When U.S. President Bill Clinton ended the trade embargo against Vietnam in 1994, free promotional bottles of Pepsi cola were available on the streets of Ho Chi Minh City within a few hours. In a matter of weeks, a new cola war had begun. Today, the U.S. is the largest foreign investor in the country: In the first 10 months of 2009, total foreign direct investment in Vietnam was US$18.9 billion, of which the U.S. contributed $8 billion, according to the Vietnamese ministry of planning and investment.

India’s foray into the country has not had the same fizz. But with a single Tata project that could bring US$5 billion to Vietnam, and additional Indian investments on the horizon, that may change soon. A signal of the growing relationship between the countries came in October, when the two nations’ prime ministers, Manmohan Singh and Nguyen Tan Dung, met at the 15th ASEAN (Association of Southeast Asian Nations) summit in Thailand and called for a boost to bilateral cooperation, particularly in the economic arena. India followed up by granting market economy status to Vietnam — a technicality permitting some trade concessions, but also a sign of stronger ties.

Now, investments seem likely. The public sector Oil & Natural Gas Corp. (ONGC) has already been involved in exploration in Vietnam. Its overseas arm — ONGC Videsh — has a 45% participating interest in an oil block in the Phu Khanh basin; PetroVietnam and BP have the rest. The Indian cabinet has just approved an additional US$149.5 million investment in the project. The estimated oil in place in the block is more than one billion barrels.

The ONGC investment is important because it is an indication of state-level cooperation. However, even more funding will come from the private sector. Two years ago, in July 2007, Prime Minister Dung had visited the Tata Steel plant in Jamshedpur during his maiden trip to India. The Tata group flagship company proposed to set up a US$5 billion steel plant in the Vung Anh Economic Zone in Ha Tinh province, 350 kilometers south of Hanoi. The Tatas were also planning a smaller, US$10 million instant coffee venture in the country through Tata Coffee, but that is still on the drawing board.

Meanwhile, the Essar Group has signed a joint venture (JV) agreement with the Vietnam Steel Corp. and Vietnam General Rubber Corp. to set up a US$527 million hot strip mill in the Phu My industrial zone in Baria Vung Tau province. Another group company — Essar Exploration & Production Ltd. — has been awarded an offshore block in Vietnam’s Song Hong basin. The exploration phase is estimated to last five years and the investment for this program will be approximately US$60 million. According to business daily Business Standard, however, the steel project has been put on hold until the economic climate improves. “Looking at the prevailing economic downturn, we have postponed our overseas projects for the time being,” the paper quotes Essar Group chairman Shashi Ruia as saying.

Friendly Territory

India has always been friendly with Vietnam, even when the latter was at war with the U.S. “[Former Prime Minister] Indira Gandhi was a great favorite of the people,” says Dhananjay Kumar, chairman of the Indian Business Chamber in Vietnam (Incham). Ho Chi Minh City has dozens of Ho Chi Minh statues. Nestled among them are only two statues of foreigners — Vladimir Ilyich Lenin and Indira Gandhi.

An Indian company setting up shop in Vietnam, therefore, wouldn’t make the headlines that a foray into a country like China would. But India’s investment in Vietnam surpasses its investment in any other ASEAN country — including Brunei Darussalam, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand and Vietnam. “Indians enjoy a special relationship with locals that can be traced back many decades,” notes Ashok Kumar Sharda, who manages three Indian restaurants in Ho Chi Minh City. Sharda has spent more than two decades in Vietnam, running assorted businesses including catering, importing timber and trading in paper and commodities.

In fact, there has always been a small but vibrant Indian community in the country — comprising mainly merchants and moneylenders, chiefly Tamils and Sindhis. At one time, Indians also dominated Saigon’s retail textile trade, especially along the city’s main shopping destinations, Dong Khoi and Le Loi streets. Full of fashion boutiques, jewelry sellers, luxury brand vendors, spas and high-end restaurants, these streets today resemble New York’s 5th Avenue or Singapore’s Orchard Road. But at one time they were crowded with textile shops manned by Indians. Almost all left the country after Communists seized control of Saigon in 1975.

Although formal bilateral relations continued between India and Vietnam, there were no individual or corporate initiatives during the next decade. “Vietnam has been in isolation not only from India but from other parts of the world as well,” says Naushad Ali Azad, professor in the department of economics at the New Delhi-based Jamia Millia Islamia (National Islamic University). “Lack of the teaching of English … has been a major factor for this isolation, but the new generation is learning English.”

Things started changing in 1986 with the launch of Doi Moi, literally meaning “renovation” and aimed at economic reforms. “The Vietnamese Communist Party signaled a crucial policy change which once again enticed Indians,” says Sharda, who landed in Vietnam in 1988 and was perhaps one of the earliest post-Doi Moi Indians. It took a while for Indian companies to view the Vietnamese reforms process seriously but, since the mid-1990s, there has been a regular stream of investments in the country. “So much so that in 1999, Indians decided to set up the Indian Business Chamber to promote economic cooperation and encourage investments,” says Harish Taparia, chairman of the Hanoi chapter of Incham and general director of Vietnam Alliance Minerals Ltd.

Apart from the Tatas and the Ruias (of Essar), private-sector Indian investors in Vietnam include Godrej and Sudima International in steel furniture, Vallabdhas Kanji Ltd. in pepper, Nagarjuna International and KCP in sugar, Alliance Minerals and RK Marble in mines, Rals International in cashew processing, and Arihant Oils & Feeds in edible oils. Computer training institutes NIIT and Aptech also have a strong presence in the country: NIIT has 34 centers and Aptech has another 35.

The RPG Group’s Phillips Carbon Black has signed a joint venture agreement with Vietnam Chemical Corp. to set up a facility at a total investment of US$70 million. Similarly, JK Tyres and Southern Rubber have an offtake agreement valued at US$36 million under which the latter will produce truck tires for exports using JK’s brandname. Production in this project has already begun.

In addition, every major Indian pharmaceutical company has representatives and marketing offices in Vietnam. While the companies cannot distribute their products directly in the domestic market, they often have a local collaborator to help build brandname and market products. The major attraction for pharma companies in this market is the absence of any price controls, which ensures higher profits. “However, this advantage is bound to vanish as the local authorities will have to enact some sort of drug pricing mechanism,” says one industry insider.

Springboard to New Markets

What makes Vietnam attractive for Indian investors? For companies like Tata Steel and Godrej, it is the potentially large domestic market. For Nagarjuna and KCP, apart from the local market, Vietnam offers opportunities to tap neighboring markets. “This country is an excellent base if you are looking to tap markets in the ASEAN,” says A. Mohan Kumar, general manager, NIVL Joint Stock Company, an arm of Nagarjuna. Another Tata Group company, Titan Industries, is planning to build an assembly plant for watches in Vietnam for better access to emerging markets in South East Asia.

For Tata Group chief Ratan Tata, Vietnam is a springboard into ASEAN markets. He had earlier planned to enter these markets from the West, using West Bengal as a base. But various projects — like Haldia Petrochemicals and, more recently, the Nano plant in Singur — didn’t come to fruition. Tata insiders say that though it would be more difficult, Ratan Tata is exploring the option of entering these markets from the East through Vietnam. The really fertile territories are Myanmar and Bangladesh, which have still not opened up to Indian companies.

Among the other factors attracting Indian companies are “the cheap and disciplined workforce, the friendly atmosphere and the investment incentives offered by the authorities,” says Mozam Daruwalla, until recently head of Godrej’s Vietnam operations and now country director (Vietnam) at Hester Biosciences Ltd. (Hester is an Ahmedabad-based, Indo-U.S. joint venture manufacturing poultry vaccines.) Adds R. Ravikumar of Multilateral Trading PTE, Hanoi (a textile trading company): “More importantly, there are no two separate sets of regulations for domestic and foreign enterprises; all businesses are treated equally.”

For Indian investors, “information technology, shipbuilding, animal-feed and processed foods are some of the potential industries where Indians can have an early advantage,” according to Navendu Kumar of Amphi Pte Ltd., a pharma distribution firm, and vice-chairman of the Hanoi chapter of Incham. He is particularly bullish about small- and medium-sized enterprises (SMEs) which could have a “bright future in this country.” Azad of Jamia Millia Islamia notes that “mutual cooperation in the services sector such as education, IT and the construction industry has a [big] potential. In my view, the development of coastal economies, including tourism, should also be taken up.”

Project Delays

One of the problems, however, is the pace of change. The US$5 billion Tata Steel project, for instance, had run into land acquisition and iron ore sourcing problems. The final permissions have only been granted this month, after a two-year delay. Some 725 acres have been allotted to the JV in which the Tatas have 65%, Vietnam Steel Corp. 30% and Vietnam Cement Industries 5%. The JV will get a 30% stake in the Thach Khe iron ore mines. “Now that the investment license process is on, we hope to have the groundbreaking ceremony before 2009 runs out,” says Indronil Sengupta, chief executive, South East Asia projects of Tata Steel.

The Tatas are not the only group facing delays. “In Vietnam, though the policies of economic reforms are in place, the implementation is slow,” says Azad. But delays are not new for Indian entrepreneurs: According to the World Bank’s Doing Business 2010 data for “starting a business,” India’s rank is 169, whereas Vietnam comes in ahead at 116. But the point is that Indians are going abroad to escape the red tape in their country. It doesn’t necessarily help that Vietnam is better in this aspect than India. “Vietnam has to compete with other ASEAN countries for Indian investment,” says Dhananjay Kumar. “That is really the benchmark.”

Many feel that Indian industry has, by and large, failed to capitalize on the strong historic bond between the two countries. According to Vietnamese government statistics, as of December 2008, India had 30 investment projects with a total registered capital of US$185.47 million. (This will rise notably once Tata Steel commences its operations in the country.) On the other hand, the bilateral trade between the two countries almost reached US$2.5 billion in 2008, with exports from India contributing US$2.1 billion.

“At the aggregate level, bilateral trade between the two countries has grown in the past and will continue to increase,” says D. Sunitha Raju, chairperson of the New Delhi-based Indian Institute of Foreign Trade. “However, at some specific levels, anxieties remain. In traditional commodity exports like rubber, tea, coffee, pepper and cashew, India has had a comparative advantage so far. But Vietnam is acquiring an edge over India in such exports to third countries. This is because the Vietnamese government is promoting and providing subsidies. Moreover, production of items like pepper and cashew has grown manifold in Vietnam, bringing down cost and making [them] attractively priced in the international markets. In contrast, Indian companies have not done enough to boost exports, primarily because of the huge and lucrative domestic market. While trade between the two countries will continue to grow, they will be competing in third countries, which is causing some anxiety.

“As far as Indian investment is concerned, there are already some large companies and SMEs operating in Vietnam,” continues Raju. “I feel that more Indian investors will look towards ASEAN and Vietnam in the years to come as opportunities arise in these regions.”