VIETNAM - With its acceptance into the WTO club in January 2007, Vietnam’s packaging industry is standing on the edge of one of the greatest growth and investment opportunities in Asia, if it can overcome the hurdles of transparent documentation, corruption and a complete lack of a distribution chain.

Comparisons between Vietnam and China are inevitable: both are Communist countries, both have a strong Confucian-based culture, both have opened their economies to foreign investment and influence in the past 20 years, both restrict the business vehicles that foreign investment can use, both have GDP growth in the 8-9 per cent range and both have a low-cost labour force, although Vietnam is actually a much cheaper place to do business than China.

But the comparisons end there as China’s population of 1.3 billion presents a massive domestic market and dwarfs Vietnam’s 84 million.

But that’s just a matter of perception; were it not for Vietnam’s proximity to China, the population of 84 million would seem to be a significant market – that’s about 30 million more people than the UK.

Population distribution is roughly: Ho Chi Minh City (formerly Saigon) with 40 per cent, Hanoi 20 per cent, while the other main urban areas such as CanTho, DaNang, HaiPhong share 15 per cent with the rest in countryside, rural farming communities.

Astoundingly, about 50 per cent of Vietnam’s 84 million population is under 20 years old, which equates to a longer working lifespan therefore creating more disposable income over their working life and consequently a greater demand for packaged products.

With average annual GDP growth levels of 8 per cent for each of the past ten years, Vietnam’s packaging sector has been growing at 13–13.5 per cent annually. Yet less than 70,000 people in the entire country qualify to pay personal income tax.

However, since modern retail is the prime enabler of packaging, we’re up the Mekong Delta without a paddle, because in Vietnam there is absolutely no formal distribution networks whatsoever. The scale of the problem is astounding: there are more than 200,000 retail outlets throughout the country which represent 85 per cent of the total retail market, although in reality only 83,000 of these are conventional stores, the rest are makeshift stalls and roadside stands. This excludes the hundreds of thousands of wet market, fresh produce stalls which are the main source of food for the majority of the country.

Much of VietNam's economy remains at the 'informal' level

While it may appear from the sheer numbers involved in retail, that Vietnam’s retail sector is healthy, the reality is that it is chaotic. No formal distribution networks exist to channel product from manufacturer down to consumer. For Vietnam’s domestic potential to be realised, distribution is the critical key.

The penetration of modern retail in the main two cities of Hanoi and Ho Chi Minh is about 15% but nationwide modern trade is less than 7%.

Compounding the difficulties are the clear differences in consumer profiles between north and south. By law, Vietnam’s distribution sector is not a protected market, but the reality is that to get product into 80,000 outlets with any semblance of order, no one company can handle it.

By law, Vietnam’s distribution sector is not a protected market, but the reality is that to get product into 80,000 outlets with any semblance of order, no one company can handle it.

In China, having had more than 12 years of the steady march of MNC retailers such as Carrefour and Wal-Mart, the MNC brand owner has a much easier route: pay above the line promotional costs, listing fees (company registration) go to the two MNC retailers, or the nine major domestic chains which hold greater market share than the foreigners, and essentially they are open for consumer business.

In Vietnam, even when they pay above the line, and listing fees, they’re still nowhere, as they have to find a way to reach more than 83,000 retail outlets.

So we must expect that within the next 12–18 months that a Tesco, Carrefour or Wal-Mart will be taking tentative steps to penetrate the market, and when that happens, they will find a consumer market ready for packaged product.

Ethics

Vietnam’s Confucian heritage and values play a big part in consumer behaviour, and have been incorporated into the Communist ethic. From a Confucian perspective you work now for the benefit of future generations.

What that translates to in a practical sense is that Vietnam has the highest literacy rate in third world Asia (excluding first world Singapore), the workforce is well educated, and as a result there is a growing awareness of the need for greater food security. Food hygiene in the wet market is completely absent.

In particular, there is a growing demand for dairy products – mainly milk for school children – but it is not uncommon for rural families to do without little luxuries so that the children can share a 200ml carton of milk.

Vietnam’s dairy sector is undergoing a major boom with the lead domestic player, VinaMilk, aiming for a listing on the Singapore Stock Exchange – the first Vietnamese company to do so. Much of the capital it will raise is to fund a distribution network.

Now that the WTO has permitted Vietnam into the exclusive club, opportunities abound, and perversely Vietnam’s colonial past and the US war may actually work in the country’s favour. Every American over the age of 30 could probably point directly to Vietnam on the map (as well as most Europeans), which is more than can be said for The Philippines, Malaysia, Myanmar, or even Singapore (I still get mail addressed to me at ‘Singapore, China’!). This geographic familiarity does play a small but important part in the competition to attract foreign investment and to win export markets: more than 70 per cent of the frozen seafood on supermarket shelves in the USA is from Vietnam.

In addition to its cheap labour-force and the fact it is more receptive to foreign investment money, unlike the Chinese who can take it or leave it), Vietnam also has two secret weapons:

• • Its foreign investment law allows direct overseas investment in local companies – they have to be fully private joint stock shareholding companies. This is unlike China where a third party entity must be formed, which means that the foreign and local companies jointly own the JV. Of course, the local partner continues to operate his own business, and often competes directly with the JV.

In Vietnam, a direct investment effectively means that this cannot happen, since both parties are ostensibly working towards the same objective – the company’s profitability.

• • Vietnam’s membership of AFTA, the Asean Free Trade Association of 10 member states (of which China is not a member) gives it access to the entire South East Asian market at preferential tariffs, generally 2-3 per cent as opposed to non-AFTA tariffs of 25 per cent - an important factor for companies targeting the more than 500 million consumers in the region.

As the Vietnamese chief financial officer of an American co-packer told me earlier this year:

“This is a great time for the generation born in 1975. They’re the first generation in 200 years who have known no war, and they’re old enough to take advantage of the entrepreneurial opportunities which are opening.