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1. Current situation
Machinery construction is key for the industrial development of a country. This is the reason why the Vietnamese Government has approved in December 2002 a Mechanical Engineering Masterplan to 2010 in order to enable sustainable development of a modern machinery industry.

Generally, the mechanical engineering has made a good progress in the last two years.

Shipbuilding industry: Vietnam has manufactured ships of 6,500 DWT and 12,000 DWT successfully. It has started construction of the biggest shipyard in Dung Quat.

Complete equipment: It is the first time that a paper pulp mill is built by domestic companies in Thanh Hoa Province. The mill will have at least 40% of its parts locally made. It is also the first time that a thermal power plant of 300 MW is built by domestic companies in in Uong Bi.

Motorbikes: Vietnam is able to manufacture motorbikes for its big demand with a localization rate of 60 – 80 %.

Automotive: Vietnam is able to assembly buses of 35 seats and 50 seats with 30% local content.

Railway carriages: Vietnam is able to manufacture passenger wagon with 70% local content.

Machine tools: A certain part of the old imported machine tools is up-graded with CNC

Engines: Manufacturing of diesel engines of below 30 HP with nearly 100% locally made parts.

Table 10.1 - Metalworking Equipment Market Size (USD million):

Import Market 30.0 36.0 43.5 57.0
Local Production 5.0 6.0 7.2 8.7
Exports 0.5 0.3 0.4 0.6
36.0 42.0 50.7 65.7

Source: Vietnam Association of Mechanical Engineering (VIASME)

2. Prospects and Recommendations

Approval of the Mechanical Engineering Masterplan to 2010
(approved by the Government in December 2002):

Sectors which get priority for development:

Complete equipment, production lines
Machinery for processing of agriculture, forest and fish products
Machine tools
Construction machinery
Shipbuilding industry
Electronic and electrical equipment
Auto industry and transport engineering

Until 2010 the mechanical engineering must cover some 45 – 50% of the whole demand, among which 30% is foreseen for export.

Complete equipment and production lines
In 2010 to be able to cover 40% of the demand, Vietnam firstly focuses on the following sectors: paper industry, cement and construction materials, power and oil industry, drink water supply, processing industry.

Until 2010 the mechanical engineering must cover 60 – 70% of the demand for medium and small engines, manufacture 400 HP engines upward with at least 35 – 40% locally produced parts.

Tractors and agricultural machines
Manufacture 2 wheel tractors with 6, 8, 12 HP
Manufacture 4 wheel tractors with 18, 20, 25 HP
In 2010 Vietnam should be able to manufacture tractors with 50 – 80 HP

Machine tools
Applying of modern technologies: PLC, CNC

Shipbuilding industry
In 2010 Vietnam will be able to manufacture ships for fishery with tonnage up to 15,000 DWT, cargo vessels of 15,000 – 50,000 DWT and 100,000 DWT with 70 – 75% locally made parts. Vietnam will be able to repair and maintenance ships of 400,000 DWT and assemble engines up to 6,000 HP.

Auto industry
In 2010 Vietnam should cover 80% of the demand in quantity and manufacture up to 60% of the car parts locally.
The Ministry of Industry has approved an amount of USD 130 million for investments in the following mechanical projects:

- 3 projects for bus frame building and bus assembling (Transinco)
- 10,000 tons/year pig-iron pipes project (Tan Long Foundry Co.)
- 1,200 units/year agricultural machines projects (Cam Pha Motor Engineering Co.)
- Power generation equipment project and gas cylinders production project (Cam Pha Central Mechanical Co.)
- Motorbike part project (Danang Mechanical & Electric Equipment Co.)
- 3 Expansion projects of Vinacafe Mechanical Co., Hoi Duong Equipment Mfg Co., Hai Phong Shipbuilding & Equipment Mfg. Co.
- Vietnam Railways railroad-car building project
- Metal digital cutting machine building project (Institute for Machinery & Industrial Instruments - IMI)

In the year 2010, it is foreseen in the master plan that the local mechanical engineering sector will meet 45 % - 50 % of country mechanical product demand and that 30 % of the total output will be generated through exports.

The Vietnamese machinery is in need of development. It needs technology, investment and political reform (not necessarily in this order). Considering the present state of the market, the potential for EU companies, with patience and determination, is enormous.

The mechanical engineering should have investment focusing on renewal of technologies and equipment, modernisation of some key processing, develop the shipbuilding industry, especially large size ships and ship reparation, increase the ability in manufacturing of complete equipment for processing of agricultural products and single machines for the farming, machines for the small and medium industry enterprises, means of transportation machine tools, construction machines.

Vietnam urgently needs new equipment and modern technologies to make its products competitive otherwise many of the big state-owned corporations may not be existing when AFTA will be applied to all ten Asian countries in year 2006.


The Financial services sector is heavily controlled by the State. However, foreign businesses in these sectors who have adopted a long-term approach to this market have managed to develop profitable businesses. Whilst this sector is not fully developed there is potential for suppliers to this industry to make sales. Vietnam looks carefully at cost but is not put off by a high price if the quality is what they require. A significant amount of aid money is being spent on developing/reforming Vietnam’s banking and finance sector. Consultancy companies with a good track record in this sector will be able to win aid funded business.

In 1990 Vietnam adopted the Ordinance on The State Bank and the Ordinance on Banking, Credit Co-operatives and Financial Institutions in order to create a legal framework for the banking system. Since then the banking system in Vietnam has made considerable progress. The re-organisation of the banking system in May 1990 strengthened the role of the State Bank of Vietnam as a central bank and transferred the credit function to four re-organised banks: the Vietnam Bank for Agriculture, the Bank for Investment and Development, the Bank for Foreign Trade of Vietnam, and the Industrial and Commercial Bank of Vietnam.

Since then, banking has become a diversified and multi-sector affair. Vietnam currently has 3 types of financial institutions: commercial banks, credit co-operatives and financial companies.

In the year 2002, the number of foreign invested credit institutions in Vietnam stood at 26 foreign bank branches (interestingly in the year the US/Vietnam trade agreement was signed the Bank of America closed its Hanoi branch). There are also 6 foreign bank sub-branches, 4 joint venture banks, 3 foreign invested finance leasing companies in the forms of joint venture and 100% foreign owned capital as well as 41 representative offices of foreign credit institutions in Vietnam.

The IMF and World Bank are supporting a five year (2000-2005) $1 billion to restructure the Banking system. The restructuring efforts will cover all kinds of domestic banks including state-owned commercial banks, joint stock commercial banks, credit institutions and the State Bank of Vietnam itself. The work will see major state-owned commercial banks operate with more autonomy as well as the merger and dissolution of some joint-stock banks. Last year, 5 joint stock commercial banks were closed, another 5 have been put under supervision. A separate bank has now been set up to handle the issue of non-performing loans. In 1991, state owned enterprises accounted for more than 90% of all outstanding debt, this has now fallen to less than 50%.

There are a number of encouraging signs emerging since 2000. The effect of the Vietnam-US Bilateral Trade Agreement means Vietnam has to relax slightly its restrictions on foreign banks. In order to implement the financial sector commitments set out in that Agreement and prepare for the World Trade Organisation (WTO) entry, the State Bank of Vietnam has been making overall amendments to the legal environment, specifically the Law on Credit Institutions. In 2001, the banking environment in Vietnam was improved significantly by a stable currency and equal treatment for all institutions participating in the market. Monetary policy has been managed more flexibly including: liberalising the interest rate of foreign currency, applying negotiable interest rates of Dong currency, adjusting the reserve requirement to be in line with international market standards, allowing wider trading bands for exchange rates, and gradual abolishing limitations on operation of foreign credit institutions.

The total value of foreign banks’ assets rose by 11.3%in 2001, constituting 12.5% of the nation’s banking sector. Non-performing debts registered by the sector were down 0.2% against the previous year. Capital mobilisation by the foreign invested sector grew by almost 20 per cent, in which foreign currency increased 33.5%.

Activities of foreign invested credit institutions, according to official figures, saw operations of foreign invested credit institutions; total assets, mobilised funds, outstanding loans and pre-tax profits; increase by 15.5%, 10%, 6.7% and 2.2% compared to the those of last year, respectively.

Performance of foreign bank branches: the total assets of the group as of the end of 2002 increased by 11% compared to that of 2001, which was nearly 10.42% of that of the whole banking market. Mobilised funds rose by 5.9%, which took about 8.8% of that of the whole banking market. Deposits represented 88%, mobilised funds in foreign currency accounted for 62.6%. The outstanding loans were up by 6.4%, which accounted for 8.4% of that of the whole banking market of which, loans in foreign currency took about 60% and medium-long term loans represented nearly 34%. In fact, foreign bank branches still face a number of difficulties in expanding credit to the economy. The reasons are: i) foreign bank branches have still not participated in big foreign invested projects, ii) an upward tendency of foreign exchange rate and inflation rate and as a result, customers prefer to borrow in domestic currency iii) some branches were too prudent or should follow the country risk policy made by their mother banks. The credit quality of the group as a whole is good. The ratio of overdue debts over total outstanding loans was rather low, which was 0.43%, down by 0.06% against the level of last year. The use of mobilised funds (to make loans or invest in domestic projects) is not high so that deposits and placements offshore with overseas banks is common.

Performance of joint venture banks: figures as of the end of 2002 showed that the total assets of the group rose by 24.4% compared to last year. Mobilised funds were up by 37.7% against 2001, which resulted mainly from a rapid growth of customer deposits in both VND and foreign currency. Outstanding loans recorded a robust growth of 53% against the corresponding period of last year. Credit quality was much improved. Overdue debts decreased by 41% compared to that of the previous year (most of them were frozen non-performing loans remained from past years).
Performance of foreign invested finance leasing companies: the total assets and mobilised funds of this group rose by 19% and 37% in comparison with those of the end 2001 respectively. Outstanding lease was up by 3%, while overdue loans declined by 4% comparing to those of 2001.

Performance of representative offices of foreign credit institutions: in 2002 3 representative offices closed due to the business strategy adjustment of mother banks but 2 new ones opened. The sector operated efficiently in 2002 continued its role of a trusty bridge for foreign investment in Vietnam. Through representative offices, many lending projects and credit agreements were concluded between foreign credit institutions and Vietnamese economic entities.

Foreign Exchange Management
Foreign currency is welcomed into Vietnam but remittance of foreign currency abroad is controlled and subject to authorisation by the State Bank of Vietnam.

Buying, selling, lending, settling and transferring transactions in foreign currency can only be made through organisations authorised by the State Bank. Generally, the State Bank controls exchange rates applied by banks and other financial institutions. By 26 February 1999, the State Bank of Vietnam had changed and the way exchange rates were set. Credit institutions had to fix their Dong/Dollar exchange rate to within +/-0.1 percent of the previous day prevailing interbank rate at the State Bank. In 2002 the State Bank widened the Dong/Dollar exchange rate to within +/-0.25% There is greater flexibility with other exchange rates. To encourage development, the State Bank of Vietnam will need to further reinforce and develop the inter-bank foreign currency market to make it become a base in defining the interbank average exchange rate closely following up the exchange currency supply and demand relationship in the market.

According to current legislation, all foreign currency revenue earned in Vietnam from export services or from other sources has to be deposited in or sold to local banks authorised to conduct foreign exchange business. Several institutions such as commercial banks, financial institutions, airlines, foreign invested enterprises, overseas branches of Vietnamese economic institutions and companies operating in maritime, post and telecommunication and insurance industries may be authorised by the State Bank to open foreign exchange accounts abroad.

All transactions and supporting documents should be undertaken in Vietnamese Dong. Exceptions are applicable to payments for exports made between the consignors and their agents, and payments for goods and services purchased from institutions authorised to receive foreign currency such as payments for air tickets, shipping and air freight, insurance and international communications.

Stock Market

The Government has developed its equitisation plan since 1992. A State Securities Commission with its head quarters in Hanoi and a representative office in Ho Chi Minh City has been established and the stock market was finally opened in Ho Chi Minh City on 21 July 2000 after much preparation.

At present 21 products have been officially registered to list on the bourse, including 2 types of government bonds. To be listed, companies must have a minimum legal capital of VND 10 billion (about USD 700,000). They must be public companies with at least 20% of shares held by a minimum of 100 individuals. They also have to prove that they have been profitable for the past two years.

The fluctuation range is +/-2% for shares per day and +/-1% for bonds. Foreigners can only buy up to 20% of the total shares issued by a company. Whilst a welcome development, the stock market will take time to develop. But there are some reasons for optimism:

Firstly, stock prices of listed companies are relatively low.

Secondly, the number of people joining the bourse is still small, the number of floor investors is not more than 3,000 that accounts for 1% of the country’s population compared to a global rate from between 30 to 95%. Besides, foreign investors have been slow to invest so far. Financial firms like insurance companies, banks, investment funds have thin volumes of stocks. Experts therefore believe this is a very good chance for investors.

Thirdly, dividends of joint-stock firms are climbing higher than interest rates quoted at commercial banks. If investors buy stocks at a price equalling or slightly higher than denominations, evidently, investment becomes a necessity.

Hongkong and Shanghai Banking Corporation and Standard Chartered Bank are the first two banks to be granted the custodian licences. That means HSBC and SCB are entitled to act for offshore custodians in their share-trading activities that are carried out at the Ho Chi Minh City’s stock market. Those offshore custodians in their turn act for stockbrokers overseas.

The Hanoi Securities Trading Centre, the second one in the country, was supposed to open early 2000 but has been delayed.

On 9 December 2000, the National Assembly passed the Law on Insurance Business. This law, which was drafted with the help of the European Commission’s Eurotap programme, will be the main law regulating the industry. The previous decree (18 December 1993) had become outdated because of the rapid development of the industry. The new law aims to regulate the obligations and rights of organisations and individuals.

The state-owned Bao Viet used to hold a monopoly on the insurance market. While it accounted for more than half the industry’s total premiums in 2001 the market has now changed with competition from 14 insurance companies with various types of ownership: state-owned, shareholding, joint ventures with foreign ownership or wholly foreign ownership. Among Bao Viet’s four rivals, Prudential is the biggest one, though only operating for 3 years it developed a network of customer-care centres in 8 provinces, and built up a strong corps of agents, Prudential now boasts 1,000,000 customers nation-wide, its market share has swollen to almost 35%. The non-life market, made up of ten players, is worth more than USD 100 million in terms of premium income and makes up 0.56% of the country’s GDP. Life insurance in Vietnam began in 1997 when Bao Viet launched its subsidiary. Since then, four more life insurers have entered this new area, including some high-profile names like Prudential and AIA. The prospects for the life sector are very favourable, particularly when considering the country’s population of nearly 80 million.

There are some challenges ahead. The main factor facing the Vietnam insurance industry is the low penetration level. Some types of commercial insurance have a penetration rate of only 20-25%. A large proportion of public property has no insurance cover. If this market is to be fully exploited, there must be a long-term and intensive campaign to raise awareness among the Vietnamese people of the need for insurance. Another challenge is that insurance practitioners, which number around 10,000, need more training in order to catch up with the global expertise in insurance and to help develop the domestic insurance market. Financial capacity is also a major challenge to many players in the market and this will affect the local market as whole.

It is unlikely that there will be any more licences granted to foreign insurance companies in the next few years. Some foreign companies, without a licence or in need of an expansion of their licence, have withdrawn from the market. In the last days of 2001, the Canadian Manulife Financial Group repurchased the capital share of the Taiwanese Chinfon Global in the Chinfon Manulife Insurance Joint Venture Company in Vietnam. The Chinfon Global Group withdrew its capital from the insurance field to have more capital to invest in motorbike, cement, and banking industries in Vietnam.

Like the rest of the world, accountancy in Vietnam is dominated by the top four global firms. With so many ODA projects, foreign accountants continue to post strong business results in Vietnam. Also their workload has increased significantly with the implementation of the Enterprise Law. This law has given many private sector Vietnamese companies the chance to become legitimate. Previously they had operated in a manner that was “tax efficient” – avoiding the attention of the authorities. Over 70,000 Vietnamese companies have been established since the passing of the Enterprise Law – not all of them new. Accountants are regularly advising well established Vietnamese business on how to become a limited company, especially after a number of years of operation.

The route for the development of the financial services sector in Vietnam seems to be well established. The role of foreign business, and their scope for operation, will probably dictate the pace of the expansion of this industry. The US-Vietnam bilateral trade agreement also covered a number of points relating to this sector. The Vietnamese authorities have made a commitment that all European companies will receive no less favourable treatment than that offered to US financial services’ companies.

Whilst there is still an element of uncertainty within the Vietnamese Government as to how to take forward the financial services industry, especially in relation to foreign involvement, it seems that the pendulum has now swung more to the side of those who believe that a vibrant financial services sector is for the overall good of the Vietnamese economy.

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