Vietnam on the Verge 

Like many burgeioning Asian powers, infrastructure is a hindrance to Vietnam's growth,
but there's a big upside once the ports and the roads are built.

by Eric Jonhson
American Shipper
Source: http://www.americanshipper.com/paid/DEC07/120706.asp?storyid=117931
Chris Runckel
If China is a Las Vegas buffet of manufacturing and shipping, then Vietnam might well be the local hole-in-the-wall café that gets a glowing review in a national newspaper.

How else to explain such excitement over one of the poorest nations in the world, where no port can handle anything larger than a 1,600-TEU ship and where landside infrastructure is in a state most charitably regarded as thoroughly inadequate?

Vietnam’s star is definitely on the rise, and has been the past few years because early movers into the Southeast Asian nation gleaned bottom line satisfaction from wages and power costs even lower than those in China. Now everybody who manufactures wants a piece, including shippers and the transportation and logistics companies who would serve them.

The trouble is, Vietnam is in a state of construction. It has designs on becoming a “developed” country (whatever that means these days) by 2020, yet port and other infrastructure projects have been delayed significantly. By some estimates, the country won’t have its first deepwater berth - in other words, one capable of handling a ship large enough to provide direct service out of the country - until 2010.

For now, Vietnam is a feeder country in the context of global trade, relying on transshipment in one of Asia’s uber ports to get its goods to the rest of the world. On the import side, it relies overwhelmingly on Asia, with eight of every 10 boxes coming into Vietnam provided by its nearby neighbors.

Meanwhile, rail service is shoddy, four-lane highways are an exception rather than a rule, and airports are only just beginning to be modernized.

Why the excitement again?

Oh yeah, because the Vietnamese government has a singular mind-set to attract foreign manufacturers to keep the economic upturn of the past decade going strong.

On one side, you’ve got transportation and logistics providers descending en masse. But their arrivals are obviously driven by the decision of shippers and manufacturers to increasingly locate factories in Vietnam, like Intel, which last year decided to build a huge chip plant near Saigon instead of India, or neighboring China.

Major players like MOL, “K” Line, APL and Maersk have all ramped up ocean and logistics services in the Southeast Asian nation as have express giants like DHL and FedEx.

But companies have to move with caution.

“Vietnam has its problems with infrastructure, but the reality is that the government realizes this is a serious problem and is moving rapidly to address it,” said Chris Runckel, president of Runckel & Associates, a consulting firm that helps foreign companies launch their businesses in Southeast Asia. “In terms of a comparison, infrastructure with all its problems in Vietnam is still generally better than in India and in terms of general orientation the Vietnamese government is moving more like China than India in improving its ports. Again, the reality, however, is that investors should realize that infrastructure in Vietnam is weak and will take years to improve, although improve it certainly will.”

FDI Leads New Age. Vietnam’s growth to this day can be traced to a number of milestones:
  • The government’s decision to initiate market-based reforms in 1986.
  • The signing of a bilateral trade agreement with the United States in 2001.
  • Accession to the World Trade Organization in January 2007.
  • Those catalysts have seen foreign direct investment flow into a country that has among the very lowest wage levels in the world, yet has a population that is 90 percent literate. FDI has taken the country’s growth to another level.
“FDI has played an important role in Vietnam’s recent economic growth,” said a February report from APL and APL Logistics, called Vietnam Transportation and Logistics: Challenges and Opportunities. “Neighboring Asian economies have been the leading source of FDI for the country.”

Singapore, Taiwan, Japan, South Korea and Hong Kong have led the FDI charge, but other nations in Asia, as well as the United States and Europe, are expected to further boost Vietnam’s growth.

Vietnam attracted $7.6 billion in FDI in 2006.

“Early development was led by the public sector but today the private sector leads port development efforts countrywide,” Runckel said. “River ports such as in the Ho Chi Minh area are being modernized and new deeper water ports in both the north and south are in either planning or oftentimes in the construction phase.”

The major infrastructure problems in terms of moving cargo from factory to port should sound pretty familiar to most supply chain executives - insufficient cargo handling ability in the ports, poor road connections, a lack of rail capacity and poor service for what capacity there is.

“All of the above,” Runckel said in response to which problems plague Vietnam. “Ports at present are insufficiently deep and cannot accommodate deep draft ships. There is insufficient wharf space. Cargo handling ability is insufficient when compared to both demand and the growth in export-based companies throughout the country. Road connections are in most cases a maximum of two lanes in each direction, leading to road congestion. Rail links need modernization and again are insufficient when compared to demand. Again, I must note, however, that light is on the horizon. Investment in all sectors is occurring and invariably conditions will be improving in the years ahead.”

But that shouldn’t mask the ground realities of today.

“Vietnam’s infrastructure is reaching capacity, particularly the port system and road networks,” said Chris Moore, managing director of Ho Chi Minh City-based consultant Mekong Research.

For shippers, this shortfall in infrastructure means reduced capacity and higher costs for transportation.

“With the shortage of container berths in the Ho Chi Minh City area, delays are inevitable, and the options to increase existing container lift capacity will have only a small impact on minimizing expected delays,” said the American Chamber of Commerce in Vietnam in a report last fall. “For example, measures to increase midstream loadings or to use breakbulk terminals for additional container loadings are inefficient short-term solutions that put midstream loading cargo at risk. Furthermore, any delays in unloading and loading feeder vessels directly impact shippers’ supply chain costs through increased inventory, higher ocean freight rates, and possible additional air freight costs for high-demand products.”

Logistical Crossroads. In many ways, Vietnam is at a crossroads. In the all-important measuring stick of a country’s ability to handle goods efficiently (cost of logistics as a percentage of a country’s GDP), Vietnam lags well behind China, Japan, Korea and even India.

By most estimates 15 percent to 20 percent of the country’s GDP is dedicated to moving goods.

“The inefficiencies of the air and ocean transportation system and a lack of supporting infrastructure on the landside, including warehousing and depot facilities, are hampering the growth of efficient logistics practices in the country,” the APL report said. “Currently, logistics costs are a significant contributor to the high cost of doing business in Vietnam. Over the last 10 years, increased competition and the improved level of logistics services have significantly reduced this cost.”

It’s that last sentence that should provide the most heartening news for those taking part in Vietnam’s economic revolution. Transportation costs are coming down, and will continue to come down as the country matures.

The APL report characterized the logistics market as being in its infancy, with most logistics handled in-house or by local freight forwarders. These local forwarders obviously don’t have the global reach that international logistics companies have.

In April, the Vietnam Freight Forwarders’ Association said there were nearly 1,000 logistics companies operating in the country, with about 10 percent being members of the association.

Championing the country’s case, the association said it could prove to be a haven for logistics, given the industry’s immature status.

“Vietnam has a long coastline, has borderlines with China, Laos and Cambodia, which can bring favorable conditions for providing transport services, especially the multichannel transport, an important factor in logistics service chains,” Nguyen Tham, the freight forwarders association’s deputy chairman, told the Vietnam Economic Times.

But the industry has a huge problem with scale. The majority of logistics companies are true mom-and-pop operations, with no more than five employees and average turnover of $18,000 to $31,000.

“Economic reforms are expected to accelerate, driven by market demands and the need for compliance with the terms of WTO accession,” the APL report said. “Government policies are expected to focus on transforming Vietnam into a market economy and continuing international economic integration. Finance from international donors is not sufficient for the growing needs of the country.”

Infrastructure Lacking. If one takes a single concept away from APL’s report on Vietnam, it’s that infrastructure is sorely lacking. Like a report in 2005 on India’s similar inadequacies, it paints a simple picture: government needs to have a vision for unlocking the trade potential of the country by building infrastructure.

How that’s done is the trick. It will surely take a mixture of public and private money. But what’s being done now is clearly not enough.

“A report by the World Bank shows that over the past 10 years, the official development assistance (ODA) coupled with the state budget and government bonds (including state-owned banks) have provided the majority of the funding for infrastructure development, with 63 percent of the total,” the APL report said. “Private sector participation has been largely limited at only 16 percent. However, if there is no drastic improvement in the private sector contribution in the coming years, the country is likely to face serious difficulty in developing its infrastructure. Vietnam’s investment needs are large and are beyond the capacity of the state to provide.

“Donor funds for capital construction are also likely to dwindle in the near future. Within a few years, Vietnam’s GDP and per capita income are set to exceed the permissible threshold of the donor community members such as the World Bank and the Asian Development Bank. In that scenario, Vietnam will not be eligible for the preferential loans from these donors, resulting in decline of aid funding. Therefore, the contribution from the private sector towards infrastructure needs to be increased significantly.”

To make matters more pressing, the report said that Vietnam’s financial markets are ill-equipped to support infrastructure development.

The government is attempting to tackle the problem of cargo mobility in a holistic way, but not always to positive effect. An ambitious set of projects, costing in the billions of dollars, are plagued by delay.

“The main problems facing the infrastructure development plan are the lack of funding, haphazard planning, wasteful spending and difficult land clearance,” the APL report sad. “These challenges have often resulted in delays in project implementation.”

Moore, of Mekong Research, said private money is flowing in, both to build manufacturing sites, but also the supporting infrastructure necessary to move goods to ports and airports.

“While the situation looks highly challenging over the next five years, by 2015 Vietnam’s infrastructure will be better positioned,” he said. “In the past, the major constraints were poor planning and inadequate financing.

“The poor planning will remain a hindrance, but there are now various sources of funding for projects, including: private financing from international and domestic investors launching infrastructure funds; Vietnamese consortia of infrastructure developers able to access domestic bank loans; continued ODA funding, though at lower rates than in the past; bilateral funding, especially by the Japanese; international capital markets; and overall increased state budget spending.”

Prior to Vietnam’s landmark accession to the WTO earlier this year, another significant economic milestone came in 2005, when the country allowed shipping companies to set up wholly owned businesses, with a license. Those licenses have been somewhat hard to come by, but the companies with a long history in Vietnam, like Maersk and MOL, are now finding the seeds they sowed reaping real benefits.

“Only three shipping lines (APL, Maersk and MOL) were granted 100 percent foreign-owned licenses to conduct shipping agency activities in 2005 and 2006 under the bilateral agreements between Vietnam and the governments of Singapore, the EU and Japan,” the APL report said. “This is the first time foreign-owned shipping lines have been allowed to establish their own agency offices in the country.”

Ports A Problem. APL clearly sees Vietnam as a nexus of trade in the Southeast Asia region, but the fact is today it is served only by small river ports despite its vast coastline.

“Vietnam has good potential to develop into a major Asian shipping hub,” the APL report said. “However, the lack of world-class deepwater port facilities is limiting its potential to fully develop shipping and related industries.”

That places it at a disadvantage, as compared to Thailand for instance, for companies who want to see a fully mature cargo ecosystem.

“Vietnam is at a distinctly less developed point in its development in terms of infrastructure as compared to China and Thailand,” said Runckel, who in 1994 was assigned to Hanoi as the first permanently assigned U.S. diplomat since the Vietnam War.

He said that draft restrictions will keep the country’s sea trade from exploding in the way China has.

“As a nation with two very large inland river systems, Vietnam has long relied on river ports for much of her trade,” he said. “These ports, largely in the Ho Chi Minh City, Hanoi and Haiphong areas, are shallow water ports that cannot take large deepwater vessels. Further, the government has not modernized these ports sufficiently and cargo handling equipment is often either overloaded or seriously out-of-date.”

Runckel said Vietnam’s ports suffer from lack of scale, and so shipping costs are relatively higher than those that receive mega container vessels.

“Shipping costs internationally are directly related to volume - the more tonnage moving through a port, generally the cheaper are the shipping costs,” he said. “In this respect, Vietnam is at a serious disadvantage to China ports like Shanghai and Ningbo or to Thai ports like Laem Chabang. Total tonnage handled by Vietnam’s major ports is much smaller as compared to Laem Chabang port and this is reflected in the costs for shipping a 40-foot container, which are substantially less out of Thailand or China. The Vietnamese government realizes that Vietnam must improve its ports and is currently doing much to do this. Also, private investment is moving to close this gap and is now taking the lead in Vietnam’s port development. The reality, however, is that at this time, Vietnam needs to do much more in this area.”

AmCham Vietnam said in its report last year that development of a new deepwater port to serve the Ho Chi Minh City region may not come in enough time to prevent severe cargo backlogs over the next three years.

“Port congestion is particularly acute in the Ho Chi Minh City area where FDI has been concentrated,” AmCham said. “In 2004, (Ho Chi Minh City) accounted for 78 percent of Vietnam’s container shipments, compared to 19 percent from the ports of Haiphong-Cai Lan (near Hanoi). While one frequently proposed solution is to encourage more future FDI in the Hanoi area, we note the Haiphong-Cai Lan ports are currently further behind in their development into efficient container terminals.”

The chamber projected container volume to swell from Ho Chi Minh City’s ports to more than 10 million by 2012, while capacity will trail about 10 percent behind. In fact, the terminals are at overcapacity today, and the margin between capacity and demand will only grow greater over the next decade.

Feeding The Region. A fundamental issue is that the largest vessel any of Vietnam’s ports can accommodate is 1,600 TEUs, meaning feeding is the only option. So, most ocean trade moves via transshipment to Singapore, Hong Kong or Kaohsiung.

Intra-Asia trade represents Vietnam’s biggest ocean market, with well over one-third of all throughput staying within the region, while Europe and North America account for less than 15 percent each. Driving the reliance on Asian cargo is Vietnam’s import makeup, where about 80 percent of the country’s imports are from neighboring Asian nations, the APL report said. The breakup of exports favors North America and Europe.

A further 18 percent of all Vietnam’s container throughput is empties.

“This reflects the imbalance of the trades in and out of Vietnam, as the majority of imports are in 20-foot container units while the exports are largely carried in 40-foot container units,” the APL report said. “Therefore, a significant number of the volumes reported by the ports are for empty container moves.”

According to ComPair Data, American Shipper’s affiliated global liner services database, there are no direct services linking Vietnam to North America, but through feeder services, cargo from Vietnam can reach the U.S. West Coast in 13 to 20 days.

The country is expected to handle around 3.6 million TEUs of cargo in 2007, or about half a year’s worth of container cargo at the Port of Los Angeles. But the volume is rising fast (at about 15 percent a year, APL said) and is constricted mainly by a lack of deepwater facilities.

“The key concern of shipping lines and shippers is whether these ports can cater for the growing demand over the next five years,” the APL report said. “The Seaport Master Plan has largely underestimated the demand for container port capacity that has grown by almost 20 percent per annum. The implementation of the plan has, to date, also been slow. Although priority port developments were listed in the master plan, there is a lack of a clear timetable for the development of new ports, and delays have resulted in a number of these planned developments being pushed back until after 2010.”

Shift In Saigon. All of Ho Chi Minh City’s ports are river ports, restricting the size of vessels able to call. That’s forced the government and private sector to focus development of new deepwater ports a bit away from the city center, which could be a good thing as it would alleviate road bottlenecks out of the port and in the city.

But transition is never easy.

“There will be port delays and bottlenecks over the next five years as the country’s main ports are shifted from Ho Chi Minh City on the Saigon River to the Cai Mep Thi Vai complex near Vung Tau, southeast of Ho Chi Minh City,” Moore said.

APL sounded the same alarm as AmCham, saying the lag time between when the new Ho Chi Minh City port is built and today could be critical.

“The potential congestion issues are expected to arise in the period 2007-2010,” the report said. “The current dedicated container handling facilities in Cat Lai and VICT are operating at almost full capacity. Although there are plans to expand handling capacity at both these terminals, these are not expected to be ready until 2008-2009 at the earliest. Meanwhile, the facilities at Saigon Port, Ben Nghe Port and ICD Phuoc Long (midstream operations) are less attractive options as these lack dedicated container handling facilities and are more suited to breakbulk and multipurpose operations.”

APL expects container volume at Ho Chi Minh to more than double by 2010, “necessitating the need for at least 10 more berths in the next five years.”

Even with the new ports at Cai Mep and Thi Vai, ports will likely be overrun and landside infrastructure could be in an even worse state.

“With a depth of 14 meters, these ports in Cai Mep would be able to handle ships of up to 80,000 dwt, making them the deepest container ports in Vietnam and they are expected to become the main international gateway ports for South Vietnam when completed in 2010,” the APL report said.

That hinges on the port being completed on time, a notion AmCham said isn’t for certain.

“Vietnam’s commitment to the deep water port at Cai Mep, scheduled to come on-line in 2010, demonstrates both a commitment to development and a corresponding recognition of expected future growth,” AmCham Vietnam said. “While we applaud this vision, we have major concerns about the 2010 time line given the complex nature of the project (in terms of site preparation), and the fact that only two of the five terminals have committed financial and development plans.”

Roads And Railways. If Vietnam’s ports are in need of investment, the situation is no less dire on its roads and railways.

“Road and bridge networks are severely underdeveloped,” Moore said. “Several highway (build/operate/transfer) projects, bridges and tunnels are in the planning or construction stages, but we’re looking at two to four years of road bottlenecks in key industrial areas.”

The APL report’s authors said bureaucracy often gets in the way of timely construction.

“Multiple levels of jurisdiction involved in financing and implementing the road reforms makes the administration of the road sector highly complex,” the APL report said. “For example, financing for national roads is approved by the Ministry of Planning and Investment and implementation is done by Ministry of Transport, while maintenance is the responsibility of Vietnam Roads Administration with funds channeled through the Ministry of Finance. For local roads, the complexity is even greater due to the involvement of provincial government departments.”

The rail network, which is completely state-operated, is very rarely relied upon by shippers as service speeds are slow and cargo capacity is low.

“Current (rail) travel time from Hanoi to Ho Chi Minh City is more than 29 hours with an average speed of only 45 kilometers per hour,” the APL report said.

While a high-speed rail line connecting Vietnam’s biggest cities is planned (it would cut transit time to 10 hours), there’s no deadline for construction on the $3 billion project to begin.

Worse yet, the state-run rail operator, Vietnam Railway Corp., is more focused on passenger traffic at the moment.

While tonnage has grown 7 percent over the past five years, that’s on a very low base, meaning the amount of cargo moving by rail is negligible. No surprise then that the cost of rail service is high and quality low, APL said.

Airports. Air freight might be a lone bright spot, if only because there is some capacity in the system.

With foreign airlines itching to grab up slots from Hanoi and Ho Chi Minh City, it’s anyone’s guess how long that capacity will remain, though.

Air freight from Vietnam is primarily driven by exports to the United States, with more than 40 percent of volume involving the U.S. market. Like ocean freight, Ho Chi Minh is the key international gateway, with four-fifths of international air freight moving through the city’s Tan Son Nhat Airport.

“Air cargo handled in Vietnam is expected to grow at the rate of 14 percent per annum to reach 576,000 tons by 2010,” the APL report said. “The trend over the past decade has been a steady increase in the volume of air freight traffic. Between 2003 and 2005, the numbers have stabilized. However, between 2006 and 2010 there is expected to be higher growth in air freight traffic owing to the planned increase in airport capacity, and the nature of goods handled.”

Singapore Airlines Cargo, which in November introduced a new service to Hanoi, is banking on the growth of the market.

“Vietnam’s GDP growth is expected to be 8.5 percent for 2007, making it one of the fastest growing economies in Asia,” said S. Supramaniam, a spokesman for the cargo airline. “FDI is also expected to reach $13 billion this year, resulting in strong imports and exports into and out of Vietnam. Therefore, many cargo services providers are moving in to Vietnam to meet the increase in demand.”

The country’s top five export markets are the United States, the European Union, Japan, China and Australia, with the United States and EU the key markets for air freight, he said.

“Vietnam’s main air cargo exports are garments/textiles, footwear and seafood,” Supramaniam said. “Electronics is also a fast growing commodity with big potential.”

He added that Singapore Airlines Cargo is confident that the necessary air cargo infrastructure will be built in time.

“Facilities are adequate and the airport authorities are continuing to upgrade them to cater to the robust growth,” Supramaniam said.

Moore agreed, saying there’s actually space in Hanoi.

“Airport infrastructure is sufficient to handle passenger growth,” Moore said. Ho Chi Minh City “just opened a new international terminal in October and Hanoi’s airport is running below capacity.”

Top Heavy. A macro look at Vietnam as a market makes it clear why companies have jumped headlong into the country - to take advantage of exceedingly low wage levels. But the country’s economic activity is weighted heavily toward its urban areas, most notably in the south around Ho Chi Minh City.

In all, the top six cities in Vietnam account for 18 percent of the population, and the majority of Vietnamese live in rural or semi-rural, agrarian areas. Annual per capita income is roughly $700, and the economy has been growing steadily at 8 percent since the after-effects of the Asian financial crisis wore off.

Vietnam has one of the densest populations in all of Southeast Asia - more than twice that of Thailand and Indonesia, for example. So it’s no surprise that Vietnam’s major cities remain among the highest in the region in terms of transportation costs. That’s offset by low wages and low energy costs.

“Of key concern for logistics is the southern Vietnam infrastructure development since it is the prime economic zone facilitating most of the country’s external trading activities,” the APL report said. “Specifically, the areas around Ho Chi Minh City have received great attention with the new port developments at Cai Mep-Thi Vai and the Long Thanh International Airport, which requires the urgent construction of a supporting land network of highways and bridges around the region. These infrastructure developments are required to connect the urban areas effectively and act as a starting point for an efficient multimodal transportation system.”

But the government is pushing for economic development to happen throughout the country, and a look at a map leads one to posit this theory: If development and infrastructure funding is dispersed throughout the country, Vietnam is in a good place because its long coastline ensures any factory can’t be too far from the ocean.

“Vietnam’s physical location may indeed offer it inherent advantages if a well thought out system of feeder ports to rivers and shallow water ports is developed,” Runckel said. “The reality, however, is that this is still somewhat in the future.”

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