2006COMMERCIAL COUNSELLORS

REPORT ON VIETNAM

EUROPEAN UNION ECONOMIC AND COMMERCIAL COUNSELLORS

2006COMMERCIAL COUNSELLORS

REPORT ON VIETNAM

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Each year the Working Group of Economic and Commercial Counselors of the European Unionpublishes a Report on the economy of Vietnam. This “Green Book” aims to provide the private sectoras well as European institutions and governments with an analysis of the recent economic performanceof 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 andthe 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 inVietnam in 2005. Section I features an overview over the economic performance of Vietnam as well asan analysis of major economic indicators such as foreign trade, investment, employment as well assectoral and monetary policies. Section II covers legal developments while Section III presents the EUat a Glance.

The second part of the report provides eleven Sections packed with abundant information on thedevelopment of important sectors of the Vietnamese economy: Garments and Textiles, Footwear,Fishery Products, Agro-Industry, Transport, 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 havebecome a mainstay of the overall relationship. The “Green Book” provides ample information in thisrespect and we trust that it will be supportive in the continuing improvement of relations betweenVietnam and Europe.

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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

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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

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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 exports – Share in VN imports 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 Textile and Garment Export 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 Import 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 Investments 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 Seafood 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

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

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ADB Asian Development BankADSL Advanced Digital Subscriber LineAFTA Asean Free Trade AreaAIA American Insurance AssociationASEAN Association of South East Asian NationsBCC Business Cooperation ContractBOT Build-Operate-TransferBP British PetroleumBTA Bilateral Trade AgreementC/O Certificate of OriginCDMA Code Division Multiple AccessCEPT Common Effective Preferential TariffCIEM Centre for Institutional and Economic ManagementCIF Cost, Insurance, FreightCNC Centre of Numeric ControlCPI Consumer Price IndexDANIDA Danish Agency for Development AssistanceDGPT Department General of Post and TelecommunicationsDSL Digital Subscriber LineEC European CommissionETC Electricity of Vietnam (EVN)EU European UnionFAO Food and Agriculture OrganizationFDI Foreign Direct InvestmentFIE Foreign-Invested EnterpriseGDP Gross Domestic ProductGoV GovernmentGSO General Statistics OfficeGSP Generalised Scheme of PreferencesHCMC Ho Chi Minh CityHSBC Hongkong Shanghai Banking CorporationHP Horse PowerIAP Internet Access Provider IDA International Development AssociationIEP Internet Exchange ProviderIFI International Financial InstitutionIL Inclusion ListIMF International Monetary FundIMI Institute of Machinery and Industrial InstrumentsIP International PostIPR Intellectual Property RightsISP Internet Services ProviderIT Information TechnologyJV Joint VentureKT Korea TelecomLDC Less Developed CountryLEFASO Vietnam Leather and Footwear Association

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MFN Most Favoured NationMPI Ministry of Planning and InvestmentMPTIT Ministry of Post, Telecommunications and Information TechnologyNGN Next Generation NetworkNGO Non-Governmental OrganizationNPL Non-Performing LoanNRP Normal Rate of ProtectionNTB Non-Tariff BarriersODA Official Development AssistanceOLAF European Anti-Fraud OfficePLC Programmable Logic ControllerPNTR Permanent Normal Trade RelationsPRGF Poverty Reduction and Growth FacilityPRSC Poverty Reduction Support CreditR&D Research and DevelopmentROK Republic of KoreaSBV State Bank of VietnamSCB Standard Chartered BankSER Special Economic RegionSME Small and Medium EnterprisesSOCB State Owned Commercial BankSOE State-owned EnterpriseSPT Saigon PostelSRV Socialist Republic of VietnamTBT Technical Barriers to TradeTEL Temporary Exclusion ListTRIPS Trade Related Aspects of Intellectual Property RightsUCLAF Anti-Fraud Coordination UnitUNCTAD United Nations Conference on Trade and DevelopmentUNDP United Nations Development ProgrammeUS United StatesUSBTA United States Bilateral Trade AgreementVAT Value Added TaxWB World BankVINATEX Vietnam Garment and Textile CorporationVITAS Vietnam Textile and Apparel AssociationVINACOAL Vietnam Coal CorporationVNPT Vietnam Post and Telecommunications CorporationVIETTEL Vietnam Military Telecommunications CompanyWTO World Trade OrganizationYOY year-on-year

Currencies:

EUR or EuroUSD United States DollarVND Vietnam Dong

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I. OVERALL ECONOMIC PERFORMANCE IN 2005

Vietnam’s economy performed well in 2005, despite the return of avian influenza in the autumn andunfavorable weather conditions (droughts in the North in the first semester, leading to lack of water for cropirrigation and power shortages, and 5 typhoons hitting the Central region in the second semester). Accordingto the government, real GDP grew by 8.43%, up from 7.8% in 2004, the highest growth rate in the past 9years 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, aswell as anecdotic evidence on flagging demand and consumption in some economic sectors in the secondsemester, cast doubts on official statistics. International financial institutions estimates of GDP growth rangefrom 7.5 to 8.1%, which remains very respectable, and is surpassed in the region only by China.

Consumer price inflation (CPI) in 2005 was 8.4% at the end of the year, well above the 6.5% target, butbelow the 2004 peak of 9.5%. However, the CPI average over the period hovered around the 2004 mark of7.7%. Avian influenza and the domestic knock-on effect of rising international commodity prices pushed upfood prices, which account for 48% of Vietnam’s CPI basket, by 10.8%. Higher world market prices forpetroleum products and other key products for which Vietnam is highly import-dependent (such as fertilizer,cement, and steel), as well as the announcement of another public sector payroll increase also contributed.Government measures to curb inflation, but also credit growth, yielded only limited effects. They included thelowering of import tariffs on petroleum products, efforts to reign in lending by state-owned banks, and pricefreezes for commodities such as power, coal and cement. The government aims to cap consumer inflationat 8% in 2006. Reaching this target will depend of the government’s willingness to temper its expansionarymacroeconomic policies, now that the 5-year plan-related growth imperative is out of the way, and applystronger 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 internationalcommitments. However, tax revenues, especially from corporate income tax and VAT, increased due to arationalisation of the tax structure. Public external debt is moderate at about 32% of GDP (41% ifoff-budget expenditure and on-lending are included), and its service costs manageable, in particular giventhe 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 deficitnarrowed to USD 4.7 billion, down from the 2004 peak of USD 5.5 billion. This translated into a currentaccount deficit of around 4.4% of GDP. As in the past, imports related to infrastructure investments andexport-oriented production account for much of this, which should lead to higher production and exports lateron. Moreover, foreign exchange reserves, including gold, 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 risingflows of ODA and FDI (USD 1.7 billion and 3.4 billion respectively in disbursed capital), but above all ofremittances from expatriate workers and other overseas Vietnamese (USD 3.8 billion)1 as well as recordrevenues from crude oil exports. In view of increasing forex reserves combined with investment-drivenimports, 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 fiveyears, and 8% in 2006. Independent forecasts for 2006 range from 7-8%. A growth rate of around 7.5% in2006 seems realistic, given that Vietnam is still on the upturn of a business cycle, and can expectcontinuing momentum in domestic demand based on sustained growth in FDI inflows, remittances andtourism receipts. However, reaching these targets will also depend on the government’s ability to maintaincurrent levels of growth impetus to the economy, which may be difficult given the already high levels ofspending and rapid bank credit growth seen in 2005, and related concerns about a possible overheating ofthe economy and a significant misallocation of resources.

1 Remittances through official channels. When informal transfers are included, the figure could be double as high.

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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 market economy remains incomplete, with many of the more difficult and politically orsocially 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 toincreased internal and external competition, and shortcomings in the financial sector. 2006 will be animportant juncture in Vietnam’s economic development. The country will have to defend its competitivenessin key export segments such as textiles and footwear, notably vis-à-vis its big neighbor China. At the sametime, it will have to strive to diversify its economy further into higher added value market segments. Underits AFTA commitments, Vietnam will also have to reduce import tariffs for ASEAN members to 0-5% by20062. 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 theofficial 2005 accession target.

Shortage of power constitutes another potential constraint to economic expansion. Demand for power growsby around 15% per year. The country’s high level of dependence of hydropower, which accounts for some56% of the 11 GW installed capacity, leaves the country vulnerable to droughts. This was witnessed alreadyin 2005; low water levels in key reservoirs already now indicate that acute power scarcity is likely to returnin the North in May/June. To address the chronic power shortage, Electricity of Vietnam in April 2006launched construction of a 1,500 MW gas-fired power plant; in the longer term, further supply diversificationis planned through the development of nuclear power (a 2 GW nuclear power plant is to be completed by2020).

Another serious challenge for the coming years remains to spread growing wealth more evenly, as currentpublic policies are proving insufficient to keep economic growth inclusive. Vietnam’s reforms, in particularprivate 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 1993to below 19.5% in 20043 . Budget transfers to poorer provinces and public investment programs with greateremphasis on remote areas were stepped up during the 2001-2005 five-year plan. Despite this, the bulk ofpublic 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 1993to 6.27 in 2004. Poverty is concentrated in the countryside, which has a poverty rate of 25%, against a mere4% for rural areas, which creates mounting migratory pressures on urban centers. In addition, despite somepositive trends, poverty itself and the poverty gap remains very high for ethnic minorities in the mountainousNorth West, as well as in the Central Highlands. The poverty gap, measuring the average spread betweenactual consumption of the poor and consumption needed to get out of the poverty measures 19.1 in theNorth 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

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Poverty among Kinh and Ethnic Minority Population

Source: GSO

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4 Including forestry and fisheries.

MAIN GROWTH DRIVERS AND COMPONENTS

GDP growth in 2005 was led by strong domestic demand, in particular domestic investment and FDI (newlicensed capital +37.2% year-on-year), resulting in a strong performance of industry (output up 17.2%), ofexports (+21.6%) and of FDI, but also by levels of credit growth which are considered excessive by manyanalysts (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 2000to 410.8%, on the back of a strong performance of the non-state sector (see Industry). A continuation ofstrong growth in foreign tourism (+18.4%) as well as in retail sales, banking and telecoms contributed to an8.5% increase in the output of the services sector. The sector’s share of GDP increased by half apercentage point to 38.5%, but remains four percentage points below its high point before the AsianFinancial Crisis and the 41-42% target in the 2001-2006 5-year plan, as well as far below the 50% averagefor developing countries. Agriculture, which represents 20.7% of the economy 4, once again remainedunderperforming, with a growth contribution of 4%, due i.a. to the impact of avian influenza and adverseweather conditions.

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

GDP growth by sector

GDP share by ownership

GDP share by sector

FOREIGN TRADE

Vietnam’s foreign trade in 2005 once again performed impressively, with a total turnover of USD 69.1billion5. 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 privatesector (+19.4%).

Imports rose by 15.4% (well below the 2004 and 2003 rate of 26.7% and 27.8%), and were worth USD 36.9billion. The trade deficit, which reflects the needs of an expanding economy, fell to USD 4.7 billion, duemainly to slower growth in imports by domestic players (+12.7%). The largest imports were in petroleumproducts (up 39% to USD 5 billion), machinery and equipment (up only 0.1% to USD 3.3 billion), steel (up16% to USD 3 billion) and other capital goods and production inputs. This flags a weakness of Vietnam’seconomy, namely the dependence on imports for the lion’s share of the inputs needed for key exportindustries. It is estimated that domestic value added is only around 20% in the footwear sector and 30% inthe textiles sector, with balance made up by the costs of imports of raw materials and intermediate inputs.

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Export growth was led by Vietnam’s traditional sectors: Crude oil (up 30.3% in value terms, due to high worldmarket prices, to USD 7.4 billion), textiles and garments (up 9.6% to USD 4.8 billion, but below the USD 5.2billion target), and footwear (up 11.7% to USD 3 billion). Exports in four other product groups also nettedover USD 1 billion each – seafood (USD 2.7 billion, +14.2%), wood products (USD 1.5 billion, +33.2%),electronic goods (USD 1.4 billion, +34.1%) and, the latest addition to the ‘big ticket’ items, rice (USD 1.4billion, +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 todominate the export sector, and the economy at large. Moreover, agricultural, forestry and fisheries andcrude oil together still account for around half of total exports (their share actually increased by twopercentage points, shored up by high world market prices), and Vietnam’s exposure to fluctuating worldmarket 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) andtardy government reactions. Textiles and footwear, which face fierce competition notably from China, are a

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

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

Vietnam’s foreign trade

In imports, China already in 2003 had overtaken Japan to become Vietnam’s No.1 partner (ASEANexcluded). Its strong performance continued (+29.7%), and ASEAN also gained ground (+21.9%). Incontrast, 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 importsfaltered, decreasing by 23.3%. Japan’s performance was average. These trends are indicative ofencroachment by emerging Asian economies in product sectors hitherto dominated by exports from OECDcountries.

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case in point. Another example is electronics manufacturing, where the cut of AFTA tariffs to 0-5% dentedthe profitability of locally manufactured electronics products. The government responded only belatedly toindustry complaints, by lowering the tariffs for components imported from ASEAN and other partners. (Moredetails 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 positionin two-way trade, after China and Japan (not counting ASEAN). It was also overtaken by the US in terms oflargest 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%, partlyreflecting growth in agricultural exports due to steep tariff cuts under the ASEAN-China Early HarvestProgram, but mainly a steep rise in imports (+29.7%). At the current average income level of the Vietnameseindividual (around USD 650) and given the burgeoning of the country’s SME sector, diversified and cheapproducts 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 positionin 2005. While exports to the EU were below par at +12.3%, the US performed better (+18.8%). The US isthe most significant market for Vietnam’s textile and wood-based products, while the EU continues to be thelargest outlet for footwear. Despite the removal of textile quotas by the EU, revenues from textiles exports tothe EU remained below average (+8.7%, against 9.6% av.). US exports performed a bit better, reflecting thetougher US textiles safeguards on competitor China (and despite the continuation of US quotas forVietnamese textiles). The biggest increase in exports was achieved with ASEAN partners (+44%), dueprobably to the progress in realising AFTA, and making up partly for ASEAN’s declining share in Vietnam’sexports over the past decade. The new dynamic in exports to Asia continued in 2006: Asian partners in thefirst four months accounted for almost half of exports, against 20.5% for Europe (+34%) and 21% for the US(+40%).

Source: GSO

Source: GSO

Share in VN exports (%)

Share in VN import (%)

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Vietnam’s trade was in deficit with all regional trading partners, namely ASEAN (USD 4 billion), South Korea(USD 3 billion) and China (USD 2.8 billion). Among the developed countries, only Japan maintained a smallsurplus vis-à-vis Vietnam (USD 318 million), while the US and the EU were in deficit (USD 5 billion and USD2.9 billion, respectively).

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

The same is true conversely for EU exports to Vietnam, where five categories account for a large part of thetotal. However, exports in four of these categories declined in 2005, and their share fell from two thirds toaround 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 largecontract for Airbus planes. In the other categories, high quality CE-marked products were challenged bygrowing competition with similar Chinese products.

6 EU and Vietnamese trade data historically have shown considerable divergences in particular as regards Vietnameseexports 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 Hong Kong,Singapore or South Korea. While Eurostat bases itself country of origin of the product (Vietnam), Vietnamese customsregisters the nationality of the importer, not the final destination.

7 Eurostat; the Vietnamese figure is slightly lower, see above.

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.

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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 FDIcommitments, +36% year-on-year and the highest figure since the Asian Crisis. USD 4.1 billion of this wasin over 800 new projects, with the remainder representing additional capital injections into existing ventures.Implemented FDI reached an estimated USD 3 billion.

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 miningaccounting 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 Taiwan (USD2.9 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 EUinvestors ranked 1st with USD 889 million, due namely to two ‘mega projects’ by Hutchinson (mobiletelecoms) 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 throughHong Kong.8

FDI commitments and disbursements

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 balancebetween new projects and capital expansions (these had been almost at an equal level in 2004, pointing toa ‘wait and see’ attitude regarding potential new investments), are indicative of a new bullishness in investorsentiment. This may in part be motivated by the wish to diversify investment away from China, and Vietnam’spivotal geographic position vis-à-vis ASEAN and China – although it is striking that other Asian economieshave not recorded similar growth in FDI in 2005. It is therefore more likely that domestic factors such asVietnam’s impending WTO accession and – most importantly – changes in domestic investment legislationmade 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 businesscommunity goes a long way toward leveling the playing field between foreign-invested and domesticeconomic operators, and addresses a number of other concerns of foreign investors (i.a. option ofinternational arbitration, diversification of investment forms, and abolition of local content, exportperformance and forex balancing requirements). However, some important questions related to the newlegal regime remain open; they include the practical implications and costs of re-registering existing FIEsunder the new Enterprise Law, as well as the majority requirement for board decisions, which seems to havebeen raised from 51% to 65% for all decisions – which would severely dilute the value of some of Vietnam’sWTO market access commitments. 10

Source: Foreign Investment Agency, Ministry of Planning and Investment

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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 thefirm’s Luxembourg subsidiary. On the same token, Metro Cash and Carry, which has a major and expanding retail presencein 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 practicalvisibility, 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 World Economic Forum 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.

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

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On the other hand, risk factors such as eroding Vietnamese competitiveness may keep new FDI inflows incheck. One issue which has caused considerable concern among investors was the increase in officialminimum 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 coulderode Vietnam’s margins vis-à-vis e.g. competition from China (where salaries remain higher, butproductivity is also superior).

The level of domestic private investment, which has grown substantially since the introduction of theEnterprise Law in 2000, continued to rise. Since 2000, 161,000 new companies, mostly small andmedium-sized, have been created, which now account for some 27% of aggregate social investment and45% of GDP. Some 40,000 new firms were established in 2005 alone, with a registered capital of USD 6.8billion, 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 newcapital, up by around 28%. However, the true potential of Vietnam’s private investment will not be tappedunless most of the current 5,650 state-owned enterprises (SOEs), many of them loss-making, arerestructured or wound up, and the private sector is granted access to all economic sectors, as well as tobanking credit, on equal terms (see “Economic Reforms”). In 2005, the share of SMEs in outstanding bankloans reached 30% (+17%); however, 70% of SMEs remain without access to bank finance. Ironically, thenew CIL, whilst bringing improvements for foreign investors, might make the lives of domestic investors moredifficult, 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 nowinvested USD 320 million in 140 projects in 30 countries, with the main destinations being Iraq (USD 100million in oil and gas ventures) and Laos (USD 84.5 million), as well as Cambodia. The government isconsidering easing procedures for outward FDI licenses, with a priority on Vietnam’s “backyard” – Laos andCambodia – 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 ofacceding at the December 2005 Hong Kong Ministerial, due to unfinished business both in bilateralnegotiations – which could not be wrapped up in time with a number of partners, including the US andAustralia – and on the multilateral front. Delays are due notably to the insistence by the US and others thatVietnam should implement the bulk of its accession commitments already prior to entry, due to the badexperience made i.a. in the context of China’s recent WTO accession. Despite the adoption of dozens ofpieces of related legislation in 2005, some key instruments are yet to be promulgated; these i.a. include theimportant implementing decrees of the Common Investment, Intellectual Property and Unified Enterpriselaws.

No new official target date has been set for accession, but Vietnam looks likely to become member by theend 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-Marchsession 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 needsto adopt legislation and submit it to WTO members for consideration in a number of areas, and the WorkingParty Report will require considerable redrafting on this basis. Two working party meetings, one in July andthe 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 ministerialmeeting 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

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problems. Under the extended implementation periods for tariff reductions granted to less developedmembers under AFTA, Vietnam should have brought most tariff lines into the “inclusion list” (IL), makingthem 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 domesticautomobile and motorcycle assemblers, are causing delays in integration. Vietnam has proposed to itspartners 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, andcompensation granted.11 Reports on Vietnamese misclassification or incorrect application of AFTApreferential 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 ofthe economy, with its output growing at a modest 4.9%. Nonetheless, this was a bit better than the sector’sdismal 2004 showing (+3.5%), and agricultural exports (with the exclusion of fisheries products) increasedby 29% in value terms to USD 5.8 billion. This was due notably to upswings in export prices for Vietnam’stop four agricultural export products, namely rice (+15.7%), rubber (+17.9%), coffee (+24.6%) and cashewnuts (+13.5%), as well as a bumper rice crop (exports up 27.3% in quantitative terms). The impact of avianinfluenza, which returned in 2005, remained limited, subtracting only around 0.1% from GDP, due to thehigher level of preparedness which allowed the government to bring outbreaks under control much morerapidly than in 2004. Vietnam officially has been free of AI since early January 2006, although at least somelimited 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, boostedmainly by export growth of aquaculture exports such as shrimp 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 nowbecome 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 cashewaccount 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 partlyof 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, cashewnuts, and aquaculture – has invariably led to very high increases in output (although often of low quality dueto poor post-harvest processing). Outputs have flooded international markets – Vietnam ranks among theworld’s top exporters for all these products – and depressed prices. The latest example, in 2005, wascatfish, world market prices for which plunged below the cost of local production, driving many farmers outof business.

Moving beyond the post-doi moi successes in agricultural renovation will require moving away from relianceon low-value, low-quality commodities, and opening up new source of agricultural productivity gains – awayfrom bringing additional physical factors of production into use, and towards technical changes which in turndepend on advances in agricultural research, extension and technology transfer, as well as farmers beingable to better adjust their use of resources to market opportunities. As in other parts of the economy, this willi.a. require a diversification of investment sources; however, agricultural investment remains stagnant anddominated by the state. Vietnam’s agricultural diversification efforts – into fruit and vegetables, and othercommodities such as cocoa – thus have so far had limited success. Given these weaknesses and also inview of an expected softening of world market prices for some commodities, external forecasts are thatagricultural expansion will slow further in 2006 and 2007, to about 2.7%. The – still quite upbeat – officialtarget 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 Thailand, whereby Vietnam has lowered rates for 36 tariff lines in compensationsince 1 April 2005. This formula is now being applied also to other ASEAN countries for 2006 and 2007.

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Production of crude oil, the largest single position in Vietnam’s exports (22.9% of total), declined by 7.7% to18 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 thehigher costs of imported refined products (+40%, USD 5.1 billion), as Vietnam has virtually no refiningcapacity of its own. Its dependence on these imports will continue, due to the delays in the construction ofthe USD 1.3 billion Dung Quat refinery – widely considered a “white elephant”. Coal production increased by21.7%, 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 bauxite. The countryis thought to sit on reserves of over 8 billion tonnes of the mineral, used for aluminum production, ranking it4th behind Australia, Guinea and Brazil. Reserves are located mainly in the Central Highlands, but there isno significant extraction so far. Preparatory work is now starting, and Vietnam hopes to be able to produce1.7 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 privatedomestic sector with a 24.1% increase. The foreign-invested sector rebounded to 20.9% (from a 2004 lowof 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%, whileSOEs fell back further, to 32.4%. The foreign-invested sector for the first time took the lead position, with36.8%.

Production of textiles and garments, Vietnam’s main export article after crude oil, increased by 14.8% to1,026 million units. Exports netted USD 4.8 billion, up 9.6%, but below the USD 5.2 billion target. This wasdue mainly to fierce competition from WTO members such as China following the lapse of the WTOAgreement on Textiles and Clothing on 1 January 2005, whilst Vietnam continued to be constrained byquotas in many major markets as a non-WTO member – notably in the US, the destination for around halfof Vietnam’s global textile exports.

Vietnam is therefore keen to diversify its export destinations for textiles. It had high hopes in particular forthe EU market, following the conclusion in December 2004 of an EC-Vietnam “Early Harvest” agreement inthe WTO accession context. The deal secured quota-free access to the European market since 1 January2005. However, Vietnam’s hopes to more than double exports to the EU (to USD 1.5 billion) were dashed byfierce international competition; actual growth was only 8.7% (against 47% for the Chinese competition).Vietnam has also secured quota-free access to Canada and Japan, but Vietnamese overtures towards theUS have been rejected. The country is now setting his hopes on the expansion of production of higherquality 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 5.5billion might however prove hard to reach.

Footwear production, mostly for exports, also increased, with exports up 11.7% to USD 3 billion (butremaining below the USD 3.4 billion target). The EC antidumping investigation launched in July 2005hindered 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 ECanti-dumping duties of 16.8% in April, Vietnam now fears that European orders will shift to third countriessuch as India or Pakistan (China is also affected by the anti-dumping case, with a duty rate of 19.4%),leading to factory closures and massive job losses in Vietnam. These fears may be overblown; despite theongoing 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 toofficial figures, Vietnam earned USD 5.6 billion from services exports in 2005 (against a USD 4 billiontarget), although no details are available.

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

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South Korea accounted for most international arrivals. This was due not least to visa exemptions forJapanese 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 isunder consideration. Despite being hampered by a still sub-par tourist services infrastructure and the lack oftrained tourism professionals, tourism is set to grow further in the future, notably because of perceptions ofVietnam as a stable country with a low risk of terrorist attacks. The World Travel and Tourism Council expectsVietnam 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 thesoftware sector, targeted to reach USD 1.2 billion turnover (domestic + exports) by 2010. The softwareindustry grew at 34-40% p.a. in recent years, albeit from a very low level. Expansion is hampered by lack ofqualified software engineers, as well as stiff competition from China and India, and insufficient IPRprotection.

For the realization of its goals for the expansion of the tertiary sector, Vietnam will – as in other sectors ofthe economy – have to unleash the productive energy of the private sector. SOEs still account for aroundhalf 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 enterprisesin these, but as in other sectors, such as distribution and retail trade, IT and professional services, it remainslargely untapped.

For industry and services in general, Vietnam’s medium-term aim is to attract FDI into more sectors, andtowards outputs with higher added value, such as IT, electronics, chemicals, plastics, machinery,pharmaceuticals and cosmetics, but also shipbuilding, where Vietnam has been making inroads in somemarket segments, earning almost USD 500 million in 2005 (which made the country the 11th largestshipbuilder). Several key sectors for future FDI and economic diversification in general are mentioned in the2006-2010 5-yearplan. However, there is no clear prioritization or the formulation of a coherent industrialpolicy. Bottlenecks Vietnam will have to face are productivity and quality issues (both remain low), theshortage 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 thecountryside. According to official figures, the “rate of utilized working time by economically active populationin 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 arerequired per year – will become more acute. How to generate sufficient employment, avoid unrest andcontrol 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. TheEnterprise 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 increasingsuccess as an exporter of labour. 70,500 workers were sent overseas in 2005, bringing the total number ofthose working abroad – mainly in Malaysia 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 orprofessional 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, notleast in the EU which so far has not become a significant market. An UK pilot scheme which allowed for thecontracting of a limited number of workers from Vietnam and other developing countries was suspended inmid-2005, shortly after its inception, due to high levels of workers who broke their contracts and stayed onillegally.

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MONETARY POLICY AND FINANCIAL SECTOR

In a bid to stem inflationary pressures, the State Bank of Vietnam (SBV) continued to tighten monetarypolicy 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 thesecould drive up interest rates, and lead to reduced production and investment, higher unemployment, andslower economic growth, the SBV in January 2005 increased the refinancing rate from 5 to 5.5% and thediscount rate from 3 to 3.5%. To justify this measure, it pointed at rising interest rates for deposits which theSBV fears could stunt domestic demand. The prime lending rate was raised twice, increasing from 7.5% to8.25% in early 2006. The SBV also expanded its open market operations, pumping in over USD 3.2 billionin the first semester of 2005.

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

SOCBs themselves remain puny in international comparison, with a combined capital of only around USD1.1 billion; lending remains their major source of income, in the absence of more sophisticated financialproducts. SOCBs suffer from government-directed lending for large infrastructure projects and for proppingup unprofitable and inefficient state-owned enterprises (SOEs). This has led to high levels of bad debt atSOCBs, estimated at some 20% of outstanding loans.12 SOCBs’ capital equity ratios at an estimated3.5-4.5% remain far below the Basel II standard of 8% which Vietnam has committed to the IMF to fulfil by2008 despite massive capital injections by the state (some USD 700 million in the year up to May 2005; theIMF estimates that almost USD 8 billion in further capital expansion would be required by 2010 to reach theinternational 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-strappedprivate sector.

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

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

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

The HCMC exchange’s role as a financial intermediary has so far remained rather marginal. Its futuredevelopment 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).

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well as with its opening to foreign-invested enterprises (FIEs). The raising of the cap for foreign ownershipof joint-stock companies from 30 to 49% of total listed and registered shares in September 2005 would alsoprovide 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 estatemarket following the implementation of legislation to cool down speculation in this sector (which resulted in70% drop in transactions) prompting investors and banks to shift investment into the stock market. The VNIndex has reached an all-time high, soaring by 63% in the first 4 months of 2006. Much of this trading seemsto be short-term and speculative, with many stock purchases financed by lending against previouspurchases. This is increasingly raising concerns about an overheating of the stock markets and resultingvolatility in the banking sector. However, the engagement of foreign investors in the stock market is alsoincreasing – 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 willtest the water for further development of the stock market as they will feature some big names includingmobile operator MobiFone and the biggest state owned commercial bank Vietcombank. This should giveVietnam’s hitherto shallow financial markets a much-needed boost. A Taiwanese company will be the firstforeign invested company to be listed in the recently inaugurated Hanoi Securities Trading Centre, which thegovernment 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 theinternational market in October 2005, obtaining good market ratings. The spread over the US treasuries ishigher than that obtained by China and Malaysia but lower than Indonesia or the Philippines. Vinashin - astate owned shipbuilder - will fund its expansion plans out of this funds. Other state owned companies suchas Electricity of Vietnam and Vietnam Airlines are also considering following suit with their own bondissuance.

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 thehighest growth potential, given Vietnam’s high saving rate on the one hand, and its underdeveloped socialsecurity system on the other – accounted for USD 497 million. Life insurance suffered a setback in 2005; thenumber of new subscribed policies with around 900,000 was only half the 2004 figure, and the number of allpremium-paying policies dropped by over 1.4 million to 5.1 million. Inflation, soaring prices of the stockmarket and gold (a traditional alternative investment), rising deposit interest rates and yield from governmentbonds, and the complexity of insurance policies which remain poorly tailored to the local market all took abite out of industry income.

However, the insurance sector is held back by the lack of investment options; around half of premiums areinvested 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 a40% 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% ofmarket.

CURRENCY

The Vietnamese Dong (VND) depreciated by a mere 0.9% against the USD in 2005 (slightly above the 2004level, 0.8%). The SBV exchange rate policy is one of a crawling peg of the VND against the USD, allowingthe VND to move within a band of +/-0.25% vis-à-vis the reference rate for the previous day. The VND hasbecome gradually more stable in recent years, despite a very low level of State Bank intervention to supportthe currency’s value. The government is considering widening the band within which the VND is traded, tohelp improve the competitiveness of Vietnam’s exports in international markets; this may result in a slightlyfaster rate of depreciation. Moreover, the increase of VND supply in the economy, due i.a. to decreasedcredit expansion, is taking its toll. Despite a global weakening of the USD and an abundant USD supplyresulting from strong flows of remittances and FDI and a trade surplus in the first quarter 2006, this causedthe USD to jump over the psychological barrier of VND 16,000, and black market rates surged to VND17,000.

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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 ingold. Although known dollarisation over the past years decreased from 40%, it remains high, at currently at24%, to which considerable amounts hoarded in cash have to be added. The soaring price of gold ischanging the traditional habit to conduct certain monetary transactions in gold. 60% of real estatetransactions, 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 tohoard their savings 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 ofUSD, while liberalising currency transactions in international payments.)

ECONOMIC REFORMS

The pace of state-owned enterprise (SOE) reform, whose centrepiece is “equitisation”, the transformation ofSOEs into joint stock companies and their partial divestment, accelerated in 2005. Since 2001 out of the5,655 SOEs, 3,349 were restructured, of which 2,188 were equitised, 252 dissolved, 416 merged, 184allowed to go bankrupt, 124 transferred to individuals and 182 disposed of. The whole equitisation processis 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% ofnon-oil exports (but only 6-7% of employment). A mere 10% of state capital in SOEs has effectively passedinto private hands, since most equitised SOEs are relatively small, and the state in many cases has retainedconsiderable equity stakes in them holding the majority of shares in over 30%, equivalent to 12% of allenterprise holdings.

The state will retain 100% ownership in “sensitive” fields such as public utilities and power transmission, aswell as in large and profitable SOEs in industries such as oil and gas, aviation and railways; 900-1,000 SOEsfall 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 bankingand insurance. While the decision provided more clarity on which SOEs are subject to equitisation, the longexclusion 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 forprivate sector development and the stability of the financial system. SOEs absorb a good third of the bankcredit available and enjoy other types of preferential treatment from the authorities, e.g. as regards landallocation. They thus deprive the private sector – which consistently outperforms the SOE sector, despite thelatter’s improvements in profitability – of growth opportunities. SOEs also account for the lion’s share ofVietnam’s non-performing loans, and thus weaken the position of the banking sector, notably of the four largestate-owned commercial banks (SOCBs). SOE reform, and, linked to it, reform of the banking system toensure that credit is allocated in accordance with market principles, are therefore of crucial importance forthe future of the economy.

Preparations are still under way for an eventual equitisation of Vietcombank, one of the big four SOCBs, andMekong 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 thepast, without being realised. The equitisation of Vietcombank in particular has been mooted for years, butrepeatedly run into difficulties over the valuation of the bank’s assets, notably over loan classification andloan loss provision.

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II. LEGAL DEVELOPMENTS

The Unified Enterprise, Common Investment and Intellectual Property laws were adopted by the NationalAssembly in November 2005, with substantial contributions from the private sector, including foreign lawfirms. The laws are generally considered to be in line with Vietnam’s WTO obligations, hence eliminatingdiscriminatory 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 fieldwith regards to corporate governance for both domestic and foreign enterprises. The UEL provide thecorporate governance mechanism and common provisions for 4 types of business including limited liabilitycompany, 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 thelocal joint stock companies but leaves it to later regulations. Secondly, the abolition of the unanimousconsensus which used to cause deadlock for a lot of business decision in the joint ventures is a positive stepas it is not restrictive and business friendly. In the former Foreign Investment Law, if only one member in theJV board of management disagrees, the decision can not be approved. However, in the UEL, by creatingthree meeting mechanism and based on the content of the meeting as well as the power of the minority ormajority shareholders, the deadlock has been removed. For most of decisions, if at least 65 % of participantspresent at the meeting, it will be passed.

One question that existing foreign invested companies worry is how the UEL will affect their operation. Theyhave two options. They can re-register and organize management/activities according to UEL within 2 yearssince the date of effect. Or if not, they can continue carrying out business activities in the sector and in theperiod as stipulated in their Investment License and will continue to benefit from other regulations of thegovernment. This means the UEL has flexibility for the existing FIEs to choose to be subject to formerForeign 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 unanimousvote from the BOM of the existing JV. The minority partner (either it can be local partner or even the foreignpartner in the JV) might not agree to relinquish their power entitled to them under the current ForeignInvestment 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 bothdirect and indirect investment. Both foreign and domestic investors are governed by the same law: UEL andCIL. UEL governs the corporate governance and CIL regulates access and entrance to the market throughlicensing 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 notlegally 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 thebusiness like forcing exportation of a certain percentage of goods and services, requiring a localization ratioin manufactured goods, limiting imports on the quantity of goods exported. However, it is not clear whetherthis 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 isexpected 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 andsector of investment. The brief requirements for registration and licensing can be found below:

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Registration and licensing

Business Registration Only

DomesticInvestmentProjectwithinvestedcapital lessthan VND15 billion

DomesticProjectbetweenVND 15 - 300bilion

Foreign &dosmeticprojectsbelow VND300 bilionfalling inconditionalsectors

Foreign &dosmeticprojectsover VND300 bilionfalling inconditionalsectors

Foreign &dosmeticprojectsover VND300 bilionnot fallingin conditionalsectors

InvestmentCertification

ForeignProjects lessthan VND 300bilion

InvestmentRegistration

InvestmentEvaluation/Certification

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III. EUROPEAN UNION AT A GLANCE

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

The process of European integration was launched on 9 May 1950 when France officially proposed tocreate "the first concrete foundation of a European federation". Six countries (Belgium, Germany, France,Italy, Luxembourg and the Netherlands) joined at the very beginning. In 1951 the six countries signed theTreaty of Paris establishing the European Coal and Steel Community (ECSC) and, in 1957, the "Treaties ofRome" 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: Denmark, Ireland and the UnitedKingdom; 1981: Greece; 1986: Spain and Portugal; 1995: Austria, Finland and Sweden; May 2004: Estonia,Lithuania, Latvia, Poland, the Czech Republic, Slovakia, Hungary, Slovenia, Cyprus and Malta).

Never before has the EU embraced so many new countries, grown so much in terms of area and populationor encompassed so many different histories and cultures. This historic opportunity will unite the Europeancontinent, consolidating peace, stability and democracy, and enabling its peoples to share the benefits ofprogress and welfare generated by European integration. A number of agencies and bodies complete thesystem. Among them are: The European Central Bank; The European Investment Bank; The EuropeanEconomic 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 itsmembers from ever happening again. War between EU countries is now most unlikely after more than 50years of building unity. The EU is rather involved in keeping peace and stability in neighbouring countriesand in other parts of the world. The EU is the biggest donor of financial assistance to troubled places in theworld.

The European Union is based on the rule of law and democracy. Its Member States delegate sovereignty tocommon institutions representing the interests of the Union so that decisions on questions of importance toEurope as a whole can be made at European level. All decisions and procedures are derived from the basictreaties ratified by the Member States. In this context, a landmark decision was made in June 2004, whenEU Heads of State and Government approved an "EU Constitutional Treaty". The Constitution, which wassigned 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 Minister 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 mainaim of the European Union is to create ever-closer cooperation among the European peoples, wheredecisions are taken as close to citizens as possible.

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

33

EU Trade with Vietnam (EUR milion) (Excluding Intra - EU trade)

source: EUROSTAT (COMEXT)

EU Imports

EU Exports

34

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

Total Trade

Vietnam’s Exports

35

Vietnam’s Imports

Total trade

36

Foreign Direct Investment (FDI) in VietnamSource: GSO - MPI

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322.

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011.

04

No

te:

Fur

ther

dat

a ca

n be

foun

d at

http

://eu

ropa

.eu.

int o

r E

UR

OS

TA

T h

ttp://

euro

pa.e

u.in

t/com

m/e

uros

tat/P

ublic

/dat

asho

p/pr

int-

cata

logu

e/E

N?c

atal

ogue

=E

uros

tat

3.-

On

occa

sion

the

"tot

als

on th

e ta

ble"

(ad

ditio

n of

the

data

on

the

tabl

e) d

iffer

from

the

"tot

als

as r

epor

ted

by E

UR

OS

TA

T".

Som

etim

es th

e di

ffere

nce

is s

igni

fican

t. W

e su

gges

t usi

ng E

UR

OS

TA

T's

to

tals

.

2.-

Dis

aggr

egat

ed d

ata

by m

embe

r st

ate

(HS

6, 4

or

2) is

ava

ilabl

e ab

out 1

4 w

eeks

afte

r th

e en

d of

the

perio

d.

1.-

EU

RO

ST

AT

pub

lishe

s ag

greg

ated

EU

trad

e to

tals

with

trad

ing

part

ners

with

in d

ays

of th

e en

d of

the

perio

d.

Pag

e 2

of 2

38

http

://eu

ropa

.eu.

int/c

gi-b

in/m

ake_

info

reur

o_pa

ge.p

l?en

/US

DE

C D

EL

EG

AT

ION

TO

VIE

TN

AM

EUIM

-V

ietn

amY

05HS

2

FR

NL

DE

ITU

KIR

DK

GR

PT

SP

BE

LU

SW

FI

AU

HU

CY

CZ

LT

LV

MT

PL

SL

SK

EE

+E

U25

00T

OT

AL

FO

R C

OU

NT

RIE

S W

HO

SE

DA

TA

AR

E C

ON

FID

EN

TIA

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**

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1. Analysis of current status

High growth, little added value

The Vietnamese garments and textile industry has continued to make a substantial contribution to theoverall 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 cheaplabour and the opening of the US market. While the results are impressive one cannot escape the fact thatthe added values are not high and that the industry is not doing enough to keep up with its maincompetitors 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 thefact that VN still is under a quota system to the US market. Economic benefits were largely generated byprocessing imported materials and accessories as local contents account for around only 30% of theexported garments and textiles.

The current biggest foreign buyers of Vietnam textile and garment products are Otto, Treller, ColombiaSportwear, Seattle Pacific Industries, Gap Inc., AMC-Target, JCPenney, Mast Industries Inc., The Children’sPlace, 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 witha registered capital of USD 460 million to more than 400 projects in 2003 with nearly USD 2 billion ofregistered capital. Currently over 400 projects are under operation accounting for over 36% of the sector’stotal export to the US market. So far Taiwan and Republic of Korea are the biggest foreign investors in thesector (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 rawmaterials to feed Vietnam’s cotton mills nationwide (so far the sector can provide only 10-15% of the textileindustry’s demand), around USD 166 million will be invested over the next 10 years in expanding cottonproduction from the current 30,000 ha to 60,000 ha by 2010 (equivalent to 20,000 tonnes of raw cotton peryear). This will meet 20% of the sector's demand for cotton by 2005 and 35% by 2010. Besides, twopolyester fibre factories, each with a capacity of 140,000 tonnes per year, will be built at a cost of USD 150million. 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 atotal capacity of 2,000 tonnes/year of which 40% is high quality silk for exports. The sector also producesabout 5.5 million meters of silk per year and nearly 800,000 silk products per year.

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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 theoverall development of the sector continues to be fast, it shows imbalances in the growth of textiles andgarments.

In recent years, the garment industry has expanded rapidly and attracted plenty of investment from theprivate sector while textiles have seen only very slow growth. This is because investment in textiles requiresa 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 productionof textile fabric, particularly the dyeing and finishing processes, requires large capital investment, hightechnology, 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 increasedomestic 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 failsto 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 localgarment and textile enterprises is that they are mainly just sub-contractors of foreign partners. Garmentexporters usually rely on foreign suppliers of raw materials and accessories to fill orders for internationalconglomerates.

Exports surging but quotas remain

Last year’s exports growth was mainly generated on the US market which has become the biggest marketfor Vietnamese goods so far. Trade between the two former war foes expanded after the Bilateral TradeAgreement went into effect in December 2001. Vietnam earned USD 2.636 billion from textile sales to theUS 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) whoseCommonly Effective Preferential Tariff (CEPT) it joined on 1 January 1996 with the aim of completingimplementation of the accession roadmap within ten years. In 2006, by the end of this period, all tariffs ontextile 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, thetwo sides negotiated a Market Access Agreement granting Vietnam as of January 2005 quota-free exportsof textiles and garments to the EU market. Vietnam, on the other hand, made a number of market accessconcessions in favour of European companies (“Early Harvest Agreement”). The Agreement was signed inBrussels on 31 March 2005. The effective suspension of the quotas entered in the SIGL system the day aftersigning. Now all obstacles to Vietnam’s textile exports to the enlarged EU market are removed and Vietnamis able to compete on an equal footing with WTO members, for which textile and garment quotas have beenabolished worldwide on the same date.

Following the EU case, Canada also removed its quotas for Vietnam's textiles and garment as from 1January 2005. The US market now remains the only major market where Vietnamese exports of textiles andgarments 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 goodopportunities for exporters of machinery and primary products. The domestic market of more than 80 millionpeople at present and of 100 million people in 2010 has big potential. According to estimates, GDP percapita in Vietnam will be USD 900 - 1,200 up to 2010. This would take demand for consumer goods to USD

45

400 - 450 per capita in 2010, of which 6–8% is the average proportion of expenditure on textiles andgarments. 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, ofthe 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 Vietnamesecompanies 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. Theindustry 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 internaland innate shortcomings facing Vietnam's garment exporters.

On 1 January 2005, after 10 years of incremental phase-outs, the quota system for garment exports expiredand with it the system which enabled smaller countries to sit at the export high table. Countries nowessentially compete for global garment markets on the basis of their own capabilities, meaningmanufacturing powerhouses like China and India can gobble their rivals up. In 2005, China´s textileindustry 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 inprofits, an increase of 77%. While it probably ate into the US market share of most nations, Vietnam wasparticularly 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. Thecountry's garment exports to the EU increased by 15% and to the US by 7% last year. The export turnoverof 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 correspondingperiod 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 tosharpen their competitive edge. Analysts in fact think the latter factor is more crucial. They suggest thatgarment export firms must restructure their management to cut costs and co-operate with one another toform bigger groups to execute large contracts for international buyers. They also call for bold investments torenovate technologies and launch overseas promotions, build up international trademarks and participatein overseas fairs. Each firm will have to find its own, mapping out specific and long-term strategies to firstsurvive in the new global system before growing.

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

In order to achieve its development objectives, the Government applies a strategy to accelerate the pace ofinvestment in the textile and garment industry. According to the master plan for the textile and garmentsector, 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, theplan provides for construction of 10 new textile plants focused mainly on textiles and dyeing. Of the 10 newcomplexes, 4 will be in the north, 2 in the central provinces, and another 4 in the southern region. They willcomprise 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 investmentcapital for 2001-2005 disbursed so far. Investment projects are yet to give a significant boost to theindustry’s development.

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Follow-up successful restructuring on the macro-level

In recent years, textile companies have replaced most of their obsolete equipment, investing in modernequipment 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 highquality specialized equipment to produce high quality products. At the same time, companies also startedprojects to treat waste water from factories located in densely populated areas, developing ISO 14000programs, 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 withthe competent agencies at home and abroad. Furthermore, besides capital investment, the Governmentencourages 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 andtextile 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 madeseveral contributions to the growth of the national garment industry for 10 years of operation. However, thecorporation has only 105,000 workers or 10% of the workers of the national textile and clothing industry. In2005, VINATEX created an industrial production value of 32% of the industrial production value of thesector. Especially, the corporation earned an export turnover of over USD 1,035 million or 23.6% of theexport value of the industry. Its annual profit is USD 32 million and contribution to the State budget is USD111.2 million.

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

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

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

Regarding fibre reeling, with around 2.2 million of spindles in place they annually produce around 220,000tonnes of fibre, meeting nearly half of the demand. By 2010, the sector will need around 334,000 tonnes offibre, so it will have to invest around USD 600 million to produce an additional 114,000 tonnes. Thesynthetic textile sector now has to import 100% of its material, but there are two major projects worth USD150 million to get off the ground soon to supply enough synthetic materials in the next five years. Thecotton sector only meets 10% of the garment sector’s demands, and it will pour in around USD 46 million inthe near future.

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

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3. Recommendations

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

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

Information about legal, social and customary specifics of the respective markets and sub-markets mustimprove and has to be disseminated more effectively throughout the sector. Vietnamese enterprises shouldincrease 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 areincreasingly paying attention to the policies applied by manufacturers. This requires transparency vis-à-visimporters with regard to labour, including salaries, work-place safety and other social accountabilitystandards. In order to compete with Chinese exporters, domestic enterprises need to focus on nichemarkets which demand high value products in limited volumes, including Japan, Saudi Arabia, Bahrain, theUnited Arab Emirates, Kuwait, South Africa, South Korea and Australia. In addition, there is the need toestablish closer co-operation between the Government, business associations and enterprises to work on allthese 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 byimproving 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 withVietnam’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 beignored. At the same time, more effective measures are required to deal with smuggling of textilesand 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-artmachinery 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 tariffpreferences, 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

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around USD 200,000 up) for a project. Such kind of projects will have the advantages as quickprofits, cheap labour, flexibility in order fulfillment, enjoy the current central and local authoritiesinvestment 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-terminvestors 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 preferentialincentives and support from both central and local authorities and will have a good future as it willconform 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 andlow-quality services.

11. The textile and garment related services, such as industrial software, equipment and partssupply, 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 ,Switzerland ,India 2,200,000

2 Spinning rotors Slovakia , Switzerland ,Japan 7,150

3 Weaving machinesSinkwang, Picanol, Vamatex, Nissan, Rotal, Kawamoto,China, toyoda

16,000

4 Knitting machinesGermany, Italy, France, US, UK, Taiwan, China, Japan,Korea

1,730

5 Sewing machinesSunstar, Pegasus, Juki, Brother, Singer, Pfaff, Veit,Gemsy, Golden Wheel, etc.

300,000

6Dyeing, printing, finish-ing machines

Morrison, Gerber, Gaston County, Uni-ace, Hisaka,Vinago, Wakayama, Reggiamii, Brukner, Famatex,Butter Worth, Dornier, AH 60, Royal Flow, Sanfort,Comfit, Winch, Wet Calender, Compact, Thies, Textima,Zet, Zigo

470

Sources: VINATEX & VITAS

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

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

2000 2001 2002 2003 2004 2005

106 148 202 244 279 310*

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

CountryExports

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

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

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

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

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)

Source: Vietnam Ministry of Trade

Source: VITAS

Years USA EU Japan Others

2003 1,973 580 514 588

2004 2,474 762 531 619

2005 2,636 875 620 705

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

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1. Analysis of current status

The footwear industry in Vietnam has been developing very fast for more than a decade. It is today the thirdlargest foreign currency earner of the country after crude oil and textile, representing constantly more than10% of total exports. Vietnamese footwear ranks fourth in world export value after China, Hong Kong andItaly.

Prior to the opening of the Vietnamese economy in the early 1990s, the footwear industry was involvedmainly in sewing only the upper parts of products to be exported to the Soviet Union and Eastern Europeancountries. After the collapse of the Soviet bloc, the Vietnamese footwear industry suffered a severe crisisdue to the disappearance of its established importers. As part of the Doi Moi reform policy, the Governmentof Vietnam encouraged the formation of joint ventures with foreign partners. This initiative resulted in therelocation of many factories from other Asian countries to Vietnam. Therefore, the sector started to recoverand 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 USD3.04 billion, up from USD 2.64 billion (a 15.1% increase with respect to 2004 figures). The industry employsaround 500,000 workers. It comprises approximately 380 manufacturers of shoes and sandals, bags andbriefcases and materials for footwear production. Ho Chi Minh City, Dong Nai, Binh Duong and Hai Phonggather the majority of companies. Total capacity is estimated at 520 million pairs per year whereasproduction in 2004 reached 496 million pairs. Export volume accounts for 95% of the total productionoutput.

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Box 1. Footwear producers by economic sectors

Box 2. Footwear producers by type of products

Shoe factories > 200

Leather goods factories Approx. 20

Shoe material factories Approx. 30

Tanneries 30

Machinery producers 2

State Owned Enterprises 61

Private Enterprises 109

Foreign Owned Enterprises 183

Joint Ventures 17

Total 370

Table 2.2. Production of Vietnam footwear industry

Vietnam footwear production by category in 2005

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

Other 14%

Women’s shoes 19%

Textile shoes 9%

Sports shoes 58%

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 aresmuggled.

In 2005, footwear export to the EU amounted to USD 1.79 billion, with a 0.6% decrease compared to 2004figures. The European Union is still the main market for Vietnamese footwear although the ratio of export tothe 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 in2005 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 ofVietnamese footwear. Vietnam is EU’s second largest supplier of shoes after China.

Source: LEFASO

Vietnam’s footwear export benefits from the EU Generalised System of Preference (GSP). All the footwearmanufactured in Vietnam qualified for preferential originating status is eligible for the GSP preferential rateof 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 ofhaving GSP status withdrawn in early 2005 when the system was revised because preferential treatment isto be withdrawn when an exporting country is able to meet competition. However, a provision was speciallyintroduced to ensure that strategic sectors, which account for more than 50% of all EU imports under GSPfrom a certain country, will be exempt from graduation (i.e., the exclusion from preferential treatment), asotherwise 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 shoesimported from China and Vietnam, the European Commission undertook in July 2005 an antidumpingproceeding concerning the import of certain footwear with leather uppers. In Vietnam, the Commission’sinvestigation identified evidence of state intervention in business decisions, accounting for practices whichwere not in line with generally accepted principles and disguised subsidies to the leather footwear sectorresulting in dumping and injury to the European industry.

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

Provisional Antidumping Duties

Starting Date April 7 June 2 July 14 September 15

Provisional Duty 4.2% 8.4% 12.6% 16.8%

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

55

2. Trends and potential

It is still too early to fully assess the effects of the antidumping measures on Vietnamese leather footwearexport. 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 continuedthrough the first months of 2006. There are risks that some foreign invested companies move production toother countries and trading companies place orders elsewhere. Some companies are already reducing theirproduction and the number of employees. LEFASO estimates that between 70,000 and 90,000 workers maybe 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 sameexpertise and production capacity as in Vietnam.

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

The importance of the US market, in particular, for Vietnamese footwear export has been steadily growingsince the entry into force (in December 2001) of the Vietnam-US bilateral agreement on goods, services andinvestment (USBTA), which granted Vietnamese exporters MFN status in the United States. In 2005, exportsreached USD 611 million USD (a 44% increase compared to 2004, more than five times higher than the 2001figure). This trend is very attractive for potential investors because they can take advantage of suchpreferential treatments with a view to boosting exports to the US. However, the American market, assophisticated as it is, features complex import procedures and diverse consumer tastes. Vietnameseenterprises 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 importduties on commodities of ASEAN origin down to 0-5% (this deadline has been postponed for somemembers 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 in2006, 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 thedomestic and on foreign markets as Chinese production is much larger than the Vietnamese one andChinese producers face lower costs for raw materials. Nonetheless, differences exist in the types of shoesthat Vietnam and China produce and in production methods. Therefore, Chinese products are not perfectsubstitutes for the Vietnamese ones. The EU provisional antidumping duty on the import of leather shoeshas been set for China at a higher level, thus allowing Vietnamese footwear to maintain a competitive edgecompared to Chinese export.

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

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

3. Recommendations

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

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 skillsof 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-Europeancountries and has not been supplemented in recent years whereas skilled workers are mainly trained byenterprises on a sporadic basis. At present, there is no technical school for the industry in the country but atechnical assistance center is planned to be established in Ho Chi Minh City. Some foreign partners haveprovided specialised training, whereas VCCI has provided courses on how to exploit the Internet to expandmarket 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 materialsare available only for manufacturing fabric shoes and in-door slippers. Materials for other categories ofproduct are heavily dependent on foreign partners and imports. Chemicals and machinery are almostentirely 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 bySouth Korea (29%), Hong Kong (9%), Singapore (7%), China (5%) and Japan (4.7%). Italy and Germanyaccounted for only 4% and 2% respectively. Dong Nai, Binh Duong and Ho Chi Minh City were majorconsumers of these machineries. Vietnamese manufacturers can only supply basic equipment such asshoe-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 leatherproduction is expected to increase steeply when several major tannery projects come into operation. Theavailability of raw material is one of the advantages Chinese producers have over Vietnamese ones,resulting in lower production costs. Moreover, companies producing in Vietnam face tariffs on footwearmachinery and spare parts and a high incidence of administrative trade barriers that should be reduced forthe sake of a sound development of the sector industry.

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

Vietnam has proved itself as one of the most attractive countries for the production of low-value addedshoes. A large portion of its export performance resulted in a mere assembling activity of importedcomponents (i.e. upper, some other accessories etc.). Vietnamese export revenue in this field, althoughquantitatively remarkable, will not bring sustainable development of its industry unless changes of courseare envisaged in the near future.

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

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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 thedistortions 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 footwearindustry. Based on its long lasting experience, the EU may play a leading role in meeting Vietnam’s needsfor training through its industrial associations. A closer co-operation between Vietnamese and Europeanenterprises in the footwear sector could lead to a significant reduction of Korean and Taiwanese tradingcompanies’ influence over the international shoe market. It also may promote an increasingly important roleof the European tanning industry, footwear accessories, components and raw material producers in theVietnamese market.

Although the local market is dominated by Chinese and domestic products, there could be in the comingyears a niche for fashionable, high quality leather shoes particularly from Italy, Spain and Portugal. Europeanproducts 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 thereare reports of the use of minimum prices to calculate duties, which results in an even actual higher taxationon the imported goods.

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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 marketsdeveloping along different patterns. However, the increased risk towards the end of 2005 of a bird fluepandemic spurred a significant increase in demand for seafood globally and thereby also an increase inprices.

The Vietnamese fishery sector continues to constitute a prominent part of the economy and thus commandssustained government attention with government investment in the sector on the increase. The fast trackdevelopment 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 shareincreased from 7% or USD 99 million in 2000 to 16% or USD 437 million in 2005. The increase from 2004to 2005 was a record high 79% in value.

Japan has regained the position as the main market for Vietnamese seafood products and saw an increaseof 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 byVietnam Black tiger shrimp and Catfish/Basa. The export to the US was however up 6.8% to USD 634million in 2005.

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

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2. Trends and potential

Vietnam has 3,260km of coastline with over 3,000 islands and a wealth of inland lakes and interiorwaterways. This combined gives the country one million square km of exclusive economic sea zone and 1.4million ha of interior fishing water, resulting in very favourable conditions for the country's fishery sector. Theoutput from fisheries and aquaculture was 2 million tonnes from inland and marine fisheries and 1.4 milliontonnes 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, anincrease of almost 20% compared to 2004. Farmed shrimp (mainly black tiger) and farmed fish (mainlycatfish) amounted to 330,000 and 934,000 tonnes respectively.

However, the long term sustainable development of the aquaculture sector continues to be affected by pooraquaculture planning, absence or lacklustre quality of Environmental Impact Assessment, environmentalpollution in lagoons, fresh water shortage, and depletion of underground water in sandy soils and diseaseproblems. 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 entersthe next 5 year planning cycle where ambitious output targets are set. A move away from output targets andtowards using adaptive indicators for the aquaculture industry seems to be bold move at this point of timebut nevertheless a requirement in the medium term if Vietnam wants to avoid mistakes that neighbouringand 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 considerationa good example that deserves to be reported. The farming of catfish has in fact developed during the last10 years, and mostly so during the latest 5-6 years. River cages an land-based catfish farms together withmore than 30 processing enterprises have emerged during recent years and the export of catfish (mainlyfrozen fillets) exceeded 100,000 tonnes in 2005, with an estimated catfish production well above 400,000tonnes in 2005. The processing industry today employs more than 20,000 people and with the vast numberof farmers and other suppliers to the industry it is likely that the whole industry has created employment foraround 50,000 people mainly in the Mekong delta.

Chart 3.3. Vietnam Pangasius Export

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Vietnam pangasius exportJan - Sep. 2001 - 2005

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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 highgrowth over the past 20 years. The majority of the country's fishing fleet, which consists of small to mediumsized boats, is occupied in this form of fishing. Unfortunately this has led to a serious depletion of the fishstock. The government is aware of the excessive capacity in coastal and inshore fisheries, which in the late1990s and the beginning of the new millennium led to a government financed programme for constructionof offshore fishing vessels. The offshore vessels have not had the anticipated impact at the coastal andinshore fisheries and there are reportedly cases of offshore vessels participating in the alreadyoverexploited inshore fisheries areas. The recorded catches from marine fisheries have as a consequencecontinued 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 relativelylarge proportion of the vessels are operating at a loss. 2005 saw the re-possessing of a number of thesenone-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 in2005 is probably above what can be considered a sustainable growth rate. 2006 will see the review oftariffs imposed the US Department of Commerce but a ruling on maintaining, increasing or decreasing thetariffs may not come before the end of the year. More than 100 overseas markets were supplied in 2005 andfurther market diversification will follow in the coming years. New and old trading partnerships are beingdeveloped and re-developed and examples include export to the UAE and Russia where export increasedby more than 100% in 2005.

The introduction of new regulation on traceability in the EU being effective as of January 2005 will pose atremendous challenge to the Vietnamese system and its unique characteristics of having a large numbersof collectors buying shrimps from the small household farmers and selling to the middlemen, who then sellto 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 theoutput bar. The plan includes among others targets for increasing the aquaculture production from thepresent 1.4 million tonnes to 2 million tonnes by 2010 and the seafood export from the USD 2.65 billion toUSD 4 billion by 2010.

Aquaculture

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

Expansion and increasing investments in the aquaculture sector is however set to continue and the comingyears is also likely to see parts of the aquaculture sector develop into more industrial scale undertakings ashas 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 organicproduction of aquaculture and even though the market at present is insignificant there are expectations thatincreased awareness among consumers will eventually lead to organic products taking up more self spacein 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 areexpected to provide results from the pilot projects that have already been initiated within the sector. Thesystem of collectors, middlemen, processors in Vietnam will have to change and adjust to the newconditions, a change that will require fundamental changes and pose a huge investment challenge for theindustry.

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

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1. Analysis of current status

Agriculture still plays a very important role in Vietnam as it offers jobs and incomes for more than 70 percentof 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 inboth production and export value of products such as peanuts, rubber, rice, cashews, milk products andfruits. 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 largestmarket for Vietnamese rice, rubber, fruits and vegetables, pepper and cashews. Coffee, honey, processedfruits &vegetables sell well in Europe. The American market is taking mostly coffee, pepper and pineapplejuice. Rice and tea are going to the African market. Private companies are expanding in domestic andinternational markets, many state owned companies are on the way of equitization.

In 2005, Vietnam reduced export taxes on 91% of its agricultural and forest products in accordance withcommitment made under the ASEAN Free Trade Area (AFTA) agreements. As a result, the average exporttax 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 itsquality.

Vietnamese agricultural products previously exported mainly in raw form and produced under contractswithout trade marks. Recently, local authorities, companies and farmers have been trying to buildtrademarks for their products. As a result Vietnam has trade marks of some products such as durian, mango,orange, litchi, etc. Business associations and corporations also have been busy building national trademarks, surveying the market, opening representative offices abroad and putting up websites to promoteexport.

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

Products Year 2005 Compared to 2004 Plan for 2006

Volume(1,000 tonnes)

Value(USD million)

Volume(1,000 tonnes)

Value(USD million)

Volume(1,000 tonnes)

Value(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 15years. 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.

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In addition, a range of new policy measures has been implemented in recent years to create incentives forliberalizing of production, encouraging farmers to invest in product development. It has resulted in acontinuous 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 maximisecomparative advantages, adopt new technologies and improve competitiveness in domestic andinternational markets. It is also necessary to construct a new rural area with appropriate economic structureand the joint development of agriculture-industry and services. Overall, the agriculture sector needs moreinvestment to boast productivity, quality and export value though the sector attracted more foreign directinvestment.

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 toincrease and will exceed USD 6 billion in 2006. However, in order to attract this level of FDI, Vietnam reallyhas 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 fewyears according to MARD.

Vietnamese farmers tend to move from rice production to vegetables, fruits, flowers and animal husbandryas they bring back much higher returns. However, the productivity of these sectors is still very low. There isgreat 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 husbandryespecially 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 waterquality and unstable supply, lack of information system and inadequate seaport service facilities, togetherrepresent a rather large obstacle when viewed by potential investors to do business in Vietnam. Because oflow quality and low productivity, the agriculture output in comparison to input, especially to the number ofpeople involved, is very low.

One of the main problems is the lack of capacity for food processing. About 20% of the total agriculturalproduction 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 othercountries because of the inconsistency in quality. The majority (90%) of the exported agriculture products isunprocessed.

Another problem is that agricultural sector of Viet Nam bases in many millions of poor and small- scalehousehold, which cannot afford the cost of modern processing and modern post harvesting techniques. Lackof financing investment remains a big problem. And the unfair treatment between private and publicsectors 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 manyfields 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 beunavoidable and put great pressure on the agricultural sector in the time to come. Solutions for these wouldbe more investments in human and physical resources as well as a suitable legal framework and policiesespecially a better international investment environment for the agricultural sector to overcome its limitations.

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1. Analysis of current status

The Vietnamese Government has approved the strategies of several transport sub-sectors (railway, inlandwaterway, port and shipping…) proposed by the national transport master plan, named Vitranss, which isrealised, jointly by a Japanese consultant and the Ministry of Transport of Vietnam. The Vitranss plansuggests 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% ofthe GDP. There will be ample opportunities for European companies to participate. Below follows a briefpresentation of some key sectors.

Air-traffic

The national flag carrier, Vietnam Airlines which is state owned and managed, operates domestic andinternational flights. During the year 2005, Vietnam Airlines carried more than 6 million passengers (anincrease of 18% comparing to 2004) and transported 97,000 tonnes of cargo (a year-to-year increase of6%). For the fiscal year 2005, the company made a growing turnover of USD 974 million. There is anothercarrier, 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 tookover the Vietnam Airlines’ stake in Pacific Airlines and implemented a plan to restructure the airline. InSeptember 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 Airlinestransported 300,000 passengers and posted a profit. Up to date, no private and / or foreign competition hasyet been allowed for domestic flights. Currently, the European Union and Vietnam have concluded ahorizontal air service agreement, following a ruling of the European Court of Justice. Vietnam and the USAalready concluded a bilateral air agreement in December 2003, which aims at setting direct flights betweenthe two countries, probably in 2006.

In terms of infrastructures, Vietnam has about 300 airports/aerodromes/airfields of all kinds. Most of themwere built before 1975 and must be upgraded or completely rebuilt. At present, the Civil AviationAdministration of Vietnam (CAAV) operates a network of 21 major airports including three internationalairports which are Noi Bai in Hanoi, Da Nang in the centre and Tan Son Nhat in Ho Chi Minh City. The NoiBai International Airport can currently handle 6 million passengers a year. In the meantime, a feasibility studyis ongoing for the construction of a new terminal T2, which is expected to be completed for the 1,000thanniversary of Hanoi in October 2010. The project which would increase the annual passengers capacity ofthe airport to 12 million by 2010 and to 20 million by 2020 is estimated to cost about USD 297 million andcould be funded by Japan. In Ho Chi Minh City, the Japan’s Bank for International Cooperation (JBIC) hasgranted a soft loan of USD 220 million to finance the construction of a new terminal at the Tan Son NhatInternational Airport, which will be operational in late 2006 and will have the capacity of handling 8 millionpassengers per year. The Da Nang International Airport is implementing a USD 70 million new terminal forwhich detailed studies are ongoing. The financing of this project is not yet closed but it seems that theVietnamese party is prepared to finance the civil work (USD 42 million), while looking for ODA credits for theremaining USD 28 million. Furthermore, the Vietnamese civil aviation authority is currently studying theconstruction of a new international airport at Long Thanh in Dong Nai province, located 40km eastward ofHo Chi Minh City. This airport is designed to have four terminals with the capacity of handling 80 millionpassengers per year when it will be completed. The construction of the new airport is planned to begin in2010 and its first terminal will be open to traffic by 2015 in order to substitute the saturated Tan Son Nhatairport. The whole project would cost about USD 8 billion. In addition, the CAAV is implementing theupgrading 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 Hanoiwith Hai Phong and lines up to the Chinese border. The railway was built mainly in the 20s and the 30s andwas heavily bombed during the Vietnam War. Despite a large programme to upgrade the main track fromNorth 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 -

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Hai Phong transport corridor), for which the Asian Development Bank (ADB) will provide USD 60 millionunder the Greater Mekong Sub-region programme (GMS) and for which France also pledged to provideco-financing for an amount yet to be worked out. The JBIC has been requested by the Vietnameseauthorities to finance the upgrading of the Hanoi - Hai Phong line. Also under the framework of thetrans-Asia railway project (Singapore - Kunming), there is a plan to connect the Vietnamese railway systemto a new line from Thailand. Last year, Vietnam Railways Corporation carried an estimated 12.78 millionpassengers, transported about 8,740 million tonnes of cargo. Its turnover for the fiscal year 2005 was of USD153 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 regionalroads connecting major cities with ports, as well as the highway between Vinh and Laos. The Hai Van Passtunnel between Hue and Da Nang, a Japan funded project, has been open to traffic. Major bridge projectsare also under way as well as the construction of feeder roads in remote areas, supported by the WorldBank.

The second trans-Vietnam highway, called the Ho Chi Minh Road, has been open to traffic. This road is verystrategic for Vietnam because it will ease the actual crowded traffic on the Highway No. 1 and ensure theroad connection between the North and the South during flood season. This road will also contribute to theeconomic 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 improvethe organisation and the quality of public transportation. Alternative transport modes become necessary tomeet 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 underpreparation. The European Union has granted a soft loan for implementing three modern bus lines in theframework of a decentralised cooperation between Hanoi, Brussels and the Ile-de-France Region. TheWorld Bank is financing the construction of two priority BRT (Bus Rapid Transit) lines. Otherwise, Francecommitted to finance up to 61% of the EUR 458 million LRT line running from Nhon to the Hanoi Railwaystation. The European Investment Bank has also confirmed its willingness to contribute up to EUR 100million to the financing of this important project. The Hanoi People’s Committee is preparing theimplementation of the detailed studies in order to kick off the civil work in 2007. This first LRT line in Vietnamis expected to be inaugurated in October 2010 on the occasion of the celebration of the millenniumanniversary of Hanoi.

In Ho Chi Minh City, the World Bank is financing studies to optimise the operation of the bus network. Interms of mass transportation development, the Vietnamese government has approved the pre-feasibilitystudy of a MRT line with the length of about 14.3km running from Ben Thanh market to Thu Duc. The costof this project is estimated at USD 630 million. The Japan Bank for International Cooperation hascommitted to finance 80% of the project. Otherwise, the Asian Development Bank is promoting theconstruction of three other MRT lines worth USD 1.5 billion by offering USD 500 million from its OrdinaryCapital Resources. At this stage, the local authority does not seem to be ready to use low concessional loansuch as OCR for non-profit project. Furthermore, the Transport and Public Works Service of Ho Chi MinhCity 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 car fleet, a number of measures have been takenby the Vietnamese authorities, e.g. the restriction of new registrations of individual vehicles in Hanoi and HoChi Minh City.

Harbours and marine transports

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

Quat. The construction of the Cai Lan deep sea port in the Ha Long Bay area has been completed and otherprojects are ongoing in the South of Vietnam, such as the construction of a harbour in Cai Mep on the ThiVai river, which would consist in moving downstream the harbour activities of the Great Saigon to the BaRia Vung Tau province. A number of shipyards already have European partners and there are plans forconstruction of coastal vessels connecting the northern and the southern part of the country. Presently thereare no passenger ships between the major ports, and the coastal vessels are usually not in a condition thatmay be called safe. Major shipyards and transport companies have approached European partners for jointventures on maritime container transportation. Recently, Vietnam has granted two licences to Europeanshipping lines which are Maersk line of Denmark for the establishment of a 100% foreign owned shippingcompany and CMA CGM of France for the establishment of a joint venture shipping company. Theliberalisation 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 in Vietnam. Transport services are mainlyprovided by SOE operators in the North and by private operators in the South. Although inland waterwaysplay an important role in the deltas, navigability is reduced due to a substantial dredging backlog and lackof 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 Europeancompanies 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 notprimarily 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 acompetitive advantage with considerably lower labour costs. There is however a potential for Europeancompanies when it comes to feasibility studies, calculations and specifications, quality control, signalsystems, evaluation of projects and so on. Heavy construction equipment and specialised constructionmaterials 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 Vietnamchooses to subsidise petrol, the prospects for a BOT or similar project for mass transportation will not provevery profitable. Experience has also shown that private companies operating in a mass transportationsystem have proven to be more efficient than those owned by cities or municipalities. Until deregulationtakes place the prospects of entering the mass transportation field are very limited, but if and whenderegulation 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 forEuropean companies. The enlargement of major harbours could also provide opportunities for Europeanbusinesses.

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

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70

1. Analysis of current status

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

The year 2005 was successful year in Vietnam’s ICT industry. According to the Ministry of Post andTelematics, Vietnam had well over 15 million fixed and mobile subscribers in the end of 2005, including 5million new subscribers during the last year, and the country reached a telephone density of 19.01 per 100habitants and by 2005 all provinces and cities were connected to broadband networks. Vietnam continuedto 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 peersin many aspects due to resources untapped and the lack of macro guidelines, the Government of Vietnamhas launched its national ICT development strategy through 2010 and beyond. The strategy focuses on fourpillars, namely the improvement of ICT applications, capacity-building for the domestic ICT industry, thedevelopment of ICT Human Resource and ICT infrastructure. The strategy aims at placing Vietnam on theupper-middle ranks in ICT development and application among ASEAN countries by the year 2010 with atotal investment reaching 2% of GDP.

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

Table 6.1. Number of telecom service providers

Service Number of licencesNumber of service providers

in operation

Fixed Line Service 5 3

International Telecommunications Service 3 2

Long distant and International telephoneService based on IP protocol

6 4

Mobile communications service 6 5

Internet Access Service 13 8

Internet Exchange 6 5

Online Services 12 3

Source: MPT

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

Source: MPT

Fixed lines

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

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

A fairer competition for all players created by reducing the monopoly encourages all fixed line serviceproviders to enhance quality, to diversify the services and to reduce fee to attract more customers. That hasbeen 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 (bothpre-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 thestate-owned giant VNPT) and MobiFone (BCC between the Swedish Kinnevik/Comvik and VNPT) sharingthe market together. Recently market has expanded. SPT in a joint venture with the Korean SLD Telecomintroduced S-Fone services operating in the CDMA platform in 2003 and Viettel (Military Electronics andTelecommunications Co) has opened a GSM mobile network in 2004. Besides, EVN Telecom (VietnamPower Telecom) come in to official operation in 2005 and the latest operator is Hanoi Telecom Company andHutchison Telecom who are preparing to open a third generation CMDA mobile phone networks.

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

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Internet

Vietnam is relatively a latecomer to the Internet world, obtaining its first permanent connection in December1997. However, as time passes by, the situation has been improved significantly. Firstly, Internet bandwidthcapacity 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 majorInternet tariff cuts. The Internet tariff in Vietnam becomes as low as the regional level. As a result, thenumber of Internet subscribers has increased so that the Internet density in the end of 2005 is 12.48 over100 habitants. The popularity of Internet in Vietnam is also due to the boom of Internet shops, which on theother side have raised public concern over censorship issues.

At the moment, there are 6 Internet Exchange Providers (IAP) and 13 Internet Service Providers (ISP). Inaccordance with the Decree No.55, IAP status is reserved for state-owned entity only while ISP status isopen up for private sector, including foreign company. US companies are allowed to provide Internetservices 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 numberof ADSL subscribers is over 200,000 by December 2005 compare to 50,000 ADSL subscribers by the endof 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 actuallyprovide services and 5 have deeply penetrated to the market. They are VNPT, FPT, SPT, Netnam andrecently 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 andcreate 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 specificplan. FPT connection service concentrates mainly on Hanoi and Ho Chi Minh City, rank 2nd in direct linedelivery to Internet users. VNPT remains a leader in Internet Vietnam with the wide network systemcovering 64 localities of the country. Its strength is telematics services, including direct Internet, despitesevere competition from other ISPs. As for major common Internet users, VNPT is appreciated as the mosteasy-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)

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 worldrate (13.9%), and it is not easy to reach 50% as of Korea, Japan, and Singapore. Suppliers, for profitreasons, have not contributed to social interest. Till now, inability to make use of computer and particularlylanguage barriers still make big challenges to users. Besides, many enterprises cannot fully take advantagesof assigned IP. But the Government has clearly addressed also these issues by distributing widely low costcomputers to users and expanding IT-training opportunities for the students.

Security problems has not been paid adequate attention, therefore many address are prevented whenconducting international transaction. Human resources of many enterprises have not met the requirementseither. The Government has also directly addressed both of these problems with new laws like Informationtechnology law, which is formally ratified by the National Assembly already. Much of the security issues willbe cured especially when the E-transaction law is put into force in the first quarter of 2006 and manyregulations on e-signature and e-payment among others will be drawn. It is expected that online trade willexpand 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, severattacks, black cap hackers, virus and spams, stolen prepaid Internet card, corrupt use of Internetinfrastructure to steal telecom fees. According to the Vietnamese leading IT strategist, to popularize Internetsafely to users and trader, it is necessary to improve legal system, especially E-commerce law, electronicsignature and upgrade IT knowledge of people, in which education plays an important role. In the 1 July 2006also the Intellectual Property Rights Law will formally take effect. As there is a basis for legal proceedings ofcopying 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 willdiversify and attract more users, but there will be both opportunities and challenges. The year 2005 hasalready witnessed the explosion of Vietnam wide-brand market. It is the significant development ofwide-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, Vietnamplans to launch its own satellite, named as Vinasat, in 2006. The project will require a funding of around USD180 million, including satellite’s production and launching costs, development of ground-control stations andinsurance for the whole project.

In February 2006, VNPT has invited four pre-qualified foreign contractors at the first aborted bidding to rebidfor the In Orbital Delivery of Vinasat. Only three bids were submitted to VNPT in March 2006 from theEuropean consortium Astrium/Alcatel Alenia Space, the American-Japanese consortiumSUMITOMO/NEC/TOSHIBA/OSC and the American Lockheed-Martin. The Vinasat project’s team iscurrently evaluating the bids. VNPT aims to reward the contract in April in order to kick off the production ofthe satellite in May 2006. According to the manufacturer, the production of a satellite of this type will takeabout 24 months. The International Telecommunications Union has indicated the date of 22 May 2008 as thedeadline 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 introductionof 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-structuredsales 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%.

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Like many other countries in Asia, in the eye of local people, mobile phones are used not simply as a toolfor 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 withnew phones. As taxes are being reduced when Vietnam joins AFTA, high-tech products’ price will continueto fall while high quality products flow in rapidly from other countries in the region, creating more choices tosuit 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 hamperedthe sales growth of officially imported mobile phones. Also, this results in some warranty issues. Thegovernment has tried to reduce trafficking by demanding a Government tag to be placed on the backside ofall 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 andinternational economies and software exports do not reach their set targets. The software industry will alsofail to reach targets if the government does not devise stronger policies to prompt the use of domesticsoftware 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 thediversified and flexible demand of the enterprises, with high quality and stability, controlled under a standardline before being introduced to the market.

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

However, information technology is intended to become one of the key government policies at variouslevels as well as in medium and small enterprises and IT will be the impulsive power of the politicaladministration 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 ofadministration, also called electric government, is Ho Chi Minh City supported by its two technology parksmuch geared for IT: Saigon Software Park and Quang Trung Software Park. The Government hasannounced parallel development programmes for the capital city of Hanoi and also nationwide. Series ofincentive measures have been introduced to attract FDI (e.g. low land rent rate, fixed and exempted incometax over many first operating years etc.). These measures together with others have brought preliminaryresult 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 densitywas over 18 per 100 habitants in the end of 2005, including 56% of mobile phone users and the samepenetration for fixed lines. At the same time there were 2.9 million Internet accounts, or 10 million Internetusers, and 12.48% of the total population had access to the Internet. Also according to NIPTS, by 2010tele-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 Internetusers will be 25 - 30%. PC penetration is expected to be 10 people per 100. This means there is plenty ofroom 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

services and channel leasing, as well as devising new service packages at reasonable prices well over twoyears. This trend will obviously continue in the coming period. Recently licensed mobile phone operatorsViettel and S-Fone are gearing up to offer various services to Vietnamese users. State-run Viettel will launchits Flex package with prepaid cards in different value levels, and subscriber discounts if charges exceed setcharge level or calling time is less than time limitation. S-Fone, operated by a South Korean-Vietnamesebusiness cooperation contract, plans to offer video on demand (VoD) to enable customers to watch videoand 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 millionmobile telephone joint venture led by Hutchison Telecommunications to build a 3G mobile phone network inthe country. Hutchison will partner Vietnam’s Hanoi Telecom and the two firms will invest under a businessco-operation contract. The joint venture will develop and operate a 3G network for 15 years usingCDMA2000 technology. About 2.9 million subscribers in Vietnam are expected to sign in during its first 10years 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 telecomsector. VNPT will enjoy favourable conditions to keep that role. But it is also required to carry outrenovations to increase its ability and competitiveness to prepare for international economic integration inthe future. As a step to improve the competitiveness, VNPT has been transformed into VNPT group in March2006.

The monopoly of state corporations will be reduced in the longer term. Goals have been set for the abolitionof other fields of corporate monopolies, enabling rapid movement into a competitive market. Also the newcompetition law 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 toincrease 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 enterthis market. However, taking a longer term view, the less-than-inviting environment of Vietnam’s telecommarket for foreign investment and foreign participation is going to experience change in the near future. TheUS-Vietnam bilateral trade agreement makes it possible for US companies to enter joint venture from thebeginning 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 publictelephone booths and satellite-link communications network developing. This global investment shouldfacilitate 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 includingwireless bandwidth connections in 2006 after experiencing a sharp increase in mobile phone and Internetbandwidth services, throughout the past year.

IT industry

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

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2005 the industry’s export turnover reached USD 2 billion. The country’s IT development plan to 2020 hasindicated the objective of maintaining the industry’s annual growth rate of above 20% with the aimed turnoverof 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 manufacturingindustry, communication devices manufacturing industry etc.

Regarding the e-government, the Ministry of Post and Telematics (MPT) has shown an interest in taking thehelm of Vietnam’s e-government scheme. If MPT wins the government’s approval it vows that 50% ofenterprises in Hanoi and Ho Chi Minh City would be able to access state agencies online by 2010. Also, halfof 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 conductcustoms 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’ssocio-economic development. Vietnam is not an exceptional case. This has been emphasised by theBusiness Forum repeatedly.

For foreign ICT firms, there is very wide scope for doing business in this market. However, BCC is no longerviewed as a good way to enter the market. Other market entry modes such as JV or WOS (Wholly ownedsubsidiaries) 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 communicationsservices is crucial for promoting human development.

- Developing the regulatory body towards a transparent policy making body. Allow competition attelecom 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,

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 andenforcement of Intellectual Property Rights to protect the ICT companies, especially those who areactive in the newly born software development industry.

- Utilising the government investments for information technology to reach all communes within thecountry, 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 oflocally assembled PCs.

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

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1. Analysis of current status

Healthcare system

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

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

With the recent decline in the quality of the public primary healthcare network, Vietnam has become increasingly reliant on the private sector. However, regulation of the private sector is minimal; doctors workingin private clinics are not subject to direct government control. A recent government report found that manydoctors 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 moredensely populated areas of the Mekong and Red River Deltas. However, figures are much lower in thecentral part of the country and drops to below 80% in the North Central Coast region. Although communesmay have sufficient facilities, there is often a severe lack of trained staff as many are traditionally reluctantto work in remote rural areas.

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

A number of foreign-owned clinics and polyclinics have appeared in recent years ever since the governmentallowed 100% foreign-owned hospitals in August 1997. Nevertheless, most of these centres may not be asprofitable 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, itrepresents more than USD 800 million, including the imports of raw materials. Between 30 and 40% of themarket 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 areregistered 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 USD0.34 in 1990. Per capita spending is expected to increase to USD 15 by 2010, mainly driven by the increaseof purchasing power.

However, cheap locally-manufactured generic products make up a large quantity of the market. Drugs donated 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 countrythrough approved state-owned import companies. In turn, the import company will distribute drugs towholesalers and distributors throughout the country. Moreover, multinational firms are not permitted to selldrugs direct through their representative offices.

Sale and distribution of pharmaceuticals is chaotic in this country. It is believed that at least 70% ofpharmacists are not licensed and have very little medical training; medical practitioners are also selling poorquality 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 ofpharmacies (private and public) now amounts to 30,000 (one pharmacy retail point for every 2,600residents). The wholesalers have to be Vietnamese bylaw, which means that foreign pharmaceuticalcompanies’ activities are limited to promoting their products to doctors and hospitals. Distributors aregenerally 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 andconstitute the single most important sector of the market. Nearly 50% of the Vietnam pharmacies arelocated 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 inpractice, 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 accessto pharmaceuticals and in hospitals.

Production and trade

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

The imported products amount to USD 550 million, which originate mainly from France, Singapore, SouthKorea, India, Thailand and Switzerland. Imports of raw materials are increasing at a higher speed thanfinished 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 lawsare poorly regulated. The country has a large number of small manufacturers, which often produce copieddrugs of poor quality. For foreign companies, trade practices in general are among the most restrictive andbureaucratic in the region. Nevertheless, there is still market potential as the opening of the economy hascreated a demand for Western drugs which cannot be met by the local industry. In the short-term, themarket certainly is facing some intricate issues. Nevertheless, it is clear that with the right partner, there iscertainly significant potential in the private market. In the medium to long-term, market potential is expectedto improve as the country’s population of 84 million increases and the GDP improves in tandem with theregional economic growth.

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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 governmentand 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 finishedgoods 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 theliving standard. More investments, mostly from domestic manufacturers, are likely in this area in themedium 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. Itonly confirms, on one hand, that illegally imported or produced drugs are not taken into account in theofficial 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 pharmaceuticalcompanies are now expecting, at the same time, a full coverage of the country and higher revenues fromsales to the middle class segment of population.

3. Recommendations

The pharmaceutical industry is poorly regulated as relaxation of command-based economy led to theemergence 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 issuesregistrations 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 registeredproducts could be rendered ineligible for re-registration upon completion of the respective terms as the MoHcould announce that Vietnam has developed the capacity to manufacture the drugs locally since thegranting of the original registration.

Product registrations are also regarded as being poorly enforced. Many state-owned companies continue toimport 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 existinglegislation is very difficult. Many products are counterfeits (products as well as packaging), and a good partof those are manufactured by the state pharmaceutical companies themselves. One of the main problemssome or these counterfeit products create, however, is their lower effectiveness in fighting illnesses, sincethere is no control on the level and quality of their components. Lately, some random tests have shown thatthe contents of some medicines were different from the formula on the label (generally, the activeingredients 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 watchlist in both 2001 and 2002. However, Vietnam has taken steps towards the implementation of WTOprinciples and the acceptance of the TRIPS agreement.

- Import restrictions related to the protection of local production

Protectionism measures are taken in order to shield local production; as an example, some sixteenpharmaceutical 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 moleculesimport should be eliminated by the end of 2006.

Vietnam imposes import tariffs on pharmaceutical products, although their level appears to be arbitrary andprone to change without warning. No published information regarding these is available. As a member of theASEAN 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 to10% of the total national consumption of medicines. This type of trafficking has subsided though, but illegalimports from Cambodia, Thailand and China are still thriving.

In a way to reduce the retail prices of pharmaceutical drugs, parallel import is encouraged by theauthorities. 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 feelingthe pressure from the authorities and have developed a very careful approach. The Ministry of Health isclearly opening the door for the entry of cheaper drugs on the market, mostly generic.

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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 spiritsconsumption is boosted by a steady economic growth (+8,5%) expected in 2006), higher purchasing powerin the urban areas of Hanoi and Ho Chi Minh City, large expatriate communities in these cities and thegrowing number of tourists. In 2005, sales of alcoholic beverages in Vietnam have posted a strong growthof 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 andHCMC, they purchase alcoholic drinks through hotels, restaurants, high range retail outlets as well assupermarkets ;

- on the other hand, consumers of locally produced beverages : their purchasing power is low and theygenerally 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 allcategories 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 anestimated 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) andHABECO (Hanoi Beer Alcohol and Beverage Corporation), supplying over 50% of domestic demand.

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

Being the favourite alcoholic drink of the Vietnamese population, it is hardly surprising that volume growthof beer consumption is highest among all alcoholic drinks. The country yearly average consumption percapita increased from 10 litres to 13 litres in 2005 and is expected to reach 16 litres in 2010 and 25 litres in2020. Economy lager is enjoying increasing popularity.

Wine

About 10 local companies produce wine from fruit and table grapes with a total production estimated atabout 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 thepopulation's growing purchasing power combined with decreasing import taxes on foreign wines will soonput 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 andspirit to wine. Furthermore, drinking imported wine is fashionable and more prestigious than drinking beer.

- Wine consumption shows a yearly growth of 7-10% in value despite high retail prices due to a strongtaxation (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 theUnited States, from Spain, from Chile, etc.).

- Demand is mostly orientated towards wines in the low to average price category still reflecting themodest 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 isstill very popular in rural areas.

According to the State plan 2005 – 2010, total alcohol production should have reached 250 million litres in2005 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, especiallyvodka, 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 isaltogether 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 allover the world to Vietnam have experienced high growth during the last 6 years with a threefold increasebetween 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 a10% share and by beer with only 3% share due to Vietnamese market supply by foreign groups from localproduction facilities.

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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 (a34% increase compared to 2004). France has a 48% share, higher in reality as French wines enteringVietnam 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 2000and 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 fromHong Kong and Singapore are major supply source. Hong Kong's share in total spirits export value toVietnam 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 alsosmuggled into Vietnam from Cambodia, Laos or China.

4. Prospects and recommendations

As in many other sectors, a major problem encountered by companies exporting alcoholic beverages to theVietnamese market is related to a lack of regulations, or more appropriately, to the constant adjusting ofcomplicated regulations and to the lack of proper implementation. The smuggling of wine and spirits remainswidespread, 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 producthas 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 alcoholicbeverages has been suppressed.

Through decision 04/2005/QD-BTC of 18 January 2005 by Ministry of Finance import duties on wine andspirits (under subheading 2004, 2005, 2006, 2008 of the Preferential Import Tariffs) have been reduced from80% to 65% for products originating from countries inside the European Community as well as for productsoriginating 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 in2005:

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)

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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%

Fresh beer30% from 01/01/200640% from 01/01/2008

Draught beer30%

40% from 01/01/2008

Other regulations

- A licence is no longer necessary to import wines and spirits into Vietnam: since May 2001, anyimport-export company belonging to the foodstuff sector is allowed to import alcoholic beverages withoutquantity restriction. A few companies import bulk wine and alcohol which may increase counterfeitingrisks 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 anoriginal label translation, content and degree of alcohol as well as name and address of the Vietnameseimporter. 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 difficultto 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 Departmentto 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, exportersare advised to register the origin or brand name of their products at the National Office of Industrial Property.

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1. Analysis of current status

The State continues to control and own the vast majority of the power sector assets with Electricity ofVietnam (EVN), a state-owned enterprise belonging to the Ministry of Industry (MoI), having a nearmonopoly on power generation and distribution. This control is gradually decreasing with the establishmentof small power plants serving industrial parks and private sector involvement in such projects as the BuildOperate 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, Vietnamplans to put into operation 35 major power plants between 2001 to 2010 with a transmission and distributionnetwork capable of handling the increased generated capacity. New and Renewable Energy (NRE) sourcessuch as hydro-power, geothermal, solar, wind and biogas are starting to be developed as alternative energysources for remote and rural areas. Opportunities exist for suppliers of equipment in these fields and to workon technology transfer projects.

As in 2005 the Oil and Gas sector continues to develop with recent commercially exploitable oil discoveriesand the gas from the Nam Con Son Basin coming onshore is providing a reliable energy source for the PhuMy power complex. There are potential opportunities for the private sector to work with PetroVietnamthrough production sharing contracts (PSC). PetroVietnam is also keen to source goods and services fromthe West to replace its ageing Soviet era equipment but price and competition from Asian suppliers arenegative factors. Equipment and service providers can compete for this business but this can be frustratedby 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 growannually at 13-15%. To meet this demand, there must be about 600-800 MW of new power capacity addedto 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 in2006, a 14% increase from last year. In order to meet this target EVN will need to invest USD 2 billion, a riseof 60% more than last year, into the construction of new power plants, transmission line and a number oftransformers. The estimated demand up to 2010 is 88-93 billion kWh and for 2020 onwards is 201-250billion. According to the master plan for power development Vietnam must be able to produce 53 billion kWhof electricity by 2005 and the target for 2010 is 100-115 billion kWh. From 2010 to 2020 production mustreach 250-300 billion kWh.

Vietnam National Coal and Mineral Industries Group (Vinacomin) and PetroVietnam are also looking into thepower generation sector with several projects that have already been approved by the GoV. Vinacomin plansto put into operation several thermal power plants with a combined generation capacity of 1,000 MW by 2010at several sites in northern Vietnam 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 highlandareas. Recent estimates by the Institute of Energy showed that the total capacity of these stations is 1.6 to2 million kW (7 to 10% of the country total hydro-power capacity). Micro-hydro power (a system ofharnessing power from streams in mountainous areas) is also widely used. Much of the equipment isimported from China at low cost.

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

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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 increasingnumber of solar power systems called photo-voltaic systems (PVs) installed throughout the south. Theirapplication 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 HaiPhong and in the central and southern regions. Given Vietnam's long coastline there may be potential forfurther development on a larger scale.

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

Vietnam also plans to develop a nuclear power plant between 2015-2020. A 3,000 MW atomic power plant inthe southern coastal provinces of Ninh Thuan or Binh Dinh would cost around USD 4.5 billion and account for5.3% 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 acombined capacity of 50,000mVa; 300,000km of medium and low voltage lines and distribution substationswith 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. Thetotal power loss rate is estimated at 12.2%, of which 2.6% is from power generation and 9.6% fromtransmission and distribution. EVN is working to improve efficiency by plans to reduce the total power lossrate 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 2.15billion.

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

The primary sources of finance for three investments are from ODA grants and loans committed by the WorldBank (WB), Asian Development Bank (ADB), and bilateral funds from various foreign governments, and fundsfrom 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 foraround 46% of the total. Other sources account for 36%, while domestic credit lines only supplied 18% of thefunds. However, according to the Strategic Development Institute’s forecast, over the next 5 yearsinternational donors can provide only about USD 300 million or 20% of the total investment needed per yearin the form of soft loan or grants. To overcome this shortfall, EVN has requested the government to allow itsissuance of corporate bonds to raise capital for power development. Another crucial source of finance overthe next decade for EVN’s is its bid to retain earnings that will be directly re-invested into new power projectsrather 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 investorsfrom 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

total power supply. Over the next 10 years, the government has decided to allow up to 20% of generatingcapacity to be in the hands of foreign-invested IPP, BOT and JV projects. This programme of liberalisationpresents 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 grownrapidly from only 175,000 bbl/d in 1996 to 342,000 bbl/d in 2002. Vietnam has six operating oil fields: BachHo (White Tiger), Rang Dong, Ruby and Dai Hung (Big Bear), Bunga and Kekwa. Most oil exploration andproduction 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 milliontonnes of crude oil and 16 billion cubmic metres of gas were produced from the oil and gas fields on thecontinental shelf of Vietnam. Revenues of the PetroVietnam reached a total of USD 25 billion over the pastfive years, with export turnover in 2005 reached USD 7.4 billion, which helped Vietnam overtake Brunei asthe third-largest crude oil exporter in the South East Asia region. PetroVietnam has also started to look toexport 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 : twoabroad in Algeria and Malaysia, and seven domestically including Su Tu Nau, Te Giac Giang, Rong 20, ThienUng, 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, toexploit oil and gas with overseas partners in both domestic and international oil fields.

PetroVietnam plans increased exploitation of Malaysian, Indonesian and Mongolian oil fields undercooperative 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 inVietnamese waters. The natural gas reserves have been estimated by industry sources to be between 60 and80tcf. As Vietnamese demand for energy continues to grow, these gas reserves will become increasinglyimportant to the national economy.

Cuu Long basin is the largest Vietnamese operated natural gas production area and is mostly associated gasfrom oil production. A 100km pipeline from the Bach Ho field is operating at near peak capacity. The Ruby andRang Dong oil fields, both of which have considerable amounts of associated natural gas, are near thepipeline. 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 isexploiting the primary field. The field contains an estimated 2tcf of natural gas. A 370km pipeline connectingthe fields, with extra pipeline capacity to transport gas from the nearby Hai Thach, Moc Tinh and Rong Doifields has been constructed. The pipeline comes ashore near Dinh Co Gas Terminal and an extension takessome of the gas inland about 20 miles to Phu My power plant complex. The pipeline capacity is 247 billioncubic feet per year. First gas from Nam Con Son gas field came ashore in November 2002 creating a strongfoundation 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 gasoutside 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 havebetween 70 billion and 100 billion cubic feet of recoverable gas reserves. The gas field is part of Talisman’sPM-3 oil & gas exploration project that Talisman Vietnam holds 33% stake; the other stakeholders arePetroVietnam and Malaysia’s Petronas Carigali.

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Refining

At present all fuels and other oil products consumed in Vietnam have to be imported. This constraint isconsidered by the GoV as a potential threat to energy security in specific and to the economic stability of thenation in general. For these reasons, PetroVietnam has been assigned by the Prime Minister to build tworefineries, 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,central Vietnam - 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 outin 1995, saying it made no economic sense to locate it in central Vietnam, far from the country's oilfields offthe 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, LGGroup, PRC’s Chinese Petroleum Company and China Development Corporation) broke down in 1997. InDecember 1998, Hanoi issued a licence for VietRoss to build the Dung Quat refinery. PetroVietnam andZarubezhneft 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 aninternational consortium led by France's Technip-Coflexip. In December 2002 the Russia partner Zarubenheftwithdrew 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 companiescomprising 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 toprovide consulting services for the refinery. Stone & Webster will represent the project owner PetroVietnamto 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 thecontract. It is expected to have a crude oil processing capacity of 130,000 barrels a day, or 6.5 million metrictonnes 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 MitsubishiCorporation.

Plans call for a design capacity of 7 million tonnes per year and the refinery will produce high qualitygasoline 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 TauProvince, about 120km east of Ho Chi Minh City. PetroVietnam favours Long Son, a location formerlyrecommended 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 theprovince. With these advantages, construction of Long Son refinery may be completed even earlier than theNghi Son complex (or Dung Quat). Refinery Number 3 will have a designed processing capacity of 6.5million 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 gassector introduce themselves to PetroVietnam as well as the Ministry of Industry. Training is an importantelement in PetroVietnam’s development and EU companies should look to include training as part of theoverall package in their business negotiations.

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1. Analysis of current status

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

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

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

Table 10.1. Vietnam’s production of machinery

Year Mechanical engineering All industries

Domestic productionvolume (at fixed price

of 1994) (b) [VND billion]

Import volume (notincluding raw materi-

als, steel) (c)[USD billion]

Total mechanicalengineering supplyvolume (d = b + c)

[VND billion]

Total industry volume(e) [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 allsignificant projects (especially as main contractors in the engineering field) were conducted by foreigncompanies. In the meanwhile, various local companies are able to design and produce complete equipmentfor power generation and to conduct large scale engineering projects such as cement plants, sugarfactories, paper mills, fertilizer plants, food processing lines and others. One example for this developmentis LILAMA, a Vietnamese company which won the tenders to be the EPC contractor for the Uong Bi thermalpower plant (300 MW), the Hoang Thach 2 cement plant (output: 1.4 mi. tonnes/year) and to supply someequipment for the Dung Quat refinery (output: 6 mil. tonnes/year); significant parts of the machinery used forsaid projects were manufactured by the company itself.

The most important local Vietnamese companies currently active in the field of mechanical engineering in2005 and their product portfolio are listed 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

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Table 10.2. Leading mechanical engineering companies of Vietnam

CompanyRevenue in 2004

[VND billion]Product Range

VINASHIN Vietnam Shipbuilding Industry Corporation

7,525.6 Ship building and repairing

VEAM Vietnam Engine and Agricultural MachineryCorporation

558.9Diesel engines, tractors and othermachines and equipment for agriculture

MIEMachinery and Industrial Equipment Corporation

412.0Machinery for small sized hydropowerstations, production lines for sugar, pro-cessing lines for coffee and others

VECVietnam Electrical Equipment Corporation

1,819.0Electric motors and appliances, trans-formers

VINAMOTOR 5,065.0 Car parts

LILAMAMachinery Erection Corporation

4,914.0Mechanical engineering and machineryfor hydropower plants, thermal powerplants, cement plants and others

COMAConstruction Machinery Corporation

1,514.3Mechanical engineering and machineryfor hydropower plants, thermal powerplants, cement plants and others

Mechanical companies of VINACOALVietnam National Coal and Mineral IndustryGroup

n.a.Spare parts and repair of coal miningequipment

VICC Vietnam Industrial Construction Corporation

558.0 Mechanical engineering for cement plants

AFRIMECO Agricultural and Irrigational Mechanization andElectrification Construction Corporation

901.9Water pumps, water pipes, piping acces-sories

Increasing the skill level and know-how of the local manufacturing industry is considered paramount by theVietnamese government since it will enable Vietnam in the medium and long term to reduce the dependenceon import of machines and equipment from abroad. Import volumes in this sector doubled within the years2000 and 2004 and are expected to reach USD 9.5 billion in 2005 (see also the table below).

Current production capabilities and know-how available to Vietnamese producers is still significantly inferiorto 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.

- Vietnamese producers of machine tools are able to manufacture products with state-of the-art PLCand CNC technology.

- Vietnamese car producers are able to assemble buses up to 45 seats with a local content of nearly30%, 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 toa 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 varietyof accessories.

- Vietnamese producers of construction machinery are, for example, able to manufacture asphalt mixerswith a capacity of up to 80t/h.

- Vietnamese suppliers of electric equipment are capable of manufacturing electric motors up to1,000kW 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 largequantities of quality bikes abroad.

- Vietnamese manufacturers of motorbikes are at the moment rather supplying parts to mainly Japaneseproducers running assembly plants in Vietnam. However, local content of the vehicles built in Vietnam isabout 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 oneof the most thriving and promising sectors of the Vietnamese economy and is prone to become aserious competitor to Japan, Korea, China and some European Countries in the internationalshipbuilding 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 effortsto upgrade the quality of their mechanical products in order to be able to compete on the internationalmarkets. Many of these companies already received orders from foreign companies to fabricate equipmentdesignated to be exported to Europe, the USA or Japan. Vietnamese machinery parts are already used inthermal power plants in India, in Turkey and on board of British ships. Traditional Vietnamese machineryexport 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 mentionedalready 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 ofPlanning and Investment, Ministry of Finance, Ministry of National Defense, Ministry of Science andTechnology, Ministry of Transport, Ministry of Construction, Ministry of Trade, Ministry of Agriculture andRural Development, Association of the Mechanical Enterprises. The execution of the plan is supervised by

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

In order to make a better use of the investment capital available, the Vietnam Association of MechanicalIndustry (VAMI, currently comprising 192 members) has come forward with the proposal that priority shouldbe 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 morecompanies are considering Vietnam as an alternative for China. The potential for a mutually fruitfulpartnership is indeed promising.

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

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

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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 aprofitable 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. Asignificant amount of aid money is being spent on developing/reforming Vietnam’s banking and financesector. Consultancy companies with a good track record in this sector will be well positioned to win suchbusiness.

Banking sector

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

Since then, banking in Vietnam has become a diversified and multi-sectoral industry. Vietnam currently has3 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 leasingcompanies including joint ventures and 100% foreign invested ones, 44 representative offices of foreigncredit institutions.

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

Some significant banking factors:

l In 2003 the State Bank chose Vietincombank to establish a network transferral company, calledBankNet, to synchronise the Automated-Teller-Machines (ATM) systems owned by local banks into onein 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 thenpostponed to the 2nd quarter of 2005 due to the withdrawal of one member - Ha Noi TechnologyDevelopment Company.

l In order to compete with foreign banks, local banks have improved and widened their services andimplemented 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, debttrading and real estate brokerage. In line with restructuring policy, the State Bank also make up theequitisation plan for commercial banks, Vietcombank and Mekong Delta Housing Bank would be the firstto be equitised. BIDV, VBARD and Vietincombank would have to wait a little longer to be considered forequitisation.

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

l In early April 2004, the State Bank issued a circular to ease restrictions on foreign bank branches andjoint venture banks based in the country to build a more flexible banking environment. The decision willallow these entities to open deposit accounts at overseas banks without restrictions, taking effect frommid April. This overturns a 1992 regulation stipulating that foreign bank branches in Vietnam could onlydeposit a maximum of 30% of their capital overseas, and joint venture banks can only deposit 10%. Thedecision 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 orderto 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 andsubject to authorisation by the State Bank of Vietnam.

Buying, selling, lending, settling and transferring transactions in foreign currency can only be made throughorganisations authorised by the State Bank. Generally, the State Bank controls exchange rates applied bybanks and other financial institutions. By 26 February 1999, the State Bank of Vietnam had changed the wayexchange rates were set. Credit institutions must fix their Dong/Dollar exchange rate to within 0.1% of theprevious day prevailing inter-bank rate at the State Bank. There is greater flexibility with other exchangerates. To encourage development, the State Bank of Vietnam will need to further reinforce and develop theinter-bank foreign currency market to make it become a base in defining the inter-bank average exchangerate 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, renderingservices or from other sources has to be deposited in or sold to local banks authorised to conduct foreignexchange business. Several institutions such as commercial banks, financial institutions, airlines, foreigninvested enterprises, overseas branches of Vietnamese economic institutions and companies operating inmaritime, post and telecommunication and insurance industries may be authorised by the State Bank toopen foreign exchange accounts abroad.

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

Stock Market

The Government has developed its equitisation plan since 1992. A State Securities Commission with itsheadquarters in Hanoi and a representative office in Ho Chi Minh City were established then with stockmarkets opening in Ho Chi Minh City on 21 July 2000 and a second stock market - the Hanoi SecuritiesTrading 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 typesof government bonds. The Hanoi Securities Trading Centre plans to auction shares of five to ten joint stockcompanies 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 of100 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 firstsecurities investment fund (Vietnam Securities Investment Fund) which is managed by the Vietnam FundManagement company, a joint venture between Vietnam’s largest joint stock commercial bank Sacombank

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and a UK company by the name of Dragon Capital. At present, Vietnam’s stock market is home to 13securities 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 betweenbrokerages with less experienced local firms losing out. However, the government thinking is that theestablishment of FSJ is necessary for local brokerages to learn from well-developed foreign partners andthey 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 wasdrafted with the help of the European Commission’s Eurotap programme, will be the main law regulating theindustry and aims to regulate the obligations and rights of organisations and individuals. The previousDecree (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 theMinistry of Finance (MoF) along with the rising pressure of integration are expected to spur insurance firmsinto seeking a greater share of the domestic market. The MoF has decided to increase the charteredcapital of the Vietnam Insurance Corporation (Bao Viet) - a state-owned organisation who used to hold amonopoly 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 insurancecompanies, there are four state-owned, four joint stock, five 100% foreign invested, seven joint venturecompanies and four of them operate in life insurance.

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

Accountancy

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

Conclusion

The route for the development of the financial services sector in Vietnam seems well established. The roleof foreign business and their scope for operation will probably dictate the pace of the expansion of thisindustry. 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 competeon a level playing field.

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

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