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Vietnam – Open for Business?

  workers building

         Like most of the world, Vietnam is actively competing for foreign investment (FDI).  Recently, there is a bad news/good news story on this in Vietnam.  Whether the story is good or bad depends on which side of the table you are sitting on.  First, any fair observer has to admit that Vietnam has done much over the last several years to improve itself as an attractive location for someone to relocate a factory, open a company or in general invest.  When President Clinton lifted the Trade Embargo with Vietnam in 1994, Vietnam was in many ways like the American Wild West in terms of infrastructure, law, regulation and many other factors – that is to say there wasn’t much infrastructure and there wasn’t much meaningful law on business.  What law and regulation there was usually turned out to be more applicable to Socialist operations and highly costly and time consuming to investors.  Because of the hype on Vietnam as being the next “Asian Tiger”, investors were oftentimes too quick to reach for their wallets and the net result was that a lot of money, time and goodwill was lost by most if not all investors.

        By 2003, many of the negative factors are changing.  First, internationally, every nation in Asia is competing for foreign investment and this is good news for people considering moving a factory, opening an office or sourcing products.  In Vietnam, the quality of infrastructure in major cities today such as Hanoi and Ho Chi Minh City is vastly improved.  Power outages still occur but the privations of life ten years ago are largely gone.  Good restaurants, well stocked supermarkets, cheap household help, strong international schools and a reduced bureaucracy all are making Vietnam more interesting as a site to start a business.  These changes aren’t yet countrywide.  In the countryside, infrastructure still has much to be improved and investors need to fully be aware of this.  Power outages are common.  Water stoppages frequent and all of this can effect your bottom line.  Industrial parks are, however, now more widely dispersed and although many of these are more visible on paper than based on their completed infrastructure admittedly the choice is much broader now throughout the country than before.

        Recently in a move to further entice foreigners to bring their money to Vietnam and invest in factories, Vietnam loosened central control of approval of investment licenses.  Now new factories need not solely pass through the Ministry of Planning and Industry (MPI) in Hanoi but investors may go directly to the local level and file the forms to start a business and invest there.  Additionally, the central government is talking about further reforms such as possibly opening up the stock market to 100 percent foreign owned companies, further freeing up hiring of engineering and senior managers and possibly even giving foreign firms the right to mortgage their assets.  The Ministry knows that competition for foreign investment is intense throughout the region and has even discussed possibly lowering land rental fees for foreign companies (currently land rental fees for local investors are 40 percent less than those for foreigners).

       The above is all good news for investors.  Although many of the changes under discussion are still a ways off, the change to allow investors to by-pass the MPI and go directly to the local level removes one layer of bureaucracy, a layer of chance for the diversion of funds and the delay in getting a project started.  Even with these changes, however, much remains to be done and action not words will be what investors will be judging Vietnam on in the long run.  To paraphrase Lenin “foreign investors will be “voting with their feet” to either pass Vietnam by or to stop and invest if the investment climate is right.

       As in China, Vietnam recognizes three types of typical business organization for a foreign company.  These are thee representative office, thee joint venture or thee one hundred percent (100%) foreign owned enterprise.  As in China, our company has had experience with all three forms.  Based on this experience, we feel that as in China the time of representative offices is long past.  We also recommend staying away from joint ventures as we believe the lack of control, problems with the law protecting minority equity participants, weak rule of law and corruption generally make a joint venture not worth the future potential problems.  We therefore recommend the one hundred per cent (100%) foreign owned enterprise which can be formed relatively quickly in Vietnam by applying for an investment license.  Such an application requires the following:

       Duration of a one hundred per cent foreign owned enterprise can be up to 50 years and this duration must be set out in the charter.  The government can grant extensions to this period but these can not exceed 70 years at this point.

       As investors looking for a site to locate their investment often look at Vietnam, Thailand and China in making a decision, we have listed all three countries below with our view of each country’s relative strengths and weaknesses as a site to locate a factory or to start and open a new business.  For Thailand, we have used Thailand’s Board of Investment, Zone 3, specifically the area around Rayong and the Eastern Seaboard.  Bangkok and its suburbs are usually not as cost competitive unless an operation requires highly technical or artistic skills which tend to be found more abundantly in Bangkok and the area immediately around the city because of Thailand’s relatively longer experience with foreign investment.
  
    

 Cost Comparison for Vietnam, Thailand and China

Factor

Vietnam

Thailand –Zone 3

China

Difference

Land Cost

Generally $35/sq mtr

$30/sq mtr

$30/Sq mtr

China -50 yr lease

Land Ownership

 Land Lease

Fee Simple –Total ownership

50 Year Lease

Thailand - Full Ownership is definite advantage.  China longer lease than VN so is second place. 

Plot Coverage

Varies widely by IZ in Vietnam

About 85%

50-60%

Thailand allows more building for same amt of land

Land Administration fee

Less than one hectare: USD 0.9/m2/yr

More than one hectare

USD 0.8/m2/yr

Above subject to VAT of 10%

 $20/Rai/Month

Required in some zones/not all

Vietnam slightly higher –China and Thailand about the same

Building Cost

For similar structure - $24/sq ft.

For Western high quality factory $22/sq ft

For similar structure  $25/sq ft

Slight difference in favor of Thailand

Utilities

 More Costly

Similar

Similar

No major difference in Thailand and China – VN more expensive

Taxes

1. For EPZ -10% tax rate – eight yr exemption.

2.  In IP and 80% exported – 10% tax rate -2 year exemption – 2 more years at 50%

3. 50-80% exported -15% tax rate -2 yr tax exemption, 2 add’l at 50%

4.  Less than 50% export – 15%tax rate -2 yr exemption – 2 add’l years at 50%

 

 

Thailand offers 8 yr exemption for BOI approved projects plus 5 additional years at 50%.  Further deductions for transportation, electricity, water for 10 years plus other deductions

2 yr exempt – 3 yrs at 50%

Thailand clearly better

Import Tax on Raw Materials

Must pay and then claim exemption at export

5 year exemption, 75% exemption of imports exempt on domestic sales

No Customs Duty if for Export Only

Slightly more generous for Thailand

Value Added Tax

0-20% - Exports are exempted, but procedure is not as simple as advertised

7%

17%

Thailand less tax, easier on refund for exports

Convertibility of Currency

Not Convertible

Fully Convertible

Not Convertible

Clear Advantage to Thailand

Tax on Funds Remitted

Up to 10% depending on size of investment –due each time money is remitted abroad

10% on Dividends

Profits Exempt from tax

Advantage to China

Cost of Fees

These can be high and unpredictable – Vietnam needs to give more attention here

Thailand slightly more expensive

China slightly cheaper

Thailand and Vietnam need to reduce these fees – Vietnam needs to give them more predictability

Unskilled Labor

US$45 in Hanoi and HCMC, $35-40 in other cities.  15% add’l required to pay to Social Security

Thai Zone 3 minimum wage about $70/month

China cost of unskilled worker $60/month

China looks cheaper but required benefits actually make China more expensive

Skilled Labor

Can be difficult to find qualified managers, financial staff  and some engineers – Skilled labor about $150 per month – office staff about them same or slightly less

Thailand competitive through the middle positions  because of addition of VN and China required benefits which make salaries more comparative

China about the same cost through the middle levels, but cheaper at the top end

Thailand more expensive for high level management, engineers, etc but availability of managers and accountants better than VN.  China has the net advantage because of lower prices for technical and management and good availability. 

Supporting Industries

Vietnam does not yet possess a wide range of supporting industries to provide raw materials, sub-assemblies, etc.  Import of most raw materials and pre-cursors is required

Thailand has a wide range of supporting industries to source supplies, services, etc.

China has a wide source of supporting industries in major areas along the coast and major cities.

China and Thailand have an advantage here over Vietnam.

Cost of Shipping a 40 foot Container

Slightly over $2,500

Slightly over $2,000

About under $2,000

Slight benefit to China

Additional Shipping Fees

More expensive than Thailand or China

Thailand Cheaper

China more Costly

Slight advantage to Thailand

Protection of Intellectual Property

Weak but improving

Thailand Stronger

China Weak

Thailand clearly stronger

Rule of Law

Weak but improving

Thailand is Strong in this area

Strengthening but still some areas to be improved

Thailand stronger but China closing

Predictability of Law and Government Policy

Can be Unpredictable

Predictable

Predictable

China and Thailand are equivalent.  Vietnam still needs to improve in this area.

Size of Domestic Market

VN larger than Thailand but lower GDP.  VN not as large as China. Also smaller middle class

Thailand’s increasing with AFTA and possible FTA with China

China clearly larger

Advantage to China

Quality of Life for Expatriate Staff

VN Improving in Hanoi and HCMC

Thailand Offers more amenities except when compared to maybe Shanghai

China Improving

 

Thailand provides more extensive activities

Cost of Supporting Expatriate Staff

 Housing more expensive than Thailand.  Food, Maid, etc.  in Thailand and VN cheaper than China.

Relatively Cheaper housing, food and other costs

More expensive Housing, Food and other expenses

Thailand cheaper

 

           As can be seen, Vietnam has improved considerably as a site for investment.  It cannot compete fully with either BOI Zone 3 in Thailand or with most areas in China, but it has considerably narrowed the difference and should not be dismissed outright in any case.  Land ownership or more accurately land lease as that is all that the Vietnam law currently allows is still significantly less advantageous when compared to Thailand and even to China.  Utilities are still high when compared to other sites like China or Thailand in the region.  Vietnam has recently reduced telephone charges but more is needed in not only this area but in other utility charges as well.  Taxes and fees are still too high.  Supporting industries are still weak.  Recent investments in plastic and other industries should remedy this in time in the plastics field but for now, this continues to be a weakness.

          Rule of law continues to be a challenge in Vietnam.  There also are still big problems with predictability of government actions – recent examples were government attempts to severely raise taxes for motorcycle and car spare parts after encouraging investment in these areas with promises to not inhibit these investments.  Although these decisions were ultimately reversed by the Prime Minister after strong lobbying by the Japanese government and industry, such reversals of business policy unfortunately occur all too frequently.  Because of the still building nature of Vietnam’s rule of law and predictability of government actions, Vietnam remains a country in which Asian countries such as Korea, Taiwan, Hong Kong and interestingly Singapore have a clear advantage.  These country’s entrepreneurs are more experienced at working in less legalistic societies where relationship can often influence and sometimes dictate decisions even when a law or regulation point to different decision.

        Despite the above conclusion on Vietnam’s current competitive position, we would remind both the Thai and Chinese governments that competitive position is relative and always subject to change.  Vietnam’s government has shown itself willing to consider and even implement changes to help entice more investment.  Thailand’s government and China’s leadership also need to continue their own continual review and improvement of investment policies.  Both have areas for improvement.  Vietnam continues to be a nation of talented, hard working individuals and when the full creative force of these people is ultimately released from the unfortunate disadvantages currently placed on their competitive position in the region by weakness on land ownership, high cost utilities, weak rule of law and weak predictability of government action, the Vietnamese people will be a powerhouse fully able to compete with any nation.


About the Author:   Christopher W. Runckel, a former senior US diplomat who served in many counties in Asia, is a graduate of the University of Oregon and Lewis and Clark Law School.  He served as Deputy General Counsel of President Gerald Ford’s Presidential Clemency Board.

Until April of 1999, Mr. Runckel was Minister-Counselor of the US Embassy in Beijing, China.  Mr. Runckel lived and worked in Thailand for over six years.  He was the first permanently assigned U.S. diplomat to return to Vietnam after the Vietnam War.  In 1997, he was awarded the U.S. Department of States highest award for service, the Distinguished Honor Award, for his contribution to improving U.S.-Vietnam relations.  Mr. Runckel is one of only two non-Ambassadors to receive this award in the 200-year history of the U.S. diplomatic service.


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