Investing in Vietnam: Opportunities and Practical Issues in Trade and Distribution Sector

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OLIVER MASSMANN AND GILES T. COOPER
DUANE MORRIS VIETNAM LLC
Investing in Vietnam:
Opportunities and Practical Issues in
Trade and Distribution Sector
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Agenda:
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• Vietnam at a Glance
• Foreign Investment and M&A Activity
• Regulatory Background in Trade and
Distribution Sector
• Investment Opportunities in Trade and
Distribution Sector
• Practical Issues and Recommendations for
Foreign Investors in Trade and Distribution

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Vietnam at a glance
• Official Name: Socialist Republic of
Vietnam
• Location: South East Asia
• Neighbors: China, Cambodia and Laos
• Area: 331,688 Km2
• Coastline: 3,260 Km
• Capital: Hanoi
• Largest city: Ho Chi Minh City (Saigon)
• Number of province: 64
• Currency: Vietnamese Dong (VND)
(01 USD = 21075 VND)
• Language: Vietnamese
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Vietnam 2012 Economy at a glance
• GDP: US$141.7 billion
• GDP per capita: US$1,596
• GDP Growth: 5.0%
• Inflation: 9.0%
• Population: 88.78 million
• Labor force aged 15 and above: 51.69
million
• FDI: US$16.3 billion (4.7%
increase)
• Total Export turnover: US$114
billion with trade surplus worth
US$284 million
• Minimum wage: VND1.15 million
(US$ 55) per month ((June 2013)
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Macro economy situation - Vietnam at a glance
 From a new emerging Asian country
• In 2007: 150th WTO member with
average annual GDP growth : 7.2 %
• In 2008: No. 1 attractive emerging market
destination for retail investment
• Sharp increase in FDI: US$12 billion
in 2006 to almost US$72 billion in 2008
 To an economy in crisis
• GDP in 2012: 5.0%
• Sovereign debt: 56.7% GDP and Non performing loan: 8.8%
• Out of top 30 most attractive emerging retail market
• IMF lowered forecasted GDP growth from 5.8% to 5.2% in 2013
and from 6.4% to 5.2% in 2014
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Foreign Investment and M&A Activity
 M&A Market
• Sharply dropped FDI and
current cautious economy
• But M&A in Vietnam is still
active
• Japanese investors keep
coming to Vietnam
• Emerging wave of M&A
from ASEAN investors
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Foreign Investment and
M&A Activity (cont)
M&A deals by sector:
• Private Equity: continuing exits by
Vietnam focused funds and relatively
little in the way of new investments
• Financial Services: pressures from competition and capital requirements may push
smaller banks to look to new foreign investors to achieve expansion
• Real Estate: whilst the office, serviced apartment and hotel sector appears to
become less attractive, the condominium/villa sector is still attractive
• Infrastructure: huge demand for power, roads, ports, bridges, etc. encourages
private investment in this sector
• Distribution and retail sector: continues to attract a great deal of attention despite
the ongoing concerns over legal restrictions facing foreign investors
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Foreign Investment and M&A Activity (cont)
 Vietnam’s biggest
foreign direct investors
as of end 2012
 Singapore now ranks
first among foreign
investors in Ho Chi
Minh City with 622
investment projects
worth $6 billion
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No. Investment Partners
Number
of
projects
Total registered-
invested capital
(USD)
Charter
capital (USD)
1 Japan 1849 28.699.621.246 8.149.053.836
2 Taiwan 2234 27.129.094.760 10.924.000.860
3 Singapore 1119 24.875.349.749 7.132.496.424
4 South Korea 3197 24.815.962.168 8.557.624.062
5 BritishVirginIslands 510 15.386.367.951 5.302.624.922
6 Hong Kong 705 11.966.693.190 3.885.429.926
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The United State of
America 648 10.507.189.345 2.518.764.942
8 Malaysia 435 10.196.424.427 3.587.302.682
9 Cayman Islands 54 7.505.985.912 1.551.590.422
10 Thailand 298 6.063.689.790 2.682.720.169

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Foreign Investment and M&A Activity (cont)
 Vietnam’s main
trade partners in 2012:
Source: IMF (DoTS)
 New investment wave expected after signing FTA with the
EU and TPP: FTA and TPP are a big chance for Vietnam to
attract more FDI and to engage globally
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No. Partners Mio US$ %
World (all
countries)
255,273 100.0%
1 China 54,029 21.2%
2 EU 27 29,615 11.6%
3 Japan 26,340 10.3%
4 United States 25,318 9.9%
5 South Korea 23,466 9.2%
6 Singapore 13,895 5.4%
7 Hong Kong 11,836 4.6%
8 Thailand 10,376 4.1%
9 Malaysia 9,239 3.6%
10 India 5,961 2.3%

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REGULATORY BACKGROUND
IN TRADE AND DISTRIBUTION
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Regulatory Background in Trade and
Distribution Sector
 Legal framework:
• Vietnam’s WTO Service –sector Commitments: Vietnam’s
commitments to international community on opening up of its
service sectors
• Investment Law dated 29 November 2005: Providing general
ground for foreign investment in Vietnam
• Decree 23 dated 12 February 2007: Specifying conditions for foreign
investment in purchase and sale of goods and services in Vietnam
• Decision 10 dated 21 May 2007: Listing specific goods subjecting to
restriction (e.g. petroleum based products like lubes) or prohibition
(e.g. gasoline) from distribution
• Circular 08 dated 22 April 2013: Detailing procedures and
conditions for foreign investment in purchase and sale of goods and
services in Vietnam11

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Regulatory Background in Trade and
Distribution Sector (Cont)
 What are foreign investors allowed to do?
• Exercise trading rights (i.e. export and import rights)
• Exercise distribution rights
• Establish retail outlets
• Engage in the trading of goods and related activities
with an export processing enterprise
• Contribute capital to, or purchase shares in, Vietnamese
enterprise that engage in trade and distribution of goods
and related activities
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Regulatory Background in Trade and
Distribution Sector (Cont)
 Trading rights: Offshore investor and foreign invested enterprises
(FIEs) may exercise Trading Rights from 01 January 2007, Vietnam’s
WTO accession date. However, FIEs export goods imported into
Vietnam must complete all import tax and financial obligations
 Distribution rights: From 01 January 2009, wholly FIEs are entitled
to invest in distribution services
 Exceptions for Restricted Goods: FIEs can not import/export or
distribute goods either legally prohibited from circulation or subject to
State monopoly (e.g. gasoline, cigarettes, etc…) or open only to local
companies (e.g. petroleum based products like lubricants;
pharmaceutical products and drugs)
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Regulatory Background in Trade and
Distribution Sector (Cont)
 Retail rights:
• All foreign investors licensed to engage in distribution business are
automatically entitled to establish FIRST retail outlet
• BUT the establishment of the second retail outlet toward is subject
to a permanent Economic Need Test (ENT) by the licensing
authority, which is often seen as the most troublesome issue
 ENT requirements:
• Previously unclear on criteria and subject to discretion of
licensing authorities on a case by case basis
• Recent development provide more opportunities by ENT
exemption cases and more transparency in licensing
procedures
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INVESTMENT OPPORTUNITIES IN
TRADE AND DISTRIBUTION
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Investment Opportunities in Trade and
Distribution Sector
 A population of about 88 million (13th
most populous country). Most are young,
easily adaptable to new trends, especially
technology products and buying habits
in retails stores
 A promising consumption heaven:
Vietnamese tends to purchase expensive
products if they are able to afford
 Lack of professional and effective retail
and supply system throughout the
country
 Western-style shopping malls are
attractive to high-end retailers from US
and EU
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Investment Opportunities in Trade and
Distribution Sector (Cont)
 Development of modern retail
channels: The percentage of modern
retails channels doubled 20% after
WTO’s accession Vietnam expects to
raise this percentage to 45%
 Increase of retail turnover: Total
retail turnover of goods and consumer
services in 2012: US$ 11.7 billion) up
by 16% over 2011 (Source: General
Statistical Office of Vietnam).
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Investment Opportunities in Trade and
Distribution Sector (Cont)
 A leading agri-food exporter with
products, e.g. rice, coffee, fruit, seafood,
etc… Agriculture and rural development
have contributed 25% of Vietnam’s GDP
 Long coastline with great geography to
become an Indochina logistics hub, able to
export to and import from key markets.
Placed 53rd among 155 economies in the
ranking table of the logistics sector
• A growing market for many industry such
as FMCG, education, health care service
and products
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Practical Issues and Recommendations
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Practical Issues and Recommendations for
Foreign Investors (Cont)
 Despite the legal framework for foreign investment,
in practice of law interpretation and application by
Vietnamese authorities, there are big differences
among Vietnam’s 64 provincial licensing authorities
 Foreign Investors face impediments doing business
in Vietnam, such as:
• Legislative and bureaucratic obstacles
• Inconsistent application of regulations
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Practical Issues and Recommendations for
Foreign Investors (cont)
 Legislative and bureaucratic
obstacles:
• Licensing procedure period: 30-45 days
according to laws. However, this
procedure can last for months in practice
• ENT requirements: Despite recent
development, it will take a while to
assess the application of new regulation
and any positive effects that it may bring
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Practical Issues and Recommendations for
Foreign Investors (Cont)
 Inconsistent application of regulations:
• Must have a harmonized system code
(HS Code) when distributing products
= Problematic requirement as HS
Codes are limited in scope and do not
cover all products intended to import
and distribute
• If not fall within HS Codes: Must seek
an opinion from customs department
=> costly and time-consuming process
• However, some authorities do not
acquire HS Code definitions and limit
the scope of the license to those and
some other do allow unlimited scope
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HS Code Description by Vietnam Customs System
Chapter 64
6404 Footwear with outer soles of rubber, plastics, leather or
composition leather and uppers of textile materials.
- Footwear with outer soles of rubber or plastics:
640411 - - Sports footwear; tennis shoes, basketball shoes, gym
shoes, training shoes and the like:
64041120 - - - Footwear for wrestling, weight-lifing or gymnastics
Code CPC Description by UN Statistics Division
28210-2
Socks, stockings and other women's hosiery, knitted or
crocheted
29310-0 Waterproof footwear of rubber or plastics
29320-0 Footwear of rubber or plastics, other than waterproof
29330-0 Footwear with uppers of leather
29340-0 Footwear with uppers of textile materials
29410-0
Ski-boots, snowboard boots and cross-country ski
footwear
29420-0
Tennis shoes, basketball shoes, gym shoes, training
shoes and the like

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Practical Issues and Recommendations for
Foreign Investors (Cont)
 Inconsistent application of regulations:
• Unclear definition of FIEs:
1% or 49% or 51%?
• Case Study 01: Mekophar’s delist from Ho Chi
Minh City Stock Exchange
 Recommendation: Be careful about types of goods and
service and check the list of prohibited and conditional
ones, the list of HS Code detailed items
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Practical Issues and Recommendations for
Foreign Investors (Cont)
 Intellectual Property Rights Theft in Vietnam:
• Piracy and IPR infringements are still widespread in
Vietnam and enforcement remains ineffective
• Obtaining injunctions from a Vietnam court against IPR
infringement is very difficult in Vietnam
• Criminal penalties of VND 500,000,000 (US$23,720) or non
custodial reform of up to 02 years can be imposed against
willful infringement of industrial property rights over
trademarks on a commercial scale
• However, it is unclear what will be considered as
commercial scale
• Vietnamese judges have very limited experience in dealing
with IP disputes. To date, very few IP cases have been
litigated24

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Practical Issues and Recommendations for
Foreign Investors (Cont)
 Case Study 02: Domain dispute of Samsung Mobile
 How to protect your IPRs in Vietnam:
• Register trademarks, patents and other IP rights as early as
possible
• Follow IPR registration of the NOIP closely
• Involve foreign business associations and diplomatic
organizations in the fight against IPR infringers
• Always enter into confidentiality agreement with
employees, which must survive upon termination of labor
contracts
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Practical Issues and Recommendations for
Foreign Investors (Cont)
 Competition Law Issues:
• An M&A of enterprises holding a combined market
share of more than 50% of the relevant market shall be
prohibited, except in case after M&A, the surviving
company or newly formed company remains a small or
medium sized company
• Competition Law prohibited a number of restrictive
agreements and practices, irrespective of the market
share of the involved parties:
 Preventing, restraining or disallowing the entrance of
business development of competitors
 Exclusion agreement
 Bid rigging26

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Practical Issues and Recommendations for
Foreign Investors (Cont)
 Competition Law Issues:
• Agreement prohibited when the combined
market share of participating enterprises
makes up 30% or more of the market:
 Price Fixing
 Market allocation
 Restricting or controlling quantities or volumes
 Imposing unfavorable conditions on the others
 Case Study 03: Premium fixing agreement of 19
automobile insurers
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Practical Issues and Recommendations for
Foreign Investors (Cont)
 Double Tax Issues:
• Wide discretion on interpretation and
application of DTAs and Vietnamese tax
laws of the tax authority
• The DTAs may not be applied if the tax
authorities consider the foreign investors to
be abusing the DTAs to avoid tax
• The regulation of permanent establishment
is ambiguous and subject to the decision of
tax authority with little clear guidance about
how the authority may exercise it’s discretion
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Practical Issues and Recommendations for
Foreign Investors (Cont)
 Foreign exchange control:
• Vietnam Dong is not freely convertible, subject to
control by the State Bank of Vietnam (SBV)
• Must specify the cost of all transactions, “payments, price
listings, advertisings, evaluating and quotations” in VND
• Must open an investment account in VND to conduct
investments in Vietnam, and convert all indirect investment
amounts from foreign currency into VND via such account
• Registration with the SBV is required in respect to investment in
form of convertible loan, convertible bond or shareholder loans
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Practical Issues and Recommendations for
Foreign Investors (Cont)
 Governing laws: The law of Vietnam requires to be governed
in case having foreign element (e.g. dispute relating to rights to real
estates in Vietnam, dispute of transportation contract with the
transporter having head office or branch in Vietnam)
 Dispute settlement:
• In principle, foreign arbitration is permitted for contracts between
foreign and domestic entities
• However, recognition and enforcement of arbitration awards in
Vietnam are very arduous
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Recommendations for Foreign Investors
 It is your chance now, take it: Invest into the
development of the value chain in this fast-
emerging market!
 In-depth understanding of Vietnamese law and
extensive local expertise!
 Careful and thorough investment action plan will
lead to great success!
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DUANE MORRIS VIETNAM LLC
Thank you!
Duane Morris Vietnam LLC Duane Morris Vietnam LLC
Pacific Place, Unit V1307/08, 13th Floor, Suite 1503/04, Saigon Tower
83B Ly Thuong Kiet, Hoan Kiem District 29 Le Duan Street, District 1
Hanoi, Vietnam Ho Chi Minh City, Vietnam
Tel.: +84 4 39462200 Tel.: +84 8 3824 0240
Fax: +84 4 3946 1311 Fax: +84 8 3824 0241
Contact email:
omassmann@duanemorris.com gtcooper@duanemorris.com
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