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Risks & rewards

Released at: 08:11, 15/10/2014 AEC 2015

Risks & rewards

Unless competitiveness improves quickly, Vietnam's business community will be unable to fully access the opportunities the ASEAN Economic Community will present and may even suffer.

by Minh Tien

ASEAN was Vietnam’s third largest export market in 2013, following the US and the EU, with turnover of $18.47 billion. The ASEAN Economic Community (AEC), which is expected to be officially established in December 2015, will present more opportunities to Vietnam’s business community by allowing for straightforward access to a market of 600 million people with no barriers on economic space, goods and services and even employment and capital.

Such advantages are, of course, not exclusive to Vietnam. Competition will become much fiercer, as many countries in the region produce similar products. Those with inadequate preparations and low competitiveness will likely see more losses than benefits after the AEC begins. According to a survey conducted by the Vietnam National University (VNU), nearly 80 per cent of respondents were not fully aware of the opportunities or the challenges the AEC may bring and so are remarkably unprepared to respond, especially when compared to regional enterprises.

Well-prepared competitors

With substantial focus given to Vietnam’s two largest markets, the US and the EU, it is perhaps understandable that Vietnam’s business community has not given too much thought to ASEAN. This market, however, may turn out to be a potential substitute given the US and the EU are experiencing somewhat slow growth following the recession. The AEC will also allow Vietnam to enjoy preferential tariffs when exporting to China, Japan, South Korea, India, Australia and New Zealand, due to the FTA+1 between ASEAN and its partners. This favourable investment environment would not only provide the conditions for local enterprises to develop strongly but would also attract foreign direct investment (FDI) into the region. While Vietnam still appears to be rather ignorant, other members have been proactive in their preparations for the AEC.

The VNU survey showed that Vietnam is far behind Thailand and Singapore in this regard, according to Mr Nguyen Hong Son from the University of Economics and Business (UEB) under VNU. As a market of nearly 100 million people with constantly increasing incomes, Vietnam will definitely attract foreign enterprises. Foreign private enterprises also receive support from their governments as regards energy, logistics and/or finance, among others. 

Roadmaps have been designed in Indonesia for particular sectors after the AEC comes into being, said Mr Agus Tjahajana Wirakusumah, Director General of International Industrial Cooperation at the country’s Ministry of Industry, such as electronics, automobiles, cement, and textiles and footwear for the domestic market, and agriculture, fisheries, furniture and food and beverages for ASEAN markets. The need for the government and the private sector to act in concert to maximise the benefits of economic integration and pursue the ideal of inclusive growth was underscored by the Secretary of the Philippines’ Department of Trade and Industry (DTI) Gregory L. Domingo. “The government has been taking steps to strengthen local industries, improve governance by simplifying business transactions and promoting transparency in bidding for government projects,” he said, and emphasised that “it was the private sector that can take the final step to success.” Mr Sun Chanthol, Cambodia’s Minister of Commerce, meanwhile, asserted that the Cambodian Government has been supportive of its private sector by easing the investment law as well as the property law, while at the same time promoting education to secure the high-level human resources needed to attract foreign investment.

In Thailand, tens of thousands of small and medium-sized enterprises (SMEs) have received training and been closely supported by the government since 2012, to alleviate any difficulties they may face when doing businesses in neighbouring countries, as part of preparations for the AEC. Enterprises are provided with specific and detailed information on various import and export sectors and the strengths and weaknesses of partners with which Thailand does business, in the context of ASEAN gradually becoming a single market.

Berli Jucker Public Co. (BJC), a major Thai import and export firm, opened two factories in Vietnam recently, not only to serve its domestic market but also to export to regional markets. Mr Aswin Techajareonvikul, President and CEO of BJC, said that such aggressive investments into Vietnam are part of the company’s plans for AEC integration, along with promoting commerce through Thai Corp. to distribute Thai goods into Vietnam and acquiring FamilyMart to compete in the retail sector.

The leading Thai corporation in agribusiness and food, Charoen Pokphand (CP), is planning to invest heavily and raise the number of its plants to ten this year. General Director of CP Vietnam, Jittisart J. Sakulchai, revealed that the purpose of the expansion was to give the company direct access to raw materials and customers in the region while reducing transportation costs.

Mr Kan Trakulhoon, Chairman and CEO of the Siam Cement Group (SCG), pointed out that the formation of AEC in 2015 will have certain impacts on capital as well as human resources at enterprises. He believes that SCG will have to headhunt aggressively to develop and expand, and started the process in 2007. In terms of training, SCG has designed a curriculum for employees willing to work abroad, to build a global mindset in accordance with the international business environment as well as language and culture.

On the home front

The quick steps taken by these foreign enterprises should be a wake-up call for domestic enterprises, which remain sluggish in preparing to change and adapt to the approaching new circumstances.

In the homeware sector, Thai goods are widely distributed in every market and supermarket in Vietnam. Mr Dang Chi Hung, Director of Business at the Kim Hang Aluminium and Plastic Company, acknowledged that Thai firms have been much quicker than others in preparing for the AEC. In the near future, he said, competitiveness will become extremely fierce. Domestic enterprises have only had to compete with Chinese products previously, which are cheap but not reliable in the minds of many consumers. When the AEC comes into being in 2015, Vietnam will have to compete with major names in ASEAN with high-quality goods at prices not necessarily higher than their Vietnamese counterparts, Mr Hung said.

Threats are not only emerging in manufacturing and trading but also in the services sector. The Ho Chi Minh City Urban City Environment Company (CITENCO) had been competing aggressively with other ASEAN service providers for some time already. According to Mr Huynh Minh Nhat, Director of CITENCO, as a leading city in economic development, Ho Chi Minh City experienced fierce competition much earlier than other cities and provinces and service providers like his must adapt much faster in order to not fall behind. CITENCO has also compiled a master plan for development to 2020, including substantial investments in a waste treatment plant that could also serve power generation, with all equipment being imported from Europe and the US.

Mr Cao Sy Kiem, President of the Vietnam Association of Small and Medium Enterprises (VINASME), believes that the greatest challenge for Vietnamese enterprises is their limited awareness regarding the AEC, as only some 20 per cent fully recognise the opportunities as well as the threats that may come. Nevertheless, even more alarming is that the VNU survey indicates that an inability to be proactive and creative when it comes to international integration has led to low levels of competitiveness among local enterprises. “Weaknesses in essential resources such as human resources, finance, international business skills and research skills as well as poor forecasts and outdated technologies limit local enterprises,” according to senior economist Pham Chi Lan.

In terms of technology, another recent survey of 100 enterprises in Hanoi and Ho Chi Minh City showed that a majority were still using technologies from the 1980s. Sixty-nine per cent were dependant upon imported equipment and technologies. The number of technical staff with expertise was just 7 per cent. Meanwhile, investment in equipment and technological innovation accounted was less than 3 per cent. The survey also revealed that the proportion of imported technology and equipment was very low, at less than 10 per cent of total import turnover. When tax rates in the AEC are set at zero, Vietnamese enterprises can access cheaper machinery to increase their competitiveness, but in such a scenario will always remain one step behind their regional competitors.

In order to prepare for and benefit from the AEC, all of this must change. Mr Tran Thanh Hai, Deputy Head of MoIT’s Import-Export Department, emphasised the need for local enterprises to carefully study their competitors in ASEAN along with technical standards and rules of origin, together with trade protection measures that other ASEAN countries may introduce. He also encouraged the exchange of information with the government. Mr Vo Tri Thanh, Deputy Director of the Central Institute for Economic Management (CIEM), said that enterprises must consider risk prevention tools against market volatility, such as derivative instruments and insurance. But, most importantly, he called attention to a shift from price-competitive thinking to a focus on non-price competition associated with standards and transaction models.

Kim Hang’s Mr Hung also believes that, to catch up with the competition, enterprises will have to study new products to meet customer demand in other ASEAN countries. Kim Hang is developing new induction cookware with more advanced features for the Malaysian market, which has a higher per capita income than Vietnam and a higher growth rate of 20 per cent per year. Sunhouse Group, another leading manufacturer in the homeware sector, have been much faster than others in responding to changes in the regional socio-economy by conducting market expansion three years ago. Nevertheless, their products are only found in Myanmar, Laos and Cambodia, representing a modest 5 to 10 per cent of domestic sales revenue. Mr Nguyen Xuan Phu, President of Sunhouse, emphasised that poor branding is a significant disadvantage of Vietnamese enterprises and pointed out that one necessity for the moment is to come up with a good marketing plan for high quality brands with sleek designs but competitive retail prices.

Ms Vu Kim Hanh, President of the Business Association of High Quality Vietnamese Products and Director of the Business Research and Enterprise Support Centre, stressed that there is no going back. “Competition between domestic enterprises has never been based on technology or management capability and has instead been based on ‘connections’,” she said. “The sustainability of Vietnamese enterprises in a regional playing field is questionable, as fairness and transparency are key factors.” She added that one lesson local enterprises seem to never learn is to identify their own core competencies, business models, markets and target consumers, in addition to recognising those of their competitors.

The AEC is an open mechanism of bilateral and multilateral trade agreements that will certainly benefit its members. Nevertheless, as the clock ticks down, if local enterprises fail to grasp the opportunities from this totally new experience they will become threats to their existence.

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