In approaching a new market, albeit a frontier market such as Vietnam, there are several considerations necessary to ensure a successful market entry. Taking the following factors into account as opposed to thinking linearly in your approach will make for a dynamic and well-rounded market entry.
1. Business Models
There are a variety of models for structuring a market entry into Vietnam. Choosing the right model for your objectives is essential in the early stages of planning your market entry.
Partnership: A partnership is a business owned by two or more people, with each partner having unlimited liability for the debts incurred by the business. There are two typical classifications of partnerships:
Partnerships: These may consist of unlimited and/or limited partners and they must have at least two unlimited partners being co-owners of the company jointly conducting business. Of note, partnerships cannot issue any type of securities.
Limited liability partnerships: Such partners shall only be liable for the debts of the company to the extent of the amount of capital they have contributed to the company
An important realization is that a successful partnership is not necessarily determined by the amount of capital involved. A well-capitalized partnership entering a saturated market will face a difficult road to financial success. Likewise, timing is important, as developing economies such as Vietnam are often subject to significant economic volatility, so be sure to do your homework.
Production Sharing Contract (PSC): A PSC is a type of contract often signed between a government and a resource extraction company concerning how much of a given resource extracted from the country will go to each party. This type of contract often pertains to oil operations.
Joint Venture: A joint venture is a business arrangement in which two or more parties agree to pool their resources in order to accomplish a specific task. Each participant is responsible for any profits, losses and costs associated with the venture.
Joint Operations Contract (JOC): In a JOC, one company will act as the operating partner for the other companies. The operating partner provides shared services on a contract basis. Secondary partners often contribute facilities, equipment, cash, or similarly add value to the operating partner. Within a JOC, no third-party joint venture is created.
Public-Private Investment Partnership (PPIP): A PPIP is a business linked to the government to invest in infrastructure. PPIP regulations are based on the government’s plans to realize its infrastructure investment ambitions. Investors of course still need to comply with all relevant investment regulations, including any foreign ownership restrictions.
2. Three Key Structures
Upon choosing one of the business models mentioned above, there are more considerations to take into account. In Vietnam, there are three ways to structure your business within the country.
Resident Representative Office (RO): The government of Vietnam allows foreign investors to establish a legal presence in Vietnam through a RO, the simplest form of establishing a legal presence in Vietnam. The idea behind the RO is that it allows a foreign entity to facilitate the promotion of products or services within Vietnam.
Branch: A branch office is a component of a foreign entity that is permitted to conduct commercial activities for the purposes of making profit in Vietnam, as governed by various international treaties signed between Vietnam and other countries.
Foreign Contractor: This business structure is popular among foreign organizations and individuals carrying out business in Vietnam in the short term without intentions to establish a long-term presence in the country.
3. Special Economic Zones
Vietnam is divided into various economic zones, or designated economic spaces conducive for different types of business or economic activities.
Industrial Zone (IZ): An area specialized in production of industrial goods and manufacturing, and has defined geographical boundaries.
Export Processing Zone (EPZ): An industrial zone in defined geographic boundaries specialized in manufacturing exports and performing services for export activities.
Hi-Tech Zone (HTZ): An area specialized in research, development, application of technology, development of hi-tech businesses, training of employees in hi-tech industries, and manufacturing and trading hi-tech products.
The advantages of these zones are many. All of above zones offer foreign enterprises a self-contained industrial estate with complete infrastructure facilities including water, warehouses, showrooms, etc. They are also close to main roads, ports and airports. While much of the country lacks basic infrastructure, these zones have become attractive to foreign investors especially in the manufacturing and sectors that are export oriented. In addition, sometimes some incentives are given to companies in these zones and the usual intensive administrative processes are significantly reduced. Another factor to take into account is any potential advantages in terms of signing a lease agreement within an economic zone. Whether through a sub-lease, or by taking advantage of a tenant moving out prematurely, the potential for finding an economical solution is limitless.
4. Royalties, Costs and Pricing Models
So you’ve made it this far. You chose the right business model for you, narrowed down which structure you plan to pursue and settled on an economic zone conducive to your business needs. Now, it’s time to get down to the purpose of all of this, making money. Of course, as with every factor outlined above, there are specific considerations to take into account pertaining to “making money” in Vietnam.
Royalties: In Vietnam, there are currently no regulations in terms of royalties relating to franchising. There is however, legislation surrounding natural resource royalties. Companies or individuals extracting natural resources from Vietnam will be required to pay royalties based on the quantity, weight or volume of the resource extracted.
Costs: The cost of capital in Vietnam is extremely high relative to many other countries, thus driving many foreign investors to invest into Vietnam using offshore funds, which feature a much lower cost of capital. As for the cost of debt, borrowing money in Vietnam often comes with a lot of risk. Bad loans are a common occurrence, and have left a very bad impression on the economy in years past.
Pricing: As with any market, there are a variety of pricing options available when establishing a new product or service in Vietnam. Many firms take advantage of hourly pricing, flat pricing or variable pricing, in which the firm will arrange pricing on a case-by-case basis. Of course, the objective will always be to find the equilibrium point where supply and demand come together. Determining a pricing strategy will also be dependent on various macro-level economic, political and social factors. Competition and whether or not your product or service already exists in the market is also a tremendous consideration.
5. Economic Goodwill
In a 1983 letter to Berkshire Hathaway shareholders, Warren Buffett famously defined a term now well known to value investors worldwide, “Economic Goodwill.”
Buffett explained that, “businesses logically are worth far more than net tangible assets when they can be expected to produce earnings on such assets considerably in excess of market rates of return. The capitalized value of this excess return is Economic Goodwill.”
What’s in a name? Well, according to Warren Buffett, potentially a tremendous amount. Think about it. When someone says the word “soda” what do you think of? Coca Cola, perhaps? This is brand loyalty, and it allows firms to generate high returns on capital with little additional ongoing investment. Companies with a long, well established history and a reputation for high quality products will generate a lot of Economic Goodwill. This should be your objective, and if you read our guide above and think it through before you enter a new market, like Vietnam for example, you too could soon be generating more Economic Goodwill than you know what to do with.
Source: http://www.forbes.com/ - Peter Pham
Key words: Vietnam's FDI, Unlocking he keys, to a successful market entry
