US embassy cable - 05HOCHIMINHCITY1118

UNCLAS SECTION 01 OF 02 HO CHI MINH CITY 001118 
 
SIPDIS 
 
SENSITIVE 
 
USDOC FOR 4431/MAC/AP/OPB/VLC/HPPHO 
 
E.O. 12958: N/A 
TAGS: EINV, ECON, ETRD, EAIR, EWWT, VM 
SUBJECT: CENTRAL VIETNAM'S CHU LAI OPEN ECONOMIC ZONE: STILL 
WIDE OPEN 
 
REF:  A) HCMC 1091  B) HCMC 1092 
 
SUMMARY 
------- 
 
1. (SBU): Quang Nam province in central Vietnam is preparing 
to develop as central Vietnam's industrial hub with a 
massive open economic zone (OEZ) in Chu Lai.  The Chu Lai 
zone covers 30,000 hectares and includes a seaport, airport, 
tourism areas and an industrial zone.  Quang Nam provincial 
leaders predict Chu Lai will become a trading center much 
like nearby Hoi An was three hundred years ago. Chu Lai's 
industrial zone holds significant promise given its large 
supply of land and cheap labor; the jury is still out on the 
zone's transportation infrastructure projects.  The 
progressive attitude of Quang Nam's leaders and their 
willingness to let market needs shape Chu Lai's development 
bode well for the project's overall success.  END SUMMARY. 
 
AMBITIOUS PLANS FOR CHU LAI 
--------------------------- 
 
2. (SBU) As part of the Consul General's October 4-7 visit 
to central Vietnam (reftels), a ConGen team visited the Chu 
Lai Open Economic Zone, located on Quang Nam's southeast 
coast, just north of the Dung Quat oil refinery project. 
The OEZ's investment promotion chief, Le Thi Tranh, said Chu 
Lai was established in June 2003, and is partially funded by 
the GVN.  In a separate meeting, Quang Nam Party Secretary 
Vu Ngoc Hoang told the Consul General that he personally 
lobbied the Politburo to establish Chu Lai and sold national 
leaders on the concept that Chu Lai could be an industrial 
hub for central Vietnam, like Ho Chi Minh City is for 
southern Vietnam and Hanoi/Haiphong are for the north. 
 
3. (U) Chu Lai's ambitious infrastructure plans include a 
seaport and an airport.  The port is currently small, narrow 
and can accommodate only small ships of no more than 6,600 
deadweight tons (dwt).  The OEZ plans to increase the port's 
capacity to accept ships of up to 20,000 dwt and dredge the 
port to a depth of 11 meters.  Chu Lai's port would compete 
with nearby Danang and Quy Nhon ports on the central coast, 
which are already processing large volumes of cargo.  In a 
subsequent meeting in HCMC with Quang Nam Party Secretary 
Hoang and Chu Lai's director, Do Xuan Dien, Dien said that 
the port would be developed gradually to meet Chu Lai 
customer requirements and that Chu Lai's managers look to 
private sector investment to shape the port's growth in the 
most economically viable manner.  For example, Dien 
anticipated that Chu Lai's port would serve the bulk 
shipping needs of two prospective projects, a glass 
manufacturing plant and an automobile refurbishing 
operation. 
 
4. (U) Chu Lai's other major infrastructure project is its 
airport. The former U.S. airbase was reopened for commercial 
traffic in early 2005 with a new terminal to handle twice 
weekly passenger flights. However, the plan is to expand the 
current facility with a much larger airport that will 
accommodate some of the world's largest airplanes, including 
the Airbus A380.  Chu Lai's leaders see the airport, which 
is slated to have a 6.5 million ton cargo capacity, as a 
transit point for the broader southeast Asian region.  Chu 
Lai has 2,300 hectares set aside for this project, which 
could be expanded to 3,000 hectares.  Two new runways, 4 km 
long and 60 meters wide, are also planned. 
 
5. (U) In addition to serving as a cargo hub, the airport 
will also act as an aircraft service and maintenance center 
for the region, according to Chu Lai's planners.  Investment 
promotion chief Tranh said the OEZ is working with a Belgian 
group that plans to finance and build a hangar that will 
hold eight planes.  When the ConGen team questioned the need 
for another large airport near Danang International Airport, 
Tranh noted that Danang's airport is located in Danang 
City's center and cannot be expanded or developed easily, in 
contrast to Chu Lai. 
 
INDUSTRIAL ZONE IS PROMISING 
 
6. (U) Chu Lai's industrial zone has several advantages that 
could make it attractive to investors, including broad 
tracts of land, a potentially abundant and cheap labor force 
and attractive financial incentives.  The OEZ offers a 
number of corporate tax breaks: no corporate tax in a 
project's first four years, 5 percent for the next nine 
years, and 10 percent from year 15.  Thanh observed these 
rates compared favorably to Vietnam's current corporate tax 
rates of 15, 20 and 28 percent.  Workers also pay 50 percent 
less than the national rate in income taxes.  There is no 
tax on imported equipment and materials for the first five 
years of a project.  Tranh also noted that land in Chu Lai 
is cheap.  It can be leased for one-sixth the cost of land 
in southern Vietnam, and leaseholds can be granted for up to 
70 years. 
 
7. (U) While there are only a handful of plants currently 
operating in Chu Lai, Tranh said that 117 investors have 
registered projects including auto assembly, seafood 
processing, packaging and glass manufacturing.  As many as 
17 projects are actually under construction.  There are also 
plans to develop tourism in Chu Lai's coastal areas, 
including a USD 40 million proposal from the Victoria Hotel 
chain, which owns luxury hotels throughout Vietnam. 
 
8. (U) Chu Lai's largest operating factory, Truong Hai Auto, 
illustrates the OEZ's industrial potential.  Open since 
September 2004, the family-owned plant currently has the 
capacity to assemble 7,400 trucks and buses per year on a 38- 
hectare site.  The vehicles are assembled based on 
Completely Knocked Down (CKD) kits with parts imported from 
Korea and China. Using kits from Daewoo, Hyundai and Kia, 
Truong Hai assembles the trucks and buses, paints them using 
an electro disposition process, and test drives them on a 
course next to the factory.  According to Mr. Tran Ba Cuong, 
Vice President of Operations, a 550kg Truong Hai minibus 
with parts from China retails for USD 5,000.  A dealer will 
charge USD 8,000 for a 1.2 ton truck from the plant.  Cuong 
told the ConGen team Truong Hai plans to increase its output 
to 25,000 units.  The factory occupies an area of 38 
hectares and its first stage of investment cost $25 million. 
Truong Hai currently employs 500 workers, 60 percent of whom 
come from the surrounding area, and the company plans to 
increase its workforce to 2,400.  The firm has brought BMW 
consultants to the factory to help train workers, most of 
whom were farm laborers previously.  Cuong said Chu Lai's 
tax-free policy and labor force led his family to invest 
there.  He also noted Chu Lai's central location allows him 
to ship products to the North and South. 
 
9. (SBU) COMMENT: We found Chu Lai OEZ to be vast, but 
remote and still in a very early phase of development.  The 
large-scale infrastructure plans are ambitious, with USD 75 
million set aside by the GVN for development of the port 
alone.  However, these projects may compete for funding with 
also critical road and rail networks to existing ports, both 
air and sea.  Chu Lai planners are keen to develop a major 
air cargo transshipment point, but they know that Fed Ex, 
UPS and DHL have already gone to Philippines, Taiwan and 
Thailand respectively.   Another challenge for Chu Lai is 
developing a skilled workforce.  While the pool of labor in 
Quang Nam is relatively large, including potential worers 
rom the more impoverished western part of Quang Nam, Chu 
Lai's developers admit training these workers is a 
challenge.  There are plans to open training centers in Chu 
Lai, and there is interest in tapping U.S. expertise in this 
area. 
 
10.  (SBU) COMMENT, CONTINUED: Despite the obstacles, the 
leaders of Chu Lai and Quang Nam are approaching the OEZ's 
development from the right perspective, which is to let the 
private sector shape the course of Chu Lai's growth. 
Provincial leadership has adopted to a laissez-faire 
approach and is committed to ensuring that the OEZ has the 
most accommodating legal and administrative framework 
possible under Vietnamese law.  Quang Nam has already 
consulted the Fulbright Economic Teaching Program in HCMC to 
assist it in crafting regulations for Chu Lai that make the 
most sense for a venture that aims to link Quang Nam with 
the world economy. 
 
WINNICK