S’pore firms should ride on Vietnam’s rising growth

With the increased emphasis on internationalisation in Budget 2017 and uncertainty in the economic climate, it has become even more critical for Singapore companies to go global.

Due to its proximity and familiarity, South-east Asia remains the first stop for many local small and medium enterprises (SMEs) when they go overseas. A combination of a relatively young population, a rising middle class, the availability of natural resources and rapid urbanisation has drawn strong foreign direct investment flows into the region.

Vietnam, for one, offers exciting growth potential. With a population of more than 90 million and a projected gross domestic product (GDP) growth rate of more than 6 per cent for this year and the next, Vietnam is an attractive market for Singapore companies to scale their business.

Singapore investors should note that doing business in Vietnam is not a walk in the park.

First, while Vietnamese businesses and consumers generally associate the Singapore brand with quality and reliability, Singapore companies often cannot compete on pricing because of the relatively lower costs of manpower, land and other resources in Vietnam.

As such, Singapore companies need to be very clear on what their value proposition is, and how their offering makes an intrinsic difference to the customer.

Second, Vietnam’s privately owned enterprises (POEs) — Sovico, Hin Lam and T&T Group, just to name a few — are playing an increasingly significant role in driving the domestic economy.

These POEs are large family conglomerates with diverse businesses and strong local networks. This is a change from earlier years, when the economy was dominated by state-owned enterprises.

The good news is that POEs are commercially driven and receptive to new business ideas.

They also view partnerships with foreign companies, including those from Singapore, positively. POEs could therefore be good local partners for Singapore companies, which would, of course, need to do their due diligence and assess the fit with their business model and philosophy.

Third, it is also interesting to note that Vietnam has two broad, distinctive cultures — one in the north and one in the south.

People in the southern parts tend to be more direct in the way they speak and engage for business. In the north of the country, the people place great emphasis on relationships and spend more time building networks and relationships before formally engaging in business discussions.

Singapore companies should bear these cultural nuances in mind as they engage the market, and take time to understand the socio-economic aspects of doing business in a country as big and divided as Vietnam.

In general, the setback from the United States’ withdrawal from the Trans-Pacific Partnership has not dimmed Vietnam’s prospects.

Foreign investors such as Samsung and Showa Denko continue to invest in manufacturing, drawn by Vietnam’s stable environment, competitive work force, and network of Free Trade Agreements that gives Vietnamese products good access to markets such as the European Union and South Korea.

Barring a surge in trade protectionism, we can be optimistic that Vietnam’s export-oriented economy will continue to steam ahead.

Besides manufacturing, the Vietnam government has encouraged investments in the areas of high technology, urban development and environment sustainability.

The country’s fast urbanisation and industrialisation will drive the demand for infrastructure, such as power and water. Power production is expected to grow at an annual rate of 14 per cent from 2015 to 2030, more than twice as fast as the economic growth rate. This will be another key driver for foreign investment in Vietnam in the next 10 years.

Vietnam also plans to increase the clean energy portion, by way of wind, solar and liquefied natural gas, in its energy mix, and is looking for investors who can bring in new technologies and knowledge into the country.

Singapore companies that have ventured into Vietnam have spoken of how they spent considerable time trying to understand local regulations and adapting their business to comply with them.

To be sure, the Vietnam government has made significant improvements to its investment laws since 2015. Some of these include opening up more sectors to foreign investors and lowering the regulatory hurdle for a foreign investor in mergers and acquisitions. But more can be done.

While most sectors are already open to majority or full foreign ownership, complex and numerous requirements for sub-licences and technical barriers still exist.

These rules, which are designed to protect local businesses, could present challenges for foreign companies. For example, a foreign retailer that seeks to expand beyond one outlet in Vietnam will first have to pass an economic needs test, in which the authorities determine how the expansion will affect local business, before approval is given.

Another challenge is in navigating the business landscape and finding the right local partners.

A good Vietnamese partner can help a foreign investor navigate the local regulations and overcome the language barrier. Local partners also bring with them strategic access to networks and relationships. Yet finding a suitable partner and learning the lay of the land take time and effort.

Given the economic opportunities in Vietnam, it is important for Singapore to maintain strong bilateral relations with it.

To that end, Singapore Prime Minister Lee Hsien Loong’s visit in March generated not only goodwill, but also reaffirmed smooth relations at both the government and business levels.

A number of business agreements were also signed, including deals on banking, infrastructure and power.

Singapore is the third-largest foreign investor in Vietnam, with registered cumulative investments of US$37.9 billion (S$53 billion) in 1,786 projects.

In 2016, bilateral trade was S$19.8 billion, with Vietnam ranked as Singapore’s 12th-largest trading partner. With Singapore being Vietnam’s sixth-largest trading partner in 2015, there is certainly scope for growth. Many Vietnamese leaders have a positive working relationship with Singapore, not least because large Singapore investments such as the seven Vietnam-Singapore Industrial Parks have helped to bring economic growth and jobs to the country.

We enjoy a good brand name in Vietnam. Singapore companies should ride on this and further enhance the Singapore brand by demonstrating that our investments bring benefits to the Vietnamese people.

This way, Singapore companies would be able to continue reaping the fruits of Vietnam’s economic growth, which still has a long runway.

ABOUT THE AUTHOR:

Ivan Tan is Group Director for Southeast Asia and Oceania at International Enterprise Singapore.