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  • Discussion Brief for the Export Strategy-Maker

    Vietnam country paper

    The trade promotion network in Vietnam –is it working?

    I. An Overview of the Export Situation of Vietnam 

    In line with the country’s renovation policy (popularly known as Doi Moi) initiated in 1986, under which the development and expansion of economic and trade relations with all countries in the world have been one of the major priorities, the government of Vietnam has been adopting various policies and measures to gradually liberalize trade and encourage export. Vietnam has been moving from trade restrictions towards free trade. The country is now a member of ASEAN Free Trade Area (AFTA) and Asia Pacific Economic Co-operation Forum (APEC) and is negotiating for accession into WTO. 

    Trade Liberalization 

    Both tariff and non-tariff barriers to trade have been substantially reduced and/or gradually eliminated. For example, the highest import tax rate (applicable to very few items such as cars) has been reduced from 200% to 60%. The average tariff in 1997 was only around 14%. Concerning export, there remain only 12 export products (consisting mainly of natural resources) that are subject to an export tax ranging from 0% to 5%. 

    The number of products subject to export or import prohibition or restriction has been minimized so that most commodities and goods are now freely imported into and exported from Vietnam. The previous requirement of government approval of export and import contracts and prices as well as licences for shipments has been abolished. 

    Under the previous regime of a centrally planned economy, only a small number of state-owned foreign trade companies had the right to handle export and import business. Since August 2000, the right to trade has been extended to all businesses of all economic sectors including private firms. Foreign trading companies may establish branches in Vietnam to do certain export and import business. They may also set up representative offices and/or appoint agents in the country to promote trade. As a result, the number of firms directly engaged in export business has increased from only about 50 in 1986 to more than 12,000 at present. 

    Export Encouragement 

    Apart from the liberalization of trade mentioned above, the government has also introduced various policies and measures to encourage export-oriented investment and export business. These policies and measures include tax incentives, easier access to credit, foreign exchange and land-use rights, easier and quicker business registration and licensing, export awards, support in trade promotion etc. For example, Vietnamese-owned exporting companies may benefit from a corporate income tax rate of 25% (as compared with the standard rate of 32%). Exporting enterprises (including foreign-owned companies) may defer the payment of value-added tax on materials and supplies imported for the production of export goods within a certain time limit. They may also find it easier to access land-use rights and enjoy preferential land rent rates. Vietnamese-owned exporting enterprises may be given a 50-70% reduction of land rent or enjoy the exemption of land rent for 3 to 6 years. Raw materials, spare parts, accessories and materials imported for the production of export goods will also be exempt from import tax. 

    The Government of Vietnam encourages foreign investment in export production by putting into place financial special incentives and preferential treatment to bring foreign direct investment into this sector. Under the foreign investment law, foreign-invested companies producing for export may enjoy preferential corporate income tax rates of 10% for the whole life of their investment plus tax holidays of up to 4 years and a 50% reduction for another 4 years or even 8 years in special cases. Export-oriented foreign investment may be licensed within only 15 days through procedures simplified to the maximum. To facilitate the importation of materials for export production, foreign-invested enterprises that export 50% or more of their production are allowed to establish bonded warehouses. 

    The Government has recently established the Export Support and Award Funds to provide financial support and rewards to exporters, especially to those who succeed in exporting new products and/or to new markets and/or in large volume. It has also been stepping up its efforts to create a favourable international environment for enhancing trade between Vietnam and the outside world. The recent status upgrading of the Vietnam Trade Promotion Commission to a more powerful TPO – the Vietnam Trade Promotion Agency (VIETRADE) – is one of many measures of the Government to further promote trade with the rest of the world. 

    Export Performance 

    The above-mentioned policies and measures to liberalize and support trade have produced remarkably good results. Despite the adverse effects of the regional economic and financial crisis during 1997-1998, Vietnamese exports grew an average of nearly 20% annually from 1990 to 2000, about 2.6 times higher than the GDP growth rate. In 2000, export earnings were more than seven times higher than in 1990. Trade deficits dropped from around US$4 billion in 1996 to less than US$ 1.2 billion in 2000. The private sector, including foreign-invested companies, is playing an increasingly important role in export development, especially in new and non-traditional exports such as electronics and processed foodstuff. Foreign and Vietnamese private enterprises contributed about 40% of the country’s total export value (excluding crude oil export). Foreign firms pre-dominate in the export of electronics. Vietnam has gone a long way from a food importer to a world leading exporter of rice, coffee, cashew nuts, pepper and seafood within a short period of time. 

    However, Vietnam’s export revenue is still relatively small. The export structure has not changed much. The export revenue per capita is currently less than US$ 200. The majority of exports still consists of low value products: unprocessed or semi-processed agricultural commodities (nearly 25%), crude oil and minerals (about 25%), labor-intensive industrial products and handicrafts (more than 30%). The prices paid for Vietnamese products (such as rice and coffee) have often been lower than world market prices. The country’s export markets are concentrated mainly in Asia and are unstable. More importantly, the competitiveness of Vietnamese exports is still low. 

    Export Objectives for the Period 2001-2010 

    The Government of Vietnam has adopted an export and import strategy for the 2001-2010 period under which the highest priority is given to export development. The strategy forecasts an average export increase of around 15% per year during the next 10 years and focuses on the development of products of high quality, high added-value and high competitiveness through the application of new technologies and using high quality materials and inputs and/or seeds and breeds. The generation of employment through exports and increase of foreign exchange reserves are also important goals of the Government, especially in the short term. 

    To this end, the strategy calls for a rapid change of the export structure: a higher share should be contributed by processed and manufactured products, especially by high-tech and high value-added products. Another priority set out in the strategy is the development of quality export products using mainly domestic-supplied materials and inputs and intensive labor. The industrial products which are considered of high export potential include: textiles and garments, footwear, handicrafts, processed foodstuffs, wood products, consumer chemicals, electrical and mechanical products, plastics, construction materials, electronics. The strategy forecasts the share of these products to reach about 40% of the total export by 2010 while the share of unprocessed or semi-processed agricultural, forestry and seafood products will drop to 22% by 2005 and 17.2% by 2010. Crude oil and mineral exports are estimated to account for only less than 3.5% of the country’s total export revenue by 2010. 

    Apart from merchandise exports, the Government also calls for the development of export-related services such as tourism, labor, telecommunication, financing, banking, insurance and transportation. Tourism and labor exports are expected to play the most important role in terms of foreign exchange earnings. It is estimated that Vietnam’s exports of services will reach around US$ 4.5 billion by 2005 and around US$ 10 billion by 2010. 

    The strategy also calls for improvement of export management by enterprises and trade support institutions (TSIs) to save cost, thus enhancing competitiveness, the gradual development of Vietnamese export brands and an increase of direct exports to leading markets such as the US and the EU. 

    To serve export development as mentioned above and help narrow the trade deficit, the strategy gives high priority to the importation of materials, modern equipment and high technologies to meet the needs of processing agricultural, forestry, seafood and light industrial products. At the same time, it calls for reducing the importation of products that are already produced locally with good quality, especially consumer goods. The strategy also recommends importing directly from original sources of technology supply such as the EU, the US and Japan. 

    II. The Current Trade Promotion Network 

    Over the past ten years, Vietnam’s trade promotion network has been gradually expanding and developing. More trade support institutions (including government, non-government and private organizations) have been established. The range of trade support services has been broadened and the quality of services has been considerably improved. Trade promotion efforts have partially contributed to the country’s recent fast and steady export increases. 

    Trade promotion in Vietnam is basically the promotion of export sales for existing products; the concept of trade development including not only sales promotion but also product development and enhancement of competitiveness is still not there. Trade promotion and export marketing strategies, skills and know-how are lacking at all levels: government, trade support institution and exporting enterprise. The quality of trade support services needs much improvement. 

    Business and Product Associations 

    There are currently dozens of non-governmental business and product associations in the country as compared with only a few in the late 80s. These organizations have made important contributions to the country’s export development. They co-ordinate and help their members to participate in specialized trade fairs at home and abroad. Onshore, they work with the government to discuss common problems of the industry and propose policies and solutions for export development in their respective industries. 

    However, most of these business and product associations were set up recently and are lacking both trade promotion skills and financial resources; they appear to be working mainly for their own survival. The services they can provide to their members in trade promotion are still limited to the provision of general trade and technological information, awareness-raising seminars, specialized training events, organization of trade fairs etc. 

    Specialized Trade Support Institutions 

    There are few specialized trade support institutions delivering quality services in either the public or private sectors. Until recently, only a small number of public institutions were mandated to deliver trade support services; for example, until two or three years ago, throughout the country, there were only four or five institutions licensed to organize trade fairs. Nowadays, the private sector is also allowed to participate. As a result, most specialized trade support institutions, today, are still very young and inexperienced. 

    The lack of competition and the fact that many Vietnamese exporting enterprises cannot afford to pay or are not used to paying fee for services are important reasons explaining the underdevelopment of specialized trade support institutions. As a legacy of a centrally-run economy, many exporters still think that trade promotion is the job of the government or should be heavily subsidized by the government. 

    Vietnamese Commercial Sections Abroad 

    Vietnam has a long-established network of commercial sections attached to the Embassies abroad (currently 40 sections). They operate under the direction of the Ministry of Trade. They provide mainly general economic and trade information on Vietnam and the countries where they are located and also business contacts. However, this network is not effective enough, largely due to three main reasons: (1) unclear operating guidelines, (2) lack of human resources and (3) financial constraints. In many cases, Vietnamese overseas trade officers lack both skills and money to collect trade intelligence or to undertake targeted market research that is critical for the formulation of enterprise-specific marketing plans. 

    Current Networking 

    The number of players in the trade promotion field in Vietnam has been growing. They co-operate sometimes and in certain events. But generally speaking, they have not yet been playing as a team in which different players should undertake different roles to provide a broad range of quality services to exporting enterprises. The trade development effort in Vietnam still consists of ad-hoc interventions by trade support institutions in a limited number of areas, mostly overseas sales support services such as trade fairs, trade missions and the provision of business contacts. 

    Many trade support institutions in Vietnam including governmental, non-governmental and private organizations are providing the same services (sometimes redundant) while, as noted above, many important services are missing or under-supplied. The reasons might be a lack of awareness as well as of human and financial resources to provide knowledge-based services. As a result, many Vietnamese TSIs enter into the same simple services that are currently over-supplied. For example, to date, trade fair companies are proposing the organization of, and participation in, nearly 200 trade fairs in Vietnam and overseas for the year 2001 alone. A frequent comment is that trade fairs in Vietnam have actually become "temporary department stores or free markets" for participants to sell their products to visitors. 

    Quality of services 

    The quality of trade support services provided by individual TSIs as well as by the whole trade promotion network in Vietnam has been improving year by year. These improvements are the result of experience accumulated by TSIs, stronger competition between them and more support from the government. 

    However, trade support service in the country is still poor both in terms of availability and quality. Many services critical to export development such as market research, trade intelligence, product design, quality management, trade financing etc. are still missing or under-supplied. Services being currently provided by trade support institutions are the provision of trade and legal information, organizations of awareness-raising seminars, specialized training events, participation in trade fairs and business missions, etc. In many cases, training courses are supply-driven and too academic due to a lack of trainers with practical experience. Participation in trade fairs is not well prepared by either Vietnamese organizers or participants. Organizers provide logistical and travel arrangements but no market information and business contacts while participants do little prior market research and little follow-up work. As a result of the above-mentioned weaknesses, most exporters rely on foreign buyers for product development and adaptation, quality management, distribution etc. and thus do not control their marketing operation. 

    The Setting up of VIETRADE 

    The Vietnam Trade Promotion Agency (VIETRADE) was set up in July 2000 by up-grading the previous Vietnam Trade Promotion Commission; it is still at the stage of capacity building. VIETRADE is a governmental organization under the jurisdiction of the Ministry of Trade. It has the mandate of being a focal point to coordinate and develop the country’s capacities and efforts in trade promotion. 

    The Experience of Cashew Nut Export Development in Vietnam 

    Vietnam started to develop cashew nut for export in the late 80s and early 90s. The value of cashew nut exports increased from US$ 26 million in 1991 to US$ 100 million in 1996 and US$ 167 million in 2000. Before 1992, all cashews were exported in the form of raw material to India. Since 1995, the main markets for Vietnamese cashew nut export are the USA, Australia and Canada. Cashew nuts from Vietnam currently account for 80% of the Australian market. Vietnamese cashew nut exporters enjoyed good profits until 1999. 

    The rapid growth of cashew nut exports from Vietnam was in response to the growth of world demand and Government export incentives. For example, the Ministry of Agriculture provided financial support to research institutes which developed and introduced new high-yield cashew seeds and proper farming techniques. Local governments encouraged the cultivation of cashews by zoning suitable land and helping farmers to apply new farming techniques. State-owned investment funds and banks supported investment in cashew nut processing etc. 

    However, processing capacity developed much faster than raw material supply. In 1992, Vietnam was able to produce 40,000 tonnes of cashews and had a processing capacity of 15,000 tonnes of materials. Currently, the processing capacity of the whole industry in Vietnam is around 200,000 tonnes of materials while the country can produce only around 150,000 tonnes. To fill the gap, many Vietnamese exporters have to import raw cashew from and through their main export competitors and end up being subject to great disadvantages such as high prices and unstable quality, etc. 

    The excess of processing capacity over domestic raw material supply and difficulties in the importation of raw materials, combined with the drop of world export prices (from around US$ 6,000 in 1999 to about US$ 5,000 last year and around US$ 3,500 this year) have caused enormous problems and even losses to Vietnamese cashew nut exporters. It was estimated that they may have suffered a loss of about US$ 15 million in 1999. 

    Lessons learnt: 

    • Need for joint planning and monitoring efforts among producers, exporters, central and local government agencies and trade support institutions in trade development; 
    • Need for strategic planning of raw material supply and linkage with processing capacities; 
    • Missing capability to forecast long term world demand; 
    • Lack of knowledge, skills and business contacts to import efficiently; 
    • Need to redefine the roles of Government and concerned product associations in sectoral development for investment, production and export; 
    • Look at the possibility of some coordination among Vietnamese export enterprises. 

    III. Priority Needs of the Business Community for Trade Support Services 

    Previously, under the country’s centrally planned economy, trade was separated from production. Production enterprises delivered their products to state-owned enterprises and co-operatives for distribution and retailing. Foreign trade was done mostly with socialist countries (former Soviet Union, Eastern Europe and Cuba) through government-to-government trade agreements and barter trade protocols. The scarcity of goods produced, central planning of production and trade and government subsidies made it unnecessary for enterprises to develop new products or improve competitiveness. As a result, there was little need for trade development. 

    Vietnam is shifting towards a market economy and integrating itself into the regional and global economies. These changes have exposed Vietnamese businesses, especially exporting enterprises, to great challenges. Trade development and export marketing knowledge and skills of a market economy are missing in most exporting enterprises, especially in small and medium-sized ones and in those new to the export field. Even large state-owned enterprises, which have longer experience in exports, are not much better off as they used to operate in a different trading environment. Thanks to the country’s trade liberalization policy, the number of enterprises engaged in export production and export business has increased dramatically over the past decade and will continue to rise in the future. As a result, the need for trade support services to Vietnamese exporting enterprises is enormous. 

    Export Marketing 

    Proper understanding of international marketing techniques is still lacking in most Vietnamese exporting enterprises: quantitative and qualitative assessment of demand, market access conditions, product design and adaptation, packaging, distribution channels, role of agents and intermediaries, advertising and promotional methods and tools such as catalogues and proper use of trade fairs in an export marketing strategy. In sum, most Vietnamese exporting companies lack human and financial capacities to formulate viable international marketing plans. 

    As a result of their own weaknesses and the ineffectiveness of the country’s trade development network, most Vietnamese enterprises tend to produce traditional products and then try to push sales onto the world market through trade fairs, trade missions and personal contacts with little profit margins, or rely heavily on foreign buyers for export development. Those buyers dictate product development, product adaptation, quality management, marketing and distribution methods, etc., and thus effectively control Vietnamese exporters. In many cases, producers rely totally on one or very few foreign customers as their window to the outside world. 

    Trade Development 

    To gradually change the present export structure towards a larger share of industrial products, move up the value chain, improve export competitiveness and expand international market coverage, Vietnamese exporting enterprises need support services to think more of trade development than of trade promotion. An international consultant currently assisting Vietnam to draw up a blueprint for an effective trade development network identified the following needs for support services: 

      1. trade information, business intelligence, market research; to support the preparation of enterprise-specific export marketing plans; 
      2. product development support services ranging from product design and/or adaptation, quality management and productivity enhancement, to packaging; 
      3. export financing (short and long term); 
      4. export sales promotion services such as trade fairs, trade missions, business match-making etc.; and 
      5. export training throughout enterprises and the trade development network itself in almost all the above areas. 

    IV. Proposed Approach to Serving Needs 

    The Need for an Effective Trade Promotion Network 

    The enormous needs for trade support servicing cannot be met by a single organization such as the recently created VIETRADE. A network including government, non-government and private trade support institutions is required in which different organizations should play different roles based on their comparative advantages; VIETRADE is expected to play a leading and coordinating role in this network. 

    VIETRADE and other stakeholders in the network are currently working together with international consultants under Project VIE/98/021 (funded by the Swiss Government and UNDP and executed by ITC) to design a blueprint for an effective trade development network in Vietnam. The network is planned to be open, voluntary and evolving, instead of being a rigid structure enforced by law or through a government decision. There will be two types of players in the network: core TSIs and relay TSIs. Core TSIs will focus more on formulation/development/planning and control functions while relay TSIs will focus more on execution/dissemination functions. 

    Core TSIs may include organizations such as the Ministry of Trade, VIETRADE, trade-related line Ministries, central product and business associations, provincial trade departments, the national chamber of commerce and industry, etc. Relay TSIs may include local TPOs (VIETRADE is a central TPO), local branches of the chamber of commerce and industry, local business associations, local branches of product associations, specialized TSIs, etc. This proposed division of responsibilities is indicative and will eventually be based on the comparative advantages of TSIs (including their human and financial resources, experience, mandate, network relations, etc.). 

    Co-operation and competition will be the main driving-force to move the network forward. Co-operation will help provide broader services to exporters and avoid unnecessary and resource-wasteful overlaps; competition will force TSIs to improve the quality of their services. Private sector trade support services will be encouraged and level-playing field competition will be nurtured. Exporters will be introduced to the fee-for-service concept while certain government financial support to trade promotion will be maintained, at least in the short term. 

    Possible Roles of VIETRADE 

    Trade is basically the work of exporting enterprises themselves. The government or TSIs cannot replace but only support exporting enterprises in trade promotion/marketing activities. As a central government TPO, VIETRADE’s main missions should be: 

      1. a focal point to develop, implement and keep watch of the national export promotion strategy; 
      2. helping product associations to develop, execute and control their respective sectoral export development plans; 
      3. mobilizing internal and external human and financial resources to help building up trade promotion capacities at all levels: government, TSI and enterprise; 
      4. fostering and coordinating co-operation among all stakeholders in an effective trade promotion network; 
      5. providing certain trade support services directly in the areas where it has unique comparative advantages, such as: 
      • trade and investment-related national image-building, 
      • using the country’s network of overseas trade offices to provide trade information and intelligence to enterprises, 
      • helping foreign business persons to contact potential Vietnamese exporters from overseas or vice versa, etc. 

    Strategy to Strengthen the Network 

    As analyzed above, the root of the weaknesses of the trade promotion network in Vietnam is the lack of human and financial resources at all levels: Government, trade support institutions and exporting enterprises. This is a major handicap for organizations to access the required information, develop, execute and monitor their work plans and also build up relations within the network to support those plans. In the case of Vietnam, we can say that the lack of human and financial resources is the main reason for non-existent or inefficient trade strategies at both the national and sectoral levels and deficient export market plans at the enterprise level. As already mentioned, being short of qualified staff and money, most TSIs are providing the same simple and poor quality services while other critical needs of exporting enterprises, especially knowledge-based are not being met. 

    To strengthen Vietnam’s trade promotion network will now require the following steps: 

        1. to promote the concept of a network and the proposed blueprint among all parties concerned, by demonstrating the overall benefits and stressing that no one should be harmed in the new framework; 
        2. to constitute some working groups among potential stakeholders and ask them to think further about certain operational elements of the blueprint or research certain trade support areas which are not sufficiently covered in the first draft; 
        3. to reassess trade support needs of the exporting business community and identify capacity gap in the network at large; 
        4. to formulate a plan to develop/strengthen capacities in the network to respond to needs and fill the existing servicing gaps; 
        5. to bring together all parties concerned with the launching and operation of the network (at Government and business levels) and try to assign some initial responsibilities so that pilot activities could be carried out; 
        6. on the basis of the results of those pilot activities, try to constitute the first group of core TSIs and relay TSIs, ensuring that their terms of reference are clearly understood and they will take ownership of the network. 

    The above steps will be carried out with the constant technical support of Project VIE/98/021. 

    Capacity-building of TSIs in the network should be based on needs (present capacity in relation to future functions) and priorities. For example, it will be more cost-effective to build up the capacities of existing trade fair companies with prior experience in this field than to train new entrants. Likewise, priority should be given to training overseas trade representatives in trade intelligence and market research because the need is urgent and the effect of their training will be more immediate on Vietnamese exports to their country of posting than training only local TPO or TSI staff in Vietnam. Based on their true comparative advantages TSIs will specialize their services and maintain synergy with other members of the network, for the ultimate benefit of exporters. 

    As mentioned earlier, the training needs of exporting enterprises are enormous. These needs are currently not being met because of a lack of competent trainers with good theoretical knowledge, good training skills and practical work experience. At present, the majority of Vietnamese trainers are lacking effective training skills and practical job experience. Under project VIE/98/021, a strategy is being developed to build up capacities at both TSI and enterprise levels in the medium term. Vietnamese trainers from training institutions and selected other TSIs will be trained to train staff from exporting enterprises and TSIs, using especially adapted international training materials. It may also prove more cost-effective to train export practitioners to become part-time trainers than to send professors to enterprises to acquire practical job experience. 

    One more element to develop and strengthen the network will be to encourage the development of TSIs on a level playing-field. The experience of other successful developing countries has been that quality in trade support services is better developed by providing trade promotion financial assistance directly to exporting enterprises rather than subsidizing TSIs. In this way, enterprises are free to buy services from either public or private sector TSIs, whichever provides the best services. This approach enhances healthy competition among TSIs, and, in turn helps develop the whole trade promotion network more efficiently. Vietnam is considering this approach. 

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    Posted 18 August 2010 
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