Wednesday, March 09, 2005

Day 3 in Saigon

Tuesday was a remarkable day that really underscored the country’s willingness to do business with Americans. Absent any qualifications, including even business cards, my associates and I were able to arrange meetings with an array of bankers, government economic development officials, lawyers and private equity partners in an effort to gather preliminary data for a comparatively small textile producer that’s considering moving some of its manufacturing operations from India to Southeast Asia. At each meeting, we expressed profound embarrassment at our lack of credentials, but our apologies were politely accepted and quickly bypassed. That we were able to arrange meetings with these people on the fly attests to this country’s thirst to do business with the west, its anxiousness to join the World Trade Organization and its general amenability to entrepreneurship and economic development – to say nothing of our own prodigious ability to bluff our way through almost anything.

Our day began just after breakfast, when Charlie and I traveled to the Sheraton to book a driver and interpreter, “Henry,” the combined services of which cost $90 for four hours. We picked up Brian and Rand back at the Sofitel and proceeded to the Department of Planning and Investment. Vietnam observes lunch in much the same way that the ritual is observed in Spain and Italy. Workers are known to take long lunches and equally long naps – often stretched out atop their desks. To pass the time, we went to a book store to purchase rather hefty volumes on Vietnamese tax codes and business law. After lunch, we returned to the DPI to meet with a bureaucrat in charge of meeting with prospective foreign direct investors.

We were extremely reluctant to present ourselves as students, as we believed meetings with higher-ups in both the public and private sectors would be much easier to achieve if we presented ourselves as employees of our client, Andrews Sport. But the inherent complication in our chosen position was our lack of any qualifying documentation, including business cards. So, for the rest of the trip we repeatedly flogged the hackneyed excuse that the airline had lost our luggage and professed extreme embarassment at our lack of business cards, which, per Asian business etiquette are exchanged and received with the kind of care afforded the transfer of Faberge eggs: recipients accept cards with both hands and study the information intensely before commencing talks. Perhaps one of the more terrifying moments on this trip was sitting before a communist party official without such qualification and proceeding with a detailed line of inquiry about the country's business regulatory environment.

Given Vietnam's notoriety for poor quality and missed shipping dates, a primary interest of ours was in the robustness of the Vietnamese legal system and the degree to which contracts were upheld and penalty clauses were enforced in Vietnamese courts. Reading between the lines, we became convinced that local courts represented something of a home field advantage for prospective local business partners. International arbitration bodies represented a more viable alternative, as their rulings would be upheld in local courts, but actually getting money from partners in the event of a missed deadline still seemed to be a dubious prospect, the futility of which is akin to suing a bankrupt entity in the US. Henry, who had lived in Australia for 15 years and had been a cotton trader in Dallas for several years as well, advised us that the best strategy was to bake some delays into our production schedule and to nurture soft relationships with business partners through tennis, meals and even less savory pastimes, depending on what can be gleaned about the partners’ tastes.

Far more encouraging are the tax incentives afforded to foreign companies operating in Vietnam. The corporate tax rate in Vietnam is 28%, but companies pay no taxes for the first two years, receive a 50% discount the following two years and pay a flat rate of 20% for the next 10 years.

Notwithstanding our concerns about quality (and, in fairness, I think these mostly centered around the quality of the raw materials themselves, rather than around the workmanship), we were told repeatedly of the quality workmanship provided by Vietnamese textile workers and, specifically, the strict attention to detail that is the mark of female workers, who, as a result of government efforts to move them from farms to factories, account for as much as 85% of the factory labor force. While agriculture accounts for 65% of the country’s labor force, it accounts for roughly a third of the country’s Gross Domestic Product. DPI officials made no secret of the country’s fierce efforts to compete with China’s prodigious manufacturing capacities and its intention to do so on the basis of quality rather than on quantity.

Of course many pitfalls lie ahead, primarily corruption in the public sector. While Vietnam operates in a very centralized, federalist system, with little variance in local laws, a much greater variance exists in the application and enforcement of national laws. “Tea money,” common parlance for bribes, is a regular cost of doing business and manifests itself in every facet of life, from dealing with traffic cops to dealing with higher-ranking government officials. Our first encounter occurred as our driver transported us from the Department of Planning and Investment to HSBC Bank, whereupon a local bicycle cop extracted the equivalent 126,400 Dồng, roughly the equivalent of $8, from our driver under the guise of what Henry smirkingly explained was “improper driving.” Given that Saigon traffic resembles what follows when a Roman candle is fired into a hornets’ nest, it is quite beyond my imagination what sort of driving could possibly be deemed improper. Indeed, traffic officers must pay to have their jobs, because of the potential to earn as much as $300 a day in tea money. Interestingly, Henry explained that foreigners rarely, if ever, get shaken down for tea money, because language barriers prevent cops from explaining the situation effectively.

Perhaps taking its cue from Singapore, Vietnam has begun aggressively prosecuting corrupt officials. As mentioned previously, death by firing squad awaits those found guilty of corruption at a cost greater than $100,000. Unlike the US, Vietnamese judges do not decide innocence or guilt, but, rather, punishment.

At HSBC, Charlie and I met with a manager in charge of business development and a lending officer who specialized in the textile manufacturing industry. After exchanging pleasantries and the usual round of profuse apologies for our lack of qualifying documents, we were served espressos and treated to a fairly wide-ranging discussion of the Vietnamese business lending environment.

Our intent was gain an understanding of collateral policies and rate and term structures. The Vietnamese equivalent of the prime rate is known as the “Cost of Funds,” and textile manufacturers can generally expect to pay between 1% and 4% over the COF. The longest term loan available is seven years and working capital loans can come in under a year. One of the last vestiges of communist economic policies in Vietnam is the inability to own land (although, like quotas, this encumbrance can be expected to fade with Vietnam’s entry into the WTO), which adds to the risk borne the country’s lenders. “Rights of use” documents associated with the land act as collateral, along with more conventional assets such as plant and equipment. In spite of the deliberate vagueness of our description of the business, the HSBC officers wasted little time enquiring about our specific lending needs. We dodged this question by explaining that our mission was largely one of gathering facts that we hoped would inform a decision on whether to build a factory or to lease excess capacity from existing factories. HSBC representatives helpfully explained that capacity lessees do have input on the types of raw materials purchased by major factories. This was a critical, given both the tax incentives afforded by US customs officials for imports made primarily from US-grown commodities such as cotton and the preponderance of cotton in Southeast Asia imported from China and India.

State-owned factories are considered a much riskier venture in the eyes of the bankers, presumably because the institutionalized inefficiencies of a communist enterprise raise fundamental doubts about the entities’ abilities to generate sufficient cash flows and in their attention to debt coverage ratios. Spurred by global capitalist motivation, private factories, by contrast, could be expected to pay greater attention to efficiencies, steady cash flow and international accounting standards – all attributes that made them vastly more appealing to both debt and equity financiers.

Meanwhile, Rand had managed to arrange a meeting with a managing partner with Baker McKenzie, one of the most prominent business law firms in Saigon.

And now, on to Kuala Lampur, Malaysia

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