Vietnam Trades Up

What could be bad for domestic businesses is welcomed by many Vietnamese consumers. Le To Nga, 65, lived through the Vietnam War and stood in line for ration cards in the 1980s. Today, she's happily filling her shopping cart at Big C, a vast new supermarket on Hanoi's outskirts run by France's Casino Group in a joint venture with a local company. Shopping "is not a matter of patriotism at all," Nga says. "These days, we just buy what we like." Foreign giants entering Vietnam will likely create as many or more jobs than they'll destroy, Pincus says, and the influx of new banks will free up credit?now available chiefly to state-owned companies?for capital-starved private businesses. Some Vietnamese businesses even welcome the competition. "I'm not worried," says Ly Qui Trung, founder of Phó 24, a chain of noodle shops. "We've already got a head start and a strong brand. I think we can compete even against McDonald's." (Trung will have to wait for that matchup; McDonald's says it has no plan to enter Vietnam.)

While local businesses gear up for the fight, Vietnam's government will have to move fast to bring its legal system and infrastructure up to speed if the country hopes to attract more multinationals. Running a factory in Vietnam can be a frustrating proposition. Electricity production is barely meeting demand, which is growing at 15% per year. Roads and ports are increasingly congested. Nike Vietnam's general manager Amanda Tucker says the company's containers sometimes sit on the dock for 24 hours before shipping out. Because Vietnam has no deep-water port to handle the new larger "super-container" ships, most exports must first go to Singapore before shipping to the U.S. and Europe, meaning more expense and delay. "The system is definitely under strain," Tucker says, and with the expected post-WTO export surge, "it's only going to get worse." Le Cong Minh, general director of Saigon Port, says there are plans to spend $600 million for upgrades, including a deep-water port at Cai Mep on the southern coast, by 2010. But the project has yet to be approved.

Perhaps Vietnam's biggest adjustment in joining the global economy will be changing its ingrained culture of corruption, secrecy and state intervention. The government recently enacted extensive new laws covering enterprise, investment and securities, which would boost protection for private businesses and increase transparency. Still, it will take time to train thousands of bureaucrats to apply rules fairly. The country ranks in the bottom third of Transparency International's corruption index; a recent government inspection of state ministries uncovered 1,700 graft cases in the first nine months of this year. Some investors grumble the government is still apt to make sudden changes in taxes, for instance, without notice. "Information is a big issue," says Dominic Scriven, director of Dragon Capital, an investment-banking firm in Ho Chi Minh City. "What you thought was true in January, may no longer be true in December."

Plenty of foreign firms have learned that the hard way. One of their main concerns is government meddling?a practice that Carl Thayer, a political professor at the Australian Defence Force Academy, calls "kicking the foreigner in the shin and demanding compensation." In a recent instance, Dutch bank ABN AMRO was accused by authorities of illegal foreign-exchange trades with state-owned Incombank, costing the latter $5.4 million. The Vietnamese bank is demanding that ABN AMRO repay the losses?even though they were incurred by an Incombank employee. ABN AMRO says it has done nothing wrong. Incombank won't comment, and Vietnamese authorities haven't said exactly which banking regulations have been broken. But what has sent a chill through the foreign investment community is that local Hanoi police?not state banking regulators?are running the investigation. "The rule of law is manipulated in Vietnam to serve interests rather than as an objective force," Thayer says. If foreign companies can't be confident they'll get fair treatment, "it will make people more hesitant to invest."

Vietnamese leaders must be asking a similar question: now that the country is a WTO member, will it be treated with fairness by the international trading community? By joining the WTO, Vietnam hopes to become free from trade restrictions such as garment quotas that in the past have constrained its exports to the U.S. and Europe. Textile manufacturing employs 2 million Vietnamese and is the country's largest export earner after crude oil. But Vietnam's trade relations with the West have sometimes been prickly. The U.S. in recent years has imposed antidumping tariffs on Vietnamese shrimp and catfish; the E.U. recently placed similar restrictions on Vietnamese-made shoes. While WTO membership gives Vietnam the ability to challenge such barriers, the country may still find itself blocked by them because Vietnam joined the WTO as a "non-market economy," a classification that denies it some protections afforded to fully fledged members. To complicate matters, the U.S., the country's largest export market, has yet to legally recognize Vietnam's WTO membership. Although passage of the necessary legislation that would grant "permanent normal trade status" to Vietnam is usually a mere formality, it could get held up in Congress by lawmakers seeking to protect textile manufacturers in their home states, or by politicians wanting to punish Vietnam for its poor human-rights record. As a result, the country could find itself in the unusual position of joining the WTO but having none of the benefits apply to its trade with the U.S., which imported nearly $6 billion in goods from Vietnam last year. "There's no question that WTO is going to be a very good thing for Vietnam," says the UNDP's Pincus. "But the thing is, they don't know how dirty the U.S. is going to play. Is the U.S. going to raise antidumping [barriers] every time Vietnam increases its market share?"

Despite the uncertainties, optimism over Vietnam's economic prospects runs deep. Last week, Intel announced it would increase its investment in a planned computer-chip-assembly and testing plant to $1 billion, tripling the company's original commitment. Upon completion, the 500,000-square-foot facility in Ho Chi Minh City will be the largest of its kind in the world. "I think Vietnam is doing all the right things," says Rick Howarth, Intel's country production manager. Says Scriven of Dragon Capital: "This is one of the most pro-change places I've been in. But there is time required. The headlines will come and the headlines will go, but the battle ahead is a long one." With WTO membership promising to even up the odds, Vietnam is ready to rumble.