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Cablegate: Vietnam: Trading and Distribution Rights Update

This record is a partial extract of the original cable. The full text of the original cable is not available.




E.O. 12958: N/A


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.

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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
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.

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