by Kevin Latner
Area: total area: 329,560 sq km
land area: 325,360 sq km
comparative area: slightly larger than New Mexico
Land boundaries: total: 3,818 km
border countries: Cambodia 982 km, China 1,281 km, Laos 1,555 km
Coastline: 3,444 km (excludes islands); maritime claims: contiguous zone: 24 nm; continental shelf: 200 nm or to the edge of the continental margin; exclusive economic zone: 200 nm; territorial sea: 12 nm
Land use: arable land: 22%; permanent crops: 2 percent; meadows and pastures: 1%; forest and woodland: 40%; other: 35%; irrigated land: 18,300 sq km (1989 est.)
Population: 73,976,973 (July 1996 est.)
Population growth rate: 1.57% (1996 est.)
0-14 years: 36% (male 13,739,304; female 12,988,929)
15-64 years: 59% (male 20,956,735; female 22,448,944)
65 years and over: 5% (male 1,548,513; female 2,294,548) (July 1996 est.)
Economic overview: Vietnam's economic performance has been impressive in 1990-95, with real growth averaging over 8% annually. Much of this growth comes from a surge in foreign investment outlays which are estimated at $750 million in 1995, up 50% from 1993 levels. Utilization of development assistance is also increasing, rising to an estimated $535 million in 1995. Foreign capital is contributing to a boom in commercial construction and strong growth in services and industrial output. Crude oil remains the country's largest single export but now accounts for only one-quarter of total exports, slightly more than manufactures. Imports are dominated by capital and intermediate goods closely related to investments. Vietnamese authorities understand the need to move quickly to establish the financial and legal infrastructure needed to sustain growth through the remainder of the decade. Reform of the banking sector is proceeding slowly, raising concerns that the country will be unable to tap sufficient domestic savings to maintain rapid growth. While government officials are leading an effort to accelerate reform, their continuing ideological bias in favor of state intervention and control of the economy may slow progress toward a more liberalized investment environment. Even with the strong growth of the economy, unemployment remains a major problem at 25 percent.
GDP: purchasing power parity - $97 billion (1995 est.)
GDP real growth rate: 9.5% (1995 est.)
GDP per capita: $1,300 (1995 est.)
GDP composition by sector: agriculture: 28%; industry: 28%; services: 44% (1995 est.);
Inflation rate (consumer prices): 14% (1995)
Labor force: 32.7 million by occupation: agricultural 65%, industrial and service 35% (1990 est.)
Unemployment rate: 25% (1995 est.)
Budget: revenues: $4.67 billion; expenditures: $5 billion, including capital expenditures of $1.36 billion (1995 est.)
Industries: food processing, textiles, machine building, mining, cement, chemical fertilizer, glass, tires, oil
Industrial production growth rate: 14% (1995 est.)
Agriculture: paddy rice, corn, potatoes, rubber, soybeans, coffee, tea, bananas; poultry, pigs; fish catch of 943,100 metric tons (1989 est.)
Exports: $5.3 billion (f.o.b., 1995 est.)
commodities: crude oil, rice, marine products, coffee, rubber, tea, and garments
Imports: $7.5 billion (f.o.b., 1995 est.)
commodities: petroleum products, machinery and equipment, steel products, fertilizer, raw cotton, grain
Vietnam's population is almost 75 million people, about equal to Germany and larger than England, France, Italy or Spain. In terms of population, it is a third the size of the United States. In terms of land area, however, it is slightly larger than the New Mexico, giving Vietnam the distinction of being almost as densely populated as Java, Indonesia, with an average population density of over 200 people per square kilometer.
After almost 20 years of communist rule, Vietnam has taken several step towards market reform. Should the government continue to seek membership in multilateral trade agreements, like the World Trade Organization, and a more active role in international trade, Vietnam could be the next Asian tiger.
Vietnam is primarily an agriculturally based economy. Approximately 60 percent of the total population are rural farmworkers. Recently, Vietnam has undergone a massive reorientation in agricultural production policies. Vietnam's Soviet style centrally planned economy for agricultural production began to fall by the wayside in 1985 and was supplanted by 1988 with its current policy. Now, with the exception of production concerns based on national security considerations production decisions are made at the farm level and inputs are available nationwide. Agricultural support policy appears to be limited to loans at 50 percent of the market rate (which is currently about 13 percent) for operating expenses. Minority groups may also apply for loans at 15 percent for capital improvements.
However, there most outlets for internationally traded agricultural goods are state entities, and market information is relatively concentrated. Sales opportunities are often limited to government purchasing agents. Thus, while the agricultural production sector has been liberalized, the state enterprise control of distribution and international trade channels puts Vietnam at a comparative disadvantage vis-a-vis developing countries with more liberal trade policies. The central government is committed to assisting farmers by looking for export markets and purchasing domestic production for export.
Almost all agricultural land is owned by the government. Use rights are provided by the government or acquired by the Vietnamese equivalent of adverse possession. Land use rights confer upon the holder the free enjoyment to any use of the land as he or she sees fit, including the right to buy, sell, rent, mortgage or exchange the use right. Should the government exercise its right to eminent domain over an individual's use right, the government must compensate the holder of that right. One difference between land rights in Vietnam and the United States is that use rights are limited, usually to a term of 30 years.
The government of Vietnam has removed production subsidies; however, through the Ministry of Agriculture and Rural Development (MARD), it would like to improve farmer income. Currently the MARD is researching how to encourage foreign direct investment. However, there is governmental concern that China will enter and exercise undue control over the Vietnamese economy. Additionally, Vietnam government officials look at increased production principally as a way to increase exports and foresee continued restrictions on imports.
There is leaf and cigarette production throughout Vietnam. Cigarettes are produced in 10 plants nationwide, including 5 that belong to the state owned Vinataba, and 5 that are owned and operated by provincial governments. Nationwide production is approximately 50 billion cigarettes and is about 70 percent of capacity. Vietnam's only exports are to Russia and China and represent less then one percent of total production; there are no official imports of cigarettes. Domestic leaf production nationwide is at least 32,000 metric tons. Leaf tobacco imports are principally for production of foreign brands produced for the domestic market and represents between 20 and 30 percent of total leaf use.
At the beginning of the crop year, the Leaf Tobacco Corporation, subsidiaries of Vinataba, the state owned cigarette manufacturer, cigarette producers and a very small number of private leaf tobacco traders contract with farmers. The farmer can provide all inputs and then sell the highest bidder or, more often, the farmer will accept seed, fertilizer, pesticides, fungicides and some agronomic advice from the buyer, and pay the cost of inputs out of the return from sales of the tobacco.
The efficiency of production varies greatly. One private leaf tobacco trader, LTZ, provided assistance, including the cost of inputs, to farmers for a net cost of 4,000 Dong (US $ 0.34) per kilogram in 1996. During the same period, the state operated Long Binh, in the South charged farmers 10,000 Dong (US $ 0.86) for its cost of inputs. Last year top grade flue-cured tobacco fetched about 12,000 (US $ 1.02) Dong per kilogram, fob at the farm, and between 17,000 and 20,000 Dong (US $ 1.46 to US $ 1.72) per kilogram, c&f at the processing plant, dry weight.
Around Hanoi, acreage used for tobacco production has declined drastically from 2,000 hectares in 1976 to approximately 280 hectares in 1996. In the north there are two growing seasons, winter and spring. Winter planting is around the late October and early November and harvest begins in January. Spring planting is around late February and early March and harvest begins at the end of April and the beginning of May. Of the two crops, winter is the better crop, providing better quality leaf and almost double the output. Average production for the winter crop is 1,500 kilograms per hectare as compared to 800 kilograms per hectare for the spring crop.
In addition to leaf processing capabilities at the cigarette manufacturing plants, there are two leaf processing companies, the Northern Leaf Tobacco Processing Company and the Southern Leaf Tobacco Processing Company (SLTP). SLTP was formed in 1989 with four principle responsibilities: promote growing leaf by providing curing facilities and providing inputs; develop the use of increased varieties through an extension program; build a leaf processing facility to process leaf for domestic cigarette manufacturers; and, develop exports. SLTP can process 7,000 tons of green leaf per year. Last year they processed 3,000 tons of local flue-cured tobacco, 500 tons of local burley, and approximately 3,000 tons of local dark air cured tobacco. Of this they exported approximately 700 tons of tobacco including 500 tons of dark tobacco, and 100 tons each of burley and flue-cured tobacco. Losses in processing are 30 percent for flue-cured tobacco and 40 percent for burley and dark tobacco. The facility has cold storage for 1000 tons of green leaf and a backup power supply. The price that SLTP pays for premium class leaf is approximately 20,000 Dong (US $ 1.71) per kilogram, but inputs provided by SLTP cost about 12,000 Dong (US $ 1.03) per kilogram, leaving farmers with a net of 8,000 Dong (US $ 0.68) per kilogram. SLTP pays 10,000 (US$ 0.86) for class 3 leaf.
SLTP has 13 buying and extension support facilities throughout the southern region and has two basic contracts with farmers, one to provide inputs and technical advice and the other to purchase tobacco. The leaf tobacco corporations have also begun drying for the farmers. Their rational is that once they take possession of the leaf they no longer have to worry about the farmer taking the leaf to a competing buyer, and thus they secure their sources of production. Notwithstanding this trend, most drying is done on the farm. Barns are approximately 2 meters square and between three and four meters high. Normal capacity is approximately 700 kilograms of harvest and produces 70 kilograms of green leaf. New barns of this type cost approximately US $ 1,000 to build. Once built operating costs are for labor and coal, which costs approximately 300,000 Dong (US $ 25.81) per ton; coal is the principle heat source. Each dry kilogram of leaf requires five kilograms of coal.
Driven by the private entrepreneurial spirit, LTZ, one of the few private leaf tobacco traders would like to see production increase ten times in the Hanoi province, from the current level of 500 tons to 5,000 and 6,000 tons by the year 2000. Private traders believe that with increased income to the farmers to increase production and increased capital investment to provide the infrastructure required to support the increased production, these goals are attainable. The principle problem for private enterprise, and to a lesser extent state enterprises, is the ability to acquire capital. Alternatives includes government sponsorship or loans, or joint ventures with foreign capital investors. In the near term LTZ would like to see a five to ten percent increase in production for 1997.
Cigarettes are either manufactured by Vinitaba, the federally owned state trading enterprise, or by provincial governments. Vinataba's member companies include 5 cigarette manufacturing plants, including primary processing, and two leaf tobacco processing plants. Each plant operates as a separate company and will produce the Vinataba brand plus as many as 20 of their own line of cigarettes. There are over 80 different brands in Vietnam. Of the primary processing plants, one is located in north Vietnam and the other is located in the south. The number one cigarette production facility is the Saigon plant, in Ho Chi Min City, followed by the Vinh Hoi and Thang Long plants.
Total domestic production of cigarettes is about 32 billion sticks with Vinataba accounting for 24 billion sticks, about 75 percent of the local market, with the remaining market share held by provincial producers. Vinataba used approximately 28,000 tons of domestic leaf while importing approximately 10,000 tons. Of the 10,000 metric tons of imported leaf, apparently 7,000 tons was imported from Cambodia and the remaining 3,000 tons was imported from Canada, India and Zimbabwe.
Most of the cigarette companies purchased second-hand manufacturing equipment in the late seventies, after the war, from East Germany, the Czechoslovakia and the USSR. Until the breakup of the Soviet Union, significant exports were directed towards Central Europe and the Soviet Union. Currently an insignificant number of domestic cigarettes are exported.
Although current policy does not permit cigarette imports, locally produced foreign brands make up between 15 and 18 percent of the local market. Foreign cigarettes produced under contract with Vinataba include 555, Dunhill, Marlboro and Salem. The Vietnamese production of Cravens is a joint venture with Vinataba and RJR. Preferring English style cigarettes made with flue-cured tobacco, the most popular foreign brand is 555 with Cravens and Dunhill second and third, respectively. (Additionally, production facilities do not provide for the tobacco blending required to produce American blend cigarette.) Foreign brand cigarettes sell for between 8,500 and 11,500 Dong (US $ 0.73 to US $ 1.00) per pack. This is about double the wholesale price, fob at the factory. About 6 billion cigarettes were smuggled into Vietnam in 1996, making up about over 15 percent of domestic consumption. Most smuggled cigarettes are of those brands available through domestic production and sell for 1,000 to 2,000 Dong (US $ 0.09 to US $ 0.17) per pack more than domestically produced foreign brands.
The Thang Long cigarette manufacturing plant has a maximum capacity of 6 billion sticks but is producing only 4.8 billion sticks; 30 percent of which are hard pack (Vinataba and Dunhill) and 15 percent of which are non-filter. Seventy percent of tobacco inputs are for flue-cured cigarettes and the remainder are for dark tobacco cigarettes.
The Thanh Hoi cigarette plant produces 2.4 billion cigarettes per year, about one third of capacity, principally of 3 main brands. The plant was established in 1966 and became a member of the Vinataba group in 1996. Thanh Hoi uses no imported tobacco and between 450 and 500 tons of tobacco per year comes from 400 hectares (HA) of farmland in the vicinity of the factory. Most of this is relatively low quality flue-cured tobacco. Production is at about 1,100 tons per HA and the highest quality produced in the areas draws 14,000 Dong (US $ 1.20) per kilogram. The ex-factory price of cigarettes are from 4,620 Dong (US $ 0.40) per pack for Vinataba to 700 Dong (US $ 0.06) per pack for Thang Long, the cheapest cigarette. These prices include the 36 percent excise tax.
Thanh Hoi expects to increase cigarette production between 10 to 15 percent per year. Currently there are no exports and the difficulties of competing on the world market make it unlikely in the near future. Currently the company does not make a profit and is not required to do so by Vinataba. The company has been advised that they should encourage the increased production of quality leaf and will be working with farmers to do so.
Production machines at Thanh Hoi include GBE/Legg for primary processing, Molins, Hauni, Neipmann and Korber, the most sophisticated cigarette producing machine producing about 5,000 sticks per minute, and Molins, Slovakia and Brookland Machine Co. for cigarette packing.
The Vinh Hoi cigarette factory is located in Ho Chi Minh (HCM) City and is the second largest cigarette producer, behind the Saigon Cigarette Factory. The factory was originally organized by a French owner in 1936 and was taken over in 1975 by Vinataba. They have independent accounting and have a cooperative agreement with Phillip Morris. Import and export issues, however, Vinataba Import Export Group decides. Seventy percent of tobacco is provided from local tobacco and SLTP. The other 30 percent is acquired directly from farmers. Like the other companies, they have been directed to encourage the production of leaf tobacco. The total leaf requirement for 1996 was 7,000 tons, excluding tobacco required for Marlboro production which was entirely imported.
Vinh Hoi produced 6.4 billion sticks in 1996. Of this, approximately 200 million were premium brand. This is down markedly from previous years production of 8 billion in 1995 and 10 billion in 1994. The primary processing facility continues to work at about 80 percent of capacity. The principle reason for the decline is the focus of production at the Saigon Cigarette Company production facility, also in HCM City, which produces over 20 billion sticks per year, of which approximately 500 million are premium cigarettes, 410 million Vinataba brand and 80 million 555. Approximately 60 percent of production is non-filter. Saigon was previously owned by BAT and produced exclusively non-filter.
Recently Vinh Hoi has purchased a stem processing machine, costing US$ 5 million. Like much of their other equipment, the machine is processed by Comas Tobacco Machinery in Silea, Italy. They expect to import 100 tons of stems from India to incorporate into their cigarettes. However, they continue to use mostly old Molins MK8 for making cigarettes. They also use Decoufle, Melia, Dulich, and Hauni cigarette manufacturing machines for a total of 18 production lines.
There is a two tier tax structure on cigarettes. All cigarettes are charged a special consumption tax. For cigarettes with local tobacco the special consumption tax is 36 percent. Cigarettes with foreign content of more than 50 percent pay a special consumption tax of 45 percent. If the foreign leaf content is less than 50 than the special consumption tax is between 36 and 45 percent. The special consumption tax is very much like a value added tax (VAT) based on the wholesale price. Vinh Hoi pays a 45 percent special consumption tax on their production of Marlboro. There are also imports on all other cigarette imports, including the foil, filter and paper used in production. Additionally, there is a 2 percent tax on the ex-factory price. The tariff on imports of leaf tobacco is 30 percent.
Both advertising and promotion of tobacco products are banned in Vietnam. Enforcement, however, is not rigorous and advertising within establishments is at the discretion of its proprietor. The practical effect is that while television, radio, newspapers, and magazines do not have promotional outlets and there are no large billboards with cigarette ads, many small signs are affixed to vehicles, located in drinking and eating establishments and even cover the booths of the street venders that dot the street corners.
In its most recent session, the National Assembly passed the Law on Trading permitting promotion but not advertising of tobacco products. The proposed effective date is 1 January 1998. However, it still must be properly implemented by the Primer Minister. The change would legitimate promotional lighters, and such, that carrying tobacco product ads. Additionally, the law on trading would change some of the tax structure as it applies to tobacco and tobacco products. Tax legislation also passed the National Assembly in the most recent session that contain a three tier VAT of 5, 10 and 15 percent. The effective date for this legislation is 1 January 1999. Once implemented, it would eliminate the 2 percent ex-factory tax and replace it with a 5 percent VAT on leaf tobacco sales to cigarette production facilities and a 5 percent VAT on cigarette sales to distributors. Where the cigarette producer and the distributor are vertically integrated the 5 percent VAT on cigarette sales would be waived in favor of a 32 percent income tax, encouraging vertical integration.
The future of growth in Vietnam depends in the government's ability to rebuild its infrastructure and free up the flow of trade in goods and services. The government has taken an important first step by decentralizing most agricultural productions decisions. The large educated population provide ample possibilities for modernization and continued economic growth. Continued monopolization by Vietnamese companies and strict market controls could thwart Vietnam's prospects. However, FAS is committed to assisting in developing Vietnam as a market and has had a representative posted there since October of last year.
* Commodity information is based on a fact finding trip to South Asia by the Author.