CENTRAL VIETNAM'S CHU LAI OPEN ECONOMIC ZONE: STILL

UNCLAS SECTION 01 OF 02 HO CHI MINH CITY 001118

SIPDIS

SENSITIVE

USDOC FOR 4431/MAC/AP/OPB/VLC/HPPHO

E.O. 12958: N/A
TAGS: EINV ECON ETRD EAIR EWWT VM
SUBJECT: CENTRAL VIETNAM'S CHU LAI OPEN ECONOMIC ZONE: STILL
WIDE OPEN

REF: A) HCMC 1091 B) HCMC 1092

SUMMARY
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1. (SBU): Quang Nam province in central Vietnam is preparing
to develop as central Vietnam's industrial hub with a
massive open economic zone (OEZ) in Chu Lai. The Chu Lai
zone covers 30,000 hectares and includes a seaport, airport,
tourism areas and an industrial zone. Quang Nam provincial
leaders predict Chu Lai will become a trading center much
like nearby Hoi An was three hundred years ago. Chu Lai's
industrial zone holds significant promise given its large
supply of land and cheap labor; the jury is still out on the
zone's transportation infrastructure projects. The
progressive attitude of Quang Nam's leaders and their
willingness to let market needs shape Chu Lai's development
bode well for the project's overall success. END SUMMARY.

AMBITIOUS PLANS FOR CHU LAI
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2. (SBU) As part of the Consul General's October 4-7 visit
to central Vietnam (reftels),a ConGen team visited the Chu
Lai Open Economic Zone, located on Quang Nam's southeast
coast, just north of the Dung Quat oil refinery project.
The OEZ's investment promotion chief, Le Thi Tranh, said Chu
Lai was established in June 2003, and is partially funded by
the GVN. In a separate meeting, Quang Nam Party Secretary
Vu Ngoc Hoang told the Consul General that he personally
lobbied the Politburo to establish Chu Lai and sold national
leaders on the concept that Chu Lai could be an industrial
hub for central Vietnam, like Ho Chi Minh City is for
southern Vietnam and Hanoi/Haiphong are for the north.


3. (U) Chu Lai's ambitious infrastructure plans include a
seaport and an airport. The port is currently small, narrow
and can accommodate only small ships of no more than 6,600
deadweight tons (dwt). The OEZ plans to increase the port's
capacity to accept ships of up to 20,000 dwt and dredge the
port to a depth of 11 meters. Chu Lai's port would compete
with nearby Danang and Quy Nhon ports on the central coast,
which are already processing large volumes of cargo. In a
subsequent meeting in HCMC with Quang Nam Party Secretary
Hoang and Chu Lai's director, Do Xuan Dien, Dien said that
the port would be developed gradually to meet Chu Lai
customer requirements and that Chu Lai's managers look to
private sector investment to shape the port's growth in the
most economically viable manner. For example, Dien
anticipated that Chu Lai's port would serve the bulk
shipping needs of two prospective projects, a glass
manufacturing plant and an automobile refurbishing
operation.


4. (U) Chu Lai's other major infrastructure project is its
airport. The former U.S. airbase was reopened for commercial
traffic in early 2005 with a new terminal to handle twice
weekly passenger flights. However, the plan is to expand the
current facility with a much larger airport that will
accommodate some of the world's largest airplanes, including
the Airbus A380. Chu Lai's leaders see the airport, which
is slated to have a 6.5 million ton cargo capacity, as a
transit point for the broader southeast Asian region. Chu
Lai has 2,300 hectares set aside for this project, which
could be expanded to 3,000 hectares. Two new runways, 4 km
long and 60 meters wide, are also planned.


5. (U) In addition to serving as a cargo hub, the airport
will also act as an aircraft service and maintenance center
for the region, according to Chu Lai's planners. Investment
promotion chief Tranh said the OEZ is working with a Belgian
group that plans to finance and build a hangar that will
hold eight planes. When the ConGen team questioned the need
for another large airport near Danang International Airport,
Tranh noted that Danang's airport is located in Danang
City's center and cannot be expanded or developed easily, in
contrast to Chu Lai.

INDUSTRIAL ZONE IS PROMISING


6. (U) Chu Lai's industrial zone has several advantages that
could make it attractive to investors, including broad
tracts of land, a potentially abundant and cheap labor force
and attractive financial incentives. The OEZ offers a
number of corporate tax breaks: no corporate tax in a
project's first four years, 5 percent for the next nine
years, and 10 percent from year 15. Thanh observed these
rates compared favorably to Vietnam's current corporate tax
rates of 15, 20 and 28 percent. Workers also pay 50 percent
less than the national rate in income taxes. There is no
tax on imported equipment and materials for the first five
years of a project. Tranh also noted that land in Chu Lai
is cheap. It can be leased for one-sixth the cost of land
in southern Vietnam, and leaseholds can be granted for up to
70 years.


7. (U) While there are only a handful of plants currently
operating in Chu Lai, Tranh said that 117 investors have
registered projects including auto assembly, seafood
processing, packaging and glass manufacturing. As many as
17 projects are actually under construction. There are also
plans to develop tourism in Chu Lai's coastal areas,
including a USD 40 million proposal from the Victoria Hotel
chain, which owns luxury hotels throughout Vietnam.


8. (U) Chu Lai's largest operating factory, Truong Hai Auto,
illustrates the OEZ's industrial potential. Open since
September 2004, the family-owned plant currently has the
capacity to assemble 7,400 trucks and buses per year on a 38-
hectare site. The vehicles are assembled based on
Completely Knocked Down (CKD) kits with parts imported from
Korea and China. Using kits from Daewoo, Hyundai and Kia,
Truong Hai assembles the trucks and buses, paints them using
an electro disposition process, and test drives them on a
course next to the factory. According to Mr. Tran Ba Cuong,
Vice President of Operations, a 550kg Truong Hai minibus
with parts from China retails for USD 5,000. A dealer will
charge USD 8,000 for a 1.2 ton truck from the plant. Cuong
told the ConGen team Truong Hai plans to increase its output
to 25,000 units. The factory occupies an area of 38
hectares and its first stage of investment cost $25 million.
Truong Hai currently employs 500 workers, 60 percent of whom
come from the surrounding area, and the company plans to
increase its workforce to 2,400. The firm has brought BMW
consultants to the factory to help train workers, most of
whom were farm laborers previously. Cuong said Chu Lai's
tax-free policy and labor force led his family to invest
there. He also noted Chu Lai's central location allows him
to ship products to the North and South.


9. (SBU) COMMENT: We found Chu Lai OEZ to be vast, but
remote and still in a very early phase of development. The
large-scale infrastructure plans are ambitious, with USD 75
million set aside by the GVN for development of the port
alone. However, these projects may compete for funding with
also critical road and rail networks to existing ports, both
air and sea. Chu Lai planners are keen to develop a major
air cargo transshipment point, but they know that Fed Ex,
UPS and DHL have already gone to Philippines, Taiwan and
Thailand respectively. Another challenge for Chu Lai is
developing a skilled workforce. While the pool of labor in
Quang Nam is relatively large, including potential worers
rom the more impoverished western part of Quang Nam, Chu
Lai's developers admit training these workers is a
challenge. There are plans to open training centers in Chu
Lai, and there is interest in tapping U.S. expertise in this
area.


10. (SBU) COMMENT, CONTINUED: Despite the obstacles, the
leaders of Chu Lai and Quang Nam are approaching the OEZ's
development from the right perspective, which is to let the
private sector shape the course of Chu Lai's growth.
Provincial leadership has adopted to a laissez-faire
approach and is committed to ensuring that the OEZ has the
most accommodating legal and administrative framework
possible under Vietnamese law. Quang Nam has already
consulted the Fulbright Economic Teaching Program in HCMC to
assist it in crafting regulations for Chu Lai that make the
most sense for a venture that aims to link Quang Nam with
the world economy.

WINNICK