and based on the content of the meeting as well as the power of the minority or majority shareholders, the deadlock has been removed. For most of decisions, if at least 65 % of participants present at the meeting, it will be passed.

One question that existing foreign invested companies worry is how the UEL will affect their operation. They have two options. They can re-register and organize management/activities according to UEL within 2 years since the date of effect. Or if not, they can continue carrying out business activities in the sector and in the period as stipulated in their Investment License and will continue to benefit from other regulations of the government. This means the UEL has flexibility for the existing FIEs to choose to be subject to former Foreign Investment Law or Unified Enterprise Laws if they can find more benefits.

It is worth noting that the re-registration of the JV under the Foreign Investment Law requires a unanimous vote from the BOM of the existing JV. The minority partner (either it can be local partner or even the foreign partner in the JV) might not agree to relinquish their power entitled to them under the current Foreign Investment law.

Common Investment Law (CIL)

CIL was approved in parallel with the UEL and will come into effect on 1 July 2006. The law governs both direct and indirect investment. Both foreign and domestic investors are governed by the same law: UEL and CIL. UEL governs the corporate governance and CIL regulates access and entrance to the market through licensing and registration requirement and conditional sectors of the market.

The law is seen as a step forward as it allows parties freedom to invest in areas as long as they are not legally barred rather than allow FDI only in areas specified by law.

Progress in the new law is the prohibition of the government from intervening into economic activities of the business like forcing exportation of a certain percentage of goods and services, requiring a localization ratio in manufactured goods, limiting imports on the quantity of goods exported. However, it is not clear whether this clause will be removed for the existing enterprises which currently are subject to this regulation. However, one principle of the CIL is investor may enjoy the more favourable terms of the new law so it is expected that the above regulation can also be applied for the existing enterprises.

Problem lies in the parallel system of registration and licensing for enterprises depending on the size and sector of investment. The brief requirements for registration and licensing can be found below:

29 Registration and licensing

Investment Investment Business Evaluation/ Registration Registration Only Certification

Domestic Investment Domestic Foreign & Foreign & Foreign & Investment Certification Project dosmetic dosmetic dosmetic Project between projects projects projects with VND below VND over VND over VND invested 15 - 300 300 bilion 300 bilion 300 bilion capital less bilion falling in falling in not falling than VND Foreign conditional conditional in 15 billion Projects less sectors sectors conditional than VND 300 sectors bilion

30 III. EUROPEAN UNION AT A GLANCE

The European Union (EU) is currently made up of 25 countries, committed to working together for peace and prosperity. They form the largest voluntary and peaceful bloc in the world: 470 million European citizens facing together the challenges of our time.

The process of European integration was launched on 9 May 1950 when France officially proposed to create "the first concrete foundation of a European federation". Six countries (Belgium, , France, , Luxembourg and the ) joined at the very beginning. In 1951 the six countries signed the Treaty of Paris establishing the European Coal and Steel Community (ECSC) and, in 1957, the "Treaties of Rome" establishing the European Economic Community and the European Atomic Energy Community (EURATOM).

Today, the EU has 25 Member States, after five waves of accessions (1973: , Ireland and the ; 1981: Greece; 1986: and ; 1995: Austria, Finland and ; May 2004: , , , , the Czech Republic, Slovakia, , , Cyprus and ).

Never before has the EU embraced so many new countries, grown so much in terms of area and population or encompassed so many different histories and cultures. This historic opportunity will unite the European continent, consolidating peace, stability and democracy, and enabling its peoples to share the benefits of progress and welfare generated by European integration. A number of agencies and bodies complete the system. Among them are: The European Central Bank; The European Investment Bank; The European Economic and Social Committee; The Committee of the Regions.

The EU was conceived in search of a model of European integration that would prevent war amongst its members from ever happening again. War between EU countries is now most unlikely after more than 50 years of building unity. The EU is rather involved in keeping peace and stability in neighbouring countries and in other parts of the world. The EU is the biggest donor of financial assistance to troubled places in the world.

The European Union is based on the rule of law and democracy. Its Member States delegate sovereignty to common institutions representing the interests of the Union so that decisions on questions of importance to Europe as a whole can be made at European level. All decisions and procedures are derived from the basic treaties ratified by the Member States. In this context, a landmark decision was made in June 2004, when EU Heads of State and Government approved an "EU Constitutional Treaty". The Constitution, which was signed at the end of 2004 and will enter into force after ratification by all Member States, foresees, inter alia:

l a single legal foundation for the EU, represented by the Constitution, replacing the EC and EU treaties;

l legal personality for the EU;

l the creation of an EU citizenship, with all citizens enjoying a number of basic rights, laid down in the Charter of Fundamental Rights which becomes an integral part of the Constitution;

l the election of the President of the European Council by qualified majority, for a term of two and a half years, renewable once;

l the appointment of a for Foreign Affairs of the Union, combining the functions of Vice-President of the Commission, and chair of the Foreign Affairs configuration of the Council of Ministers;

l the extension of qualified majority voting in the Council, and the introduction of the principle of "double majority" (of Member States and represented population);

l a further increase of the legislative and budgetary powers of the European Parliament.

Europe is a continent with many different traditions and languages, but also with shared values. The main aim of the European Union is to create ever-closer cooperation among the European peoples, where decisions are taken as close to citizens as possible.

31 The EU is run by five institutions, each playing a specific role:

l European Parliament (elected by the peoples of the Member States); l Council of the European Union (composed of the governments of the Member States); l European Commission (driving force and executive body); l Court of Justice (ensuring compliance with the law); l Court of Auditors (ensuring sound and lawful management of the EU budget).

32 EU Trade with Vietnam (EUR milion) (Excluding Intra - EU trade) source: EUROSTAT (COMEXT)

EU Imports

EU Exports

33 Total Trade

Vietnam's trade with major partners (USD million) Source: GSO

Vietnam’s Exports

34 Vietnam’s Imports

Total trade

35 Foreign Direct Investment (FDI) in Vietnam Source: GSO - MPI

36 Title indicates EUropean EXports or IMports to and from Vietnam. The period is denoted by Year (for full years), Semester or Quarter, Year. http://europa.eu.int/cgi-bin/make_inforeuro_page.pl?en/USD EC DELEGATION TO VIETNAM Level of detail is shown as HS6 (subheading), HS4 (heading) or HS2 (chapter). TRADE STATISTICS Other notes are provided at the end of the table.

EU EX - Vietnam Y 05 HS2

FR NL DE IT UK IR DK GR PT SP BE LU SW FI AU HU CY CZ LT LV ML PL SL SK EE +EU 25

00 TOTAL FOR COUNTRIES WHOSE DATA ARE CONFIDENTIAL, B 01 LIVE ANIMALS 869.53 0.10 728.44 0.60 1,598.67 02 MEAT AND EDIBLE MEAT OFFAL 131.16 9.33 113.68 13.78 30.82 15.18 34.42 11.01 201.91 561.29 03 FISH AND CRUSTACEANS, MOLLUSCS AND OTHER AQUATIC I 251.23 318.41 227.75 147.26 1,303.43 92.05 4,085.44 1,014.00 42.20 0.01 195.99 2,018.59 9,696.36 04 DAIRY PRODUCE; BIRDS' EGGS; NATURAL ; EDIBLE 7,917.26 21,468.42 7,043.90 9.69 122.76 1,853.39 356.92 39.89 12,619.62 47.45 1,079.79 8.19 1,645.74 12,121.19 37.40 66,371.61 05 PRODUCTS OF ANIMAL ORIGIN NOT ELSEWHERE SPECIFIED 263.77 2,013.90 622.85 358.23 226.38 4.76 0.02 3,489.91 06 LIVE TREES AND OTHER PLANTS; BULBS, ROOTS AND THE 4.46 2,105.47 9.76 2,119.69 07 EDIBLE VEGETABLES AND CERTAIN ROOTS AND TUBERS 94.50 68.59 21.97 86.85 31.63 303.54 08 EDIBLE FRUIT AND NUTS; PEEL OF CITRUS FRUITS OR ME 7.57 0.11 0.52 9.37 10.26 46.07 73.90 09 COFFEE, , MATE AND SPICES 48.32 12.11 12.20 95.97 13.58 182.18 10 CEREALS 126.14 126.14 11 PRODUCTS OF THE MILLING INDUSTRY; MALT; STARCHES; 6,689.38 477.49 1,835.14 117.31 2,809.98 1,994.44 2,276.23 5.09 178.65 392.74 16,776.45 12 OIL SEEDS AND OLEAGINOUS FRUITS; MISCELLANEOUS GRA 38.84 69.67 2,708.78 138.92 1.61 72.17 1.34 211.36 0.92 0.99 246.97 104.40 3,595.97 13 LACS; GUMS, RESINS AND OTHER SAPS AND EX 527.70 22.77 877.31 23.80 11.54 9.90 8.41 0.16 13.46 64.14 1,559.19 14 VEGETABLE PLAITING MATERIALS; VEGETABLE PRODUCTS N 15 ANIMAL OR VEGETABLE FATS AND OILS AND THEIR CLEAVA 36.27 167.08 68.90 322.20 1.64 143.17 279.56 1,018.82 16 PREPARATIONS OF MEAT, FISH OR CRUSTACEANS, MOLLUSC 238.24 100.06 37.39 102.62 30.92 473.15 39.53 14.64 1,036.55 17 SUGARS AND SUGAR CONFECTIONERY 584.95 534.03 86.49 827.64 31.43 283.13 87.73 149.61 631.63 0.01 401.58 3,618.23 18 COCOA AND COCOA PREPARATIONS 105.37 22.15 159.53 24.05 13.63 217.06 0.08 81.41 623.28 19 PREPARATIONS OF CEREALS, FLOUR, STARCH OR ; PA 780.32 6,945.11 371.05 474.62 392.99 9,406.62 2,900.19 1,774.79 544.97 1.57 82.72 16.40 36.75 7.69 23,735.79 20 PREPARATIONS OF VEGETABLES, FRUIT, NUTS OR OTHER P 78.33 18.60 105.75 130.73 3.75 202.07 135.36 91.38 24.68 18.79 7.82 12.98 830.24 21 MISCELLANEOUS EDIBLE PREPARATIONS 1,365.05 20,570.19 2,817.49 134.92 86.99 4,860.74 1.88 4.22 38.49 31.26 1,223.37 92.20 64.19 31,290.99 22 BEVERAGES, SPIRITS AND VINEGAR 8,511.48 1,517.25 297.31 848.76 398.17 87.28 47.92 58.64 238.32 75.58 1.54 2.22 171.53 0.33 105.00 40.51 12,401.84 23 RESIDUES AND WASTE FROM THE FOOD INDUSTRIES; PREPA 1,288.60 2,390.11 1,459.65 1,384.16 344.86 426.01 946.19 232.93 30.83 48.12 767.74 9,319.20 24 TOBACCO AND MANUFACTURED TOBACCO SUBSTITUTES 2,511.99 633.43 74.92 32.88 0.25 52.83 3,306.30 25 SALT; SULPHUR; EARTHS AND STONE; PLASTERING MATERI 465.47 28.25 467.27 919.29 771.28 0.05 79.47 221.55 13.45 1.64 7.38 21.63 36.54 3,033.27 26 ORES, SLAG AND ASH 1.16 86.80 143.16 67.64 298.76 27 MINERAL FUELS, MINERAL OILS AND PRODUCTS OF THEIR 206.29 45.93 454.57 8.40 105.79 0.17 23.42 2,184.81 9.50 39.36 0.16 1,628.23 73.51 4,780.14 28 INORGANIC CHEMICALS: ORGANIC OR INORGANIC COMPOUND 731.80 46.42 2,285.39 773.71 1,653.09 10.61 118.02 868.82 117.69 30.35 194.15 35.29 44.78 13.48 6,923.60 29 ORGANIC CHEMICALS 9,097.26 4,659.30 6,051.31 4,771.66 2,876.44 52.63 166.54 24.98 78.33 2,534.03 3,937.60 55.29 1,139.60 443.90 38.68 178.73 0.35 52.76 45.88 679.21 149.69 37,034.17 30 PHARMACEUTICAL PRODUCTS 65,445.88 10,257.95 20,102.88 8,651.05 10,299.33 2,335.70 489.84 525.91 644.23 2,919.99 9,648.42 2,944.37 22.51 4,142.27 11,624.71 3,580.34 910.76 3,311.97 324.62 112.93 158,295.66 31 FERTILIZERS 9.00 221.83 132.02 328.46 570.16 15.00 298.78 670.79 509.33 2,755.37 32 TANNING OR DYEING EXTRACTS; TANNINS AND THEIR DERI 941.39 682.59 5,542.28 2,459.16 1,593.51 5.77 1,614.93 54.64 15,026.33 613.98 40.50 1,757.06 209.79 277.15 53.67 0.04 22.12 30,894.91 33 ESSENTIAL OILS AND RESINOIDS; PERFUMERY, COSMETIC 9,972.59 1,051.22 4,984.43 1,072.98 3,140.15 2,472.37 328.93 7.03 732.39 22.85 4.30 0.12 126.71 21.90 73.25 43.65 24,054.87 34 SOAPS, ORGANIC SURFACE-ACTIVE AGENTS, WASHING PREP 395.48 711.35 3,600.75 183.34 415.49 90.17 1,001.73 846.67 27.39 1.55 2.27 1.31 0.08 7,277.58 35 ALBUMINOUS SUBSTANCES; MODIFIED STARCHES; GLUES; E 506.81 489.25 608.61 780.32 354.02 307.09 0.51 134.11 542.36 14.19 11.55 0.04 0.08 15.12 102.63 3,866.69 36 EXPLOSIVES; PYROTECHNIC PRODUCTS; MATCHES; PYROPHO 2.64 38.62 0.05 41.31 37 PHOTOGRAPHIC OR CINEMATOGRAPHIC PRODUCTS 72.47 39.79 714.39 679.29 322.10 10.21 17.14 10.34 1,865.73 38 MISCELLANEOUS CHEMICAL PRODUCTS 12,542.59 1,503.76 15,307.80 2,842.78 6,187.51 1,016.00 1,491.82 2.95 2,540.76 3,957.96 293.43 200.52 141.44 105.35 20.01 8.96 380.89 11.74 0.14 48,556.41 39 PLASTICS AND PRODUCTS 7,849.32 3,065.80 22,729.09 5,118.66 3,577.34 95.07 776.03 50.29 12.95 1,481.49 5,299.27 16.43 6,078.08 33.11 2,184.07 18.67 746.82 16.84 99.89 29.88 0.51 33.09 59,312.70 40 RUBBER AND ARTICLES THEREOF 2,931.37 1,602.51 3,287.72 1,053.94 1,068.80 5.02 25.07 11.87 885.57 754.98 331.41 5.06 102.69 5.68 35.82 17.11 0.10 0.19 7.64 85.26 12,217.81 41 HIDES AND SKINS (OTHER THAN FURSKINS) AND LEATHER 2,919.13 283.37 2,411.33 30,774.25 9,001.39 8.80 226.05 1,182.13 43.06 92.24 165.21 171.21 94.59 47,372.76 42 ARTICLES OF LEATHER; SADDLERY AND HARNESS; TRAVEL 437.81 1.35 95.83 823.05 92.18 5.97 2.69 52.32 4.17 143.53 2.17 0.46 2.93 0.88 1,665.34 43 FURSKINS AND ARTIFICIAL FUR; ARTICLES THEREOF 25.56 63.87 75.41 36.55 71.38 147.03 419.80 44 WOOD AND ARTICLES OF WOOD; WOOD CHARCOAL 2,049.04 62.89 4,671.44 942.51 365.17 0.20 0.17 0.62 113.34 721.95 5,119.53 7,640.14 435.93 15.01 143.52 178.35 399.45 29.02 33.73 778.86 23,700.87 45 CORK AND ARTICLES OF CORK 16.75 79.07 2.22 0.14 98.18 46 WICKERWORK AND BASKETWORK 12.85 2.00 14.85 47 PULP OF WOOD OR OF OTHER FIBROUS CELLULOSIC MATERI 220.37 190.18 6,852.26 39.94 185.71 28.19 123.32 2,842.14 957.88 76.33 11,516.32 48 PAPER AND PAPERBOARD; ARTICLES OF PAPER PULP, PAPE 3,712.68 398.66 5,594.16 1,322.74 854.46 20.01 61.18 1.16 0.15 129.27 653.09 665.39 2,410.83 2,925.39 0.99 72.51 52.68 6.06 478.15 19,359.56 49 BOOKS, NEWSPAPERS, PICTURES AND OTHER PRODUCTS OF 671.55 41.07 790.82 31.55 971.92 39.63 49.62 59.93 187.24 0.03 30.56 2.20 23.59 4.34 1.23 0.10 4,594.72 7,500.00 50 SILK 2.11 256.64 6,748.97 91.30 18.94 1.34 1.42 7,120.72 51 WOOL, FINE AND COARSE ANIMAL HAIR; YARN AND FABRIC 9.89 110.18 261.30 3,460.81 71.55 72.21 15.30 5.46 9.59 0.47 2.12 3.20 9.02 4,031.10 52 COTTON 516.14 144.60 6,285.06 4,526.56 66.46 0.01 704.68 28.49 5.02 399.45 22.25 6.89 339.72 117.86 7.05 8.19 2.32 13,180.75 53 OTHER VEGETABLE TEXTILE FIBRES; PAPER YARN AND WOV 13.78 9.66 438.23 1,400.74 47.71 2.02 19.50 7.44 3.21 121.25 2,063.54 54 MAN-MADE FILAMENTS 3,254.03 450.94 2,257.43 2,143.37 226.85 453.07 4.91 470.01 124.42 38.51 3.49 174.43 12.29 0.35 43.92 9,658.02 55 MAN-MADE STAPLE FIBRES 171.46 64.63 2,149.60 1,810.05 156.79 1,644.84 3,263.58 454.88 1.63 12.29 43.94 126.10 9,899.79 56 WADDING, FELT AND NONWOVENS; SPECIAL YARNS; TWINE, 52.27 1,182.07 3,340.32 880.30 1,377.13 24.15 163.54 113.60 8.35 485.49 0.19 0.64 70.64 7,698.69 57 CARPETS AND OTHER TEXTILE FLOOR COVERINGS 7.33 40.00 61.53 24.65 11.82 160.47 183.51 0.17 12.50 501.98 58 SPECIAL WOVEN FABRICS; TUFTED TEXTILE PRODUCTS; LA 798.23 19.43 1,065.02 392.14 238.72 20.17 351.21 1.36 0.17 3.61 343.11 118.23 131.76 3.54 2.84 47.65 3,537.19 59 IMPREGNATED, COATED, COVERED OR LAMINATED TEXTILE 800.26 55.59 3,972.30 1,667.53 1,169.14 570.11 2.39 60.68 122.39 338.93 56.63 57.61 22.99 15.72 8,912.27 60 KNITTED OR CROCHETED FABRICS 1,502.69 10.55 5,075.27 1,265.43 158.32 282.10 1.54 588.13 181.67 6.54 96.29 0.01 7.84 9,176.38 61 ARTICLES OF APPAREL AND CLOTHING ACCESSORIES, KNIT 39.57 82.57 29.95 460.45 91.38 73.14 0.91 0.91 3.18 7.35 13.38 0.01 0.03 802.83 37 38

EU EX - Vietnam Y 05 HS2

FR NL DE IT UK IR DK GR PT SP BE LU SW FI AU HU CY CZ LT LV ML PL SL SK EE +EU 25

62 ARTICLES OF APPAREL AND CLOTHING ACCESSORIES, NOT 187.18 59.19 882.74 1,344.02 40.61 0.69 12.39 363.66 8.40 25.63 0.20 10.01 9.41 21.73 20.28 0.05 6.70 3.11 2,996.00 63 OTHER MADE UP TEXTILE ARTICLES; SETS; WORN CLOTHIN 113.87 14.20 194.42 67.53 163.76 13.27 9.02 30.10 4.13 3.92 7.70 4.09 1.57 7.49 0.23 635.30 64 FOOTWEAR, GAITERS AND THE LIKE; PARTS OF SUCH ARTI 316.59 14.19 731.59 1,444.37 682.38 5.88 231.47 25.28 10.87 18.23 3,480.85 65 HEADGEAR AND PARTS THEREOF 267.88 4.11 21.61 0.95 2.87 1.77 0.88 0.05 57.34 357.46 66 UMBRELLAS, SUN UMBRELLAS, WALKING-STICKS, SEAT-STI 0.02 0.02 67 PREPARED FEATHERS AND DOWN AND ARTICLES MADE OF FE 1.05 0.06 1.11 68 ARTICLES OF STONE, PLASTER, CEMENT, ASBESTOS, MICA 66.50 200.52 272.12 664.08 25.12 39.59 30.23 81.99 34.82 211.32 67.55 30.12 1.51 0.47 1,725.94 69 CERAMIC PRODUCTS 58.45 57.75 4,242.36 726.93 57.95 0.09 1,943.62 76.53 8.75 87.69 110.58 7,370.70 70 GLASS AND GLASSWARE 705.89 68.45 972.55 580.11 341.14 42.24 0.74 238.19 247.85 125.52 0.47 106.49 6.27 767.35 33.09 89.30 4,325.65 71 NATURAL OR CULTURED PEARLS, PRECIOUS OR SEMI-PRECI 10,833.70 1.07 522.97 340.52 1.58 84.67 26,589.85 13.68 38,388.04 72 AND STEEL 4,535.92 3,850.75 9,833.80 1,845.12 2,872.00 4.84 21.77 53.33 7,949.90 24,689.97 17.05 1,906.51 2,643.99 1,787.62 60.84 97.38 337.99 14.11 62,522.89 73 ARTICLES OF IRON OR STEEL 2,636.16 3,944.68 11,490.00 2,405.65 1,480.90 540.98 4.26 41.63 2,017.79 1,428.12 240.40 708.02 101.12 1,089.80 10.06 469.86 20.69 13.69 4,873.17 90.93 33,607.91 74 COPPER AND ARTICLES THEREOF 433.29 219.64 1,538.64 1,216.03 612.77 1.67 36.96 20.38 47.93 165.97 109.61 1.24 4.84 7.30 4,416.27 75 NICKEL AND ARTICLES THEREOF 99.83 3.48 478.63 1.17 578.90 1,162.01 76 ALUMINIUM AND ARTICLES THEREOF 4,437.74 261.82 5,785.37 1,702.12 3,515.20 27.54 200.38 104.87 104.44 59.54 2.44 908.18 1.94 31.46 164.92 0.34 17,308.30 78 LEAD AND ARTICLES THEREOF 56.95 4.14 14.55 14.32 89.96 79 AND ARTICLES THEREOF 2,019.41 22.66 67.86 12.98 65.82 0.43 2,189.16 80 AND ARTICLES THEREOF 0.78 1.75 2.53 81 OTHER BASE ; CERMETS; ARTICLES THEREOF 0.74 77.86 43.55 1.59 1.46 0.33 125.53 82 TOOLS, IMPLEMENTS, CUTLERY, SPOONS AND FORKS, OF B 1,394.33 102.70 3,249.82 958.77 761.90 32.94 418.70 4.26 60.12 74.87 71.06 178.39 30.05 0.31 235.93 1.97 30.86 0.36 7,607.34 83 MISCELLANEOUS ARTICLES OF BASE 317.86 192.41 1,377.10 904.72 186.31 53.85 20.00 2.73 146.63 42.36 9.75 30.32 0.06 85.35 16.58 122.89 44.20 3,553.12 84 NUCLEAR REACTORS, BOILERS, MACHINERY AND MECHANICA 38,732.73 13,579.96 157,783.34 71,742.85 19,059.57 1,525.73 12,806.41 1,027.42 763.40 7,088.15 15,770.32 167.43 14,556.58 7,034.94 7,787.20 941.49 20.86 3,576.54 88.45 0.89 6,093.88 160.99 101.82 12.81 380,423.76 85 ELECTRICAL MACHINERY AND EQUIPMENT AND PARTS THERE 64,467.85 4,812.53 74,838.81 15,457.11 20,829.75 303.20 10,310.04 102.33 6,875.58 6,220.62 13.07 43,851.78 9,720.42 1,649.37 1,856.80 886.52 162.46 65.31 2,718.83 2.27 55.04 54.37 265,254.06 86 RAILWAY OR TRAMWAY LOCOMOTIVES, ROLLING-STOCK AND 2,546.26 236.09 174.15 30.42 160.44 155.83 3,303.19 87 VEHICLES OTHER THAN RAILWAY OR TRAMWAY ROLLING-STO 580.19 26,765.30 16,304.79 20,536.62 720.55 2.60 731.63 1,064.94 2,850.21 794.44 435.56 29.03 20.19 603.94 0.90 1,587.26 39.51 73,067.66 88 AIRCRAFT, SPACECRAFT, AND PARTS THEREOF 6,439.07 683.18 49,634.33 6.12 61.42 88.31 0.83 13.24 56,926.50 89 SHIPS, BOATS AND FLOATING STRUCTURES 3.06 61.70 32.11 149.17 14.51 548.66 209.49 1,018.70 90 OPTICAL, PHOTOGRAPHIC, CINEMATOGRAPHIC, MEASURING, 10,895.15 2,665.33 27,565.84 6,606.70 7,934.26 6.90 916.67 5.13 0.93 754.35 444.81 12.04 1,538.72 1,130.33 5,271.53 596.18 9.01 477.90 85.17 2.72 578.44 27.47 53.61 67,579.19 91 CLOCKS AND WATCHES AND PARTS THEREOF 164.26 70.04 28.50 18.58 9.82 0.38 2.33 23.58 0.22 3.92 321.63 92 MUSICAL INSTRUMENTS; PARTS AND ACCESSORIES FOR SUC 1.41 13.43 54.78 4.13 19.13 92.88 93 ARMS AND AMMUNITION; PARTS AND ACCESSORIES THEREOF 173.20 50.39 2.20 222.10 1.63 200.66 650.18 94 FURNITURE; MEDICAL AND SURGICAL FURNITURE; BEDDING 1,763.18 311.07 1,553.02 730.63 565.49 289.84 15.84 195.83 207.30 421.04 27.99 258.97 25.68 152.86 7.85 3.45 1.73 6,531.77 95 TOYS, GAMES AND SPORTS REQUISITES; PARTS AND ACCES 808.87 11.32 55.41 91.16 256.22 6.52 127.46 21.89 0.17 40.11 0.07 7.74 38.11 1,465.05 96 MISCELLANEOUS MANUFACTURED ARTICLES 124.50 32.92 1,431.75 237.65 341.87 572.76 7.89 6.14 35.70 28.45 2.43 137.04 3.70 194.92 3,157.72 97 WORKS OF ART, COLLECTORS' PIECES AND ANTIQUES 6.63 6.57 1.97 15.17 99 OTHER PRODUCTS 316.99 8,171.63 2,711.45 1,338.92 647.62 74.62 0.10 13,261.33

Total as reported by EUROSTAT 313,680.01 147,115.43 545,817.98 218,340.35 118,683.21 24,510.80 56,286.69 3,464.61 5,667.63 68,168.97 126,495.43 681.13 99,722.21 36,306.67 35,413.38 17,720.61 3,709.87 14,569.63 1,033.84 303.88 87.21 43,390.87 980.56 2,326.50 1,656.08 1,886,133.53

Total on the table 313,679.90 145,611.79 538,314.66 217,275.07 118,136.69 24,510.81 48,829.75 3,464.62 5,642.58 68,169.03 126,449.29 506.95 85,715.44 35,047.14 32,113.53 17,720.65 3,709.87 13,334.28 1,042.04 295.69 87.21 43,390.89 984.56 2,322.51 1,656.09 1,848,011.04

Note: 1.- EUROSTAT publishes aggregated EU trade totals with trading partners within days of the end of the period. 2.- Disaggregated data by member state (HS 6, 4 or 2) is available about 14 weeks after the end of the period. 3.- On occasion the "totals on the table" (addition of the data on the table) differ from the "totals as reported by EUROSTAT". Sometimes the difference is significant. We suggest using EUROSTAT's totals. Further data can be found at http://europa.eu.int or EUROSTAT http://europa.eu.int/comm/eurostat/Public/datashop/print-catalogue/EN?catalogue=Eurostat

Page 2 of 2 Title indicates EUropean EXports or IMports to and from Vietnam. The period is denoted by Year (for full years), Semester or Quarter, Year. http://europa.eu.int/cgi-bin/make_inforeuro_page.pl?en/USD EC DELEGATION TO VIETNAM Level of detail is shown as HS6 (subheading), HS4 (heading) or HS2 (chapter). Other notes are provided at the end of the table.

EU IM - Vietnam Y 05 HS2

FR NL DE IT UK IR DK GR PT SP BE LU SW FI AU HU CY CZ LT LV MT PL SL SK EE +EU25 00 TOTAL FOR COUNTRIES WHOSE DATA ARE CONFIDENTIAL, B * * * * * * * * * * * * * * * * * * * * * * * * * * 01 LIVE ANIMALS 2,784.29 2.08 72.46 43.65 6.72 77.76 386.07 183.09 2.03 1.29 3,559.44 02 MEAT AND EDIBLE MEAT OFFAL 187.57 11.25 177.24 33.26 554.20 963.52 03 FISH AND CRUSTACEANS, MOLLUSCS AND OTHER AQUATIC I 25,527.74 31,339.70 33,055.48 47,758.17 15,006.92 77.39 5,689.11 3,638.62 2,895.52 40,150.58 42,404.51 3,027.08 9.60 32.99 385.63 504.24 364.98 46.79 128.63 8,712.42 27.57 0.03 70.29 260,853.99 04 DAIRY PRODUCE; BIRDS' EGGS; NATURAL HONEY; EDIBLE 296.15 91.76 570.44 20.12 263.24 0.02 406.55 392.53 5.47 155.98 2,202.26 05 PRODUCTS OF ANIMAL ORIGIN NOT ELSEWHERE SPECIFIED 19.12 90.00 51.89 1,098.44 19.16 5.73 0.12 0.29 6.73 5.39 1,296.87 06 LIVE TREES AND OTHER PLANTS; BULBS, ROOTS AND THE 33.54 203.88 21.69 24.92 87.42 0.06 5.81 0.14 377.46 07 EDIBLE VEGETABLES AND CERTAIN ROOTS AND TUBERS 907.81 362.18 566.06 2,596.58 341.91 22.45 142.56 383.85 2.73 0.70 2.41 3.22 127.65 66.34 2.12 5,528.57 08 EDIBLE FRUIT AND NUTS; PEEL OF CITRUS FRUITS OR ME 4,367.09 53,452.95 8,476.50 4,343.83 19,031.31 68.41 0.24 2,023.32 3,605.44 2,234.72 239.10 21.73 133.27 72.41 99.39 927.18 473.30 594.09 11.70 100,175.98 09 COFFEE, TEA, MATE AND SPICES 26,117.44 25,013.55 128,148.49 46,498.68 21,187.35 0.03 2,759.72 2,428.80 4,829.63 67,502.78 14,949.23 0.53 1,834.26 646.23 1,824.94 4,216.21 2,326.80 124.37 243.79 10.35 23,667.38 1,883.26 663.62 376,877.44 10 CEREALS 679.90 861.91 120.31 409.35 324.89 0.64 45.12 183.18 43.80 2.99 75.26 0.13 5.92 0.96 2,754.36 11 PRODUCTS OF THE MILLING INDUSTRY; MALT; STARCHES; 16.71 33.39 22.35 236.78 50.36 234.40 1.08 4.93 1.95 1.49 6.23 1.01 9.06 0.98 620.72 12 OIL SEEDS AND OLEAGINOUS FRUITS; MISCELLANEOUS GRA 129.52 121.47 305.96 2.13 317.38 1.42 81.86 6.29 9.19 0.07 13.71 30.92 7.37 1.91 1,029.20 13 LACS; GUMS, RESINS AND OTHER VEGETABLE SAPS AND EX 1.77 0.14 3.43 4.33 1.41 0.02 157.97 7.91 0.97 1.93 0.05 179.93 14 VEGETABLE PLAITING MATERIALS; VEGETABLE PRODUCTS N 92.63 25.70 102.32 15.67 104.53 44.32 436.18 12.50 40.27 14.85 3.89 2.94 9.38 0.78 905.96 15 ANIMAL OR VEGETABLE FATS AND OILS AND THEIR CLEAVA 2.52 79.01 208.03 0.22 28.08 3.45 3.23 0.81 325.35 16 PREPARATIONS OF MEAT, FISH OR CRUSTACEANS, MOLLUSC 10,159.99 4,730.81 9,298.91 6,604.45 15,585.23 125.01 1,883.48 396.38 24.23 758.15 6,056.53 592.77 113.83 13.90 442.79 693.29 55.52 9.25 29.19 457.13 58,030.84 17 SUGARS AND SUGAR CONFECTIONERY 182.05 148.55 35.42 172.21 25.08 1.34 126.85 34.56 4.46 63.24 0.20 4.90 15.98 25.31 0.64 840.79 18 COCOA AND COCOA PREPARATIONS 9.93 51.88 61.81 19 PREPARATIONS OF CEREALS, FLOUR, STARCH OR MILK; PA 5,282.32 1,837.74 3,077.55 238.01 3,157.33 40.59 41.03 2.93 1,488.71 256.87 0.01 12.59 10.25 1,130.19 5,808.45 6.33 3.91 0.31 22,395.12 20 PREPARATIONS OF VEGETABLES, FRUIT, NUTS OR OTHER P 1,927.79 4,092.13 1,119.84 109.78 744.55 455.21 29.12 87.19 41.30 423.69 12.34 16.53 45.82 43.38 289.83 9.60 10.25 60.61 17.77 0.41 9,537.14 21 MISCELLANEOUS EDIBLE PREPARATIONS 421.25 193.99 390.68 7.53 334.11 0.37 12.23 127.48 64.47 10.90 3.94 330.39 1,577.23 3.42 113.70 697.92 4,289.61 22 BEVERAGES, SPIRITS AND VINEGAR 216.53 133.86 184.47 74.62 2.36 22.77 8.84 2.93 1.63 0.01 19.86 4.69 31.22 13.72 1.15 718.66 23 RESIDUES AND WASTE FROM THE FOOD INDUSTRIES; PREPA 24 TOBACCO AND MANUFACTURED TOBACCO SUBSTITUTES 123.10 209.34 63.04 0.01 3.23 68.73 459.06 65.34 62.42 1,054.27 25 SALT; SULPHUR; EARTHS AND STONE; PLASTERING MATERI 142.02 80.80 885.91 108.21 0.02 0.11 23.08 8.86 102.80 446.76 0.64 0.67 5.79 0.39 1,806.06 26 ORES, SLAG AND ASH 3,742.42 0.06 3,742.48 27 MINERAL FUELS, MINERAL OILS AND PRODUCTS OF THEIR 6,606.30 30.21 1,545.04 14,187.83 1.24 22,370.62 28 INORGANIC CHEMICALS: ORGANIC OR INORGANIC COMPOUND 2.22 5.56 0.62 1.46 138.20 18.27 166.33 29 ORGANIC CHEMICALS 388.61 1,603.30 342.67 380.38 517.17 28.44 37.96 1,873.15 1,227.11 29.22 13.47 15.05 30.75 4.08 227.21 49.72 6,768.29 30 PHARMACEUTICAL PRODUCTS 25.59 0.37 0.53 0.96 5.38 8.83 7.36 74.34 6.43 97.83 1.07 0.82 30.36 0.93 260.80 31 FERTILIZERS 9.58 9.58 32 TANNING OR DYEING EXTRACTS; TANNINS AND THEIR DERI 1.21 0.52 76.72 9.98 39.00 1.32 0.26 9.09 0.79 27.35 1.34 3.53 9.55 70.69 0.01 251.36 33 ESSENTIAL OILS AND RESINOIDS; PERFUMERY, COSMETIC 329.13 116.90 482.91 9.92 113.46 0.02 36.69 52.32 0.17 9.13 0.11 10.01 1.45 0.45 0.02 1,162.69 34 SOAPS, ORGANIC SURFACE-ACTIVE AGENTS, WASHING PREP 30.96 824.79 85.61 5.26 29.34 0.02 53.46 374.85 44.53 0.11 6.18 0.12 1.80 39.71 1.36 1,498.10 35 ALBUMINOUS SUBSTANCES; MODIFIED STARCHES; GLUES; E 15.19 3.00 8.52 57.83 0.01 0.77 0.15 0.38 0.01 3.51 0.77 90.14 36 EXPLOSIVES; PYROTECHNIC PRODUCTS; MATCHES; PYROPHO 0.34 0.34 37 PHOTOGRAPHIC OR CINEMATOGRAPHIC PRODUCTS 12.52 0.59 8.90 2.10 0.37 4.33 28.81 38 MISCELLANEOUS CHEMICAL PRODUCTS 246.33 140.42 372.73 78.56 301.70 4.26 72.71 1.14 52.06 28.48 13.94 10.34 67.31 1,389.98 39 PLASTICS AND PLASTIC PRODUCTS 6,887.02 7,980.51 9,244.45 8,854.75 6,179.27 399.67 876.14 282.23 777.36 5,180.70 4,948.99 5.97 2,791.31 1,603.37 3,057.27 355.01 13.04 260.04 48.22 15.69 919.12 7.86 106.33 125.45 60,919.77 40 RUBBER AND ARTICLES THEREOF 10,607.56 2,055.53 30,352.71 11,282.74 5,275.48 375.50 299.34 1,003.50 956.52 9,018.28 6,780.03 1,073.13 1,918.65 835.46 190.94 21.30 1,204.58 86.08 22.52 2,797.25 816.69 1,214.43 88,188.22 41 HIDES AND SKINS (OTHER THAN FURSKINS) AND LEATHER 192.00 2,493.95 9,300.92 98.85 186.92 502.28 12,774.92 42 ARTICLES OF LEATHER; SADDLERY AND HARNESS; TRAVEL 28,206.90 10,066.77 38,178.52 10,874.30 14,523.89 283.96 1,808.35 364.54 113.26 11,499.71 57,573.51 13.39 7,634.94 807.82 1,731.17 135.89 62.70 822.85 24.88 15.10 21.19 1,117.81 230.07 20.47 2.18 186,134.17 43 FURSKINS AND ARTIFICIAL FUR; ARTICLES THEREOF 155.86 184.83 164.55 11.88 517.12 44 WOOD AND ARTICLES OF WOOD; WOOD CHARCOAL 5,616.14 2,659.86 7,734.10 1,711.43 4,630.71 88.82 979.56 215.08 188.56 2,263.69 4,171.62 0.29 1,935.18 185.70 175.09 102.25 3.44 293.73 7.45 4.36 372.96 16.61 3.83 45.52 33,405.98 45 CORK AND ARTICLES OF CORK 5.51 5.51 46 WICKERWORK AND BASKETWORK 5,005.11 3,520.35 19,514.67 3,018.58 4,992.73 653.39 907.25 426.70 317.35 4,814.59 3,071.99 1,906.63 499.02 695.56 605.38 63.43 777.81 102.84 165.07 3.57 1,599.87 129.69 46.57 87.60 52,925.75 47 PULP OF WOOD OR OF OTHER FIBROUS CELLULOSIC MATERI 548.14 548.14 48 PAPER AND PAPERBOARD; ARTICLES OF PAPER PULP, PAPE 420.05 324.37 1,267.48 609.47 180.05 19.83 96.77 312.03 38.33 427.48 35.66 92.97 164.48 12.03 145.27 12.93 87.35 12.04 15.29 189.81 57.95 24.60 23.43 4,569.67 49 BOOKS, NEWSPAPERS, PICTURES AND OTHER PRODUCTS OF 71.86 146.81 745.83 52.44 161.00 1.84 53.17 0.35 0.20 324.82 445.80 1.79 5.00 9.61 3.77 0.14 26.60 3.60 47.60 0.07 0.05 2,102.35 50 SILK 18.33 1.56 6.47 3,172.67 2.26 0.02 0.96 0.66 1.13 0.11 3,204.17 51 WOOL, FINE AND COARSE ANIMAL HAIR; YARN AND FABRIC 55.83 125.73 2.78 0.09 184.43 52 COTTON 158.45 22.88 16.94 45.09 0.12 53.79 252.31 0.90 91.47 334.51 105.51 2.10 0.74 50.66 4.64 1,140.11 53 OTHER VEGETABLE TEXTILE FIBRES; PAPER YARN AND WOV 20.53 38.17 478.50 119.73 4.80 31.16 121.50 0.04 814.43 54 MAN-MADE FILAMENTS 46.48 90.45 762.65 191.45 167.74 14.14 482.80 36.51 627.51 876.35 55.01 15.70 1.49 23.59 0.91 164.47 21.69 3,578.94 55 MAN-MADE STAPLE FIBRES 15.52 133.57 841.81 588.88 22.00 409.35 243.62 48.07 80.23 2.23 4.12 0.05 171.79 6.55 0.03 2,567.82 56 WADDING, FELT AND NONWOVENS; SPECIAL YARNS; TWINE, 847.20 344.32 113.06 130.57 378.83 14.03 237.86 493.56 10.72 94.19 115.58 46.64 28.73 1.52 37.68 22.70 17.31 3.33 0.02 2,937.85 57 CARPETS AND OTHER TEXTILE FLOOR COVERINGS 41.60 2.09 184.80 43.76 204.09 0.16 0.09 107.32 9.65 2.04 4.97 31.94 3.87 21.22 36.81 694.41 58 SPECIAL WOVEN FABRICS; TUFTED TEXTILE PRODUCTS; LA 405.87 119.46 400.29 1,181.23 640.50 7.19 8.47 25.08 331.54 31.24 19.29 101.66 2.48 98.67 0.37 10.96 0.02 17.65 3,401.97 59 IMPREGNATED, COATED, COVERED OR LAMINATED TEXTILE 14.86 129.03 137.24 9.86 11.73 111.03 0.95 1.33 0.40 27.17 0.16 1.45 8.17 19.31 472.69 60 KNITTED OR CROCHETED FABRICS 71.57 309.48 47.73 29.99 150.03 0.24 6.22 5.14 1.39 17.10 638.89 61 ARTICLES OF APPAREL AND CLOTHING ACCESSORIES, KNIT 19,627.00 13,503.04 35,527.59 8,293.57 42,226.86 1,771.57 4,844.69 1,274.76 62.63 13,174.78 12,788.60 0.10 2,854.83 698.29 4,007.98 379.39 108.11 3,000.24 1.17 18.70 92.13 1,256.38 44.94 1,634.26 27.41 167,219.02 62 ARTICLES OF APPAREL AND CLOTHING ACCESSORIES, NOT 45,223.10 36,403.94 174,215.18 22,751.26 83,582.00 1,809.00 18,578.75 3,388.35 79.48 52,187.33 37,344.10 0.24 12,966.95 4,459.37 9,222.69 1,122.76 48.82 3,805.61 4.32 62.29 8.71 4,379.78 617.39 2,459.08 53.60 514,774.10 63 OTHER MADE UP TEXTILE ARTICLES; SETS; WORN CLOTHIN 6,959.68 3,312.39 12,559.33 8,602.58 10,143.35 109.36 3,301.32 2,651.81 445.74 7,056.86 8,206.14 0.39 3,392.75 185.33 146.96 27.22 6.75 947.01 113.26 143.85 3,420.63 1.81 151.93 28.41 71,914.86 64 FOOTWEAR, GAITERS AND THE LIKE; PARTS OF SUCH ARTI 185,695.57 173,614.59 467,889.52 192,170.29 567,160.37 8,815.26 21,500.11 21,591.11 1,371.17 105,978.07 254,244.60 41,006.80 7,809.96 27,430.19 1,703.15 1,034.31 5,593.63 1,433.18 583.41 213.26 4,863.69 1,242.58 215.23 373.04 2,093,533.09 65 HEADGEAR AND PARTS THEREOF 3,077.11 1,212.65 2,602.43 914.30 1,229.82 6.27 432.40 13.75 11.53 1,091.11 4,634.49 262.35 73.01 55.59 14.01 6.75 306.46 13.67 114.82 0.04 312.53 16,385.09 66 UMBRELLAS, SUN UMBRELLAS, WALKING-STICKS, SEAT-STI 520.87 67.22 289.28 41.66 512.35 53.12 303.72 39.20 3.62 40.79 15.96 155.87 30.85 0.11 0.41 2.09 0.44 2.75 0.41 0.80 0.40 2,081.92 67 PREPARED FEATHERS AND DOWN AND ARTICLES MADE OF FE 119.62 1.81 58.06 6.37 44.78 39.28 0.14 17.24 0.73 0.03 0.27 2.28 0.13 290.74 68 ARTICLES OF STONE, PLASTER, CEMENT, ASBESTOS, MICA 710.25 4,214.07 1,243.57 1,164.42 1,157.88 95.08 345.07 37.63 253.45 15,136.41 12.16 218.59 7.06 129.98 59.38 13.59 80.72 34.38 0.71 46.84 24,961.24 69 CERAMIC PRODUCTS 11,143.44 13,233.34 31,773.54 3,755.12 22,538.16 1,234.67 4,946.15 617.09 200.01 7,173.18 6,010.23 0.64 5,003.33 798.56 1,921.59 416.40 162.76 825.50 224.87 149.57 59.70 998.87 150.35 53.45 7.22 113,397.74 70 GLASS AND GLASSWARE 1,041.13 191.53 754.06 63.30 752.64 53.52 23.00 35.31 17.94 115.48 285.11 80.00 18.15 36.46 3.20 1.36 12.00 20.87 0.16 0.77 3,505.99 71 NATURAL OR CULTURED PEARLS, PRECIOUS OR SEMI-PRECI 33,413.13 303.65 1,454.76 594.68 582.43 1.89 128.07 1.44 283.88 969.13 23,658.17 0.92 245.26 10.62 0.14 3.47 0.71 99.73 1.40 61,753.48 72 IRON AND STEEL 9.74 67.62 151.80 1.44 0.75 3.24 234.59 73 ARTICLES OF IRON OR STEEL 3,766.81 4,810.81 19,235.52 3,475.29 7,451.60 67.06 1,757.57 2,397.90 20.93 3,270.81 3,684.35 8.52 6,788.95 526.62 289.99 54.27 189.48 712.52 28.45 251.74 515.31 39.49 20.87 59,364.86 74 COPPER AND ARTICLES THEREOF 2.32 3.80 9.29 9.74 183.41 0.12 21.27 5.26 3.13 4.54 1.62 12.97 23.54 7.41 0.18 288.60 75 NICKEL AND ARTICLES THEREOF 4.42 4.42 76 ALUMINIUM AND ARTICLES THEREOF 466.47 247.14 373.84 6.68 142.62 9.43 1.99 0.61 9.72 27.55 0.26 68.15 0.05 0.64 822.36 16.29 0.35 0.93 2,195.08 78 LEAD AND ARTICLES THEREOF 8.63 26.45 1.49 36.57 79 ZINC AND ARTICLES THEREOF 387.37 583.58 1,349.53 33.16 251.11 3.38 888.16 5.52 83.87 288.10 7.70 312.74 158.29 13.20 13.70 4,379.41 80 TIN AND ARTICLES THEREOF 666.70 468.70 942.38 13.30 2,091.08 81 OTHER BASE METALS; CERMETS; ARTICLES THEREOF 107.43 537.11 60.37 69.59 5,676.65 14.69 6,465.84 82 TOOLS, IMPLEMENTS, CUTLERY, SPOONS AND FORKS, OF B 955.00 3,038.42 18,366.52 3,185.38 4,416.92 0.07 322.68 82.10 8.44 2,395.14 1,205.44 453.43 63.70 480.99 0.03 29.79 111.92 4.08 35,120.05 83 MISCELLANEOUS ARTICLES OF BASE METAL 439.80 8,459.78 3,195.75 502.80 1,686.58 3.72 133.79 15.90 0.44 384.19 1,721.72 0.08 332.54 17.16 152.63 2.71 2.66 15.54 1.33 92.77 6.09 0.33 2.91 17,171.22 84 NUCLEAR REACTORS, BOILERS, MACHINERY AND MECHANICA 8,345.93 11,459.73 15,493.74 9,999.79 15,709.47 17.32 462.41 15.76 75.73 695.29 742.01 2,086.22 1,825.37 7,522.95 1,902.10 0.89 84.35 0.33 25.47 578.14 344.88 38.23 20.88 77,446.99 85 ELECTRICAL MACHINERY AND EQUIPMENT AND PARTS THERE 19,734.27 23,332.58 10,648.55 5,364.45 10,249.93 1,113.72 733.53 75.89 16.54 3,675.17 4,765.92 0.06 828.68 174.32 1,232.38 4,798.88 0.41 64.49 230.23 12.90 27.45 553.47 79.09 100.63 83.18 87,896.72 86 RAILWAY OR TRAMWAY LOCOMOTIVES, ROLLING-STOCK AND 0.85 14.96 25.55 26.78 28.05 96.19 39 40

EU IM - Vietnam Y 05 HS2

FR NL DE IT UK IR DK GR PT SP BE LU SW FI AU HU CY CZ LT LV MT PL SL SK EE +EU25

87 VEHICLES OTHER THAN RAILWAY OR TRAMWAY ROLLING-STO 2,670.05 11,853.06 22,431.54 3,899.57 43,209.59 72.34 4,501.93 323.20 290.64 7,602.51 8,620.16 5,317.81 103.34 7,255.57 368.61 204.30 598.19 68.58 97.84 42.96 3,187.94 1,063.79 96.66 38.02 123,918.20 88 AIRCRAFT, SPACECRAFT, AND PARTS THEREOF 4,588.91 789.08 584.99 178.03 555.52 5.91 6.45 65.09 48.96 59.16 13.80 8.97 8.94 8.36 15.35 4.34 8.02 6,949.88 89 SHIPS, BOATS AND FLOATING STRUCTURES 89.17 142.74 2.36 0.14 10.57 244.71 147.87 99.71 737.27 90 OPTICAL, PHOTOGRAPHIC, CINEMATOGRAPHIC, MEASURING, 6,341.86 2,968.25 5,311.72 5,920.17 1,395.47 217.74 119.56 2.49 121.42 3,004.90 2,279.34 534.26 2,344.21 54.53 0.26 10.44 1.75 34.04 0.10 0.60 30,663.11 91 CLOCKS AND WATCHES AND PARTS THEREOF 235.73 32.35 1,942.02 5.17 359.74 0.33 7.51 82.97 218.19 0.24 0.51 2,884.76 92 MUSICAL INSTRUMENTS; PARTS AND ACCESSORIES FOR SUC 86.71 39.39 297.73 144.09 1,526.05 0.06 7.36 12.29 110.25 11.10 87.53 1.80 0.04 124.95 0.57 2,449.92 93 ARMS AND AMMUNITION; PARTS AND ACCESSORIES THEREOF 1.04 0.30 0.10 0.42 1.53 0.07 0.21 0.15 0.02 3.84 94 FURNITURE; MEDICAL AND SURGICAL FURNITURE; BEDDING 87,409.83 47,958.98 89,271.73 24,925.97 129,529.80 11,354.52 17,578.33 10,825.90 2,687.23 44,426.90 27,887.64 112.41 17,091.53 9,569.49 2,182.52 1,502.42 668.13 1,481.39 58.92 115.89 259.84 4,221.52 39.88 63.92 379.23 531,603.92 95 TOYS, GAMES AND SPORTS REQUISITES; PARTS AND ACCES 12,302.78 2,912.99 8,045.48 3,084.55 13,112.19 97.41 585.94 23.13 81.02 2,228.64 7,950.27 1,398.93 180.80 116.86 128.56 9.00 151.06 0.57 2.14 0.68 1,918.32 7.72 21.94 54,360.98 96 MISCELLANEOUS MANUFACTURED ARTICLES 4,951.13 5,014.54 2,800.31 8,299.46 4,769.85 33.19 277.28 477.65 201.03 1,846.14 411.26 0.11 87.02 93.45 126.63 144.95 86.02 1.47 31.41 373.79 169.67 37.76 20.54 30,254.66 97 WORKS OF ART, COLLECTORS' PIECES AND ANTIQUES 194.81 24.03 104.09 88.27 197.60 11.33 177.95 48.15 88.30 11.54 3.34 16.75 5.04 0.13 1.97 1.25 3.49 1.75 979.79 99 OTHER PRODUCTS 7.56 1,714.29 104.88 5,232.25 618.73 54.34 12.24 7,744.29 Total as reported by EUROSTAT 605,923.75 524,846.76 1,232,998.59 471,591.56 1,087,365.12 29,603.43 99,589.71 56,892.77 17,222.57 407,526.94 592,833.53 164.65 125,608.41 33,636.45 73,953.35 19,169.17 3,656.09 29,943.15 3,927.81 2,683.22 975.36 74,210.83 7,133.46 8,849.00 1,481.90 5,511,787.58

Total on the table 605,923.98 524,843.72 1,232,977.00 471,591.57 1,087,364.22 29,603.50 99,284.06 56,892.76 16,686.16 407,527.00 592,833.54 164.64 125,604.97 33,636.36 74,048.03 19,169.14 3,656.10 29,943.19 3,927.84 2,683.23 975.37 74,210.88 7,133.49 8,849.02 1,481.92 5,511,011.69

Note: 1.- EUROSTAT publishes aggregated EU trade totals with trading partners within days of the end of the period. 2.- Disaggregated data by member state (HS 6, 4 or 2) is available about 14 weeks after the end of the period. 3.- On occasion the "totals on the table" (addition of the data on the table) differ from the "totals as reported by EUROSTAT". Sometimes the difference is significant. We suggest using EUROSTAT's totals. Further data can be found at http://europa.eu.int or EUROSTAT http://europa.eu.int/comm/eurostat/Public/datashop/print-catalogue/EN?catalogue=Eurostat 41 42 1. Analysis of current status

High growth, little added value

The Vietnamese garments and has continued to make a substantial contribution to the overall growth of the economy in 2005. However, the development remains chancy and unsustainable. Large export earnings and hundreds of thousands of new jobs have been bought by capitalizing on cheap labour and the opening of the US market. While the results are impressive one cannot escape the fact that the added values are not high and that the industry is not doing enough to keep up with its main competitors in this sector.

The growth rate was lower in 2005 with only 10.3% and the export turnover was USD 4.84 billion, due to the fact that VN still is under a quota system to the US market. Economic benefits were largely generated by processing imported materials and accessories as local contents account for around only 30% of the exported garments and textiles.

The current biggest foreign buyers of Vietnam textile and garment products are Otto, Treller, Colombia Sportwear, Seattle Pacific Industries, Gap Inc., AMC-Target, JCPenney, Mast Industries Inc., The Children’s Place, American Eagle Outfitters, Perry Ellis-Supreme, Adidas-Salomon, Sear and John Apparel Group, Nike, Diesel, Hugo Boss, Timberland, The Levy Group, Guess, CK, etc.

Table 1.1. Vietnam Textile and Garment Export Turnover

Year 2000 2001 2002 2003 2004 2005 2010*

USD mil. 1,892 1,975 2,781 3,686 4,386 4,836 9,000

Source: Vietnam Textile & Apparel Association (VITAS); * Estimated figures

Private Sector gradually dominating structure of the industry

So far, the industry is made up of over 2,000 companies, including over 50 state-owned enterprises (5%), over 1,500 private/joint-stock/limited liability businesses (46%) and around 450 foreign-invested enterprises (33%) with a work-force of over 2 million. In 2004, total production capacity reached 260,000 tonnes of yarn, 518.2 million meters of fabric, 784 million pieces of clothing and 114.3 million pieces of knitted wear.

As for the foreign direct investment (FDI) in the sector, it has grown pretty fast from 100 projects in 2001 with a registered capital of USD 460 million to more than 400 projects in 2003 with nearly USD 2 billion of registered capital. Currently over 400 projects are under operation accounting for over 36% of the sector’s total export to the US market. So far Taiwan and Republic of Korea are the biggest foreign investors in the sector (accounting for over 60% of total FDI in textile and garment industries) such as Choong Nam, Pangrim, Formosa, Hualon, Tainan, Chung Shing, Shingviet, Hansoll Vina etc.

The cotton processing plants now have a capacity of 15,000 tonnes/year. Due to the increasing need for raw materials to feed Vietnam’s cotton mills nationwide (so far the sector can provide only 10-15% of the textile industry’s demand), around USD 166 million will be invested over the next 10 years in expanding cotton production from the current 30,000 ha to 60,000 ha by 2010 (equivalent to 20,000 tonnes of raw cotton per year). This will meet 20% of the sector's demand for cotton by 2005 and 35% by 2010. Besides, two polyester fibre factories, each with a capacity of 140,000 tonnes per year, will be built at a cost of USD 150 million. Investment for producing garment accessories is estimated at USD 40 million.

There are currently 19 state-owned natural silk processing plants and more than 100 private ones with a total capacity of 2,000 tonnes/year of which 40% is high quality silk for exports. The sector also produces about 5.5 million meters of silk per year and nearly 800,000 silk products per year.

43 Strong points in garments not supported by domestic textile base

However, the gap between the development of textile and of garment firms is substantial. Whereas the overall development of the sector continues to be fast, it shows imbalances in the growth of textiles and garments.

In recent years, the garment industry has expanded rapidly and attracted plenty of investment from the private sector while textiles have seen only very slow growth. This is because investment in textiles requires a huge amount of capital and only produces returns in the long term.

In 2004, garments accounted for 90% of the exports from the garment and textile industries. The production of textile fabric, particularly the dyeing and finishing processes, requires large capital investment, high technology, and strong technical management. As a result, Vietnamese firms - both private and state-owned - have not performed well in this sector. So the sector will need foreign investment to help increase domestic textile production.

On the other hand, each year, Vietnam must import an average of 1,000 million metres of cloth, equal to 70% of demand.

So far, the domestic textile sector can meet only 30% of the fabric needs of the garment sector. It also fails to meet other demands of garment exporters like fibres (import share: 85%), chemicals (import share: 100%), machinery and parts (import share: 95%) as well as cotton (import share: 90%). The main weakness of local garment and textile enterprises is that they are mainly just sub-contractors of foreign partners. Garment exporters usually rely on foreign suppliers of raw materials and accessories to fill orders for international conglomerates.

Exports surging but quotas remain

Last year’s exports growth was mainly generated on the US market which has become the biggest market for Vietnamese goods so far. Trade between the two former war foes expanded after the Bilateral Trade Agreement went into effect in December 2001. Vietnam earned USD 2.636 billion from textile sales to the US in 2005, up from USD 2.474 billion in 2004 and just USD 50 million in 2001.

At the same time, Vietnam carries on with integrating into the ASEAN Free Trade Agreement (AFTA) whose Commonly Effective Preferential Tariff (CEPT) it joined on 1 January 1996 with the aim of completing implementation of the accession roadmap within ten years. In 2006, by the end of this period, all tariffs on textile and garment products will be 0-5% only.

After Vietnam and the EU reached an agreement on Vietnam’s accession to WTO on 9 October 2004, the two sides negotiated a Market Access Agreement granting Vietnam as of January 2005 quota-free exports of textiles and garments to the EU market. Vietnam, on the other hand, made a number of market access concessions in favour of European companies (“Early Harvest Agreement”). The Agreement was signed in Brussels on 31 March 2005. The effective suspension of the quotas entered in the SIGL system the day after signing. Now all obstacles to Vietnam’s textile exports to the enlarged EU market are removed and Vietnam is able to compete on an equal footing with WTO members, for which textile and garment quotas have been abolished worldwide on the same date.

Following the EU case, Canada also removed its quotas for Vietnam's textiles and garment as from 1 January 2005. The US market now remains the only major market where Vietnamese exports of textiles and garments are subject to quotas.

2. Trends, potentials and challenges

By its own size and as a member of AFTA, the Vietnamese textile and garment market offers good opportunities for exporters of machinery and primary products. The domestic market of more than 80 million people at present and of 100 million people in 2010 has big potential. According to estimates, GDP per capita in Vietnam will be USD 900 - 1,200 up to 2010. This would take demand for consumer goods to USD

44 400 - 450 per capita in 2010, of which 6–8% is the average proportion of expenditure on textiles and garments. Such average will be exceeded by far in the big cities.

The role Vietnam plays on the international textile and garment market is still that of an also-ran. In 2005, of the sector’s total exports over 55% has been absorbed by the US market and 18% by the EU market, leaving behind the Japanese market with 13%.

A post-quota era at the horizon

The post-quota era in global textile exports has kicked off and early indications suggest Vietnamese companies are struggling to cope. Since it is still not a member of the World Trade Organisation (WTO), some countries, notably the US, restrict imports from Vietnam through quotas. In the first quarter of 2006, the country's exports were USD 1.36 billion, an increase of 40% compared to the same period last year. The industry expects growth of 11% so that it can reach an export figure of USD 5.5 billion for the whole year. While it is easy to blame external causes for the middling performance, experts point to a myriad of internal and innate shortcomings facing Vietnam's garment exporters.

On 1 January 2005, after 10 years of incremental phase-outs, the quota system for garment exports expired and with it the system which enabled smaller countries to sit at the export high table. Countries now essentially compete for global garment markets on the basis of their own capabilities, meaning manufacturing powerhouses like China and India can gobble their rivals up. In 2005, China´s textile industry grew rapidly thanks to the end of the global quota system. China´s cotton yarn output rose 23.6% year-on-year, while cotton product export grew 31.7% year-on-year. The industry made USD 2 billion in profits, an increase of 77%. While it probably ate into the US market share of most nations, Vietnam was particularly worried being a non-WTO member. Thailand's garment increased the export value with the US, Japan and Europe by 12% as of last year. The value of exports was recorded at USD 6.75 billion.

The EU (one of the largest importers) and Canada have lifted quotas for Vietnamese garment exports. The country's garment exports to the EU increased by 15% and to the US by 7% last year. The export turnover of textile and apparel in the first quarter of 2006 to Canada has been increasing considerably, among this, the export turnover of Jackets in particular has increased up to by 200% as compared with corresponding period of time in last year, secured USD 1.5 million.

Strategies needed to counter new challenges

It is clear that to overcome this problem, clear policies are necessary while enterprises also have to sharpen their competitive edge. Analysts in fact think the latter factor is more crucial. They suggest that garment export firms must restructure their management to cut costs and co-operate with one another to form bigger groups to execute large contracts for international buyers. They also call for bold investments to renovate technologies and launch overseas promotions, build up international trademarks and participate in overseas fairs. Each firm will have to find its own, mapping out specific and long-term strategies to first survive in the new global system before growing.

To avoid the tariffs, Vietnam should ensure that exporters change accounting practices in line with the Generally Accepted Accounting Principles. In addition, they should create adequate paper records to show the absence of Government control and clearly define the relationship among affiliates and between themselves and the Government.

In order to achieve its development objectives, the Government applies a strategy to accelerate the pace of investment in the textile and garment industry. According to the master plan for the textile and garment sector, approved by the Government in Decision 55 dated April 2001, the industry requires VND 65 trillion, or some USD 4.3 billion in this decade, or USD 420 million per year for investment. Between 2001-2005, the plan provides for construction of 10 new textile plants focused mainly on textiles and dyeing. Of the 10 new complexes, 4 will be in the north, 2 in the central provinces, and another 4 in the southern region. They will comprise fibre, textile and dyeing factories equipped with the latest, environment-friendly machinery. However, in the first two years of the plan, investment efficiency was not high with just 25% of all investment capital for 2001-2005 disbursed so far. Investment projects are yet to give a significant boost to the industry’s development.

45 Follow-up successful restructuring on the macro-level

In recent years, textile companies have replaced most of their obsolete equipment, investing in modern equipment made in Europe or Japan, associated with advanced technology in such key areas as dyeing, printing and finishing. Garment companies also invested in new and modern production lines, with high quality specialized equipment to produce high quality products. At the same time, companies also started projects to treat waste water from factories located in densely populated areas, developing ISO 14000 programs, applying the SA 8000 social standards for exported products, especially to the US market.

Progress was also made in building trademarks of well-known companies like Garment Co. No. 10, Viet Tien, Nha Be, Thanh Cong and Viet Thang. More companies realize the importance of registering copyrights with the competent agencies at home and abroad. Furthermore, besides capital investment, the Government encourages enterprises to invest in the work-force and develop their human resources.

The Government Decision 55/TTg-CP on strategies to accelerate the development of the garment and textile sectors aims to increase the percentage of domestically supplied raw materials to 50% by 2010. Greater investment to increase cloth supply is therefore essential.

The National Textile and Garment Corporation (VINATEX) which was established in 1995, has made several contributions to the growth of the national garment industry for 10 years of operation. However, the corporation has only 105,000 workers or 10% of the workers of the national textile and . In 2005, VINATEX created an industrial production value of 32% of the industrial production value of the sector. Especially, the corporation earned an export turnover of over USD 1,035 million or 23.6% of the export value of the industry. Its annual profit is USD 32 million and contribution to the State budget is USD 111.2 million.

In line with the overall policy, the corporation has changed its organization to the form of a mother and subsidiary business. 40 out of 52 of its affiliates have been equitised so far. VINATEX holds major shares and is mother company of 28 out of the 40 equitised enterprises. In addition, the corporation has restructured 9 State-owned businesses into one-member limited companies operating in accordance with . 15 among its affiliates have operated in the mother-subsidiary model for long. The goal for the group is to become the leading multi-ownership group in terms of both production capacity and competitiveness in the region by the year 2010.

To improve its growth rate in the next five years while the country fulfills the international process, the sector has devised specific development and investment plans. Accordingly, it aims to achieve USD 7-8 billion from exports and USD 3.5 billion from the domestic market, up 80% compared to current figures. The sector will need more than 3.5 million sq.m of cotton a year, 60% of which will be imported. To have the remaining amount of cotton made domestically, the sector will have to invest more than USD 1 billion in equipment and technology.

For knitting cotton, investment will be poured mainly into Ho Chi Minh City. Thousands of households with thousands of knitting- will make around 280,000 tonnes, meeting demands by 2010, however, they should further improve the quality of their products.

Regarding fibre reeling, with around 2.2 million of spindles in place they annually produce around 220,000 tonnes of fibre, meeting nearly half of the demand. By 2010, the sector will need around 334,000 tonnes of fibre, so it will have to invest around USD 600 million to produce an additional 114,000 tonnes. The synthetic textile sector now has to import 100% of its material, but there are two major projects worth USD 150 million to get off the ground soon to supply enough synthetic materials in the next five years. The cotton sector only meets 10% of the garment sector’s demands, and it will pour in around USD 46 million in the near future.

The investment improvement is not small, therefore it should be diversified. Important sources include foreign investors, loans from investment and development funds and listing shares on stock markets.

46 3. Recommendations

Enterprises should be more competitive in their prices, add value to their products, and increase their capacity to meet customers’ orders. Government agencies should contribute by continuing their administrative reforms and making more efforts to cut rates. Enterprises should also expand promotions and should develop strategies to attract major customers.

At present, the rates of cargo transport, electricity, water supply and waste disposal are still 30-35% higher for Vietnamese garment manufacturers than the regional average.

Information about legal, social and customary specifics of the respective markets and sub-markets must improve and has to be disseminated more effectively throughout the sector. Vietnamese enterprises should increase importers’ confidence in their products by upgrading quality and reducing delivery times. However, good quality, fair pricing and good business practices are not enough asconsumers in EU countries are increasingly paying attention to the policies applied by manufacturers. This requires transparency vis-à-vis importers with regard to labour, including salaries, work-place safety and other social accountability standards. In order to compete with Chinese exporters, domestic enterprises need to focus on niche markets which demand high value products in limited volumes, including Japan, , Bahrain, the , Kuwait, , South Korea and Australia. In addition, there is the need to establish closer co-operation between the Government, business associations and enterprises to work on all these problems together.

Recommendations to surmount the obstacles of the industry

1. Create a level playing field for enterprises of different sectors by gradually removing indirect subsidies for state-owned enterprises in terms of access to land, credit and quota allocation and by improving the accounting and auditing system. Speed up equitisation of the state-owned enterprises and harmonize the State’s investment with the policy of reducing the State’s direct participation.

2. Design a proper strategy for development of the textile and garment industry. Key target should be the expansion of the garment sector by strengthening backward integration.

3. Import protection for the industry should take the form of lower tariffs and be consistent with Vietnam’s obligations under CEPT, AFTA, APEC and WTO.

4. Transforming from working on processing orders to selling completed products.

5. While the strategic focus should be on export orientation, the domestic market should not be ignored. At the same time, more effective measures are required to deal with of textiles and garments.

6. Vietnam being a labour intensive and capital scarce country, enterprises should invest in appropriate technology. Even plentiful labour resources cannot substitute state-of-the-art machinery to increase added value and backward integration. The industry needs a strategy how to upgrade technological standards and use new technology more effectively.

7. Establish a single, demand-driven, industry-responsive association of the industry which can function as a channel of communication between the industry and the Government.

8. The enterprises need to enhance their dynamism and approach towards innovation, raise the level of information on markets and obligations under international agreements in terms of tariff preferences, non-tariff measures and intellectual property rights, focus on training their employees more specifically.

9. The garment and auxiliaries/accessories sector would be good for short-term investors, especially for the ones who have long-term order, as it requires rather small sums of capital (from

47 around USD 200,000 up) for a project. Such kind of projects will have the advantages as quick profits, cheap labour, flexibility in order fulfillment, enjoy the current central and local authorities investment preferential incentives. By the way, it should be noted that the preferential incentives are different from time to time, from location to location where the factory is based as well as the products to be produced. Products of high quality and non-quota requirements would be good solutions to avoid the competition from other local and international garment makers.

10.Textile, dyeing, printing and finishing would be the sectors in consideration for long-term investors as these require big amounts of capital (around USD10,000,000 up), long time for capital reimbursement. In the long-run, investment in these sectors will enjoy special preferential incentives and support from both central and local authorities and will have a good future as it will conform to the Government’s master-plan for the textile and garment industry development until 2010 for localisation and meet the need of the garment makers to reduce the import reliance. However, it also should take into consideration some current investment obstacles such as non-transparent and "weathercock" policies as well as lack of skilled labours, expensive and low-quality services.

11. The textile and garment related services, such as industrial software, equipment and parts supply, technical services, trade promotion, trade mark development, franchise, design, training, quality control, management etc. are also areas foreign investors can consider to get involved in.

Table 1.2. Vietnam Current Production Capacity

Product No of Enterprises Yearly Production Capacity

Spinning 102 260,000 tonnes

Weaving 135 680 million square meters

Knitting 56 300,000 tonnes

Garment 1,050 2,000 million pieces

Accessories 169 -

Source: Vietnam Textile & Apparel Association (VITAS)

Table 1.3. Vietnam Current Textile and Garment Machinery and Equipment

No. Description Brands/Country of Origins Quantity

1 Spindles China, Japan, Italy , ,India 2,200,000

2 Spinning rotors Slovakia , Switzerland ,Japan 7,150

Sinkwang, Picanol, Vamatex, Nissan, Rotal, Kawamoto, 3 Weaving machines 16,000 China, toyoda Germany, Italy, France, US, UK, Taiwan, China, Japan, 4 Knitting machines 1,730 Korea Sunstar, Pegasus, Juki, Brother, Singer, Pfaff, Veit, 5 Sewing machines 300,000 Gemsy, Golden Wheel, etc.

Morrison, Gerber, Gaston County, Uni-ace, Hisaka, inago, Wakayama, Reggiamii, Brukner, Famatex, Dyeing, printing, finish- V 6 Butter Worth, Dornier, AH 60, Royal Flow, Sanfort, 470 ing machines Comfit, Winch, Wet Calender, Compact, Thies, Textima, Zet, Zigo

Sources: VINATEX & VITAS

48 Table 1.4. Vietnam Garment & Textiles Machinery and Equipment Import (USD million)

2000 2001 2002 2003 2004 2005

106 148 202 244 279 310*

Source: Vietnam Textile & Apparel Association (VITAS); * Estimated figures

Table 1.5. Vietnam Textile and Garment Export Markets (USD 1,000)

Exports Country 2004 2005

Australia 21,573 24,802

Austria 8,020 12,052

Belgium 39,142 52,069

Canada 48,839 80,933

China 14,834 8,140

Denmark 14,347 17,091

Finland 4,641 6,394

France 90,953 103,355

Germany 226,999 236,957

The Netherlands 62,796 79,278

Hong Kong 22,153 12,520

Italy 54,946 39,028

Japan 531,092 603,902

South Korea 63,237 49,477

Spain 67,189 84,135

Taiwan 195,456 183,150

UK 97,843 153,441

US 2,474,382 2,602,902

Others 347,112 488,775

World Total 4,385,554 4,838,401

Source: General Department of Statistics & General Department of Customs

49 Table 1.6. Vietnam and VINATEX Total Investment Capital 2005 - 2010 (USD million)

Item Vietnam Vinatex

Years 2005 2010 2005 2010

Extended Projects 1,600 1,380 300 125

Upgrading, Newly Built 900 700 500 500

Total 2,500 2,080 800 625

Source: Vietnam Textile & Apparel Association (VITAS)

Table 1.7. Vietnam Textile & Garment Export Value by Markets (USD million)

Years USA EU Japan Others

2003 1,973 580 514 588

2004 2,474 762 531 619

2005 2,636 875 620 705

Source: Vietnam Ministry of Trade

Table 1.8. Key Textile & Garment Projects Calling for Foreign Investments

No. Projects Annual Capacity 1 Cotton grinding mill 20,000 tonnes 2 Mill producing polyester yarn 140,000 tonnes 3 Spinning mill 1,500-3,000 tonnes 4 Mill producing polyester fabric for sport wear and winter wear 10–20 mil. meters 5 Factory producing cotton yarn dyed fabric for shirt 10 mil. meters 6 Mill producing solid color fabric (T/C, PVC): 20 mil. meters 7 Mill producing large width printed fabric for bed covers and bed heets 20-30 mil. meters 8 Home textile mill 20 mil. meters 9 Geo-textile mill 5,000 tonnes 10 Tyre-core fabric mill 10,000 tonnes 11 Knitting factory 5 mil. pieces 12 Shirt factory 2 mil. pieces 13 Khaki trouser factory 2 mil. pieces 14 Men’s suit factory 500,000 pieces 15 Factory producing bedcovers, table sheets 5 mil. pieces

Source: VITAS

50 51 1. Analysis of current status

The footwear industry in Vietnam has been developing very fast for more than a decade. It is today the third largest foreign currency earner of the country after crude oil and textile, representing constantly more than 10% of total exports. Vietnamese footwear ranks fourth in world export value after China, Hong Kong and Italy.

Prior to the opening of the Vietnamese economy in the early 1990s, the footwear industry was involved mainly in sewing only the upper parts of products to be exported to the and Eastern European countries. After the collapse of the Soviet bloc, the Vietnamese footwear industry suffered a severe crisis due to the disappearance of its established importers. As part of the Doi Moi reform policy, the encouraged the formation of joint ventures with foreign partners. This initiative resulted in the relocation of many factories from other Asian countries to Vietnam. Therefore, the sector started to recover and found new markets, bringing the export value to unprecedented heights.

Source: General Department of Vietnam Customs/LEFASO

According to the Vietnam Leather and Footwear Association (LEFASO), in 2005 export turnover was USD 3.04 billion, up from USD 2.64 billion (a 15.1% increase with respect to 2004 figures). The industry employs around 500,000 workers. It comprises approximately 380 manufacturers of shoes and sandals, bags and briefcases and materials for footwear production. Ho Chi Minh City, Dong Nai, Binh Duong and Hai Phong gather the majority of companies. Total capacity is estimated at 520 million pairs per year whereas production in 2004 reached 496 million pairs. Export volume accounts for 95% of the total production output.

52 Box 1. Box 2. Footwear producers by economic sectors Footwear producers by type of products

State Owned Enterprises 61 Shoe factories > 200 Private Enterprises 109 Leather goods factories Approx. 20 Foreign Owned Enterprises 183 Shoe material factories Approx. 30 Joint Ventures 17 Tanneries 30 Total 370 Machinery producers 2

Table 2.2. Production of Vietnam footwear industry

Unit: 1,000 pairs, pieces 2002 2003 2004 2005

Different kinds of shoes 360,000 436,644 462,260 496,343

1.1 Sports Shoes 189,429 244,802 268,321 286,517

1.2 Textile Shoes 31,428 28,645 22,939 44,118

1.3 Woman's Shoes 71,710 87,423 97,848 94,053

1.4 Other 67,433 75,774 73,152 71,683

Note: Other includes leather shoes, slippers and sandals Source: LEFASO Vietnam footwear production by category in 2005 Vietnam footwear production by category in 2005

Other 14%

Women’s shoes 19% Sports shoes 58%

Textile shoes 9%

At present, annual sales volume in the domestic market makes up around 80 million pairs of shoes. Domestic makers are severely challenged by competition from products made in China, many of which are smuggled.

In 2005, footwear export to the EU amounted to USD 1.79 billion, with a 0.6% decrease compared to 2004 figures. The European Union is still the main market for Vietnamese footwear although the ratio of export to the EU on total export value has been declining from 74.5% in 2001 to 59% in 2005. On the other hand, 20% of total export value went to the US market, which received only 7.3% in 2001. Footwear export to Japan in 2005 accounted for 3% of total export value, compared to 2.8% in 2004. Among the EU member countries, United Kingdom, Germany, the Netherlands, Belgium, France, Italy and Spain are the main importers of Vietnamese footwear. Vietnam is EU’s second largest supplier of shoes after China.

53 Source: LEFASO

Vietnam’s footwear export benefits from the EU Generalised System of Preference (GSP). All the footwear manufactured in Vietnam qualified for preferential originating status is eligible for the GSP preferential rate of 70% of the full duty rate on importation into the EU. Footwear classified under Harmonised System (HS) Chapter 64 is normally subject to EU duty rates between 3% and 17%. Vietnamese footwear ran the risk of having GSP status withdrawn in early 2005 when the system was revised because preferential treatment is to be withdrawn when an exporting country is able to meet competition. However, a provision was specially introduced to ensure that strategic sectors, which account for more than 50% of all EU imports under GSP from a certain country, will be exempt from graduation (i.e., the exclusion from preferential treatment), as otherwise it would cause a disproportionate impact on the preference enjoyed by the country.

The EU antidumping proceeding on leather footwear

Following a complaint submitted by the European Confederation of the Footwear Industry on leather shoes imported from China and Vietnam, the European Commission undertook in July 2005 an antidumping proceeding concerning the import of certain footwear with leather uppers. In Vietnam, the Commission’s investigation identified evidence of state intervention in business decisions, accounting for practices which were not in line with generally accepted principles and disguised subsidies to the leather footwear sector resulting in dumping and injury to the European industry.

Therefore, in March 2006, the Commission adopted provisional measures that will be in force starting from April 2006. Special Technical Athletic Shoes (STAF) and children shoes are excluded from the provisional measures that will be imposed progressively over a period of six months according to the following timeframe:

Provisional Antidumping Duties

Starting Date April 7 June 2 July 14 September 15

Provisional Duty 4.2% 8.4% 12.6% 16.8%

Final measures are due to enter into force by 7 October 2006. However, Vietnam export of leather shoes will continue to benefit from preferential treatment under GSP.

54 2. Trends and potential

It is still too early to fully assess the effects of the antidumping measures on Vietnamese leather footwear export. According to LEFASO and the Ministry of Trade, in the fourth quarter of 2005 orders declined by 30% as compared with the same period of 2004 and the declining trend in orders for leather shoes continued through the first months of 2006. There are risks that some foreign invested companies move production to other countries and trading companies place orders elsewhere. Some companies are already reducing their production and the number of employees. LEFASO estimates that between 70,000 and 90,000 workers may be laid off. Only in the forthcoming months will it be possible to evaluate the exact dimension of such a shift, as it will be difficult for foreign investors and traders to find other countries that have developed the same expertise and production capacity as in Vietnam.

In order to curb the possible reduction of export to the EU, the Ministry of Trade has adopted trade promotional strategies to increase export to other markets such as , Canada, Brazil, Japan, South Korea, Eastern Europe countries, and especially the US. Moreover, local firms are encouraged to expand export to Central Asia and African countries.

The importance of the US market, in particular, for Vietnamese footwear export has been steadily growing since the entry into force (in December 2001) of the Vietnam-US bilateral agreement on goods, services and investment (USBTA), which granted Vietnamese exporters MFN status in the United States. In 2005, exports reached USD 611 million USD (a 44% increase compared to 2004, more than five times higher than the 2001 figure). This trend is very attractive for potential investors because they can take advantage of such preferential treatments with a view to boosting exports to the US. However, the American market, as sophisticated as it is, features complex import procedures and diverse consumer tastes. Vietnamese enterprises will have to make substantial efforts to ensure a sustainable presence.

Starting from 1 January 2002, ASEAN member countries under the CEPT-AFTA scheme reduced import duties on commodities of ASEAN origin down to 0-5% (this deadline has been postponed for some members like Vietnam). AFTA offers an opportunity for exporting footwear products within the AFTA market (particularly Singapore), opened with low tax rates. Although protection for Vietnamese production ceased in 2006, ASEAN countries are not seen by Vietnamese footwear producers to be major competitors.

China is undoubtedly perceived as Vietnam’s primary competitor by domestic businesses both on the domestic and on foreign markets as Chinese production is much larger than the Vietnamese one and Chinese producers face lower costs for raw materials. Nonetheless, differences exist in the types of shoes that Vietnam and China produce and in production methods. Therefore, Chinese products are not perfect substitutes for the Vietnamese ones. The EU provisional antidumping duty on the import of leather shoes has been set for China at a higher level, thus allowing Vietnamese footwear to maintain a competitive edge compared to Chinese export.

LEFASO Vietnam is drafting a new strategy to 2015 and vision towards 2020 that will be submitted to the Ministry of Industry for approval. The main goals are expanding footwear production and upgrading equipment through investments. The Association encourages businesses to shift to independent production rather than processing footwear components for foreign companies to increase local added value. The plan would also focus on training workers, raising the capacity of the design and marketing staff, and creating incentives for companies investing in the production of raw materials.

The fierce domestic and international competition will probably lead to a concentration of most national production in fewer competitive and technologically advanced companies. At the same time, environmental issues have gained more ground, and there is a plan of moving most of the current highly polluting manufacturing activities (such as tanning processes) out of urban areas. Focus is also being given to the improvement of working conditions, gender issues and corporate social responsibility.

3. Recommendations

The Vietnamese footwear industry enjoys low labour cost and relatively efficient and cost-effective international transport and shipping facilities. The industry requires minimum investment for owners and,

55 being highly labour intensive, has generated considerable employment, especially for women (around 80% of workers in the industry).

However, it still presents many weak points, which result from a lack of experience and poor technical skills of its local management and workers. Training is particularly needed in the fields of design and marketing. Still the majority of technical employees was trained in the former Soviet Union and East-European countries and has not been supplemented in recent years whereas skilled workers are mainly trained by enterprises on a sporadic basis. At present, there is no technical school for the industry in the country but a technical assistance center is planned to be established in Ho Chi Minh City. Some foreign partners have provided specialised training, whereas VCCI has provided courses on how to exploit the Internet to expand market opportunities and on how to use computer software to improve design.

It is estimated that around 80% of materials used for footwear production is imported. Domestic materials are available only for manufacturing fabric shoes and in-door slippers. Materials for other categories of product are heavily dependent on foreign partners and imports. Chemicals and machinery are almost entirely imported. In 2004, the machinery import climbed to USD 90 million, up 29% compared to 2003, mainly supplied by Asian countries. Taiwan provided around 35% of the total machinery import, followed by South Korea (29%), Hong Kong (9%), Singapore (7%), China (5%) and Japan (4.7%). Italy and Germany accounted for only 4% and 2% respectively. Dong Nai, Binh Duong and Ho Chi Minh City were major consumers of these machineries. Vietnamese manufacturers can only supply basic equipment such as shoe-shapers and cutters.

The local tanning industry covers roughly one quarter of leather requirements for the upper part of shoes, therefore the leather for upper parts, linings and soles is mainly imported. However the total tanned leather production is expected to increase steeply when several major tannery projects come into operation. The availability of is one of the advantages Chinese producers have over Vietnamese ones, resulting in lower production costs. Moreover, companies producing in Vietnam face tariffs on footwear machinery and spare parts and a high incidence of administrative trade barriers that should be reduced for the sake of a sound development of the sector industry.

Most enterprises operate on processing contracts, while foreign partners supply materials and designs and market the finished products. The manufacturing process is occupied largely with sub-contracting mostly from Taiwanese and Korean trading companies along with the contribution of foreign investors, while Vietnamese brands are unknown. The finished goods are then exported to the international market under the management of foreign (mostly Taiwanese and Korean) contractors. This reduces profits of local footwear makers.

Vietnam has proved itself as one of the most attractive countries for the production of low-value added shoes. A large portion of its export performance resulted in a mere assembling activity of imported components (i.e. upper, some other accessories etc.). Vietnamese export revenue in this field, although quantitatively remarkable, will not bring of its industry unless changes of course are envisaged in the near future.

International contacts through trade promotion activities in different markets and an increased participation of Vietnamese companies in specialised international fairs especially in Europe should be encouraged. The yearly Leather and Footwear fair in Ho Chi Minh City is also becoming an increasingly important occasion for local and foreign enterprises operating in this sector.

56 Table 2.4. Export turnover of Vietnam footwear industry by economic sectors (USD million)

Economic Sector 2002 % 2003 % 2004 %

1/ Vietnamese Enterprises 884.08 47.9 1,169.81 45.0 1,087.64 41.2

- State Enterprises 347.86 18.8 383.79 17.0 366.25 13.6

- Non-State Enterprises 536.22 29.1 786.02 28.0 721.39 26.8

2/ FDI Companies 838.65 45.4 1,097.57 48.4 1,383.06 52.4

3/ Joint-venture Companies 123.40 6.7 149.19 6.6 169.56 6.4

Total 1,846.00 100.0 2,267.38 100.0 2,640.26 100.0

Source: General Department of Vietnam Customs and yearly reports of LEFASO VN

Major efforts will have to be made, also with European technical assistance, in addressing and removing the distortions that have been revealed by the EC antidumping investigation on the export of leather footwear, and bringing Vietnamese enterprises’ operation in full compliance with market economy rules.

Although EU direct investment in the footwear sector is still limited, the entrepreneurial expertise and know- how of European companies remain of utmost importance for the new orientation of Vietnamese footwear industry. Based on its long lasting experience, the EU may play a leading role in meeting Vietnam’s needs for training through its industrial associations. A closer co-operation between Vietnamese and European enterprises in the footwear sector could lead to a significant reduction of Korean and Taiwanese trading companies’ influence over the international shoe market. It also may promote an increasingly important role of the European tanning industry, footwear accessories, components and raw material producers in the Vietnamese market.

Although the local market is dominated by Chinese and domestic products, there could be in the coming years a niche for fashionable, high quality leather shoes particularly from Italy, Spain and Portugal. European products are particularly appealing to an emerging class of people whose income is increasing. However, access to the Vietnamese market is not easy. Rates applied to European shoes are set at 50% and there are reports of the use of minimum prices to calculate duties, which results in an even actual higher taxation on the imported goods.

57 58 1. Analysis of current status

The seafood export continued to grow in 2005 elevating the growth back to a 2 digit figure namely 10.6%. The total export of seafood increased to USD 2.65 billion in 2005, with the international seafood markets developing along different patterns. However, the increased risk towards the end of 2005 of a bird flue pandemic spurred a significant increase in demand for seafood globally and thereby also an increase in prices.

The Vietnamese fishery sector continues to constitute a prominent part of the economy and thus commands sustained government attention with government investment in the sector on the increase. The fast track development over the past 10 years of the seafood export and growth is depicted in the table below.

Table 3.1. Vietnam’s Export of Seafood 1996-2005 (USD Mil.) Year 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 Seafood Export 670 780 817 971 1,475 1,777 2,023 2,240 2,397 2,650 Annual increase (%) 21.8 16.4 4.7 18.8 51.9 20.5 13.8 10.7 7.1 10.6

Source: Ministry of Fisheries

The EU market saw the largest increase in seafood import from Vietnam during 2005. The EU market share increased from 7% or USD 99 million in 2000 to 16% or USD 437 million in 2005. The increase from 2004 to 2005 was a record high 79% in value.

Japan has regained the position as the main market for Vietnamese seafood products and saw an increase of 7.7 % from 2004 to USD 813 million in 2005.

The US market is still influenced by the import tariffs imposed on two of the major commodities traded by Vietnam Black tiger shrimp and Catfish/Basa. The export to the US was however up 6.8% to USD 634 million in 2005.

The total number of seafood processing enterprises increased from 405 in 2004 to 439 in 2005. By the end of 2005 a total of 171 enterprises had obtained access to the EU (EU code), compared to 18 enterprises by the end of 1999. 300 enterprises had obtained approved HACCP systems and were therefore granted access to the US market.

Chart 3.2. Vietnam’s Export of Seafood in 2005

Seafood Export 2005 USD 2.65 billion Source: Vietnam Association for Seafood Exporters and Producers

59 2. Trends and potential

Vietnam has 3,260km of coastline with over 3,000 islands and a wealth of inland lakes and interior waterways. This combined gives the country one million square km of exclusive economic sea zone and 1.4 million ha of interior water, resulting in very favourable conditions for the country's fishery sector. The output from fisheries and aquaculture was 2 million tonnes from inland and marine fisheries and 1.4 million tonnes from aquaculture adding to a total of 3.4 million tonnes in 2005, an increase of 9% compared to 2004.

Aquaculture

The aquaculture production picked up pace again in 2005 and a total of 1,437,400 tonnes was recorded, an increase of almost 20% compared to 2004. Farmed shrimp (mainly black tiger) and farmed fish (mainly catfish) amounted to 330,000 and 934,000 tonnes respectively.

However, the long term sustainable development of the aquaculture sector continues to be affected by poor aquaculture planning, absence or lacklustre quality of Environmental Impact Assessment, environmental pollution in lagoons, fresh water shortage, and depletion of underground water in sandy soils and disease problems. The success of timely introduction of Good Aquaculture Planning (GAP), sets of Code of Conduct (CoC), environmental and disease monitoring will be crucial as the Vietnamese aquaculture industry enters the next 5 year planning cycle where ambitious output targets are set. A move away from output targets and towards using adaptive indicators for the aquaculture industry seems to be bold move at this point of time but nevertheless a requirement in the medium term if Vietnam wants to avoid mistakes that neighbouring and other countries in the region have already faced.

Case Study: The Vietnamese Catfish Industry

The development of the Vietnamese catfish industry is however when everything is taken into consideration a good example that deserves to be reported. The farming of catfish has in fact developed during the last 10 years, and mostly so during the latest 5-6 years. River cages an land-based catfish farms together with more than 30 processing enterprises have emerged during recent years and the export of catfish (mainly frozen fillets) exceeded 100,000 tonnes in 2005, with an estimated catfish production well above 400,000 tonnes in 2005. The processing industry today employs more than 20,000 people and with the vast number of farmers and other suppliers to the industry it is likely that the whole industry has created employment for around 50,000 people mainly in the .

Chart 3.3. Vietnam Pangasius Export

Vietnam pangasius export Jan - Sep. 2001 - 2005

60 Source: FAO-Globefish, Pangasius Market Report, December 2005

Inshore fishing

Inshore fishing (at a depth of less than 20 meters) is Vietnam's traditional form of fishing and has seen high growth over the past 20 years. The majority of the country's fishing fleet, which consists of small to medium sized boats, is occupied in this form of fishing. Unfortunately this has led to a serious depletion of the fish stock. The government is aware of the excessive capacity in coastal and inshore fisheries, which in the late 1990s and the beginning of the new millennium led to a government financed programme for construction of offshore fishing vessels. The offshore vessels have not had the anticipated impact at the coastal and inshore fisheries and there are reportedly cases of offshore vessels participating in the already overexploited inshore fisheries areas. The recorded catches from marine fisheries have as a consequence continued to increase and have in 2005 risen to a level more than 27% higher compared to 2000.

Offshore fishing

The operational performance of the offshore fishing fleet continues to constitute problems and a relatively large proportion of the vessels are operating at a loss. 2005 saw the re-possessing of a number of these none-performing off-shore vessels and this reportedly led to a better operational performance.

Seafood Export

The export value of the seafood production continues to increase and the increase of 10.6% recorded in 2005 is probably above what can be considered a sustainable growth rate. 2006 will see the review of tariffs imposed the US Department of Commerce but a ruling on maintaining, increasing or decreasing the tariffs may not come before the end of the year. More than 100 overseas markets were supplied in 2005 and further market diversification will follow in the coming years. New and old trading partnerships are being developed and re-developed and examples include export to the UAE and where export increased by more than 100% in 2005.

The introduction of new regulation on traceability in the EU being effective as of January 2005 will pose a tremendous challenge to the Vietnamese system and its unique characteristics of having a large numbers of collectors buying from the small household farmers and selling to the middlemen, who then sell to the processors. This challenge will require concerted actions between central and provincial authorities, VASEP and the fishermen and aquaculture industry for years to come.

3. Recommendations

The plans and targets set for the coming 5-year period within the fisheries sector continues to raise the output bar. The plan includes among others targets for increasing the aquaculture production from the present 1.4 million tonnes to 2 million tonnes by 2010 and the seafood export from the USD 2.65 billion to USD 4 billion by 2010.

61 Aquaculture

The question is if these targets are realistic when considering that the ministry also aims at ensuring that sector developments are sustainable in the long term. The main challenges and obstacles for achieving these targets will be for the aquaculture sector to adopt standards that will ensure a well planned and environmentally sustainable development and approaches that are socially inclusive keeping the small household farmers in business. Raw material is in short supply already for the fast increasing processing industry and failing to ensure that the development of the aquaculture industry in Vietnam is based on the mentioned sound principles will hamper the growth potential and eventually reverse the trend and create a fall in supply of raw materials from aquaculture.

Expansion and increasing investments in the aquaculture sector is however set to continue and the coming years is also likely to see parts of the aquaculture sector develop into more industrial scale undertakings as has been the case in other countries in the region. This will provide new opportunities equipment suppliers. In the other end of this scale there seems to be an increasing window of opportunity for extensive organic production of aquaculture and even though the market at present is insignificant there are expectations that increased awareness among consumers will eventually lead to organic products taking up more self space in the hyper/supermarkets in Europe and the US.

Seafood Processing and Export

The introduction of a product tracking system will be the main challenge in the future and 2006-2007 are expected to provide results from the pilot projects that have already been initiated within the sector. The system of collectors, middlemen, processors in Vietnam will have to change and adjust to the new conditions, a change that will require fundamental changes and pose a huge investment challenge for the industry.

New processing plants are being constructed and with that come investment in equipment and indeed investment in types of equipment. The industry is gradually changing from heavy labour intensive production methods towards more mechanised and automated production methods. The production will still be labour intensive but new equipment is finding its way to increase efficiency and save on operational costs such as water, ice and electricity.

62 63 1. Analysis of current status

Agriculture still plays a very important role in Vietnam as it offers jobs and incomes for more than 70 percent of Vietnamese population. Agriculture accounts for more than 30% of the total export value and about 25% of Vietnam’s GDP. In spite of the threatening situation of Avian Influenza, the year 2005 saw an increase in both production and export value of products such as peanuts, rubber, rice, , milk products and fruits. In terms of export value, rice took the lead followed by rubber and coffee according to MARD.

Agricultural products are being sold in 100 countries and territories over the world. Asia is the largest market for Vietnamese rice, rubber, fruits and vegetables, pepper and cashews. Coffee, honey, processed fruits &vegetables sell well in Europe. The American market is taking mostly coffee, pepper and juice. Rice and tea are going to the African market. Private companies are expanding in domestic and international markets, many state owned companies are on the way of equitization.

In 2005, Vietnam reduced export on 91% of its agricultural and forest products in accordance with commitment made under the ASEAN Free Trade Area (AFTA) agreements. As a result, the average export tax on agricultural and forest products fell from 24.5% to 4.9%. The cooperation among government, scientists, farmers and businessmen has helped to ensure smooth agricultural and forest production and its quality.

Vietnamese agricultural products previously exported mainly in raw form and produced under contracts without trade marks. Recently, local authorities, companies and farmers have been trying to build trademarks for their products. As a result Vietnam has trade marks of some products such as durian, , , litchi, etc. Business associations and corporations also have been busy building national trade marks, surveying the market, opening representative offices abroad and putting up websites to promote export.

Table 4.1. Statistic on the export of agricultural products in 2005

Products Year 2005 Compared to 2004 Plan for 2006 Volume Value Volume Value Volume Value (1,000 tonnes) (USD million) (1,000 tonnes) (USD million) (1,000 tonnes) (USD million) Rice 5,250 1,407 4,060 950 4,000 1,100 Coffee 892 735 975 641 750 573 Vegetable & Fruits 235 179 330 Rubber 587 804 513 597 495 596 Pepper 109 150 112 152 100 134 Cashew nut 108 501 105 436 110 535 Tea 88 97 99 96 110 114 Peanut 55 34 45 28 150 80 Sugar 0.7 264 1.4 526 Milk & milk products 90 34 Oil (veg. &animal) 16 55 Total 4,333 3,694 Source: Ministry of Agriculture and Rural Development (MARD)

2. Trends and potential

Vietnam plans to develop and apply bio-technology in agriculture and rural development over the next 15 years. At present, some high-tech agricultural zones have been set up outskirts of Hanoi, Ho Chi Minh City, Dalat and some other cities to improve productivity as well as the quality of agricultural products.

64 In addition, a range of new policy measures has been implemented in recent years to create incentives for liberalizing of production, encouraging farmers to invest in product development. It has resulted in a continuous and sustainable growth with an average growth of 4.5 % yearly over the period 2000 to 2005. Moreover, changes in the agriculture structure are strongly driven by market and export orientation.

The long-term target of the agricultural sector is to strengthen the commercial agriculture to maximise comparative advantages, adopt new technologies and improve competitiveness in domestic and international markets. It is also necessary to construct a new rural area with appropriate economic structure and the joint development of agriculture-industry and services. Overall, the agriculture sector needs more investment to boast productivity, quality and export value though the sector attracted more foreign direct investment.

In 2005, foreign direct investment (FDI) in Vietnam totalled USD 5.8 billion, 25% higher than in 2004 and 29% above the 2005 plan. The Ministry of Planning and Investment predicts that FDI in Vietnam will continue to increase and will exceed USD 6 billion in 2006. However, in order to attract this level of FDI, Vietnam really has to improve both its infrastructure and legal system. Foodstuffs, fruit and vegetables, rubber, coffee, tea, husbandry, forestry and wood processing will be the key agricultural fields calling for FDI in the next few years according to MARD.

Vietnamese farmers tend to move from rice production to vegetables, fruits, flowers and animal husbandry as they bring back much higher returns. However, the productivity of these sectors is still very low. There is great need for technical and financial investments to improve the quality of seeds, breeds and feeds. Therefore, opportunities for foreign companies to invest in horticulture, floriculture and husbandry especially diary production and animal feed are very good in Viet Nam.

3. Recommendations

It seems that the existing poor infrastructure in Vietnam, with the inadequate electricity, questionable water quality and unstable supply, lack of information system and inadequate seaport service facilities, together represent a rather large obstacle when viewed by potential investors to do business in Vietnam. Because of low quality and low productivity, the agriculture output in comparison to input, especially to the number of people involved, is very low.

One of the main problems is the lack of capacity for . About 20% of the total agricultural production is lost because no modern post harvest and food processing technology is available. In addition, agricultural products exported from Vietnam are always in the lower price range compared with other countries because of the inconsistency in quality. The majority (90%) of the exported agriculture products is unprocessed.

Another problem is that agricultural sector of Viet Nam bases in many millions of poor and small- scale household, which cannot afford the cost of modern processing and modern post harvesting techniques. Lack of financing investment remains a big problem. And the unfair treatment between private and public sectors is also a big obstacle to speed up the overall agricultural development process.

Added to the list of problems is the weakness or absence completely of a quality control system in many fields of agriculture, the overuse of pesticides and fertilisers, the residues of antibiotic, heavy metals, insecticides and hormones as well as animal diseases are threatening human health and export.

It is clear that beside opportunities, challenges in 2006 such as unexpected natural disaster, bad weather, plant and animal diseases like AI as well as the tariff cuts according to the AFTA commitment will be unavoidable and put great pressure on the agricultural sector in the time to come. Solutions for these would be more investments in human and physical resources as well as a suitable legal framework and policies especially a better international investment environment for the agricultural sector to overcome its limitations.

65 66 1. Analysis of current status

The Vietnamese Government has approved the strategies of several transport sub-sectors (railway, inland waterway, port and shipping…) proposed by the national transport master plan, named Vitranss, which is realised, jointly by a Japanese consultant and the Ministry of Transport of Vietnam. The Vitranss plan suggests a medium (5 years) and long term (10 years) strategic plan for the development of a modern, competitive and multimodal transport sector. The cost to achieve this master plan is evaluated to 2.5% of the GDP. There will be ample opportunities for European companies to participate. Below follows a brief presentation of some key sectors.

Air-traffic

The national flag carrier, Vietnam Airlines which is state owned and managed, operates domestic and international flights. During the year 2005, Vietnam Airlines carried more than 6 million passengers (an increase of 18% comparing to 2004) and transported 97,000 tonnes of cargo (a year-to-year increase of 6%). For the 2005, the company made a growing turnover of USD 974 million. There is another carrier, Pacific Airlines, which was established in 1991 by several Vietnamese state-owned enterprises. Vietnam Airlines was the biggest shareholder of Pacific Airlines keeping 86% of its stake. At the end of 2004, Pacific Airlines reported of loss of USD 14 million. The Ministry of Finance on behalf of the government took over the Vietnam Airlines’ stake in Pacific Airlines and implemented a plan to restructure the airline. In September 2005, the Vietnamese government allowed Singapore based Temasek Holdings to acquire 30% of the capital of Pacific Airlines which was valued at USD 167 million. For the year 2005, Pacific Airlines transported 300,000 passengers and posted a profit. Up to date, no private and / or foreign competition has yet been allowed for domestic flights. Currently, the European Union and Vietnam have concluded a horizontal air service agreement, following a ruling of the European Court of Justice. Vietnam and the USA already concluded a bilateral air agreement in December 2003, which aims at setting direct flights between the two countries, probably in 2006.

In terms of infrastructures, Vietnam has about 300 airports/aerodromes/airfields of all kinds. Most of them were built before 1975 and must be upgraded or completely rebuilt. At present, the Civil Aviation Administration of Vietnam (CAAV) operates a network of 21 major airports including three international airports which are Noi Bai in Hanoi, Da Nang in the centre and Tan Son Nhat in Ho Chi Minh City. The Noi Bai International Airport can currently handle 6 million passengers a year. In the meantime, a feasibility study is ongoing for the construction of a new terminal T2, which is expected to be completed for the 1,000th anniversary of Hanoi in October 2010. The project which would increase the annual passengers capacity of the airport to 12 million by 2010 and to 20 million by 2020 is estimated to cost about USD 297 million and could be funded by Japan. In Ho Chi Minh City, the Japan’s Bank for International Cooperation (JBIC) has granted a soft loan of USD 220 million to finance the construction of a new terminal at the Tan Son Nhat International Airport, which will be operational in late 2006 and will have the capacity of handling 8 million passengers per year. The Da Nang International Airport is implementing a USD 70 million new terminal for which detailed studies are ongoing. The financing of this project is not yet closed but it seems that the Vietnamese party is prepared to finance the civil work (USD 42 million), while looking for ODA credits for the remaining USD 28 million. Furthermore, the Vietnamese civil aviation authority is currently studying the construction of a new international airport at Long Thanh in Dong Nai province, located 40km eastward of Ho Chi Minh City. This airport is designed to have four terminals with the capacity of handling 80 million passengers per year when it will be completed. The construction of the new airport is planned to begin in 2010 and its first terminal will be open to traffic by 2015 in order to substitute the saturated Tan Son Nhat airport. The whole project would cost about USD 8 billion. In addition, the CAAV is implementing the upgrading of other major regional airports such as Can Tho, Chu Lai, Cam Ranh, Phu Quoc and Na San.

Railways

There is presently only a one track railway system, connecting Hanoi with Ho Chi Minh City, as well as Hanoi with Hai Phong and lines up to the Chinese border. The railway was built mainly in the 20s and the 30s and was heavily bombed during the . Despite a large programme to upgrade the main track from North to South, the express train takes roughly 29 hours between the two major cities (approx. 1,700 km). There are plans for the rehabilitation and modernization of the Hanoi - Lao Cai line (part of the Kunming -

67 Hai Phong transport corridor), for which the Asian Development Bank (ADB) will provide USD 60 million under the Greater Mekong Sub-region programme (GMS) and for which France also pledged to provide co-financing for an amount yet to be worked out. The JBIC has been requested by the Vietnamese authorities to finance the upgrading of the Hanoi - Hai Phong line. Also under the framework of the trans-Asia railway project (Singapore - Kunming), there is a plan to connect the Vietnamese railway system to a new line from Thailand. Last year, Vietnam Railways Corporation carried an estimated 12.78 million passengers, transported about 8,740 million tonnes of cargo. Its turnover for the fiscal year 2005 was of USD 153 million, i.e. a 24.4% year-on-year increase.

Roads, tunnels and bridges

Highway No. 1 goes through the whole country and has been mostly upgraded, also some major regional roads connecting major cities with ports, as well as the highway between Vinh and Laos. The Hai Van Pass tunnel between Hue and Da Nang, a Japan funded project, has been open to traffic. Major bridge projects are also under way as well as the construction of feeder roads in remote areas, supported by the World Bank.

The second trans-Vietnam highway, called the Ho Chi Minh Road, has been open to traffic. This road is very strategic for Vietnam because it will ease the actual crowded traffic on the Highway No. 1 and ensure the road connection between the North and the South during flood season. This road will also contribute to the economic growth in central highland regions. This project is totally funded by the State budget.

Mass transportation and public transport

Mass transportation is developing heavily in the major cities and efforts are agreed on to constantly improve the organisation and the quality of public transportation. Alternative transport modes become necessary to meet the growing demand for public transportation and to stamp out traffic congestion.

In Hanoi, bus transportation is increasing by 20% every year and many important projects are under preparation. The European Union has granted a soft loan for implementing three modern bus lines in the framework of a decentralised cooperation between Hanoi, Brussels and the Ile-de-France Region. The World Bank is financing the construction of two priority BRT (Bus Rapid Transit) lines. Otherwise, France committed to finance up to 61% of the EUR 458 million LRT line running from Nhon to the Hanoi Railway station. The European Investment Bank has also confirmed its willingness to contribute up to EUR 100 million to the financing of this important project. The Hanoi People’s Committee is preparing the implementation of the detailed studies in order to kick off the civil work in 2007. This first LRT line in Vietnam is expected to be inaugurated in October 2010 on the occasion of the celebration of the millennium anniversary of Hanoi.

In Ho Chi Minh City, the World Bank is financing studies to optimise the operation of the bus network. In terms of mass transportation development, the Vietnamese government has approved the pre-feasibility study of a MRT line with the length of about 14.3km running from Ben Thanh market to Thu Duc. The cost of this project is estimated at USD 630 million. The Japan Bank for International Cooperation has committed to finance 80% of the project. Otherwise, the Asian Development Bank is promoting the construction of three other MRT lines worth USD 1.5 billion by offering USD 500 million from its Ordinary Capital Resources. At this stage, the local authority does not seem to be ready to use low concessional loan such as OCR for non-profit project. Furthermore, the Transport and Public Works Service of Ho Chi Minh City is conducting a pre-feasibility study on a tram line running from Cho Lon market to the West station.

In the meantime, in order to control the development of the fleet, a number of measures have been taken by the Vietnamese authorities, e.g. the restriction of new registrations of individual vehicles in Hanoi and Ho Chi Minh City.

Harbours and marine

Several harbours have been upgraded in the last few years and there are plans in the direction of further enlarge some major harbours including the extension of the harbour nearby the new oil refinery in Dung

68 Quat. The construction of the Cai Lan deep sea port in the Ha Long Bay area has been completed and other projects are ongoing in the South of Vietnam, such as the construction of a harbour in Cai Mep on the Thi Vai river, which would consist in moving downstream the harbour activities of the Great Saigon to the Ba Ria Vung Tau province. A number of shipyards already have European partners and there are plans for construction of coastal vessels connecting the northern and the southern part of the country. Presently there are no passenger ships between the major ports, and the coastal vessels are usually not in a condition that may be called safe. Major shipyards and transport companies have approached European partners for joint ventures on maritime container transportation. Recently, Vietnam has granted two licences to European shipping lines which are Maersk line of Denmark for the establishment of a 100% foreign owned shipping company and CMA CGM of France for the establishment of a joint venture shipping company. The liberalisation of the Vietnamese maritime transport sector has started within the frame of the “early harvest” agreement reached between EU and Vietnam in the process of its accession to WTO.

Inland waterway transport

About 8,000km of rivers are used for inland waterway . Transport services are mainly provided by SOE operators in the North and by private operators in the South. Although inland waterways play an important role in the deltas, navigability is reduced due to a substantial dredging backlog and lack of navigational facilities. Moreover, facilities and equipment of river port are mostly in poor condition.

2. Prospects and recommendations

Once deregulation of the aviation sector takes place there should be ample opportunities for European companies to enter the market, either as supplier or as a partner through BOT or in other forms.

In the railway sector as well as for roads, tunnels and bridges, the strength of European companies may not primarily be in the construction part itself, e.g. rehabilitating the Kunming - Hai Phong line, building Thailand - Vietnam line or the second track of the railway. In this field neighbouring countries usually have a with considerably lower labour costs. There is however a potential for European companies when it comes to feasibility studies, calculations and specifications, quality control, signal systems, evaluation of projects and so on. Heavy construction equipment and specialised construction materials are other areas where European companies would probably have a competitive advantage.

As for mass transportation, several studies have shown that as long as the government of Vietnam chooses to subsidise petrol, the prospects for a BOT or similar project for mass transportation will not prove very profitable. Experience has also shown that private companies operating in a mass transportation system have proven to be more efficient than those owned by cities or municipalities. Until deregulation takes place the prospects of entering the mass transportation field are very limited, but if and when deregulation takes place, this could become an interesting sector for European companies.

Marine transportation and sea freight as well as passenger services may become an interesting field for European companies. The enlargement of major harbours could also provide opportunities for European businesses.

The prospects for growth of inland water transport are fairly modest. There is plan to improve ports, inland waterways and navigational safety. These investments would involve new projects to which European companies could participate.

69 70 1. Analysis of current status

Telecommunications and related-industries are currently among the fastest growing industries in Vietnam. In the late 1980s Vietnam implemented the Doi Moi Policy and has since expanded its IT infrastructure exponentially in the hopes of leapfrogging the international technology gap. Over the past 5 years, Vietnam has sustained an average network growth of over 20%, one of the highest in the region. The International Telecommunications Union (ITU) assumed Vietnam ranked second worldwide behind China in regards to telecommunications development. In information technology, it is estimated by IDG that the country’s growth rate of expenses for IT in the 2004-2008 period will be among top 10 of the world, ranked the 4th following India, Russia and .

The year 2005 was successful year in Vietnam’s ICT industry. According to the Ministry of Post and Telematics, Vietnam had well over 15 million fixed and mobile subscribers in the end of 2005, including 5 million new subscribers during the last year, and the country reached a telephone density of 19.01 per 100 habitants and by 2005 all provinces and cities were connected to broadband networks. Vietnam continued to report huge growth in all business segments.

In addition, fully aware of the facts that the country’s ICT industry has still lagged far behind its regional peers in many aspects due to resources untapped and the lack of macro guidelines, the Government of Vietnam has launched its national ICT development strategy through 2010 and beyond. The strategy focuses on four pillars, namely the improvement of ICT applications, capacity-building for the domestic ICT industry, the development of ICT Human Resource and ICT infrastructure. The strategy aims at placing Vietnam on the upper-middle ranks in ICT development and application among ASEAN countries by the year 2010 with a total investment reaching 2% of GDP.

About 40% of telecom equipment is currently sourced locally. The provisioning of equipment for networks has generated fierce competition. Regarding the telecom service providers, the smaller service providers with no more than 30% of market share are now free to set their prices. Consequently, small to medium firms such as Viettel, SPT welcome the price competition while the giant VNPT feels the heat of competition. The competition has prompted VNPT to be transformed from corporation into VNPT group in March 2006. On one hand, the liberalization of price settings surely improves the well-being of consumers. In addition, the telecom market will become more segmented. Governmental authorities will still play a referee role in maintaining an orderly and fair playground for all. However, the WTO accession is expected to change the setting for ICT sector and foreign suppliers are ambitious to break into the market once Vietnam makes achievement in progress of joining WTO this year. This draws a clear forecast about the severe competition in telecom market.

Table 6.1. Number of telecom service providers

Number of service providers Service Number of licences in operation Fixed Line Service 5 3 International Telecommunications Service 3 2 Long distant and International telephone 6 4 Service based on IP protocol Mobile communications service 6 5 Internet Access Service 13 8 Internet Exchange 6 5 Online Services 12 3

Source: MPT

71 Fixed lines

Vietnam has maintained the average growth rate of fixed line network of 27% over the past 5 years and the year 2005 is not an exception. The increasing popularity of telephone services is mainly thanks to considerable cut in establishment fees and call rates. According to one estimate, the telephone call rates of Ho Chi Minh City are near the regional average.

Up until 1995, VNPT (Vietnam Post and Telecom Corporation) was the sole player in this market. Now several other smaller players have succeeded in obtaining operation licences from MPT such as Saigon Post and Telecom (SPT), Vietnam Military Telecommunications Company (Viettel), Electrical Telecommunications Company (ETC), Hanoi Telecom Company (Hanoi Telecom). Among them, 2 companies (SPT, Viettel) have already introduced their fixed line service to the market although the popularity is not as much as the giant VNPT.

A fairer competition for all players created by reducing the monopoly encourages all fixed line service providers to enhance quality, to diversify the services and to reduce fee to attract more customers. That has been a momentum for future expansion of the network in the following years.

Mobile Networks

Rapid growth was witnessed again in this market in 2005. The number of mobile phone subscribers (both pre-paid and post-paid) reached 5 million already at the end of 2004 and over 9 million at the end of 2005.

Traditionally, there used to be only two operators in this field, namely VinaPhone (a subsidiary of the state-owned giant VNPT) and MobiFone (BCC between the Swedish Kinnevik/Comvik and VNPT) sharing the market together. Recently market has expanded. SPT in a joint venture with the Korean SLD Telecom introduced S-Fone services operating in the CDMA platform in 2003 and Viettel (Military Electronics and Telecommunications Co) has opened a GSM mobile network in 2004. Besides, EVN Telecom (Vietnam Power Telecom) come in to official operation in 2005 and the latest operator is Hanoi Telecom Company and Hutchison Telecom who are preparing to open a third generation CMDA mobile phone networks.

Chart 6.2. Mobile communication service market share (Dec 2005)

Source: MPT

The above figures show a great potential for the development of new operators that will positively influence the development of Vietnam’s mobile phone service market and consumers are obviously the beneficiary in this. However, the ratio of mobile subscriber number against fix phone one is still among the lowest in the region. Thus, a great potential for the network development can be easily seen.

72 Internet

Vietnam is relatively a latecomer to the Internet world, obtaining its first permanent connection in December 1997. However, as time passes by, the situation has been improved significantly. Firstly, Internet bandwidth capacity is now expanded and there are six gateways connecting Vietnam with the US, Japan, Hong Kong, South Korea, China and Singapore. Equally important is that subscribers have enjoyed several major Internet tariff cuts. The Internet tariff in Vietnam becomes as low as the regional level. As a result, the number of Internet subscribers has increased so that the Internet density in the end of 2005 is 12.48 over 100 habitants. The popularity of is also due to the boom of Internet shops, which on the other side have raised public concern over censorship issues.

At the moment, there are 6 Internet Exchange Providers (IAP) and 13 Internet Service Providers (ISP). In accordance with the Decree No.55, IAP status is reserved for state-owned entity only while ISP status is open up for private sector, including foreign company. US companies are allowed to provide Internet services through joint venture companies from December 2004 onwards.

Table 6.3. Vietnam’s Internet subscription

The number of subscribers 2.90 million

Internet users 10.02 million

Internet users/Population 12.48 % (35.2% in urban area)

Total Internet bandwidth capacity 3,615 Mbps

ADSL, the high-speed Internet access service has been provided by VNPT, SPT, OCI and FPT. The number of ADSL subscribers is over 200,000 by December 2005 compare to 50,000 ADSL subscribers by the end of 2004. Also noteworthy is the coming of Internet telephony, which essentially is Internet-based telephone.

Currently there are 16 ISP authorized by Ministry of Posts and Telematics, but only 8 of them actually provide services and 5 have deeply penetrated to the market. They are VNPT, FPT, SPT, Netnam and recently Viettel. The biggest market share belongs to VNPT. The next are FPT, Viettel, SPT and Netnam. The others operate moderately. The leading corporations of Vietnam Internet assert their dynamic power and create the outstanding place in the community.

While VNPT brought VNN call service to the market in 2000, FPT had prepaid Internet card in 2001. Depending on their internal power and strategies, Internet operators have their own strength and specific plan. FPT connection service concentrates mainly on Hanoi and Ho Chi Minh City, rank 2nd in direct line delivery to Internet users. VNPT remains a leader in Internet Vietnam with the wide network system covering 64 localities of the country. Its strength is telematics services, including direct Internet, despite severe competition from other ISPs. As for major common Internet users, VNPT is appreciated as the most easy-to-use and beneficial service for connecting to the World Wide Web. Viettel, as a 2-year-old new comer, thanks to the compact infrastructure, is holding the 3rd position.

Chart 6.4. Internet market share (Dec. 2005)

73 The imbalance development between localities has caused the imbalance development of Internet usage. Though Internet user growth rate of Vietnam is high in the region, it is still low in comparison with the world rate (13.9%), and it is not easy to reach 50% as of Korea, Japan, and Singapore. Suppliers, for profit reasons, have not contributed to social interest. Till now, inability to make use of computer and particularly language barriers still make big challenges to users. Besides, many enterprises cannot fully take advantages of assigned IP. But the Government has clearly addressed also these issues by distributing widely low cost computers to users and expanding IT-training opportunities for the students.

Security problems has not been paid adequate attention, therefore many address are prevented when conducting international transaction. Human resources of many enterprises have not met the requirements either. The Government has also directly addressed both of these problems with new laws like Information technology law, which is formally ratified by the National Assembly already. Much of the security issues will be cured especially when the E-transaction law is put into force in the first quarter of 2006 and many regulations on e-signature and e-payment among others will be drawn. It is expected that online trade will expand in both B2B and B2C model when firms and people get familiar with credit card and e-contract.

However, the greatest challenge is the other side of Internet like depraved culture and information, sever attacks, black cap hackers, virus and spams, stolen prepaid Internet card, corrupt use of Internet infrastructure to steal telecom fees. According to the Vietnamese leading IT strategist, to popularize Internet safely to users and trader, it is necessary to improve legal system, especially E-commerce law, electronic signature and upgrade IT knowledge of people, in which education plays an important role. In the 1 July 2006 also the Intellectual Property Rights Law will formally take effect. As there is a basis for legal proceedings of copying source code and selling cracked software copyrights issues may increase. However, relying on that, the infringement rate in Vietnam will be reduced.

According to Mr. Nguyen Le Thuy, Director of Vietnam Internet Center, Ministry of Posts and Telematics, development potential for Internet subscribers is positive until 2010. Online value-added services will diversify and attract more users, but there will be both opportunities and challenges. The year 2005 has already witnessed the explosion of Vietnam wide-brand market. It is the significant development of wide-band Internet that support for the born of new online value-added services such as game online, positioning by GIS technology, music and film download.

Satellite business

To save the leasing money and to improve the independence and efficiency of its telecom industry, Vietnam plans to launch its own satellite, named as Vinasat, in 2006. The project will require a funding of around USD 180 million, including satellite’s production and launching costs, development of ground-control stations and insurance for the whole project.

In February 2006, VNPT has invited four pre-qualified foreign contractors at the first aborted bidding to rebid for the In Orbital Delivery of Vinasat. Only three bids were submitted to VNPT in March 2006 from the European consortium Astrium/Alcatel Alenia Space, the American-Japanese consortium SUMITOMO/NEC/TOSHIBA/OSC and the American Lockheed-Martin. The Vinasat project’s team is currently evaluating the bids. VNPT aims to reward the contract in April in order to kick off the production of the satellite in May 2006. According to the manufacturer, the production of a satellite of this type will take about 24 months. The International Telecommunications Union has indicated the date of 22 May 2008 as the deadline for the In Orbital Delivery of Vinasat. As estimated, after being launched, Vietnam will only use 15% of the total capacity of this satellite, so other partners can lease the rest from Vietnam.

Mobile phones sets

In 2005, the market for mobile phones in Vietnam became more and more diversified with the introduction of many new models from different famous brand names like Nokia, Samsung, Sony Ericsson, Motorola, Siemens etc. These manufacturers have made greater commitments to this market by setting well-structured sales and customer service networks. However, the competition is mainly between two biggest players: Nokia and Samsung with Nokia leading with the market share of about 54%.

74 Like many other countries in Asia, in the eye of local people, mobile phones are used not simply as a tool for communications but somewhat more importantly as a way to show off their prosperity and fashionalibity. As a result, the local people are willing to spend considerable amounts to keep themselves up-dated with new phones. As taxes are being reduced when Vietnam joins AFTA, high-tech products’ price will continue to fall while high quality products flow in rapidly from other countries in the region, creating more choices to suit every pocket. The obvious result is remarkable rise of expenses on digital products.

Due to a rather high tax rate, mobile phone trafficking is a very profitable grey business. This has hampered the sales growth of officially imported mobile phones. Also, this results in some warranty issues. The government has tried to reduce trafficking by demanding a Government tag to be placed on the backside of all the phone sets but the vendors have complained that tagging is too expensive.

IT industry

Generally speaking, Vietnam’s IT market is small and very modest compared with the country’s potential. The growth rate of 20% is considerable, however IT sector is not competitive in the regional and international economies and software exports do not reach their set targets. The software industry will also fail to reach targets if the government does not devise stronger policies to prompt the use of domestic software and services among local enterprises, according to industry experts.

It has been proved that the application of IT can make great contribution to the success of enterprises. However, domestic software suppliers are still unable to provide with products that can well adapt to the diversified and flexible demand of the enterprises, with high quality and stability, controlled under a standard line before being introduced to the market.

Currently, Vietnamese private company with state support have developed a Vietnamese version of the open source operating system Linux as well as a number of open source software products. A number of computer retail companies have put this OSS operating system and software on their computers, enabling them to push prices down for domestic consumers and also supply these substantially cheaper computers to schools and other groups who may previously not have been able to afford the more expensive licensed proprietary software.

However, information technology is intended to become one of the key government policies at various levels as well as in medium and small enterprises and IT will be the impulsive power of the political administration reform to the “one-door-one-stamp” target. Online communication will be encouraged, employed and intensified in various localities and the leader in application of this new mean of administration, also called electric government, is Ho Chi Minh City supported by its two technology parks much geared for IT: Saigon Software Park and Quang Trung Software Park. The Government has announced parallel development programmes for the capital city of Hanoi and also nationwide. Series of incentive measures have been introduced to attract FDI (e.g. low land rent rate, fixed and exempted income tax over many first operating years etc.). These measures together with others have brought preliminary result with the Intel investment decision of USD 602 million in Ho Chi Minh City.

2. Trends and potential

According to the National Institute for Post and Telecommunication Strategy (NIPTS) the telephone density was over 18 per 100 habitants in the end of 2005, including 56% of mobile phone users and the same penetration for fixed lines. At the same time there were 2.9 million Internet accounts, or 10 million Internet users, and 12.48% of the total population had access to the Internet. Also according to NIPTS, by 2010 tele-density will be around 32-42 lines per 100 habitants, including 14-16 mobile phones per 100 habitants. The Internet subscribers will be 8 - 12 per 100 habitants, including 30% broad-band users while Internet users will be 25 - 30%. PC penetration is expected to be 10 people per 100. This means there is plenty of room for foreign and domestic investors to do business in Vietnam’s ICT sector.

Telecom

Service providers have now been setting up infrastructure, market access, researching mobile phone

75 services and channel leasing, as well as devising new service packages at reasonable prices well over two years. This trend will obviously continue in the coming period. Recently licensed mobile phone operators Viettel and S-Fone are gearing up to offer various services to Vietnamese users. State-run Viettel will launch its Flex package with prepaid cards in different value levels, and subscriber discounts if charges exceed set charge level or calling time is less than time limitation. S-Fone, operated by a South Korean-Vietnamese business cooperation contract, plans to offer video on demand (VoD) to enable customers to watch video and download clips on handsets.

As to Third Generation, W-CDMA and CDMA2000 will be the two main standards for 3G (third generation) and the country will develop 4G after 2010. The Vietnamese government has licensed a USD 650 million mobile telephone joint venture led by Hutchison Telecommunications to build a 3G mobile phone network in the country. Hutchison will partner Vietnam’s Hanoi Telecom and the two firms will invest under a business co-operation contract. The joint venture will develop and operate a 3G network for 15 years using CDMA2000 technology. About 2.9 million subscribers in Vietnam are expected to sign in during its first 10 years of operations, said Hanoi Telecoms officials.

It is presumable that in the short term VNPT will surely maintain its position as market leader in the telecom sector. VNPT will enjoy favourable conditions to keep that role. But it is also required to carry out renovations to increase its ability and competitiveness to prepare for international economic integration in the future. As a step to improve the competitiveness, VNPT has been transformed into VNPT group in March 2006.

The monopoly of state corporations will be reduced in the longer term. Goals have been set for the abolition of other fields of corporate monopolies, enabling rapid movement into a competitive market. Also the new puts limits on state monopolies. According to the strategy, enterprises from all economic sec- tors would be able to take part in post and telecom services supply. The non-state sector is expected to increase its service market share in post and telecom markets by 25 - 30% by 2005 and 40 - 50% by 2010.

At this moment, BCC is the preferred method by the Vietnamese Government for foreign companies to enter this market. However, taking a longer term view, the less-than-inviting environment of Vietnam’s telecom market for foreign investment and foreign participation is going to experience change in the near future. The US-Vietnam bilateral trade agreement makes it possible for US companies to enter joint venture from the beginning of 2005. The other countries are seeking similar possibilities through Vietnam’s WTO accession.

As abstracted from the BTA, the main elements related to telecommunications and Internet are: - Vietnam’s agreement to implement the WTO regulatory reference paper; - Vietnam-US joint ventures (with 50% cap on US equity participation) are allowed locally in many higher end areas such as e-mails and voice mails within two to three years; - from December 2004 onwards, joint ventures (with 49% cap on US equity participation) should be able to enter the mobile and satellite services market; and - from 2007 onwards, the market for long distance and international voice telephony services should be liberalised for the establishment of JVs with US firms.

VNPT has announced plans to invest heavily into its network development. Priority will be given to public telephone booths and satellite-link communications network developing. This global investment should facilitate the introduction of new technologies, like NGN (Next Generation Network) or IP Protocol to VNPT.

In summary, experts claim that Vietnam’s telecom market will continue to enjoy exceptional growth including wireless bandwidth connections in 2006 after experiencing a sharp increase in mobile phone and Internet bandwidth services, throughout the past year.

IT industry

IT industry (including hardware manufacturing, software development etc) has a growth rate of 25%. Total

76 2005 the industry’s export turnover reached USD 2 billion. The country’s IT development plan to 2020 has indicated the objective of maintaining the industry’s annual growth rate of above 20% with the aimed turnover of USD 6 to USD 7 billion in 2010 and USD 15 billion in 2020.

The country IT industry development plan has also outlined the key national programmes in IT sector:

l Develop a legislative system and policies that help to boost the industry development.

l Programme to increase the IT application into all socio-economic activities: - Eradicating IT illiteracy for 20 million people - Training 30,000 ICT specialists - Creating 1 million useful information pages - Manufacturing 1 million low price Internet connection devices - Establishing solid basis for e-government.

l Develop infrastructure for telecommunication and Internet - Broad band connection for all government institutions, research centers, universities, hospitals, schools etc. - 100% communes has access to Internet

l IT human resource development - 100% secondary school has access to Internet and use Internet in their daily study.

l Develop major IT industry branches including software development industry, PC manufacturing industry, communication devices manufacturing industry etc.

Regarding the e-government, the Ministry of Post and Telematics (MPT) has shown an interest in taking the helm of Vietnam’s e-government scheme. If MPT wins the government’s approval it vows that 50% of enterprises in Hanoi and Ho Chi Minh City would be able to access state agencies online by 2010. Also, half of all government agencies documents would be accessible online, residents in Hanoi, Ho Chi Minh City, Can Tho and Danang would carry e-identity cards and up to 40% of enterprises would be able to conduct customs procedures online by 2010. The government will focus on e-government implementation and “everything should be considered”- according to Deputy PM Pham Gia Khiem. However at the time being, the definition of e-government in Vietnam has not yet been explained and understood comprehensively, which has prevented the country from developing it.

3. Recommendations

A well developed ICT sector and competitive telecom services are very important for any country’s socio-economic development. Vietnam is not an exceptional case. This has been emphasised by the Business Forum repeatedly.

For foreign ICT firms, there is very wide scope for doing business in this market. However, BCC is no longer viewed as a good way to enter the market. Other market entry modes such as JV or WOS (Wholly owned subsidiaries) are very feasible in the near future.

The strategic steps for reaching these goals should include:

- Improving regulations in the ICT market to promote greater participation of private sector. The level of competitiveness of the market and therefore the affordability of the information and communications services is crucial for promoting human development.

- Developing the regulatory body towards a transparent policy making body. Allow competition at telecom sector, keeping the number of telecom operators to a reasonable number in order to optimise the balance of competition and coverage area. Encourage operators to build maximum area coverage,

77 to bring as many people as possible within service coverage area.

- Improving the legal framework through the approval of cyber laws to stimulus e-commerce and enforcement of Intellectual Property Rights to protect the ICT companies, especially those who are active in the newly born software development industry.

- Utilising the government investments for information technology to reach all communes within the country, thus enabling equal access to telephone and Internet. Modernising the ICT-tools of the public administration. Improving the future ICT-skills through investments in school children.

- Building a private software sector in Vietnam, with a strong emphasis on the export market. There is also a focus on improving local content, and improving the level of domesticalisation and quality of locally assembled PCs.

- Enhancing R&D activities as well as to develop human resource in terms of quality and quantity, a close link is to be established between the ICT industry and universities.

78 79 1. Analysis of current status

Healthcare system

As with the other South-East Asian countries, the system can be broadly classified into public (or government) and private facilities. Nearly all hospitals are state-owned and these strongly influence the diagnosis and dispensing trend in the country. Outpatient care is provided principally in clinics and infirmaries.

Vietnam has a strong system of local government based on villages, communes, districts and provinces. The organization of health services in Vietnam is arranged around several tiers. At village level, very basic services are provided by community health workers who come primarily from large international organizations. At the next level, communes (with about 8,000 people each) are equipped with at least one health centre. These centres are staffed by assistant doctors and nurses who can dispense drugs and traditional medicinal remedies. However, many lack equipment or specialist supplies. Some larger inter-commune health centres exist and serve up to five different communes. At district level, district health centres and hospitals are responsible for coordinating health programs and providing basic secondary services for the district. Each district hospital serves up to 200,000 people. Provincial hospitals provide the most specialist care available outside the major cities, and act as referral centres for cases from district hospitals. They also act as intermediate level medical schools. However, in practice, both doctors and pharmacies are actually dispensing drugs.

With the recent decline in the quality of the public primary healthcare network, Vietnam has become in creasingly reliant on the private sector. However, regulation of the private sector is minimal; doctors working in private clinics are not subject to direct government control. A recent government report found that many doctors did not have the necessary licence or were performing procedures beyond their authority.

Access to healthcare

Most of the communes have their own clinic facilities and coverage increases to nearly 100% in the more densely populated areas of the Mekong and Red River Deltas. However, figures are much lower in the central part of the country and drops to below 80% in the region. Although communes may have sufficient facilities, there is often a severe lack of trained staff as many are traditionally reluctant to work in remote rural areas.

Vietnam has a large number of private clinics; of these, however, many are very small and locally owned and do not conform to Vietnamese government standards of hygiene and sanitation. Private facilities are concentrated in Ho Chi Minh City, Vietnam’s largest city, while more rural areas tend to be more reliant on public facilities.

A number of foreign-owned clinics and polyclinics have appeared in recent years ever since the government allowed 100% foreign-owned hospitals in August 1997. Nevertheless, most of these centres may not be as profitable as expected due to the fact that locals cannot afford the prices charged in these facilities.

Market

With nearly 85 millions inhabitants, the market for pharmaceuticals increases by 10% every year. In 2005, it represents more than USD 800 million, including the imports of raw materials. Between 30 and 40% of the market is covered by local production. We can propose the following segmentation:

The Pharmaceuticals Industry Association of Vietnam considers that more than 10,000 different drugs are registered in this country, of which 4,500 are generics, 1,500 traditional Asian medicine, and 4,300 foreign.

The national spending on pharmaceuticals was around USD 9 per capita in 2005, compared to a mere USD 0.34 in 1990. Per capita spending is expected to increase to USD 15 by 2010, mainly driven by the increase of purchasing power.

80 However, cheap locally-manufactured generic products make up a large quantity of the market. Drugs do nated as part of aid projects often form a significant part of the market for some therapeutic classes.

By 2010, it is expected that 60% of the pharmaceutical market will be served by locally-made products. Nevertheless, the forecasts may be largely over-optimistic based on past experience.

Distribution

Vietnam operates a restrictive distribution system. All imported products must be shipped into the country through approved state-owned import companies. In turn, the import company will distribute drugs to wholesalers and distributors throughout the country. Moreover, multinational firms are not permitted to sell drugs direct through their representative offices.

Sale and distribution of pharmaceuticals is chaotic in this country. It is believed that at least 70% of pharmacists are not licensed and have very little medical training; medical practitioners are also selling poor quality or even banned drugs. It is also reportedly becoming more common for patients to self-medicate.

700 companies are responsible for the wholesale of 80% of drugs in Vietnam, whereas the number of pharmacies (private and public) now amounts to 30,000 (one pharmacy retail point for every 2,600 residents). The wholesalers have to be Vietnamese bylaw, which means that foreign pharmaceutical companies’ activities are limited to promoting their products to doctors and hospitals. Distributors are generally small private companies, many which are poorly equipped and cover a small geographical area.

Pharmacy outlets are estimated to account for approximately 55-60% of the total pharmaceutical market and constitute the single most important sector of the market. Nearly 50% of the Vietnam pharmacies are located in the key urban markets of Ho Chi Minh City and Hanoi.

Officially, drugs are separated into prescription ('specialty') drugs and OTCs ('vital & essential drugs') but in practice, all drugs are readily available over the counter in pharmacies. OTCs account for an estimated 30% of the market by volume. Traditional herbal medicine remains popular, both in remote areas with poor access to pharmaceuticals and in hospitals.

Production and trade

The local production of pharmaceuticals is increasing rapidly and represents more than one third of the national consumption. At the moment more than 200 foreign medical supply companies have representative offices in Vietnam. Drug toll-manufacturing is still forbidden in this country, even if some arrangements are possible through licensing.

The imported products amount to USD 550 million, which originate mainly from France, Singapore, South Korea, India, Thailand and Switzerland. Imports of raw materials are increasing at a higher speed than finished drugs and specialties.

The Vietnamese exports, on the other hand, are negligible.

2. Trends and potential

The Vietnamese pharmaceutical market is chaotic and enforcement of IP, distribution and dispensing laws are poorly regulated. The country has a large number of small manufacturers, which often produce copied drugs of poor quality. For foreign companies, trade practices in general are among the most restrictive and bureaucratic in the region. Nevertheless, there is still market potential as the opening of the economy has created a demand for Western drugs which cannot be met by the local industry. In the short-term, the market certainly is facing some intricate issues. Nevertheless, it is clear that with the right partner, there is certainly significant potential in the private market. In the medium to long-term, market potential is expected to improve as the country’s population of 84 million increases and the GDP improves in tandem with the regional economic growth.

81 On the production side, we expect the local manufacturing to increase for the years to come at a high rate, of 5 to 10% per year. The locally manufactured drugs are strongly encouraged by the central government and are sold at really low competitive prices (in comparison with imported ones).

On the import side, the trend is difficult to evaluate. What has changed significantly is the shift from finished goods to raw materials, for which the demand is growing rapidly.

On the whole, the use of medicines is still at a low level in Vietnam, and should increase on par with the living standard. More investments, mostly from domestic manufacturers, are likely in this area in the medium term, with the imported goods facing a tougher challenge.

It is clear that the total consumption of drugs is increasing in Vietnam. The official statistics - general figure (USD 800 million) proposed in this report - doesn’t seem to contemplate the real importance of this trend. It only confirms, on one hand, that illegally imported or produced drugs are not taken into account in the official statistics and, on the other hand, that local statistics are not to be totally trusted.

On a general point view, distribution networks have considerably improved and the pharmaceutical companies are now expecting, at the same time, a full coverage of the country and higher revenues from sales to the middle class segment of population.

3. Recommendations

The pharmaceutical industry is poorly regulated as relaxation of command-based economy led to the emergence of a complex and difficult operating environment.

Issues surround 5 key items:

- Product registrations

There is a standard 5-year duration for product registrations; the Ministry of Health (MoH) often issues registrations that are valid for only one year. Although information is not furnished for such variations, products with no local competition are more likely to receive the longest registration terms.

Product re-registration may be rejected for reasons other than of safety and efficacy. Some registered products could be rendered ineligible for re-registration upon completion of the respective terms as the MoH could announce that Vietnam has developed the capacity to manufacture the drugs locally since the granting of the original registration.

Product registrations are also regarded as being poorly enforced. Many state-owned companies continue to import and distribute unregistered drugs; taking action against these companies proved difficult.

- Protection of intellectual property (IP)

IP protection is generally regarded as inadequate as violations are widespread and enforcing the existing legislation is very difficult. Many products are counterfeits (products as well as packaging), and a good part of those are manufactured by the state pharmaceutical companies themselves. One of the main problems some or these counterfeit products create, however, is their lower effectiveness in fighting illnesses, since there is no control on the level and quality of their components. Lately, some random tests have shown that the contents of some medicines were different from the formula on the label (generally, the active ingredients were at a much lower percentage than required).

The U.S.A. trade association, PhRMA, requested that Vietnam be placed on the USTR Special 301 watch list in both 2001 and 2002. However, Vietnam has taken steps towards the implementation of WTO principles and the acceptance of the TRIPS agreement.

- Import restrictions related to the protection of local production

82 measures are taken in order to shield local production; as an example, some sixteen pharmaceutical molecules are still not accepted since the time of their license renewal three years ago. Moreover, the state enterprises have a de facto monopoly for the supply to hospitals. The last round of nego- tiations between the EU and Vietnam ended on a more positive note, howeve; all restrictions on molecules import should be eliminated by the end of 2006.

Vietnam imposes import tariffs on pharmaceutical products, although their level appears to be arbitrary and prone to change without warning. No published information regarding these is available. As a member of the ASEAN group, it is theoretically obliged to reduce pharmaceutical tariffs to 5% by year 2006.

- Parallel imports

Parallel import channels have been a problem for a long time. They were fed mostly by Vietnamese abroad, sending «parcels» to their families in Vietnam. It is estimated that these imports represented between 9 to 10% of the total national consumption of medicines. This type of trafficking has subsided though, but illegal imports from Cambodia, Thailand and China are still thriving.

In a way to reduce the retail prices of pharmaceutical drugs, parallel import is encouraged by the authorities. India and South Korea are the most active suppliers in this segment.

- Pharmaceutical pricing

Though the issue of retail prices is not as hot as it was in 2004, the foreign manufacturers are still feeling the pressure from the authorities and have developed a very careful approach. The Ministry of Health is clearly opening the door for the entry of cheaper drugs on the market, mostly generic.

83 84 1. Analysis of current status

Vietnam, an emerging market of 83 millions inhabitants, is offering increasing commercial opportunities. Despite a still low average living standard (GDP per capita : USD 640 in 2005), beer, wine and spirits consumption is boosted by a steady economic growth (+8,5%) expected in 2006), higher purchasing power in the urban areas of Hanoi and Ho Chi Minh City, large expatriate communities in these cities and the growing number of tourists. In 2005, sales of alcoholic beverages in Vietnam have posted a strong growth of about 15 % in value.

The consumption of alcoholic beverages in Vietnam is driven by two different types of consumers:

- on one hand, consumers of imported products : they are either foreign consumers (expatriates, business men and tourists) or local consumers with high revenues ; living in cities, mainly Hanoi and HCMC, they purchase alcoholic drinks through hotels, restaurants, high range retail outlets as well as supermarkets ;

- on the other hand, consumers of locally produced beverages : their purchasing power is low and they generally live in rural areas ; their favourite drinks are beer, rice alcohol and fruit wines.

Vietnam's market for alcoholic beverages is on the rise and should experience strong growth in all categories during the next decade; the most dynamic development will be registered by beer and wine.

2. Production and consumption

Beer

Local production reached 1.5 billion litres in 2005, a 6% increase compared to 2004, and will face an estimated 2.5 billion litres domestic demand in 2010.

End of 2005, the Vietnamese beer industry had 329 breweries with a total capacity reaching 1.7 billion litres. The national production is dominated by two State companies SABECO (Saigon Beer Company) and HABECO (Hanoi Beer Alcohol and Beverage Corporation), supplying over 50% of domestic demand.

Two 100% foreign invested breweries and three joint ventures between Vietnamese companies and international groups produce famous international brands locally: Tiger (Singapore), Carlsberg (Denmark), Heineken (Netherlands), San Miguel (Philippines), Foster (Australia) etc. The world numbers 1, the American brewer Anheuser Busch, as well as Dutch SABMiller are also entering the Vietnamese beer market through agreements for the first with Sabeco, for the second with Vinamilk, the most important Vietnamese dairy group.

Being the favourite alcoholic drink of the Vietnamese population, it is hardly surprising that volume growth of beer consumption is highest among all alcoholic drinks. The country yearly average consumption per capita increased from 10 litres to 13 litres in 2005 and is expected to reach 16 litres in 2010 and 25 litres in 2020. Economy lager is enjoying increasing popularity.

Wine

About 10 local companies produce wine from fruit and table grapes with a total production estimated at about 10 million litres a year. The two biggest local producers are Thang Long Wine and Beverage Company (1 million litres in 2005) and Ladofoods Lam Dong Foodstuff Joint Stock Company (1.5 million litres in 2005). Local wines satisfy a basic demand from local consumers who cannot afford imported wines. However the population's growing purchasing power combined with decreasing import taxes on foreign wines will soon put pressure on local producers in terms of compliance with international quality standards.

Due to westernisation and health awareness, consumers living in urban areas tend to switch from beer and spirit to wine. Furthermore, drinking imported wine is fashionable and more prestigious than drinking beer.

85 - Wine consumption shows a yearly growth of 7-10% in value despite high retail prices due to a strong taxation (65% import taxes, 20% consumption taxes and 10% VAT).

- Wine sales are still dominated by French wines, followed by wines from Australia, from Italy, from the United States, from Spain, from , etc.).

- Demand is mostly orientated towards wines in the low to average price category still reflecting the modest average income of consumers.

- Price level, origin or brand popularity as well as bottle external aspect are decisive purchasing drives.

- Red wines have a 70% share in still wine consumption in Vietnam; however white wines are on the rise, especially in the South of the country.

Liquors and spirits

Rice alcohol has the lion’s share in the local spirit production and consumption. Traditional and cheap, it is still very popular in rural areas.

According to the State plan 2005 – 2010, total alcohol production should have reached 250 million litres in 2005 and will reach 300 millions in 2010, split as follows

- industrial production : 120 million litres in 2005 and 220 million litres in 2010 - individual (home) production : 130 million litres in 2005 and 80 million litres in 2010.

The national spirit production is dominated by the following companies:

- DOLICO (Dong Xuan Alcohol Company), in Phu Tho Province, - HALICO (Hanoi Liquor Company), in Hanoi, branch of the State company Habeco, - BINH TAY DISTILLERY COMPANY, in HCMC branch of the State company Sabeco.

These three companies produce rice alcohol, vodka and rum as well as fruit wines.

Among imported spirits, cognac and whisky are generally preferred to brandies. White spirits, especially vodka, are gaining popularity among the younger consumers. Consumption of imported spirits face different obstacles

- high taxes for spirits of 40° and above (65% import duties, 65% consumption taxes et 10% VAT, that is altogether 140%); - competition of locally produced spirits ; - preference given to wine in terms of health ; - restrictive advertising regulation.

3. Imports

According to figures newly released by GTA (Global Trade Atlas), exports of alcoholic beverages from all over the world to Vietnam have experienced high growth during the last 6 years with a threefold increase between 2000 and 2005 and a 75% increase in value in 2005 compared to 2004.

Spirits have an 87% share in value in exported alcoholic beverages to Vietnam, followed by wines with a 10% share and by beer with only 3% share due to Vietnamese market supply by foreign groups from local production facilities.

86 Table 8.1. Alcoholic beverages - Export from all over the world to Vietnam between 2000 and 2005 (USD)

2000 2001 2002 2003 2004 2005 05/04 Share 05 Total 46,027,020 51,921,825 68,905,871 74,470,214 82,126,268 143,989,122 75% 100% Beer 349,296 1,715,652 1,999,374 2,488,440 2,820,136 4,005,544 42% 3% Wine 9,083,024 5,880,699 6,396,234 8,100,947 10,921,813 14,593,044 34% 10% Spirits 36,594,700 44,325,474 60,510,263 63,880,827 68,384,319 125,390,534 83% 87%

Source: GTA

Wine exports to Vietnam

Most wines exported to Vietnam are still wines. The exported value reached USD 14.6 million in 2005 (a 34% increase compared to 2004). France has a 48% share, higher in reality as French wines entering Vietnam through re-exports from other countries (Singapore, Malaysia, etc.) are not taken into account.

Among the countries having registered the highest increase in export value to Vietnam in 2005 are Italy (164%), Chile (90%) and Australia (48%).

Table 8.2. Wines (mostly still wines) - Export from all over the world to Vietnam between 2000 and 2005 (USD)

2000 2001 2002 2003 2004 2005 05/04 Share 05 Total 9,083,024 5,880,699 6,396,234 8,100,947 10,921,813 14,593,044 34% 100% France 4 ,562 ,170 3,874,529 3,722,835 4,574,554 6,190,915 7,042,674 14% 48% Malaysia 0 7,185 21,763 232,233 262,042 1,932,736 638% 13% Australia 207,127 265,334 430,638 566,177 1,059,393 1,567,915 48% 11% Singapore 563,613 423,822 553,507 580,511 745,314 1,015,029 36% 7% Italy 133,716 168,023 210,475 419,398 301,678 797,369 164% 5% USA 181,150 55,216 288,100 279,668 417,011 462,155 11% 3% Chile 29,010 69,491 82,812 194,037 216,796 411,966 90% 3% Spain 192,742 62,321 123,089 183,362 335,473 223,189 -33% 2% Hungary 111,930 123,509 200,671 357,546 272,228 173,117 -36% 1% Others 3,159,256 831,269 762,344 713,461 1,120,963 966,894 - 14% 7%

Source: GTA

Spirits exports to Vietnam

According to GTA figures, spirits export to Vietnam reached USD 125.4 million in 2005. Re-exports from Hong Kong and Singapore are major supply source. Hong Kong's share in total spirits export value to Vietnam reaches 57% and Singapore's 35%. The share of other export countries (France, United Kingdom, etc.) only partially reflects the reality as foreign spirits are sent to Vietnam via third countries and are also smuggled into Vietnam from Cambodia, Laos or China.

87 Table 8.3. Spirits exports from all over the world to Vietnam between 2000 and 2005 (USD)

2000 2001 2002 2003 2004 2005 05/04 Share 05

Total 36,594,700 44,325,474 60,510,263 63,880,827 68,384,319 125,390,534 83% 100%

Hong Kong 21,169,757 28,896,638 32,804,757 35,596,300 32,153,393 71,378,795 122% 57%

Singapore 12,157,208 10,874,534 19,637,517 19,083,998 25,769,469 44,140,518 71% 35%

France 1,371,024 1,121,088 1,678,682 2,679,957 4,973,454 3,058,448 -39% 2%

Malaysia 208,276 514,921 694,976 499,343 639,209 2,288,705 258% 2%

China 724,462 1,943,873 2,776,062 1,860,682 1,298,089 1,361,666 5% 1%

Canada - - 400,066 692,492 317,695 511,243 61% 0

South Korea 97,661 79,490 237,380 257,492 336,428 444,959 32% 0

UK 638,374 186,540 590 875,114 961,571 434,435 -55% 0

Others 227,938 708,390 2,280,233 2,335,449 1,935,011 1,771,765 -8% 1%

Source : GTA (Global Trade Atlas)

4. Prospects and recommendations

As in many other sectors, a major problem encountered by companies exporting alcoholic beverages to the Vietnamese market is related to a lack of regulations, or more appropriately, to the constant adjusting of complicated regulations and to the lack of proper implementation. The smuggling of wine and spirits remains widespread, fuelled by the high price of legally imported wines and spirits.

Counterfeiting is the other big challenge for foreign producers since the local consumers, when purchasing, rely mostly on the reputation of well known brands. As in other Asian markets, the brand name of a product has a major influence on purchasing decisions.

Regulations

Import duties

Through decision 47/2003/QD-BTC of 11 April 2003 the minimum CIF value taxation system for alcoholic beverages has been suppressed.

Through decision 04/2005/QD-BTC of 18 January 2005 by Ministry of Finance import duties on wine and spirits (under subheading 2004, 2005, 2006, 2008 of the Preferential Import Tariffs) have been reduced from 80% to 65% for products originating from countries inside the European Community as well as for products originating from countries which have been granted the most favoured nation clause by Vietnam.

Consumption taxes

Consumption taxes for alcoholic beverages have been modified as follows by the Ministry of Finance in 2005:

88 Alcoholic beverages Consumption tax Wine and spirits 40° and above 65% From 20° until 40° 30% Less than 20° 20% Herbal alcohol 20% Beer Bottled or caned beer 75% 30% from 01/01/2006 Fresh beer 40% from 01/01/2008 30% Draught beer 40% from 01/01/2008

Other regulations

- A licence is no longer necessary to import wines and spirits into Vietnam: since May 2001, any import-export company belonging to the foodstuff sector is allowed to import alcoholic beverages without quantity restriction. A few companies import bulk wine and alcohol which may increase counterfeiting risks due to the lack of control in Vietnam.

- The labelling law makes it compulsory to place a new label on every product; this label must include an original label translation, content and degree of alcohol as well as name and address of the Vietnamese importer. The list of ingredients is compulsory for alcohols with more than two components (liquors...).

Counterfeiting

Counterfeiting is widespread in Vietnam. The resulting damage for foreign producers remains very difficult to evaluate.

It is, therefore, of utmost importance that EU grants Vietnam bilateral assistance

- by setting up a regulatory and controlling body on food products, - by boosting the Justice Department's capacity to design proper law and to help the Police Department to create an efficient enforcement system (actions have already begun in these areas).

In order to protect their products and to be in a position to take proceedings against counterfeiters, exporters are advised to register the origin or brand name of their products at the National Office of Industrial Property.

89 90 1. Analysis of current status

The State continues to control and own the vast majority of the power sector assets with Electricity of Vietnam (EVN), a state-owned enterprise belonging to the Ministry of Industry (MoI), having a near monopoly on power generation and distribution. This control is gradually decreasing with the establishment of small power plants serving industrial parks and private sector involvement in such projects as the Build Operate Transfer (BOT) Phu My power complex in Baria-Vung Tau province in South East Vietnam.

According to the Government of Vietnam’s (GoV) power generation development master plan, Vietnam plans to put into operation 35 major power plants between 2001 to 2010 with a transmission and distribution network capable of handling the increased generated capacity. New and Renewable Energy (NRE) sources such as hydro-power, geothermal, solar, wind and biogas are starting to be developed as alternative energy sources for remote and rural areas. Opportunities exist for suppliers of equipment in these fields and to work on technology transfer projects.

As in 2005 the Oil and Gas sector continues to develop with recent commercially exploitable oil discoveries and the gas from the Nam Con Son Basin coming onshore is providing a reliable energy source for the Phu My power complex. There are potential opportunities for the private sector to work with through production sharing contracts (PSC). PetroVietnam is also keen to source goods and services from the West to replace its ageing Soviet era equipment but price and competition from Asian suppliers are negative factors. Equipment and service providers can compete for this business but this can be frustrated by procurement procedures that lack transparency and where decisions are tied to the lowest bidder.

Electricity

According to the MoI figures, Vietnam's estimated demand for electricity from now until 2010 will grow annually at 13-15%. To meet this demand, there must be about 600-800 MW of new power capacity added to the grid annually. In 2005, the total installed capacity of Vietnam power system reached 11,340 MW (including IPPs).

The total power output in 2005 was 52 billion kWh and EVN has set a target to produce 59 billion kWh in 2006, a 14% increase from last year. In order to meet this target EVN will need to invest USD 2 billion, a rise of 60% more than last year, into the construction of new power plants, transmission line and a number of transformers. The estimated demand up to 2010 is 88-93 billion kWh and for 2020 onwards is 201-250 billion. According to the master plan for power development Vietnam must be able to produce 53 billion kWh of electricity by 2005 and the target for 2010 is 100-115 billion kWh. From 2010 to 2020 production must reach 250-300 billion kWh.

Vietnam National Coal and Mineral Industries Group (Vinacomin) and PetroVietnam are also looking into the power generation sector with several projects that have already been approved by the GoV. Vinacomin plans to put into operation several thermal power plants with a combined generation capacity of 1,000 MW by 2010 at several sites in including Na Duong, Cao Ngan, Son Dong, Cam Pha and Mao Khe.

New and Renewable Energy (NRE)

Small hydro-power stations are making considerable contribution to the development in the remote highland areas. Recent estimates by the Institute of Energy showed that the total capacity of these stations is 1.6 to 2 million kW (7 to 10% of the country total hydro-power capacity). Micro-hydro power (a system of harnessing power from streams in mountainous areas) is also widely used. Much of the equipment is imported from China at low cost.

Approximately 200 founts of hot water streams concentrated in the Central Highlands, south central coastal and mountainous areas from Quang Binh to Khanh Hoa provinces have been surveyed. With temperatures between 40oC to 150oC, they are hot enough to generate geothermal power. However, the lack of specific studies is the main block to foreign investment. To date only one feasibility study of a 50 MW plant in Quang Binh province has been commissioned by the American firm ORMAT.

91 Solar energy will play an increasingly important role in the development of power network for rural/rural areas. With long life expectancy, easy installation/application and maintenance, there have been an increasing number of solar power systems called photo-voltaic systems (PVs) installed throughout the south. Their application in the north of Vietnam is more limited because of the climate/season difference from the south.

Wind turbines have been installed for recharging household batteries in coastal areas of Quang Ninh and Hai Phong and in the central and southern regions. Given Vietnam's long coastline there may be potential for further development on a larger scale.

Gas produced from decomposing organic materials is another option that is being exploited in places like the Philippines, Indonesia and Thailand. A number of regions in Vietnam are examining this source of power generation. The Ho Chi Minh City authorities are currently reviewing two bio-gas digester power units. Can Tho University in the Mekong Delta is also carrying out projects on installation of smaller biogas plants in the Delta.

Vietnam also plans to develop a nuclear power plant between 2015-2020. A 3,000 MW atomic power plant in the southern coastal provinces of Ninh Thuan or Binh Dinh would cost around USD 4.5 billion and account for 5.3% of the country total electricity generation by 2020.

Power transmission and distribution

By 2010 there are plans to add 15,000km of 110kV to 500kV power lines, transformer stations with a combined capacity of 50,000mVa; 300,000km of medium and low voltage lines and distribution substations with a total capacity of 20,000mVa to the country’s transmission and distribution system.

At present, 100% of all provinces and 88% of rural households have access to the national power grid. The total power loss rate is estimated at 12.2%, of which 2.6% is from power generation and 9.6% from transmission and distribution. EVN is working to improve efficiency by plans to reduce the total power loss rate to 10% in 2010 and 8% in 2020.

Investment

In 2005 one fourth of the investment capital of the whole country was spent on power sector at USD 2.15 billion.

According to the MoI, the power industry will need about USD 22.5 billion from 2005 to 2010 in investment to build new generating facilities, construct new transmission and distribution networks and upgrade facilities to cut losses and improve efficiency. Of the total projected investment, USD 12.3 billion will be required for power generation projects and the remaining USD 10.2 billion is for expanding and upgrading the national power transmission and distribution network.

The primary sources of finance for three investments are from ODA grants and loans committed by the World Bank (WB), Asian Development Bank (ADB), and bilateral funds from various foreign governments, and funds from the Vietnamese government. Primary bilateral donors in the power sector are Japan (via JBIC), France, AFD, Germany, Sweden (via SIDA), Belgium, Switzerland, Finland and Nordic Investment Bank.

Figures show that foreign loans provided the largest proportion of EVN’s total investment, which accounts for around 46% of the total. Other sources account for 36%, while domestic credit lines only supplied 18% of the funds. However, according to the Strategic Development Institute’s forecast, over the next 5 years international donors can provide only about USD 300 million or 20% of the total investment needed per year in the form of soft loan or grants. To overcome this shortfall, EVN has requested the government to allow its issuance of corporate bonds to raise capital for power development. Another crucial source of finance over the next decade for EVN’s is its bid to retain earnings that will be directly re-invested into new power projects rather than returned to the public coffers and then pumped back by the GoV budget allocations to EVN.

To attract the necessary capital, the power generation sector will be opened to foreign and domestic investors from other sectors under various forms, including Independent Power Producers (IPP), Build-Operate- Transfer (BOT), Build-Transfer (BT), Build-Transfer-Operate (BTO) etc. IPP currently generate about 13% of

92 total power supply. Over the next 10 years, the government has decided to allow up to 20% of generating capacity to be in the hands of foreign-invested IPP, BOT and JV projects. This programme of liberalisation presents significant sales and investment opportunities for foreign companies.

Oil

Vietnam has 600 million barrels of proven oil reserves and further discoveries are likely. Production has grown rapidly from only 175,000 bbl/d in 1996 to 342,000 bbl/d in 2002. Vietnam has six operating oil fields: Bach Ho (White Tiger), Rang Dong, and Dai Hung (Big Bear), Bunga and Kekwa. Most oil exploration and production activities occur offshore in the Cuu Long and Nam Con Son Basin.

Vietnam has no operating refineries and most of its oil production is exported. Export markets include Japan (the largest importer of Vietnamese oil), Singapore, the US and South Korea. In 2005 about 18.5 million tonnes of crude oil and 16 billion cubmic metres of gas were produced from the oil and gas fields on the continental shelf of Vietnam. Revenues of the PetroVietnam reached a total of USD 25 billion over the past five years, with export turnover in 2005 reached USD 7.4 billion, which helped Vietnam overtake as the third-largest crude oil exporter in the South East Asia region. PetroVietnam has also started to look to export its technical expertise in projects outside of Vietnam.

The corporation’s successes last year partly originated from new oil and gas discoveries in seven fields : two abroad in Algeria and Malaysia, and seven domestically including Su Tu Nau, Te Giac Giang, Rong 20, Thien Ung, Phuong Dong, Rong Tre and Dong Quan D.

The Corporation has also made efforts to finalise over 50 contracts, worth roughly USD 7 billion in total, to exploit oil and gas with overseas partners in both domestic and international oil fields.

PetroVietnam plans increased exploitation of Malaysian, Indonesian and Mongolian oil fields under cooperative agreements, as well as promoting new discoveries in Vietnam.

Gas

Vietnam's gas reserves are more promising than known oil reserves with large confirmed amounts of gas in Vietnamese waters. The reserves have been estimated by industry sources to be between 60 and 80tcf. As Vietnamese demand for energy continues to grow, these gas reserves will become increasingly important to the national economy.

Cuu Long basin is the largest Vietnamese operated natural gas production area and is mostly associated gas from oil production. A 100km pipeline from the Bach Ho field is operating at near peak capacity. The Ruby and Rang Dong oil fields, both of which have considerable amounts of associated natural gas, are near the pipeline. However, the pipeline has insufficient capacity to carry gas from these fields so it is flared instead.

Most of the natural gas reserves are believed to be located in Nam Con Son Basin. A BP-led consortium is exploiting the primary field. The field contains an estimated 2tcf of natural gas. A 370km pipeline connecting the fields, with extra pipeline capacity to transport gas from the nearby Hai Thach, Moc Tinh and Rong Doi fields has been constructed. The pipeline comes ashore near Dinh Co Gas Terminal and an extension takes some of the gas inland about 20 miles to Phu My power plant complex. The pipeline capacity is 247 billion cubic feet per year. First gas from Nam Con Son gas field came ashore in November 2002 creating a strong foundation for the nation's gas industry.

The US-based company Unocal made another significant find in the Gulf of Thailand at the end of 1997. Unocal has been allowed to amend their PSC with Petrovietnam to expand their search for natural gas outside the original block.

In November 2003, Canada's Talisman Energy discovered gas off the coast of Vietnam. The Hoa Mai 1X site, south of the Vietnam’s southernmost tip and near the sea boundary with Malaysia, is estimated to have between 70 billion and 100 billion cubic feet of recoverable gas reserves. The gas field is part of Talisman’s PM-3 oil & gas exploration project that Talisman Vietnam holds 33% stake; the other stakeholders are PetroVietnam and Malaysia’s Carigali.

93 Refining

At present all fuels and other oil products consumed in Vietnam have to be imported. This constraint is considered by the GoV as a potential threat to energy security in specific and to the economic stability of the nation in general. For these reasons, PetroVietnam has been assigned by the Prime Minister to build two refineries, with a planned third, early in the next decade.

The proposed site of Refinery Number 1 (Dung Quat Refinery) is at Dung Quat Bay, Quang Ngai province, - 125km south of Danang and 850km south of Hanoi.

The proposed location of the Dung Quat refinery has been shrouded in controversy. French Total pulled out in 1995, saying it made no economic sense to locate it in central Vietnam, far from the country's oilfields off the southern coast and the main consumer markets in Hanoi and Ho Chi Minh City.

Vietnam turned to Russia after lengthy negotiations with U.S. and Asian partners (Conoco Inc, Petronas, LG Group, PRC’s Chinese Petroleum Company and China Development Corporation) broke down in 1997. In December 1998, Hanoi issued a licence for VietRoss to build the Dung Quat refinery. PetroVietnam and Zarubezhneft each held a 50% stake in the 25-year project.

In April 2002, the principal construction contract, worth around USD 720 million, was awarded to an international consortium led by France's -Coflexip. In December 2002 the Russia partner Zarubenheft withdrew from the Dung Quat joint venture and Vietnam decided to go on by itself with the project.

Following project modifications, overall construction will be carried out by a group of foreign companies comprising France’s Technip S.A., Japan’s JGC Corp. and Spain’s Technicas Reunidas.

In October 2003 the UK firm Stone & Webster Limited signed a USD 21.3 million deal with Vietnam to provide consulting services for the refinery. Stone & Webster will represent the project owner PetroVietnam to appraise the technical design prepared by the Engineering, Procurement and Construction (EPC) contractor.

Construction for the project can be completed in approximately 34 months after the government approves the contract. It is expected to have a crude oil processing capacity of 130,000 barrels a day, or 6.5 million metric tonnes a year.

The proposed site of Refinery Number 2 (Nghi Son Refinery) is in Thanh Hoa province in northern Vietnam. In January 2003, a Collaboration Agreement was signed between PetroVietnam and the Japanese Mitsubishi Corporation.

Plans call for a design capacity of 7 million tonnes per year and the refinery will produce high quality gasoline and petrochemical products such as LPG, mogas 90-92-95, kerosene, jet fuel, diesel, FO, bitumen, polypropylene, polyester, benzene, etc.

For Refinery Number 3, PetroVietnam is conducting a geological survey at Long Son in Ba-Ria Vung Tau Province, about 120km east of Ho Chi Minh City. PetroVietnam favours Long Son, a location formerly recommended by foreign investors for Vietnam's first oil refinery.

Long Son has several advantages as the area already has good infrastructure, located near Ho Chi Minh City (the largest market for oil in Vietnam) and is close to the supply source of crude oil off the coast of the province. With these advantages, construction of Long Son refinery may be completed even earlier than the Nghi Son complex (or Dung Quat). Refinery Number 3 will have a designed processing capacity of 6.5 million tonnes of oil per annum.

Given the State’s interest in this sector is important that companies wishing to do business in the oil and gas sector introduce themselves to PetroVietnam as well as the Ministry of Industry. Training is an important element in PetroVietnam’s development and EU companies should look to include training as part of the overall package in their business negotiations.

94 95 1. Analysis of current status

The Vietnamese mechanical engineering sector has been developing with awesome speed during the last years. The government attributes this development mainly to the proper execution of its master plan in the mechanical sector which had been approved in 2002.

According to this plan, Vietnamese manufacturers of machinery should be able to meet 45 - 50% of the total local demand with domestic production by 2010 and export about 30% of this volume abroad. While during the early years of its implementation skeptical voices doubted whether the figures set out by this plan could be met, nowadays observers agree that the target will be reached not only timely but even much earlier than originally planned. In 2005, locally produced machinery products were meeting already 35% of the total Vietnamese demand.

Vietnamese domestic production of machinery effectively doubled between within the last 5 years and reached an output volume of almost 75,000 billion Vietnamese Dong (VND) by 2004. This growth was surpassing the overall growth of Vietnamese industry volume which increased by about 79% in the same period of time.

Table 10.1. Vietnam’s production of machinery

Year Mechanical engineering All industries

Domestic production Import volume (not Total mechanical volume (at fixed price including raw materi- engineering supply Total industry volume of 1994) (b) als, steel) (c) volume (d = b + c) (e) [VND billion] [VND billion] [USD billion] [VND billion]

1995 13,839.90 2.967 46,773.60 103,374.70

2000 33,830.60 4.781 103,154.50 198,326.10

2001 40,687.40 4.949 115,318.30 227,342.40

2002 49,844.50 5.880 140,437.60 261,092.40

2003 64,832.45 7.983 189,686.60 305,080.40

2004 74,816.65 8.624 211,938.30 354,030.10

Until the year 2001, Vietnamese manufacturers were just able to produce non-standard items; almost all significant projects (especially as main contractors in the engineering field) were conducted by foreign companies. In the meanwhile, various local companies are able to design and produce complete equipment for power generation and to conduct large scale engineering projects such as cement plants, sugar factories, paper mills, fertilizer plants, food processing lines and others. One example for this development is LILAMA, a Vietnamese company which won the tenders to be the EPC contractor for the Uong Bi thermal power plant (300 MW), the Hoang Thach 2 cement plant (output: 1.4 mi. tonnes/year) and to supply some equipment for the Dung Quat refinery (output: 6 mil. tonnes/year); significant parts of the machinery used for said projects were manufactured by the company itself.

The most important local Vietnamese companies currently active in the field of mechanical engineering in 2005 and their product portfolio are listed below:

96 Table 10.2. Leading mechanical engineering companies of Vietnam

Revenue in 2004 Company Product Range [VND billion] VINASHIN 7,525.6 Ship building and repairing Vietnam Shipbuilding Industry Corporation

VEAM Diesel engines, tractors and other Vietnam Engine and Agricultural Machinery 558.9 machines and equipment for agriculture Corporation

Machinery for small sized hydropower MIE 412.0 stations, production lines for sugar, pro- Machinery and Industrial Equipment Corporation cessing lines for coffee and others

VEC Electric motors and appliances, trans- 1,819.0 Vietnam Electrical Equipment Corporation formers

VINAMOTOR 5,065.0 Car parts

Mechanical engineering and machinery LILAMA 4,914.0 for hydropower plants, thermal power Machinery Erection Corporation plants, cement plants and others

Mechanical engineering and machinery COMA 1,514.3 for hydropower plants, thermal power Construction Machinery Corporation plants, cement plants and others

Mechanical companies of VINACOAL Spare parts and repair of coal mining Vietnam National Coal and Mineral Industry n.a. equipment Group VICC 558.0 Mechanical engineering for cement plants Vietnam Industrial Construction Corporation

AFRIMECO Water pumps, water pipes, piping acces- Agricultural and Irrigational Mechanization and 901.9 sories Electrification Construction Corporation

Increasing the skill level and know-how of the local manufacturing industry is considered paramount by the Vietnamese government since it will enable Vietnam in the medium and long term to reduce the dependence on import of machines and equipment from abroad. Import volumes in this sector doubled within the years 2000 and 2004 and are expected to reach USD 9.5 billion in 2005 (see also the table below).

Table 10.3. Vietnam import of machinery

Year 2000 2001 2002 2003 2004

USD mil. 4,781.5 4,949.0 5,880.0 7,983.7 8,624.0

Current production capabilities and know-how available to Vietnamese producers is still significantly inferior to Japanese, Korean, European or US competitors; however, the technology gap is rapidly closing. According to industry sources,

- Vietnamese producers of Diesel combustion engines are already able to produce a total output of 30,000 units per year at a higher quality than Chinese competitors. - Vietnamese producers of machinery for agricultural use are able to manufacture all kind of water pumps up to 36,000 m3/h, various machinery for land cultivation as well as complete processing lines for rubber, sugar, rice polishing and tea.

97 - Vietnamese producers of tools are able to manufacture products with state-of the-art PLC and CNC technology. - Vietnamese car producers are able to assemble buses up to 45 seats with a local content of nearly 30%, trucks and all types of rail road car and goods wagons - Vietnamese suppliers of power plants equipment are able to produce pressure pipes bringing water to a stator with up to 175 MW as well as non-standard items, oversized items for electro static precipitators, boilers, oil tanks, complete oil pipe lines, turbines for small scale hydro power plants and a vast variety of accessories. - Vietnamese producers of construction machinery are, for example, able to manufacture asphalt mixers with a capacity of up to 80t/h. - Vietnamese suppliers of electric equipment are capable of manufacturing electric motors up to 1,000kW and 6kV, transformers as well as most standard types of wires and cables. - Vietnamese manufacturers for electric fans are able to fully cover the domestic market. - Vietnamese producers of bicycles are able to fully cover the domestic market and to export large quantities of quality bikes abroad. - Vietnamese manufacturers of motorbikes are at the moment rather supplying parts to mainly Japanese producers running assembly plants in Vietnam. However, local content of the vehicles built in Vietnam is about 80% and local content of the engines is almost 60%. - Vietnamese shipbuilders are able to build ships up to 53,000 DWT, container ships up to 1,016 TEU, passenger ships up to 200 seats and to repair ships up to 200,000 DWT. The shipbuilding industry is one of the most thriving and promising sectors of the Vietnamese economy and is prone to become a serious competitor to Japan, Korea, China and some European Countries in the international shipbuilding market. Up to now, ships have been exported to Japan, Germany, Iraq and the UK.

Several local companies (such as LILAMA, VINASHIN, COMA) have already undertaken significant efforts to upgrade the quality of their mechanical products in order to be able to compete on the international markets. Many of these companies already received orders from foreign companies to fabricate equipment designated to be exported to Europe, the USA or Japan. Vietnamese machinery parts are already used in thermal power plants in India, in and on board of British ships. Traditional Vietnamese machinery export products include machine tools, diesel engines and bicycles.

2. Trends and potential

The master plan for the development of the mechanical engineering sector drafted in 2002 and mentioned already above is focusing on the 8 following products or groups of products:

- Production lines - Engines - Machinery for agricultural works and processing of agricultural products, wood processing, fisheries - Machine tools - Construction machinery - Ship building - Electrical and electronic appliances - Mechanical engineering for automobile industry and transportation means

The development program was drafted by several ministries, including the Ministry of Industry, Ministry of Planning and Investment, Ministry of Finance, Ministry of National Defense, Ministry of Science and Technology, Ministry of Transport, Ministry of Construction, Ministry of Trade, Ministry of Agriculture and Rural Development, Association of the Mechanical Enterprises. The execution of the plan is supervised by

98 a steering committee, headed by Deputy Prime Minister Nguyen Tan Dung. Main obstacle for a smooth performance of the master plan is the apparent lack of investment capital, with interest rates of local banks for projects defined by the plan ranging from 6.6% - 7.8% per year. This is 30% lower than the market rates but still considerably high.

In order to make a better use of the investment capital available, the Vietnam Association of Mechanical Industry (VAMI, currently comprising 192 members) has come forward with the proposal that priority should be given to two mechanical clusters, one in the North (at Dinh Vu, Hai Phong) and the other one in the South (between HCM City and Dong Nai Province).

3. Recommendations

Several European companies already have a close cooperation with Vietnamese partners; more and more companies are considering Vietnam as an alternative for China. The potential for a mutually fruitful partnership is indeed promising.

Vietnamese companies are generally lacking know-how, technology and capital which are factors quite abundant in internationally active European companies. On the other hand, European labour costs are relatively high and thus uncompetitive in a global context. The cost structure of Vietnamese companies is highly attractive, albeit slightly less favourable than in China. However, Vietnamese companies are able to compensate for this competitive disadvantage with better quality, better work ethics and a better protection of intellectual property issues.

A teaming up of European and Vietnamese partners is thus highly recommended, giving Vietnamese companies access to Western know-how and simultaneously European companies a reliable and cost efficient production base in Asia.

99 100 Summary

The Financial Services sector is controlled by the State and supervised closely by the State Bank of Vietnam. Foreign businesses in the sector that have adopted a long-term approach have managed to develop a profitable business. Whilst this sector is not fully developed there is potential for suppliers to make sales. Vietnam looks carefully at cost but is not put off by a high price if the quality is what they require. A significant amount of aid money is being spent on developing/reforming Vietnam’s banking and finance sector. Consultancy companies with a good track record in this sector will be well positioned to win such business.

Banking sector

In 1990 Vietnam adopted the Ordinance on the State Bank and the Ordinance on Banking, Credit Co-operatives and Financial Institutions in order to create a legal framework for the banking system. Since then the banking system in Vietnam has made considerable progress. The re-organisation of the banking system in May 1990 has strengthened the role of the State Bank of Vietnam as the central bank and thus transferred the credit function to the present 5 state-owned commercial banks (SOCB). They are: the Vietnam Bank for Agriculture and Rural Development (VBARD), the Vietnam Bank for Investment and Development (BIDV), the Bank for (Vietcombank), the Vietnam Industrial and Commercial Bank (Vietincombank), and the Vietnam Bank of Social Policies.

Since then, has become a diversified and multi-sectoral industry. Vietnam currently has 3 types of financial institutions: commercial banks, credit co-operatives and financial companies.

To date there are 28 foreign bank branches and four joint venture banks, 3 foreign invested leasing companies including joint ventures and 100% foreign invested ones, 44 representative offices of foreign credit institutions.

The Government authorities are working with the State Bank to review all legal documents and regulations to be amended in the spirit of the Bilateral Trade Agreement (BTA) signed with the United States of America and even further with WTO requirements to further develop banking services. The State Bank has drafted an action programme for international economic integration of the banking sector and a master plan for the integration of Vietnamese banks. Under the master plan, by the end of 2005, Vietnam will realise commitments on banking services in line with the BTA. From 2006 and 2010, the country will start implementing the WTO’s General Agreement on Trade Services and the ASEAN Framework Agreement on Services (AFTA). From 2011 to 2020, the banking and financial services market will be opened up to ensure full compliance with all the above agreements.

Some significant banking factors:

l In 2003 the State Bank chose Vietincombank to establish a network transferral company, called BankNet, to synchronise the Automated-Teller-Machines (ATM) systems owned by local banks into one in order to connect all ATM systems with each other. Vietcombank failed in their bid to head up the plan, though they are the biggest card supplier. BankNet was supposed to start in November 2004 but then postponed to the 2nd quarter of 2005 due to the withdrawal of one member - Ha Noi Technology Development Company.

l In order to compete with foreign banks, local banks have improved and widened their services and implemented restructuring. At present, there are around ten service items in Vietnam’s banking sector. They include mobilisation and lending, payment transaction, retail banking, guarantees, securities, debt trading and real estate brokerage. In line with restructuring policy, the State Bank also make up the equitisation plan for commercial banks, Vietcombank and Mekong Delta Housing Bank would be the first to be equitised. BIDV, VBARD and Vietincombank would have to wait a little longer to be considered for equitisation.

l In addition to the issuance of polymer banknotes for value of 50,000 and 500,000 and coins for value of 200, 500, 1000, 2000 and 5,000 which the State Bank issued at the end of 2003, the plastic notes for value of 100,000 was launched in September 2004 as part of efforts to foil counterfeiters.

101 l In early April 2004, the State Bank issued a circular to ease restrictions on foreign bank branches and joint venture banks based in the country to build a more flexible banking environment. The decision will allow these entities to open deposit accounts at overseas banks without restrictions, taking effect from mid April. This overturns a 1992 regulation stipulating that foreign bank branches in Vietnam could only deposit a maximum of 30% of their capital overseas, and joint venture banks can only deposit 10%. The decision repeals another regulation that foreign bank branches and join venture banks must deposit 15% of their registered capital at the State Bank when they start operating in Vietnam.

l The Amended Law on Credit Organisations was issued and came into effect from 1 October 2004. Other legal documents were also promulgated in line with bilateral and multilateral commitments in order to set up a fair and transparent environment to all participants.

Foreign Exchange Management

Foreign currency is welcomed into Vietnam but remittance of foreign currency abroad is controlled and subject to authorisation by the State Bank of Vietnam.

Buying, selling, lending, settling and transferring transactions in foreign currency can only be made through organisations authorised by the State Bank. Generally, the State Bank controls exchange rates applied by banks and other financial institutions. By 26 February 1999, the State Bank of Vietnam had changed the way exchange rates were set. Credit institutions must fix their Dong/Dollar exchange rate to within 0.1% of the previous day prevailing inter-bank rate at the State Bank. There is greater flexibility with other exchange rates. To encourage development, the State Bank of Vietnam will need to further reinforce and develop the inter-bank foreign currency market to make it become a base in defining the inter-bank average exchange rate closely following up the exchange currency supply and demand relationship in the market.

According to current legislation, all foreign currency revenue earned in Vietnam from export, rendering services or from other sources has to be deposited in or sold to local banks authorised to conduct foreign exchange business. Several institutions such as commercial banks, financial institutions, airlines, foreign invested enterprises, overseas branches of Vietnamese economic institutions and companies operating in maritime, post and telecommunication and insurance industries may be authorised by the State Bank to open foreign exchange accounts abroad.

All transactions and supporting documents should be undertaken in Vietnamese Dong. Exceptions are applicable to payments for exports made between the consignors and their agents and payments for goods and services purchased from institutions authorised to receive foreign currency such as payments for air tickets, shipping and air freight, insurance and international communications.

Stock Market

The Government has developed its equitisation plan since 1992. A State Securities Commission with its headquarters in Hanoi and a representative office in Ho Chi Minh City were established then with stock markets opening in Ho Chi Minh City on 21 July 2000 and a second stock market - the Hanoi Securities Trading Centre - opened on 8 March 2005 after much preparation.

At present 28 products have been officially registered to list on the Ho Chi Minh City bourse including 2 types of government bonds. The Hanoi Securities Trading Centre plans to auction shares of five to ten joint stock companies at its first trading. To be listed, companies must have a minimum legal capital of VND 10 billion (about USD 700,000). They must be public companies with at least 20% of shares held by a minimum of 100 individuals. They also have to prove that they have been profitable for the past two years.

The fluctuation range is +/-2% for shares per day and +/-1% for bonds. Foreigners can only buy up to 20% of the total shares issued by a company.

Towards the end of March 2004, the Vietnam State Securities Commission licensed the country’s first securities investment fund (Vietnam Securities Investment Fund) which is managed by the Vietnam Fund Management company, a joint venture between Vietnam’s largest joint stock commercial bank Sacombank

102 and a UK company by the name of Dragon Capital. At present, Vietnam’s stock market is home to 13 securities companies, all of which are local concerns. The creation of this foreign securities joint venture (FSJ) makes the local securities companies concerned that it will prompt fierce competition between brokerages with less experienced local firms losing out. However, the government thinking is that the establishment of FSJ is necessary for local brokerages to learn from well-developed foreign partners and they have asked the SSC to devise a framework for establishing FSJs.

Insurance

On 9 December 2000, the National Assembly passed the Law on Insurance Business. This law, which was drafted with the help of the European Commission’s Eurotap programme, will be the main law regulating the industry and aims to regulate the obligations and rights of organisations and individuals. The previous Decree (18 December 1993) had become outdated because of the rapid development of the industry.

Although the insurance industry has developed strongly in recent years growing at a rate of 28-29%, insurance premiums are still only a modest 1.5-2% of GDP. A number of reforms announced recently by the Ministry of Finance (MoF) along with the rising pressure of integration are expected to spur insurance firms into seeking a greater share of the domestic market. The MoF has decided to increase the chartered capital of the Vietnam Insurance Corporation (Bao Viet) - a state-owned organisation who used to hold a monopoly on the insurance market to VND 3,000 billion (USD 200 million).

Vietnam now has 20 licensed insurance companies and two broker companies. Among the insurance companies, there are four state-owned, four joint stock, five 100% foreign invested, seven joint venture companies and four of them operate in life insurance.

The insurance market promises to feature bustling operations and dramatic changes after the strategy for developing it in Vietnam in the 2003-2010 period was recently approved by the Prime Minister. The strategy calls for the mobilisation of domestic and foreign resources for socio-economic development and for raising enterprises’ business and financial capacity to meet the demands of competition and international integration. The PM’s strategy will make Bao Viet a powerful financial and insurance group by 2010. It will remain wholly state-owned, while allowing other insurance companies to be either privately owned or joint stock.

Accountancy

The top six global audit firms dominate accountancy in Vietnam. With the never ceasing work of ODA projects foreign accountants continue to maintain strong business results in Vietnam. Also their workload has increased significantly with the implementation of the Enterprise Law. This law has given many private sector Vietnamese companies the chance to become legitimate. Previously they had operated in a manner that was “tax efficient” by avoiding the attention of the authorities. Since the passing of the Enterprise Law the number of private Vietnamese companies continues to grow rapidly. Accountants are regularly advising well-established Vietnamese business on how to become a limited company especially after a number of years of operation.

Conclusion

The route for the development of the financial services sector in Vietnam seems well established. The role of foreign business and their scope for operation will probably dictate the pace of the expansion of this industry. The US-Vietnam bilateral trade agreement also covered a number of points relating to this sector. The Vietnamese authorities have made a commitment that all-European banks and companies will compete on a level playing field.

Whilst there is still an element of uncertainty within the Vietnamese Government as to how to take forward the financial services industry, especially in relation to foreign involvement, it seems that the pendulum has now swung more to the side of those who believe that a vibrant financial services sector is for the overall good of the Vietnamese economy and its overall development.

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