Procurement Facilitation Paper: Vietnam
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1 Procurement Facilitation Paper: Vietnam Executive Summary: The US-ASEAN Business Council offers its views on the business environment for U.S. defense companies in Vietnam. This paper includes the results of a survey completed by our members on the opportunities and challenges afforded by Vietnam s defense market. It also offers a list of suggestions which, if implemented, could significantly expedite the procurement of U.S. defense articles and services by the Vietnamese government. Broadly speaking, U.S. defense firms regard Vietnam as a promising market. Challenges faced by US companies include: incomplete understanding of Vietnam s strategic goals and procurement priorities; confusion over its military procurement process; and a lack of engagement with key stakeholders in the armed forces, government, and domestic defense sector. To highlight areas of opportunity, the US-ASEAN Business Council canvassed its Defense and Security Committee for their views on Vietnam s business environment. The Council and its members look forward to supporting efforts by the U.S. public and private sectors in concert with the government of Vietnam to further develop the overall U.S. Vietnam defense partnership. Background: Selected Indicators on Vietnam s Defense Market Population (2014) 93.5 million GDP (nominal, 2014) $187.9 billion Total military personnel 522,000 Defense expenditures $4.2 billion Foreign defense imports $1.1 billion Sources: The World Factbook; the World Bank; IMF; SIPRI. All monetary amounts are in 2014 U.S. Dollars. Vietnam raised military expenditures by 113 percent between 2004 and 2013, the largest increase among the 10 ASEAN nations marked a watershed for Vietnam s military modernization effort. That year, the Communist Party of Vietnam (CPV) issued a detailed national security strategy for , which identified the protection of maritime sovereignty as a key policy goal. More than 50 percent of Vietnam s population resides along its 2,025-mile coastline, and the government perceives its greatest security challenges as emanating from the South China Sea. Vietnam s maritime claims encompasses an area roughly three times the size of its land territory. It is estimated that the seas around Vietnam hold hydrocarbon reserves equivalent to 1.2 billion barrels of oil, a fish stock of about 2.7 million tons, and numerous other natural resources. The Vietnamese Navy and Air Force, which until the early 2000s had limited capacity to defend national maritime interests, have rapidly modernized over the past half-decade. Major military purchases during this period have served to enhance the armed forces ability to conduct area denial operations off the Vietnamese coast and around installations in the Spratly/Trường Sa archipelago. Most notably, in 2009 Vietnam agreed to purchase six Kilo-class submarines from Russia at a cost of approximately US$2.6 billion. The deal includes delivery of and training on the submarines, as well US-ASEAN Business Council 1
2 as construction of a maintenance and repair facility at Cam Ranh Bay. Russia has also agreed to provide the Vietnamese air force with a third squadron of Sukhoi Su-30MK2 fighter aircraft. Despite significant advances in Vietnam s indigenous defense industry, the country remains dependent on foreign imports to equip its armed forces. Russia has traditionally served as Vietnam s primary supplier of defense articles, an arrangement which is expected to continue in the short-to medium-term. In recent years, however, the CPV has undertaken a policy of building security ties with other powers. As Deputy Minister of National Defense Nguyen Chi Vinh said in 2010: In the past, Vietnam used to cooperate in national defense with socialist and a number of neighboring countries. Now we follow the [CPV s] open policy by cooperating with many countries [all] over the world. The next phase of Vietnam s military modernization process requires high-quality foreign investments and business partners who will work with Vietnam to economize its resources and contribute to the development of Vietnam s self-defense capability. In both regards, U.S. companies are among the best qualified to contribute, as each can offer their expertise and experience in capability areas vital to the safety and protection of Vietnam. Emerging Market Opportunities: Survey respondents expressed particular interest in doing business in the following sectors of Vietnam s defense market: Maritime Domain Awareness (MDA) The CPV has long recognized the strategic and economic importance of securing the country s maritime periphery. As previously noted, Vietnam has focused much of its recent military modernization on investments in asymmetric naval deterrence, emphasizing shore-based anti-ship missiles, attack submarines, and stealthy littoral combatants. The role of the Vietnam Coast Guard (VCG) is also increasingly important, both for routine policing duties and as a non-military option in the face of territorial encroachment. In a maritime context, however, effective control over territory is particularly dependent on comprehensive informational awareness. Vietnam s limited MDA capacity is in this sense a significant strategic deficiency. MDA is a process that collects, synthesizes, and analyzes data about activities in, and the conditions of, a given maritime environment, and then communicates relevant information to decision makers. The collection portion of the MDA process can involve a wide variety of systems: sensors, aerostats, buoys, radars, surface vessels, and aircraft, both manned and unmanned. A majority of respondents (77 percent) expressed specific interest in marketing MDA-related systems to Vietnam. Humanitarian Assistance and Disaster Relief (HADR) Deadly storms and floods are common in Vietnam, parts of which are low-lying and densely populated. Between 2007 and 2011, government data show that an average of 430 people were killed annually by natural disasters, with property losses estimated at one percent of GDP. In recent years, Vietnam has moved to proactively address the threat posed by natural disasters. The country s thorough preparations for Typhoon Haiyan in 2013 won praise from the international community. However, Vietnam s military remains lacking in air and naval US-ASEAN Business Council 2
3 transport capabilities, and is also deficient in the ground assets and support facilities needed for effective HADR operations. Council Members are interested in engaging the government Vietnam to address these areas of operational weaknesses. Systems of interest in this regard include utility helicopters, fixed-wing transport aircraft, communications equipment, and logistical vehicles. Command, Control, Communication and Computing (C4) Systems Both on a tactical and strategic level, a key feature of modern warfare is the rapid, accurate transmission of information. In the abstract, C4 refers to the system of systems whereby military formations collect, transmit, and receive data. This data can include reconnaissance, firing solutions, troop positions, inventory levels and weather conditions. This category of defense articles naturally includes conventional military communications equipment, but also fire-control systems, target illuminators, and radar, among other examples. A substantial portion of survey respondents expressed interest in selling C4 systems to the Vietnamese military. Challenges for U.S. Business: U.S. defense firms face certain challenges and barriers which constrain their activities in Vietnam. Survey respondents indicated three particular areas of concern: Which of the factors below currently affects your company s ability to do business in Vietnam? Check all that apply: Answer Options Response Percent Inadequate access to Vietnamese government 53.8% officials Lack of understanding of Vietnam s 92.3% procurement process Lack of information concerning Vietnam s 69.2% procurement priorities Other 30.8% Uncertainty Concerning Vietnam s Defense Priorities The Government of Vietnam has historically designated matters pertaining to national defense as state secrets. The country rarely provides information on defense industry cooperation, servicing agreements, and military procurement. For example, Vietnam has submitted annual reports on arms imports and exports for inclusion on the United Nations Register of Conventional Weapons since During this period, Vietnam has fully disclosed its arms imports only four times: 1995, 1997, 2004 and For its part, the Ministry of Defense (MoD) has issued three whitepapers over the past 20 years. The most recent of these, published in 2009, revealed the size of Vietnam s defense budget and articulated general strategic goals. It did not provide a breakdown of the Vietnamese defense budget, nor any insight into the armed forces procurement schedules. This lack of US-ASEAN Business Council 3
4 transparency has led to uncertainty on the part of U.S. businesses, who remain unsure as to Vietnam s strategic objectives and acquisition priorities. The Council recognizes the fundamental necessity of discretion in matters pertaining to national security. However, under Foreign Military Sales (FMS) procedures, defense companies seeking to market their products abroad must first articulate to the U.S. Government the express requirements of their foreign clients. The combination of these two factors greatly limits Council members attempting to sell defense articles to Vietnam. Confusion over Procurement Process In a similar vein, nearly all survey respondents (92 percent) indicated a lack of understanding with respect to the procurement process itself. Terms and conditions for defense contracts were described as opaque or unclear. The lack of clarity, specifically regarding decisionmaking criteria, and the lack of coordination between relevant government bodies causes confusion and inefficiency. Vietnam has not disclosed any offset obligations with respect to military procurement. The country does, however, give preference to companies offering technology transfers, and encourages cooperation for co-production of arms and equipment. Within the constraints of International Traffic in Arms Regulations (ITAR), Council Members are broadly willing to proffer technical assistance. Lack of Engagement with Key Stakeholders Another frequently-cited issue by survey respondents was an absence of engagement with key entities involved in the procurement process. In recent years, Vietnam has organized several summits involving foreign defense companies, but these ad hoc events rarely lead to long-term dialogue. On a more fundamental level, Council members are unsure with whom and whether they can discuss relevant issues. The General Import-Export Van Xuan Corporation (VAXUCO), which is housed within the Ministry of Defense (MOD), is the only designated importer for non-dual use military goods. However, both VAXUCO and the MoD proper typically refer all inquiries from foreign firms to the Ministry of Foreign Affairs (MoFA). While the MoFA serves as a key interlocutor in the wider U.S.-Vietnam relationship, its personnel may be less familiar with either the needs of the Vietnamese armed forces or the concerns of U.S. defense firms. In addition, legal questions persist concerning the use of local consultants to elucidate the procurement process. While respecting the need to preserve classified information, the Council submits that such individuals are often necessary to facilitate communication between the government and the private sector. Creating Solutions: More Frequent Communication of Defense Priorities The Council suggests that the Government of Vietnam utilize regular defense publications as a means to communicate its procurement priorities. This could take the form of annual or semi-annual strategic white papers giving U.S. defense firms insight into official thinking and planning. Ideally, these publications would articulate specific mission requirements and US-ASEAN Business Council 4
5 budgetary allocations, thereby allowing U.S. companies to maintain compliance with FMS procedures. Leverage Burgeoning Security Ties Improving security ties with the United States could greatly expedite Vietnam s transition from its traditional arsenal of Soviet and Russian equipment. Excellent military training is offered by the U.S. Department of Defense s International Military Education and Training (IMET) program. Clarifying the Procurement Process The Council requests that the Government of Vietnam clarify several aspects of the defense procurement process; namely, standard terms and conditions, decision-making criteria, dispute-resolution mechanisms, and regulations governing the use of local consultants. Elucidation of these issues will greatly enhance the ability of U.S. defense firms to market their good and services. Fostering Dialogue Many of the concerns cited by survey respondents could likely be resolved via more frequent dialogue. This engagement could take several forms, and might include the following activities on the part of the Vietnamese government: Organizing events to introduce foreign firms to key government personnel, including the lead procurement official from each of the armed services; Participation in defense industry events and fora, both at the regional and the international level; Presentations by MoD officials on the defense procurement process and associated policies; and Scheduling regular summits to connect U.S. defense firms with relevant government stakeholders. US-ASEAN Business Council 5
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