Concerns Over Vietnam's Infrastructure Development - Export Container Growth, 06 Sep 2006

Overview

For over a decade, sustained economic growth across Vietnam has created millions of jobs and generated billions of dollars in export earnings. With Vietnam’s accession to the WTO likely to take place later this year, foreign and local investment will surely increase, bringing further growth to many sectors. Export oriented activities are possibly the single most important element of Vietnam’s economic development. From manufactured goods such as textiles, footwear and furniture, to seafood and agricultural products, exports create jobs and generate significant revenues for Vietnam.

While prospects for continued growth are high, the purpose of this letter is to highlight the concerns of a large group of companies currently exporting from Vietnam, all of whom are signatories. We are very concerned about the development of ports and related infrastructure projects that will allow for the efficient and timely export of primarily containerized cargo. Along with our major shipping and logistics providers, we have been tracking developments in both export growth and infrastructure planning carefully. We see the potential for delays and related challenges on the horizon.

We believe decisions or actions regarding infrastructure made this year (2006) could have a profound impact on Vietnam’s continued export growth, and its competitiveness with other countries in the region. As large infrastructure projects take years to complete, early planning, commitment and development of projects is critical.

Our growing concerns have led us to request meetings with senior government officials in Hanoi on September 7 and 8, 2006. As investors and businesses committed to a long-term presence in Vietnam, we have shared interests with Vietnam in the country’s development. Our objective is to share our interests and concerns with you, and learn more about Vietnam’s commitment to infrastructure development in the key areas noted below.

Port Congestion

Port congestion is particularly acute in the Ho Chi Minh City area where FDI has been concentrated. In 2004, HCMC accounted for 78 percent of Vietnam’s container shipments, compared to 19 percent from the ports of Haiphong / Cai Lan. While one frequently proposed solution is to encourage more future FDI in the Hanoi area, we note the Haiphong / Cai Lan ports are currently further behind in their development into efficient container terminals that can accommodate feeder vessels of at least 1,500 TEU (twenty-foot equivalent units).

The corporate signatories to this letter are concerned about facing significant delays in their Vietnam supply chains. As shown in the chart below, demand will begin to exceed terminal capacity in calendar year 2007. The situation will worsen in 2008 and 2009 before the deep-water terminal at Cai Mep becomes operational in 2010.

Chart 1. Supply and Demand at HCM City Ports

With the shortage of container berths in the HCMC area, delays are inevitable, and the options to increase existing container lift capacity will have only a small impact on minimizing expected delays. For example, measures to increase mid-stream loadings or to use break-bulk terminals for additional container loadings are inefficient short-term solutions that put mid-stream loading cargo at risk. Furthermore, any delays in unloading / loading feeder vessels directly impact shippers’ supply chain costs through increased inventory, higher ocean freight rates, and possible additional airfreight costs for high demand products.

Vietnam’s commitment to the deep-water port at Cai Mep, scheduled to come on-line in 2010, demonstrates both a commitment to development and a corresponding recognition of expected future growth. While we applaud this vision, we have major concerns about the 2010 timeline given the complex nature of the project (site preparation), and the fact that only 2 of the 5 terminals have committed financial and development plans. For this reason, we want to understand Vietnam’s plans and timelines to develop the other 3 terminals, as well as the timelines for construction and dredging for the new Hiep Phuoc port whose capacity has been included in Chart 1.

Road, Bridge and Tunnel Infrastructure

Getting containers to the ports in a timely manner from factories and consolidators’ facilities is also a concern given the significant increase in passenger and freight traffic in and around the HCMC area. Container cut-off times at terminals will need to be strictly enforced to improve terminal productivity so reliability in road transport becomes more critical. A number of highway, bridge, and tunnel infrastructure developments have either started or are planned to start and be completed between 2007 and 2010 as noted in Chart 2 below:

Chart 2. Landside Infrastructure Projects

Because infrastructure projects of this size are complex, and fairly new in Vietnam, shippers are apprehensive that the timelines will be met. We urge the Government of Vietnam to exert its best efforts to expedite the completion of all major approved port and landside infrastructure projects and to publish quarterly project updates.

Additional Projects and Future Planning

Companies committed to exporting from Vietnam for the long-term will share the position that the current list of port and landside projects needs to be followed by an even more aggressive effort to identify and develop additional transport related infrastructure projects. In planning our future sourcing strategies for Vietnam, we are interested in learning of Vietnam’s plans and financial commitment to bring major transport infrastructure projects on-stream at the speed necessary to ensure timely shipments. The following are some of the longer-term transport infrastructure projects of most concern:

• Developing container terminal capacity in the Haiphong / Cai Lan ports for feeder vessels of at least 1,500 TEU;

• Additional deep-water terminals in the South beyond Cai Mep;

• More aggressive timeline for developing the new Long Thanh International Airport;

• Additional land-side infrastructure projects to assure timely delivery of containers to / from ports.

Our meetings with you in Hanoi demonstrate our commitment to Vietnam and our shared concern over transport infrastructure development in Vietnam. We come to learn and listen, but we also come with an important message, namely, that our supply chains must move at the speed of commerce. Our sourcing decisions depend upon the timely flow of product so we can maintain minimal inventory levels and competitive transportation costs.

If Vietnam is able to successfully develop its infrastructure, the country will become more competitive in the global economy, and further its own goals of export growth and job creation. We share these interests and look forward to future cooperation.

Thank you for listening and for your actions.

Signed:

adidas
GAP
Heinrich Deichmann-Schuhe GMBH & Co.
KG
IKEA
Klaussner International
Li & Fung ( Trading ) Ltd
Limited Brands, Inc.
Nike, Inc.
Lollytogs
Pier 1 imports
Restoration Hardware
Theodore Alexander
Wal-Mart Stores

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