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7. PHARMACEUTICALS

1. Current status

Market
With about 80 million inhabitants, the market for pharmaceuticals is an important one. In 2001 it represents roughly USD 600 million (547 in 2000, +10%)

We can propose the following segmentation of those USD 600 million:

- USD 177 million were produced locally in 2001 (USD 174 million in 1999)
- USD 418 million (USD 398 million in 2000, USD 361 million in 1999) were imported.

The Pharmaceuticals Industry Association of Vietnam considers that 10,000 different drugs are registered in this country, of which 4,500 are generics, 1,500 traditional Asian medicine, and 3,900 foreign.
The national spending on pharmaceuticals was USD 6.2 per capita in 2002, compared to a mere USD 0.34 in 1990.

Distribution
700 companies are responsible for the wholesale of 80% of drugs in Vietnam, whereas the number of pharmacies (private and public) now amounts to 30,000 (one pharmacy retail point every 2,600 residents). By law, wholesalers have to be Vietnamese, which means that foreign pharmaceutical companies’ activities are limited to promoting their products to doctors and hospitals.

Production and Trade
The local production of pharmaceuticals is increasing rapidly. From 1995 to 2001, its value has tripled from USD 45 million to USD 177 million. It represents more than one fourth of the national consumption, and 150 companies, local, joint venture or fully foreign owned are producing 4,500 different authorized products. At the moment more than 200 foreign medical supply companies have representative offices in Vietnam.

The imported products amount to USD 418 million, which originate from France (12%), Singapore (10%), South Korea (8.1%), India (7.3%), Thailand (5.5%) and Switzerland (5.5%). Imports of raw materials are increasing at a higher speed than finished drugs and specialties.

The Vietnamese exports, on the other hand, are negligible: USD 14.5 million in 2002, against USD 12.7 million in 2000.

2. Trends and potential

On the production side, the local manufacturing has more or less leveled off. One can expect, however, the production to increase for the years to come at a much-higher rate, of 5 to 10% per year. The locally manufactured drugs are strongly encouraged by the central government and are sold at really low competitive prices (in comparison with imported ones).
On the import side, the trend is difficult to evaluate. What has changed significantly, is the shift from finished goods to raw materials, for which the demand is growing rapidly.

On the whole, the use of medicines is still at a low level in Vietnam, and should increase on par with the living standard. More investments, mostly from domestic manufacturers, are likely in this area in the medium term, with the imported goods facing a tougher challenge.

It is clear that the total consumption of drugs is increasing in Vietnam. The official statistics - general figure (USD 600 million) proposed in this report – does not seem to contemplate the real importance of this trend. It only confirms, on the one hand, that illegally imported or produced drugs are not taken into account in the official statistics and, on the other hand, that local statistics are not to be totally trusted.

On a general point view, the increase in consumption is far higher in rural areas than in cities. Distribution networks have considerably improved and the pharmaceutical companies are now expecting, at the same time, a full coverage of the country and higher revenues from sales to the middle class segment of population.

3. Problems and recommendations

Three major problems still plague the pharmaceuticals market in Vietnam:

- Illegal imports
- counterfeit products
- Import restrictions related to the protection of local production
- labeling law.

Parallel import channels have been a problem for a long time. They were fed mostly by Vietnamese abroad, sending «parcels» to their families in Vietnam. It is estimated that these imports represented between 10 to 20% of the total national consumption of medicines. This type of trafficking has subsided though, but illegal imports from Cambodia, Thailand and China are still thriving.

Many products are counterfeits (products as well as packaging), and a good part of those are manufactured by the state pharmaceutical companies themselves. One of the main problems some of these counterfeit products create, however, is their lower effectiveness in fighting illnesses, since there is no control on the level and quality of their components. Lately, some random tests have shown that the contents of some medicines were different from the formula on the label (generally, the active ingredients were at a much lower percentage than required).

Protectionism measures are taken in order to shield local production: as an example, some twentythree pharmaceutical molecules are still not accepted since the time of their license renewal two years ago. Moreover, the state enterprises have a de facto monopoly for the supply to hospitals.

Other restrictions apply to the minimum capital needed for a foreign pharmaceutical company to register in Vietnam (USD 2.79 million). Besides, drug toll-manufacturing is still forbidden in this country, even if some arrangements are possible through licensing.

In principle, the law protecting intellectual property against counterfeits exists in the health sector, but its implementation in the country depends on the good will of the Economic Department of the Vietnamese Police. This department is still understaffed and under equipped, its knowledge of economic crime is still low. A real good cooperation in the field of control and protection of foreign trade marks and original products is under way with the Ministry of Commerce (Gestion du marché), in Hanoi as well as in the different Vietnamese Provinces, especially Ho Chi Minh City.

The Health Law brings a harmonization of technical and legal rules to the pharmaceutical market, and defines precisely the pending questions on the quality of basic formulas, stability of each component for complex drugs, conditioning, and registration procedures of drugs in the country.

The law on Labeling published in 2000 was smoothed a few weeks later after the different players in the pharmaceutical and cosmetics sector made clear that the new dispositions were out of reach for the profession. Today, it is considered by the foreign drug manufacturers as being enforced in a flexible way, which means that no major problem is foreseen in the future. The compulsory labeling, even of the “smallest packaging” (i.e. pills, capsules, etc.) however, is considered complicated and useless, since it is difficult to realize technically and unreadable anyway by the patient.

8. ALCOHOLIC BEVERAGES

1. Current status

The alcoholic beverages market in Vietnam is still a traditional one, but changes appear quickly. However, most of the population is still fond of its local products, which are mainly rice alcohol and beer. It is estimated that the country produced, in 2002, around 900 million litres of beer (11 litres per person) and 260 million litres of other alcoholic beverages, of which 240 million litres is rice alcohol. Before further examining this market, some facts have to be underlined first:

Vietnam’s living standard is still low. There are two markets for alcoholic beverages: the one represented by foreigners, hotels, restaurants (and a few wealthy locals), and the other, which comprises the majority of the population.
There are three major obstacles to the definition of the import market:

- Most of the imported alcoholic beverages are registered by Vietnamese customs as originating from Hong-Kong, France and Singapore. Hong Kong and Singapore only stock alcoholic beverages from other countries and re-export them within Asia. So it is difficult to track down the real origin of the beverages.
- Many products are illegally imported into Vietnam from China, Laos and Cambodia in order to avoid the heavy taxation (it is estimated that up to 80% of the local spirit consumption is smuggled in). Moreover, other products, particularly hard liquors, are counterfeited locally. The extent of this last problem is impossible to assess.

Local importers, in order to avoid taxation, submit grossly undervalued prices in their customs declaration. Since the custom offices keep track of the value of goods (and volume figures are not always available), their statistics are to be used with caution.

Production and Imports

Beer
Imported beers are mostly for the duty free market. Their market share is negligible. Most of the beer drunk in Vietnam is locally made. Several joint ventures with foreign companies have developed: e.g. Carlsberg, Heineken, San Miguel, Foster-BGI, Henninger. They produce around 25% of the total output. Central State companies produce another 25%. The rest is being manufactured by small-scale local breweries and individuals. In 2000, the country counted 469 breweries, including 6 joint-venture companies, 2 central State companies and 461 local state or private companies. Only 53 of these produce more than 1 million of litres per year.

Wine
Local production of wine is limited to some type of fruit and grape wines, with a sparse distribution over the whole territory. The local market is estimated to 8-9 million of litres per year, dominated by Thang Long Company (75% of the market). The "Thang Long Wine" is sold at around 1 USD/bottle. Other companies, like Vinawine, Dalat Wine or Ibiscus try to improve the quality of these kind of products.

Wines are mostly imported, amounting to a total value of 4.1 million USD in 2001 and 4.9 in 2002. The first exporter is France (52.4% of total), followed by Singapore (8.3%), Russian Federation (8.2%), Australia (5.9%), the USA (4.4%), China (3.8%), Czech Republic (2.6%), Bulgaria (2.5%). The general trend of wine sales is upward.

Liquors and spirits
Local production of spirits is taking off. Apart from rice alcohol, which has the lion’s share of the market, some local companies, in joint venture with a foreign company or by themselves, start manufacturing various brandies and liquors. Official imports have reached USD 6 million in 2002, with 3 million from Singapore (49.9%), 1.9 million from France (31.7%), 2.4% from Russian Federation and 2.2% from Netherlands.

Duty Free Imports
The Duty Free system (shops are present in the big towns and near the borders) represents an entire import market on its own in Vietnam, separated from others statistics. Nearly USD 12 million were imported in Vietnam in this way in 2001. Hong Kong (58%) and Singapore (20%) were the two mains sellers, France representing only 7% in value.
Most of spirits are imported through this system.


2. Trends and potential

Traditional drinks have the most important place in the market, but they tend to be more sophisticated than previously (packaging, new products in the liquor sector) and more quality oriented. The beer market is large and should show, as in the past, a strong upward trend (+10% per year).

3. Prospects and Recommendations

As in many other activities, the major problems encountered by foreign producers of alcoholic beverages in the Vietnamese market are related to lack of regulations, or more appropriately, to the constant adjusting of complicated regulations and a lack of proper implementation. Counterfeiting is the other big challenge for foreign producers since the local consumers, when purchasing, rely mostly on the reputation of well known brands. As in other Asian markets, the brand name of a product is a major factor in the consumer’s purchase decision.

Regulations
Import taxes are high (100% on the CIF value for wines, 120% for spirits since May 2001). Since a lot of CIF prices were under valued by the importer in order to avoid too heavy a taxation, the Government applies a minimum CIF value, per brand or some categories of products (for example "table wine" or "vins de pays"), which means that some brands are at a disadvantage, while others are favoured. This system leaves the door open to all type of bargaining. A good negotiator will probably get a better deal from Customs.

However, this system should be suppressed soon by Vietnam, as specified in the EU/Vietnam Textile and Market AccessAgreement initialled on 15 February 2003. In this agreement, it is also anticipated that the Vietnamese import duties on European wines and alcohols shall be reduced to 80% in 2004 and 70% in 2005, which will ease also the problem of invoice under-evaluation.

Excise taxes are calculated on the basis of CIF + import tax value. They vary from 20% to 70%, depending on the degree of alcohol: wines (below 20 deg.): 20%; from 20 to 30 deg.: 25%; from 30 to 40 deg.: 55%; more than 40 deg.: 70%.
A licence is no longer needed to import wine and spirit in Vietnam: since May 2001, any import-export company in the foodstuff sector is allowed to import alcohols without quantity restriction. Since this decision, the number of alcoholic beverage importers has grown to more than 70, including 40 in Ho Chi Minh City. A few companies import bulk alcohols, but these practices may increase the risks of counterfeiting, because of the lack of control in Vietnam.

A new labelling law imposes a new label on every product, with a translation of the original label, the content, the degree of alcohol, the name and address of the Vietnamese importer and the mode of conservation for alcoholic beverages with low degree of alcohol. The list of contents is compulsory for alcohols with more than two components (liquors...).

Counterfeiting
This is of concern to all foreign producers. The extent of damage caused by this activity is very difficult to assess, but it is a widespread problem. For Cognac, the main problem is refilling of Cognac bottles with other alcohol. Here are some recent examples for Bordeaux wines:

- the wine is bought in bottles in eastern Europe, the label taken off in Vietnam and replaced by a locally manufactured Bordeaux label.
- table wine bought in bulk in France is bottled in Vietnam, with the Bordeaux name on it.
- the wine is bought in bottles of “vin de Pays” or table wine, the label taken off in Vietnam (or somewhere else) and replaced by a copy of Bordeaux label.
- Some “Bordeaux“ wines are simply produced in China and exported to Vietnam.

It is, therefore, of utmost importance for European producers, that European countries help Vietnam to set up a regulatory and control body on agro food products, boost the capacities of the Ministry of Justice to design proper laws, and the Police to create an efficient enforcement system. Some actions have already begun in these areas.

In order to protect its production and to be able to take proceedings against counterfeiters, exporters are advised to register the brand name of their products at the National Office of Industrial Property.


9. ENERGY

General
The majority of the power sector remains controlled and owned by the State. In power generation and distribution Electricity of Vietnam (EVN) is dominant. In the past it has been reluctant to relinquish any of its control but small power plants serving industrial parks have been established for some years and private sector involvement in the Phu My power complex is now well established through a BOT model. In oil and gas there are opportunities for the private sector to work with Petrovietnam through production sharing contracts. Opportunities also exist for suppliers of equipment and services.

Electricity
In power generation, stand alone units that serve industrial parks or factories have been successful. In 2001, private sector investment entered into the main stream of power generation with investments in the Phu My complex in the South of Vietnam (3800 MW). Two power plants within this complex will be developed through a BOT model (Phu My 2-2 with EDF and two Japanese companies, and Phu My 3 with BP). The investment made by international companies such as EDF or BP, and the IFIs (ADB and WB) is a positive sign for future private investors in this field in Vietnam. In 2002, the electricity produced by the IPPs reached 6%. In the next few years, some public Vietnamese companies will invest in power generation through BOT model or as direct producers for the power network. Vinacoal, Petrovietnam, Song Da, Vinaconex, Bao Viet. are concerned. The two first companies are expected to invest in gas and coal fired. plants in the near future, whereas Song Da is supposed to have signed a BOT agreement with EVN for an hydroelectric project. The Vietnamese Government has also said it will refund power infrastructure related costs incurred by investors when setting up in this market. This may encourage more investment in smaller generation projects. Whilst the price of electricity in Vietnam remains so low and the Vietnamese EVN shows a reluctance to divest any of its power, general opportunities in this sector will be limited and those that succeed will have worked hard to achieve their success. EVN is unlikely in the near future to be pushed into agreeing an open market. Vietnam cannot afford to take on financial commitments that may lead to an over capacity in this sector.

EVN, as the monopoly provider of power in Vietnam, produced about 35 TWh in 2002 of power. Its transmission and distribution network supplies electricity to only 65% of Vietnamese households. The World Bank’s rural energy projects I & II hope to improve this figure. Distribution and transmission losses are much higher than those of Vietnam’s competitors. Hydro power and gas are the main sources of fuel for generation in the South, hydro power the only source in the centre, and hydro power and coal in the North. Vietnam’s reliance on unreliable water resources makes it vulnerable to power failures: another disincentive to overall FDI. The Son La Hydropower Project – a USD 3.5 billion project which the Vietnamese Government hope to start building in 2005 and put into operation in 2016 – was agreed upon, after a number of years of debate, the National Assembly in November 2002. Preparation and infrastructure work is now taking place.

Between 2001 and 2020, around 40-50 power plants will have to be built to meet the growing demand for electricity. In 2002, EVN intended to invest more than USD 1 billion for power stations and networks in which the projects of Phu My 1, Ham Thuan-DaMi, Pha Lai 2, etc were the priorities; Phu My Gas-operated plant 4, Uong Bi Thermal Plant expansion were also being planned. EVN will also develop 3 power networks of 500KV, 84 projects of 220KV and 367 projects of 110KV.
Vietnam is also planning to construct its first nuclear power plant between 2015 and 2020. According to studies, a 3,000 MW nuclear power plant in the Ninh Thuan province would cost around USD 4.5 billion and account for 5.3% of the country's total electricity generation by 2020.

Oil and Gas
Through PetroVietnam, Vietnam exported an estimated USD 3.3 billion of crude oil in 2002, but imported USD 2 billion of petrol. Crude oil remains Vietnam’s biggest export. Refined petroleum products is the biggest import. Whilst at 300,000 barrels per day Vietnam is not a major oil producer, oil has a great impact on the economy. Some of the increase in Vietnam’s import/export figures of 2002 can be traced to the price of oil rather than its own economic performance.

Though a net oil exporter, Vietnam does not have a refinery. It set up a Vietnamese-Russian Joint Venture Vietross Refinery in Dung Quat (Central Vietnam) to commence operations in October 2004 with 6.5 million ton capacity per annum. However, this has run into problems due to it being a 50/50 joint venture and in late 2002 the Russian partners left the project. With demand growing at more than 25% per year, Vietnam wants to take this project forward by itself. The Deputy Prime Minister Dung recently insisted that this USD 1.5 million plant was to be finished by 2005. Also, Vietnam is now looking to develop a second Oil Refinery No. 2 in Thanh Hoa (Northern Vietnam), near Nghi Son. This was approved in 2002. PetroVietnam is likely to work with a partner (Mitsubishi is the favourite). This project will also produce other products such as mad made fibres for the textiles industry.

A brief History of Vietnam’s energy market

Pre-1975
Developments took place mainly in the South and were American–led. On the upstream side, in the mid 1960s, Mobil discovered the Blue Dragon field. Data suggested that this was a field with commercial quantities of oil but this assessment arrived just one month before the fall of Saigon and consequently Mobil was not able to pursue this find. There was no upstream activity in the North. Industry in Vietnam was dependent upon petroleum imports.

Soviet Union era
Building on Mobil’s discovery, and with the aid of Soviet geologists, oil was found in a number of blocks in southern Vietnam. In June 1981, the joint venture Vietsovpetro was formed between PetroVietnam and Zarubezhneft of Russia. The first ton of oil was lifted in 1986 and to date the White Bear field has produced 200,000 barrels per day. Vietsovpetro has accounted for 90% of total crude output. Soviet specialists have provided equipment and expertise in all stages of exploration and production since the late 1970s. Many Vietnamese oil specialists are Soviet trained.

Doi-moi era
From 1988 up to the beginning of 2002 PetroVietnam has signed 44 petroleum contracts with about 50 world petroleum companies. Most PSCs began in the early 1990s although companies such as Shell and BP had established a presence in Vietnam in the 1980s. The first downstream project was formed between Castrol and Saigon Petro. By the mid 1990s a number of other foreign companies had set up downstream manufacturing facilities.

The early 1990s also saw the start of ODA money entering the power sector, however foreign investment has not followed. Subsidies and inefficient operations have impeded such investment. Such obstacles have prevented a number of important upstream projects from being developed. The donor community has now told the Vietnamese government that new projects will have to be financed by the private or state sector.

Position at the end of 2002
Like many other sectors, those working in the energy sector have seen gradual improvements in the business environment but believe more needs to be done if Vietnam is to attract the investment it needs to develop its power sector.BP has signed deals in 2001 to exploit and transport gas from the giant Nam Con Son field. At over USD 1 billion, this is the largest single private sector investment in Vietnam. The field is expected to deliver gas from 2002/2003. On 29 November 2001, work on the USD 413 million Phu My 3 power plant developed by BP started in the southern province of Ba Ria-Vung Tau. The 715-megawatt facility should be up and running in 2003, as scheduled. Phu My 3 is the third component of the Nam Con Son Integrated Gas Project. It not only supplies the region with electricity but also is a major consumer of gas from the Nam Con Son Basin. It will be transferred to Electricity of Vietnam after 20 years of operation. On the same path, the construction of the 750 MW Phu My 2.2 power plant (EDF and Sumitomo/Tepco) has started in October 2002 and should be finished in the second half of 2004 , as the Phu My 4 plant (450 MW), totally owned by EVN. The Phu My complex also includes a USD 400 million urea fertiliser plant, now under construction. Many observers see this project as a watershed for Vietnam. It is possible that the Vietnam Government will look favourably on other independent infrastructure projects, in a number of sectors.

Taking a further step to build the gas industry, the Government issued decision No. 776/QD-TTg on June 14, 2001 to endorse the blueprint for the USD 1.5 billion (estimated) Ca Mau gas-power-fertiliser complex, which is jointly sponsored by PetroVietnam, Electricity of Vietnam (EVN) and Vietnam Chemical Corporation. The project will cover an area of 1,208 ha in Khanh An hamlet, U Minh commune, Ca Mau Province, in the South of Vietnam.

With the Donor community adamant that Vietnam has to look elsewhere to meet its power demands, (outside of rural energy where it is acknowledged that the costs of getting power to the people cannot be met with an economically viable project), the Vietnamese Government has recognised the need to bring foreign partners into the equation.

…and beyond

If Vietnam is going to develop its economy it needs more power. Studies show that the only way Vietnam can do this is by increasing the amount of private sector participation. Vietnam does not have the money to do so itself and ODA money will only cover a small percentage of the funds required. The Vietnam Business Forum has indicated to the Vietnamese government ways in which this goal can be achieved. Vietnam should make the market more attractive for independent producers. Pending transactions should be concluded. An electricity law with independent regulation should be passed. Generation and distribution should be separated from transmission. A number of generating and distribution facilities should be equitised leading to a more open market.

The problems in the energy sector are similar to those faced by other industries. The potential is there but the capability is not. Local manufacturing for some equipment is available, however, the local share of products for the energy sector is very small.

The only way that this potential can be reached is with foreign involvement. International investors, on the whole, will only enter this market when the conditions are in place for them to execute a business plan successfully. This is currently not the case. There are too few successes to encourage further investment in this sector. It is hoped that now that the giant BP deal is signed and that the construction of the first energy BOT on international tender (EDF) has actually started with a financial involvement of the World Bank, the Vietnamese will realise that public/private sector partnership is an effective way forward of meeting its goals.

Vietnam continues to attract the attention of the international business community. Turning that attention into material gain is only within the gift of the Government. Without a business environment which is good for Vietnam and investors, it will struggle to meet its targets.

In summary, significant progress has been made but not to an extent that the international business community is convinced that Vietnam wishes to continue with public private sector partnerships..

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