BUSINESS REPORT
retail
Vietnam's retail
sector has long been
a target of foreign
. Investors eager to access its 88 million consumers with growing spending power and demand for quality products. • Mr MINH
COOPER and Mr TRAN
Duane Morris Vietnam
istorically, retail has been one of the most restricted investment sectors for foreign investors in Vietnam, with regulations and policies designed to limit their access in the h6pe that domestic players would develop and fill the market space. Prior to WTO accession in January 2007 very few foreign invested retail operations were licensed in the country, and those tended to be negotiated on a case-by-case bilateral basis with the Vietnamese Government and accompanied by heavy capital investment commitments. Upon joining the WTO, Vietnam agreed to a road map to open up market access in the trading and distribution sectors in general and now foreign investors have - on paper clear rights to access the market to import all non-restricted goods and to provide all kinds of distribution services, including retail activities. Despite this, practical and policy barriers have hampered foreign investment in rhis important sector and rhe government has been under increasing pressure to give meaningful effect to its WTO commitments in rhe field. Recent draft legi;;lation, whilst welcome,
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VIETNAM ECONOMIC TIMES, JANUARY 20 II
suggests that
will be incremental.
SOLID PROSPECTS The first nine months of 2010 have seen high levels . of foreign investment commitment to Vietnam and an impressive trade surplus for the foreign investment sector of some $1.7 billion compared to the country's overall $2 billion trade deficit. Despite this, foreign investment in the distribution sector remains low. More than three years since joining the WTO, Vietnam has significantly changed its legal and investment environment to open up and facilitate the distribution sector, especially for retail activities. Not long ago, Vietnam ended India's three-year reign as the most attractive emerging market destination for retail investment, according to the seventh annual Global Retail Development Index, a study of retail investment attractiveness among 30 by emerging markets conducted management consulting firm A. T. Kearney. Vietnam's investment attractiveness in retail was based on the long-term stability of economic growth, the stable political environment, a young population, increased consumer awareness and spending (an impressive 75 per cent increase between
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2000 and 2007), and the rapid urbanisation of Vietnam (with more than 1 million people a year migrating to the two large cities ofHo Chi Minh City and Hanoi). As at the end of 2009, Vietnam had 446 supermarkets, of which just 21 were foreign invested, and a large proportion (425) being State-owned. Gross revenue reported by foreig!1 invested enterprises in the retail sector accounts for just 4-5 per cent of the total retail market's gross revenue. While a number of flagship foreign invested rerail operations have been licensed in Vietnam such as Metro Cash & Carry (Germany), Big C (France), Bourbon (France), Parkson (Malaysia), and Diamond Plaza and Lotte (South Korea) rhere is a distinct absence of smaller or non department!supermarket brands.
WTO COMMITMENTS AND DOMESTIC LAW Under its WTO commitments, Vietnam has to open up its service sectors to investors from WTO member countries. The right to exportlimport and distribute are among Vietnam's WTO commitments and are to be opened to foreign investors in phases. The forms of whoHy foreign owned company (WFOC) and joint venture company (JVC) are permitted for exercising provisions of disrriburion services in accor
BUSINESS REPORT be imported and exported are subject to a government list on such goods. FIEs licensed to trade, including both JVCs and WFOCs, may import goods and sell the imported goods to one or more local licensed distributor(s) for onward distribution. Pursuant to Decree 23, "distribution" means activities of wholesaling, retailing, agency for purchase and sale of goods and franchising in accordance with the law of Vietnam. Where a company is granted a specific distribution right, it is given the right to directly sell goods to end users, either organisations or individuals (retail) or the sale of goods to traders or other organi sations, excluding the sale of goods directly to end consumers (wholesale).
INVESTMENT CER1'IFICATE
dance with Vietnam's WTO commitments. Distribution services include (i) commission agents' services, Oi) wholesale trade services, (iii) retailing services, and (iv) franchising. Upon accession to the WTO, a foreign investor was allowed to establish a JVC with local partners/shareholders to engage in distribution services, with the foreign investor's capital contribution to be no more than 49 per cent of total charter capital. From January 1, 2008 a majority foreign owned JVC was permitted and as ofJanuary 1, 2009, WFOCs were permitted in the distribution sector.
TRADING RIGHTS VS. DISTRIBUl'ION RIGHTS Vietnamese law distinguishes between the acts of "trading" and "distribution". The rules applicable to foreign invested enter prises (PIEs) wishing to engage in these activities differ depending on each activity. Where a company is granted the right to engage in import and export (trading), it is given the right to directly import and export permissible goods, without having to go through a State owned or local trading company. The right to import is the right to bring goods into Vietnam and includes the right to sell such goods to properly licensed distributors in Vietpam. The goods that may
outlet ends on the expiration date of the Ie. The establishment of a second and subse quent retail sales outlets is permitted on a case-by-case basis subject to compliance with the so-called "economic needs test" (ENT) , which consists of analysis of a number of factors, including the proposed number of retail sale outlets, market stability, population density in the relevant city/province of the second or subsequent retail sales outlets, and conformity with the city's or province's municipal planning. An FIE wishing to establish a second or subse quent retail sales outlet(s) -must conduct procedures to obtain a license for such outlet(s). The licensing authority shall issue the licence upon receiving approval from MolT. The licensing process is to take from 33 to 48 working days, but in practice may take longer.
All foreign investors must apply for and obtain an investment certificate (IC) prior to undertaking their first investment project ANTICIPATED CHANGES in Vietnam. An IC acts as the legal Foreign investors are awaiting the issuance document establishing the relevant FIE in of a new Decree repealing Decree 23 on retail Vietnam as well as setting out the specific activities, which may resolve outstanding issues on retail definition, establishment of business activities such FIE may engage in. In investment projects in conditional retail sales outlet(s) and the ENT. Under the sectors such as distribution services, foreign draft new Decree dated September 2010 (the investors must undergo an investment draft), the definition of "retail" has been evaluation by the licensing authorities and amended in line with the WTO agreements, other relevant authorities such as Prime i.e. "the activity of selling goods directly to Minister, the Ministry of Industry and Trade end-users for the purpose of consumption by (MolT) or other ministries, for principal individuals and households." The right to establish retail sales outlet(s) approval or consulting ideas. Such authority will ultimately exercise its discretion on outside the first retail sales outlet shall be whether to issue the sought-after licence. considered based on appropriateness to The exact procedure and documents municipal planning and three criteria: required for the evaluation licensing process number of retail sales outlets, market will depend on many factors, including size, stability and population density. The draft provides more clearly the contents, authori scale, location and type of investment. Specific distribution business license sation and principles for establishment of (the "baby permit"). FIEs involved in national and municipal planning for retail trading and/or distribution activities require outlets. In order to reach unity of regula a separate distribution-specific "business tions on "municipal planning" between licence" in addition to an Ie. For existing national level and provincial level, the draft FIEs, the relevant provincial people's stipulates further on the principle of committee is responsible for issuing such planning retail sales oudets allocation, business licences after receiving written timeframe to complete the allocation, and confirmation from MolT that the appli procedures for publicising and approving cation meets the" conditions agreed to by drafts of allocation. The draft also provides some further Vietnam in its international commitments. For newly-established FIEs, the investor details on the ENT, with methods on calcu must submit "an application dossier for lating retail sales outlets within a relevant investment" to the licensing authority. This geographic area, evaluating the stability of body must obtain the written approval of the current market, and defining the density MolT before issuing an "IC" establishing of the population. It is not currently known the FIE and acting as the legal basis for it to when the new Decree will be finalised but it conduct stated trading and/or distribution is likely it will be issued and become effective in early 2011. activities. In conclusion, as Vietnam's legislative Establishment of retail sales outlet{s). When a FIE is granted an IC permitting the framework continues to evolve and business of retail distribution services, such investment procedures and practices are enterprise has the right to establish its first simplified, it is becoming a far more retail sales outlet from which to conduct attractive investment destination from a such retailing without submitting an appli regulatory perspective. Coupled with cation dossier for a licence for establishment Vietnamese consumers' rapidly growing per of its first retail sales outlet. Such FIE is capita income and the country's young prohibited from conducting retail activities population, economic growth and political outside the first established retail sales outlet stability, Vietnam's position as one of the unless expressly licensed to do so. The world's most attractive destinations for retail • operation duration of the first retail sales investment is likely to remain.
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VIETNAM EcONOMIC TIMES, JANUARY 2011