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Vietnam Today

Petering out

Released at: 17:00, 10/10/2014

Petering out

The struggles of private enterprises - the engine of economic growth - reflect declining business dynamism in Vietnam.

by Thong Dat

Staying in business seems to get harder every day for Mr Vu Quoc Tuan, the owner of a Hanoi-based food processing company he started eight years ago when the economy was humming along nicely. But given the current operational costs, not to mention the competition from foreign rivals, his company, which employs 21 people, struggles to turn a profit. Despite his best efforts, the orders are simply not there.

It is quite common these days to hear claims that the private sector is rapidly growing into a key driver of Vietnam’s economic growth and job creation. The sector contributes more than 10 per cent of GDP while it is expected to create a total of 3.5 to 4 million jobs from 2011 to 2015, after being responsible for 3.2 million new jobs from 2006 to 2010. Despite such contributions, however, the sector still lives in the shadow of State-owned enterprises (SOEs) and foreign-invested enterprises (FIEs) and has major constraints in accessing finance and markets. Today, as Vietnam continues to grapple with the effects of economic slowdown, private enterprises are enduring a large share of the economic pain.

Tough time

The private sector makes up about 95 per cent of all businesses operating in Vietnam. Over the last two decades their number rose from 15,000 to 600,000, with an average of 80,000 being established each year. The smallest employ just a handful of workers while some of the largest employ thousands.

Still, key sectors of the economy remain firmly in the hands of the State sector, with SOEs controlling either all or most of major sectors such as oil, petrochemicals, telecommunications, electricity, aviation, airports and railways. Private enterprises are also at a clear disadvantage compared with FIEs, who have received more investment preferences and been prioritised in investment policies. 

As the economic downturn marches on, it’s these private enterprises that are particularly vulnerable to the squeeze. While falling sales have made the headlines, small business owners face other problems as varied as the enterprises they run. Manufacturing is slowing and financing is hard, if not impossible, to come by. Rents are rising and profits are falling or vanishing. “Private enterprises are all feeding on themselves,” said Ms Pham Chi Lan, an independent economist. “They are scared and not quite sure what to do.”

For 36-year-old Mr Vu Tuan Nam, who owns the Phuong Nam mini furniture store, he has to do whatever it takes to keep the business running and his employees paid. “I really have to think about every purchase and every decision,” he said. Being cautious about expenses is one way he’s coping with the fact that sales are down by more than 10 per cent at the store. He’s also scaling back on inventories, making sure the schedules of his five employees are as efficient as possible and forgoing his own salary to make sure his workers receive theirs. Even so, Mr Nam knows he’ll have to downsize eventually, since he can’t afford the rising rent.

In the short term, the fortunes of private enterprises appear to be on the decline. An alarming set of figures from the National Financial Supervisory Commission (NFSC) showed that total demand in the economy remains weak, making life harder for the corporate sector in general and for private enterprises in particular. The NFSC report also estimated investment by the private sector in the first half of 2014 stood at just 10.3 per cent of GDP, lower than the 11.1 per cent recorded in the same period last year. 

Of course, not all of the obstacles facing private enterprises come from the outside. Many owners lack the know-how they need to manage their businesses and other critical functions, according to analysts. “Knowledge and an understanding of what a private enterprise needs to do to be successful are key obstacles for owners,” said Mr Le Xuan Nghia, Director of the Business Development Institute. “For instance, many private enterprises aren’t organised in a way that gives banks confidence.”

Declining dynamism

In the past many people romanticised the idea of running a business, but it’s not easy in today’s environment considering that enterprises face competition from all over the country. Low-cost loans are still hard for very small private enterprises to obtain despite an improved credit climate. Perhaps as a result, new enterprises have been on a persistent decline since the beginning of the year.

Meanwhile, recently released data from the General Statistics Office found that 33,454 enterprises announced closure, compared with 37,315 being newly established. The figure illustrates that business dynamism is slowing down and bankruptcies will continue into the future. “A lot of private business leaders are now feeling discouraged and depressed,” said Mr Nghia. “Some even attempt to force their way into risky investment fields such as gold or property speculation, and this is worrying. We need to acknowledge this decline as a problem.”

Although Mr Vo Quang Canh, Deputy Chairman of the Saigon Business Club, is less pessimistic, he still believes the decline in entrepreneurship is real. “There’s always the issue of money, which keeps some entrepreneurs from even starting,” he said. “It’s still tough to get funding from banks.” But the decline in the rate of newly-established private enterprises may present opportunities for entrepreneurs who actually choose now to launch their enterprise. “They will have a more efficient path to the market with reduced risk,” said Mr Canh.

Overall, the message is clear. Whatever the reason, the declining entrepreneurial dynamism has people concerned. Private enterprises are a key driver of job creation and they play an important role in promoting productivity gains throughout the economy. “Business dynamism is clearly on the decline,” said Mr Canh. “But it is critical to long-term economic growth.” 

Support needed

Over the last two decades the rise of the private sector has made a huge contribution to Vietnam’s economic growth and forced the State sector to become more efficient. However, recession and economic downturn are now putting private enterprises to the test. Surviving during the hard times requires private business owners have a steely determination and never-say-die attitude, but it’s clear that the current business environment must improve. “Authorities at all levels could do more to support entrepreneurs,” said Mr Nam. “Administrative procedures, despite being reformed for many years, still remain tortuous, hindering businesses. Authorities should provide incentives and tax breaks, not hurdles and unnecessary rules.”
In 2013 the government proposed amendments to the tax law to cut corporate income tax rates and also reduce interest rates to help the financing of enterprises. However, enterprises say that these measures have not really worked, since their greatest difficulty at the time was liquidating inventories, as some 73 per cent of enterprises polled by the Vietnam Chamber of Commerce and Industry (VCCI) said that large inventories were their greatest concern.

The most active support the government can give that will be critical in the long term, however, is removing the discrimination private enterprises face. Shifting the focus from the State sector to the private sector remains an obvious step forward. Authorities appear poised to respond to a growing reaction from private enterprises about the discrimination they face, but it requires a very different strategy and a whole new approach. 

SOE reform, according to Mr Nghia, will bring a number of benefits to the development of the private sector, which has struggled in an unfair business environment with barriers to access and financing that has weakened the overall efficiency of the economy. “The non-State sector and private enterprises may benefit from wide-ranging reforms to the country’s SOEs,” he said, adding that SOE reform will give full play to the effect of fair competition and guarantee equal treatment for public and non-public sectors when acquiring resources and accessing the market.

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