GRIPS Development Forum
Policy Minutes

No.9

October 2002

Foreword
The Japan International Cooperation Agency (JICA) has since 2000 been
conducting a joint research project on Vietnam's trade and industrial policies
under international integration with the participation of Japanese scholars andVietnamese researchers from the National Economic University, Hanoi. This
project inherits the spirit of JICA's previous joint research project with Vietnam(the so-called "Ishikawa Project," 1995-2001), including real-sector
orientation, emphasis on field works, and the fostering of long-term and mutuallyrespecting relationship with our counterparts.
We would like to publish some of our policy discussions in the National Graduate
Institute for Policy Studies (GRIPS) policy minutes series to introduce theconcrete contents of our policy dialogue and invite comments and suggestions
from the fellow experts and policy makers.
For more details on the project, please visit:
http://www.neujica.org.vn/

October 2002
GRIPS Development ForumContents

Intensive Steel Seminar ･･･････････････････････････････････････ P. 1

Second Intensive Steel Seminar ････････････････････････････････ P.13

＜Supplement＞
Summary of the Japanese Views
on Steel Industry and Trade Policy ･････････････････････････ P.37

Intensive Steel Seminar
Date:
Place:

October 16, 2000 (8:30-17:00)
Daewoo Hotel, Hanoi<Vietnamese side>
Active participants:
Nguyen Quang Thai (Vice President, Development Strategy Institute (DSI))
Pham Quang Ham (Former Director, DSI/ Industry Department)
Do Huu Hao (Director General, MPI/ Institute for Industry Policy & Strategy)
Nguyen Kim Son (President, Vietnam Steel Corporation (VSC))
Pham Chi Cuong (Vice President, VSC)
Nguyen Huu Tho (VSC/Planning and Investment Department)
Hoang Duc Than (Research Member, National Economic University (NEU))
Bui Van Muu (Dean, Polytechnic University/Iron and Steel Making Department)
Ngo Tri Phuc (Polytechnic University)
Other participants: Pham Hong Chuong (NEU), Tran Hoe (NEU), Nguyen The Anh (NEU),
Dinh Huy Tam (VSC), Nguyen Van Vinh (MPI(Ministry of Planning andInvestment), DSI), Vu Thi Ngoc Phung (Vietnam Economic Association), Nguyen
Thi Nga (MPI, DSI), others.
<Japanese side>
Active participants:
Kenichi Ohno (Professor, National Graduate Institute for Policy Studies (GRIPS))
Fukunari Kimura (Professor, Keio University)
Nozomu Kawabata (Associate Professor, Tohoku University)
Takao Aiba (Japan Economic Research Institute)Nobuyoshi Tanaka (Japan International Cooperation Agency (JICA) expert, NSC)
Toshiki Yabuta (Nippon Steel Corporation (NSC))
Other participants: Morimasa Kanamaru (JICA Resident Representative), Daisuke Hosokawa(JICA), Miho Ota (JICA), Tadashi Kikuchi (Keio University), others.
<Chairpersons>Pham Quang Ham (morning), Kenichi Ohno (afternoon)<Interpreter>
Dang Dinh Quy (The Ministry of Foreign Affairs of Vietnam)
1

[Morning Session]
Opening remarks by Mr. Kanamaru and Mr. Thai (Omitted)
Presentation-- Pham Chi Cuong:
Let me present my personal opinion, as someone who has worked in the steel industry for 37
years. The VSC (:Vietnam Steel Corporation)’s M/P (:Master Plan) has already beenpresented and approved by the government [for details, see Mr. Tho’s comments below]. I
have four points.
1. NISW (:New Integrated Steel Works) and separate investments in smaller plants are bothneeded (two-track approach). The NISW is large and efficient and will be the core of oursteel industry in the future. By contrast, smaller plants are less costly and can be establishedsooner. Decision to build NISW must be made quickly, since free trade will start to bite by2010 or so.
2. We will initiate the production of flat products, currently all imported, by building CRMs(:Cold Rolling Mill) and HSMs (:Hot Strip Mill). The first HSM should be a priorinvestment to NISW. If it is built separately, securing the supply of slabs will be difficult.
3. For steel making, NISW is the correct answer. EAFs (:Electrical Arc Furnace) alone will
be too small to fill our need and face the shortage of input (scrap).
4. Regarding the rehabilitation of TISCO (:Thai Nguyen Iron and Steel Corporation) andSSC (:Southern Steel Corporation); TISCO’s capacity is being expanded to 240,000 tons
using Chinese technology, completed by 2001. Additional expansion to 500,000 or even 1-2
million tons, although suggested, is questionable. Far from the port and markets, TISCO
faces an inherent weakness of high transport costs. As to SSC, its current performance isgood because of (i) cheap scrap, (ii) import protection, and (iii) low-price orientation ofusers. But these advantages will disappear in the future, and SSC will lose competitiveness.
To avoid this, a combination of closing old plants and building new ones is necessary. As afirst step, we want to build an EAF plant in Phu My.
Presentation-- Kenichi Ohno:
I have translated the VSC’s plans into a spreadsheet model and numerically and graphicallyevaluated four uncertainties. Simulations are based on the 1998 JICA (:Japan International
Cooperation Agency) M/P with necessary updates and subject to further revision [Excel files
were provided to MPI, NEU and VSC].
1. Uncertainty over financing:If all finance is borrowed, debt service and current-account deficit will be too large. If a
2

JV (:Joint Venture) is chosen, no such deficits will occur but future profits must be shared(if successful). Also, a JV means Vietnam will not have full control.
2. International price fluctuations:
During the 1990s, steel prices exhibited medium-term cycles of roughly 5 years. The
previous JICA M/P assumed high prices of 1997, but if this year’s very low prices are used,projected profits will be significantly reduced. Either is extreme. It is certain that prices willfluctuate. In my paper, the range of profitability is shown graphically assuming that
instability of steel markets will remain basically the same as in the 1990s.
3. Tariff scenarios:
Five cases are examined: full AFTA (:ASEAN Free Trade Area) compliance, zero tariffs,
high tariffs, moderate tariffs, temporary moderate tariffs. High tariffs will naturally boost
profitability, but actually it cannot be chosen due to international pressure and adverse
effects on steel-using industries.
4. Investment timing:
Two-track gradualism, single-track NISW construction, and accelerated single-track
NISW construction are compared. The last will require an enormous sum beyond Vietnam’s
financial capacity. The first will need less (but still large) amounts.
Nozomu Kawabata:
Short-term profit motive and domestic competition are not enough to strengthen the steel
industry, but also the strategies encompassing a long-term vision and international
competitiveness are required. Import substitution industries require the same. The mostimportant thing is to establish technical integrity, not technical fragmentation. As in the caseof TISCO in Vietnam, there are also some unsuccessful cases of steel investment in India due
to technical fragmentation. We have estimated the material flow of the steel industry for the
next every five years until 2020 based on the VSC’s investment plan that was made available
to us. [It was found afterwards that the VSC’s investment plan had actually been proposed at
an even more accelerated pace.]
There are three advantages in completion of the first BF (:Blast Furnace) around 2016-2017,
which we call the gradual approach.
1. Even if the gradual approach is adopted for building the modern NISW, it will be able tosustain technical integrity as long as the appropriate sizes and technical plans are selected.
This is important.
2. This slow approach can offer wider options in the future, by expanding the availability oftechniques such as Dios and Romelt.
3. CRM1 (:the 1st Cold Rolling Mill) and HSM1 (:the 1st Hot Strip Mill) can be built
independently prior to the NISW without affecting the technical integrity of NISW.
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CRM2 and HSM2 should, however, become a part of the future NISW.
However, some drawbacks also exist with this gradual approach; it will be necessary to avoid
technical fragmentation forced by political/regional pressure. Also it will be important toadequately cope with the market and price fluctuations. High quality production will be
expected so as not to compete with the cheap exports from CIS. As for import protection, highprotection should not be applied, as it will hurt domestic steel users. The best solution is toincrease competitiveness and form a strong industry that only needs little protection.
I would like to add three other points. First, Vietnam’s FDI policy has been unclear and lacks
consistency. Why does the Vietnamese government allow so much foreign investment in steel
rolling which is not capital-intensive? Secondly, the electricity tariff is too expensive for thehealthy development of the steel industry. Third, there is inconsistency between domestic
entry policy and external protection policy. The combination of free investment and free trade,or investment restriction and protection would be acceptable, but actually, the government
allows free investment in Vietnam’s steel rolling while following protectionism externally.
This will only encourage inefficient makers to enter and result in excessive competition.
Fukunari Kimura:
Under AFTA, protection will become almost impossible by 2006-10, although there may besome room during the transition years. Two points should be mentioned. First, the AFTA
deadline—2006 for Vietnam—may be delayed due to Malaysia’s desire to protect
automobiles, but it will arrive sooner or later. As for the WTO (:World Trade Organization),
the days are gone when high tariff ceilings were permitted; some countries, such as Mongolia,
had zero tariffs before entering the WTO. Vietnam must also prepare for low tariffs. Second,
steel is an industry with potentially large forward and backward linkage. FDI (:Foreign Direct
Investment) was key to the creation of supporting industries in other ASEAN (:Association ofSoutheast Asian Nations) members. If steel is overly protected in Vietnam, high steel prices
may discourage FDI inflows and no supporting industries may grow.
Takao Aiba:
I am a credit analyst with international experience including China. To me, the VSC’s plan for
NISW looks too risky and hasty; it is not a project that can be financed on a commercial basis.
Although the financial data of the VSC are not entirely open, let us assume a turnover of$500m, net income of $6m, and depreciation of $5-7m. The rule of thumb is that maximum
commercial bank borrowing is 10 times the cash flow (net income plus depreciation), whichmeans that the VSC can safely borrow about $100-150m. On the other hand, the proposed
NISW will require $6 billion—10 times the turnover and a thousand times the profit. This4

amount is out of question, from the viewpoint of credit analysis (the first CRM alone, $100+
million, may be affordable). The VSC considers steel as the backbone of the entire economy.
But this will be a very weak backbone in Vietnam. Mr. Ohno’s simulation predicts a string oflosses up to 2020, but this will mean bankruptcy if it is an ordinary joint stock company.
Vietnam must be very careful in steel investment.
Cuong:
We admit that the biggest problem is financing and rapid construction of NISW will be risky.
But it must be remembered that this is not a VSC project, but a national project withgovernment involvement for the purpose of reducing imports. In other ASEAN countries, BFs
are built by the government even though their steel companies are more profitable than us. Of
course, VSC cannot finance it alone. As to the concrete steps toward NISW, no consensus
exists and I myself am not sure. It will depend on the financial capability of the government
and VSC. We hope to complete the first step toward it by 2010, but many problems are
already arising.
Nguyen Huu Tho:
We appreciate Japanese advice on many aspects of our industry. We too have studied theseissues for long. Let me briefly explain the VSC’s M/P using transparencies. We have three
investment scenarios (base, high, low) up to 2010 [These transparencies were later provided
on a confidential basis]. The base scenario builds HSM in 2009, CRM in 2010, and slab
production in 2012, as prior investments for NISW. The high case assumes HSM in 2005,
CRM in 2006, and slab production in 2010. In the low case, NISW construction will not be
started before 2010 (preparations only) while HSM is built in two steps: hot coil production
with imported slabs in 2006, and slab production in 2009. This low case is similar to Mr.
Ohno’s “gradual” scenario.
Nobuyoshi Tanaka:
Steel investments should begin with relatively inexpensive and profitable downstream plants,
gradually and separately from NISW. As for flat steel production, appropriate capacity will be
about 30-50% of domestic demand. Domestic demand for flat products is expected to growfrom the current 1 million to 3 million tons in ten years. Timely investment is needed.
As for quality and product mix, Vietnam should target ordinary carbon steel of high quality.
To achieve this, appropriate latest proven technology must be carefully chosen. Specifically,
6Hi is recommended for CRM and Coil-Box-Tandem for HSM. Ladle furnace is traditional
technology but will contribute significantly to quality and productivity. To produce a broad
range of products, BF-BOF (:Blast Furnace-Basic Oxygen Furnace) technology is more suited5

than EAF. Long products can be produced by EAF, but flat products will require BF. If EAF isto be also used, choose the latest proven type with easy maintenance.
Metal source also requires careful consideration. In order to secure a stable supply ofimported scrap, long-term contracts with a reliable trading company will be desirable. If DRI(:Direct Reduction Iron) is to be adopted, it can lower the dependency on scrap. If domestic
coal is to be used, the right kind of DRI technology must be chosen. Smelting direct reduction
is not yet established technology and Vietnam should not adopt it now.

[Afternoon Session]
Presentation--Do Huu Hao:
Steel promotion policy is still under consideration by the government. I will present mypersonal view. First, the priority should be import substitution to meet domestic demand. At
the same time, product diversification from construction steel to hot rolls, cold rolls, special
steel, alloys etc. should be attempted. Second, we must combine traditional integrated mills(BF-BOF) and other specific methods (DRI, EAF-CC (:Continuous Casting), etc.). Ways toutilize domestic natural gas should be explored. Third, investment financing will mainly bedomestic, but the possibility of foreign JVs will not be ruled out. Fourth, downstream
segments grew during 1991-2000, but emphasis must now be shifted upstream during
2001-2010. As for the timing of NISW, various opinions exist—this issue is of course related
to the feasibility of upstream investment.
Domestic steel demand is expected to grow robustly in the future. We hope to achieve aself-sufficiency ratio of 70-80% by 2010.
The big problem with our steel industry is shortage of domestic billets. We aim to boost billet
production from the current 400 thousand tons to 1.0-1.4 million tons during 2001-05,
achieving a sufficiency ratio of 50%. This will require development of domestic mines in Thai
Nguyen, Cao Bang and Lao Cai. Locations of CRM, HSM and EAF-CC mill should be
carefully selected. The capacity of SSC must be expanded. We also need pre-F/S (Feasibility
Study) and F/S for NISW with the use of Thach Khe ore. We already have a few feasibility
studies, but with different conclusions. I personally support the use of Thach Khe ore and theinitial capacity of 2.5 million tons, with later expansion.
During 2006-10, three steel industry centers should be established: Thai Nguyen in the North,
NISW in Ha Tinh (North Central Region) using Thach Khe ore, and SSC in the South. The
6

biggest obstacle is financing. As Mr. Aiba noted, VSC alone cannot finance it. The
government should mobilize all possible means including long-term subsidized loans. Hightariff protection cannot be used, but specially reduced electricity and gas prices are worth
consideration.
Presentation--Toshiki Yabuta:
I am a flat product specialist with 25 years of experience. Steel is an industry with extensive
forward and backward linkage. It is a heavy industry requiring complex and delicate
processes which must be integrated into one coherent system. If everything goes smoothly, ittakes 21 days from injection into BF to final products. But even one hitch greatly lowers
operation efficiency. There are only a few steel mills in the world that achieve consistently
high operation efficiency. Low operation ratios are common even in Europe and America.
Exceedingly low efficiency of 50-60% is often observed in developing countries. This is so
because producers purchase machinery without acquiring necessary operation andmaintenance skills. Demand constantly diversifies while machinery constantly depreciates. To
fill this gap, frequent maintenance and occasional revamping are required.
Moreover, a large number of managers and engineers are needed to operate these integrated
machines. Also, one NISW employs great amounts of computer memories and terminals, andtens of thousands of cranes and motors. You must understand how difficult it is to operate thiscomplex and huge system on a commercially viable basis. In our company (NSC), a large
number and a great variety of engineers are at work. Computer software alone is sovoluminous that it is managed by one of the largest software companies in Japan. I would liketo emphasize that the steel industry requires the extensive support of related technologicalsystems.
Presentation--Nobuyoshi Tanaka:
I would like to comment concretely on the proposed NISW. At present, there are 141 large
BFs operating in the world, of which 15, mainly in Asia, were added in the 1990s. The crucial
thing about BF today is large capacity and longevity. This is true also in Japan, where firms
try to extend the life of large BFs as much as possible. To achieve this, a complex high-techsystem, unthinkable before, is utilized. If a new BF is to be built in Vietnam, its capacity
should be at least 3,000m3 (2 million tons/year) and if possible, over 4,500m3 (3 million
tons/year). Large BFs are more efficient and can compete with newer processes such as Corex,
Romelt, Dios, etc.
The construction cost of NISW, measured in hot coils, will be about $1,000/ton. Assuming aninterest rate of 7.5% and maturity of 10-20 years, the depreciation cost will be $100-150 per a7ton of hot coils. If a medium-sized BF is built in inland Thai Nguyen, its cost will be muchhigher than when a more appropriate site is chosen. Such a plan will be unrealistic.
NISW, requiring huge investment, should be built in the following steps. First, build smaller
downstream plants (HSM, CRM, etc.) separately from NISW. Second, consider coal-based
DRI or smelting reduction which can use domestic resources. These should be linked withproposed billet centers. Third, NISW should be built from downstream and only whendomestic demand is large enough. After completion, steel production by NISW and EAFs (i.e.,billet centers) should meet 40-50% of domestic demand.
Ohno:
As a co-chairperson, let me sum up the discussion so far. The biggest question is of course thespeed of NISW construction. In addition, we have identified the following issues:
1. Should Thach Khe be used as a main input to NISW, or should ore be imported?
2. Should TISCO be further expanded to become a steel center in the future?
3. What is the proper tariff system?
In free discussion, please refer to these points as much as possible.
Bui Van Muu:
Let me first respond to the co-chairperson’s points. First, NISW should be built before 2010.
Preparations should begin immediately. Second, thorough F/S of Thach Khe ore has not been
conducted, and no consensus has been reached. In my opinion, Thach Khe ore—and otherdomestic raw materials—should be supplementary inputs after 2010. Exploration should
however begin right now. Third, Thai Nguyen is far from both materials and markets and istherefore not a good candidate for a steel industry center. TISCO’s capacity should not be
expanded beyond 500,000 tons/year. Fourth, temporary tariff protection is necessary,
especially in initial years.
Absorption of management skills will take time, and we must immediately begin to learn it.
We thank JICA for all the studies in the past, but the M/P must be translated into specificinvestment plans. Financing, management skills, domestic raw materials must also be
considered in designing concrete steps.
Primary concerns for the near future are: (i) rehabilitation of existing plants to improve
technology and supply capacity; (ii) securing scrap supply, expand efficient EAFs and closeinefficient ones; (iii) methods and processes to utilize domestic resources must be studied; and(iv) build a plant to produce various alloys, to meet diverse demand.

8

Hoang Duc Than:
JICA’s studies are academically respectable, but for practical applications, we need a broader
context including financing and cost-benefit analysis. The steel question is not of one
company or one industry; steel is a national industry and the government should officially
support it.
The interests of politicians and the steel industry (producers and importers) are often in
conflict. Some politicians want to build NISW at any cost, but that will not be sustainable in
the long run. Private importers are after their own short-term profits and welcome rising
imports. To promote steel, profitability of VSC is an inappropriate indicator. Investment
decision must be made by an economy-wide criterion. Even if VSC encounters losses,
steel-using industries may develop and become competitive. If so, steel promotion is worth its
cost.
It is important to jump to the latest technology. Otherwise, low competitiveness, losses, andpermanent subsidies will be the result. This cannot be achieved by one company alone, so
official help is essential. Let me point out four objectives. First, financing is beyond the VSC
or government budget. Inflow of FDI is still not enough. The government should designatesteel as a high priority industry, much above present treatment. Second, we need F/S on theusability of domestic raw materials. Third, I believe the domestic market is sufficiently large,
but no precise projections have been made. Fourth, despite Mr. Yabuta’s contention that steel
requires a complex technological system, I believe Vietnam can quickly absorb necessary
skills. I do not worry about it.
NISW should be completed after 2010. But preparations must be made before 2005, andconstruction must start following that.
Ngo Tri Phuc:
I was much interested in the presentations by JICA and VSC. For Vietnam, the only advantage
is that of a latecomer; we can learn and introduce optimal technology from other countries.
On the other hand, we have many disadvantages: low competitiveness due to high cost,
outdated equipment, quality good enough only for construction bars, etc. As Mr. Kimura
points out, we must join AFTA and compete internationally. But I cannot agree with the ideathat small plants should be initially built. From the beginning, we should establish modern
large-scale steel works.
I agree with Mr. Than that the biggest problems are financing and the use of domestic
materials. Financing must be the responsibility of the government. As to the usability of9domestic resources, a few foreign studies exist, but no study has been conducted by the
Vietnamese. We ourselves must study and come to a conclusion, be it Thai Nguyen expansion
or Thech Khe ore. Some people have warned that Thach Khe ore is of low quality, but
technical problems can surely be overcome in the future. Others noted high transportation costof Thai Nguyen, but this is no problem either. Since Vietnam is now investing intransportation infrastructure as a matter of priority, shipping cost for Thai Nguyen will be
reduced, sooner or later. In conclusion, NISW should be established at the earliest date. The
year 2010 is not soon enough.
Kimura:Even if gradualism is adopted, under international integration, the VSC’s strategy will become
extremely important. The key issue is how to deal with inefficient units. With AFTA, someoutdated plants will inevitably be driven to closure—but that is good. The highest priority for
the VSC is to design a policy of productivity improvement so that relatively efficient plants
can survive. TISCO is an inefficient unit with excessive employment. Under integration, good
plants should not be sacrificed for the survival of bad plants. Similarly, domestic materials
should be used only when they are very cost-effective by international standards.
Ohno:
Mr. Phuc said that Thai Nguyen’s transportation cost would be reduced in the future. But wealready have a super highway from Hai Phong port to Hanoi, and from Hanoi to Thai Nguyen
the road is not so bad either. Even so, Thai Nguyen suffers from high transportation costs andthis can hardly be lowered in the future. As for Thach Khe ore, I understand that its high zinccontent is a serious problem for BF operation. It is much better to import the kind of ore with
ideal quality and composition. The profit margin of the steel industry is very slim, and any
compromise in plant location or materials will be fatal in the international survival race.
Yabuta:We also used high-zinc ore in Japan thirty years ago, but that required frequent stoppages andmaintenance of BF, which was very inefficient. We no longer use such ore, and no engineer at
our company (NSC) remembers the technology for it. We now face another type of high-zincproblem: how to extract zinc contained in automobile scrap.
Phuc:
Zinc in scrap and zinc in ore are completely different problems.
Nguyen Kim Son:Our steel industry is facing great challenges in the age of integration. It is imperative that we
10should incur no losses while steel is being supported. Vietnam should closely examine thefeasibility of each proposed steel project. VSC has a two-pronged strategy: short-term
independent investments and long-term NISW. The former consist of seven projects such as
TISCO and SSC rehabilitation, billet centers in the North and South, the first CRM, the first
HSM, etc.
One question is whether the first HSM should be a prior investment to NISW or separately
built. If separately built, stable supply of scrap may not be secured. For this reason, we
believe the first HSM should be part of future NISW.
We have no consensus on the timing of NISW construction. Some say the first BF should becompleted by 2010, but we at VSC consider 2012 to be a more reasonable target. Mr. Tanaka
recommends an even later date. If we want to use temporary protection, early construction
will be better, before the AFTA deadline. But if we think of financing, a gradual approach will
be suitable.
Regarding steel, we have many disagreements in Vietnam. First, we at the VSC think that
there is no input supply problem with CRM but slab supply for HSM may be difficult toobtain. Second, the location of NISW is hotly debated. Some propose to build NISW in Thai
Nguyen with the capacity of 1.3-3.0 million tons, but we disagree. Thai Nguyen is displaced
from materials and markets, hardly an ideal location. NISW must be at a port in Central
Region. Third, as to the timing of NISW, the proposal of VSC aims at the first BF in 2012,
covering 50% of domestic demand. Our M/P has already been submitted and approved by thegovernment. Before and after the approval, our views remained the same.
Closing remark--Ohno:
In steel promotion, financing is among the biggest problems and it appears there are only two
ways to overcome it. And at present, neither way faces a bright prospect.
The first is for government to designate steel as the highest priority national industry and poura large amount of soft policy loans into it. But whether the government will do so, andwhether steel deserves such a privilege in the first place, remains uncertain. People who study
steel like us often develop emotional attachment to this industry, but it is not the only industry
in Vietnam. The merit to the national economy as a whole is a more important concern.
The second is to find foreign partners willing to share costs. Cooperation with foreigners will
also facilitate information collection, technology transfer, shock response, etc. On the other
hand, joint venture means the Vietnamese side will not have full control of the projects for the11

pursuit of national interest. Foreign investors are often interested only in short-termcommercial profits; they have no obligation to act on behalf of Vietnam’s industrialization.
Incidentally, ODA (:Official Development Assistance) funds are no longer available forindustrial projects like steel.
Let me summarize the Japanese view presented today. We are not against Vietnam’s plan toestablish NISW as a long-term goal, but it must be achieved gradually and in two tracks,
because of financial constraints and the necessary lead-time to learn the skills to manage ahuge plant complex and to cope with integration shocks. We do not consider it proper to
finalize the site of NISW and begin to commit financially to it at present.
I thank your active participation in this seminar. Members of Trade and Industry Group, letme again remind you that we are to submit our drafts by November 15 and exchangecomments prior to Hanoi Workshop in December.

[Produced by Kenichi Ohno and Tadashi Kikuchi]

12Second Intensive Steel Seminar
Date:

October 25, 2001 (8:30-16:35)

Place:

Conference Room in the head office of Vietnam Steel Corporation (Hanoi)

As an important part of the research activities and policy dialog of the NEU-JICA joint
research project, a one-day seminar to discuss the current and future policy of Vietnam's steel
industry was held in Hanoi on October 25, 2001. This was the second such meeting. The
seminar was hosted by Mr. Pham Chi Cuong, our project member and Deputy General
Director of Vietnam Steel Corporation, and attended by concerned ministries, Japanese andVietnamese steel experts, and project members.
The steel industry master plan was approved by the Prime Minister in September 2001
(No.134/2001/QD-TTg). It was considered very important at this time to evaluate thisDecision and make suggestions for concrete implementation. The contents of the Decisionwere explained by the VSC and discussed extensively by the panel. Japanese experts noted
ambiguities and potential problems in the master plan and advised on the technical andmanagerial choices that VSC was about to make. Concrete technical options and producttargeting were proposed to meet the shifting market demand. The MOF presented its views onprotection on the steel industry in the future, which was also lively discussed.
The contents of the entire discussion are reported below. All statements are on the record.

<Vietnamese side>
Active participants:
Nguyen Kim Son (President, Vietnam Steel Corporation (VSC))
Pham Chi Cuong (Vice President, VSC)
Tran Minh Huan (Director, Ministry of Industry (MOI)/International Relation Dept)
Nguyen Thi Lan (Ministry of Finance (MOF)/Import-Export Tax Division)
Bui Van Muu (Dean, Polytechnics University/Iron and Steel Making Department)
Hoang Duc Than (Research Member, National Economic University (NEU))
Tran Van Hoe (Research Member, NEU)
Pham Hong Chuong (Project Coordinator, NEU)

13

Truong Chi Trung (Ministry of Planning and Investment(MPI) in charge of steel industry)
Other participants:
Nguyen Huu Tho (Director,VSC/Planning and Investment Dept)
Nguyen Phuc (Deputy Director, VSC/Planning and Investment Dept)
Nguyen Van Thong (Director, VSC/Engineering Dept)
Truong Dinh Viet (Acting-Director, VSC/Im-export Dept)
Dang Thuc Khang (Director, VSC/Accounting and Financial Dept)
Vu Truong Xuan (Deputy Director, VSC/Engineering Dept)
Dinh Van Tam (Deputy Director, VSC/Office Cabinet)
Trinh Khoi Nguyen (VSC/Planning and Investment Dept)
Nguyen Van Nghiep (Dean, Polytechnics University/Integration-Material Technology
Faculty)Than (Vice-Dean, Polytechnics University/Integration-Material Technology Faculty)
Nguyen Minh Ngoc (Research Member, NEU)
Hang (Cong Nghiep [Industry] Newspaper)
Reporter (Tap chi Khoa hoc [Science Journal])<Japanese side>
Active participants:
Kenichi Ohno (Professor, National Graduate Institute for Policy Studies (GRIPS))
Nozomu Kawabata (Associate Professor, Tohoku University)
Nobuyoshi Tanaka (Japan International Cooperation Agency (JICA) expert, NSC)
Toshiki Yabuta (Nippon Steel Corporation (NSC))
Yoshiyuki Sakaguchi (Nippon Steel Trading Co.)
Other participants:
Hitomi Asano (Attaché, Embassy of Japan)
Koji Nishimiya (JICA)
Chiaki Konuma (JICA)
Kuniaki Amatsu (JICA)
Taro Hamada (GRIPS)<Chairpersons>Nguyen Kim Son, Tran Minh Huan, Hoang Duc Than and Kenichi Ohno
<Interpretation>
Translation Dept, The Ministry of Foreign Affairs of Vietnam
14

[Morning Session]
Opening remarks by Nguyen Kim Son (Omitted)
Presentation-- Pham Chi Cuong:“The Real State and Future of the Steel Industry in Vietnam”
The development stages of the Vietnamese steel industry in the past are explained according
to the presented paper. Since 1990, the steel industry has achieved strong development. The
VSC (:Vietnam Steel Corporation) plays a key role in the industry. Even so, the steel industry
faces a number of serious problems. Its technology is obsolete, capacities of furnaces andmachines are too small, and production costs are higher than the world average.
The industry’s M/P (:Master Plan) is based on the JICA Plan and revised further by domestic
experts and various ministries. In August 2001, the Vietnam government approved the M/P
up to 2010, outlining key directions for future development of the Vietnamese steel industry.
This was subsequently issued as the Prime Minister’s Decision. However, the M/P will berevised as necessary to reflect a new situation in the international and domestic markets in thenext 10 or 20 years. It is not something fixed permanently.
The major targets of the M/P include the following.
1.

The steel industry must maintain stable growth to meet the requirements of the national
industrialization and modernization, gradually becoming a pillar of Vietnam’s industry.

2.

Closely coordinate the use of domestic and foreign resources. Opportunities forinternational cooperation and labor division should be fully exploited.

3.

Balanced development between steel making and steel rolling is essential for reducing
billet imports.

4.

Product diversification and establishment of standards are needed to meet the market
demand.

5.

Investments should be directed to the VSC (which now has a 31% share) to become aleading corporation in domestic steel production while encouraging other economic
sectors also to participate in steel production.

6.

Exploitation of domestic natural resources, especially iron ore, should be considered.

7.

Taking rational steps to develop the industry in the current difficult condition for fundmobilization. Mobilize different sources including state investment loans, which will be
the main source in the first period, and foreign loans with government guarantee.

8.

Development of human resources and technology should be given more attention.
15

The detailed investment plan for 2001-05 was shown in the table. The total targeted
investment from 2001 to 2005 is approximately 1 billion USD in the M/P, and this does notinclude any investment for new integrated steel works. The financial source remains unclear.
Since the government must also invest in other projects, it has only limited funding for the
steel industry. Finding the remaining balance will be the responsibility of the VSC.
Nozomu Kawabata:I would like to ask three questions about the M/P.
First, the M/P includes investment in the production of long products. However, under thecurrent oversupply of long products, more investment would surely make the future situation
worse. Why does Vietnam want to do this?
Second, did the government decide to exploit Thach Khe iron ore mine, which is alreadyincluded in the M/P (450 billion VND)? Also, has the detailed construction plan for an
integrated steel works been proposed with respect to location and material procurement?
Third, the table in the Cuong paper indicates that the location of HSM1 (:the 1st Hot Strip
Mill) will be in the South (Phu My), which is appropriate from the viewpoint of efficiency,
while the Prime Minister’s Decision leaves it blank. Has the location of HSM1 been decided?
Cuong:
Construction of the new long product mills is to replace the old, inefficient mills. That will
not add to the nation’s capacity but will make, the VSC more competitive.
As for the Thach Khe mine, the Vietnamese government is now conducting a pre-F/S (:preFeasibility Study) in cooperation with Russia, especially regarding future processing andusing high-zinc ore. This will be completed in two years. If the result is favorable, thegovernment will assign the VSC to carry out a full F/S with the Russian partner. The amountincluded in the M/P is the cost of F/S, but it may not be used if the pre-F/S turns out to be
negative.
The location of HSM1 has not been decided officially. The table in my paper reflects mypersonal view. The Japanese experts have already raised the issue, and we need to consult
with more international experts before the final official decision is made.

16

Kawabata:
The location of HSM1 should be decided as soon as possible. Otherwise, the construction
plan to meet the domestic demand will be delayed.
Tran Minh Huan:
The Ambassador of South Africa asked me about the Thach Khe situation. They are alsointerested in the possibility of exploitation.
Hoang Duc Than:
Mr. Cuong presented four missing links in the Vietnamese steel industry: capacity, marketorientation, management and skills and human resources. May I ask two questions?
First, in the resolution of the 9th Party Congress, very ambitious goals are presented for the
steel industry, including 1-2 integrated steel works, producing flats and sheets, and domestic
rolling capacity. These targets are quite high. By what concrete measure will you achieve
them?
Second, the domestic market share of VSC has declined from 95% previously to a mere 31%
today. With this background, what is the roll of the non-state sector in the construction of the
new integrated steel works and other investments?
Nguyen Kim Son:
The four shortcomings mentioned above are permanent. But we cannot stop here. There is noway but to go forward and develop steel; there is no other choice.
It is true that the targets of the M/P in its first phase, including billet production, are ambitious
and will be a very heavy burden on us in financing, human resources, infrastructure, etc. Evenso, I am sure we can meet this challenge. The billet centers in the North and South are alreadyapproved.
Difficulties we now face are largely global. International competition is very tough. Even
without exporting, strengthening competitiveness is necessary to meet the requirements of thedomestic market under stiff international competition. But some protection, as shown in the
Ohno paper last year, is needed. Even in the process of integrating into the WTO (:World
Trade Organization) regime, some level of protection is permitted.

17

As to the role of the non-state sector, the government does not make any preference for ordiscrimination against any sector within any particular industry, including steel. Although theshare of the non-state sector is increasing, it cannot develop the steel industry alone. Since
capital requirements are very high, many sectors, including the VSC, must participate in its
development.
Nobuyoshi Tanaka:
The new rolling plant in Da Nang listed in the Cuong paper is not included in the M/P of thegovernment. Under the situation of overcapacity in rolling nationwide, how is the market to
be divided among the VSC, joint ventures and the private sector?
I would also like to hear more details on the proposed F/S of the Thach Khe mine to be
conducted by the Russian team.
Son:
You are right, the Da Nang rolling plant is not included in the official M/P. But in order toimprove competitiveness and raise output of VSC to meet the future demand, we believe newrolling plants need to be constructed, raising the market share of VSC to 54% by 2005. The
old plants in Thai Nguyen must be rehabilitated and a new Da Nang plant must be built tokeep our presence in the market. Otherwise, VSC will be marginalized. The proposed Da
Nang plant will be in the center of the Vietnam, 700 km away from the steel production
centers. This distance will be an advantage to the new plant.
Russia’s first F/S on Thach Khe dates back to the 1960s. They made a thorough study of it
and other teams also conducted similar studies. The ground was dug and samples werecollected. Russia has two steel mills using ore with high-zinc content of 0.07-0.1%. Russia
can make use of their own experience and technology in conducting the Thach Khe F/S. It isalso less costly to ask Russia to do an F/S. The pre-F/S will make an assessment of the mine’s
feasibility, including infrastructure, topology and processing technology. If we receive afavorable result, we go on to the F/S.
Kenichi Ohno:
I wonder what is the role of the public sector in the development of the steel industry. If the
VSC tries to participate in all branches of steel production for fear of marginalization,
including long products which are now in oversupply, it will aggravate the problem. The roleof the public sector should be precisely to avoid such wasteful investment by issuing proper18

warning signs to the private sector and execute investment coordination. To join the race foroverproduction is not the right target. The proper role of the public sector is to initiate theproduction of flat products and to increase billet production which no private firms are willingto undertake because of uncertainty and the lack of capital, in order to adjust the imbalance insteel supply.
Cuong:
Now I come back to the question Mr. Kawabata and Mr. Ohno raised. The VSC’s plan is toreplace many existing old rolling mills by new investment. This is true both for Thai Nguyen
and Da Nang. The total production capacity of long products will not be increased. The Prime
Minister also instructed not to increase the capacity of long products especially by local
authorities. For now, no more licenses will be issued for the production of long products.
As to Thach Khe, I personally took part in the bilateral talks where Russia agreed to do thepre-F/S. They proposed to study the following two aspects, namely the exploration of themine and the processing of ore to reduce the zinc content to less than 0.04%. But we still needhigh quality ore for the blast furnace. As we said before, whether this pre-F/S will lead to afull F/S is uncertain at this moment.
Presentation--Nobuyoshi Tanaka:“The Selection of the Most Appropriate Process for Steel Production”
As a JICA expert, I worked daily with VSC top management for three years. This is my first
return to Hanoi after six months.
It is not unreasonable to expect Vietnam’s steel demand to continue to increase vigorously inthe future. Regarding long products, the target of supplying 80-90% of domestic demand isdesirable. Large-size section, wide flange, large-diameter bar and other special steel had betterbe imported, because domestic demand is too small and investment to produce them is toolarge.
To increase capacity by new investment, the gradual, two-track approach is recommended.
Regarding flat products, 30-50% of market demand for cold rolled steel should be supplied
domestically. It is not wise to enter into the market of low quality cold rolled products, sincesuch a market is being flooded by cheap Russian steel and a new investment will not produce
any profit. One-stand reverse CRM (:Cold Rolling Mill) is recommended for ease in quality
control and handling thin materials. Here again, special steel should not be produced for thesame reason.
19

As for HR (:Hot Rolled) steel, domestic demand for thin HR coil is likely to rise. A compact
tandem HR mill with six stands and finishing which can handle from thin to heavy materials
is recommended.
EAFs (:Electric Arc Furnace) for long products with state of the art technology, including theLF (:Ladle Furnace), will shorten time for making steel. CCC (:Continuous Continuous
Casting) will improve productivity.
With regard to the choice between BF-BOF (:Blast Furnace-Blow Oxygen Furnace) versus
other technology, we must consider the global shortage of coke in the future. As the life spansof many existing coke ovens will expire in 2010-2030, it is essential to consider whether tobuild new coke ovens or to adopt an entirely new smelting process. In either case, there areboth merits and demerits. New smelting technology is developing, but its speed is uncertain.
It is also possible to produce flat products with EAF-made steel with much lower cost (abouthalf), but the quality is low and products are limited. Only the US has succeeded incommercializing this method, but the US market is huge.
As for BF (:Blast Furnace) proposed for a future integrated steel works, we can learn frominternational experience. BFs in landlocked areas are uncompetitive; all such BFs in EU havebeen shut down or replaced by EAFs. In Japan, BFs have large capacity, with the average sizeof 3,580m3. Meanwhile, bars and wirerods are all produced with EAF only, no BF-made steel
is used for these products.
In Korea, POSCO (:Pohang Iron and Steel Company) has many BFs of the same size (3,800m3), which reduces investment and maintenance costs. Their Corex technology is more
efficient than a small BF but less efficient than a large BF. EAFs are efficient but theirproduct prices are low.
Taiwan faces a shortage of crude steel; their BFs are inefficient. We can also draw many otherlessons from the experiences of China, India, Brazil and South Africa.
In conclusion, I would like to repeat the two key recommendations. First, produce flat
products with good quality, in order to avoid head-on competition in the poor quality market.
Second, Vietnam must be very careful in the use of domestically available resources. Highzinc ore is unsuitable for BFs. Even if you increase the coke rate, productivity will be low and
BF life will be shortened. I understand VSC is currently contemplating an F/S on domesticore. Even if it yields a positive result technically, we still have the question of costeffectiveness.
20

Presentation-- Toshiki Yabuta:“Technology Transfer by Technical Cooperation in Steel Industry”
In technology transfer in steel, Japan has been a net exporter since 1994. In steel products,
Japan has been a net exporter since the 1970s. There are four types of technical cooperation:
diagnosis, consultation, training and information. All these are known as “software know-how
transfer” and not patent licensing.
The steel industry is a heavy industry, but it is quite unique because it needs a large amount ofknow-how type technical cooperation for efficient operation. Through-process improvement
and flat rolling improvement are the two major areas of technical cooperation in the steel
industry.
There are seven secrets for a successful production of flat products:
1. Selection, design and installation of necessary and sufficient equipment
2. Systematic and continuous training of operators
3. Theoretical and practical training of maintenance crew and regular monitoring ofequipment
4. Securing material coil of good quality
5. Strict policy and appropriate organization for quality control
6. Accurate market research and quick action
7. Optimal production control system
Technology is influenced significantly by human factors. This is a major difference between
technology and science. Therefore, technology is affected by the cultural feature of eachcountry.
The following points are typical patterns of failure in installing new equipment: (1) lack ofequipment capability; (2) long delay and poor performance in the startup period; (3) use of an
unsuitable mathematical model; (4) wrong selection of the manufacturing process; (5)insufficient survey on quality requirement of the market. These failures are frequently
observed in the introduction process of new technology especially in the field of flat rolled
products.
The problem almost always arises with technological know-how and not equipment itself.
Production of cold rolled products is quite different from iron making, steel making or hot
rolling. In the cold rolling process, quick response, beauty of the product, and the sense of“area” are the key factors.
21

Cuong:Mr. Tanaka recommends that VSC produce long products to meet 80-90% of the domestic
market, and flat products to meet a lower percentage of demand, i.e. 30-40%. One of thepractical reasons why Vietnam cannot produce all its steel is lack of investment funds.
According to his advice, Corex and Romelt may have a better chance than a big EAF. But
these processes also have limitations. They require better quality coal and lump ore, which isdifficult to supply in Vietnam. These methods are not implemented in many countries. Russia
does have these, but its production is only in small amounts.
Tanaka:It is not wise to meet all domestic demand for flat steel, because a large part of this demand isof poor quality. While there are many customers who want to get only low price and low
quality, such a market does not bear any profit for a newly constructed rolling mill, with avery stiff competition from Russia and Ukraine offering ultra low prices. Vietnam must aim at
higher quality flat products.
Efficient smelting reduction will be realized perhaps in 10-30 years; it will take a long time.
This method was first implemented by South Africa and India. They did so because their ironore and coal are not of best quality, so they cannot be used for normal steel making. Three
years ago at the IISI (:International Iron and Steel Institute) meeting, these countries
announced their plans to shift from BF to smelting, step by step. They claim this would also
reduce pollution. India may adopt Romelt in the near future too.
Some EAFs are very efficient and these will continue to exist in the future. Small BFs inlandlocked areas in EU have been already replaced by these EAFs. If Vietnam improves
efficiency of the existing EAFs through rehabilitation and consolidation, two efficient EAFs
in the North and three in the South should be sufficient and be operated to produce necessary
billets. CCC is desirable.
Bui Van Muu:
If Japan has already studied the Romelt process, please let us know its results. Can Vietnam,
which has no high-quality coal but only anthracite, apply this process?
Tanaka:It is a difficult question, but let me try.
22

Romelt is possibly a good idea for reducing the initial investment because its investment costis lower in comparison to other steel making processes. But in operation, BF is more efficient;
it uses only half the coal compared with Romelt. The key for a successful Romelt operation is
how to efficiently utilize a huge amount of generated gas as a by-product. One way is to use it
for a power plant, but then the investment cost for that plant will have to be considered. In
South Africa, ISCOR has already constructed Corex combined with DRI (:Direct ReductionIron) a few years ago. In order to improve quality of products by using low quality materials,
such as high zinc proportion, this combination might be appropriate for Vietnam. But overall,
the technology still belongs to the future.
The domestically available anthracite can be utilized for the commercial coal-base DRI plant.
Japan already uses special coal produced from the rotary hearth method. Anthracite can also
be used for injection into the BF.
Cuong:You say that small BFs have been mostly shut down in the world. What proportion of steel do
BFs produce in Japan?
Tanaka:In Japan, BFs produce 68-70% of steel. We have a small capacity of EAFs relative to demand,so scrap is exported. In EU, EAFs produce 40% of steel. In Brazil, EAFs produce only 20%.
Ohno:
With all respect to Russian scientists and engineers, we must be careful. Russia is a transition
country like Vietnam. It is not famous for economic efficiency or international
competitiveness. As we know, Russia exports steel at extremely low prices ignoring cost. I
am certain that Russian experts can solve technical problems of high zinc content etc. but
Japanese experts are more concerned with demand side and international cost competitiveness,
not just technical possibility. In evaluating the Russian reports, VSC must also add thisperspective.
Cuong:
Not only Japanese experts but experts from other countries also warn against the Russianstudies. Because Russia recently moved to the market mechanism, the country may not begood at building efficient projects. The Russian pre-F/S might not fully evaluate market
factors such as demand for iron ore. So we will be very careful. With regard to market
23research, we have to do it ourselves.
Ohno:
When a developing country establishes a new domestic industry, it is customary to start withlow quality, mass produced products. As the country accumulates experience and technology,
step by step, the product mix moves up to more high-tech products. However, in the case of
the steel industry, I do not think you can do this. If you go to low quality, mass produced steel
products, you will have to directly compete with unreasonably low prices of Russia andUkraine. Your project will incur huge losses in the initial years, and it will be judged a failure.
Your CRM1 (:the 1st Cold Rolling Mill) should not directly compete with Russia and other
CIS (:Commonwealth of Independent States) countries. If you fail with CRM1, there will be
no money or investors for a HSM. That will be the end of the modern steel industry in
Vietnam.
Investment in steel is very expensive. Naturally, the government tries to economize on theinvestment cost. It wants to buy the cheapest equipment. But if you do this, your competitor
will be Russia and the project will fail, with all money wasted. It is difficult to make a jump intechnology, but in the case of Vietnam’s steel industry, a medium-sized jump is called for.
You must produce not low quality but medium quality from the beginning. This is a big
challenge for a country like Vietnam at the premature stage of industrial development.
Son:
Japan has extended much assistance to the VSC. We at the VSC also examined various
technical options. Non-coke technology is not yet put to practical use. We believe the best
technology for steel making is BF-BOF. As to Romelt, there will be a 10-30 year wait.
My desire in the next five years is as follows. After the pre-F/S on Thach Khe is completed,
there should be an F/S for the NISW (:New Integrated Steel Works). We hope to receive
JICA assistance on both mines and NISW, possibly beginning in 2004 or so. JICA has
extended much assistance, but it still remains an unborn baby. If the baby is not born, it isvery painful to the mother.
Yoshiyuki Sakaguchi:
I have been in the steel trading business in Vietnam for five years. I go to the actual market
every day throughout this country. Market research is crucially important.
24

In my opinion, Vietnam’s demand for steel will reach 8-9 million tons in 2010, not 6 million
tons as forecast by the VSC. Imports of Japanese steel are also increasing. 700,000 tons will
be imported this year, of which 200,000 tons are billets and 250,000 tons are hot coil. This isa “catch-up” demand and is going to rise further.
The key question are: how will the VSC operate, even with new plants, in this increasinglycompetitive market? And how and whether to establish upstream processes?
Son:
Last year, the actual demand was 2.8 million tons against projected 2.5 million tons. This year
also, the actual demand is already higher than projected in the M/P. If the demand continues
to increase like this, it will reach 5 million tons by 2005, much higher than projection.
Regarding the upstream issue, the M/P aims to strengthen both upstream and downstream.
Demand in 2010 may well reach 8-9 million tons. In that case, the integrated steel work will
be able to meet only half that amount.

[Afternoon Session]
Presentation-- Nozomu Kawabata:“Steel Market and Investment Strategy in NIEs (:New Industrialized Economy) and ASEAN
Economies: Sheets and Strip Case”
Development of the domestic market with vertical linkage is a key factor for the steel industry.
It is difficult for a developing country to establish an export-oriented steel industry, so mostdemand must be found domestically. Regarding the domestic market, the first point to be
noted is that Vietnam’s market is relatively small compared with other developing countries,
but it is expanding rapidly. The second point is relative intensity of steel use. Developing
economies like Vietnam are steel intensive economies. The third point is that a large part ofdomestic demand is for products with low levels of processing. In short, not only quantitative
expansion but qualitative upgrading is important.
For the construction of CRM and HSM in Vietnam, the experiences of other ASEAN
countries are instructive. Most of producers in ASEAN cannot produce high-grade sheets.
Two things should be remembered for the Vietnamese industry. First, mills invested byforeign enterprises are showing superior technological performance. Second, technological25

performance is the necessary but not the sufficient condition for success.
Currently, international steel prices are depressed. Two things can be said about this. First,
any producer will have difficulty in competing with cheap products from Russia and Ukraine.
Second, with respect to CIS products the price margin between hot coil and cold coil is very
narrow. If the new CRM in Vietnam sells cold coil at the same price as the CIS products, itcannot make profits even if it uses CIS-made hot coil as an input.
In Vietnam, we see no market for high-grade products and no profit for low-grade products.
Under these circumstances, the middle range market should be the main target for the new
CRM and HSM in Vietnam. Vietnamese companies should concentrate their effort toestablish clientele in this market. They should listen to both immediate customers and end
users. They should promote use of steel for industries as well as households.
If CRM1 succeeds in building customer confidence in the middle range market, its operation
will be efficient initially because its supply capacity will be less than domestic demand.
However, there is a problem in later years. According to the approved M/P, when CRM2 andHSM1 become operational by 2010, the domestic supply of CR is 805,000 tons while its
demand is expected to be 501-651,000 tons. Implementation of the M/P will create anoversupply. How can this be?
Son:
Our investment strategy depends on the market size. The implementation of the investment
projects will be revised according to the actual market size, and it can be delayed if
oversupply is foreseen. Mr. Kawabata’s calculation seems correct, but demand forecast is still
uncertain. What we need to do first is to conduct a full F/S with all elements included,
especially a further demand research. The basis of investment should be the market, and notpolitical will.
Pham Hong Chuong:
I would like to ask two questions to Mr. Kawabata. First, what is the basis of your market
forecast in the future? Second, should we not expect a greater oversupply, since Vietnam is
not the only country investing in steel?
Kawabata:
My forecast of demand for cold rolled products is based on the F/S report by JICA and26

Nippon Steel Corporation. High and middle grade markets include motorbike assemblers,galvanized sheets, substrate and export-oriented appliance assemblers, etc. I recommend that
VSC strengthen its market research activity.
I add one more important comment. If the HSM1 and CRM2 are not constructed by 2010 but
delayed to a later date, oversupply of CR will be avoided. I recommend a gradual approachfor constructing your new mills.
Than:
I have three questions.
First, what is Vietnam’s competitiveness relative to the rest of ASEAN?
Second, which country is the competitor for Vietnam?
Third, I would like to know Japan’s experience of technical assistance to countries like
Vietnam.
Kawabata:
As to the first question, my forecast is only about demand and supply quantities.
Competitiveness depends on Vietnamese efforts. My forecast assumes full capacity operation.
If operational difficulties are encountered, that will make the situation worse.
As to the second question, Korea and Japan will be your main competitors if you produce
high and middle quality products. According to a coil center operating in Vietnam, Indonesianand Taiwanese coils were rejected by customers such as appliance assemblers. Only Korean
and Japanese coils were accepted. Thailand can also become your competitor. SUS (:Siam
United Steel Co.,Ltd.) and TCR (:Thai Cold Rolled Steel Sheet Public Co.,Ltd.) export CR tosolve their overcapacity problem. If you ever choose to enter the low-end market, Russian andUkrainian mills will be your competitors with cutthroat competition. As we said before,
competition with CIS countries is not recommended.
Yabuta:As to the third question, Japan’s technical transfer has been offered to Thailand, India,
Indonesia, Vietnam, Taiwan, Korea (POSCO), etc. What we notice is, first, the level ofautomation and theoretical accuracy is rising recently. Second, a new equipment has greater
advantage over an older one, and even a difference of 1 to 2 years also matters. However,equipment alone is not sufficient for productivity, efficiency and cost reduction. Operationaland maintenance skills are more relevant for the flat rolling process. According to my27

experience, the skills of workers and operators will determine whether new technology
contributes to competitiveness.
Ohno:
Vietnam can decide its competitors; it is not a given thing. One of the key messages from theJapanese experts is that Vietnam should choose your competitors carefully. You also ask if
Vietnam’s steel will be competitive. Again, it all depends on your strategy. Mr. Tanaka
stressed this morning that Vietnam should choose appropriate equipment. Mr. Yabuta justnow emphasized the importance of “software,” that operational and maintenance skills areequally important. It all depends on your business plan and government policy. We are here tohelp you make the right choice.
Cuong:A while ago Mr. Kawabata pointed out an inconsistency in the M/P, that domestic supply of
CR would exceed its demand in 2010. He wants to advise that investment in CRM2 andHSM1 should be delayed, that the timing should be extended into the future. Is myunderstanding correct?
Kawabata:
Yes.
Cuong:
When the M/P was approved last August, our Prime Minister said that its implementation
should be based on market reality and the timing should be adjusted as necessary. Indeed, weshall do so. In the previous M/P prepared by the Japanese experts, the operation of NISW
would begin in 2017 while the VSC’s plan puts it some time after 2010. But this timing
remains flexible. We will continue to choose and adjust for the right timing.
The Vietnamese market is small. When we permitted joint-venture companies to produce longproducts in 1995-96, supply increased quickly and created an oversupply. But if we stopped
approving further investment in new mills, demand would have overtaken supply again verysoon.
Tanaka:I agree with Mr. Cuong completely. It is essential to consider the demand-supply balance.
Every mill to be constructed in the future must consider this condition. I recommended lastyear that the integrated steel works should be operational when the Vietnam’s steel demand28

would reach 10 million tons. At that time, that was forecast to happen around 2017. But if 10
million tons are reached sooner, the target year could be moved forward.
Domestic demand composition is likely to be about 50:50 between flat and long products inthe future.
I again stress that normal commercial grade steel with high quality should be produced in
Vietnam. If so, Vietnam’s CRM and HSM will be sufficiently competitive in the Southeast
Asia, even against SUS in Thailand. SUS’s capital cost per ton is greater than the proposed
CRM1 in Vietnam. SUS has to produce higher grade CR using more expensive Japanese or
Korean hot coils to satisfy its customer needs such as sheets for outer panels of automobiles.
In addition, transportation cost from Thailand to Vietnam in small shipment is 20-30 USD per
ton. This is also a big handicap for SUS. Will SUS be able to export CR to Vietnam? It is very
doubtful.
Cuong:
I want to ask Mr. Kawabata and Mr. Tanaka. We want to produce cold rolled sheet, but its
price is currently depressed globally. The price is so low that it is almost the same as the priceof billet or even scrap. Steel manufacturers are very worried about this. Meanwhile, we canprotect our products only until 2006 under AFTA (:ASEAN Free Trade Area). What is yourfuture perspective and opinion?
Kawabata:
Price fluctuation is a destiny for the modern steel industry. It is inescapable for all steel
manufacturers in the world.
As my data showed, the worst situation is in the price of hot coil. It is too depressed now, andthis situation cannot prevail permanently. But in a sense, it is partly a permanent problem withtoo many developing countries building their own hot and cold rolling mills. In addition,
advanced countries already have too many HSMs. It is natural to see a general trend forovercapacity in the hot sheet and strip industry.
The slab-to-HR price margin is very thin all over the world. But as my data shows, the margin
between hot and cold rolled coils in Europe is normal ($80-125/ton). European products arefor high and middle range markets. If you produce high quality cold rolled sheet for thismiddle range market, you will possibly have a reasonable margin. But the same margin for
CIS products, with low quality, is much narrower ($35-72). No profit can be made in thismarket.
29

Regarding trade friction over steel, it is beyond the power of individual companies. It is aproblem of the global steel trade system.
Tanaka:The current prices of cold rolled sheets and coils are strongly influenced by Russian andUkrainian exports. These prices are very mysterious and cannot be justified in any way.
Maybe their raw material cost is zero. Maybe these countries do this to earn foreign exchange.
No one can produce at such a low cost. But this cannot continue for a long time. Most
customers are now aware of the low quality of Russian steel. In the future the market will
eliminate such producers. The same can be said about low quality bars produced by tiny
private companies in Vietnam. I do not think these mills will survive for long.
Yabuta:My impression of the Vietnamese steel industry is that the quality of operators andmaintenance staff is high. They are especially good at Vina-Kyoei Steel Ltd. But you still
have two defects. The first is lack of market research methods. The second is lack of“customer-first” policy. These problems are responsibilities of the management.
In Argentina, capacity utilization in ETL (:Electrolytic Tinning Line) production was initiallyvery low at 40% and that of HSM was only 65%. However, with technical assistance, theseratios improved to 100% and 90%, respectively. The HSM’s pass ratio improved from 73% to
83% and through yield jumped from 77% to 90%. Given the same equipment, technicalassistance can be quite effective in improving efficiency. Leading CRMs can achieve even
100% capacity.
Presentation-- Nguyen Thi Lan (for Dang Thi Binh An):
“Protection policy for steel industry under economic integration”
Vietnam’s protection policy for encouraging import substitution worked well over the past
years. But in the integration process, domestic companies have to face stiff competition fromimports. We must shift policy to a new direction. We now need to encourage exportorientation. To do so, protection policy should be applied on the selective basis. We should
protect only those industries which contribute large value-added to the national economy suchas food processing. Vietnam already has high competitiveness in certain industries like coffee
and rice. Protection should be applied only for limited periods. The candidates and periods forprotection should be decided in accordance with ASEAN and APEC (:Asia Pacific Economic
Cooperation) tariff reduction roadmaps.
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Over the past years, the steel industry has not shown strong competitiveness and good
performance. Now, we have some joint ventures producing high grade steel products. But
most steel is still imported. Moreover, steel industry requires high technology and big capital
but produces low profit. The effective protection ratio of the steel industry is very high. The
domestic steel industry does not look competitive according to cost and benefit analysis. We
should not invest more to this industry from the viewpoint of economic efficiency. But,
strategically speaking, we still have to develop this industry for industrialization of thecountry.
The following should be a reasonable way to protect steel. For billet, it is our policy to raise
its tariff in the future, but the increase will not be very large, i.e. with a maximum of 10%. For
ordinary steel for construction, we will lower import tariffs beginning in 2003. According to
the CEPT (:Common Effective Preferential Tariff) requirement, the tariff for construction
steel will be reduced to less than 20% in 2003 and to 0-5% by 2006. For other steel products(sheet, strip and flat products) which are not produced domestically, the current tariffs arevery low. The government should raise these tariffs as domestic production begins in the
future, but not to a very high level since they are inputs for many industries. The maximum
rate should be 20%. According to the CEPT tariff reduction schedule, the tariffs for theseproducts also need to be reduced to 0-5% by 2006. However, this reduction is unlikely to havea strong impact on domestic steel producers because the ASEAN members are not very
competitive in these high grade steel products.
Chuong:I have two questions.
First, is it the MOF policy to protect “key” industries, including steel, although they lackcompetitiveness?
Second, we should encourage domestic industries to export, but they first must meet domestic
demand so exportation will be difficult for them. Mr. Son said that Vietnam already has
overcapacity in construction steel. In that case, VSC should be encouraged to export thisproduct, should it not? What is the policy on the steel industry regarding the production fordomestic market or for export?
Lan:
Apart from economic analysis, the socio-economic strategy requires the country to implementa protection policy for those industries which promote the modernization of Vietnam. They
tend to be heavy industries with low profitability. Protection must be geared to the national
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need. These key industries will continue to enjoy policy assistance.
For them, protection for 5-10 years is acceptable. In come cases, to ensure a level playing
field, extended protection of even 15-20 years is also permissible. high protection.
Manufacture or heavy industries, which deem to be key industries, are put on the temporal list
for 5, 10 or 15 years’ protection. But after 5, 10 or 15 years this protection has to be removed.
That is my answer to your first question. As to the second question, I will invite Mr. Trung,steel expert at MPI, to answer.
Truong Chi Trung:The government has identified priority areas in which we should produce domestically, i.e.
billets, flat products as well as metallurgy and mining industries. VSC should develop
construction steel capacity by replacing old mills to improve competitiveness. Privatecompanies should invest in new mills. Investment will come from the state budget,
commercial bank loans and the budget for mining. For pre-F/S and F/S for the integrated steel
works, preferential state loans at the interest rate of 3-5% will be provided. For mills for flats
products and other rolling mills, commercial bank loans and other credits should be sought.
Tran Van Hoe:
According to our research on the AFTA roadmap, there are two issues.
The first question is what to do with non-ASEAN countries like Korea. What are we going to
do with tariffs with outsiders?
The other issue is that some people argue the government should have not only a plan for
cutting tariffs, but it should also have a plan to increase tariffs. What about this idea?
Lan:First, according to the CEPT scheme, tariffs are reduced gradually until 2006 except thosecommodities on the exclusion list for state security and other reasons. For commodities
originating in non-ASEAN countries, normal tariff are levied. But we cannot maintain too big
a difference between these two rates if we are to avoid trade diversion effects.
Second, a plan for tariff increase is out of question. We will not offset tariff reduction byraising other tariffs! If lost revenues must be covered, we will use other means such as VAT(:Value Added Tax).

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Kawabata:I agree with Ms. Lan about tariff cuts for long products. But flat products are a different
matter. For hot and cold rolled products, tentative protection should be applied because any
steel mill will need a certain adjustment period at the outset before realizing full capacity
utilization. On the other hand, CRM1 will provide only a part of domestic demand. It will
have to compete with foreign CRMs. A fine-tuning of Vietnam’s trade policy is necessary inthis regard.
A trade war is going on in the global steel market. Many anti-dumping and safeguard
measures are being applied. This problem cannot be simply solved by tax and tariff policies
alone. Vietnam should prepare trade laws. And I recommend that Vietnam to participate in a
multilateral forum for steel trade. Now only OECD (:Organization for Economic Cooperation
and Development) has such a forum.
Lan:
We already have clear roadmaps according to APEC and AFTA. We will also join WTO in
the future. We are improving our trade-related institutions so they will be compatible with the
WTO/GATT (:General Agreement on Tariffs and Trade) regime. Customs valuation rules arerevised. True, tariff protection alone will be impotent against foreign malpractices, but tooffset them, we can use anti-dumping and safeguard measures as well as taxes and subsidies.
MOF and MOT (:Ministry of Trade) are jointly mapping out these rules and we are in thedrafting them for submission to National Assembly in 2002.
Hoe:
New policies to counter foreign trade practices are being introduced. Previously, we had only
taxes. Now, measures such as new valuation method and taxation at border are prepared.
Tariffs and certificate and licensing systems are being revised. MOT is now preparing to
remove licenses but we may still need other non-tariff measures such as certification of origin
and standards to replace them. These measures are being prepared to be ready by 2002.
Than:
Infant industries also need protection. I think that protection should be based on the use of
local resources and inputs. For example, there should be a regulation on local contents formotorbike assembly.

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Lan:
Our taxation department at MOF is keen to analyze the comparative advantage of oureconomy. Industries that can create high value-added by using local resources should receive
assistance. Employment is a very important issue for us. On the other hand, the automobile
and motorbike industries actually are not that important from this perspective.
Ohno:
We have to very clearly distinguish between long products, which are already oversupplied,
and flat products with no domestic production at present.
For long products, according to Ms. Lan’s presentation, the maximum tariff will be 10% andshould be reduced to 0% very soon, together with the removal of non-tariff barriers. To me itsounds a bit too fast. I would prefer a little longer adjustment period.
By contrast, for flat steel, the AFTA schedule up to 2006 is inconsequential since Vietnam
will not produce very much of it by that time. What really matters is protection after that.
According to Ms. Lan, an extended protection of 15 to 20 years is even permissible for theseindustries. Here, I think she is a bit too generous. In my opinion, protection periods for new
hot and cold rolling mills and billet centers should be extended beyond 2006, but only during
their start-up periods. This will probably mean 7-8 years, and at the maximum, 10 years. 1520 years will be too long.
Lan:
For most products, the CEPT limits must be observed and tariffs must be lowered to 0-5% by
2006. For long products such as construction steel, supply exceeds demand. For flat products,
all are imported. The future situation is that we will reduce tariffs on long products andincrease tariffs on flat products. Actually, we do not have to worry too much about flat
products in ASEAN because they lack competitiveness. For flat products originating
elsewhere, the 20% tariffs will still apply.
Sakaguchi:
I would like to report my observation on the current market situation, especially concerning
the newly emerging products. Domestic steel demand is now increasing. Imported steel fromJapan is processed here to be exported to other countries. Pipes, for example, are exported thisway. My company as well as VSC’s trading companies export them to Singapore. We are
now thinking of exporting Vietnamese steel pipes to the United States.
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Concerning Mr. Than’s previous question, I think Vietnamese customers will decide who will
be Vietnam’s competitors. Customers will also decide which grade and which quality areneeded. When you build plants, you have to listen to the customers’ voice if you want tosurvive. The market situations are changing day by day. For example, SUS of Thailand wastargeting domestic customers, but it now has to export because of the depressed domestic
demand. This can happen to any company.
As Japanese companies invest in Vietnam, such as Canon in the north and Toshiba in thesouth, the market will change. If Toshiba decides to procure domestic flat steel for theirrefrigerators, the market of flat products will change and expand dramatically in the next five
years. If you plan to build a plant, you should check the market constantly. I even thinkexporting deformed bar, currently in oversupply, is possible with proper policies.
Closing remark by Pham Chi Cuong (Omitted)[Produced by Nozomu Kawabata and Kenichi Ohno]

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Summary of the Japanese Views on Steel Industry and Trade Policy∗
byJapanese members of Trade and Industry Group
Japan-Vietnam Research Project
January 11, 2001

1. Overview on steel industry promotion
We, on the Japanese side, conditionally support Vietnam’s effort to designate steel asa national industry, aim at partial import substitution, plan a NISW (:New Integrated SteelWorks) as a long-term goal, and realize these objectives under restrained import protection.
The condition for our support is that Vietnam should implement these with sequencing andmethods that are realistic and concrete. It will take a long time for Vietnam to learn steel
production technology and operational know-how appropriate for international integration. At
present, Vietnamese enterprises do not possess sufficient technology or management skill, andthe Vietnamese government lacks a proper policy framework or crisis management capability.
It is risky to try to promote capital-intensive industries, including the steel industry, without
simultaneously strengthening domestic capability. We urge Vietnam to use the rather difficult
process of steel industry promotion under international integration as an excellent opportunity
to improve domestic capability. In promoting the steel industry, we do not consider it proper
to give it a very special priority status, well above other candidate industries (however,moderate support on a par with other industries is acceptable). Even in the case of importsubstitution, strict criterion based on efficiency and international competition are required.

2. Timing of construction of an NISWIn strengthening the steel industry, Vietnam should adopt a gradual and two-track∗

This document summarizes the common view at this moment of the Japanese members of Trade andIndustry Group (Kenichi Ohno, Nozomu Kawabata and Fukunari Kimura) based on intensive consultations
with the concerned members of General Commentary Group (Koichiro Fukui and Takao Aiba) and a JICA
expert (Nobuyoshi Tanaka), and the results of Intensive Steel Seminar in Hanoi, October 2000, and Hanoi
Workshop, December 2000. It is drafted by Kenichi Ohno.
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approach. That is to say, rather than immediately starting to construct an NISW, Vietnam
should initially build relatively small-scale facilities independently from the proposed
NISW—such as a CRM (:Cold Rolling Mill), a HSM (:Hot Strip Mill) and billet centers—atappropriate sites and step by step (the first track). Only after making adequate preparations
and gaining sufficient experiences, Vietnam should seriously undertake the construction of an
NISW mainly during the 2010s (the second track). One possible scenario of NISW
construction which we regard as appropriate entails the following: start port construction andland preparation around 2008, complete a CRM and an HSM around 2013, complete the first
BF (:Blast Furnace) around 2017, and complete the second BF around 2021. The “Base Case”
presented by VSC (:Vietnam Steel Corporation) is also a two-track approach, but it proposes
to build an NISW at a much accelerated pace than what we regard as suitable.
We recommend the two-track gradualism above for the following reasons:(i) By extending the construction period, annually required financial resources will be
reduced and the experience of steel promotion can be accumulated. These will in turnfacilitate the mobilization of domestic and foreign resources, which will have to be verylarge eventually.
(ii) An NISW is a huge and concentrated technological complex. Vietnam needs a sufficientlearning time before it can acquire operational and management skills.
(iii) The menu of technology available to Vietnam is always changing and expanding. To
maximize the degrees of freedom, Vietnam should select technology over time, rather thanmaking irreversible commitments for the entire projects at the outset.
(iv) Adequate room for adjustment must be preserved in order to respond effectively topossible negative shocks, such as global recession, regional crisis, sharp falls ininternational steel prices or deterioration of the domestic economy. Should an extremely
adverse situation emerge, Vietnam also needs the flexibility to postpone the constructionof an NISW for a certain period.

3. The role of HSM1 (:the 1st Hot Strip Mill)In view of the above consideration, we do not take the position that HSM1 should beconstructed as a prior investment to the future NISW. Now that Phu My has been selected as
the site of CRM1 (:the 1st Cold Rolling Mill), we recommend that HSM1 should be built on
the site adjacent to it. If HSM1 is deemed as a prior investment to an NISW, its construction is
subject to inadvertent delay since an NISW itself may face difficulty in raising funds or otherproblems and be postponed. For the timely establishment of the domestic supply capacity offlat products in line with growing demand, we consider it important to build HSM1 separately
38

from and in advance of an NISW. Inter-process linkage can be ensured by locating CRM1 andHSM1 on the same site. As to the problem of stable supply of slabs, it must be noted that slab
imports will be necessary anyway, regardless of whether HSM1 is built separately from ortogether with an NISW, until two BFs of an NISW are completed and steel-making capacity isgreatly enhanced. To ensure stable sourcing of imported slabs, we recommend long-term
contracts with countries which are likely to have excess capacity in slab production. In
addition, it may be worthwhile to study the possibility of EAF (:Electrical Arc Furnace)-basedslab production (As for HSM2, it can be constructed as the same site as an NISW).

4. Usability of domestic raw materials
We recommend a full-scale F/S (:Feasibility Study) on the usability of Thach Khe ore.
However, we are already informed that this ore suffers from high zinc content and is notsuitable for BF use, and that it will also be difficult to develop due to geographical andgeological reasons (deposits are located from and up to 400-700 meters below sea level,
requiring vast draining). For the purpose of realizing efficient BF operation underinternational competition, the extent to which Thach Khe ore can be used in BF is impossible
to judge at the moment. Usability, required investment and operational costs should be
evaluated by a full-scale F/S. If the outcome of F/S is unfavorable, importing 100% of raw
materials and deciding not to exploit domestic mines becomes a plausible option. Generally
speaking, domestic raw materials should be used only if they are equal to internationally bestmaterials in terms of quality and cost. Any compromise in quality or cost of raw materials will
seriously endanger the survivability of the industry under international integration. This is true
not only with raw material procurement but also with the location of the NISW or selection oftechnology as discussed below.

5. Location of the NISW
Regardless of whether raw materials are 100% imported or partially domesticallysupplied, the NISW should be built on a newly developed coastal site. To guarantee
international competitiveness, Vietnam must select a site suitable for building a deep sea port
in Middle Region and use a large specialized vessel to transport raw materials. Inland areas,
including Thai Nguyen, are not appropriate for building an NISW due to the permanenthandicap in additional land transportation cost. When iron ore can be transported from
Australia to Japan for $6/ton, the current land transportation cost of $6/ton or more between
Hai Phong and Thai Nguyen is too large for financial viability.
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6. Selection of technology, production capacity and product mix
Vietnam should avoid both outdated equipment and untested frontier technology.
Instead, it should select “state of art technology” from the set of “proven technology.” We callthis the “fast-second approach.” At the level of individual production facilities, capacity mustbe sufficiently large to ensure operational efficiency. At the national level, the total output
should cover only part of the domestic demand. We recommend partial import substitution
because it enhances efficiency and crisis response capability. Under partial import substitution(compared with full import substitution), it is easier to maintain high operation ratios in theevent of negative shocks. Moreover, technical integrity among different processes must
always be the primary concern in making investment decisions. In transfer of technology,
random buying of cheapest equipment should be avoided; instead, a comprehensive
technology transfer contract covering basic design to stable operation should be concluded.
As for the product mix, what to produce must be selected carefully based on the size andcharacteristics of domestic demand and avoidance of head-on clash with foreign exporters
offering extremely low prices.

7. Financing
Financing is a problem common to all projects, but the difficulty is particularly
severe in the case of an NISW requiring huge capital. We recommend the pursuit of JV (:Joint
Venture) arrangement (MOI (:Ministry of Industry) and VSC have announced that 100%
foreign investments in steel will not be permitted but JVs are acceptable). JVs are helpful
since they share financing, risks and crisis management with the Vietnamese side. In order toattract FDI (:Foreign Direct Investment), however, investment plans must be realistic andconcrete and Vietnam’s ability to promote the steel industry must be dependable in the eyes offoreign partners. It should also be recognized that foreign partners are often in pursuit of theirshort-term commercial interests, and not the national interest of Vietnam. As noted above,
singling out the steel industry as the top priority among all industries and pouring a large
amount of scarce national resources into it is not advisable. Such excessive promotion would
also militate against the industry’s own efforts to improve competitiveness.

8. Additional investment in TISCO (:Thai Nguyen Iron and Steel Corporation)
The first rehabilitation plan for TISCO looks reasonable, but we doubt whether its
second rehabilitation plan is really necessary. As stated above, inland TISCO lacks the40

conditions to become a steel industry center in the 21st century. Minor repairs to improve
efficiency and to cope with the employment problem are desirable, but larger amounts should
not be invested in TISCO. For the purpose of minimizing the social impact, TISCO should beallowed to survive as a small-scale steel plant located near raw material supply, as long as
low-cost materials continue to be locally available. The idea of locating an NISW in Thai
Nguyen must be abandoned.

9. Production of special steel
Special steel is characterized by great diversity, small lots and high quality (with thepossible exceptions of structural steel and high-carbon steel produced in relatively large lots
and with similar compositions to ordinary steel). We do not recommend building a special
steel plant at this time since Vietnam’s domestic demand for this kind of steel will be too
small for efficient production in the foreseeable future. Except for the items noted above,
special steel should be imported.

10. Export orientation
The MOI and DSI (:Development Strategy Institute) suggest steel exports as a target
along with import substitution. However, the Vietnamese steel industry is too fragile tobecome a viable exporter in the competitive and demanding international market (beyond thecurrent tiny exports to neighboring countries such as Laos and Cambodia). We regard importsubstitution as an appropriate target for now. Even with production for the domestic market,
international competitive pressure can be used effectively as an incentive for productivity
improvement. The important thing is not how much the industry exports, but whether it is
exposed to international competition. Overly ambitious attempt at exporting may even run therisks of excessive investment or selecting the wrong product mix from the viewpoint of thedomestic market.

11. AFTA (:ASEAN Free Trade Area) and WTO (:World Trade Organization) policies(i) International integration cannot, and should not, be avoided. Vietnam should accept afree trade regime in principle. Each industry should take this as given when it conducts(forward-looking) new investments or (backward-looking) consolidation and closure ofexisting plants.
41

(ii)

Deviation from AFTA (0-5% tariffs by 2006) may be permissible if it is only for a small
number of industries, temporary and the tariff rate is only moderately high. Before
conducting such a policy, however, concrete and realistic promotion strategies for the
proposed industries must be presented. If no such strategy exists, Vietnam will be unable
to negotiate with AFTA or WTO with “ownership.”(iii) In WTO accession negotiations, “MFN (:Most Favored Nation)”, “national treatment”
and “transparency” must be strictly observed. On the other hand, there is room fornegotiation in “market access” and “convergence of economic institutions.” For thesedemands, Vietnam should decide whether or not to accept them individually from theviewpoint of economic principles.
(iv) Vietnam should consider the possibility of using WTO-consistent subsidies (satisfying
non-specificity) as a means of selectively supporting domestic industries.
(v)
Vietnam should prepare “anti-dumping duties,” “counter-veiling duties” and“safeguards” as defense measures against cheap exports from CIS (:Commonwealth of
Independent States) or regional crisis. It must be noted however that these are short-term
emergency measures and should not be confused with medium- to long-term industrial
promotion policies.
(vi) At present, countries applying for WTO accession are facing demands which are morestrict than those for existing LDC (:Least Developed Country) members, and some ofthese demands are unreasonable. It is advisable for Vietnam to cooperate with countries insimilar situations to make an appeal to international organizations and developed countries
for fairer treatment.
[End]

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