FINAL PAPER

VEMBA8 HCM: Jack HUA

Dr. Suyderhoud

BUS627

Government and the External Environment

December 7, 2014

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AGENDA

Literature Review………………..……………………………………….…………………………....….3

Purpose Statement………………………………… ……………………………………………….……...3

Standing strong in the US Segment…………………………..……………………………………….….3-4

Economic Development in America-Vietnam………...………………………….………………...….4-7

Tax Credit Energy Policies……………………….……………………………………….…………...…4-5

Increasing interest rate is turbulent…….…….……………………………………………..………………5

Adding operations in Vietnam……………………………………………………………………………5-6

Vulnerabilities in Foreign Trade………………………………...………………………………..…..7-10

Changing energy policy in Vietnam ……………………………………………………………………..7-8

Vietnam Trade policies favoring Exports…………………………………………….…………………..8-9

Vietnam State-owned enterprise challenges………………………………………….…………………9-10

Depreciate Exchange Rates for exports………………………………...…………………………...10-12

VND depreciate improves foreign wealth……………………………………………………………...…11

Depreciate to attract FDI…………………………………………….……………………………………12

Conclusion………………………………………….……………………………………………………..12

Figure 1.1 – Value of private nonresidential construction.……………………………………………….13

Figure 1.2 – Forecast Electricity Consumption……………………..………………………………….....14

Figure 1.3 – Non-domestic building use of Air-Conditioner.……………………….…….……………...15

Figure 1.4 – FDI in Vietnam………………………………………………………………….…………..16

Figure 1.5 – Energy forms in Vietnam……………………...……………………….…….……………...17

Figure 1.6 – Vietnam Inflation with other countries………………………………………….…………..18

Citation…………………………..……………………………………….………………………..….19-20

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Literature Review

Four Season Air, Inc., a family-owned business in southern California, started their first installation air

conditioning project for a three bedrooms household in the summer of 1998. This company, nowadays, generated

average annual revenue of over $1 million for installation and servicing on heating, ventilation, and air conditioning

(HVAC) units in the residential and commercial markets. The company lines of business are providing services,

such as installation, maintenance, servicing, and consulting, and selling retail HVAC products, such as ventilation

system and air compressor, both to commercial and residential customers in a local market. The company

distinguished itself from the local competitors in a number of ways. First, Four Season Air focused to differentiate

itself by providing quality installation and consulting services for large commercial facility or buildings, ranging

from 15 to 25 stories. Secondly, the company designs ventilation system with Information Technology applications

to improve the efficiency of airflow and reduce the cost of electricity in buildings for stakeholders.

Four Season Air, Inc. has two market segments: commercial and residential customers. The majority of the

revenue, however, is derived from installing air conditioning, heating, and ventilation units for customers in the

commercial market segment. Our HVAC businesses, generally, fall in a monopolistic competition because there are

many players in these market segments. The residential market tends to be more monopolistic than the commercial

market. Large cash reserves of Four Season Air, Inc. is affected by the rise in inflation and the lost of economic

opportunity in alternative and profitable investment. Thus, Vietnam landscape in energy industry is untapped, both

in terms of technological and human capital. There is an opportunity for my family business to diversify business

operations and gain new market shares. Purpose Statement: This paper will focus on macroeconomics of the

Energy industry, especially energy efficient market segment, the outlook in the United States development policy,

and an overview of Vietnam as an additional investment opportunity for Four Season Air, Inc. Furthermore, an

examination of the risk exposure of Vietnam economy structure will help identify and mitigate the external risks.

Standing strong in the U.S. commercial segment

Four Season Air, Inc. focuses its services in the commercial market segments since the level of competition

is lower than the residential segment. My family business, in return, is able to maximize their economic profits in

this business field. The majority of the business revenue is derived from this segment. However, my family

business operation and scale are limited within southern California. The aspect of this market is stable if HVAC

firm has a specialization. There is an increase from cooperation; faster reaction to speed, openness of transaction,

small transaction, and product level demand is inelastic for this market.

Thus, it is common to see cooperative pricing in the commercial market segments for those reasons. The

demand for commercial air conditioning, which tends to be inelastic and the customer responds a little to the change

in price. My family business is standing strong and uses a niche and a price leader strategy for this particular

market. Based on the improved economy, including the construction and real estate industries, in the United States,

the demand for HVAC installations and upgrades will be profitable in the next several years. California’s economy

has bounced back after a slow start to 2014. The technology, manufacturing, real estate, logistic and construction

sectors have all contributed to the state’s positive growth (Trinet).

These factors will be the driving force for the demand in HVAC. The small to medium-sized employment

and human economic indicators have forecast the California construction sector will add nearly 10,410 jobs by the

end of the year (Trinet). An increase labor force, furthermore, in construction is a good indictor that the demand for

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HVAC will continue to steadily increase both in the residential and commercial market segments. Four Season Air,

Inc. needs to maintain its core business: installation, maintenance, servicing, and consulting while selling products,

relatively in small scale, such as ventilation system and air compressor, both to commercial and residential

customers.

Economic Development Policy in America

The healthy business in the construction and real estate industry are important consideration for HVAC

firms. The demand for new construction in buildings and commercial properties and real estates is closely linked to

the demand for HVAC projects and servicing. The 2008 mortgage bubble had plummet the housing market in

America. The HVAC industry, in general, will improve as foreign investors seeking in the real estate market for

opportunity. The construction industry, also, is a complementor industry for the HVAC. The real estate is a

complementary industry to the HVAC industry. Los Angeles city is the largest transactions for real estate in the last

year by Asian investors (UCLA). This city is an attractive destination to invest because of its liquidity, geographic

location, large Asian communities, and nice weather. Based on the improved economy, including the construction

and real estate industries, in the United States, the demand for HVAC installations and upgrades will be profitable in

the next several years.

California’s economy has bounced back after a slow start to 2014. The technology, manufacturing, real

estate, logistic and construction sectors have all contributed to the state’s positive growth (Trinet). However, the

United States monetary policy surprises such as a rise in interest rates will impact those complementors of HVAC

industry and the customer behavior in the residential and commercial markets. Overall, the service-based industry

such as Four Season Air, Inc. that focuses on local markets has little to no presence of foreign competition in the US

market (IBIS). Heating and Air Conditioning contractors industry has a low level of globalization since the industry

has no imports or exports, and the vast majority of companies operate within small, specific regions. Thus, the

swing in the United States economy risk is low for likelihood and high for consequence. Even though the Federal

Reserve will likely increase interest rate in an increment manner in the near future, there are tax credit energy

incentives to stimulate the demand for energy efficient system.

Tax Credits Energy Policies

Recently, the plummeting crude oil price has challenge the outlook for alternative forms of energy.

Oil prices have been declining since this summer. Today, a barrel of oil is selling at $66, reflecting an over-supply

of oil on the world market, which has deeply driven oil prices down (Greiner). OPEC, the Middle East cartel,

decided not to cut their production in November, 2014, which is affecting the oil supply and demand. The oil prices

will affect small to medium size companies since the fixed costs are high. Reaching level of economy of scale is

where they will maximize economic profits. However, the supply of oil has inclined and demand remains stagnated.

Eventually, the oil prices will rise again in the future since small and medium companies will be acquired or force

out of business.

Energy efficient HVAC units, furthermore, are often more expensive than less efficient counterparts in the

energy market. Thus, the decline in oil prices will only slightly impact the HVAC industry in the short term. As a

result, federal and state governments have created financial incentives through tax credit programs for customers

(IBIS). The federal government extended this benefit for HVAC products until 2016. The Clean Air Act and EPA’s

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Clean Power Plan signal a clear intent from the Whitehouse to curb fossil fuel industrial emissions and develop

alternative forms of energy for the American economy outside of oil and gas development (O’Sullivan). The EPA is

the environmental protection agency that governs stipulation to protect human health and environment since 1970.

Increasing interest rates is turbulent

Private nonresidential construction and residential construction returned to growth in 2011. The strongest

growth came from retail and other commercial facilities, private healthcare facilities (IBIS). Growth had increased to

13.1% in 2012 due to continued low interest rates from the Federal Reserve monetary policy. Residential and

commercial customers have a higher purchasing power and consumer credit, nearing pre-recession levels (Oxford).

An environment with low interest rate fosters consumer spending. These customers will play an important role in

the increasing demand for HVAC units. A group of customers in this segment will prefer quality services rather

than cheap HVAC costs.

The growth in nonresidential construction is forecast to continue strongly in 2015 to 2020 in figure 1.1.

This is likely because many firms have lots of cash on hand that can be used to reinvest in capacity expansion

(IBIS). These investment, in return, will allow firms to meet the projected demand by customers, who are returning

to work and are now willing to increase their expenditure. On the other hand, nonresidential construction is

responsive to many factors such as a change in interest rates. Most likely, in 2015, the Federal Reserves will

increase the interest rate. The speculation in interest rates has affected the Real Estate Investment Trust and stock

market in October. Federal Reserve Chairwoman, Janet Yellen, said the central bank could trigger some financial

turbulence when it starts raising short-term rates from near zero (Leubdorfs).

The risk is high for likelihood and low to moderate for consequence since American economy is improving

and recovering. This type of risk is unavoidable but there are other programs such as tax credit for upgrades on

energy efficient equipment to offset the increasing interest rate in the near future. Washington will continue to

promote energy efficient policies and incentives to reduce carbon emissions for consumers. Relying on this

incentive will help Four Season Air, Inc. customers utilized new HVAC equipment and servicing. There are many

non-profit organizations and association such as Green Society Association to help promote energy efficient

equipment for commercial and residential market segments as such.

Adding operations in Vietnam Energy demand in Vietnam had tripled over the last decade, and it is likely to triple again over the next

decade if economic growth remains robust (World Bank). Potential energy savings across the economy remain

largely untapped in this region. Thus, policies and programs need to be in place to stimulate energy-saving

opportunities since this does not happen over night. Investing and trading energy efficient products and services

such as HVAC will diversify the impeding risks in Four Season Air, Inc. operations in America and maximize its

economic profits. The introduction of large-scale coal imports will only make cost rise for consumers. Costs for

standard and equipment improvement typically run at one-quarter of the cost of commercial energy supply (World

Bank). Improving energy efficiency for residential and commercial customers increases industrial competitiveness

by lowering fixed and production costs such as reducing energy bills. Entering in this industry is profitable for my

family business since they’re able to diversify their servicing operations, and allocate human and resource capitals

for this region.

In figure 1.2, the table illustrates the Vietnam electricity projected demand in the period of 2011-2020. The

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estimated demand, overall, will increase for commercial electricity with consideration of electricity saving factor

from 180 (TWh) to 300 (TWh) during 2015 to 2020 for the near term. Shortage in energy supply is likely to occur

for Vietnam in the near future. The annual output of Vietnam’s energy increased by 14% and fulfilled only 98% of

local people’s demand (Vietnam). The authorities in Vietnam agreed the domestic energy market reveals an

imbalance between supply and demand, an inefficient use of energy, and unsteady energy development. To boost

energy development, a combined efforts of different energy sectors, including electricity, coal, oil and gas, new

energy, and renewable energy (Vietnam). Furthermore, speeding up the restructuring of state-owned enterprises in

the energy industry to build a healthier competition environment and encourage the private sector.

On 18 June 2010, the National Assembly of Vietnam passed the Law on Energy

Saving and Efficiency to apply energy saving measures and regularly reporting on energy

usage to higher authorities (AFD). The law, also, encourages the production and utilization

of energy efficient equipment and material, and promote energy saving and efficiency

through incentives and technology development. Because of the estimated forecast

electricity growth in household, non-domestic, and industry consumption in figure 1.2, the

Ministry of Industry and Trade is developing a special capacity building program to expand

and improve the qualifications of local expertise in various areas.

There will be a high demand on human resource development for energy

management (AFD). Thus, the risk of entry barrier by the Vietnam government is low for

probability and high for consequence since there is a lack of technology and human capital

to produce energy efficient equipment and system. Vietnam is promoting the use of energy

efficient equipment through article 26 of the law on energy intensive industrial facilities

compliance with the provision on energy servings and efficiency during the construction

period; however, the program is still in the infancy stage. The Government of Vietnam has

introduced legislation to implement Minimum Energy Performance Standards for appliances

and equipment. The implementation is aim to improve prosperity in Vietnam while

increasing energy security and reducing carbon emissions (Energy Rating).

The residential electricity sector accounts for about 39% of the country’s electricity use and 21 percent of

total final commercial energy demand (World Bank). In Figure 1.3, the illustration depicts the air conditioners

market share among various market segments in Vietnam (Energy Rating). In Vietnam, heating is not a critical

issue, but the key issues are air conditioning technology, lighting technology, and refrigerators. Economic growth in

Vietnam is surpassing the country’s ability to supply sufficient energy for it’s industrial, agricultural, and household

consumer needs (Forum). Vietnam has an opportunity since the country will need to increase its investment into

various energies. The electricity market is controlled by the state-owned monopoly and most foreign investment is

impeded by red tape. Since the country’s entry into WTO, the risk to foreign investment has eased. Electricity

prices remain low in the country because Vietnamese law requires EVN to sell much of its electricity at an

unprofitable average (Forum).

Vulnerabilities in Foreign Trade in Vietnam.

Vietnam is an emerging market, where construction is intensifying in the region. Economic performance

has improved over the last year in this region. Growth is improving gradually, underpinned by robust exports and

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foreign direct investments (FDI) while domestic activity remains restrained (IMF). Vietnam is often recognized as

among the best developing countries of achieving high economic growth and reducing poverty. In figure 1.4, FDI

commitments in Vietnam from 2009 to 2011 have dropped significantly because of the financial crisis in 2008.

Multinational corporations are increasing their FDI in Southeast Asian countries such as Vietnam to diversity their

country risk. Currently, foreign company such as Intel had invested a plant facility in Vietnam to diversify their

operations and reap the benefits of lower labor in Vietnam than China. However, some have argued that in

international comparison Vietnam’s performance is not very spectacular and there are many problems such as the

sustaining economic growth and ensuring quality of development (Vo). The risk of aggressive competition in this

business is low to moderate for likelihood and moderate to high for consequence. Overall, high risks equal high

rewards.

Domestic vulnerabilities exist, .luding banking sector weakness and inefficient state-owned enterprises.

State-owned enterprise account for about a third of Vietnam’s GDP, in industries ranging from finance to fabrics,

seafood-processing to shipbuilding (Economist). Ninety-nine percent of construction projects in Vietnam have

fallen behind schedule, with red tap and delayed and land clearance procedures (Asia Pulse). Doing business in this

region is difficult since there is no clear process. Some major projects, yet, managed to stay on track such as the Son

La hydroelectric facility, which was completed two years in advance, saving about $2 billion U.S. dollars (Asia

Pulse). Good preparation, sufficient land clearance compensation for residents, and proper selection of project

management personnel and contractors were the key success.

Changing energy policy in Vietnam

Energy policy in Vietnam has been changing slowly in the past decade. Energy policy, simply, is a plan of

action for tackling issue related to energy supply, demand, and trade and consequences of energy activities. Systems

of energy to produce electricity in Vietnam in the past years have been diverse with three main sources:

hydroelectricity, coal thermo-electricity, and gas thermo-electricity. Figure 1.2, show that in 2010, 20% of thermo-

electricity and 35% of natural gas thermo-electricity while renewable energy such as solar and wind energy make up

a small proportion of 2% (Phat). Although the demand for efficient energy consumption is relatively high, foreign

investors have been afraid of investing in this field despite their growing interests and economic opportunity.

However, the current competitive mechanism in electricity industry is strongly controlled by the state

energy corporations. This exclusiveness has blocked the healthy development of the energy industry in Vietnam

(Phat). For instance, EVN, a state-owned electricity enterprise, has been building 14 projects, 11 projects are

preparing to be invested in, and 4 of them were chosen contractors. Furthermore, gas thermo-electricity market

segment belong to Vietnam National Oil and Gas Group (PVN) and Vietnam Coal and Mineral Industry Group

(TKV) owns coal thermo-electricity segment. All of these companies are state-owned enterprise. Strategies made

for the development of energy industry are merely within EVN’s framework and neglect the consultation of

international energy organizations or independent management (Phat). This fails to create an explicit environment

for investment and has prevented from attracting capital and investment of energy corporations. If there were a good

integration from private, regulations, and foreign investment, the prices would be lower or loss making could be

avoided. Thus, each of these Vietnamese corporations has a kind of power or monopoly power in their hand, and

the cooperation and the incoherent integration because of self-conflicting interest.

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In Figure 1.5, the overall forms of energy is unequally distributed, giving natural gas and hydroelectricity is

the two major systems in Vietnam (Phat). In addition, the economic and technological ability and human resources

of EVN are limited, so are their strategies. Instead of the clearly managerial division between the Ministry of

industry and trade and EVN, all strategies of energy development of this Ministry are seemingly decided mostly by

EVN (Phat). Vietnam state-owned enterprise (SOE) is progressing at a slow pace since restructuring plans have been

developed, and efforts are focused on amendments to the legal framework (IMF). The Vietnamese government has

issued new regulations to enhance SOEs’ financial reporting and transparency to satisfy foreign investors and attract

FDI into Vietnam. This effort will improve the government efficiency and level the playing field for the private

sector. On the hand, implementation remains a challenge since the framework is still in the infancy stage.

Vietnam Trade Policies favoring exportation

The United States and Vietnam have a dramatic history because of the Vietnam conflict over two decades

ago. The United States had lifted its embargo on trade with Vietnam in February 1994, but still levied on imports

from Vietnam (Nguyen). Globalization has improved the relationship between Vietnam and the United States. In

December 2001, a bilateral trade agreement between these two countries came into affect. This is expected to

reduce the tariff on Vietnamese goods entering the United States from around 40 percent to 3 percent, in practice.

Over a period of three years, Vietnam will reduce the tariffs it charges on import from the United States as well as

eliminate restrictions on many agricultural and industrial products over three to seven years (Nguyen). The real

significance of this agreement is that it introduces more competition into the economy, and pushes reform and

growth overall, especially in the state sector. Furthermore, U.S. companies are to be allowed to enter the services

sector, including insurance and banking, accounting and legal services, engineering, construction, market research,

and etc.

After 14 years, the regional dynamics in Southeast Asia has changed since the rise of China, an increasing

security threat to Vietnam, Japan, Taiwan, Indonesia, Brunei, Philippines, and others, and a closely interconnected

economy of Vietnam with the rest of the world. Last year, Vietnamese President Sang embarked from Hanoi to

Washington, where he and President Obama will work together to bolster economic and military ties (Nguyen).

Vietnam is struggling with a slowing economy and rising disputes with China over territories in the South China

Sea. Vietnam’s economic relationship with China is important, however, national security supersedes the economic

interdependency in this case. The rising tension between Vietnam and China over maritime incident, recently

during this summer, ignited a protest in Bing Duong city, Vietnam. The United States sees Vietnam along with

Philippines, Taiwan, Japan, and South Korea as key economic and strategic partners in this region. Vietnam existing

issues with China will draw a closer connection to the West.

Vietnam trade policy will favor the United States since they will make further strides to strengthen its ties

with the West (Nguyen). The risk of unstable trade policy between the two countries is low for likelihood and high

for consequence. The economic relationship between the two will, also, continue to develop with the emerging

Trans-Pacific Partnership (TPP). TTP is a regional free trade agreement under negotiations between various

Southeast Asian countries, the United States, and Japan. This agreement is expected to govern regional competition

issues, capacity building, cross-border services, customers, e-commerce, environmental issues, investment, market

access for goods, and trade remedies. The TPP is advantageous for American investors since they can reap the

benefits of the opportunities provided by the TPP while safeguarding their investments against political and

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regulatory risks (International). The TPP aims to reduce barriers to trade and investment and allow member states’

exporters to tap into global supply chains and new market for services. This agreement will be one of the most

significant free trade agreement, covering approximately 26% of world trade, with member states’ GDP amounting

to 39% of the world’s GDP in 2012 (International).

Four Season Air, Inc. should take a new leap in diversifying its operation by exporting HVAC services in

Vietnam. Rather than a risk, investing and trading in Vietnam are profitable opportunities in the long term for our

company. Despite the strong presence in the country of foreign-invested enterprises, technology transfer has been

limited and the labor force is unskilled (EUI). Around 50% of Vietnam’s workers are still employed in agriculture.

With that said, there is a demand for skilled servicing in Vietnam. My family business is able to fill this gap by

providing HVAC expertise to commercial projects and academic institution. The entry barrier, in general, is high

for most industries. However, Vietnam is receptive to new services, such as installing a comprehensive energy

efficient HVAC system for a three to five star hotel, where there is a need for new technology and rare technical

skills. Overall, foreign investment is projected to pick up in 2015-2019. Four Season Air, Inc. is in the business of

promoting energy efficient equipment such as HVAC system and the demand for this advance skilled and HVAC

projects are high. This positive trend will not only support a rise in import of capital goods, but also strengthen the

external demand and boost imports by the export-manufacturing sector, and domestic demand for imported

consumer goods will grow (EUI). Furthermore, exports will rise by an annual average of 15.2% in 2015-2019,

while import growth will average 16.3 in the same period (EUI).

Vietnam’s SOE challenges

Although the process of trade liberalization and international integration creates new opportunities for

Vietnam, it may also cause some negative socioeconomic impacts, especially in the short run and impose serious

challenges to Vietnam’s further development (Vo). It appears that Vietnam’s policy is receptive to promote exports

such as zero export duty, tax exemption, and export credit. Furthermore, exporters pay duty on their inputs and are

reimbursed for the share of imports used to produce exported goods. At the surface, exporting goods out of the

country sound profitable for firms. However, the infrastructure of the government division creates a complex issues

such as the delays in tax refund due to underdeveloped communication between treasury and custom departments.

State-owned enterprises have an advantage among private sectors because of their privileged access to the state-

owned commercial banks.

Despite a significant progress in trading aspect, Vietnam’s trade regime has still operated within a rather

comprehensive framework of trade barriers with efforts to promote exports as well as to protect import-substituting

products (Vo). Vietnam and the United States signed a bilateral trade agreement (VN-U.S. BTA) in July 2000 on

the basis of World Trade Organization principles and regulations especially with intellectual property and services

trade. Vietnam’s biggest economic reform and trade challenges will to restructure the country’s state-owned

enterprises. This task is necessary both to meet WTO commitments and to boost the country’s competitiveness as

foreign participation in the improved economy (EUI). However, many state-owned enterprises are resistant, in the

short term, to change and many of them are, also, politically well connected. Four Season Air, Inc. is a small size

company from a local market in the United States of America.

Lastly, information has been limited in Vietnam. Many Vietnamese consumers, especially in commercial

and industrial establishments, actually have little concrete idea of the potential for energy savings in their business

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and how much money could be saved through energy efficient equipment (World Bank). Also, the availability of

expertise is limited in the region. Clients are not able to tap to the appropriate expertise to advise on energy savings

options and identify projects and sources of financing (World Bank). The risk of trade barrier is high for this

industry since the SOE controls a large proportion of the market share. However, Four Season Air, Inc. is able to

utilize its technical skills and human capital to gain small to medium size projects in Vietnam, especially in

commercial, hospital, and enterprises market segments.

Entering in the government-led project is difficult without the proper connection. However, expanding and

improving the qualifications of local expertise is another area where Vietnam needs to make major improvements.

Leveraging the Vietnam AmCham, an independent association of American and international business with 500

companies and more than 1,000 representative from American companies based in Vietnam, to promote fairness

with competition is a method to mitigate SOE monopoly. FDI is often undertaken from large multinational

companies. FDI projects break up domestic monopolies and lead to more competition because of superior quality of

foreign product and services (Lam). Attending and applying for this membership will help put a voice for foreign

companies operating in this region. Most of these companies have a significant portion of Vietnam FDI. FDI

businesses operate in Vietnam, use a majority of Vietnamese workforce and generate 25% of the country’s total

social investment and 64 to 65% percent of export earnings (Vietnam).

Exchange Rates support Export

American small business such as Four Season Air, Inc. has an advantage when doing business in Vietnam

due to large cash reserves in dollars from operations in America. The VND is depreciating and the dollar is

appreciating, nowadays. Monetary loosing is an effective way for large economies to stimulate consumption and

investment such as the United States. However, small countries such as Vietnam do not have this option. Vietnam

uses a crawling peg exchange rate system to control its currency. Vietnam will continue to operate this system,

allowing the dong's exchange rate against the US dollar to adjust to changing market conditions (EUI). Exchange

rate pegs act as a disciplining device, allowing policy makers in countries with a high inflation to import credibility

and lower inflation from abroad (Phuc).

In the past, the State Bank of Vietnam (SBV) has shored up demand for the dong through unconventional

policy measures, such as lowering interest rates for US dollar deposits and prohibiting interest payments on

deposited gold (EUI). When the VND depreciates with respect to foreign currency, there is a relative increase in

Vietnam’s inward foreign direct investment (Pham). Simply, it is cheaper to invest in Vietnam, than elsewhere.

Thus, the FDI flows into Vietnam play an important role to promote exports from Vietnam to other countries and

foreign investor uses Vietnam as a platform for selling their products to markets worldwide. The risk of VND

appreciating against the dollar is low for likelihood and moderate for consequence. Vietnam is a developing country

that strives on an economy of exports and internal consumption.

Rather the risk is low in the long term, the economic profit for investing and trading services in Vietnam is

at high, in terms of exchange rate. With an additional operation in Vietnam, Four Season Air, Inc. is able to reap the

benefits of low cost labor and provide a quality and skilled labor for the untapped demand of energy efficiency. But

carefully maintaining a small VND reserves in Vietnam and investing the remaining dollar reserves in other

investment vehicles such as the stock market in America are appropriate strategy. By engaging in this strategy, Four

Season Air, Inc. is able to fully capitalize the exchange rate in Vietnam.

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VND depreciation improves foreign wealth

In figure 1.6, Vietnam has higher inflation volatility than ASEAN countries and China. Vietnam,

generally, employ higher interest rates than neighboring countries during unstable conditions to offset its risks. As

the dollar appreciate against the dong, American investor has a higher purchasing power than domestic investor in

Vietnam. Depreciation in the VND will likely attract foreign investors such as an American company who have the

purchasing power when converting the foreign exchange rates. FDI from the United States to Vietnam has been

growing since 2002 with $61.3 million and $162.4 million in 2004 (Pham). In addition, in 2006, Vietnam attracted

over $10.2 billion of newly registered capital. This means, also, depreciation of the exchange rate, which would lead

to an increase in import price and inflation.

The State Bank of Vietnam has repeatedly devalued the dong to boost exports in the region (Pham). Thus,

the SBV will continue top peg its currency to the dollar. Vietnam’s fragile banking sector and its poor inflation

track record had reduce the confidence in the VND, leading residents to convert their dong assets into either dollars

or gold to hedge against inflation or domestic currency in 2012 (Chan). Furthermore, Vietnam cannot afford to

allow the real value of VND to appreciate since it has a large trade deficit (Pincus). Domestic producers will be at

risk from competition from cheap imports. In the future, the SBV will continue to peg the Dong currency against

the Dollar to support Vietnamese companies and export. However, because of the high demand of technology from

imports, Vietnam will continue to be open to import for highly skilled services and advanced equipment until

Vietnamese enterprises are able to produce the same quality of services and products.

Obviously, importing HVAC equipment in Vietnam will not be conducive for Vietnamese customers since

the value is costly when converting the exchange rate from VND do dollar. Acquiring the foreign equipment is

likely to happen because of the significant reduction in energy costs. Vietnam liberalized capital account and

openness to capital flows, but the State Bank of Vietnam is having challenges to maintain a stable exchange rate and

an independent monetary policy (Chan). Implementing HVAC servicing and projects in Vietnam is more lucrative

than America since the labor is cheap. Retaining talent and hiring employees in America is more expensive than

Vietnam. Four Season Air, Inc. is able to procure off the benefits when operating in Vietnam in demanding and

booming industries such as tourism, hospital, and construction.

Depreciate Dong to attract FDI

Exports have become a main source of Vietnam's economic growth, employment creation, and poverty

reduction (Pham). Interestingly, during 1990 to 2006, the share of imports to gross domestic product surpassed that

of exports by an average of about 6.45 percent. The imbalance between the supply and demand for VND generates

inflation, and the increased demand for dollars put downward pressure on the VND exchange rate in Vietnam

(Pham). In foreign investor perspective, the existing foreign exchange environment between VND and dollar is an

opportunity to exploit cheap labor in Vietnam. Vietnam, yet alone, offers cheap labor to foreign companies and

developed countries. The risk of a currency collapse is low for likelihood and high for consequence if Four Season

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Air, Inc decides to obtain VND reserves for local business transaction. A real depreciation of VND improves the

capital wealth of foreign investor relative to that of domestic investors.

Lowering VND interest rates could persuade depositors holding VND in saving accounts to switch to

dollars or gold. Thus, the SBA has a higher rate than most countries. Although the local does not favor the dong,

the dong has a higher interest rates than the dollar for saving and certified deposits. By the same token, devaluing

their currency, Vietnam’s export and economic strategy has been very successful. Thus, Four Season Air, Inc.

should rely on doing business in the US currency to avoid depreciating VND. Not all Vietnamese businesses,

however, will have US currency for business transaction. Four Season Air, Inc. will need to maintain a small VND

reserves and shift its large VND reserves, from profits accumulation, to other assets such as real estate purchases or

investing in savings, with an annual rate of 8%, and Vietnam stock market. This approach will explore various

venues and minimize the depreciating value of the VND.

Conclusion

The healthy business in the construction and real estate industry are important consideration for HVAC

firms in America. Four Season Air, Inc. operations in America will increase because of the new increasing demand

for energy efficient HVAC equipment. Energy demand in Vietnam had tripled over the last decade, and it is likely to

triple again over the next decade if economic growth remains robust (World Bank). Potential energy savings across

the economy remain largely untapped in this region. Thus, policies and programs need to be in place to stimulate

energy-saving opportunities since this does not happen over night. Investing and trading energy efficient products

and services such as HVAC will diversify and minimize the impeding risks in Four Season Air, Inc. operations in

America. Vietnam appears to be a nationalistic country since state-owned enterprises account for about a third of

Vietnam’s GDP, in industries ranging from finance to fabrics, seafood-processing to shipbuilding (Economics). The

current competitive mechanism in electricity industry is strongly controlled by the state energy corporations. In the

past, this exclusiveness has blocked the healthy development of the energy industry in Vietnam (Phat).

In the near future, Vietnam trade policy will favor the United States since they will make further strides to

strengthen its ties with the West to offset rising China (Nguyen). The risk of unstable trade policy between the two

countries is low for likelihood and high for consequence because of the pending Trans-Pacific Partnership, a new

economic relationship agreement (TPP). The TPP is advantageous for investors since they can reap the benefits of

the opportunities provided by the TPP while safeguarding their investments against political and regulatory risks

(International). The TPP aims to reduce barriers to trade and investment and allow member states’ exporters to tap

into global supply chains and new market for services. My family business is able to fill this gap by providing

HVAC expertise to commercial projects and academic institution. The entry barrier, in general, is high for most

industries. However, Vietnam is receptive to new services, such as installing a comprehensive energy efficient

HVAC system for a three to five star hotel, where there is a need for new technology and skilled. Overall, foreign

investment is projected to pick up in 2015-2019.

However, expanding and improving the qualifications of local expertise is another area where Vietnam

needs to make major improvements. Leveraging the Vietnam AmCham or other international agencies to promote

fairness with competition is a method to mitigate SOE monopoly. FDI is often undertaken from large multinational

companies. Vietnam needs FDI to increase or maintain its GDP. Lowering VND interest rates, in addition, could

persuade depositors holding VND in saving accounts to switch to dollars or gold. Lastly, Four Season Air, Inc. is

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able to capitalize the depreciating dong to exploit cheap labor since labor is a large portion of the fixed costs for

HVAC projects. His company should rely on doing business in the US currency to avoid depreciating VND. Not

all Vietnamese businesses, however, will have US currency for business transaction. Four Season Air, Inc. will need

to maintain a small VND reserves and shift its large VND reserves to purchasing real estates or investing in savings,

with an annual rate of 8%, and Vietnam stock market.

Figure 1.1, Value of private nonresidential construction from IBIS research

(Sources: IBIS research database)

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Figure 1.2, Forecast Electricity Consumption from Energy Rating

(Sources: Energy Rating from http://www.energyrating.gov.au/wp-content/uploads/Energy_Rating_Documents/

Library/General/International/Vietnam-Energy-Efficiency-Market-Survey.pdf)

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Figure 1.3, Non-domestic building use of Air Conditioner

(Sources: Energy Rating from http://www.energyrating.gov.au/wp-content/uploads/Energy_Rating_Documents/

Library/General/International/Vietnam-Energy-Efficiency-Market-Survey.pdf)

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Figure 1.4, Foreign Direct Investment in Vietnam

(Sources: IMF Vietnam IMF Country Report No. 14/311 October 2014)

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Figure 1.5, Energy forms in Vietnam

(Resource: Phat, Nguyent Tan. “Challenges of Energy Security to the Industrialisation and Sustainable Development in Vietnam.” Volume 3: Issue 3: Pages 174-180. Publication August 2012. )

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Figure 1.6, Vietnam Inflation with other countries

(Sources: IMF Vietnam IMF Country Report No. 14/311 October 2014)

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