By Ruy Y. Moreno Ho Chi Minh City
Described by some observers as the next Asian Tiger, Vietnam has emerged from political isolation with a rush. Some USD 18.2 billion in capital has financed nearly 1,300 separate projects as of January, 1996 following economic reform that opened the country to foreign investment. Of those projects involving foreign investment, the service and tourism industries ranked second, accounting for USD $6.3 billion as of January, 1996. The Vietnam government has reported it expects foreign investment of some USD $40 billion between 1994 and the year 2000.
For international companies in the hospitality and tourism industries, this Southeast Asian nation represents both a highly promising and problematic market. Major hotel development underway in the country's two major cities Ho Chi Minh City and the capital city of Hanoi - may result in market saturation by 1998. It is to be noted that there are now 231 foreign joint ventures for tourism capitalized at nearly USD $5.0 billion, and a number of new hotels of international standards have been built in Hanoi, Ho Chi Minh City, Hai Phong and Danang. Development outside these cities has already become a focus of international groups and may ultimately be a source of considerable opportunity as crumbling infrastructure is rebuilt and the country takes its place in the global trade arena.
Risks and Rewards
The government of Vietnam enacted economic reform in 1986 under the policy of doi moi or renovation - followed by promulgation of the Law on Foreign Investment in 1987 intended as the first of many steps ps in the transition to a market economy. The U.S. trade embargo, in place since the end of the Vietnam War, was lifted in February, 1994, followed by official "normalization" of relations with the country last year. U.S. firms moved quickly - investing USD $1.1 billion in Vietnam as of January, 1996. Meanwhile, the economy continues to grow rapidly. Vietnam's rate of growth has climbed from a real increase in the Gross Domestic Product (GDP) of 8.8 percent in 1994 to 9.5 percent last year and a forecast 10 percent jump this year, according to the Economist Intelligence Unit.
A country rich in natural resources, Vietnam enjoys a 1,400 mile tropical coastline with many attractive sites available for long-term lease to support the tourism industry. At the same time, the country is in a race to modernize all types of infrastructure - from inadequate roads and power supplies to port facilities and telecommunications. And despite economic and regulatory reform in a business environment that continues to evolve, foreign investors must navigate a complex bureaucratic maze.
Government rules require companies to meet specific standards for approval
of hotel projects in various locations. In Ho Chi Minh City, for example,
a minimum of 150 rooms is required. Four-star hotel projects must involve
an investment of USD $90,000 to USD $120,000 per room to be approved, while
the location must be in accordance with the master plan for the development
of the country's tourism program. Other criteria include:
According to The Ho Chi Minh Tourism Department, there were approximately
1.3 million visitors to Vietnam in 1995. This indicates that tourism to
Vietnam has nearly doubled since 1993 when visitation totaled 700,000.
The Tourism Department predicts that this arrival count will climb at double-digit
growth rates over the next five years and will total nearly 3.8 million
visitors by the year 2000. Vietnam's absence from the international tourism
circuit for many years means that the country must now develop both the
hotel and tourism infrastructure needed to attract and accommodate this
level of visitation. Although formal statistics detailing the composition
of international visitation to Vietnam are not yet available, it is estimated
that nearly 75 percent of total arrivals are visiting for business or other
official purposes. Other travel includes tourists and overseas Vietnamese
that are visiting families or relatives in the country.
| Estimated Growth in Foreign
Visitors to Vietnam
(number of persons) |
|
|||
|---|---|---|---|---|
|
|
|
|
||
|
1993
|
700,000
|
-
|
||
|
1994
|
1,000,000
|
43%
|
||
|
1995
|
1,300,000
|
30%
|
||
|
1996
|
1,800,000
|
38%
|
||
|
1997
|
2,300,000
|
28%
|
||
|
1998
|
2,800,000
|
22%
|
||
|
1999
|
3,330,000
|
19%
|
||
|
2000
|
3,800,000
|
14%
|
||
| Source: Ho Chi Minh City Tourism Department | ||||
The Vietnam General Tourism Administration estimates that at the end
of 1995 there were nearly 22,287 hotel rooms in Vietnam of which only 2,500
rooms were in the four- or five-star quality. Properties developed during
the last five years (including the Omni, Equatorial, Saigon Prince, Century
Saigon, Saigon Star and the New World Hotel - all located in Ho Chi Minh
City) account for a large percentage of these four- and five-star hotels.
There are a number of international standard hotels proposed or under development
throughout the country and expected to come on line between 1996 and 1998.
These include 28 hotels in Hanoi and four hotels in Ho Chi Minh City.
Furthermore, a number of older state-owned hotels (such as the Majestic
Hotel, the Caravelle Hotel, and the Thang Loi Hotel) have been or are being
renovated and upgraded. This extraordinary growth of available lodging
supply has caused concern about market saturation in both Hanoi and Ho
Chi Minh City particularly in the four- and five-star category.
| Projected Increases to
International Standard Hotel Room Supply
Source: Vietnam General Tourism Administration |
||||
| Ho Chi
Minh City |
Hanoi
|
|||
|
1996
|
870
|
997
|
||
|
1997
|
1,595
|
1,199
|
||
|
1998
|
550
|
2,145
|
||
|
1999-2000
|
N/A
|
1,980
|
||
Evolving Markets
The cities of Ho Chi Minh and Hanoi have been the focus of foreign investment
in the lodging sector during the past several years. Both cities have had,
and continue to experience, a significant increase in available four- and
five-star lodging supply. This development is resulting in increased competition,
declining occupancies and average room rates, and declining profit margins.
| Ho Chi Minh City
The city occupies a hinge position between southeastern and south-western Vietnam including the Mekong Delta, the largest rice producing area in the country. Although it accounts for less than 7 percent of the total population, Ho Chi Minh City generates nearly 30 percent of the national industrial output and nearly one-third of the national budget. Building upon these trends and the central location of the city, Ho Chi Minh City is endowed with relatively strong capacities for the future development and diversification of the economy. The city has been, and is expected to remain, one of the most attractive cities for foreign investors. Ho Chi Minh City currently captures nearly 35 percent of total foreign investment capital as a result of its key role in the economy, the strength of its infrastructure corn pared to other parts of Vietnam, and the relatively qualified labor force. It is estimated that at the end of 1995, the hotels in the four- and five star lodging tier achieved an average annual occupancy of nearly 60 percent at an average room rate of USD $100. Occupancies at these hotels have reportedly decreased since 1993 despite the increase in visitation to the country. This is a direct result of the extensive growth in available hotel room supply. In order to sustain existing occupancy rates, it is estimated that growth in visitation to the city must exceed 30 percent each year. Despite aggressive growth estimates prepared by the Ho Chi Minh City Tourism Department, it is unlikely that the local economy will sustain continuous growth at this level. The growth in available supply in Ho Chi Minh City is expected to result in increased competition, especially in the arena of pricing which should have an adverse effect on bottom line profitability and investment returns. Investors have begun to reflect concerns on these issues. |
| Hanoi
Over the past several years, growth in visitation to the city exceeded the growth in available supply of international standard rooms in Hanoi. As a result, the hotels in this market have been exhibiting strong occupancy and average room rates. However, this trend is likely to change. As indicated earlier, there are approximately 28 new hotel projects planned or under construction in Hanoi and the surrounding suburban market areas. This growth in available hotel supply is likely to result in declines in occupancies and average room rates for the hotels. |
As a result of potential overbuilding in Ho Chi Minh City and Hanoi,
savvy investors have begun to seek development opportunities in other,
less-developed locations. There are two major projects underway in central
Vietnam that are taking advantage of this opportunity.
| China Beach - A USD $243 million resort complex is planned for
development at China Beach by the BBI Group, a U.S.-based investment company.
China Beach is a pristine sandy beach once used by the U.S. military forces.
Da Nang - The first international standard hotel to be located in Da Nang is being developed by a joint venture between Australian Leda Holdings, Ltd. and local authorities on a site that was once the location of the U.S. consulate. The USD $24 million project will be managed by Accor Asia Pacific which already manages Sofitel hotels in Hanoi and Dalat and the Mercure Hotel in Ho Chi Mirth City. |
While growing pains are evident, Vietnam is clearly committed to economic reform and expansion. Political and regulatory uncertainties, combined with the urgent need to modernize infrastructure are hurdles to overcome for any organization contemplating investing in Vietnam, especially outside of Ho Chi Minh City and Hanoi. Potential opportunities are considerable however, for well capitalized and knowledgeable hotel companies with strong Vietnamese partners as the country moves forward with long-term economic development.
(Ruy Y. Moreno, based in Ho Chi Minh City, is General Director of Arthur Andersen's practice in Vietnam.)
This report also features:
The Russian
Hospitality Industry - A Market Economy Evolves
Cuba - Tourism as a
Replacement Industry
©Arthur Andersen