Vietnam facing challenges building its autonomous economy

After signing 17 Free Trade Agreements (FTAs), Vietnam has been successful in expanding its market to 200 nations and territories, including 50 key exporting countries. Vietnam is staying at the top positions in tough markets regarding high export turnover rate. However, the scale of domestic businesses seems not developed to expectations.

Garment production at Garment Co. No.10 (Photo: SGGP)

The most prominent reason leading to difficulties in expanding the scale of small domestic enterprises is unfair preferential policies between national and international companies. To attract foreign investments, many localities are adopting special preferential policies such as tax reduction by 5 percent within 37.5 years or by 50 percent within 13 years, tax exemption within 6 years, land and water rent reduction by no more than 75 percent within 22.5 years. Foreign companies also receive support to grow their technical and social infrastructure.

Meanwhile, domestic businesses never enjoy such favors. For instance, in the mechanical industry, compared to the preferences of tax exemption on technology and production line import, the medium-term loan interest rate of 2-3 percent given to foreign enterprises, domestic ones have to pay 10 percent of tax on technology and production line import. The latter must find land to build factories themselves, and its request for capital loan for manufacturing activities usually encounters obstacles.

This has made it nearly impossible for domestic small-scale enterprises to compete against large-scale international corporations. That is not to mention complicated procedures before these national companies can approach support policies. Take for an example the value-added tax reduction by 2 percent lately by the Government, which comes into effect from February to December 31, 2022. Since the list of eligible commodities is not consistent among localities, businesses in many places cannot enjoy it.

Another reason lies in the fact that despite a high need to borrow money to enlarge their factories and upgrade their devices, domestic businesses are not approved a loan since most banks have already hit their credit limit, which means a chance to access the 2-percent loan interest rate policies is out of reach of many companies.

One more factor that leads to trouble in developing a business’s scale is specialized inspection regulations. For example, the maximum threshold for phosphorus level in post-treatment wastewater of seafood processing procedures is too strict. Also, the implementation of the Vietnamese Criteria on industrial wastewater for intensive aquaculture ponds is not at all suitable, and hence negatively affecting the competitiveness of domestic companies in the global market. Before this were a series of reports related to power abuse during inspection times to issue a specialized certificate for a business.

Chairman of Vietnam Leather, Footwear and Handbag Association Nguyen Duc Thuan stressed that this unbalance between domestic and foreign enterprises is increasing to a worrying level, looking at the export turnover gap for the last 10 years.

Corrugated iron roll production line of Ton Dong A Corp. (Photo: SGGP)

Statistics from the Industry and Trade Ministry reveal that since the beginning of 2022, the total national export turnover has reached US$296.34 billion, a rise of 16,6 percent compared to this time last year. However, 74 percent of that amount belongs to foreign companies. This displays a weakness in both capital sources and technology of Vietnamese enterprises, making it challenging for these organizations to meet the demands of the technical barriers in foreign markets.

Deputy Director Ngo Xuan Nam of the National Office of Notification and Inquiry on Sanitation, Epidemiology and Quarantine of Vietnam (SPS Vietnam Office – under the Ministry of Agriculture and Rural Development) shared that his office receive on average 100 regulations a year related to new or adjusted technical standards for the quality of exported goods.

Most recently, the Europe Commission has released a notice changing the maximum residue levels (MRLs) of Metalaxyl on pepper to 0,05ppm. This has made it nearly impossible for Vietnamese pepper to enter the EU market since to satisfy this regulation, there must be a major change from the growing, harvesting, to the processing stages. Small-scale domestic enterprises find it extremely difficult to adjust.

Another notable point is that the export tax advantages brough by FTAs are fully exploited by foreign companies. When EVFTA comes into effect in August, EU offers a zero-percent tax for Vietnamese seafood and agricultural products but only for a certain quota such as 80,000 tonnes of rice a year. Being large-scale, international corporations quickly take advantage of this and enjoy the tax exemption, while Vietnamese companies are slower due to weak internal resources and cannot receive this preference.

The last worrying state is the acquisition of small-scale domestic businesses by larger-scale foreign ones on their way to expand their market to Vietnam. One such instance is Binh Minh Plastic Joint Venture Co., which was bought by Siam Cement Group (SCG) in April 2018. After that acquisition, the company’s net revenue has developed continuously to reach VND5.2 trillion ($209 million) in 2021 and nearly VND3 trillion ($120.6 million) just in the first 6 months this year.

This situation is not at all rare nowadays in Vietnam. CJ Group has bought Cau Tre Export Processing JSC., or Mondelez International bought Kinh Do Food Processing Co., or Pho 24 chain was sold to Viet Thai International (VTI).