VIETNAM: TRADING AND DISTRIBUTION RIGHTS UPDATE

UNCLAS SECTION 01 OF 02 HO CHI MINH CITY 001335 SIPDIS STATE FOR EAP/MLS AND EB/TPP/BTA/ANA DEPARTMENT PLEASE PASS USTR ELENA BRYAN AND GREG HICKS USDOC FOR 4431/MAC/AP/OPB/VLC/HPPHO E.O. 12958: N/A TAGS: ETRD ECON BEXP VM WTRO BTA WTO SUBJECT: VIETNAM: TRADING AND DISTRIBUTION RIGHTS UPDATE REF: HANOI 2377 ¶1. (SBU) SUMMARY: Vietnam's limits on trading and distribution are a financial burden to U.S. companies trying to sell their goods in Vietnam. U.S. business representatives estimate that having to use Vietnamese trading and distribution companies to get U.S. goods into Vietnam's market adds as much as 18 percent to the cost of goods brought into Vietnam. One U.S. company that availed itself of trading rights granted under the U.S.-Vietnam Bilateral Trade Agreement (BTA) in the last year appears to have gotten approval to have those rights extended into 2006. END SUMMARY. ¶2. (U) EconCouns and HCMC EconOff met recently with HCMC-based U.S. companies that are adversely affected by Vietnam's restrictions on trading and distribution. U.S. and other foreign companies are prohibited from directly importing and distributing their goods in Vietnam and must use a Vietnamese company, often a state-owned enterprise (SOE),to sell products here. The BTA provides phase-ins for trading and distribution rights; currently, U.S. companies involved in substantial manufacturing may import other goods directly, though they must still use a Vietnamese distributor. The BTA also currently allows U.S. firms to have a 49 percent stake in a joint venture distribution company. ¶3. (SBU) A U.S.-owned logistics firm, American Indochina Management (AIM),that markets and sells American consumer goods, equipment and construction materials provided a breakdown of the costs incurred by being unable to import and distribute these goods directly. AIM has an exclusive Vietnamese distributor, which has its own infrastructure and overhead. This means there are two companies to sell the same products; each company has its own expenses, and each must show a profit. Each company must pay taxes. AIM, which is registered offshore, is limited in the amount of capital it can access since the Vietnamese company holds the firm's assets, i.e. the goods being distributed. AIM's director estimated that this structure adds between 18 and 19 percent to the value of the goods being distributed. This additional cost must be recovered by increasing the sale price of the goods. ¶4. (SBU) An American pharmaceutical business, Abbott Laboratories, that sells medicine and nutritional supplements in Vietnam estimated the fact that it cannot import its products directly adds as much as 10 percent to the cost of its goods, including service charges that must be paid to SOEs that import its products. Pharmaceuticals are one in a list of goods under the BTA that are subject to additional phase-ins beyond those set for general trading/distribution rights. Abbott would likely still use a local distributor, even were it allowed to distribute directly. For Abbott, the inability to import its goods directly is where the additional costs lie. ¶5. (SBU) Another U.S. company, Monsanto, that sells hybrid seeds and herbicides in Vietnam estimated that the inability to trade and distribute directly adds 10 to 15 percent to its cost structure. Were it able to distribute directly, Monsanto would incur the cost of setting up a distribution network, but the firm would be able to better control sales and marketing. Much of its seed sales depend on a distributor's knowledge of the science behind and benefits of the various hybrids. Monsanto can only provide limited product knowledge and support to Vietnamese distributors, in part because of intellectual property considerations. Vietnam's weak protection of intellectual property rights has resulted in counterfeit versions of the firm's seeds appearing in the local market. Monsanto is reluctant to share detailed information with Vietnamese distributors due to these problems. ¶6. (SBU) Carrier, an American firm that sells residential and commercial air conditioners said trading and distributing indirectly added five to ten percent to the sales price of its goods. Carrier's managing director said that though five percent may not seem like a large number, some of the company's commercial chillers sell for USD 200,000, which means as much as USD 10,000 can be added to the price as a result of having to go through a local importer/distributor. Trading and distribution restrictions also limit Carrier from selling to large construction projects. Carrier can submit bids to install its air conditioners and chillers, but cannot bid to supply the equipment itself. ¶7. (SBU) Proctor & Gamble noted that local distributors do not always have sufficient capital to supply the market with the amount of goods demanded by consumers. For example, Proctor & Gamble has a beauty product that is in high demand, but distributors have only a finite amount of capital to purchase the good from Proctor & Gamble, which is reluctant to extend a large amount of credit to local distributors. P & G has observed significant quantities of smuggled or counterfeit versions of this beauty product in the market in response to the limited official supply and high demand. P & G also pointed out that the GVN loses import duties as a result of the U.S. company having to use local distributors that have limited amounts of capital with which to place orders. If P & G could distribute directly, it would import more product and therefore pay more in duties. ¶8. (SBU) At the same time, the GVN continues to follow through on implementation of its BTA obligations in this area, albeit slowly. Mission is aware of one U.S. company with manufacturing facilities in Vietnam that has been able to import its goods directly, as mandated by the BTA. However, that company, Colgate Palmolive, reported experiencing delays in having those rights extending into 2006. Following its initial application for trading rights (reftel),Colgate was granted permission within two weeks of its application to import directly for the rest of 2005. Colgate's application with the Ministry of Trade to extend these rights was met with requests for further information and delays in response to Colgate's submission of its application and additional information. Colgate has heard informally that permission to import directly in 2006 has been granted, but it awaits formal notification. ¶9. (SBU) COMMENT: None of the companies we visited had any interest in distributing through a 49 percent joint venture, as is currently permitted by the BTA. All said they would need to be able to distribute independently before costs would be cut and in order to be able to control distribution fully. U.S. firms will be able to form 100 percent-owned distribution companies to distribute certain products beginning in 2008, according to the BTA. All the firms agreed that direct trading and distribution rights for a broader range of products should be granted more expeditiously. WINNICK