Market Entry Strategy

American companies interested in doing business in Vietnam may do so indirectly through the appointment of an agent or distributor in Vietnam. (Note: U.S. companies new to Vietnam should conduct sufficient due diligence on potential local agents/distributors to ensure that specific permits, facilities, manpower and capital are available.) U.S. firms seeking a direct presence in Vietnam can establish a commercial operation utilizing the following options: 1) a representative office license; 2) a branch license; or 3) a foreign investment project license under Vietnam's revised Foreign Investment Law. In addition, U.S. companies interested in doing business in Vietnam should contact the U.S. & Foreign Commercial Service or Foreign Agriculture Service in Hanoi and Ho Chi Minh City. Contact information is located in Ch.11 U.S. and Vietnam Contacts.

American business executives should be aware that Vietnam’s legal and regulatory environment is undergoing profound change. Ongoing efforts to implement BTA commitments and to lay the legal and regulatory foundation for WTO accession will bring about significant changes in Vietnamese law affecting an array of commercial issues. In 2005, Vietnam’s National Assembly is expected to finalize a number of important legislative initiatives. Among the laws and ordinances expected to be passed in May 2005 are a full revision of the Commercial Law, intended to provide a modern and simplified legal framework for commercial transactions, as well as a broad legal framework for liberalizing distribution services in Vietnam. A new Civil Code, addressing contract enforcement, secured transactions and property rights is also slated for passage in the spring of 2005. Amendments to the Customs Law of 2000 are also anticipated, including provisions intended to modernize customs procedures and implement greater use of technology in the customs clearance process.

A second series of legal changes is likely to follow in late 2005 or 2006. These should include a new Intellectual Property Rights Law which will be intended to bring Vietnam into compliance with BTA obligations and the WTO agreement on Trade Related Intellectual Property; a new Law on Electronic Transactions to form the legal basis for how digital information is used in commercial transactions; amendments to the Law on Import and Export Duties addressing procedures for collecting import tariffs and taxes; revisions of the Enterprise Law intended to unify and streamline regulations for registration and corporate governance of private, state-owned and foreign-owned companies; and a new Law on Technology Transfer intended to modernize an outdated legal and policy framework for technology transfer.

The items above are only a partial list of the legislative initiatives currently underway that should transform key elements of Vietnam’s commercial environment. Still, effective implementation and issuance of follow-on implementing regulations will be important to determining the impact of these legislative initiatives.

Using an Agent or Distributor

Unless a foreign company has an investment license permitting it to distribute its own goods in Vietnam, a company must appoint an authorized agent or distributor.

Agents: A Vietnamese agent imports and sells a foreign supplier’s goods in Vietnam for a commission. The risk of non-payment rests with the foreign supplier, and the after sales service/support is typically performed by the foreign supplier, as the agent is only selling the goods on behalf of the foreign firm. Vietnam's Commercial Code recognizes the right of foreign companies to appoint agents, provided that the Vietnamese agent's authorized scope of business includes such activity and the agent obtains an import-export code from the customs authorities.

Distributors: Under a distributorship arrangement, the question of legal protection and recourse is clearer. The Vietnamese distributor buys the goods from the foreign supplier for resale in Vietnam and thus is liable for the full amount of the goods purchased. Unlike some agents, distributors normally provide after sales service/support. A distributorship arrangement is considered a “foreign trade contract” and must be structured in compliance with Vietnam’s regulations on foreign trade contracts. In principle, it is legally binding upon signing.

Legal and Practical Considerations: U.S. companies should conduct sufficient due diligence on potential local agents or distributors to ensure that they have the specific permits, facilities, manpower, capital, and other requirements necessary to meet their responsibilities. Commercial agreements should clearly document the rights and obligations of each party, and stipulate dispute resolution procedures. In most cases, payment by irrevocable confirmed letter of credit is recommended, although it should be noted that letters of credit issued by local banks may not be enforceable.

Going to court is generally not a recommended strategy to enforce agreements or seek redress for commercial problems in Vietnam. Foreign firms who have dealt with the court system in Vietnam report it to be slow and non-transparent. Similarly, although a framework for commercial arbitration exists in Vietnam, the process is not usually considered a viable option for foreign entities. When the need to consider such strategies arises, the advice of an international law firm operating in Vietnam should be sought.

Foreign-Invested Trading Companies in Vietnam: When seeking prospective agents or representatives in Vietnam, U.S. exporters may wish to consider not only Vietnamese firms, but the representative offices of foreign trading companies operating in Vietnam, as well. The latter, which include U.S. trading companies, often have distinct advantages in communication, experience in importing, expertise in product and package modification, and marketing capability.

Finding a Local Partner: While 100 percent foreign invested enterprises are becoming more numerous, the majority of foreign companies operating in Vietnam have chosen to partner with local firms. One way to locate Vietnamese partners is to contact local chambers of commerce and industry associations. The major chamber of commerce for Vietnamese enterprises is the Vietnam Chamber of Commerce and Industry (VCCI), headquartered in Hanoi with branches throughout Vietnam. VCCI members include state-owned enterprises (SOE’s), joint-stock companies, and private firms of all sizes in many sectors. In Ho Chi Minh City, the Investment & Trade Promotion Center (ITPC) can also make introductions to prospective partners. Another channel for finding a local partner is through local industry associations, since most key industries in Vietnam have formed associations. A number of private consultant companies have also developed matching services. Additionally, an effective means for finding a local partner is to utilize the Gold Key Service and/or International Partner Search of the offices of the U.S. Commercial Service in Hanoi and Ho Chi Minh City. Information on this service is available at http://www.buyusa.gov/vietnam/en/services_for_us_exporters.html

Establishing an Office

In order to establish a commercial presence in Vietnam, a foreign firm must obtain one of the following three types of license:

Representative Office License: A representative office is generally easy to establish, but is the most restricted form of official presence in Vietnam. The license is issued by the Ministry of Trade (MOT) and allows for a narrow scope of activities, as stipulated in the “Regulations on Establishment and Operation of Representative Offices of Foreign Economic Organizations in Vietnam.”

A representative office may rent office space/residential accommodations, employ local staff and a limited number of expatriate staff, and conduct a limited range of business operations. Permitted activities include market research and monitoring of the marketing and sales programs carried out by its overseas head office, as well as pursuing long-term investment activities. As the representative office is regarded as a commercial liaison office and not an operating entity, it is strictly prohibited from engaging in any revenue-generating activities, such as trading, rendering professional services, revenue collection, or subleasing of its office space.

The representative office license permits the foreign company to open only one office at one site. Should the firm wish to open a second office in the same city or, more commonly, in a different city, another license is required. A "branch representative office" license is no longer allowed. Experts advise that a foreign company should decide at the time of application whether it wants more than one representative office in Vietnam. Experience suggests that it is easier to obtain licenses for several rep offices when all are applied for simultaneously. If an additional license application is made at a later date, the Ministry of Trade may require documentation on the performance of the first representative office.

• Tax Considerations: A representative office is exempt from corporate tax auditing requirements. Income tax for Vietnamese and expatriate staff must be paid in accordance with relevant regulations.
• Other Considerations: From time to time, representative offices have come under scrutiny by the local People’s Committees (municipal governments), police, tax and labor authorities, especially with respect to foreign service providers who claim they are not rendering services on-the-ground, but are merely facilitating services actually provided by their head office.

Application Procedures: The procedure to establish a representative office is relatively straightforward. An application with stipulated supporting documentation must be submitted to the MOT. The application and profile must be prepared in English and Vietnamese, and both sets of documents must be duly executed. Applicants have 90 days to register with the local People’s Committee once the license has been issued. The fee for a representative office license is VND 1,000,000 (about US $65). The license is usually valid for three years and may be extended for additional three-year periods.

Branch License: The term “branch” office under the laws of Vietnam refers to a 100 percent foreign-owned business that operates in certain designated service sectors. These sectors, which are restricted and closely monitored by the Vietnamese government, include banking, law and insurance. Many foreign branch offices first entered Vietnam as representative offices and later applied for a branch license. Branch status authorizes a foreign business to operate officially in Vietnam, including billing on-shore and the execution of local contracts.

• Tax considerations: Branches are fully liable for Vietnamese taxes on their assets and activities.
• Application Procedures: Applications for a branch license are generally submitted to the ministry or other competent authority for the industry in question (e.g., the State Bank of Vietnam for banking licenses, or the Ministry of Justice for law offices).

Decree 45-2000-ND-CP of the Government dated September 6, 2000 defines a Branch Offices (BO) of a Foreign Business Entity as an "affiliate" established to engage in commercial and/or tourism activities to earn profits directly. BO is limited to conducting business in:

• Export of the following goods purchased in Vietnam: handicraft wares, processed and raw agricultural products (except rice and coffee), processed and raw vegetables and fruit, industrial consumer goods, meat, processed foodstuffs;
• Import of the following goods for sale in the Vietnamese market: machinery and equipment for mining and agricultural or aquaculture processing, raw materials for human and veterinary medicine or fertilizers and insecticides.

Foreign Investment Licenses (FIL): Foreign investment in Vietnam is regulated by the Ministry of Planning and Investment (MPI) through FILs and related implementing regulations, decrees, and circulars. Compared to previous legislation the FIL delegates more authority over investment licensing to provinces, municipalities, and investment zones, although several provinces and large cities have been urging the Vietnamese government to expand their autonomy in this area. The Prime Minister's office retains authority over larger and "sensitive" projects. MPI remains the principal government agency dealing with foreign investors.

There are four primary forms of investment for foreigners in Vietnam:

i) Joint venture (JV) agreements have been discussed in the preceding section.

ii) A business cooperation contract (BCC) allows a foreign firm to pursue business interests in cooperation with a Vietnamese firm without conferring the right of establishment or ownership. In many respects it is the most flexible arrangement Vietnam offers to foreign investors, although the BCC license carries no tax holidays or concessions such as those given to other types of foreign investments. BCC's have predominated in the telecommunications and petroleum sectors, where the government limits foreign involvement in operations and management.

iii) 100-percent foreign-invested enterprises ("FIE's") have become more popular recently, as investors have learned to navigate the local system on their own and as problems with JV partners have become more apparent. Amendments to the Foreign Investment Law adopted by the National Assembly in May, 2000 regularized procedures for conversion of joint ventures to 100 percent FIE’s. The new law made a number of other improvements upon its 1996 predecessor which enhanced the attractiveness of investing in Vietnam. It has reduced the number of issues requiring unanimous approval by the boards of joint ventures, thereby strengthening the management control of the majority investor (which is typically the foreign partner). It simplified licensing procedures, lowered remittance tax rates, and gave foreign-invested enterprises relief from excessive government inspections. Disadvantages of FIE’s over other forms of investment include more difficult access to land-use rights (except in industrial zones and export processing zones) and a more limited duration of license.

iv.) Build-operate-transfer (BOT) investment agreements are authorized under the FIL, but the legal, regulatory, and financial framework is still incomplete. The FIL also recognizes build-operate-own (BOO), build-transfer-operate (BTO), and build-transfer (BT) forms of investment projects. Many international observers believe that BOT and other private financing mechanisms hold the key to Vietnam's future infrastructure development. Vietnam's enormous needs have largely been financed by multilateral and bilateral ODA up until now, but the Government’s project wish list threatens to overwhelm donors.

Under a BOT agreement the investor builds an infrastructure project, operates it for an agreed period of time to recover the investment and earn a profit, and then returns it to the government without further compensation. In principle, BOT projects are subject to approval by the Prime Minister's Office. BOT projects may be joint ventures or 100 percent foreign-owned. They are exempt from land tax and from payment of duties on goods imported to implement the contracts. They enjoy a lower profits tax rate (10 percent), a 5 percent withholding tax rate (the lowest normal rate), an eight-year tax holiday starting from the first profitable year, and a government guarantee for conversion of revenue from local to foreign currency. The term of a BOT can extend to fifty years, after which project ownership reverts to the government.

In 2003, the Vietnamese Government expanded the options for foreign investment in Vietnam in an effort to attract more foreign investment capital into the country and to enhance the efficiency of existing FIE’s. Effective as of May 7, 2003, the recently amended Law on Foreign Investment in VN permits the following:

• Existing FIEs may co-operate with other foreign investors to perform a BCC.
• Joint Venture Enterprises (JVEs) may be established between an existing 100 percent Foreign Owned Enterprise (FOE) and a Vietnamese enterprise or between an existing 100 percent FOE and an existing JVE. An existing 100 percent (FOE) may co-operate with another existing 100 percent FOE and/or foreign investor(s) to establish a new 100 percent FOE.

Direct Marketing

Unless a foreign company has established a local office under the Foreign Investment Law, it can only conduct direct marketing activities through a Vietnamese partner such as a distributor or agent. Many direct marketing techniques are novel concepts to the Vietnamese consumer and the government is considering regulations designed to protect consumers in this area from unscrupulous “pyramid schemes.” The logistical barriers to direct marketing include the lack of consumer data, a scarcity of mailing lists, and limited private telephone ownership. Several cosmetic and lingerie companies have experimented with door-to-door sales on a limited basis in Ho Chi Minh City. Over the past couple years, foreign life insurance companies have been licensed and have assembled large teams of agents who engage in traditional telemarketing, door-to-door selling, and workplace marketing in urban areas.

Some observers believe that the direct selling and multi-level marketing organizations that have already set up in Vietnam will eventually encounter official suspicion, leading to problems of the kind the industry has recently experienced in China.

For business-to-business marketing, direct mailings/faxes and emails are widely used; however, mailing list databases are typically created in-house. Some leading international consumer market research firms operate in Vietnam and can develop demographic data for their clients.

Distribution and Sales Channels

Legal Constraints on Foreign Participation: Despite recent liberalization, Vietnam’s regulations continue to place significant restrictions on foreign participation in the importing and distribution sectors. In this context, "foreign" refers to companies or organizations with foreign capital. To a large extent, import and distribution activities are reserved for Vietnamese entities, and offshore manufacturers must work through Vietnamese firms to establish distribution or retailing operations inside Vietnam. However, foreign-capital companies licensed to manufacture in Vietnam may be permitted to distribute their products domestically. Investment licenses now may also allow foreign-invested companies to import raw materials for manufacturing their products locally, as well as finished products before production start-up for the purpose of test marketing and developing the business over a limited period of time.

Under the U.S.–Vietnam BTA, U.S. firms are permitted to own up to 49% of joint ventures with Vietnamese partners in distribution services beginning three years after the date of entry into force of the Agreement (on December 10, 2004), subject to some limitations on trading and distribution rights. As of December 10, 2007, majority ownership by an American company will be allowed, and 100% U.S. ownership of distribution service companies will be permitted as of December 10, 2008.

Distribution Channels: Vietnam’s distribution system is a fragmented patchwork of state-owned import-export companies, private and state-owned wholesalers, independent Vietnamese agents and distributors, retail outlets, and street stalls. The formal distribution channels often overlap parallel channels for smuggled and “gray market” goods.

Non-Vietnamese entities are barred from general participation in Vietnam's distribution system, although foreign investors have the right to sell, market, and distribute what they manufacture locally. Most local firms holding import licenses are state-owned enterprises (SOE's).

For many products, nationwide distribution requires the establishment of separate networks in the north, the south, and the central regions. Lack of physical infrastructure links among the major regions, cultural and economic differences across the nation, and the fact that today's Vietnam was divided during the period when the modern economy was established all make it difficult to achieve “one-stop” distribution in many sectors.

Importing and Exporting: In order to engage directly in export or import activities, a company's business registration certificate must cover “import-export” or “trading.” This activity is mainly reserved for Vietnamese firms, both state-owned and private. A foreign-invested enterprise may be granted a license to import specific products designated in its investment license, especially raw materials and even finished goods needed to develop a market for products that will eventually be produced in Vietnam.

Companies that do not have their own import license must work through licensed traders, who typically charge a commission of between one and two percent of the value of the invoice. Under Vietnamese law, the importer is the consignee. Therefore, it is important to identify a reliable importer with the ability to clear merchandise through customs quickly and efficiently. If a licensed third-party importer is used, the importer will handle customs clearance. If a foreign invested firm imports products directly, it will have to make arrangements to handle customs clearance at the port. This can be burdensome. Many foreign firms have complained that the administration of customs is opaque, at best. Importers have charged that duty classifications for the same product differ from inspector to inspector, and that even the same inspector may charge different rates for the same item at different times. There is little effective recourse should the importer disagree with the classification. Over the past few years, customs officials at many levels have been indicted on charges of corruption and many importers have become accustomed to paying “facilitation fees” to gain clearance of their goods through customs.

Wholesale: Both local and foreign-invested companies may act as wholesalers if their business registration certificates or investment licenses so state, or if the wholesale operations are established for the purpose of distributing their own products.

While a small number of foreign-invested warehousing operations offering modern and efficient facilities have been established in recent years, warehouses and other storage infrastructure in Vietnam are for the most part quite basic. Climate control is rare and security may be a problem. Tracking and processing of inventories is primarily manual, and the physical movement and handling of goods is on par with practice in other less developed nations in the region.

Wholesalers may or may not also be licensed importers. They typically offer both storage and transportation services, but the level of infrastructure and service is low by international standards. Warehouses in Vietnam often consist of little more than raw storage space with the bare minimum of environmental control, handling and security equipment. Many wholesalers are poorly capitalized and unable to upgrade their infrastructure. At least one U.S. firm has established third party, value-added wholesaling operations in HCMC. Other foreign firms are investing in “cold chain” port facilities, especially in the South.

A significant development in wholesaling was the launch in 2001 of a wholesale cash-and-carry operation to serve small retailers by Germany's Metro AG group. Metro Cash and Carry operates a members-only service restricted to businesses and offers a variety of both food and non-food items. The company has fairly ambitious plans to expand its operations in Vietnam’s larger cities over the next few years.

Retail: Vietnam’s retail landscape is undergoing rapid transformation, providing more outlets for proper display and marketing of products. A number of Western-style mini-markets and convenience stores (e.g., MaxiMart, CityMart and Saigon Coop) are cropping up in the major urban areas. While anecdotal reports suggest that shoppers perceive the mini-marts as expensive and per customer sales are still fairly low, most experts agree that this trend will continue to gather pace, as it has among Vietnam’s more developed neighbors. At the moment, these outlets are said to account for about five percent of total retail trade, and most consumer purchases continue to take place at traditional street-side shops or official “wet” and “dry” markets organized by district governments. Nevertheless, these new retail outlets are expanding rapidly in major cities and offer promising opportunities for distributing a wide-range of U.S. consumer goods. An example of a recent international entrant to Vietnam’s retail segment is France-based Big C, which opened a “hyperstore” outlet in Hanoi in January 2005. This store is the chain’s fourth retail outlet in Vietnam. Company officials expect 10,000 customers a day to visit the facility.

Shopping center developments are also mushrooming in Vietnam. The Saigon Superbowl and Diamond Plaza in Ho Chi Minh City, the nation’s first large-scale entertainment and retail centers, only opened in 1996 and 2000 respectively. Other recent developments include a large retailing center (21,797 sq. m) in the mixed-use Thuan Kieu Plaza in Cho Lon, HCMC’s “Chinatown”, as well as SAVICO-Kinh Do Plaza, a pastel “strip mall” type development in the heart of District 1. Although Ho Chi Minh City leads this sector, similar developments are taking place in Hanoi, which saw its second downtown mall open in late 2004.

Showrooms and service centers for specialized products such as electronics, appliances, automobiles, and industrial goods are also increasing. General Electric (GE) Company’s Appliance Division and Lighting Division have launched chains of retail outlets and industrial equipment manufacturer Parker-Hanafin and air conditioner giant Carrier have opened similar outlets in HCMC. These developments are changing the way the wealthier and more cosmopolitan segment of urban Vietnamese shops. Still, apart from these pioneering projects, retail outlets consist mainly of family-run market stalls or small street-front shops.

Selling Factors/Techniques

Development of Consumerism: Foreign brands have proliferated in Vietnam over the past decade. This is indicative of rising urban incomes and a relative opening to the outside world. Market observers speak of the growth of “consumerism” in Vietnam, but it must be borne in mind that this remains a country with low per capita GDP (under $500 for the country as a whole, according to official figures). The market for most imported consumer goods is the well-off segment in a handful of large cities and some parts of the Mekong Delta. Among consumers there is much trial usage, but little brand loyalty. The bottom line generally comes down to price. The main attractions of foreign products are their perceived higher quality and status. Among foreign products, there is a general hierarchy of perceived quality, based on the country of origin. Vietnamese consumers tend to prefer imported US, Japanese and European brands over Chinese products and those made locally by foreign and Vietnamese producers. Ultimately, brand loyalty is built on price, proven quality and availability.

Awareness of brands comes from word of mouth, promotions and advertising. Urban consumers are remarkably familiar with leading foreign products, even those not generally available in Vietnam. One major reason for this is contact with, and “care packages” from, relatives abroad. Overseas Vietnamese, mostly first-generation emigrants, amount to a few million people concentrated primarily in the United States, Canada, France, Australia, and Southeast Asia. A large number of them maintain close contact with their families in Vietnam, and transfer quite a bit of information on lifestyles abroad. The large volume of gray and black-market goods also furthers consumer familiarity with foreign brands brought in from neighboring countries. However, copycat products made in Vietnam have taken market share from some original producers.

Market segmentation: Geography is a key factor in segmenting Vietnam’s market. This includes not only the regional segmentation of North-Central-South, but also the segmentation of urban versus rural markets. Vietnam is roughly separated into three separate economic regions surrounding core urban centers: the South centered on Ho Chi Minh City, the North based in Hanoi, and the Center focused on Danang. The main distinctions among these regions are consumer purchasing ability, brand awareness and recognition. Vietnam's per capita GDP stands at around $500, while unofficial estimates put HCMC's per capita GDP as high as $1,700. The actual disparity is probably even greater, as certain income elements that are not well captured in official statistics (such as remittances from overseas relatives and private sector activity) are centered more in the South. Currently, consumer purchases are strongest in Ho Chi Minh City (and the contiguous provinces of Binh Duong, Dong Nai, and Ba Ria-Vung Tau), where there is a concentrated and growing population of consumers with disposable income. Consumers in the South also tend to exhibit a greater degree of brand awareness than do consumers in the North and Central regions. This is principally due to extensive contact with Westerners prior to 1975 and the influence of returning overseas Vietnamese. These defining factors have had an impact on market demand disparities, market entry strategies, product-line segmentation and marketing mix. For many companies, the first marketing goal is to penetrate Ho Chi Minh City; as well over half of all Vietnamese purchases of foreign consumer goods take place in this area.

Product Information: Foreign companies in Vietnam utilize trade fairs, product seminars, product demonstrations, and point-of-sales materials, as well as print and broadcast advertising. The aim is not only to promote their merchandise, but also to educate both sellers and end-users. Many foreign products do not need to be adapted to local tastes and conditions, but it may be necessary to educate the buyer as to the features and benefits of the product. Detailed product information in the Vietnamese language should be provided to agents and distributors. It should be noted that seminars, product promotions, workshops, and press conferences may require approval in advance by local authorities.

Practical Considerations: As a rule of thumb, hands-on involvement is required to achieve commercial success in Vietnam. U.S. firms should foster close relationships and maintain regular communication with Vietnamese representatives, agents, and/or distributors of their products. Not only are many products competing for limited shelf, showroom or warehouse space, but Vietnamese representatives often handle multiple brands of the same product type. A close relationship allows the foreign supplier to keep abreast of the changes and developments in local market conditions and assess the competitiveness of its products. This approach also ensures that the Vietnamese partner is updated on product information and motivated to market the product. Frequent training and support for after-service activities are also key elements of this activity.

Trade Promotion and Advertising

Advertising has been permitted in Vietnam only since 1990, but the industry has grown rapidly in the past decade. Industry experts estimate foreign-invested enterprises spend around $1 billion annually on advertising in Vietnam, but more than 70 per cent of this goes to the foreign-invested advertising firms.

Regulation: Advertising remains heavily regulated by the Vietnamese Government. In principle, only companies licensed in Vietnam may place advertisements. Advertisements for tobacco and liquor (excluding beer) are prohibited in the mass media. Advertising for pharmaceuticals, agri-chemicals, cosmetics and toiletries require registration and approval from the appropriate ministries before being run, while the Ministry of Culture and Information must approve all advertising content. Arbitrary enforcement and interpretation of the regulations hinder the development of the advertising industry. Limits on advertising and promotional expenditures exist and are tied to a percentage of total sales.

Foreign Ad Agencies in Vietnam: Vietnam's advertising market is now home to around 700 advertising companies, plus nearly 30 foreign-invested representative offices and seven wholly foreign-invested firms. About 80 percent of local advertising companies are now working on advertising contracts for foreign-invested advertising firms. Only the remaining 20 per cent have independent advertising contracts, but these are still backed-up by foreign companies abroad. Most foreign advertising firms are not permitted to directly sign contracts with local media agencies. Instead they have to go through local advertising companies to implement ad campaigns in newspapers or TV commercials

The majority of foreign advertising firms are likely to remain as representative offices for the foreseeable future. Many foreign firms work closely with Vietnamese advertising companies in order to support their international clients. Under the BTA, American companies are allowed to enter into joint ventures with Vietnamese firms, to offer advertising services, but the U.S. partner is limited to a 49 percent equity stake. This cap will increase to 51 percent in December 2006, and be fully removed in December 2008.

While highly sophisticated advertising production may have to take place offshore, most production for the multinational ad agencies occurs place within Vietnam, primarily in Ho Chi Minh City. Foreign advertising executives say that the “80/20” rule applies to the geographical distribution of their business in Vietnam: 80 percent of the business is in Ho Chi Minh City, while 20 percent is in Hanoi. Ho Chi Minh City and the surrounding provinces are said to lead the rest of the nation in disposable income, familiarity with foreign trends and brands, quality of broadcast programming and print media, and production skills.

Clients: For the foreseeable future, multinational corporations in Vietnam will provide most of the business for foreign advertising firms. In recent years, the top ten ad buyers in both TV and print have all been foreign-invested companies. Currently, the leading categories of TV ads are toiletries/cosmetics, soft drinks, pharmaceuticals, household cleaning products, and foods. The leading print ad buyers are firms marketing soft drinks, toiletries/cosmetics, vehicles (primarily motorcycles), pharmaceuticals, and transport/tourism services.

Television: Many foreign brand managers make heavy investments in television advertisement campaigns. Over 90 percent of Vietnam’s urban population of 18 million owns televisions. These viewers watch an average of three hours per day, mainly during the peak time of 6-9 p.m. Household television ownership is estimated to be 92 percent in HCMC and 96 percent in Hanoi. However television viewership is higher in the HCMC area throughout the day, and nearly four times that of Hanoi in peak evening hours according to one recent survey. There are five major television stations and one national broadcaster (VTV). With the emergence of satellite dishes, many households also watch international networks (CNBC, CNN, StarTV). Vietnamese advertisers spent an estimated $100 million annually on TV advertising.

In accordance with the recently issued Decree No. 24, advertising campaigns on radio and television must not exceed eight continuous days at any one stage, except in some exclusive cases. A film broadcast on television is permitted to be interrupted no more than twice by advertising, and each instance must not exceed five minutes, while the limit for light entertainment programs is no more than four times, each time not exceeding four minutes. Decree 24 does not permit advertising immediately after the opening music or titles in news and documentary programs, although it is permitted in film, sports and light entertainment programs.

Print Media: While spending on TV advertising increased substantially, it is print advertising that has really exploded, with annual growth rates of around 30 per cent achieved in recent years.

A high literacy rate, a surge in new publications, and increased print media circulation all support the print media’s growing popularity as an effective channel for advertising. Regulations place limits on space allocated for advertisements. Surveys suggest that Vietnam’s advertising rates are the lowest (in terms of cost per insertion) in the Asia-Pacific region. There are over 400 newspapers and other publications in Vietnam, but few have nationwide circulation. Among the more popular publications are “Thanh Nien” (Young Adult), “Nhan Dan” (The People), “Tuoi Tre” (Youth), “Saigon Giai Phong” (Saigon Liberation) and “Lao Dong” (Labor). Within the past year, several international quality publications have begun circulation, including "Nha Dep" (Beautiful Home), "Dinh Cao" (Sports & Fitness), "M" (Fashion) and "Phu Nu The Gioi" (Woman's World), Gia Dinh & Tiep Thi (Family & Marketing). These latest publications are setting new standards for the quality of publishing in Vietnam. English newspapers and publications include the Saigon Times Daily, Vietnam News, Vietnam Economic Times, and Vietnam Investment Review.

Outdoor Advertising: Outdoor advertising ranges from billboards and signboards to public transport, building walls, bus stations, and wash and service stations, among others. Many placements are illegal, so firms should confirm that the advertising agency has proper permits to lease the space.

Under Decree 24, large outdoor advertising billboards that are not suitable to urban planning, social safety, aesthetics and the environment will be restricted in urban areas. For example, billboard advertising in Ho Chi Minh City is restricted to the vicinity of the airport. Advertising on articles such as umbrellas, scooters, booths and roofs does not require a permit; however, it must comply with advertising regulations.

Radio: Radio advertising is not yet widely used for product promotion, but radio ad volume is growing. This is largely due to improvements in programming, such as the inclusion of English lessons and international music along with the standard selection of Vietnamese pop music, which in turn increases the appeal of radio programs to advertisers. Today, the audience represents a cross-section of the population with increasing buying power. There are three major stations and one national broadcaster, Voice of Vietnam (VOV). The cost per thousand listeners is very inexpensive. Although radio has not been so popular as TV and print, radio ad expenditures have doubled over the past few years.

Trade Fairs: Trade fairs are numerous and cover a broad range of sectors, but generally do not provide venues of an international standard for product promotion. Many are co-sponsored by government ministries, SOEs, and industry associations. Common venues are the Giang Vo Exhibition Center, the Viet-Xo Cultural House, and the Army Guest House in Hanoi. In Ho Chi Minh City, the Reunification Palace, international hotels and Ho Chi Minh City International Exhibition and Convention Center are the common locations. Booth rentals at many shows average around US $100/m2.

Pricing

The overriding factor in pricing for the Vietnam market is the low level of per capita income. While consumers want quality and understand that quality comes at a premium, most buying decisions are highly price-sensitive.

Imported products generally begin with higher production costs reflected in the invoice, and then must incorporate the following elements into the pricing structure:

• Import agent fees (typically 1 to 2 percent of the invoice).
• Customs duty. As of a result of the implementation of the U.S. – Vietnam BTA, the Government of Vietnam has granted permanent Normal Trade Relations (NTR) duty rates to goods of U.S. origin. While these are the lowest tariffs levied, they still may be as much as 50 percent on nonagricultural products.
• Value-added tax (VAT) in the range of 5 to 10 percent is levied on the landed cost when the goods change title.

Typical markups for fast-moving consumer goods range from 10 to 15 percent at the distributor level (assuming a fairly high level of distributor service), and retail markups are also in the same neighborhood.

Price plays an important role in the consumer's perception of the product. Although Vietnamese consumers expect to pay a premium for a foreign label or brand, in practice, the actual number of consumers who are willing to pay the higher price is limited. Most Vietnamese buyers are very price-sensitive, as one would expect given the low per capita income. With the abundance of less expensive products in the form of smuggled or counterfeit goods and “copycat” brands, competition is keen. Market analysts agree that one exception to this generalization is consumer durables. Many Vietnamese view the purchase of big-ticket consumer items as both a status symbol and an investment. Therefore, they want to buy the best in terms of quality and durability.

Practical Considerations:

• Import taxes, value-added tax (VAT), special consumption taxes, customs service fees, and delivery delays can quickly price products out of the market or cut margins. The fragmented distribution system creates multiple layers of wholesalers, dealers and vendors, with markups at each stage. Moreover, foreign suppliers are often frustrated by their inability to maintain control over the product's pricing. Random and frequent price fluctuations are common, as many local distributors and wholesalers under-cut prices to achieve a faster turnover or withhold goods to prop up prices.
• One important pricing cycle to note is linked with the Christmas Holiday and the Lunar New Year celebration (several days between late January and mid February, depending on the year). As there is a flurry of buying in the few months preceding these holidays and little activity immediately afterwards, price hikes and reductions follow accordingly.

While individual incomes are rather low, purchasing power may be higher than expected as a result of the extended family organization, which is still quite common in cities (and nearly universal in the countryside). Unmarried adult children commonly live with parents, as do the eldest son and his family. Thus, several wage earners can pool earnings within a household. Similarly, less income is spent on housing per person, and unmarried adult children in particular may be able to spend a large percentage of their income on discretionary purchases. For larger items such as consumer durables, relatives may pool funds to provide one another low-interest or interest-free loans in rotation.

Sales Service/Customer Support

After-sales service and customer support are important components of a sale, as they can distinguish a company from its competitors. Purchasers of foreign products will expect access to a supplier in country, rather than from a regional base. This will be especially true for state-owned enterprises (SOE's). Foreign firms may need to emphasize customer service training for the front-line local staff, as well as technical training for technicians.

Warranties are also an effective marketing tool to assure customers that they are buying a genuine, high quality product. After-sales service is viewed as part of marketing and distribution. Foreign (offshore) suppliers are not permitted to provide direct sales service and customer support unless they have a licensed foreign investment project in Vietnam. Otherwise, a Vietnamese company must provide these services.

Protecting Your Intellectual Property

Vietnam is a member of the World Intellectual Property Organization (WIPO) and is a signatory to the Paris Convention for the Protection of Industrial Property. It has acceded to the Patent Cooperation Treaty and the Madrid Agreement Concerning the International Registration of Marks, and in late 2004 joined the Berne Convention. Vietnam is working to devise a system of protecting intellectual property rights (IPR) consistent with the WTO TRIP’s agreement, and has made related commitments under the U.S - Vietnam Bilateral Trade Agreement. Vis-à-vis TRIPS standards, Vietnam still lacks regulations on the protection of encrypted program-carrying satellite signals

While significant progress on the legal regime for protecting IPR has taken place in recent years, enforcement of IPR remains woefully inadequate at the street level and market level, at least with regard to music, motion picture, software and trademark violations. Most of major cities in Vietnam are rife with music CD, VCD, and DVD shops, with 99 percent of the product on sale pirated. A wide variety of consumer products bearing false or misleading labels are also readily available in the markets, as are counterfeit labels themselves. Local police authorities often are slow to act on court decisions. Violators sometimes negotiate with plaintiffs demanding payoffs to stop producing pirated material.

There are several enforcement agencies involved in and vested with authority to address IPR infringement issues. These include the Ministry of Science and Technology Inspectorate, the Ministry of Culture and Information Inspectorate, the Ministry of Trade Market Management Bureau, the Ministry of Public Security Economic Police, the Ministry of Finance Customs Office and the People’s Court (Civil Court). As a result, there are no clear-cut lines of responsibility among these agencies. Generally, sending warning letters to infringers or bringing civil actions to the courts has not been very effective. Warning letters that are not accompanied by a decision of infringement from the National Office of Intellectual Property (NOIP) are often ignored and court actions are lengthy and relatively costly. Vietnamese courts do not have detailed intellectual property regulations or settled procedures for dealing with intellectual property cases and their knowledge and experience in this filed is still limited. Administrative enforcement has been the most effective approach and is recommended as the first step for dealing with infringement cases in Vietnam.

Foreign firms, which have attempted to work with Vietnamese authorities to enforce IPR regulations at the street level, have reported mixed success. A number of U.S consumer goods manufacturers audit black market and pirated product in the marketplace and attempt to counter it with campaigns of education and incentives.

Due Diligence

Any firm establishing new business ventures in Vietnam should develop business relationships in a positive, but cautious manner. It is imperative that relationship building include adequate due diligence prior to entering into contracts or other commercial arrangements. The overall mentality of the local business sector is oriented toward making money quickly, by any means. The concept of building businesses and business relationships in order to profit in the future is not wide-spread (although one may hear quite a bit of rhetoric about the need for the foreign party to make a long-term commitment). Thus, extra care must be taken to check the bona fides of every business, be it agent or customer, before entering into a business arrangement.

The best way to check the quality of the business and its management staff is to request a list of customers and suppliers that are currently transacting business with the entity. One must make the effort to contact a number of references, in order to verify the validity and integrity of the business. The more references of foreign suppliers and/or customers, the better.

This is especially true for consultants, whether local or foreign. These firms should be able to supply a list of satisfied customers. There have been many cases of consulting firms that have failed to perform in this market. Ensuring that the firm has actually completed several successful transactions on behalf of foreign clients can eliminate these types of situations.

One of the most challenging aspects of developing partnerships in Vietnam is verifying the bona fides of prospective partners. As noted elsewhere, very few firms in Vietnam are audited to international standards. This may change as certain joint-stock companies submit themselves to more rigorous audits with a view to listing on Vietnam's infant stock exchange. Private firms may prefer not to disclose assets and funding sources (let alone liabilities), while information on SOE’s may be considered sensitive by the authorities. There are no commercial credit information services in Vietnam, and banks generally will not divulge to third parties information about the financial status or history of their clients. Faced with such challenges, many foreign parties simply request international law firms to investigate prospective local partners. In general, the following resources are available:

Online company information: Information on a number of companies is available from
· People's Committees: Local municipal governments have information from filings of local corporations. While this is not generally available to the public, authorities do recognize that certain professionals such as attorneys have a legitimate need for such information and may share it with them.
News media databases: A certain amount of information may be obtained from databases (increasingly issued in CD-ROM form) of leading English language periodicals such as the Viet Nam News (http://vietnamnews.vnagency.com.vn), the Vietnam Investment Review (www.vir.com.vn) and Vietnam Economic Times (www.vneconomy.com.vn). This may be particularly helpful in determining whether negative information on a company has been published.