Vietnam freight transport report q1 2011

... of any information hereto contained Vietnam Freight Transport Report Q1 2011 © Business Monitor International Ltd Page Vietnam Freight Transport Report Q1 2011 CONTENTS Executive Summary ... Monitor International Ltd Page Vietnam Freight Transport Report Q1 2011 SWOT Analysis Vietnam Freight Transport SWOT Strengths Weaknesses Opportunities Threats ƒ Vietnam' s strong domestic growth... Source: General Statistics Office of Vietnam © Business Monitor International Ltd Page 22 Vietnam Freight Transport Report Q1 2011 Air Freight Vietnam' s airfreight industry is recovering modestly

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TRANSPORT REPORT Q1 2011

INCLUDES 5-YEAR FORECASTS TO 2015

Part of BMI’s Industry Report & Forecasts Series

Published by: Business Monitor International

Copy Deadline: December 2010

CONTENTS

Executive Summary 5

SWOT Analysis 7

Vietnam Freight Transport SWOT 7

Vietnam Political SWOT 8

Vietnam Economic SWOT 9

Vietnam Business Environment SWOT 10

Business Environment Rating 11

Table: Asia Pacific Freight Business Environment Ratings 11

Freight Industry Ratings 12

Transport Intensity Index 13

Vietnam Logistics Performance Index (LPI) 13

Industry Trends and Developments 14

Multimodal/Logistics 14

Road 14

Rail 14

Air 15

Maritime 16

Market Overview 20

Industry Forecast Scenario 22

Macroeconomic Forecast 22

Road Freight 22

Table: Road Freight 22

Air Freight 23

Table: Air Freight 23

Maritime Freight 24

Table: Maritime Freight 24

Rail Freight 25

Table: Rail Freight 25

Table: Inland Waterway Freight 25

Trade Overview 26

Table: Trade Overview 27

Table: Key Trade Indicators 28

Table: Main Import Partners (US$mn) 29

Table: Main Export Partners (US$mn) 29

Macroeconomic Outlook 30

Table: Vietnam – Economic Activity 32

Company Profile 33

Vietnam Airlines 33

Doan Xa Port 35

Vietnam Petroleum Transport Jsc (VIPCO) 37

Country Snapshot: Vietnam Demographic Data 39

Section 1: Population 39

Table: Demographic Indicators, 2005-2030 39

Table: Rural/Urban Breakdown, 2005-2030 40

Section 2: Education And Healthcare 40

Table: Education, 2002-2005 40

Table: Vital Statistics, 2005-2030 40

Section 3: Labour Market And Spending Power 41

Table: Employment Indicators, 1999-2004 41

Table: Consumer Expenditure, 2000-2012 (US$) 41

BMI Methodology 42

How We Generate Our Industry Forecasts 42

Transport Industry 42

Sources 43

100,000 tonnes by 2020 and 200,000 tonnes by 2030 The Vietnamese government has ambitious plans to modernise and expand the country's airport infrastructure, though some plans - like the Long Thanh international airport - have been in the pipeline for years with little progress being made However, the government's willingness to get projects off the ground provides grounds for optimism

Moving into 2011, we believe Vietnamese macro-economic growth is being driven primarily by domestic consumption and infrastructure investment On the negative side, exports are being constrained by what

we see as a double-dip global economic slowdown led by important trading partners such as the US and

China A widening trade deficit will be a drag on growth The interplay of these factors has led BMI to

maintain our GDP estimate for 2010 at 6.7% growth, a rate we see slowing to 5.6% in 2011 Although these growth rates are slower than the high single-digit percentages experienced before 2009, they are still relatively supportive of the freight transport sector

Over the next five years, we are predicting that growth will come out at a fairly vigorous annual average

of 6.3% Risks to this projection remain Overheating is one of them, with the possibility of inflation rising too sharply On the political front, the National Congress of the Communist Party due to be held in early 2011 is still a factor persuading the government to keep consumption levels expanding

Road building and road usage are both expanding strongly Indeed, it can be argued that a large part of the country's economic growth is road-based In 2011, we see a relatively moderate growth rate of 6.9% to 30.19bntkm

Vietnam's airfreight industry is recovering modestly against the background of a troubled global aviation sector, with repercussions from the European volcanic ash crisis in Q210 also playing a part In Vietnam

itself the industry is beginning to experience intense competition In terms of air cargo volume, BMI sees

growth of 5.3% to 147,910 tonnes in 2011, compared to growth of 2.1% in 2010

BMI is projecting strong growth in 2011 volume handled at the Port of Ho Chi Minh City (also known as

SNP, Saigon New Port), up by 7.5% to 21.84mn tonnes, after the 6.2% rate estimated in 2010 Going

forward, we believe growth will be vigorous SNP is also expected to see 4.4% container handling growth

to 2.627mn TEUs in 2011, following growth of 3.5% experienced in 2010 At Da Nang Port (DNP) we see 2011's volume gaining by 2.8% to 2.68mn tonnes DNP will see box growth of 7.1% to 58,919 TEUs

Rail freight carried increased by an estimated 6.7% in 2010, and is set to experience a bit of a slowdown

in 2011, with growth of 4.7% to 4.251bntkms This suggests that Vietnam will not be making the most of the potential of rail, one of the most fuel-efficient forms of bulk transport

In real terms, Vietnam's total trade (imports + exports) recovered by 5.4% in 2010, a rate which we see accelerating slightly to 6.2% in 2011 despite the effects of the 'double dip' global economic slowdown Over the five years to 2014, we calculate that total foreign trade will expand at an annual average rate of 6.5%, just ahead of the growth of the economy as a whole (+6.3%) Over this period, exports will grow at

an average per annum rate of 7.3%, ahead of imports at 5.9% In nominal terms, exports will gain 15.4%

to US$73.37bn in 2011, while imports will grow 14.9% to US$87.0bn We expect Vietnam to continue to run a balance of trade deficit throughout our five-year forecast period running to 2014 In the immediate short term, the deficit will widen as the growing economy sucks in more imports, despite the effects of two devaluations of the Vietnamese dong (in November 2009 and February 2010)

Vietnam's principal export commodities are crude oil and manufactured goods The country's main imports are machinery and equipment

Vietnam's main export partners are the US, Japan, Australia, China and Germany The country's main sources for imports are China, Singapore, Japan, South Korea and Thailand Vietnam's geographic position on the South China Sea allows the country access to the main transpacific and intra-Asian shipping routes, enabling the country to meet its trading needs

SWOT Analysis

Vietnam Freight Transport SWOT

Strengths ƒ Vietnam's strong domestic growth rate coupled with its geography: a long country

stretching for thousands of kilometres on a north-south axis creates a need for distance freight haulage

long-ƒ Recovery at the nation's ports in 2010 is expected to continue over the mid-term

ƒ Vietnam's location on the South China Sea gives the country access to the main Asian shipping routes, as well as access to the developing land transport links with ASEAN countries, allowing the country scope to develop its trade logistics

inter-Weaknesses ƒ The generally poor state of the road network Despite new highway construction, only

13.5% of the road network is considered to be in good condition, only 26% has two or more lanes and only 29% is tarred

ƒ Traditionally low investment in rail; although attempts are being made to rectify this, the potential of rail for cost-effective bulk freight is being underutilised

ƒ Decades of under-investment have left the country with a port infrastructure system ranked 99th our of 133 countries by the World Economic Forum Competitiveness Report

Opportunities ƒ The beginnings of local commercial vehicle production, which will help improve the

stock of lorries used by road haulage companies

ƒ Growing international interest in Vietnam as a growth market within the box shipping sector

ƒ The opening of a deepwater container terminal in May 2009 set up better direct shipping links to the US

Threats ƒ Potential 'stop-go' in economic gowth as the government may be forced to tighten

monetary and fiscal policy in response to overheating

ƒ State-owned freight companies may be unprepared to compete effectively as the doors are gradually opened for international companies to enter the Vietnamese market

Vietnam Political SWOT

Strengths ƒ The Communist Party government appears committed to market-oriented reforms,

although specific economic policies will undoubtedly be discussed at the 2011 National Congress The one-party system is generally conducive to short-term political stability

ƒ Relations with the US are generally improving, and Washington sees Hanoi as a potential geopolitical ally in South East Asia

Weaknesses ƒ Corruption among government officials poses a major threat to the legitimacy of the

ruling Communist Party

ƒ There is increasing (albeit still limited) public dissatisfaction with the leadership's tight control over political dissent

Opportunities ƒ The government recognises the threat that corruption poses to its legitimacy, and

has acted to clamp down on graft among party officials

ƒ Vietnam has allowed legislators to become more vocal in criticising government policies This is opening up opportunities for more checks and balances within the one-party system

Threats ƒ The slowdown in growth in 2009 and 2010 is likely to weigh on public acceptance of

the one-party system, and street demonstrations to protest economic conditions could develop into a full-on challenge of undemocractic rule

ƒ Although strong domestic control will ensure little change to Vietnam's political scene

in the next few years, over the longer term, the one-party-state will probably be unsustainable

ƒ Relations with China have deteriorated over the past year due to Beijing's more assertive stance over disputed islands in the South China Sea and domestic criticism

of a large Chinese investment into a bauxite mining project in the central highlands, which could potentially cause widescale environmental damage

Vietnam Economic SWOT

Strengths ƒ Vietnam has been one of the fastest-growing economies in Asia in recent years, with

GDP growth averaging 7.6% annually between 2000 and 2009

ƒ The economic boom has lifted many Vietnamese out of poverty, with the official poverty rate in the country falling from 58% in 1993 to 20% in 2004

Weaknesses ƒ Vietnam still suffers from substantial trade, current account and fiscal deficits,

leaving the economy vulnerable as the global economy continues to suffer in 2010 The fiscal picture is clouded by considerable 'off-the-books' spending

ƒ The heavily-managed and weak dong currency reduces incentives to improve quality

of exports, and also serves to keep import costs high, thus contributing to inflationary pressures

Opportunities ƒ WTO membership has given Vietnam access to both foreign markets and capital,

while making Vietnamese enterprises stronger through increased competition

ƒ The government will in spite of the current macroeconomic woes, continue to move forward with market reforms, including privatisation of state-owned enterprises, and liberalising the banking sector

ƒ Urbanisation will continue to be a long-term growth driver The UN forecasts the urban population to rise from 29% of the population to more than 50% by the early 2040s

Threats ƒ Inflation and deficit concerns have caused some investors to re-assess their hitherto

upbeat view of Vietnam If the government focuses too much on stimulating growth and fails to root out inflationary pressure, it risks prolonging macroeconomic instability, which could lead to a potential crisis

ƒ Prolonged macroeconomic instability could prompt the authorities to put reforms on hold, as they struggle to stabilise the economy

Vietnam Business Environment SWOT

Strengths ƒ Vietnam has a large, skilled and low-cost workforce, that has made the country

attractive to foreign investors

ƒ Vietnam's location - its proximity to China and South East Asia, and its good sea links - makes it a good base for foreign companies to export to the rest of Asia, and beyond

Weaknesses ƒ Vietnam's infrastructure is still weak Roads, railways and ports are inadequate to

cope with the country's economic growth and links with the outside world

ƒ Vietnam remains one of the world's most corrupt countries Its score in Transparency International's 2009 Corruption Perceptions Index was 2.7, placing it in 22nd place in the Asia-Pacific region

Opportunities ƒ Vietnam is increasingly attracting investment from key Asian economies, such as

Japan, South Korea and Taiwan This offers the possibility of the transfer of tech skills and knowhow

high-ƒ Vietnam is pressing ahead with the privatisation of state-owned enterprises and the liberalisation of the banking sector This should offer foreign investors new entry points

Threats ƒ Ongoing trade disputes with the US, and the general threat of American

protectionism, which will remain a concern

ƒ Labour unrest remains a lingering threat A failure by the authorities to boost skills levels could leave Vietnam a second-rate economy for an indefinite period

Business Environment Rating

Table: Asia Pacific Freight Business Environment Ratings

Freight transport market

Country structure Limits

Market risks

Country risk Risks

Overall rating

Regional rank

Scores out of 100, with 100 highest Source: BMI

The freight transport sector in the Asia Pacific region offers one of the most attractive business

environments for the industry worldwide There are various reasons for this First, the region offers a powerful combination of future growth and economies of scale It contains arguably the two most

significant of the four BRIC (Brazil, Russia, India and China) economies, which, it is argued, are the powerhouses of future global growth China and India combine vast geographical size, large populations, globally competitive labour costs and as yet untapped infrastructure potential To this must be added the 'third BRIC', Russia, which, although outside the region, has critically important trade and transport links

to Asia (such as crude oil exports to China) Second, at a 'big picture' level, most of the regional power centres are committed to reasonably pragmatic and relatively stable, market-based policies Countries that

in the past were either fervently communist (China, Vietnam) or capitalist (Malaysia, Taiwan) share a much wider non-ideological common ground focused on how to achieve a sustainable rise in living

standards This is not to say, of course, that the area is free of tensions and flash points (North Korea, China-Japan, India-Pakistan to name just a few)

Strong freight transport growth rates are combined with a very encouraging infrastructure investment picture across most of the region

By mode, road haulage will grow as road infrastructure and vehicle density is extended and as the shift to smaller/higher value loads continues Rail freight will benefit from long-distance economies of scale, whether from the opening up of the Australian hinterland or big projects such as the new Silk Road route Shipping is being lifted by the surge in trans-Pacific commodity and manufacturers' trade routes, while air freight is growing on the back of liberalisation and the budget airline boom While the freight transport industry in the region suffers from patchy regulation and in some areas there are ongoing issues with corruption and cronyism, it is on the whole much more open and competitive than in the past A strong positive factor is the dynamic and outward facing role played by foreign trade

Freight Industry Ratings

Our overall freight transport rating for Vietnam stands at 58.1 (out of a theoretical maximum score of 100) This is composed of a score of 60.7 for potential returns (reflecting factors such as market size, growth and the competitive environment), which gets a 70% weighting, and a lower score of 52.3 for risks to those returns (reflecting factors such as market orientation, regulatory environment and other country-risk issues), which gets a 30% weighting

Vietnam's freight transport traffic, measured in mntkm, rose by an annual average of 10.2% in 2005-2009 and, according to our projections, will decelerate to an annual average of 7.4% in 2010-2014

According to official information, there is a wide range of transport sector investment projects in the pipeline, across road, rail, air and sea Work is underway to develop the Mekong basin area, and new seaports are planned While there is no doubt that Vietnam's transport infrastructure is expanding, our rating for this category is constrained by poor planning and limited project management experience

Vietnam is moving towards a full market economy, but is doing so at a relatively slow pace, given that the reform process started nearly two decades ago The country gained access to the WTO in 2007 In the transport sector, state-owned enterprises (SOEs) continue to be dominant in many areas There is not yet a clear legal framework for the protection of passenger and freight customer rights

Freight transport competition remains limited, with SOEs dominating key transport modes There are few foreign entrants, although we expect more to arrive during the forecast period To be able to operate in the country, significant negotiations and procedures are required Although the government favours attracting

more foreign direct investment (FDI), the local environment is not yet fully supportive of competitive markets

Transport Intensity Index

This index is derived by calculating the average annual growth rate for total trade (imports plus exports) over a 10-year period running from 2005 through to 2014 As such, it is a mix of actual performance (the five-year 2005-2009 period) and projected performance (2010-2014) In Vietnam's case, actual average annual trade growth in 2005-2009 was a strong 18.8%, which in our projections will ease substantially to 11.1% per annum in 2010-2014 The annual average across the 10 years as a whole is 16.8%

Vietnam Logistics Performance Index (LPI)

In 2007, the World Bank launched its Logistics Performance Index (LPI), intended as 'the first in-depth cross-country assessment of the logistics gap among countries' The LPI was calculated on a five-point scale and based on survey responses from over 800 logistics professionals Countries were given an aggregate LPI score, which was in turn made up of seven sub-categories, covering criteria such as the quality of customs, infrastructure and international shipments, logistics competence, tracking and tracing, domestic logistics costs and timeliness

In the 2007 survey, Vietnam was ranked 53rd in the world with an LPI score of 2.9 For comparison with the major OECD economies, the Netherlands was ranked second in the world with an LPI of 4.2;

followed by Germany (third with an LPI of 4.1), the UK (ninth, LPI of 4.0) and the US (14th, LPI of 3.8)

In comparison with other Asian economies, Singapore was the world number one with an LPI score of 4.2, followed by Australia (17th, LPI of 3.8) and Taiwan (21st, LPI of 3.6) Then came South Korea (25th, LPI of 3.5), Malaysia (27th, LPI of 3.5), China (30th, LPI of 3.3), Thailand (31st, LPI of 3.3) and Indonesia (43rd, LPI of 3.0) Vietnam was therefore close to the bottom end of the regional LPI ranking, ahead of Papua New Guinea (95th, LPI of 2.4) and Laos (117th, LPI of 2.3) In terms of the different components of the index, Vietnam's best performing areas, ranked in order, were domestic logistics costs, timeliness, international shipments, and tracking and tracing Weaker areas in descending order were customs, logistics competence, and infrastructure

Industry Trends and Developments

Multimodal/Logistics

Damco, the logistics division of Denmark-based shipping group AP Moller Maersk, is to establish a new

logistics centre in Vietnam at a cost of more than US$4mn The company will construct the 26,000m2 logistics facility at Binh Duong, 25km from Ho Chi Minh City, as part of its expansion plans in a key growth market According to Damco Asia-Pacific CEO Tony Hotine, the company has positioned the new facility strategically to cater for the rising customer needs for quality and flexible integrated logistics

solutions BMI believes increased trade integration in South-East Asia will create opportunities for

freight transport operators in the region Damco has been building its presence in the South-East Asian market and in 2009 opened a new transportation hub in Thailand's Samrong district Growing interest in the region has been supported by increased trade integration

Road

Vietnam's Ministry of Transport in October approved an investment of VND28trn (US$1.44bn) for the

Da Nang-based Quang Ngai expressway project The 26m-wide, 139.5km-long expressway connects Hoa Vang, Da Nang City with Tu Nghia District, Quang Ngai province The road is expected to be built according to road standard level A and has been designed to include four lanes for speeds of 120 km/h The section from Da Nang to Tam Ky (Quang Nam) would be financed by Japan International

Cooperation Agency (Jica) The Tam Ky city to Quang Ngai part, would be financed by the World Bank and counterpart funds

In March 2010, Vietnam's Prime Minister Nguyen Tan Dung approved VND350trn (US$18.09bn) for the construction and development of the road system in the country The funds were approved under the development scheme of 2020 and long-term plan until 2030 Vietnam has a total road network of

222,000km - the 20th largest globally - although only 19% of it is paved, indicating the poor condition of road infrastructure in the country Vietnam's Ministry of Transport and Communications has estimated that it will require close to US$60bn in the period up to 2020, to fund road infrastructure projects

Rail

In October 2010, it was reported that Vietnam had started to build Hanoi's first metro line which will be 12.5km long It will link Nhon in Tu Liem suburban district and the Hanoi railway station in the inner district of Hoan Kiem The US$1bn Nhon-Hanoi railway line will have 12 stations, four will be

underground The line is to run with a maximum speed of 80km/h It is scheduled to come online by 2015 and would carry 300,000 passengers daily EUR283mn (US$384mn) in funding has been secured from

the French government, while the remaining funds will come from Europe Investment Development Bank and the city's state budget

BMI notes that urban railways have proliferated in Vietnam as urbanisation rates increase, with most

major cities in South East Asia now either having their first metros in operation, or planning to build them Urbanisation trends in the country coupled with steady population growth is exerting increased pressure on urban infrastructure and this will only continue to grow in the next few years Crucially, urban railways are much more commercially viable than the more 'risky' regional rail projects, where poor national infrastructure and uncertain demand can potentially limit returns and foreign investor interest

In September, is was reported that Spanish group GEV and Ho Chi Minh City (HCMC)'s Urban Railway

Management Board had signed a cooperative agreement to implement a metro railway line within

HCMC BMI believes this project will be the first of many incursions by Spanish firms into Vietnam's

transportation infrastructure The HCMC metro project will cost US$1.85bn and will involve the

construction of the No 5 metro railway line running from Bay Hien crossroad to Saigon Bridge It will be carried out under an Engineering, Procurement and Construction (EPC) contract

The first phase of the project will cost EUR500mn (US$649mn) and will be funded by the Spanish government through the use of Official Development Assistance (ODA) As for the second phase, the Asian Development Bank and Spain are currently considering the level of investment for the project The first phase of the metro project is expected to commence at the end of April 2011 In 2009, foreign direct investment (FDI) in Vietnam from Spanish sources was only US$9.7mn, while as a matter of comparison FDI from Korea and the United States were significantly larger at US$1,597.7mn and US$5,948.2mn respectively However, this lack of investment seems set to change

In December 2009, both countries signed a memorandum of understanding (MOU) to cooperate in areas such as science, technology and social affairs The MOU also stated details for the capital provision for the No 5 metro line and a list of Vietnamese projects that could require Spanish financing With the strengthening of economic ties between the two countries, there is certainly considerable scope for greater

Spanish involvement in Vietnam's booming infrastructure industry However, BMI does point out that

Vietnam's business environment still suffers from high levels of corruption and heavy delays in project development, and these two areas represent significant downside risk to Vietnam's growth potential

modernisation of the airport by 2020 The plan includes construction of parking plots for 20 aircraft by

2020 and expansion of the current runway before the construction of a second runway after 2030 The project will increase the airport's annual passenger capacity to 5mn by 2020 from the current capacity of 500,000 passengers, which will be further increased to 9mn passengers by 2030 The airport's annual cargo capacity will also be increased to 100,000 tonnes by 2020 and 200,000 tonnes by 2030 The

Vietnamese government has ambitious plans to modernise and expand the country's airport infrastructure, though some plans - like the Long Thanh international airport - have been in the pipeline for years with little progress being made However, the government's willingness to get projects off the ground provides grounds for optimism

The Association of Asia Pacific Airlines (AAPA) in Late July reported that carriers based in the Asia Pacific region recorded a 30.4% year-on-year (y-o-y) surge in freight tonne km (FTK) in June 2010, according to Air Cargo News This signifies solid recovery in the economy In the same period, the carriers also registered a 34.8% y-o-y growth in international air cargo demand In June 2010, the airlines' average international cargo load factor jumped by 4.5 percentage points to 70.8%, while its freight

capacity grew 22% y-o-y BMI believes the air freight sector is on course for a solid recovery in 2010;

however, the industry must continue to navigate a number of potential challenges With demand in the US and other Western markets expected to experience a sluggish recovery, we believe the main source of growth for AAPA lines in 2010 will come from local markets, in particular growing consumer bases such

as China

Maritime

Ha Long Shipbuilding Company, an affiliate of the Vietnam Shipbuilding Industry Group, successfully launched another car carrier, Violet Ace, on October 2 2010 The carrier has a capacity to transport 4,900 cars per voyage The ship was designed by Naval Progetti Design Institute (Italy), approved by

Classification Society DNV (Norway), which also supervised the construction The modern car carrier is 185.6 metres (m) long, 32.26m wide and 36.10m high and has a speed of 19.8 nautical miles per hour Violet Ace features 13 decks -11 garage decks, one crew deck and one cabin deck - apart from a volley ball yard, a sports house, a mini swimming pool and a heliport It is the second ship constructed by Ha

Long Shipping Company under a contract with Israel-based Ray Shipping Company

In September, it was reported that a new terminal development in the north of Vietnam had become the latest example of an international company investing in the country's shipping sector As the Vietnamese

market continues to grow, BMI expects more and more companies to make these new container terminals

ports of call on their East-West services Vietnam National Shipping Lines (Vinalines) received the ahead from Vietnamese Deputy Prime Minister Hoang Trung Hai to set up a joint venture (JV) to build

go-two wharves at the northern port of Haiphong The JV has been agreed with Japanese companies MOL, NYK and Itochu Corporation, and it is projected that the wharves will cost US$350mn The new

development at the port will enable it to accommodate vessels capable of carrying up to 8,000 20-foot equivalent units (TEUs)

Once the development is completed in 2015, it is expected that the port will handle 855,000TEUs

annually, and will account for around half of all containers handled in north-Vietnamese ports BMI notes

that this is further evidence of Vietnam's growth as a destination for container ships Up until recently it was not a port of call for ships traversing the major Asia-Europe trade lane, and was instead served by feeder vessels from regional transhipment hubs However, in September both South Korean company

Hanjin Shipping and Israeli line Zim Integrated Shipping Services added the South-East Asian

country to their major services Hanjin Shipping has also made Vietnam a port of call on its transpacific services Haiphong is not the only port in Vietnam where a major terminal is being developed

In addition to adding Vietnam to its Asia-Europe and transpacific services, Hanjin Shipping is also investing, along with MOL and Wan Hai Lines, in the Tan Cai Mep International Terminal in the south of

the country, which is due to come online in 2011 BMI can understand container lines' interest in the

country Vietnam's trade with the US and Europe has been steadily increasing over the decade According

to data from the IMF's Direction of Trade Statistics, Vietnamese exports to Europe reached US$1.8bn in

2008, a y-o-y increase of 51%, while imports from Europe grew by 78% to US$1.6bn We believe that the market has huge potential, and that those lines investing early, whether by developing container terminals or by adding Vietnamese ports to the rotations of their major East-West services, will be

rewarded by huge growth

Vietnam's state-owned shipping and port operator Vietnam National Shipping Lines (Vinalines) was in mid-September said to be planning to divest its 21.8% stake in Vietnam Container Shipping within the following three months, reported Vietnam News Brief Service, as cited by Turkish Maritime This move

by Vinalines is part of its strategy to re-restructure its capital sources Vinalines has concluded the sale of unsecured corporate bonds worth US$51.32mn in the domestic market The company registered a 146% y-o-y surge in pre-tax profit to US$35.31mn in H110 Vinalines is Vietnam's largest commercial shipping line, comprising, in terms of capacity, about 45% of the country's total fleet Vietnam's shipping sector has suffered from a lack of investment and is underdeveloped in relation to those of several other Asian nations According to data provided by UNCTAD, the capacity of Vietnam's fleet was 3.14mn DWT in

2007, making it the 11th largest national fleet in the Asia Pacific region and less than half the size of that registered under the Philippines, which has a comparable population

Vietnam National Shipping Lines (Vinalines)'s plans for expansion were fast-forwarded in Q3 2010 with the shipping company taking on 36 vessels from debt-laden Vietnamese shipbuilder Vinashin Although BMI notes that Vinalines was already planning to expand its fleet, it is unlikely that it planned to do so in this manner, and it now faces the challenge of getting substandard vessels up to scratch, an extra

expensive for the company Vinaline's Chairman Duong Chi Dung, has stated that up to two-thirds of the

acquired vessels cannot be used currently as they fail to meet technical requirements He estimates that the company will need to spend US$26mn to repair the vessels and purchase insurance cover Dung has stated that he expects some financial aid from the government for the project The 36 ships are part of an asset offloading from Vinashin, which is in debt to the tune of US$4.5bn

The shipbuilding company is expected to be rescued by the government, but has been forced to shed the vessels it owns, with Petro Vietnam being the other company to acquire vessels from the troubled

shipbuilder Vinalines stated earlier in 2010 that it planned to expand, and was seeking state funding for

40 new-build vessels In 2006, the Vietnamese government approved a US$1.8bn expansion programme

to expand the company's fleet to 136 ships - 2.6mn deadweight tonnes (DWT) - by 2010 In March 2010 the shipping line pledged a new round of expansion, seeking to increase its fleet to 6-7mn DWT by 2015

BMI questions whether this fleet expansion will go ahead since the line has now acquired 36 vessels,

particularly as the government is expected to be tapped to provide funds for the ships' refurbishment and

so may not be willing to also finance Vinalines' new-build plan BMI suspects that the 36 ships, along

with their need for investment to get the up to scratch, are something of an unwanted gift for the

company On the positive side, the company has been able to expand its fleet a lot quicker than if it had waited for new builds to come online

However, considering the current state of the shipping sector, with container shipping recovering

sluggishly following a massive decline in 2009 and dry bulk shipping struggling as Chinese demand dries

up, Vinalines may not have chosen to expand immediately The lead time on new-build vessels of 18 months would have allowed its fleet to come online at a time when overcapacity is not such a threat

Further to this, BMI believes that by ordering new builds, Vinalines would have had control over the

expansion of its fleet and the specifications of the vessels it was ordering By acquiring a job-lot of Vinashin vessels, Vinalines has ceded this control

The US and Vietnam in early July 2010 signed a memorandum of understanding (MoU) that will see

containers destined for the US scanned for nuclear materials before they disembark BMI believes that

this is evidence of the continued American drive to tackle what it feels is its Achilles' heel, with the belief that the country's port sector could be a route for a potential terrorist attack We think that Vietnam had little choice but to sign the MoU, given the increasing importance of US trade to the country The

agreement was signed by the US and Vietnam on July 2 and paves the way for the US Department of Energy's National Nuclear Security Administration (NNSA) to work with Vietnamese ministries to install radiation-detection equipment in Vietnamese ports

The agency will provide, install, maintain and train Vietnamese staff in the operation of container

scanners Kenneth Baker, NNSA's principal assistant deputy administrator for NNSA's Office of Defense Nuclear Nonproliferation stated in the agency's press release: 'Our partnership with Vietnam will greatly

strengthen our capability to prevent nuclear and radiological smuggling through the maritime system in a key, strategic region of the world We appreciate Vietnam's efforts and commitment to keeping these dangerous materials out of the hands of terrorists, smugglers and proliferators.'

The MoU between the two countries is part of a wider US programme that ultimately aims to scan 100%

of US-bound containers at foreign ports on the basis that they constitute a potential threat to national security Increasingly wary of asymmetric attacks on its own soil since 9/11, this is part of a raft of legislation passed in recent years that aims to prevent another such attack In July 2007, the US

government passed a bill requiring foreign ports to have scanning procedures for US-bound cargo in place within the next five years

BMI has noted that these plans have met with some dissent, however, and have been labelled by

Christopher Koch, president and CEO of the World Shipping Council, in an address to the US Senate Committee on Commerce, Science and Transportation as 'unworkable' We believe that these extra security measures have the potential to cause significant delays and congestion in ports Given how import an export partner the US has become for Vietnam, it is unlikely that the South-East Asian nation could have done anything but sign the agreement The two countries signed a bilateral trade agreement in

2001, and since 2002 the value of Vietnamese exports to the US has grown by more than five times Vietnamese exports to the US are now worth 50% more than the country's second-placed export partner, Japan

Market Overview

In January 2007, Vietnam officially joined the WTO, an event seen as an important milestone in the country's closer integration into the global economy WTO membership has helped boost Vietnam's international trade and develop its freight transport capabilities

Road transport is the most advanced in terms of freight sector privatisation and is the dominant mode for freight, with a market share of around 60% of domestic cargo There are over 1,050 enterprises registered

in the road transport business, which include 16 state-owned enterprises (SOEs), 233 limited liability companies, 350 private companies and 450 joint stock companies Very few foreign-invested companies are present

Most road transport companies are of small or medium size, and each company, on average, owns about

50 vehicles In addition, tens of thousands of individual household businesses exist that operate

informally in the road freight sector, and are thus difficult to account for and monitor

Vietnam has a national road network of 222,179km Of this, only 42,167km, or 19%, is paved In

addition, recent surveys indicate that approximately 40% of the network is in poor to very poor condition and will require substantial investment even to reach a maintainable condition The quality of Vietnam's road infrastructure was judged by the World Economic Forum (WEF) to be poor and was ranked 102 out

133 nations surveyed in the WEF 2010 Global Competitiveness Report

Vietnam's railway transport sector has only one operator, the Vietnam Railway Corporation (VRC),

established in April 2003 as a state corporation operating railway transport and related services The government has announced plans to separate the management of rail infrastructure from passenger and cargo services Vietnam's rail network totals 2,600km (excluding sidings) The network is mixed-gauge, comprising 2,169km of 1.000m gauge and 178km of 1.435m gauge The network has 1,790 bridges totalling 45km and 11.5km of tunnels The principal axis is Hanoi-Ho Chi Minh City (1,726km) Other lines emanating from Hanoi are to Hai Phong (102km), Lao Cai (296km) and Dong Dang (162km) Railway infrastructure in Vietnam was ranked 58 out of 114 by the WEF

There are two principal airlines operating in Vietnam: Vietnam Airlines and Pacific Airlines Both are majority state owned, although Australia's Qantas is now a minority shareholder in Pacific Airlines The

government has announced plans to build the country's largest airport at Long Thanh in the southern province of Dong Nai, at an estimated cost of US$8bn The authorities also plan to expand Noi Bai International airport in Hanoi The three major airports handling freight are located at Ho Chi Minh City, Hanoi and Da Nang, each of which have international connecting flights Minor airports such as Cat Bi at

Haiphong are generally used for domestic flights to the three larger hubs In 2010, Vietnam's air transport infrastructure was ranked 84/ 133 nations by the WEF

UNCTAD shipping fleet statistics indicate that by the end of 2007, Vietnam had 387 commercial vessels with a total capacity of 3.14mn DWT and ranked 28th out of 162 countries around the world (but fourth

in ASEAN after Singapore, Malaysia and Thailand) The average vessel size is 2,650DWT

Vietnam's fleet structure lacks specialised container vessels, bulk cargo ships, large oil and liquefied petroleum gas (LPG) tankers Multi-function ships and bulk cargo ships account for 87% in number and 63% in tonnage, and container ships account for only 2.2% in number and 9% in tonnage The largest local operator is the Vietnam National Shipping Lines (Vinalines)

Vietnam's dense river and canal network provides the country with a highly developed inland waterway system This is the second-largest sub-sector involved in domestic cargo transport, accounting for 25-30%

of total transport volumes Currently, the inland waterway transport sub-sector is managed by two state corporations affiliated to the Ministry of Transport, one SOE affiliated to the Vietnam Inland Waterway Authority, and some enterprises managed by other ministries, operating in support of the power

generation, cement and paper industries In addition, there are about 230 co-operatives and hundreds of inland waterway transport enterprises in the country

Vietnam's seaport network comprises many small- and medium-sized entities, with inefficient

distribution Most big ports are located far inside rivers, like Hai Phong and Ho Chi Minh City, with limited depth at the entrance Some ports are located in big cities, thus making it difficult to connect with other modes of transport for cargo transfer from and to ports, due to traffic congestion Except for several new ports or upgraded ports, most ports have been operating for many years and lack investment and are seriously degraded

The loading and unloading equipment in some ports is obsolete, leading to low productivity The average productivity of a Vietnamese port is only 2,500 tonnes/m per wharf, or 40-50% of productivity of other ports in the region

Though a series of new port investments are expected to see conditions gradually improve during the next few years, for the time being the quality of Vietnam's port infrastructure is judged to be poor and was ranked 99 out of 133 nations by the WEF