Los Angeles Times
Friday, December 25, 1998
Vietnam's Open Door Now Exit for Investors
By DAVID LAMB, Times Staff Writer
HANOI--Less than five years after Vietnam became the hot new frontier for foreign investment, many expatriate businesspeople are packing up and leaving in frustration over the slow pace of economic reform and their inability to make money.
No American corporation has turned a profit here since the U.S. trade embargo was lifted in 1994, according to U.S. diplomats. With investor confidence ebbing, along with the buzz that made Vietnam the place to be, the foreign exodus is an unsettling portent for a long-isolated country that needs capital and, publicly at least, is committed to finding a place in the global marketplace.
"I did not feel I could, in good faith, encourage others to invest their money in a country as complicated and risky as Vietnam," said Kim Odhner, a U.S. entrepreneur who packed it in recently after three years. "I left feeling that Vietnam has to work out its own issues before it is fully ready to address the expectations of others."
There are no figures on how many of the approximately 20,000 foreign businesspeople in Vietnam are leaving. But there are indicators: Enrollment in Ho Chi Minh City's International School, which caters to the children of expatriates, has dropped nearly 20% in the past year. Business sources said 182 representative offices have closed in Ho Chi Minh City, formerly known as Saigon. Of Hanoi's 1,002 luxury apartment units, which foreigners once waited months to rent, more than 400 stand empty. Office rents have dropped 60%.
The elegant Hanoi Club opened last year (fee to join: $10,500), projecting that it would have 1,500 members by 2000. It has struggled to reach 370, is laying off local staff and has reduced its number of expatriate employees from 14 to six. The Sheraton Hotel in Hanoi was boarded up and abandoned two weeks before its scheduled opening this year; construction of the Marriott and Hyatt hotels in Ho Chi Minh City stopped in midstream. Seven media concerns, including Time magazine, have closed their Hanoi offices or relocated their correspondents to other Asian cities.
"We used to bring in families with containers of furniture who wanted to rent a villa," said an Australian moving-company executive. "Now, if someone comes, he's usually lugging two suitcases, his family is in Bangkok [Thailand's capital] or the States, and he wants a serviced apartment."
Exodus Spreading Throughout Region
Vietnam is certainly not suffering alone: Expatriates are leaving other Southeast Asian countries as foreign companies cut expenditures in response to the Asian economic crisis. Cigna Corp., an insurance and financial services firm, has reduced its expatriate staff in Asia from 46 to seven. Hundreds of expatriates did not return to Indonesia after riots in May that were sparked, in part, by economic problems. Others have left Malaysia, where a depression and the arrest of Anwar Ibrahim, the reform-minded former deputy prime minister, led to civil unrest.
But the expatriates' departure from Vietnam is especially noteworthy: Many say they would have stuck it out had Vietnam's Communist government made good on its promises of economic reform. Virtually all leave reluctantly, having developed a fondness for the Vietnamese people and an affection for Hanoi, the last Southeast Asian capital flush with charm and beauty.
"Am I sorry to leave Hanoi?" asked Cigna's Tom O'Dore, sitting on the balcony of his lakeside apartment in Hanoi before moving last month. "Darn right I am. This is a great place to live. It's just not a great place to do business."
O'Dore, with his Vietnamese wife and son, moved to Cigna's Bangkok office. Like many downsizing companies, Cigna will keep a presence here, with three Vietnamese employees, hoping that one day the nation blooms again as a business opportunity. Among the reasons for O'Dore's departure: Vietnam never acted on its pledge to allow 100% foreign ownership of insurance firms, or on Cigna's request for a license to do business under that arrangement.
"I think basically they're still just sitting on our application," he said.
Although many major players, such as Ford Motor Co., IBM Corp. and General Electric Co., have dug in for the long haul, gloom is pervasive in the business community. Said one American who asked not to be identified: "I was convinced Vietnam was the place to be in the mid-'90s. Everything I've got, and more, is invested here. Whether I can hang in until there's a turnaround, I don't know."
Vietnamese officials are gravely concerned that the expatriate exodus is translating into the loss of much-needed foreign capital. They have promised to redouble efforts to improve the business climate, but their reforms have been so cautious and slow in coming that many investors are skeptical about Vietnam's commitment to a free-market economy.
Communists Are Crux of Problem
The crux of the problem is that the Communist Party wants the perks, but not the risks or responsibilities, of such an economy. Old guard members, shaped by a generation of war, distrust the motives of foreign investors. These party members remain at heart isolationist, protective of Vietnamese culture and uneasy with the speed of change in the world around them.
They insist that foreign investors wanting to do business take on a Vietnamese partner. Few quibble with that. But the foreigners put up all the money and take 100% of the risk. The Vietnamese contribute only land, which they received free from the government. The Communist Party considers the Vietnamese partners savvy operators if they increase the size of the payroll and the taxes a company pays on each salary. (To pay an employee $4,000 net a year costs a company about $20,000 gross, most of which is taxes.)
As in many developing countries, civil servants in Vietnam don't make enough to survive--even the prime minister's base salary is only $96 a month. That forces some government workers to seek secondary sources of income, chief of which can be the "toll at the bottleneck," as one investor euphemistically called the bribes he pays to move applications along.
Investors also are stymied by Vietnam's policy of decision by consensus, which negates individual accountability. There is no reward for taking risks, no incentive for challenging, no bonus for a Vietnamese CEO who makes a profit. By the time dozens, maybe hundreds, of major and minor officials have hashed over even the smallest matter, no one is responsible.
The nightmarish bureaucracy makes Vietnam the most stressful country in Asia for foreigners to work in, according to a survey released this month in Hong Kong by Political and Economic Risk Consultancy.
Even Singapore's founding father, Lee Kuan Yew, is advising Vietnam to move decisively to improve the business climate and stem the departure of U.S. executives.
"You're treating the Americans like you did in the war," he recently told senior Vietnamese officials. "You invite them in and then you ambush them."
Consultant and investor James Rockwell was one of the first U.S. businesspeople to settle in Vietnam, in 1992. Many of Vietnam's top officials turned up at the reception for the opening of his office, where, for the first time in postwar Hanoi, U.S. and Vietnamese flags flew side by side. One of his first customers was Chrysler Corp.
Last year, Chrysler pulled out, along with its intended $189-million investment. One reason: Hanoi had promised it would license no more than three car manufacturers; at last count, there were 14. This year, Rockwell and his family went home too, back to Grangeville, Idaho.
Rockwell left because he had met the personal goals he had set, he said, and "because the fire was gone. Investors, once enthusiastic, were pulling out. The Vietnamese, once seemingly appreciative and respectful of foreign investors, had come to view them as teat to milk. Being able to get a 'fair' return on your investment in Vietnam is a decade away and will begin to happen only when the lifeblood of Vietnamese progress--investment--is squeezed to a trickle. That's now in the works."
Flashback to 1994. Fireworks in Ho Chi Minh City greet word that the United States has lifted its trade embargo. A Pepsi representative rushes out to Hanoi's Noi Bai International Airport and hands out free soft drinks. Foreign investors pour into Vietnam--the world's 14th-most populous country--convinced that the bright, industrious nature of the people and the government's stated commitment to a free market will turn Vietnam into another Taiwan or South Korea.
Vietnam had tapped into a cash cow. It set up a dual-pricing structure (which remains in effect), charging foreigners three times what a Vietnamese pays for rail and air tickets. Long-distance telephone charges became (and remain) among the world's highest. Rents shot up to Hong Kong levels. Before long, Hanoi had become one of the world's 10 most expensive cities for expatriates to live in.
"There was electricity in the air," said Jay Ellis, an American whose R&R Tavern became a popular expatriate watering hole. "People--Vietnamese and foreigners--were excited. You had the feeling things were really happening."
But "expats" no longer stand three deep at Ellis' bar--"It was a long, slow summer," he says. Landlords no longer get what they did when there was an undersupply of good housing--up to $7,000 a month for a two-bedroom apartment, two years' rent in advance. The construction of 15 luxury apartment buildings in Hanoi is on hold for want of likely tenants.
Although many younger government officials want to push through reforms advocated by the World Bank and foreign investors--more openness, less red tape, a new legal system, an overhaul of the banking sector, a faster pace for privatization--their influence is overshadowed by older party members who value control and secrecy and do not release, even to members of the National Assembly, a breakdown of budget spending.
Undue Pessimism Is Seen by Some
Most observers agree that expectations for Vietnam were unrealistically high in the euphoria of the mid-'90s--and are probably unreasonably pessimistic in the downturn of 1998. In the current mood of investor frustration, they say, it is easy to forget that Vietnam has made remarkable progress in a decade and that the nation and its 75 million people still have promising long-range potential.
But for now, economists are focused on the 46% drop, to $1.65 billion, in direct foreign investment in the first nine months of 1998, compared with the same period in 1997.
The fact that the Asian crisis, now well into its second year, has narrowed the gap between rich and poor nations has given Hanoi some comfort. But its main response has been increased caution. Many worry that Vietnam could be left further behind when its more advanced neighbors, such as Thailand, build on lessons learned and on restructured economies to regain accelerated growth.
Vietnam's challenge, economists say, is to decide whether it wants to cling to heavy state supervision--which places a premium on the control of information, of fiscal policy and of political growth--or speak the same economic and intellectual language as the rest of Southeast Asia.
"We're not trying to force anything Western on Vietnam," U.S. Ambassador Douglas "Pete" Peterson said. "But the Vietnamese can't create an economy that's not compatible with international markets or one that doesn't embrace international standards. If they do, no one will understand them."