SPECIAL REPORT

VIETNAMS CAPITALIST ROADERS

Vietnam is hoping to follow Chinas road to prosperity. But its problems have begun to overshadow its promise. Policymakers face critical choices that could either make Vietnam the next emerging-market star or deepen its economic malaise.

JANUARY 2011

VIETNAMS CAPITALIST ROADERS

JANUARY 2011

VIETNAM FOLLOWING CHINAS PATH TO PROSPERITY

By John Ruwitch and Jason Szep Ho Chi Minh City, Vietnam, Jan 13

guyen Duc Tai was on a mission one sweltering January morning in Vietnams commercial capital, Ho Chi Minh City. Flush with cash from his annual bonus, he wanted to buy his wife a new mobile phone, a gift for the coming Tet lunar new year holidays. In a country where the average annual income is about $1,100, a good phone is a big investment. Tai wanted to make the right choice with his 5 million dong ($250). It was so confusing. I went to two shops, but no one could give me the full picture of what I could get for my money. They showed me one or two phones. Thats not enough. If they could show me 10 at similar prices I could make a decision.

Vietnam
200 km

CHINA

Hanoi LAOS

The 35-year-old smelled opportunity. I said to myself, theres something wrong here. I have money. Im willing to pay. But I cannot find what I want. There is a mistake somewhere and if I can fix that, the customers will support me. Fast-forward six years and Tai is chief and co-founder of Mobile World, Vietnams largest cellular phone retailer, part of a new breed of fast-growing companies tapping a swelling middle class in the Communist-run country of nearly 90 million people. Vietnam has emerged over the past decade from the hangover of war to play a central role on Asias factory floor, producing everything from footware to computer parts. An economy once built around carpet-bombed rice paddies now boasts gleaming shopping malls and towering skyscrapers. BMWs and Rolls Royces jostle for space on streets clogged with motor-scooters and bicycle rickshaws. As northern neighbor and former imperial ruler China begins the transition from sweatshop economy to consumer society, Vietnam hopes to follow. Companies such as Mobile World could lead the way. But in recent months, Vietnams

problems have overshadowed its promise from spiraling inflation to a stumbling currency, red tape, a debilitating trade deficit and creaking infrastructure. Policymakers face critical choices in the next few years that could either make Vietnam the worlds next emerging-market star or deepen its economic malaise.

China is basically five to 10 years ahead of Vietnam. So it is a good leading indicator for whats coming.
That forms a sober backdrop to the ruling Communist Party congress that began on Wednesday, where delegates will give their nod to maintaining policy goals aimed at delivering economic growth of up to 7.5 percent a year for the next five years. Addressing Vietnams urgent problems is not on the formal agenda, although stabilising the economy is a hot topic behind the scenes. Even without bold reforms, nimble companies are shaking up the private sector, led by executives inspired by success stories from China.

THAILAND

VIETNAM
CAMBODIA Ho Chi Minh City South China Sea

A coconut vendor sits in front of the opera house while waiting for customer in Ho Chi Minh City on January 4, 2011. REUTERS/Nguyen Huy Kham
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Despite Vietnams chronic economic problems, Mobile World for instance has grown from seven stores to more than 70 over the past three years with nearly 4,000 staff. Revenue doubled last year to $150 million and is projected to double again this year. Net profit, $5 million last year, is expected to triple this year to $14 million. We dont care about politics, laughs Tai. We care about the customer. Interviews with business executives, investors and independent analysts reckon Vietnams burgeoning prosperity trails Chinas by a decade or so. Young executives, and the overseas investors who back them, have settled on a simple premise: what works in China, should work in Vietnam. China is basically five to 10 years ahead of Vietnam. So it is a good leading indicator for whats coming, said Chris Freund, managing partner at frontiermarket investor Mekong Capital, whose funds invest in 21 Vietnamese companies including Mobile World. Early signs suggest he may be right.

Vietnam internet population

Number of internet users mln 30 25 20 15 10 5 0

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

Sources: Vietnam Ministry of Information and Communications, World Bank, General Statistics Office. Reuters graphic/Christine Chan 10/01/11

Take Le Hong Minh, the 34-yearold founder of Vietnams dominant Internet group VNG Corp an online gaming company that is fast becoming the countrys answer to Yahoo Inc. and Facebook. Modeled on Chinas most valuable Internet company, Tencent Holdings Ltd, VNG has expanded from 100 staff to 1,300 in five years, attracting investment

WEB-SAVVY GENERATION

from Goldman Sachs and boasting millions of users a day with ambitions to compete with global companies. After poring over Chinese kung-fu novels as a child, Minh surfed the Internet for the first time at Monash University in Australia where he studied business, discovering along the way a passion for martial arts videogames. Returning to Vietnam, he landed a finance job that paid the bills but failed to slake his inner gamer. To do that, he traveled to Daejeon, South Korea where he represented Vietnam at the 2002 World Cyber Games. Though not a winner, he saw how high-speed Internet and videogames were more than playthings. They were big business.

Vina Games Chief Executive Le Hong Minh poses for a photo at his company in Ho Chi Minh City on January 4, 2011. REUTERS/Nguyen Huy Kham

At the time, more than half of South Koreas Internet users were watching soap operas and sports on their computers. But in Vietnam, the Internet barely functioned. Minh set up a gaming room with friends -- a precursor to todays Internet cafs in 2003. But for the first six months, there was no Internet connection, just 40 computers with standalone videogames. Minh remembers when that changed, almost to the hour. It was July 3, 2003. The government opened its first registration for broadband Internet. He was among the first in line. We said this is heaven, he recalls. Thats the moment online games were born in Vietnam. I kind of understood the investment opportunities and we had the passion of a bunch of guys who liked to play games, so we formed the company in 2004 and put together a business plan. VinaGame was born. A year later, backed by venture-capital firm IDG Ventures, they launched their first product, licensing a martial arts game from Chinese software developer Kingsoft Corp Ltd. About 20 friends fanned across the country to promote Vietnams first online martial arts game, plastering posters in about 5,000 gaming rooms in three cities. They calculated they could turn a profit if they had 100,000 customers their first year. We had that number in one day, recalls Minh. In the first month we had 500,000, and then after three months we nearly had a million users.
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Five years on, now named VNG, they compete directly with Yahoo, reaching 60 percent of Vietnams 27 million Internet users, compared to Yahoos 50 percent, according to VNGs own data. Their www. zing.vn portal offers entertainment, news and social networking. For e-mail and for instant messaging were not able to really compete, but we win with other services. Theyve also developed Vietnams first locally made online game and are venturing into e-commerce. As they grow, they are shaking up Vietnams image as a country dominated by textile manufacturers, computer component makers and rice growers. Plans for a public offering are in the works. Our mission is to make the Internet change Vietnamese lives, said Minh, whose disarming style and unfussy headquarters project the youthful zeal of a Silicon Valley Internet startup. Beanbag chairs rest against a boardroom wall. He drives a yellow Mini Cooper and his passion for videogames has not diminished. My wife still complains a lot about me playing games until one, two oclock in the morning. On a recent Tuesday afternoon at VNGs 8,000 sq ft, warehouse-style office over a grocery store in Ho Chi Minh City, dozens of staff crammed into a conference room where finalists in a VNGs Got Talent contest performed on stage an internal morale boosting event inspired by the American reality TV series Americas got talent. Some sang. Others dressed in drag. It underscores the biggest challenge facing VNG and other fast-growing Vietnamese companies: staffing. Finding qualified people is very, very hard, said Minh. And then growing people is even harder because we have a very limited pool of talented and experienced people. When you are able to grow them, they are going to be approached by so many others. Despite those concerns, VNG is attracting interest, including a strategic partnership with Chinas Tencent, known for its online games, Chinas largest instant-messaging platform and foray into English-language products. Henry Nguyen, managing general partner at IDG Ventures Vietnam, reckons VNG is still 5-6 years from its peak. Fueling his optimism is Vietnams young

Vina Games CEO Le Hong Minh gestures during an interview at his office in Ho Chi Minh City on January 4, 2011. REUTERS/Nguyen Huy Kham

population. Ninety percent are below or within the working age, according to United Nations data. To paraphrase former U.S. President Bill Clintons 1992 campaign slogan, he said, To us, its the demographics, stupid. Vietnams middle-class has more than doubled in the past decade to 64 percent in urban areas, according to Asia-Pacific research consultants Cimigo. Sixty percent of the population is under 35 years old. The economy more than tripled to over $100 billion from $30 billion just a decade ago, along with per capita wealth, although off a low base.

LOOMING RISKS

But doubts are growing over whether authorities can pilot the economy deftly enough to turn Vietnam into Asias next tiger. Some signs are not encouraging, such as the Finance Ministrys decision to sign away proceeds of Vietnams first international bond to state-owned Vietnam Shipbuilding Industry Corp, or

Vinashin, in 2005, handing over all $750 million from the oversubscribed 10-year issue. The arrangement was part of the Communist Partys plans to try to keep the state sector in control of the commanding heights of the economy by bankrolling the big ones, monopolising the sectors they operate in, and creating state-owned conglomerates modeled on South Koreas powerful chaebols. Despite the huge sum, Vinashins chief executive Pham Thanh Binh said at the time the amount was barely a quarter of the funds needed to reach its ambitious shipbuilding targets over the next five years, during which he expected 30 percent growth. So he sought more cash from the government, the capital markets and foreign lenders. Instead of focusing on producing more and better boats, though, Vinashin sprouted subsidiaries at an alarming rate, often in unrelated fields such as hotels, motorbikes and stockbroking. Then the global economic downturn

Finding qualified people is very, very hard. And then growing people is even harder because we have a very limited pool of talented and experienced people. When you are able to grow them, they are going to be approached by so many others.
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Vietnam at a glance
Key statistics GDP* Population GDP per capita* Unemployment rate Average annual rate of inflation No. of mobile phone subscriptions No. of internet users *$1 = 19,500 dong GDP growth % change y/y Vietnam Indonesia Philippines Thailand 5.3% 4.5% 1.1% -2.2% $101.58 bln 89.57 mln $1,168.72 2.88% 9.19% (2010 estimate) 6.88% (2009) 153.7 mln 20 27.4 mln Data as of 2010. TV sets Cable TV Mobile phones PCs 0 TV, mobile phone & PC ownership % (among 15-64 year olds in Ho Chi Minh City) 2000 2009 100 80 60 40

15 10 5 0 -5 -10 -15

1990

1995

2000

2005

2009

Sources: General Statistics Office, World Bank, Ministry of Information & Communication, Cimigo, Thomson Reuters. Reuters graphic/Christine Chan 10/01/11

struck, sucking the wind out of the shipping industrys sails. Vinashins debt problems were too big to avoid at some $4.4 billion by the middle of last year. The Communist Party declared the firm on the brink of bankruptcy and the government ordered it re-organised. Binh and other executives were sacked and later arrested. Vinashin has become a prime example of the risks inherent in the governments industrial policy and has sparked heated debate within the party, according to sources close to the communist leadership. The government ordered Vietnamese banks to freeze their loans with Vinashin to give it breathing room. But as the company drifted toward default last month on a $600 million loan by

international creditors, all three ratings agencies downgraded Vietnam, raising the cost of capital when it critically needs to raise funds to improve infrastructure. Such problems deepen Vietnams macroeconomic troubles. Annual inflation hit a 22-month high in December of nearly 12 percent, the currency has lost nearly 25 percent against the dollar on the gray market since the end of the first quarter of 2008, and the International Monetary Fund said foreign exchange reserves had sunk to just 1.8 months of prospective imports by the end of September. State-owned enterprises (SOEs) have been sucking up capital and increasing risk in the banking system without producing big advances in economic growth and job creation.

In the long term, its just not sustainable what theyre doing, said Jonathan Pincus, dean of the Fulbright Economics Teaching Programme in Ho Chi Minh City and a former economist for the United Nations in Vietnam. Whats going to happen when the chickens come home to roost on Vinashin? I think theyll just run out of money. Its going to get very expensive for them to get debt and theyre broke, so what happens if a couple of banks blow out? Theyre not China. Theyre not sitting on $3 trillion in reserves. A study by Vietnams Central Institute for Economic Management and the National Univerity of Singapores Lee Kwan Yew School of Public Policy presented to the government last month showed Vietnams incremental-capital
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output ratio, or ICOR, a measure of the efficiency of capital use, was actually worsening because of money poured into SOEs. Vietnams ICOR averaged 4.8 in 2000-2008 and 5.4 for 2006-2008, substantially less efficient than Taiwan, South Korea and Thailand during similar phases of development. Yet the party seems as committed to the state sector as ever, a decade after enacting an Enterprise Law that opened the floodgates for private businesses. The result is a warped competitive environment that puts private business at a disadvantage.

Vietnam GDP per capita growth

GDP per capita current $ 1200 1000 800 600 400 200 0 Asian Financial Crisis GDP per capita growth % Global downturn 8 7 6 5 4 3 2

'90

'91

'92

'93

'94

'95

'96

'97

'98

'99

'00

'01

'02

'03

'04

'05

'06

'07

'08

'09

PRIVATE SECTOR CHALLENGES

Source: World Bank Reuters graphic/Christine Chan 11/01/11

Examples are plentiful. Jetstar Pacific, an airline partly owned by Australias Qantas Airways Ltd, has had many setbacks in Vietnam, where the skies are dominated by flag carrier and SOE Vietnam Airlines. In April 2008, for instance, it had trouble securing deliveries of fuel from the state jet fuel monopoly, Vinapco, a company under Vietnam Airlines. In the grocery store space, South Korean supermarket Lotte Mart, part of Lotte Shopping Co Ltd, opened its first shop in Ho Chi Minh City in 2008 but faced long delays getting approval to open a second in the city where homegrown and state-owned Saigon Co.op Mart has been eager to cling to its market share.

If I go in and say American management gurus say you should do this, and this and this, it is in one ear and out the other. But if I ask them who was Buddha being as a leader, they will get it and try to apply it.
Preferred access to land and capital only make the problems worse. Deputy Prime Minister Nguyen Sinh Hung has made privatising state enterprises a priority over the next four years after about 144 sold shares to the public last year. Thats good news to Andy Ho, managing director and head of investment at VinaCapital, the countrys largest private equity firm. We look at dilapidated, beat up companies where we can make a difference. We love the SOEs, he said. We invest in a lot of businesses that cater to the consumer growth. But Vietnams war-scarred past poses unique issues for private equity. Years of war and communist central planning wiped out a generation of entrepreneurs. Big investments by overseas-backed funds are often accompanied by training for local CEOs or, if the state retains control of a newly privatised firm, extensive talks to convince bureaucrats to think of the bottom line. We sit down with them and say, there are certain changes you need to make to grow your business. About 75 percent of the companies listen, said Ho, whose firm manages $2 billion of investments. Mekong Capitals Freund, a Chicago native and religion scholar from

The SOEs really do see it as their right to monopolise the market.

The excuse, said Fred Burke, a managing partner at international law firm Baker & McKenzie, was that it did not meet an economic needs test that Vietnam was allowed to retain under its 2007 World Trade Organisation agreement. In reality, he said, it was pure protectionism. The SOEs really do see it as their right to monopolise the market, Pincus said. Big investments in the state sector squeeze the fiscal balance and exacerbate inflation pressures. More state spending, plus inefficient use of capital translates into less output per dollar and higher prices for goods.

Mekong Capitals Managing Director Chris Freund poses for a photo at his office in Hanoi January 7, 2011. REUTERS/Nguyen Huy Kham

University of California, Santa Cruz, runs classes for executives teaching them to think like Buddha. If I go in and say American management gurus say you should do this, and this and this, it is in one ear and out the other. But if I ask them who was Buddha being as a leader, they will get it and try to apply it, said Freund, a former Templeton Asset Management Ltd portfolio manager who founded Mekong Capital in 2001. A simple look at Vietnams stock market shows how the
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country dearly needs such leaders. The global liquidity that coursed through the worlds emerging markets last year missed Vietnam, whose 10-yearold Ho Chi Minh City Stock Exchange lost about 3 percent in the year compared to gains of more than 40 percent in both Thailand and Indonesia. Ho at Vinacapital says his clients thought the risks were just too great but are now taking a second look, partly due to extraordinarily low valuations, the cheapest in Southeast Asia. The Vietnam Index is down 59 percent from its March 2007 peak. Were already seeing some investors coming back, said Ho, citing gains in VinaCapitals exchange-traded funds listed in London. The VinaCapital Vietnam Opportunity Fund Ltd is up about 9 percent from mid-November, better than the Thai markets two percent rise in the same period. Were seeing signals people are interested in Vietnam.

Vietnams under-35 age group is driving growing demand for residential property, making that sector a good bet, says VinaCapital

INFERIOR EDUCATION

Henry Nguyen, of IDG, is effusive about Vietnams prospects but he isnt blind to the risks. His background gives him unique perspective. In 1975, at the end of the Vietnam War at age two, he fled the Communist invasion of South Vietnam with his family. He spent seven months in a refugee camp in the Philippines before moving to Virginia, where he grew up with little interest in his former homeland, answering his parents Vietnamese with English and going on to Harvard University. He only returned in the mid-1990s, reluctantly, as a travel writer for the Harvard student-run Lets Go series. I fell in love with the place, he said. After finishing medical and business school, he worked as a tech stock picker at Goldman Sachs in New York under famed Microsoft analyst Rick Sherlund, but soon felt the pull of Vietnam again. He returned in September 2001, arriving on the day the World Trade Center in New York was attacked. He watched the aftermath on TV, trying to contact friends. I think something tripped inside me, and I thought maybe not living in the U.S. is not such a bad thing, he said. Three years later, he got an offer from Bostonbased IDGs founder Pat McGovern to

open shop in Vietnam. He now oversees two funds, one worth $100 million, the other $150 million. Not only did he fall in love with the country, Nguyen soon fell in love with, and in 2008 married, Prime Minister Nguyen Tan Dungs daughter. Yet he is frank about Vietnams challenges. There are three issues that keep me up at night long term, he said. At the top of the list is physical infrastructure a long-standing problem in Vietnam, where from the early 1900s until the early 1990s development was on hold by conflict and ill-conceived collectivist policies. Even when I say Vietnam is China circa 97-98, its actually much further behind in terms of physical infrastructure, he said. Vietnams existing ports are

overstretched, it lacks highways and the electricity grid is chronically short of power making blackouts common. Second is governance and corruption. In the end most people feel pretty cynical about government, and probably in most cases rightfully so.

I think something tripped inside me, and I thought maybe not living in the U.S. is not such a bad thing.
And third is education, perhaps the most common refrain among business owners and investors. He notes, for instance, that nearly 2 million students sit for exams annually for 750,000 seats at full time universities.

A policeman stands guard next to a floral decoration with the communist logo at the National Convention Center, the venue for the 11th Party Congress, in Hanoi on January 12, 2011. REUTERS/Nguyen Huy Kham
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The quality of tertiary education in Vietnam is failing, too. Its a crying shame when you have people who are so ambitious, want to try hard, want to work hard, and most of them are getting the crappiest of education that you can imagine, he said. Those barriers have kept many competitors out of Vietnams growing consumer market from McDonalds Corp to Starbucks Corp and Wal-Mart Stores Inc, all of which have made big inroads in China. Starbucks chairman and chief executive Howard Schultz said in July he wanted to explore opportunities to enter Vietnam. But thick red tape might force the worlds biggest coffee chain to franchise its stores, something it does not do in most other countries. Red tape is Vietnams biggest nontariff barrier, said Burke at Baker & McKenzie. Policymakers, he added, have deeply rooted concerns over competition, including a fear of Chinese companies taking control of Vietnams rice supply if they open private trade too quickly. Protectionism is still a problem, said Burke, a founding member of the American Chamber of Commerce in Vietnam.

If Wal-Mart, for example, wants to come in and set up huge stores that will transform the future of retailing in Vietnam, they are going to have to jump through a lot of hoops.
But he is encouraged by a threeyear-old reform plan known as Project 30 that promises to cut administrative procedures by 30 percent. The World Banks 2010 Doing Business report says it takes on average 44 days and nine administrative procedures to start a business in Vietnam, compared with an average of 39 and eight in the rest of Asia. While Starbucks ponders its future in Vietnam, local chain Highlands Coffee is snapping up choice real estate and gaining share in a country whose thirst for caffeine sipped at Parisian-style cafes dates to French colonialism.

A woman dressed in the traditional Vietnamese ao daicostume serves tea to Prime Minister Nguyen Tan Dung (front R) during the opening ceremony of the 11th Party Congress in Hanoi on January 12, 2011. REUTERS/Nguyen Huy Kham

Its founder, Vietnamese-American David Thai, saw Starbucks rise from his hometown of Seattle into an international coffee powerhouse. He sniffed opportunity and now operates 40 cafes. Right now foreign retailers have not made a dent in Vietnam, said Freund at Mekong Capital. If Wal-Mart, for example, wants to come in and set up huge stores that will transform the future of retailing in Vietnam, they are going to have to jump through a lot of hoops. Wal-Mart has no plans to enter the market, said spokesman Kevin Gardner. Compare that to China, where Wal-Mart operates 189 outlets with more than 50,000 workers.

EXPLOITING THE INTERNET

Perhaps not surprisingly, Nguyen Duc Tai, the chief of fast-growing Mobile World, does not fear foreign competition. But hes using technology and exploiting

the Internet to keep his position safe. Before setting up his company with four friends, he knew he had to solve the problem that vexed him while trying to buy a phone for his wife. Consumers need good information, he reasoned, so before opening his first store he set up a website detailing the prices and specs of phones he would sell. It was the first of its kind on Vietnam and a hit. But that led to another problem: how to keep prices the same on his website and in his growing network of shops, especially in a market prone to surges in demand and currency fluctuations. His solution: digital price tags that are centrally updated twice a day and linked to the website. That paved the way for a primitive e-commerce system in which customers buy goods by inputting their phone number. Within 30 minutes, a Mobile World official calls, takes the order and sends a courier on a motorbike
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A woman looks at a product catalogue while visiting a Saigon supermarket in Hanoi on May 5, 2010. REUTERS/Nguyen Huy Kham

to deliver the phone and collect the money. The website generates about $1 million a month, enough to make Mobile World Vietnams biggest player in e-commerce, an industry in its infancy in a country where most people do not have credit cards and use cash for almost every transaction. This is a good weapon for us to compete with other retailers, said Tai, leaning forward in a chair in one of his shops. Another weapon is Dinh Anh Huan, his business development director, who travels once a month to China to study how companies there operate. In Vietnam, the culture and the economy are very similar to Chinas. So every month I go to China. I go to the stores. I see the suppliers, the manufacturers, I go to their factories. I buy the products. I watch and study. I go back home and every day I study Mandarin, he said, referring to the main Chinese dialect. In the northern capital of Hanoi, Dao

The Vinh also has a taste for China. The 38-year-old chief executive of Golden Gate Trade & Service, a fast-growing restaurant chain operator, is modeling his business on Chinas Little Sheep Group Ltd which has more than 350 chain stores around the world. That is our case study, he said, But of course our culture is different and we have to find our way of doing things. Five years ago, Vinh and two friends set up a restaurant specialising in mushroom hotpot -- a savoury mix of mushrooms, meat and vegetables boiled in a salty broth and eaten from a gasfired vessel. Within two years, he had six shops. By last year, he had 34. Our vision is in the next three years to increase profits 40-50 percent a year, and at the end of 2013 to have about 90 or 100 restaurants, he said. His rival, seven-year-old Pho 24, a network of soup noodle shops that has become the biggest restaurant chain in Vietnam with 60 stores, has expanded abroad with 19 restaurants. Founder

and chief executive Ly Qui Trung said he expects the number of franchised stores to double or triple in the next five years. But mom-and-pop shops still hold sway over the Vietnamese consumer . In congested Ho Chi Minh City, a city of about eight million people, shoppers elbow their way through crowded Saigon Plaza, whose two floors of small rented stalls sell everything from clothing and jewellery to knock-off handbags and childrens toys. Theres a lot of variety here and the prices range from low to high. Best of all, you can bargain, said Te Vinh Loc, a 34-year-old designer as he snaked his way through a maze of second-floor stalls on a Thursday afternoon. Sometimes I look at the high-end places, but they dont have what Im looking for so I come here. A few shops away, saleswoman Quynh Thi Bich Lai sells a blue-and-white soccer shirt with the Adidas logo for $6. Its just good business, said Quynh, who moves about 200-300 units of
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Golden Gate CEO Dao The Vinh at his office in Hanoi January 7, 2011. REUTERS/Nguyen Huy Kham

clothing a month in a stall no bigger than 2 sq metres. Retailers at Saigon Plaza pay rent of about $600 a month and generate about $2,000 in revenue, pocketing about $500 a month in profit. Down the street, at the sparkling new Vincom Center, store attendants sat quietly in mostly empty stores, some thumbing messages on their phones. At a Versace store, womens handbags were on sale for around $2,600 each more than double the annual salary of an average Vietnamese worker. Business is not good but ok, said salesman Nguyen Anh Tuan. The shop attracts about 50 shoppers a day, he said, though only about five make purchases. But the potential for future growth means the luxury brands cant afford not to be in Vietnam.In usually staid Hanoi, paparazzi at a rope line snapped celebrities arriving in stretch limos for the September opening of a Gucci store opposite the landmark century-old opera house and Hanoi stock exchange building. Most days, however, shoppers are scarce. On a Monday afternoon, Nguyen Trong Minh had the plush shop to himself while buying a pair of sunglasses for his mother. The 24-year-old consultant,

People eat Golden Gates Kichi-Kichi hotpot restaurant in Hanoi January 7, 2011. REUTERS/ Nguyen Huy Kham

Luxury items are displayed for sale at a Saigon supermarket in Hanoi May 5, 2010. REUTERS/ Nguyen Huy Kham

who recently returned to Vietnam after studying for five years in Minnesota, paused when asked how long it would take for a store like Gucci to really take off. Itll be a while.

Additional reporting by Bradley Dorfman in Chicago; editing by Bill Tarrant

Cover photo: Commuters in Ho Chi Minh City cruise past a poster promoting Vietnams Communist Party Congress on January 4, 2011. REUTERS/Nguyen Huy Kham

For comments or queries:

Bill Tarrant Enterprise Editor, Asia william.tarrant@thomsonreuters.com John Ruwitch Bureau Chief, Vietnam john.ruwitch@thomsonreuters.com

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