SOES THRIVE AS TOURISM FOCUS SHIFTS FROM INTERNATIONAL TO

UNCLAS SECTION 01 OF 03 HO CHI MINH CITY 000356

SENSITIVE
SIPDIS

STATE FOR EAP/MLS, USAID/ANE, EEB/TPP/BTA/ANA
USDOC FOR 4431/MAC/AP/OPB/VLC/HPPHO
USTR FOR BISBEE
TREASURY FOR CHUN

E.O. 12958: N/A
TAGS: ECON EIND EINV ETRD CVIS SOCI PGOV VM
SUBJECT: SOES THRIVE AS TOURISM FOCUS SHIFTS FROM INTERNATIONAL TO
DOMESTIC

REF: 08 HANOI 1391

HO CHI MIN 00000356 001.2 OF 003



1. (SBU) Summary: While the global economic downturn has
reduced the number of international visitors by 16 percent in
the first quarter, domestic tourism continues to expand and
firms catering to that sector of the market seem to be picking
up some of the employment slack. This is especially important
because by some estimates, tourism employs over ten percent of
Vietnam's workforce. The prime beneficiaries of this shift are
the state-owned enterprises that dominate Vietnam's tourism
sector. The GVN has led efforts to revive international tourism
by reducing prices and fees. These efforts have yet to show
results, and many operators are calling for more aggressive
promotion in overseas markets and the easing of visa
requirements. End Summary.

Domestic Tourism Offsetting the Drop in Foreign Visitors
-------------- --------------

2. (SBU) Overall international arrivals have fallen over sixteen
percent in the last three months, with international business
travel plummeting by over twenty five percent (reftel). The
latter drop has hit HCMC, Vietnam's commercial hub, hard. Five
star HCMC hotels report record low occupancy rates of below 50
percent, while luxury resorts along the central coast are
filling only a quarter of their rooms. The drop off has
prompted the GVN, state-owned and foreign-invested tourism
firms, as well as domestic tourism companies, to launch
promotion campaigns, lower prices and cut costs in an effort to
resuscitate demand. Explosive growth in international tourism
-- 4.2 million visitors last year, up from two million in 2001
-- had been one of the drivers of Vietnam's economic boom.
According to the Vietnam National Administration of Tourism the
tourism sector employed over ten percent of the nation's work
force while a World Economic Forum study estimated it comprised
between four and eight percent of GDP in 2008.


3. (SBU) While foreign tourists are staying home, Vietnam's
middle class continues to travel, both domestically and
regionally. Vietnam Airlines (VNA) Boeing 777s on the HCMC to
Hanoi run are usually packed, and the airline told us that while
international traffic is down 20 percent year on year, domestic
volume is up four percent. Mr. My of Lua Viet Tours, which
caters primarily to a Vietnamese clientele, said the company was
adding tours to meet increasing demand. The company's most
popular international offering, a four day bus tour to Angkor
Wat, Cambodia sells for $195 USD per person, all inclusive, and
is usually sold out. A two day $24 USD package to a beach town
four hours from HCMC is the firm's most popular local tour.
Local consumers are also keeping the bars and restaurants of
HCMC's high end hotels afloat. The manager of the HCMC Sheraton
noted that while 85 percent of the five-star hotel's guests are
foreigners (the hotel has not significantly lowered room rates),
locals account for an analogous 85 percent of the hotel's food
and beverage sales; they pack exclusive HCMC eateries on
weekends to feast on pricey shark fin soup and abalone.


4. (SBU) In fact, some companies catering primarily to
Vietnamese tourists are doing very well. General Director of
Saigon Tourist, Mr. Nguyen Huu Tho, painted a rosy picture of
the state-owned tourism conglomerate's finances: average yearly
profit increases of 25 to 30 percent, a fifty-four percent surge
in customers served in 2008 (against an increase of less than
one percent nationwide),and the construction of three to four
new hotels every year this decade, all financed from retained
earnings. With over 100 hotels and resorts plus ownership of,
or interests in, several airlines, golf courses, banks, and
foreign travel agencies, the SOE's revenues surpassed $500
million USD last year. According to Mr. Tho, the global
downturn has yet to slow growth, with revenues for the first two
months of 2009 in line with 2008's record breaking increase in
revenue. As tourists economize by choosing cheaper lodgings,
the occupancy rates at the three and four star hotels that make
up the bulk of Saigon Tourist properties have remained over 70
percent. In contrast, Saigon Tourist's two five star HCMC
hotels are only half-full, despite room rate reductions of up to
30 percent. Also, Vietnamese now account for some 50 percent of
Saigon Tourist's revenues, which decreases the dependence on the
foreign market according to Director of Saigon Tourist Travel
Mr. Vo Anh Tai.

'Impressive Vietnam' Campaign Impresses Few
--------------

5. (SBU) Because the State has strong interest in supporting a
sector that that contributes directly to provincial and national
budgets, few are surprised that GVN has been trying to promote

HO CHI MIN 00000356 002.2 OF 003


tourism. Responding to the global economic downturn, the GVN
has sought to lower costs for the tourism industry by, for
example, halving the value added tax (VAT) on tourism services
to five percent. The Vietnam National Tourism Association
(dominated by State companies like Saigon Tourist) initiated a
marketing campaign 'Impressive Vietnam' offering discounted
package tours in the hope that cheaper prices will lure more
international travelers. Saigon Tourist is the linchpin in the
GVN's 'Impressive Vietnam' price reduction campaign, with many
of the firm's hotels or resorts offering reduced room rates.
Most of the benefits involve bundling services available under
the broad State umbrella -- Vietnam Airlines is offering fare
reductions of 30 to 60 percent to the approximately 40 tour
agencies that have signed on.


6. (SBU) Few foreign-invested hotels are taking part because
they prefer to maintain control of their pricing strategy and
see little benefit from the program. Tourism officials say the
number of international visitors continues to slide. Hoteliers
and travel agency owners are particularly distressed at the lack
of international advertising. They insist that until it
develops a tourism brand akin to "Incredible India" or "Malaysia
Truly Asia" Vietnam's potential as a high-end tourism
destination will not be realized. Several private tour
operators suggested funding an effective international promotion
would be an appropriate use of GVN economic stimulus funds.
Hoteliers and travel company officials called for stronger
measures, most citing 'visa upon entry' travel and more
aggressive promotion in overseas markets as key to rebuilding
tourist numbers.

SOEs Quietly Dominates Vietnam's Tourism Sector
-------------- --

7. (SBU) Most would be surprised at the level of State
involvement in the tourism industry, one industry analyst
explained, not just state-owned monopolies like Vietnam Airlines
or historic colonial-era jewels like HCMC's Continental or
Majestic hotels, but also substantial equity stakes in the
five-star internationals. After "reunification" in 1975 resorts
and hotels in southern Vietnam were nationalized and were
managed by the Ministry of Public Security. "In the official
mind" many hotels and resorts, or even the tourism sector in
general, remains associated with "reunification", according to
the director of a major 5-star international hotel in HCMC. And
although virtually all of the Ministry of Public Security
officers that initially ran Saigon Tourist (and other tourism
SOEs) have retired, an "MPS mentality still lingers" in the
firm's corporate culture, according to the Director. "The
Majestic or the Continental could easily be HCMC's Raffles, but
as currently run are not compatible with international five star
standards" says another international hotel manager.
International hotel managers likewise point to an unwillingness
to turn over control of key assets to foreigners as being behind
Saigon Tourist's decision to reject numerous offers by
international firms to manage either hotel.


8. (SBU) Private tourism companies, whether hotel/resort or tour
companies, say competing with the SOEs is tough. The private
tourism sector lacks the scale, capital and preferential access
to state-owned airlines, railroads and real estate to compete
meaningfully with state-owned tourism conglomerates. SOEs,
especially Saigon Tourist, snagged most of prime HCMC hotel
sites more than 30 years ago, and aren't interested in doing
anything to benefit of their private sector competition.
Private companies are shut out of many of the discounts offered
by the 'Impressive Vietnam' discount promotion and can't
effectively compete with Saigon Tourist's deep pockets and web
of industry connections. Mr. My of Lua Viet Tourist Co. says
Saigon Tourist seems to get 'first pickings' of discounted seats
on VNA flights, and when asked about Impressive Vietnam's 15
percent discount on rail travel, simply noted that "Vietnam
Railways has their own travel agency." Mr. Nguyen of Hoi An
Express travel said Saigon Tourist receives preferential land
use and lease arrangements from local authorities not available
to his resort properties. He also noted that small tourism
firms like his are not been able to take advantage of the GVN's
Small Medium Enterprise loan subsidy program until they pay off
existing loans. He predicts that fewer than 20 percent of
Vietnam's private tourism firms would survive a downturn lasting
an additional year or more.

Slowdown Forces Productivity Gains
--------------

9. (SBU) As elsewhere, the economic downturn has lead the

HO CHI MIN 00000356 003.2 OF 003


industry to cut costs wherever possible. The manager of a
foreign invested five star hotel in downtown HCMC fondly
recalled the "salad days" of mid-2007. With occupancy rates
averaging 85 percent, the hotel often auctioned the last vacant
rooms to the highest bidder, and focused exclusively on the
business travelers then flooding HCMC, ignoring the tourist
market as "too price sensitive". Since the global downturn
halved occupancy rates in the second half of 2008, the hotel has
cut costs and contract employees. Whereas one thousand
employees served 300 rooms in 2007, now 800 staff cover 500
rooms. Employees have been cross-trained to multi-task and have
foregone a yearly raise, while new technology has cut
expenditures for water and energy. As a result, the manager
notes that although revenues are still down, profit conversion
and productivity have increased, leaving the hotel well placed
for the anticipated recovery.

Comment:
--------------

10. (SBU) The effects of the global downturn on Vietnam's
tourism industry mimic its impact on the broader economy. While
international tourism is down, domestic travel, part of a
broader picture of steady domestic consumption, remains buoyant.
A long downturn will likely trim the ranks of the private
domestic tourism sector, concentrating even more of the industry
in state hands, but will leave a more productive core of
surviving private sector firms. Similarly to the export
manufacturing sector, tourism would also benefit from the GVN
making use of the economic slowdown to "catch up" in
transportation infrastructure. Improved transportation links
between tourism destinations would encourage repeat visits and
longer stays, allowing Vietnam to emerge from the economic
downturn better able to compete with its neighbors for the
tourist dollar. End comment.


11. (U) This cable was coordinated with Embassy Hanoi.
FAIRFAX