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Dispute bad news for investors

Two female students ride on a motorcycle during a rush hour on a crowded street in Ho Chi Minh-City yesterday. There are currently some 10 million motorbikes on circulation in Vietnam. A bitter dispute over import quotas that has forced two Japanese motorcycle manufacturers to suspend operations in Vietnam will have minimal effect on their bottom line but could deter other investors, analysts said. PHOTO: AFP

A bitter dispute over import quotas that has forced two Japanese motorcycle manufacturers to suspend operations in Vietnam will have minimal effect on their bottom line but could deter other investors, analysts say.

Assembly lines at Honda's base in Vinh Phuc province, northwest of Hanoi, ground to a halt on September 18, while Yamaha stopped production at its plant on the outskirts of the capital on Thursday after running out of parts.

Suzuki has also warned it will follow suit by the end of this month unless the government grants a reprieve on the import allowances.

"This dispute will affect the attitude of other Japanese investors," said Carl Thayer, political analyst at the Australian Defence Force Academy.

"In addition it will raise questions in foreign investors' minds about the unreliability and inconsistency of the Vietnamese government in trade and investment matters."

The stand-off began on Sept. 4 when the trade ministry announced it was slashing the number of sets of parts that bike assemblers could import during the year from 2.5 million to 1.5 million.

Of the reduced quotas, 600,000 sets were allocated to the seven foreign-invested manufacturers, with the balance of 900,000 divided up among Vietnam's 55 domestic assemblers. Each set makes one motorbike.

The move prompted a storm of protest from the three Japanese auto giants, who had based their annual production targets for their joint venture operations in Vietnam on the larger, original quotas.

Perhaps taken back by the reaction, Hanoi subsequently justified the decision as a means to stem an alarming traffic accident toll, with at least 10,548 deaths last year.

"We expect and we have sympathy from other governments because this issue is directly linked to the lives of our people," foreign ministry spokeswoman Phan Thuy Thanh told reporters on Thursday.

While the government's stated motive is beyond reproach, analysts believe the quota cuts were primarily designed to support struggling local auto parts' makers by forcing foreign assemblers to source from them rather than from overseas.

"Protectionism for local firms lies at the heart of the issue," said Thayer. "The government's explanation that cutting imports would reduce rising traffic accidents is an ex post facto rationalisation."

Whatever the motive, the impact on the company balance sheets will be negligible compared to the potential adverse effects on Vietnam as it looks to draw in more overseas cash to fuel its economic growth.

"On the bottom line this is not going to have much of an impact on the manufacturers because Vietnam is just one Asian market of many," said Christopher Richter, auto analyst for HSBC in Tokyo.

"But the frustrating thing is that they regard Vietnam as a potential growth market and now this growth looks stunted.

"Also, if they have ever had ambitions of using Vietnam as an export base, these could now be called into question."

He warned that unless the dispute is quickly resolved the three Japanese auto giants could take their business elsewhere. "There are a lot of other places where they can invest."

Thayer says that while the crisis is unlikely to deteriorate to the extent that it spills over and affects other Japanese investments or official development assistance funding, it has damaged Vietnam's stock among the investment community.

"Vu Khoan, the newly appointed deputy prime minister, will have his work cut out to contain the negative message his government's action is sending to Japanese and other foreign investors."

Japan is Vietnam's third largest foreign investor, as well as its biggest aid donor and trading partner. Last year, bilateral trade totalled US$4.72 billion.

"The dispute is ill-timed coming as Vietnam and Japan negotiate a bilateral investment agreement that would place Japanese businesses on the same footing as local ones," added Thayer, a long-time Vietnam watcher.

The three companies have expressed disappointment at the government's reluctance to reach a compromise, particularly after Khoan met industry representatives in Japan at the beginning of the month to discuss the crisis.

Whether a delegation sent from the trio's headquarters in Japan, together with representatives from the Japan Automobile May 11, 1996 pledge to the US Association (JAMA) and the ministry of economy, trade and industry can make any headway in the dispute remains to be seen.

The 10-member team arrived in the capital on Wednesday.

But whatever the outcome, the saga has already left a bitter taste in the mouths of the three manufacturers.

"It is very unreasonable. We find their thinking 20 years behind China. It is very difficult to understand where they are coming from," said one executive, who requested anonymity.
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