The arrival of foreign petroleum enterprises will result in major changes to the market in the future.
Japan’s Idemitsu Kosan Group will become the first foreign enterprise to be involved in Vietnam’s petroleum distribution business. Many believe it may face significant hurdles in developing its network despite possessing advantages in capital and experience.
Time to open up
Idemitsu Kosan and Kuwait Petroleum International Ltd. (KPI) have been granted a business license to establish joint ventures selling petroleum products. Idemitsu is not only one of the three largest oil companies in Japan but also one of its leading petroleum retailers, with about 3,700 gas stations.
The Ministry of Industry and Trade (MoIT) has confirmed that a number of foreign enterprises will be permitted to distribute petroleum products in Vietnam when investing in an oil refinery in Vietnam. This forms part of the government’s commitments to investors when they conduct oil refinery projects in the country.
The Vietnam National Petroleum Group (Petrolimex) has also signed a Memorandum of Understanding with Japan’s JX Nippon Oil and Energy Corporation regarding strategic cooperation. JX Nippon Oil and Energy’s plan is for the company and Petrolimex to launch the Nam Van Phong Petrochemical Refinery Complex and be allowed to distribute petroleum products in Vietnam. These form part of the government’s specific commitments, and according to free trade agreements Vietnam has signed it will officially open its retail petroleum market by 2018-2019.
Economic expert Dr. Vu Dinh Anh said that he wasn’t surprised at the licensing of Idemitsu Kosan. For many years it has visited Vietnam to study its distribution network and has sought his advice on market mechanisms and the management of State agencies. Under Vietnam’s commitments in free trade agreements it must open up its retail petroleum market and many foreign enterprises will come to the country and directly invest in or purchase gas station networks from domestic enterprises.
Mr. Ngo Tri Long, also an economic expert, said that Vietnam is now participating in global value chains, including food security and energy security, and the acceptance of competition is therefore essential. Foreign enterprises in the energy industry must obey the strict regulations that local enterprises follow. “Integration is a global trend and if we do not join in we will die,” he said. “The most important thing is to identify solutions to overcome the challenges and not be afraid when Vietnam opens up its market.”
Other countries have opened up their energy markets in recent times. In Southeast Asia, Indonesia permitted foreign energy companies to conduct business. Myanmar also allowed international companies to establish joint venture companies to build petrol stations in the 2015-2016 period. Cambodia’s petroleum market has been completely opened up and foreign companies have arrived in the country. Thai enterprises and Vietnam’s Petrolimex now have a presence in Laos.
Not easy for newcomers
The arrival of foreign enterprises will definitely be an important factor in changes to market structure. The expectation of foreign enterprises is that they will break the position held by major enterprises in the petroleum market but this certainly won’t happen overnight.
Mr. Anh said that competitiveness will improve the market in all respects, including the price and quality of products and supply services. Foreign enterprises will push domestic and other foreign petroleum enterprises to boost their market share. The dominant position of major petroleum enterprises may therefore decline, creating a fairer and more competitive market. He added, however, that in order to ensure better market operations there must be rational management. Firstly, enterprises will compete on price, as regulated in Decree No. 83/2014/ND-CP, issued on December 3, 2014, but the Decree needs to be amended to guarantee better management efficiency. There must also be appropriate mechanisms and conditions for enterprises to fully compete.
Mr. Long said that this will be beneficial to local consumers and the market in general. The existing market has been absent competition due to the dominant influence of the three giants in the field. This led to a lack of transparency and low competitiveness, to the detriment of consumers. The participation of foreign enterprises will improve the situation and pressure to cut petroleum prices will grow and the quality of products and supply services will improve. Mr. Long also proposed technical barriers be adopted to ensure supplies and consumers’ benefits.
From a business perspective, the decision to join a new market is usually made after the business has conducted surveys and made a detailed assessment of market structure. Vietnam’s petroleum market is largely held by 23 petroleum enterprises, including Petrolimex, which holds a market share of 48 per cent, and Saigon Petro and PVOil, which have a combined market share of 20 per cent. The three giants are the dominant players and have broad distribution networks and business resources. Such figures indicate than any newcomer will face difficulties in carving out even a small market share.
The Ministry of Industry and Trade (MoIT) said that at this time no foreign enterprise has been licensed for petroleum distribution locations. Those who will be permitted to establish a distribution network must meet the standards contained in Decree No. 83 on oil trading, such as warehousing and agency numbers, among others.
Having been involved in the petroleum industry for many years, Mr. Nguyen Van Tiu, General Director of the 1 Self-Petroleum JSC, said that, firstly, it will not be easy for foreign enterprises to develop in Vietnam’s market. Their greatest advantage is access to overseas capital at low or even zero interest rates and the exchange rates they can access are suitable for petroleum export and import activities. Enterprises eyeing Vietnam also have a great deal of experience in the petroleum industry. There are also a host of obstacles they must address. Local enterprises have outlets in prime locations, both in urban and rural areas. Foreign enterprises may purchase existing gas stations but the price is certain to be high. They will have to purchase a number of gas stations if they are effectively utilize their distribution networks, and this will involve spending a large amount of capital. Profit margins, meanwhile, may well be quite low.
“Japanese petroleum distributors are targeting supplying Japanese manufacturers operating in Vietnam. Distributors are not targeting the consumer segment because expansion of distribution networks is required.”
Dr. Vu Dinh Anh, Economic Expert
“Decree No. 83 distinguishes foreign and domestic enterprises but does not specifically apply to foreign enterprises. The Decree therefore needs to ensure a fair, equal and competitive environment for involved.”
Dr. Ngo Tri Long, Economic Expert
“The opening up of the petroleum market to foreign enterprises is good news because the local market suffers from an oligopoly. The State has intervened in the local market but has been ineffective, so the market needs competitiveness.”
Ms. Pham Chi Lan, Economic Expert
“The participation of foreign enterprises naturally has an impact on the business activities of domestic petroleum enterprises. I think this will only be in the short term, however. In retail, it will be difficult for foreign enterprises to compete and secure good locations for gas stations. In wholesale, distribution to Japanese manufacturers is low because they primarily use electrical power, which is cheaper. To approach other manufacturers, foreign enterprises need to offer cheaper prices, while local petroleum enterprises have longstanding business relationships and are more familiar with changes in the local market than their foreign rivals. The market may change, however, when foreign investors join the game.”
Mr. Nguyen Van Tiu, General Director of the 1 Self-Petroleum JSC