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Vietnam’s Economic Transformation

From Communism to Capitalism: Vietnam’s Economic Transformation In October 2001, US President G. Bush signed an agreement that created a US Vietnam free trade area. The signing marked yet another milestone along Vietnam’s path toward a more open market, the timeline for which includes the following: ? In February 1994, US President Bill Clinton ended America’s 19 year economic embargo of Vietnam and opened the door for US companies to target the world’s twelfth most populous country. ? In July 1995, President Clinton reestablished diplomatic relations with Vietnam.

In the absence of diplomatic relations, many Vietnamese manufactures exports to the US faced prohibitive tariffs ? In 1995 Vietnam joined the Association of Southeast Asian Nations (ASEAN) ? In 1998 the White House announced that it would exempt Vietnam from the Jackson-Vanik amendment. The exemption meant that American companies investing in Vietnam could apply for financial assistance from the Overseas Private Investment Corporation and the Export-Import Bank ? In July 2000, US President Bill Clinton signed a trade pact with Vietnam ? The Asia-Pacific Economic Cooperation (APEC) Summit was held in Hanoi in November 2006 ?

Vietnam joined WTO in 2007 After being ratified by Congress, President Clinton’s actions in the mid- 1990s established normal trading relations between the 2 countries. In particular, Vietnam benefited from an immediate lowering of duties on a number of goods produced by its light industry sector. Vietnamese tariffs and quotas on imports from the United States would be lowered more gradually. A number of US companies immediately seized the opportunity. As Brian Watson a Hong-Kong based deputy regional director for the McCann-Erickson advertising agency said in the mid 1990’s, “Vietnam is the next great frontier.

There is an enormous amount of interest among clients. Every meeting starts with a question about going into Vietnam. ” While the US business community hailed the US government’s initiatives, many American firms found themselves playing catch-up; by the early 1990s many non-US companies had preceded the Americans into Vietnam. For example, South Korean industrial giant Daewoo was a key investor; other companies with major commitments included Sony, Toshiba, Honda, Peugeot and British Petroleum.

Carrier was among the first US companies to legally market in Vietnam in 1994; the company’s window air conditioners appeared in stores in Hanoi and Ho Chi Minh City. Gillette began shipping razor blades and disposable razors, and AT&T began selling home and office telephone products. ExxonMobil began exploring for oil, Caterpillar set up equipment leasing operations, and the Otis Elevator division of United Technologies joined in the construction boom. J. Walter Thompson and Ogilvy&Mather became the first Western ad agencies to open liaison offices in Vietnam.

In the view of the fact that 60% of Vietnam’s population is under the age of 25, it is no surprise that PepsiCo and Coca-Cola Company were also quick to make moves in Vietnam. At the time of the official announcement about ending the embargo, McCann-Erickson had already produced a TV commercial for Coca Cola that included the global slogan “Always”; likewise Oglvy&Mather had a Pepsi ad ready for TV. Coca-Cola is building a $20 million bottling plant outside of Hanoi, but was denied permission to build in HoChi Minh City (formerly Saigon).

Pepsi’s joint venture with a Vietnamese firm in Ho Chi Minh is bottling Pepsi. To supply the market in the south, Coca-Cola imported canned soda form Singapore. As a result, a can of Coke costs twice as much as a bottle of Pepsi. Experts agree that the Vietnamese market holds tremendous potential over the long term. It may be two decades before Vietnam reaches the level of economic development of Thailand. Meanwhile the country’s location in the heart of Asia and the presence of an ample low-wage workforce are powerful magnets for foreign companies.

By the end of 1999, France ranked first in foreign investment while Japan was the top trading partner. Overall foreign direct investment peaked at about $3. 1 billion in 1997 after rising steadily since the early 1990s. After falling to about $2. 1 billion in 1999, investment rebounded to $2. 3 billion in 2002. There are still many challenges for the companies seeking to invest in Vietnam. The population is very poor, with a 2004annual per capita GNI of only about $540. However urbanities with savings estimated at $1 billion to $2 billion comprise one quarter of the population.

The infrastructure is underdeveloped: only 10% of roads are paved, electricity sources are unreliable there is less than one telephone per 100 people and the banking system is undeveloped. The Communist Party of Vietnam is struggling to adapt to the principles of a market economy and the layers of bureaucracy build up over decades of communist rule slow the pace of change. A key agency is the State Committee for Cooperation and Investment; as a deputy director of the agency explained “Every authority would like to have the last say.

We have to improve the investment climate. ” William Ratliff, an analyst at Hoover Institute points out that the question for Vietnam is “whether it’s possible to carry on free-market reforms and maintain absolute political power. ” Yvonne Gupwell, a business consultant who was born in Vietnam, believes that “The biggest mistake companies make is they think because the Vietnamese are so polite, they’re a little bit dim. The Vietnamese are poor, but they are not mentally poor at all. ” Statistics support this view; for example adult literacy is nearly 90%.

An emerging entrepreneurial class has developed a taste for expensive products such as Nikon cameras and Ray Ban sunglasses. Notes Do Duc Dinh of the Institute on the World Economy, “There is a huge unofficial economy. For most people, we can live only 5 days or 10 days a month on our salary. But people build houses. Where does the money come from? Even in government ministries there are two sets of books – one for the official money and one for unofficial. ” Euphoria over Vietnam’s potential showed signs of waning at the end of the 1990s. Part of the problem was the “currency contagion” that struck Asia in mid-1997.

Asian countries that had been major investors were forced to scale back their activities in Vietnam. More generally, many companies where finding it difficult to make a profit. Cross-border smuggling from Thailand depressed legitimate sales of products produced locally by Procter&Gamble, Unilever, American Standard and other companies. Today many companies are discovering that Vietnam is an excellent source of low-cost labor. Burgeoning apparel textile exports to the United States led to an agreement on export quotas in 2003. The fledging tech sector also appears to hold great promise.

Vietnam’s universities turn out graduates who are highly trained in information technology. One company, Glass Egg Digital Media provides software writing services to leading global video game developers such as France’s Infogames and US-based Electronic Arts. Glass Egg founder, Phil Tran pays programmers annual salaries of about $4000, tens of thousands less than programmers in the United States are paid. Although still strongly influenced by communist hardliners, the bureaucrats in Hanoi have demonstrated an increased willingness to adopt much-needed reforms to foreign investment laws.

In January 2000, the regulatory environment improved with the enactment of an enterprise law that streamlined the process of market entry and setting up a business; a stock market was also opened. Increasingly, decisions about foreign investment are made at the provincial level, and local officials are offering incentives and issuing import licenses more quickly. Investors in many industry sectors are now able to set up wholly foreign-owned firms; previously the government rarely approved such arrangements. Instead, foreign companies were encouraged to form joint-ventures with state-owned companies.

The improved investment climate helps explain why a number of foreign automakers including Ford, GM, Toyota and DaimlerChrysler have established operations in Vietnam. Noted one local businessman approvingly, “In the past, it was absolutely horrendous to set up a private company. Now, 99% of the difficulties are gone. ” Vietnam’s free trade area agreement with the US entered into force in December 2001. The effect was immediate: the value of US imports from Vietnam more than doubled in 2002, to nearly $2. 4 billion.

At the end of 2003, the two nations signed an air service agreement that will make it easy for travelers to book flights to Vietnam. The agreement comes as Vietnam’s government is marketing the country as an attractive vacation destination. Despite such positive news, however many problems for example, Vietnam’s legal system is still bewildering and regulations can change on a moment’s notice. Relations between the new trading partners have shown some signs of strain, as evidenced by US charges that Vietnam has been dumping catfish in the US market at artificially low price. Discussion Questions 1.

Assess the market opportunities in Vietnam for both consumer-products companies and industrial-products companies. What is the nature of the opportunity? 2. Nike and several other well-known American companies are sourcing some of their production in Vietnam, thereby taking advantage of a labor force that is paid the equivalent of $2 per day or less. Are goods labeled “Made in Vietnam” likely to find widespread acceptance among American consumers? 3. Some critics have argued that Cuba is more deserving of diplomatic and trade relations with US than Vietnam. What are some of the factors behind this argument?