Diplomatic Limbo Hinders U.S. Investment in Vietnam : Asia: Twenty years after American troops pulled out, Vietnam is industrializing. Now U.S. firms want back in.

Vietnam’s economic progress can be measured by the usual dry economic statistics. Or it can be measured as it is by Canadian economist Geoffrey Hainsworth--by what causes the trauma that enters the emergency room at Hanoi’s biggest hospital.

When Hainsworth first visited Vietnam in 1989, the emergency ward was filled with pedestrians run down by bicyclists. A couple of years later, the casualties were bicyclists struck by motorcyclists. Then it was motorcyclists colliding with taxis. Now, it is trucks.

“The source of the accident gets more and more capital intensive,” explained Hainsworth, director of the Centre for Southeast Asian Research at the University of British Columbia in Vancouver. “There’s an enormous transportation revolution going on.”

In the two decades since the United States pulled its troops out of Vietnam, the country’s Communist leaders have sought to revolutionize more than their politics.

Spurred by the spread of market economics and the collapse of socialism around the world, the Vietnamese launched their own version of Russia’s perestroika in the late 1980s in hopes of propelling one of the world’s poorest economies into the 21st Century.

The success of doi moi , as the economic reforms are called, can be seen in the clogged streets of Vietnam’s biggest cities, where Mercedes-Benzes, Toyotas and taxis jostle for space.

But corruption, exorbitant rents, poorly developed banking and legal systems and, most important, the continuing diplomatic limbo between the United States and Vietnam have stood in the way of the flood of greenbacks the Vietnamese had hoped would follow last February’s lifting of the U.S. trade embargo.

“The Vietnamese envisioned Americans coming with container-loaded vessels full of dollar bills or jumbo jets crammed with $100 bills. But in part, they knew an America from the 1960s that had lots of money and didn’t face much competition from Asia,” said Mark Reed, an American business consultant who grew up in Vietnam and now commutes between Ho Chi Minh City and Seattle. “It’s a different world in 1995.”

Indeed, Vietnam’s effort to introduce free market reforms to its long-isolated economy has gotten its biggest boost, financially and politically, from its neighbors in Asia, which are expected this summer to accept the country into the region’s most powerful economic grouping--the Assn. of Southeast Asian Nations.

Overseas Chinese investors from Taiwan, Hong Kong and Singapore have led the charge, spurred by their close proximity and historic ties with Vietnam. South Korea, Australia and Japan--Vietnam’s top trading partner--complete the country’s list of leading investors. The United States, which has contributed $270 million of the country’s $11.2 billion in total foreign investment, ranks 13th on the list, behind even Switzerland.

The infusion of hard currency from abroad, combined with Vietnam’s natural resources, low-cost work force and educated population contributed to several years of 8% growth. One of the most stunning turnarounds was the country’s shift last year from being a net rice importer to the world’s third-largest exporter of rice.

In 1994, Vietnam’s total two-way trade was $8.1 billion, up from $4.4 billion in 1991. The potential represented in that dramatic increase is why the California-Southeast Asia Business Council, the U.S./ASEAN Council for Business and Technology and other U.S. business groups are lobbying Congress and the White House to establish full diplomatic relations with Vietnam.

After lifting the trade embargo last year, the Clinton Administration said it would not establish full diplomatic relations until the Vietnamese made more progress toward resolving the whereabouts of more than 2,000 service personnel still missing from the Vietnam War.

Without a normal diplomatic relationship and a bilateral trade treaty, Vietnam is not eligible to receive the benefits of lower U.S. tariffs or low-cost loans and insurance through the Export-Import Bank and the Overseas Private Investment Corp.

U.S. executives, particularly those representing such major exporters as Caterpillar and Boeing Co., argue they are unable to compete with foreign companies able to offer the cash-strapped Vietnamese government such assistance.

Caterpillar recently lost a $7-million contract with a cement company in Vietnam to Komatsu, its top Japanese competitor, because it was unable to provide competitive financing, according to Bill Lane, governmental affairs manager for the Illinois-based company.

That loss was particularly nettlesome for the world’s leading supplier of earthmoving equipment, because it dominated the market in Vietnam prior to the war--and because Vietnam has plans for $7 billion in infrastructure investments.

“The U.S. banks won’t participate in Vietnam until they have some sort of Ex-Im guarantees, and that is absolutely critical to our ability to (get) a meaningful part of the pending infrastructure projects,” he said.

The stakes are particularly high for California.

Home to at least half of this country’s Vietnamese expatriates and several major U.S. investors, the state is positioned to benefit greatly from any increase in the $222-million transpacific trade relationship, according to Jeremy Potash, director of the Oakland-based California-Southeast Asia Business Council.

(Vietnam’s top exports to the United States last year were coffee, seafood and rice; its major purchases were aircraft and parts, fertilizer and cotton.)

Even with the trade obstacles still in place, the fledgling U.S.-Vietnam relationship already gets a boost from the close to 900,000 Vietnamese expatriates living in this country. They and other refugees scattered across the globe send an estimated $1 billion a year back home to their friends and relatives.

But with the 1996 presidential campaign already underway in the United States, a high-ranking State Department official, who asked not to be named, said it is unlikely any major changes will be made in U.S. policy toward Vietnam.

“Politicians have always judged the POW/MIA issue to be a negative political issue,” he said. “The feeling is you don’t gain any votes by doing this.”

Vietnam’s leaders are struggling with far more than the political fallout from the Vietnam War. While the recent economic reforms have made millionaires of a few, the prolonged civil war and the several decades of economic isolation that followed left the country far behind its wealthier Asian neighbors.

But those U.S. firms that already have opened offices in Vietnam--including Coca-Cola, PepsiCo, Unocal, and soon Microsoft--are banking on a national buying spree as the country begins its climb up the consumer ladder. MasterCard International has recently licensed four Vietnamese banks to issue credit cards for the first time in the nation’s history.

Anxious to regain the top position it held in Vietnam’s market before it was forced to leave in 1975, Atlanta-based Coca-Cola already has two production facilities in Ho Chi Minh City and is close to completing a $20-million plant in Hanoi. Over the next decade, the company expects to invest more than $45 million in Vietnam to create a network of manufacturing plants, bottling facilities and distributorships.

“You’ve got a warm climate, hard-working people and a rapidly developing economy with expanding consumer incomes,” said Andrew Angle, president of Coca-Cola’s division for Southeast and West Asia. “That’s an excellent market for soft drinks and for consumer goods in general.”

Competition is particularly fierce for a piece of the country’s huge oil and gas reserves and infrastructure market.

Los Angeles-based Unocal has applied to join Mobil and other foreign competitors drilling for oil off the coast of southeast Vietnam. Expectations are high for the South China Sea, which is home to an estimated $1-trillion worth of oil and gas reserves. But the risks are equally daunting, from a volatile territorial dispute involving China and half a dozen other Asian countries to the region’s unpredictable geology and turbulent seas.

U.S. construction giants Brown & Root International, Morrison Knudsen and Bechtel are among those vying for the multibillion-dollar job of modernizing Vietnam’s roads, ports and telecommunications systems. Included on the list are millions of dollars worth of work on Highway 1, the 1,430-mile arterial stretching from China to the Gulf of Thailand.

When Telstra, Australia’s largest telecommunications company, first got involved in Vietnam in 1986, there were only nine international telephone lines serving the entire country. Now, Telstra has installed more than 2,000 international circuits and is eyeing Vietnam’s antiquated domestic telephone network, which the government wants to replace with the latest in digital technology.

“Where they used to have only one telephone per village, now, with Western investment, they have the financial muscle to put 2,000 telephones in one office development,” explained David King, Telstra’s general manager in Vietnam.

Sixty foreign banks, including Bank of America and Citicorp, have established offices in Vietnam, largely to serve the foreign trade community. Access to capital remains a huge hurdle for foreigners since the state-owned banks, which still dominate the banking sector, make most of their loans to state enterprises.

But Luu Le, Vietnam manager for B of A, said Vietnam’s finance officials are taking steps to loosen restrictions so that commercial banks, domestic and foreign, can expand their services. At present, B of A has a branch in Hanoi offering wholesale banking services and a representative office in Ho Chi Minh City limited to advisory services.

“Both sides, meaning the Vietnamese side and the foreign side, understand there are a lot of things to do,” Le said. “The point that is a little bit sensitive is the pace of change.”

Much work remains for Vietnam’s leaders, from rewriting the commercial code to modernizing the government’s auditing and accounting system. Last week, the National Assembly passed a landmark law making state-owned companies more independent and establishing rules for their reorganization and dissolution. This law is crucial to the government’s plan to sell shares in the firms and establish a stock market to attract investment.

Nguyen Manh-Hung, director of the Indochina Institute at George Mason University in Fairfax, Va., fears the Vietnam government’s failure to move more quickly to settle such fundamental issues as property ownership could prove politically and economically destabilizing.

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Vietnam’s top leaders, he said, are party loyalists who are strong on dogma, weak in technical know-how and reluctant to relinquish power to those with the skills to help the country through this painful transition period.

“The Vietnamese government doesn’t want to fall behind,” he explained. “On the other hand, it doesn’t want to be (politically) disoriented. But it can’t have its cake and eat it, too. Some kind of basic political decisions must be made that provide an atmosphere that is stable and can encourage long-term investment rather than short-term, get rich-quick schemes.”

Foreign executives complain of the high cost of doing business in Vietnam, including widespread corruption. Shortages of real estate, telephone lines and other basic amenities have sent prices skyrocketing, making Hanoi and Ho Chi Minh City among the world’s most expensive places to do business. Rents for good office space are higher than in New York City, and a phone call from Ho Chi Minh City to the United States costs $5 a minute.

Establishing a joint venture means negotiating a gantlet of bureaucrats that stretches from Vietnam’s State Committee for Cooperation and Investment down to the local level. Foreigners cite numerous examples of nightmarish bureaucracy, including the requirement that as many as 71 signatures be obtained on an application for a foreign investment license.

For those reasons, Vietnam can be hostile territory for small entrepreneurs without extensive overseas experience and deep pockets.

Kevin Silva, the San Francisco-based manager of Vietnam trade for Radix Group International, a Los Angeles-based freight forwarder, said he has fielded many calls over the past year from small California entrepreneurs looking for advice on how to crack the Vietnam market.

His advice? Go elsewhere.

“Unless you’re a very big company, there are a lot better places to make money,” said Silva, whose firm has an office in Vietnam through a joint venture with Jardine Matheson, the British trading company.

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But Peter Collino, the chief financial officer of EPG International, an Anaheim manufacturer of water filtration systems, said it is possible for a small company like his to succeed in Vietnam with help from the local Vietnamese community. He said the cultural expertise and language skills of his partner, Michael Nguyen Le, were critical to their company landing nearly $1-million worth of business in Vietnam in less than a year.

“It’s not too expensive (to operate) if you’re either Vietnamese or you can move around and know the culture,” Collino said.

EPG, which owns a chain of Water Gourmet retail stores in California, is among those benefiting from one negative result of Vietnam’s leap into the industrial age--a dramatic increase in smog and water pollution. The firm sells a wide range of water filtration equipment, including a low-cost product being used by Pepsi Cola to enhance the purity of its soft drinks.

One key to EPG’s success in Vietnam has been its pricing: Its disposable ultraviolet sterilization system sells for just $40.

“Anything that goes over there has to be inexpensive,” Collino said.

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Not Yet a Tiger

Vietnam has attracted more than $11 billion in foreign investment since the late 1980s, most of it from the Far East. Economic growth has been strong, but poverty still dominates; the per capita income is $170 a year.

Foreign investment in Vietnam

In dollars:

Rank Country No. of Projects Investment, in billions 1 Taiwan 172 $1,97 2 Hong kong 170 1,80 3 Singapore 76 1,12 4 South Korea 102 0.936 5 Japan 76 0.792 6 Australia 43 0.662 7 Malaysia 32 0.585 8 France 59 0.513 9 Switzerland 13 0.459 10 Holland 18 0.385 11 England 15 0.376 12 Thailand 47 0.294 13 United States 28 0.270

Note: Data as of February

Vietnam At A Glance

Area: 205,840 miles sq.

Population: 72.3 million

Population growth rate: 2.2%

GDP per capita: $170

Life expectancy: 67 years

Infant mortality: 36 per 1000 live births

Adult literacy rate: 88%

Total exports: $3.6 billion

Total imports: $4.0 billion

Economic Growth in Vietnam

Vietnam’s imports are expected to increase sixfold in the 1990s:

Vietnamese exports are expected to more than double in the next four years:

Similarly, the country’s gross domestic product, is expected to be twice as large in 1999 as it was in 1991

Sources: U.S.-ASEAN Council for Business & Technology; Vietnam’s State Committee for Cooperation and Investment; World Bank; Bank of America World Information Services.

Researched by EVELYN IRITANI and JENNIFER OLDHAM / Los Angeles Times