GO EAST, YOUNG MAN
VIETNAM’S BOOMING ECONOMY OFFERS PLENTY OF OPPORTUNITY—IF YOU CAN NAVIGATE THE GRAFT
Back in 2001, Lafarge Concrete opened its first plant, a joint venture cement-grinding facility in Ho Chi Minh City—formerly Saigon—barely a year after the U.S. and Vietnam signed their bilateral trade agreement. Like many companies, the building-materials giant saw Vietnam’s potential as an echo boom reflecting the massive construction surge occurring just across the border with China.
Lafarge soon opened a second facility, a concrete manufacturing plant, not far away. But the real action was happening up north in the capital. Hanoi was tripling in population, housing a tidal wave of new private companies whose mere existence would have alarmed the government just a few years earlier, before legal and market reform policies began transforming the country into a hybrid capitalistic-socialist state. Industrial production skyrocketed, exceeding 20 percent during the early ‘90s. PricewaterhouseCoopers, the global accounting and auditing firm, ranked Hanoi the world’s fastest-expanding city by GDP growth and Vietnam the world’s fastest-growing Emerging Market.
Lafarge, which produced and sold concrete, cement and other building products in 64 countries around the world, naturally looked north, eying expansion into the epicenter of the boom. Michael J. Duffy, a consultant and outside counsel to the company from mid-2009 through 2012, recalls routine delays at the ports, unexpected tariffs and resistance from the firm’s potential customers—general contracting firms that for the most part were state-owned or government-connected.
“What I found most striking were the market barriers that existed and grew the farther north you went,” says Duffy, a Philadelphia lawyer who spent years in Vietnam working on various long-term projects and even married a local. In Duffy’s telling, Lafarge flourished in the former Saigon, which the lawyer calls business-friendly, but struggled farther north in Danang. In Hanoi, Duffy says, the company’s expansion plan effectively stalled out and the company discontinued its efforts by mid-2010.
Why the stony reception? Duffy cites several factors. One was business climate: the country’s northern half being a government-dominated region where state-owned enterprises proliferate. Another was cultural, reflecting widespread preference for government-approved companies—those officially recognized as well as those simply known to be in favor. A foreign company hoping to do business in the north, Duffy contends, better arrive brandishing government connections or face the consequences.
“Personal relationships and benefits were often vital to allowing a business to succeed,” says Duffy. “Other companies would not do business with a non-connected outsider.”
A country no larger than New Mexico populated by 90 million, Vietnam has long been both paradox and priority for the United States. The two nations have engaged in a drawn-out and oftentimes acrimonious relationship, characterized by epic cultural misunderstandings and enduring political disputes. After spending the 1960s locked in a bloody conflict known as the “Vietnam War” in America and the “American War” in Vietnam, both sides signed a peace treaty in 1972; the U.S.’s disengagement was followed by the North’s military victory three years later, resulting in unification under communist rule. Fifteen years later, the countries reestablished diplomatic relations after a lengthy U.S.-led trade embargo; three decades later, officials from both governments reassembled to sign the trade agreement credited—at least in the U.S.—with triggering the country’s rapid industrialization and access to middle-class goods and services.
Now, after decades of military battle, economic boycotts, rhetorical saber-rattling and diplomatic maneuvering, mutual pursuit of trade opportunities is bringing the two countries closer than they’ve ever been. Which is not to say that the road ahead is smoothly paved.
“The Vietnam market represents the next great opportunity for all types of American companies,” declares an exporter’s advisory posted on the Department of Commerce’s Export.gov website. After extolling the country, the document abruptly alarms: “Corruption is a fact of life at many levels of Vietnamese governmental bodies and business. You must learn in advance how to deal with it and how to avoid getting caught in the crossfire of competing demands.” It concludes with the warning, “Persons convicted of corruption are now being sentenced to death or to long prison terms.”
The country’s economic boom, solid infrastructure, friendly people and relatively easy access to other Asian economies fan interest in Vietnam among trade-minded business owners and executives around the world; its unreliable transparency, government unpredictability, and stultifying, corrupt bureaucracy pace international concerns. U.S. exporters and multinationals—the new kids on the block—realize soon enough that while opportunities abound, the playing field is hardly level; those who don’t get that do not last long. Competition from well-entrenched and government-favored companies from China, Japan, Indonesia, Korea and Singapore is intense. And concern about counterfeiters operating with impunity is high.
“Companies have invested a great deal in marketing products to the Vietnamese marketplace, only to have that investment undermined by local production of counterfeit goods,” says lawyer Duffy. “Just as often, a company will invest in developing their brand, only to have a local company produce goods that, while not identical, have a name and style similar enough to confuse consumers into mistakenly purchasing them.”
Still, the influx continues. Vietnam is the U.S.’s 23rd-largest trading partner, shipping $20.3 billion in goods to this country in 2012, a 19 percent rise over the previous year. Vietnam absorbed about $4.6 billion of U.S. products last year, representing a 38 percent increase over the prior year—but still generating a $15.7 billion imbalance. The long-running deficit is often attributed to what’s known as “soft protectionism”—a hard-to-trace blend of official sluggishness, bureaucratic inertia and signaling government preferences to intimidated business owners. Trade advocates expect the situation to change; the office of the U.S. Trade Representative has placed Vietnam on the Special 301 Watch List. Privately, officials say Vietnamese leaders understand that the barriers—informal or otherwise—must come down for the country to fully participate in the global economy.
Leading sectors for U.S. export and investment include power generation, transmission and distribution; agriculture; telecommunications equipment and services; oil and gas machinery and services; computer hardware and software; airport equipment; environmental products; and medical equipment.
As for foreign direct investment (FDI) opportunities, American interests are clamoring for position amid tough competition in a tightly controlled market. Vietnam has attracted more than $210.5 billion from foreign companies and investors over the past decade, funding primarily new factories and processing plants, much of it in the power-generation sector. Real estate deals come in a distant second.
Last year’s FDI rose 4.7 percent to $16.3 billion, according to Vietnam’s Foreign Investment Agency. Nearly 1,300 new foreign-invested projects were granted licenses with total registered capital of $8.6 billion.
Despite surging commercial interest in Vietnam, U.S. entities were cleared to invest less than $1 billion last year. The amount pales in comparison with the $13 billion spent by Japan. Right behind Japan came Taiwan, Singapore and South Korea. The United States came in behind—you better sit down—Samoa and the British Virgin Islands.
As costs of doing business in China continue to rise, multinational executives scan the horizon for what’s known in managerial shorthand as “the next China,” meaning a country able to meet demanding international manufacturing, sourcing and distribution standards, assure safety and reliability, and deliver all of the above on a fee scale well under what Chinese workers now command.
“For companies that focus on logistics, Vietnam may be the next China,” says Page Siplon, executive director of the Georgia Center of Innovation for Logistics. Siplon cites as partial evidence recent container traffic volume: Vietnam’s is up, China’s is flat.
“The environment is changing fast,” he says. “The days when you needed a man with a gun guarding the door are over.”
The country’s many advantageous attributes and appealing features have turned people like Jim Angleton into unabashed Vietnam cheerleaders. Angleton, president of Miami-based AEGIS FinServ Corp., a business debit card provider, scuttled around Southeast Asia three years ago scouting locations for an Asian base before settling on Vietnam. Says Angleton: “After exhaustive travels and in-depth research, we decided to establish offices for our debit card division in Saigon,” referring to the city renamed for Ho Chi Minh after the war and which many Westerners and some Vietnamese still call Saigon. During his searches Angleton ruled out Hong Kong, he says, citing “seriously high levels of corporate espionage and lack of respect for trademark rights” and intellectual property in general. As for Singapore, he relished the archipelago’s culture and natural beauty but cringed at the cost.
So, it was off to Vietnam.
“We concentrated our relocation of existing staff to Vietnam and were pleasantly surprised to learn that many ex-pats live there,” he says. “We have been fortunate enough to hire from their highly experienced workforce.”
When he speaks with fellow C-suiters, Angleton is not shy about extolling the country that has welcomed him. “I’ve told about 40 other executives: Don’t go to Hong Kong. Don’t go to Indonesia. Come to Vietnam.”
Banking On Exports