Building a joint venture in an emerging market
A Burmah Castrol case study

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Page 2: New markets

Burmah Castrol 4 Image 5Positioned at the centre of the fastest growing economic zone in the world, Vietnam offers a unique opportunity for Burmah Castrol to continue geographic expansion of its heartland business. Vietnam is situated on the eastern seaboard of the Indochinese peninsula. Neighbouring countries are China to the north and Laos and Cambodia to the west. Vietnam has a land area approximately one third larger than the UK. The population of Vietnam is 75 million people. The two major cities are Hanoi in the north and Ho Chi Minh City (formerly Saigon) in the south. The majority of the population lives in rural areas and is evenly spread through the countryside.

Vietnam is ruled along classic Marxist-Leninist lines where the Communist Party of Vietnam and the Government are totally fused. Following the much publicised period of Doi Moi (Renewal) in Vietnam, it now appears likely that pursuit of a free market economy through stage by stage reform is the aim of the Vietnamese Government. Doi Moi has opened up Vietnamese markets to foreign investors and companies.

In 1990, the Soviet Union cut back heavily on direct aid in the form of subsidies to Vietnam. The resultant loss of cheap lubricants, previously supplied by the Soviet Union, has led the Government to liberalise the lubricants industry and elevate it to a priority investment category. Market reforms, therefore, are taking place but the Government is not prepared to engage in the sort of widespread reforms that would threaten the existing political system.

Economic background

Prior to the Vietnam war in the 1960s and early 1970s, Vietnam was at a similar stage of economic development to Singapore, Thailand and Malaysia, which are all now highly profitable economies for Burmah Castrol. There is little reason to doubt that following reform of the economy, Vietnam will enter an accelerated growth period and offer similar significant opportunities for the sale of Castrol lubricants, even though Vietnam is currently one of the poorest nations in the world.

Economic problems increased when Vietnam invaded Cambodia in 1979 and became involved in conflict with the Khmer Rouge and other resistance movements within Cambodia. This invasion brought further political isolation from Western countries and a US-led trade and investment embargo, which was maintained until 1994. Until recently, the maintenance of a 1.3 million strong army was also a considerable drain on Vietnam’s economic resources. However, economic reforms since 1987 have helped lead to a turnaround in the economy. By allowing peasants once again to own land and sell their produce at market prices, Vietnam has been transformed from a net rice importer to the world’s third largest rice exporting nation. Like other South East Asian economies, Vietnam has been experiencing rates of growth which are the envy of the West. Vietnam possesses enormous mineral resources and recent foreign investment in offshore oil exploration activities has finally borne fruit. Successful processing of these finds will provide much-needed US dollars and a catalyst for economic growth.

Whilst the foreign investment law of Vietnam allows foreign companies to invest at 100% equity, the preferred investment route of the State Investment authority is through a joint venture with a local partner. This makes good sense - a well-connected, established local partner with access to foreign currency can help the foreign investor greatly, making a joint venture the most appropriate strategy.

Burmah Castrol | Building a joint venture in an emerging market