SAIGON HIGH TECH PARK ENTICES US INVESTMENT

UNCLAS SECTION 01 OF 02 HO CHI MINH CITY 000573 SENSITIVE SIPDIS STATE FOR EAP/MLS E.O. 12958: N/A TAGS: ECON ETRD EINV EFIN VM SUBJECT: SAIGON HIGH TECH PARK ENTICES US INVESTMENT ¶1. (SBU) Summary: Saigon High Tech Park (SHTP) has emerged as a significant new hub for high tech investment in Vietnam. Preferential tax treatment, direct governmental access, and VAT and import duty exemptions are just a few of the benefits that have lured many U.S. investors, laying the foundation for other companies to follow. While SHPT is quite popular, it is far from the only choice open to high tech investors and new regulations and worsening traffic are chipping away at SHPT's competitiveness. End Summary. ¶2. (U) As of July 6, 2009, Saigon High Tech Park (SHTP) is home to 38 companies representing a total capital of over $1.71 billion dollars and 8,500 local and foreign employees. U.S. companies have invested over $1.2 billion dollars, including Intel's computer microprocessor and chipset production factory, Jabil's print circuit board factory, and Pulse's micro acoustic instrument and silicon microphone factory. Other investors, such as Oregon-based Datalogic Scanning's new factory, are clearly U.S.-related although not U.S. owned. (Datalogic Scanning is now owned by Datalogic of Italy.) A state owned and operated organization, SHTP is in the process of completing Phase I of its 300-hectare development plan, with 613 more hectares scheduled to be developed during Phase II. SHTP's Magnet Effect -------------- ¶3. (U) The 2006 establishment of the Intel Facility was a major milestone for the park, not only because of Intel's $1 billion in direct investment, but also because of the credibility the high-tech giant has provided and the huge potential market for suppliers to co-locate with Intel. Now that Intel and other major US companies are well-established, SHTP's leadership hopes smaller firms will quickly follow, lured by the benefits of shared resources, increased collaboration and greater access to customers/suppliers that close proximity to larger firms will allow. ¶4. (SBU) Firms have flocked to SHTP in part because of Vietnam's relative competitive edge over China in certain areas. The General Manager of the recently opened Datalogic facility noted they chose Vietnam over China because of issues with China's less favorable tax policy, continuing labor problems (including high turnover) and high risk of intellectual property right infringement. High Tech Law Creates Challenges -------------- ¶5. (SBU) As of July 2009, new investors to SHTP are obligated to abide by the new high tech law requiring technology companies to allocate 1% of total revenue for research and development (R&D) in the first three years and over 1% from the fourth year onward. Additionally, hi-tech products must make up 60% of total annual revenue in the first three years and at least 70% from the fourth year onward, and companies must ensure 5% of the staff are university graduates. The law does offer land and tax incentives for hi-tech enterprises meeting the requirements--such as an exemption from the corporate income tax (CIT) for four years and a 50% reduction for another nine years. While these rules are, in theory, easily met by most high technology firms, there can be a significant gap between theory and paperwork. What, precisely, counts as R&D at a production facility? Do improvements in production line efficiency count even if they are based upon employee input rather than "scientific research"? Also, can the cost of the molded plastic case -- or even the cardboard packaging -- of a high technology product be counted toward the minimum revenues derived from high tech products? So far, the answers are not entirely clear. SHTP representatives told EconOff that although lawmakers are in the process of developing the implementation guidelines for the high tech law, SHTP fears a decline in potential investors once the regulations go into effect. It will be worth monitoring how this new law affects investment in the long run. ¶6. (SBU) Because of the new law, SHTP has been forced to improve its incentive package. Large investors (defined by SHTP as $500 million or more) are now eligible to receive a tax package under HO CHI MIN 00000573 002 OF 002 which they will pay zero tax for the first four years, five percent through year nine, and 10 percent for the next thirty years. Previously, tax incentives were the same for the first nine years but then ended entirely after year 11. In addition to the tax rate adjustment, SHTP will also continue to offer competitive land pricing, VAT and import duty exemptions on machinery, equipment and construction materials and "one stop" servicing in terms of providing everything from construction of facilities to hiring after contracts are signed. Challenges for the Future -------------- ¶7. (SBU) In addition to the challenges presented by the new high tech law, potential investors are worried that SHTP's power and waste disposal facilities will not be serviced adequately by HCMC's poor infrastructure, and that Vietnam's labor force does not have the high tech skills needed to support further market growth. In response to infrastructural concerns, SHTP published a brochure outlining the infrastructure capabilities of the park. It cannot, however, change reality on the ground. Over this past summer, a consortium of firms operating at SHTP have been engaged in a so-far futile attempt to convince HCMC leaders to take urgent action to address key infrastructure issues, including the rapidly worsening traffic between the city center and SHTP. SHTP is located on the city's eastern edge, so firms locating there face longer trips to the city center than do firms locating in competing industrial parks located nearer to the center of the city. HCMC's oldest export processing zone, Tan Tao, is in the process of converting 20 percent of its land area into a new high technology park and has already attracted numerous investors, including U.S. firms such as Alpine BioMedical. ¶8. (SBU) Concerning the lack of skilled labor, SHTP has begun collaborating with local universities and vocational schools to better prepare students. SHTP also developed a specialized training facility where companies can work with SHTP to customize programs that guarantee their employees will have the skills needed to perform. A second training center is now in the works, and SHTP has also submitted suggestions to city governmental officials in Ho Chi Minh and local academic institutions for ways to improve their high tech curriculum in order to ensure a well-prepared work force for future high tech jobs. While helpful, these steps cannot address overall, systemic weakness in the Vietnamese educational system. While companies appear quite hopeful that the situation will be resolved in the long term, in the short term they are resorting to hiring more expatriate staff than originally planned. ¶9. (SBU) COMMENT: While high technology development in Vietnam or even just in the southern region is clearly not dependent upon the success of SHTP, experience around the world -- including in the USA -- has repeatedly shown the importance of having a significant concentration of high technology firms in order to generate the positive externalities that help the whole industry grow. While SHTP has played a useful role in providing a central hub for investment and investors are generally positive about their decision to locate there, factors outside of the control of park management are increasingly clouding SHTP's future prospects. Vietnam is not facing a crisis -- yet -- but the same challenges facing SHTP could negatively impact what currently appears to be a very bright future for Vietnam's high technology sector. END COMMENT. FAIRFAX