Tag Archives: Giles Cooper

What can be done to help Vietnam’s SMEs?

Small- and medium-sized enterprises (SMEs) are central to Vietnam’s economic growth, providing significant contributions to job creation, export promotion and poverty reduction.

 

However, despite accounting for some 98 percent of the country’s enterprises, 40 percent of GDP and 50 percent of employment, the performance of SMEs is still constrained by many factors, both internal and external, such as shortage of qualified human resources and limited access to technology, as well as administrative hurdles.

 

Despite the obstacles, the number of SMEs continues to grow, adding around 100,000 in 2016, thanks to government reforms. For this trend to continue, and to meet the goal of one million enterprises by 2020, changes are needed to smooth the entry of firms to the market and help startups to grow. Here are three steps to ensure the sustainable development of smaller firms in Vietnam:

 

  1. Improve access to credit

 

Among the detrimental external factors, lack of access to credit is considered the primary obstacle preventing the growth of SMEs. Up until now, banks providing commercial loans have allocated their resources to larger firms rather than smaller enterprises, citing higher default risks, lack of financial transparency and lack of assets as factors in the decision.

 

Complex banking procedures and a shortage of appropriate loan packages for SMEs compound the problem.

 

According to the World Bank’s ‘Doing Business 2018’ report, Vietnam ranked 68 out of 190 economies – jumping 14 places against the previous year. The country ranked 29 out of 190 economies in terms of their access to credit. In terms of both score and ranking, Vietnam measured well above the average for OECD (Organisation for Economic Cooperation and Development) members and East Asia-Pacific countries.

 

The World Bank attributed the country’s position to its legal framework regarding the expansion of collateral assets and the completion of the credit information system from 2008 to 2017. Specifically, the Civil Law 2015, which came into effect on January 1, 2017, has expanded the scope of assets to be used as mortgages, which helps improve access to credit and puts businesses and investors in a better position.

 

Despite the positive figures, a large number of enterprises still find it cumbersome to access bank credit and are often denied.

 

Therefore, one of the most important measures to support SMEs is to improve their access to loans. Diversified capital raising channels and a credit market for SMEs, with appropriate lending packages based on demand, could help to decrease the dependency on banks. In return, small firms should work on improving transparency to reduce risks.

 

  1. Link up to global supply chains

 

As of 2017, only 21 percent of Vietnamese SMEs were participating in global supply chains, much lower than neighbours like Thailand and Malaysia, sitting at 30 percent and 46 percent, respectively. Integrating further with global supply chains in terms of procurement, operations and sales will allow firms to manage competition, reduce risks and cut costs.

 

Slow progress in dismantling state-owned enterprises, sluggish productivity and an uncompetitive private sector result in a shortage of private medium-sized enterprises. This ‘middle segment’ needs to link up with well-managed supply chains to dominate markets, gain trust from customers and expand business strategies. Vietnamese firms have struggled to join big markets and are left out of crucial supply chains.

 

This situation can change. As a member of APEC, ASEAN and the WTO, Vietnam holds a critical position politically and geographically. Vietnam’s proximity to southern China, home to many production networks, also gives it a competitive edge. Taking advantage of these trade opportunities, as well as coming digital and e-commerce trends, would help to streamline the country’s supply chains and build a more dynamic private sector.

 

  1. Cut red tape

 

A survey released last year by the Vietnam Private Sector Forum showed that 44 percent of enterprises said they had missed market opportunities because of legal barriers and restrictions.

 

In an effort to simplify and remove barriers to businesses, Vietnam’s Ministry of Industry and Trade (MoIT) has moved to cut business and investment red tape in half. Such a move is designed to make administrative procedures easier for the private sector, and especially small and medium enterprises. The country’s business environment has been gradually changing as the government moves to develop the private sector.

 

This is a step in the right direction, however, the results are neither meeting the expectations of enterprises, nor government targets. Vietnam’s administrative environment has long been criticised for being too complicated and creating unnecessary barriers for businesses. Analysts often complain that the many conditions and regulations in the country do not meet international standards, such as requirements on minimum or legal capital or human resources rules.

 

The World Bank suggested that the country needs to do better at supporting early-stage businesses, particularly in dealing with construction permits, registering property and enforcing contracts.

 

These are just some of the obstacles standing in the way of Vietnam’s smaller businesses. With the Law on Support for Small- and Medium-sized Enterprises (SME Law, 04/2017/QH14) coming into force at the start of 2018, it is hoped that the challenges detailed above will be addressed. A dynamic, competitive and innovative private sector, in which SMEs play a leading role, is a solid guarantee of Vietnam’s future prosperity and growth. The government has shown a desire to help the country’s fledgling firms, now is the time to put words into action.

 

For more information about Vietnam’s investment climate, please contact Giles at GTCooper@duanemorris.com or any of the lawyers in our office listing. Giles is co-General Director of Duane Morris Vietnam LLC and branch director of Duane Morris’ HCMC office.

3 reasons smart investors are banking on Vietnam

Vietnam’s Gross Domestic Product (GDP) expanded by 6.81 per cent last year, marking its highest growth rate in a decade. The country continues to impress, with the economy growing by 7.38 percent in the first quarter of 2018 – one of the fastest rates in Asia – and total growth is expected to be in the region of 6.7-6.8 percent for the year. It could even hit 7.1 percent, according to the Asian Development Bank.

 

Looking ahead, the Vietnamese Government is seeking to maintain the country’s good growth until at least 2020, with the Prime Minister encouraging private companies – currently accounting for 43 per cent of GDP – to grow and increasing investment into rural areas.

 

There’s much to celebrate about Vietnam’s growth over the last few years, and many investors have already taken note and got in on the action. For those still on the fence, here’s just three reasons why a bet on the country’s economy may pay off handsomely.

 

Switched on to electronics

 

Other countries in the region tend to export raw materials or components to China, where they are assembled into other products. Vietnam exports mainly finished goods.

 

One such producer, the Samsung Electronics factory in Thai Nguyen, in northern Vietnam, employs more than 60,000 people and produces more mobile phones than any other facility in the world. Samsung Electronics’ combined factories in Vietnam produce almost a third of the firm’s global output. So far, the company has invested a cumulative US$17 billion in the country.

 

The relationship has been mutually beneficial, helping to make Vietnam the second-biggest exporter of smartphones in the world, after China. Samsung alone accounted for almost a quarter of Vietnam’s total exports of US$214 billion last year.

 

The company’s presence in Vietnam will not stop there, with co-CEO, Koh Dong-jin, recently informing the Prime Minister of plans to expand production and open further plants.

 

Samsung isn’t alone in Vietnam’s exciting electronics landscape. The export turnover of electronics and household electrical appliances accounted for 28.9 percent of total export turnover. Mobile phones & components, cameras and other machinery brought in revenue of US$61.8 billion, an increase of US$14.45 billion compared to the year before.

 

An international mindset

 

Vietnam received FDI worth 8 percent of GDP last year — more than double the rate of comparable economies in the region. Foreign-owned firms now account for nearly 20 percent of the country’s output. They have grown more than twice as fast as state-owned enterprises over the past decade, despite the country’s nominally communist government.

 

In contrast to China, a large rival in the cheap manufacturing stakes, Vietnam is liberalising its economy to welcome foreign industry. In 2015 the government opened 50 industries to foreign competition and cut regulations in hundreds more. It sold a majority stake in the biggest state-owned brewer, Sabeco, to a foreign firm last year. Similar sales are expected in the coming months.

 

Vietnam’s enthusiasm for free-trade deals has made it especially alluring to foreign investors. It is a founding member of the Trans Pacific Partnership, a multilateral trade agreement that includes Australia, Canada and Japan, among others. Although the agreement fell apart without US support, it was quickly repurposed and renamed. A significant trade pact with the European Union is also on the horizon. The deal signed with South Korea a few years ago has made it South Korea’s fourth-biggest trading partner.

 

Fertile ground for start-ups

 

The government has put forward a number of regulations and programmes to support start-ups, especially innovative ones, including Decree 38/2018/ND-CP (Decree 38) on innovative start-up investment. Decree 38 identifies and recognises innovative start-up investment activities as a business, and cements the legal status of innovative start-up companies and funds.

 

The decree is expected to provide a legal basis for private investors when jointly contributing capital to establish a creative start-up fund and streamline capital flows for creative start-up activities.

 

According to the Vietnam Chamber of Commerce and Industry (VCCI), the country boasts a strong entrepreneurial drive and ranks among the 20 economies with leading entrepreneurial spirit.

 

Up to US$291 million was poured into Vietnamese start-ups last year, a year-on-year increase of 42 percent. However, this figure lags behind the region as whole, which saw investment of US$7.86 billion. The number of M&A deals remains small and no startup has yet made an IPO. Clearly, there is still a lot of room for growth in this sector.

 

The great potential hasn’t gone unnoticed and the government has recognised the tremendous importance that the start-up movement has to the economy and accelerated its development.

 

As well as a young, cheap and plentiful supply of workers, the Vietnamese economy possesses a dynamism unlike others in the region. Nurturing such domestic entrepreneurship is the key to sustainable growth. The Vietnamese government has already set out ambitions of creating a vibrant ‘start-up nation’, with a million new enterprises being born by 2020.

 

These are just a few of the reasons why smart investors should be seriously considering Vietnam as their next investment destination. In addition to the above, economic growth will be driven by manufacturing and export expansion, rising domestic consumption, strong investment fueled by foreign investors and domestic firms, and an improving agriculture sector. These is an abundance of optimism over the country’s future, and the signs are that this year Vietnam will be one of the strongest performers in the region.

 

For more information about investing in Vietnam, please contact Giles at GTCooper@duanemorris.com or any of the lawyers in our office listing. Giles is co-General Director of Duane Morris Vietnam LLC and branch director of Duane Morris’ HCMC office.

Are green bonds the answer to Vietnam’s infrastructure dilemma?

For many countries across Southeast Asia, including Vietnam, the rapid pace of growth has meant that finding stable sources of funding can be a struggle.

 

This is particularly true in the case of infrastructure. According to a report by the Asian Development Bank the region will need up to US$2.8 trillion worth of roads, bridges and railways by 2030 to keep up with economic growth.

 

Faced with an increasingly unstable political climate, Southeast Asian nations are looking at safer options to fund their infrastructure developments over the coming years. Over-reliance on China, which has already backed nearly US$1 trillion worth of projects under its ‘Belt and Road’ initiative, will likely be scaled back as economies turn to domestic solutions. Fears of China’s plan overstepping its stated bounds have caused countries around the region to rethink their embrace of the ‘belts and roads’, with instances of financial misuse and failed projects serving as cautionary tales.

 

Political tensions over territorial claims in the South China Sea and increasing international protectionism are also causing countries like Vietnam to seek self-sufficiency in future financing. State budgets across the region are coming under growing strain, so leaders are looking elsewhere to fund much-needed development over the coming years. One proposition is to promote the issuance of ‘green bonds’.

 

What you need to know about ‘green bonds’

 

A green bond is like any other bond, however the funds raised by the issuer are earmarked for ‘green’ projects, or in other words, those that are environmentally-friendly and take climate concerns into account. Particular sectors that stand to benefit most from the issuance of green bonds are renewable energy, infrastructure and construction.

 

Building roads, bridges, tunnels and tracks takes a huge toll on the climate, both locally and nationally, thus projects which seek to lessen their environmental footprint are a top priority.

 

On top of concentrating funding towards environmentally-friendly projects, green bonds also highlight the issuer’s commitment to sustainable development. Additionally, they provide issuers access to a specific set of global investors who invest only in green ventures. With the increasing focus of foreign players towards green investments, it could also help in reducing the cost of capital.

 

What does this mean for Vietnam?

 

According to German development agency GIZ, Vietnam will need roughly $30.7 billion by 2020 to move its current carbon-dependent development onto a more sustainable path, and towards its Intended Nationally Determined Contribution (INC).

 

Some 30 percent of the credit for green growth is expected to come from the state budget, consisting of central and provincial funds as well as official development assistance (ODA), whilst the remainder will be sourced from the private sector.

 

Under the Vietnam Green Growth Strategy (VGGS), approved by the government for the 2011-2020 period, the capital market will be key in achieving the country’s targets. It is here that green bonds will be vital – raising funds specifically for green projects and enterprises, creating a platform for green products’ derivatives trading, as well as tapping into private sector investment for sustainable development.

 

In terms of foreign interest, Vietnam’s issuance of green bonds is hoped to attract international investors with an orientation towards sustainable development, renewable energy and environmentally-friendly growth. Investors around the world are increasingly attuned to the challenges of climate change and the energy transition. More and more of them are clamoring for investment tools that take environmental issues into account, especially in the developing world.

 

Vietnam is not the only country in the region to see the promise of sustainable funding. With the ASEAN Green Bond Standards (AGBS) developed and launched in November 2017, common standards were laid down for the issuance of ASEAN green bonds. The AGBS label is to be used only for issuers and projects in the region and specifically excludes fossil fuel-related projects. Companies in Malaysia, Singapore and Indonesia have already issued bonds labelled as ASEAN Green Bonds.

 

Funds raised from these green bond issuances will be allocated to projects such as renewable energy, waste management, green buildings and infrastructure, which meet sustainability criteria and contribute to the common goals of integration, connectivity and overall ASEAN growth. Primarily, regional leaders are realising that growth cannot come at the expense of future generations. Initiatives like the AGBS will help in the allocation of resources towards climate friendly investments.

 

Stunted green growth

 

One of the milestones to be achieved by 2020 is to expand the green bond market to at least 1 percent of the global bond market, currently about US$90 trillion. For this to happen, sovereign issuers must be completely on board.

 

Asia’s local currency green bond market is still characterised by a lack of liquidity, limited diversification of bond structures, and the absence of a large regular stream of bankable projects.

 

Additionally, consistent demand from socially responsible investors is still limited, hampering the market’s growth potential.

 

There is, however, a lot of potential for growth in the local currency green bond market, as long as sovereign issuers establish an enabling environment and a strong framework is applied. The key constraint will be the number and size of bankable green investments.

 

If Vietnam fully embraces the ‘green bond’ movement, an injection of funds in this manner could prove a panacea – patching up the infrastructure funding gap, laying the foundations for more rapid expansion and ensuring the long-suffering climate gets a breather.

 

For more information about Vietnam’s green bonds, please contact Giles at GTCooper@duanemorris.com or any of the lawyers in our office listing. Giles is co-General Director of Duane Morris Vietnam LLC and branch director of Duane Morris’ HCMC office.

Land speculation clouds Vietnam’s renewable energy projects

Vietnam’s southern province of Ninh Thuan continues to see growth in its renewable energy resources, with Spain’s Siemens Gamesa Renewable Energy (SGRE) winning in its bid for the second phase of the existing 39MW Dam Nai wind farm.

 

According to the plan, the company will supply 12 turbines by October this year. SGRE will also handle the management and maintenance of the facility over the course of the next ten years for Dam Nai’s operator, independent power producer Blue Circle.

 

The first phase of the Dam Nai wind farm kicked off in April last year, with total investment capital of US$15 million. During the first phase SGRE installed three turbines, which are already operational. Siemens Gamesa has said it expects “significant growth” in Vietnam over the coming years as the country “begins to utilise some of the best wind resources in Southeast Asia.”

 

As of April 2018, the country had 197MW of installed wind power capacity, split between 98MW onshore and 99MW offshore.

 

On top of turbines, the province of Ninh Thuan has also been targeted by firms for solar power development, thanks to its status as one of the driest areas of the country. A number of companies have already signed up to develop projects in the province. However, despite excellent solar conditions, a growing economy and a strong manufacturing base, Vietnam’s solar ambitions have been relatively modest compared to its near-neighbors in the region.

 

Not all blue skies

 

Vietnam is among the most promising renewable energy markets in Southeast Asia, offering significant opportunities for investment in clean energy, especially wind and solar power. With a population touching 92 million and energy demand forecast to grow by 13 percent annually over the next four years, the country is eyeing an energy policy that includes a substantial mix of renewables.

 

According to the government’s revised Power Development Master Plan VII, Vietnam needs investment in the power sector amounting to US$150 billion for the period up to 2030 in order to keep pace with the nation’s projected annual growth of 10-12 percent. The renewable energy sector is considered a priority for investment with contributions set at 7 percent by 2020 and 10 percent by 2030.

 

A large number of firms have already been lured to take advantage of the market’s huge potential. A recent report by USAID (United States Agency for International Development) found that in the solar power sector, as of 2017, more than 100 new projects had been planned, including 70 in the province of Binh Thuan.

 

There are, however, issues hindering the sustainable development of the sector. These include poor administration and low transparency, leading to corruption among investors and officials. The major risks are related to programming and licensing of investors and access to land. The rosy picture of deals hides a more problematic truth.

 

Many investors registering projects don’t intend to join the market immediately, but instead are snapping up advantageous plots of land. For wind and solar power projects in particular, location is everything. Areas with strong and consistent natural wind or intense sunshine will inevitably bring better returns for firms who set up shop with their panels or turbines.

 

One expert said that nearly all land plots in advantageous positions are now occupied, though the renewable power plants remain on paper, and may never be developed. This speculation over land poses a risk of harming the market, and slowing the much-needed transformation of Vietnam’s energy sector.

 

As the top spots get booked up, real investors will have to stump up a premium for their projects, or shell out fees for intermediaries. Transparency in development programming, licensing procedures and project execution supervision is a must for the market to run effectively.

 

Coupled with relatively low feed-in tariffs (FiT) and arduous legislative hurdles to overcome, the added headache of a premium on land may cause investors to look elsewhere when considering locations for their renewable power projects.

 

A recent StoxPlus report has identified 245 renewable energy projects currently in Vietnam, including wind and solar power as well as biomass, which are being deployed at different stages. Obviously, if all planned projects begin operation the country’s targets would be met overnight. However, of the total projects, only 19 percent have reached the construction phase and 8 percent have begun operation. Most projects are still in the preparatory stages.

 

Investors are also struggling with a lack of clear information about the market. Even though information about renewable energy projects in Vietnam has been floating around, there is no clear details on the number of projects or their development status, creating confusion and uncertainty among developers and other stakeholders.

 

Joint ventures between foreign and domestic enterprises may help to address some of these bottlenecks – with local firms providing some much-needed information and international players adding the technical know-how that is lacking from the domestic market. This is, unfortunately, only a partial solution. In the long term, a stronger legislative framework will be needed to support to sustainable development of the renewable power sector in Vietnam, and help the country to meet its targets and support its booming energy needs.

 

For more information about Vietnam’s renewable energy sector, please contact Giles at GTCooper@duanemorris.com or any of the lawyers in our office listing. Giles is co-General Director of Duane Morris Vietnam LLC and branch director of Duane Morris’ HCMC office.

Hanoi has long road ahead to become a ‘smart city’

Wirelessly managing streetlights to cut the cost of energy. Sensors providing real-time alerts on water leaks and air pollution. Intelligent management of public transport and road networks to avoid congestion. These are just some of the benefits a ‘smart city’ could provide, and if authorities and investors succeed, these advancements could be coming to Hanoi in the near future.

 

Plans are already in place to turn Vietnam’s capital into a smart city by 2030, with priority areas identified as health, education, transport and tourism. Taken together, the application of technology in these areas will bring significant improvements to residents’ quality of life and boost the city’s tourism potential.

 

Hanoi has already applied smart systems to monitor car parking in some districts, and an anticipated roll-out of this technology across the whole city aims to provide information on traffic status and better manage public passenger transport.

 

Similar implementations are planned for other sectors. With input and investment from major foreign players, the city sees the deployment of modern IT infrastructure utilising the Internet of Things (IoT). Citizens will be connected to their homes and primary services, as well as traffic infrastructure and vital information about their environment. For this to happen successfully, work is needed to set up modern infrastructure in transport, healthcare and education.

 

In order for these systems to be implemented and managed effectively, foreign know-how will be needed.

 

Intelligent implementation

 

According to local authorities, the process of transforming Hanoi into a smart city will take place over three phases. The first, from 2016 to 2020, will consist of building the foundations and infrastructure needed, as well as implementing smart applications in traffic, tourism, environmental management and security.

 

The second phase, from 2020 to 2025, smart city solutions will be put into operation and a digital economy will be formed. In the third phase, from 2025 to 2030, the different parts of the project will be connected and Hanoi will become a functioning smart city.

 

The capital city is not alone. According to the Ministry of Information and Communications, the government has set a target of creating five smart cities by 2020, and is designing

criteria for such projects, making it more convenient for foreign investors to jump in.

 

The southern hub, Ho Chi Minh City, has its own plans to get ‘smart’ in the near future. Tran Vinh Tuyen, deputy chairman of the city People’s Committee and head of the smart city management board plans “a comfortable, positive, healthy and safe living environment with convenient public transportation, good healthcare, less crime and clean water and environment.”

 

In addition to these benefits, smart cities will bring sustainable economic growth, and help develop a digital, knowledge-based economy. Such moves are sure to generate interest and attract investment.

 

Not all plain sailing

 

Domestic firms like Viettel, VNPT, FPT, and CMC are keen to get involved with the development of smart cities in Vietnam. Various countries with experience in smart cities have also expressed a desire to cooperate with Hanoi in this endeavour. In particular, leaders from Singapore have shown a willingness to partner with Vietnam on hi-tech parks and software industrial zones, as well as working together on the smart city project. In addition to funding, Singapore is ready to provide training and support to implement and manage smart city technology and software.

 

With Vietnam continuing to grow rapidly, concerns over rising energy demands are high on the agenda. As a key component of a smart city, a greater focus will be needed on green and sustainable energy if the country is to successfully fuel onward growth.

 

There is clearly a lot of potential in this sector, however, energy is just one challenge standing in the way. Specifically, Hanoi faces problems in ICT infrastructure, traffic congestion, water shortages, wastewater treatment and increasing environmental pollution. A dearth of qualified human resources will also present difficulties in implementing some of the proposed solutions.

 

However, for many sites, construction has yet to begin. A lack of clear regulations is proving to be a major roadblock for the development of smart cities, with the implementation of a US$37.3 billion smart city in Hanoi’s Dong Anh district struggling to get off the ground. More than 20 large Japanese firms, including Sumitomo, Mitsubishi, Panasonic and Tokyo Metro have signed up to provide various services but are yet to begin work.

 

The 310 hectare project will be designed by Nikken Sekkei Group and is expected to be completed in 2023, if they get the green light.

 

In this case it is authorities lagging behind in the provision of clear criteria. The novelty of such projects is one issue, with city leaders unsure on how these new developments will fit into existing city-planning norms.

 

If the target of five smart cities by 2020 is to be met, the government will need to come up with some clear and detailed legislation soon, so that both investors and authorities are happy with the planned projects. Of course, updating regulations in Vietnam can prove to be a drawn-out affair and investors may be waiting some time before ground is broken on the cities of the future.

 

For more information about investment in Vietnam, please contact Giles at GTCooper@duanemorris.com or any of the lawyers in our office listing. Giles is co-General Director of Duane Morris Vietnam LLC and branch director of Duane Morris’ HCMC office.

Amazon wades in to Vietnam’s e-commerce jungle

Vietnamese media was abuzz with news that US giant Amazon is set to join the country’s fast-growing retail market this month, with representatives stating that the company will open its platforms to domestic small- and medium-sized enterprises.  Despite the buzz, softly, softly is order of the day with the e-commerce giant aware that there’s plenty of regulation in the pipeline that will affect development of the e-commerce sector in Vietnam.

 

Amazon signed a deal with the Vietnam E-Commerce Association (VECOM) at the Vietnam Online Business Forum in Hanoi on March 14. The deal was discussed at a meeting late last year between the association and Amazon, according to Brand Finance Global Ranking.

 

With a young, hyper-connected population of nearly 100 million, Vietnam is a prime target for e-commerce development in Southeast Asia. Unfortunately for shopaholics, the representative from Amazon denied the company had intentions to trade in Vietnam at this time.

 

Instead, Amazon has agreed to provide e-commerce services for VECOM, which is a group of 140 local online businesses, marking the first time the association has collaborated with an e-commerce player. The Amazon deal will allow Vietnamese firms to sell and export goods through its ecosystem. In return, The Vietnamese market holds strong growth potential for Amazon in the future.

 

Prime target

 

On the bright side, it may not be long before Amazon and other online retailers change their tune. Partnering with third-party merchants, like in the agreement with Vietnam, is likely a precursor to Amazon entering the market with its full slate of offerings. Similar steps were taken by the firm in Australia and Brazil.

 

Such deals can be considered a way for Amazon to get its foot in the door and build familiarity with consumers before introducing its full line-up of services. This could mean that Vietnam is the next target in the company’s Southeast Asian strategy, after rolling out in Singapore last year. As subscribers dwindle, expanding from saturated markets like the US and EU would be a good bet, and Southeast Asia as a whole provides a promising future for e-commerce.

 

In particular, Vietnam’s e-commerce market grew by 25 percent last year, and the growth trend is expected to continue. Revenue from online retail is forecast to hit US$10 billion by 2020, accounting for 5 percent of the country’s total retail market.

 

As it stands, Lazada dominates a third of the country’s online shopping market. Head of Chinese giant Alibaba, Jack Ma, stumped up US$1 billion to buy stakes in Lazada and enter the Southeast Asian market, including Vietnam. This move allowed deeper penetration into Vietnam’s e-commerce and brought products directly to Vietnamese consumers through the B2C (business to consumer) model.

 

It is this model that Amazon will seek to emulate. The Chinese firm is positioned primarily as an intermediary – connecting sellers to buyers, and operating a delivery network.

 

Amazon clearly sees the potential. The country has the ingredients for a thriving e-commerce economy thanks to a young population, rising incomes and growing internet and mobile adoption. This last point, the ubiquity of mobile phones, will prove crucial if online platforms are to succeed. The importance of mobile commerce in generating traffic is far greater in Southeast Asia than in other Western economies, so a mobile strategy will make or break a venture.

 

From street to screen

 

The changing tastes of the country’s young consumers is pushing traditional brick-and-mortar stores to rethink their strategies. Big retailers like Vincom, Lotte, AEON and Saigon Co.op have launched online shops with alluring promotions to attract buyers.

 

However, the market is still at an early stage of development, meaning challenges such as high cash-on-delivery rates, lack of customer trust and poor logistics infrastructure. Meanwhile, e-commerce companies are spending aggressively to gain market share, resulting in fierce competition.

 

Difficulties in turning a profit have led to a number of failures. VNG Corp reported a loss of over US$5.3 million from its investment in e-commerce firm Tiki.vn in 2017. Other local e-commerce companies like Lingo.vn, Deca.vn and Beyeu.com have been forced to shut down due to prolonged losses.

 

The blame for these failures has been placed on high logistics costs. According to experts, companies need to allocate enormous expenses for their e-commerce business, from sales and marketing to warehousing and logistics, easily eating into profits. Many platforms also overspend on promotions and discounts in early months to lure customers and increase their market share in a crowded environment.

 

However, the challenges don’t seem to have dampened enthusiasm and foreign players continue to pump money into the online retail sector. Undeterred, Lazada is investing in the growth of its first mile, last mile and fulfillment capabilities to keep up with the growth of e-commerce in Vietnam. In addition to developing automated sorting centres to speed up delivery, the company also cut commissions by 50 per cent to lure in more online retailers.

 

Online retail makes up just 1 percent of the total retail market in Vietnam, compared to 14 percent in the US and China. As such, there is plenty of room still to grow. The ongoing expansion of the marketplace, and continued investment pouring in, will help Vietnam to develop an e-commerce ecosystem, allowing for opportunities in logistics, warehousing, and online payments.

 

For more information about e-commerce in Vietnam, please contact Giles at GTCooper@duanemorris.com or any of the lawyers in our office listing. Giles is co-General Director of Duane Morris Vietnam LLC and branch director of Duane Morris’ HCMC office.

Outcomes of APEC – the TPP is dead, long live the CPTPP

As the dust settles and Vietnam returns to some semblance of normality following this year’s APEC summit, regional business leaders and investors are left to consider the consequences of the forum.

 

This year marks the second time that Vietnam has hosted the APEC summit, and the event was largely considered a success for the country. Vietnam was placed in a difficult position, between the competing interests of the United States and China, requiring a deftness in diplomacy.

 

Most media outlets were more concerned with President Trump and what would be his first appearance at a multilateral forum in the Asia-Pacific region. Widely-expected faux pas did not materialise, but neither did much news on the US’ position towards the region. Trump’s keynote speech was short on surprises, following familiar themes of protectionism, isolationism and criticism of predatory economic policies. Essentially, the speech underlined what we already know – that under the Trump administration the US would be taking a step back from the Asia-Pacific region and trade will need to be conducted on a bilateral basis.

 

In a marked contrast to the American tirade, China’s President Xi Jinping presented himself as a champion of economic openness and globalisation. Xi espoused a vision in support of a multilateral trade regime, and received hearty applause in return from the amassed delegates.

 

Putting his words into practice, Trump’s subsequent stop in Hanoi saw the signing of US$12 billion in commercial deals, including in the natural gas, transport and aviation sectors. In particular, national carrier Vietnam Airlines signed a deal worth US$1.5 billion for engines and support services from US firm Pratt & Whitney.

 

Despite the very different stalls set up by the attendant superpowers, Vietnam managed to balance itself somewhere in between. In a joint statement, Vietnamese President Tran Dai Quang and Trump reaffirmed the importance of the countries’ Comprehensive Partnership, and agreed to promote bilateral trade and investment.

 

Vietnam also stood in support of Xi’s signature policy, the Belt and Road Initiative. Specifically, both sides agreed to enhance economic and trade cooperation, with a particular focus on infrastructure.

 

Regional and international media praised Vietnam’s hosting of the summit and the final Economic Leaders’ Week, highlighting the country’s commitment to economic integration, sustainable growth and support for micro, small and medium enterprises (MSMEs). In the eyes of many, Vietnam has cemented its position at the centre of APEC’s economic structure. The country took advantage of the opportunity to enhance its prestige in the international arena and show others the strides it has made in development since it last hosted APEC.

 

Resurrecting the TPP

 

Trump’s election last year seemed to herald the demise of the Trans-Pacific Partnership (TPP), at least in its current form. Without US support, the trade agreement was surely destined to be forgotten or watered down to the point where it becomes worthless.

 

The US withdrawal failed to dampen enthusiasm for the trade pact, however, with Japan and Australia strongly advocating the continuation of talks, and protecting the gains made in the original TPP negotiations.

 

Following discussions in Danang, the 11 countries still backing the TPP agreed to its resurrection, and renaming, as the Comprehensive Progressive Agreement for the TPP (CPTPP). The move represents a clear rebuke to Trump’s ‘America First’ focus on bilateral deal-making. Despite a last-minute wobble from Canadian Prime Minister Justin Trudeau, the members agreed on keeping core elements of the original deal that would advance open markets, combat protectionism, and strengthen regional economic integration.

 

Vietnamese leaders were certainly sorry to see the US turn its back on the TPP; knowing that access to American markets would have brought significant economic benefits. Although a deal is better than no deal, the CPTPP is expected to have a more modest impact on the nation’s economic future.

 

The National Center for Information and Forecasting predicts that under the CPTPP, Vietnam’s GDP could increase by 1.32 percent, compared to a potential 6.7 percent with the TPP. Similarly, the export growth rate is estimated at 4 percent, instead of the 15 percent previously. If the CPTPP is ratified, Vietnam would also be able to expand its export markets, with opportunities to reach Canada, Mexico and Peru.

 

Nevertheless, there is still room for the CPTPP to be derailed – the pact requires domestic ratification by each member economy. While Japan has already done so, other members, particularly Canada, could require longer to officially validate the pact.

 

There are, however, reasons to be optimistic. Many were certain the US withdrawal would be the death knell for trade pacts like the TPP, only to see America’s Asia-Pacific allies regroup and move forward on their own. There is clear commitment to regional economic integration, with or without America’s blessing.

 

A multilateral trade deal would provide much-needed clarity for businesses, especially smaller ones, in entering new markets. Universal standards would make life a lot easier for the region’s many MSMEs looking to expand their operations across borders. Those working in the digital sector would benefit from a framework on data security, privacy, intellectual property and e-commerce.

 

Even after Trump withdrew the US from the TPP, the original template survived almost wholly intact. The bar remains high, and the remaining members now have the opportunity to hash out a progressive framework for continued economic growth.

 

Although Donald Trump received the most attention in Danang, the main achievement of APEC may be the reanimation of a deal he sought to kill. This time the harsh rhetoric may have had an unintended consequence – pushing the region even further towards economic integration and free trade.

 

For more information about doing business in Vietnam, please contact Giles at GTCooper@duanemorris.com or any of the lawyers in our office listing. Giles is co-General Director of Duane Morris Vietnam LLC and branch director of Duane Morris’ HCMC office.

Vietnam steps up sale of SOEs

Hopes abound that a new Decree will drag the near-moribund process of privatising large State-owned enterprises (SOEs) into a new and more efficient phase.

 

Over the past 30 years, the restructuring of SOEs has been a key component of Vietnam’s economic reforms under Doi Moi (renovation). The process has been undertaken by successive governments and is a central pillar to creating the business-friendly climate desired by the current leadership.

 

Nevertheless, it remains largely a work in progress. According to a report by the Central Institute for Economic Management (CIEM), since 1992, Vietnam has ‘equitised’ over 4,500 enterprises (‘privatized’ being considered an unsuitable term for Vietnam and not always accurate anyway given the propensity for the State to maintain controlling stakes).  The fact is that many of these took place in a short period of time and were smaller production units of large conglomerate-type corporations.  The CIEM report concluded that progress is below expectations. SOEs have struggled to attract strategic investors and sale of shares has not reduced the level of State budget in SOEs’ charter capital, as was hoped.

 

There are multiple reasons for the disappointing progress including restrictions on foreign ownership, and the State’s desire to maintain ultimate management control.  Opaque valuations and concerns over transparency also deter strategic and other investors from getting involved in the process and ultimately slow it down.

 

To continue growing, Vietnam is under increasing pressure to reform the equitisation process for its SOEs, with new efforts being made to accelerate the government’s divestment. Under plans announced earlier this year, the government will equitise a further 137 SOEs in the 2016-2020 period.  Many of those slated are large and some can be considered the cream of the crop.

 

This renewed motivation is driven in large part by the government’s need to mobilise financial resources to deal with a rising fiscal deficit and public debt. The country’s obligations under a number of free trade agreements also provide impetus to break up the big entities.

 

Determining demand

 

Recently, a significant change was announced in a bid to speed up equitisation of SOEs: the law will change to allow book building as a means of determining interest and price for IPOs of SOEs.

 

Up until now, the equitisation of Vietnam’s SOEs has been handled through public auction, direct negotiation and underwriting. Most have adopted the public auction method, but this has proved unattractive to investors, with even big assets like Vinamilk failing to generate the expected interest.

 

Under new Decree 126/2017/ND-CP, the Prime Minister has instructed the Ministry of Finance to prepare detailed guidelines on implementation of book building to facilitate efficient IPOs as part of the equitisation process.

 

This method of price discovery, used widely internationally and now approved for the first time in Vietnam in connection with equitisation purposes, is expected to make the process more efficient and attractive to strategic investors.  Decree 126 also eases restrictions on the profitability of strategic partners (from three to two years), cuts the lock-in period (from five to three years) and provides more detailed guidance on valuations of SOEs generally (notably removing reference to DCF valuation and providing more clarity around valuation of land use rights and goodwill).

 

It is hoped that this move, to take effect from 1 January 2018, will enhance transparency in SOE equitisation and hasten the hitherto slow listing on the country’s stock exchanges. The Decree will have a particular impact on the next wave of SOE IPOs, slated for 2018-19.

 

Energy giants next?

 

An area in dire need of extensive equitisation is the energy sector. In order to ease electricity shortages, attract more investment and boost economic growth the country will need to tackle inefficient State-owned power actors.

 

The issue of power shortages could come to a head in the next four years, with forecasts predicting that annual growth in electricity consumption will start to match, and possibly outpace, the installed capacity growth. If consumption continues to expand at a similar rate to the last decade (an average of 12 percent a year) the country could soon be facing a power crisis.

 

This gloomy scenario is looking increasingly likely, considering that foreign direct investment (FDI) into the manufacturing sector, which accounts for 50 percent of total electricity consumption, has doubled over the past four years to reach US$63.1 billion. Luckily for businesses, the government is keen on keeping this development trend going, and having the electricity to power it.

 

Recent reports in the media state that the government has lined up a series of sizable IPOs of major power corporations, including PV Power, EVN Generation Corporation Number 3 (Genco 3) and Binh Son Refining and Petrochemical Company Limited (BSR). If the above projections on power demand growth are anything to go by, Vietnam’s power sector holds significant potential, and may prove an irresistible offer to foreign firms. This offer, however, is contingent on the government breaking up the energy giants and levelling the playing field for investors. Official approval of the book building method for pricing IPOs is a start.

 

PV Power, the country’s second-largest electricity producer, plans to auction a 20 percent stake through its IPO scheduled for the end of this year, and 28.8 percent of shares will be sold to strategic investors. Meanwhile, the equitisation of Genco 3 is awaiting the government’s go-ahead.

 

The changes above demonstrate a willingness to step up the equitisation of SOEs, with looming budget considerations providing a timely incentive. Beginning next year, the slow process may finally gather some much needed pace and see involvement of foreign players previously put off by the state of play.

 

For more information about Vietnam’s equitisation and IPO processes, please contact Giles at GTCooper@duanemorris.com or any of the lawyers in our office listing. Giles is co-General Director of Duane Morris Vietnam LLC and branch director of Duane Morris’ HCMC office.

Spotlight on APEC and Vietnam

While Vietnam’s central city of Danang is abuzz with preparations for the upcoming APEC Economic Leaders’ Week, and the much-anticipated visit by US President Donald Trump, businesses and investors are waiting for clearer signals on the US approach to the country and the region.

 

Unlike the visit of former president Barack Obama in 2016 and his administration’s ‘Pivot to Asia’ policy, Donald Trump has been less forthcoming about his stance on Southeast Asia. The moves that have been made – scrapping the Trans-Pacific Partnership (TPP) for example, heavily suggest the US is pivoting away again, and have seriously dented Vietnam’s free trade aspirations.

 

Some remain upbeat, saying that President Trump’s attendance at the APEC Economic Leaders’ Meeting in Danang this November is a positive sign, underscoring the US’s commitment to the partnership between the two nations and the region as a whole.

 

Trump’s speech at the summit will likely be the first articulation of his administration’s strategy towards the Asia-Pacific region. The White House has indicated a United States’ “vision for a free and open Indo-Pacific region.” The details of this vision will no doubt have a big impact on the way international businesses view the region in the years to come.

 

Planned meetings between Trump and Vietnamese leaders in Hanoi are hoped to continue the thawing of relations that was accelerated under the Obama administration. During Obama’s visit in 2016, the arms sanctions that had been in place for over five decades were lifted, effectively transforming Vietnam into one of the United States’ leading comprehensive strategic partners in the region. Companies from the two countries inked new commercial deals involving planes, engines and wind energy, worth more than US$16 billion. Now, Vietnam is a major trading partner and free-trade advocate.

 

Politically, it is hoped that some more flesh will be put on the bones of the US foreign policy towards Southeast Asia, particularly on subjects like the South China Sea.

 

Focus on free trade

 

Setting aside predictions on US behaviour, the summit in Danang will gather economic leaders of 21 APEC members to discuss issues of shared concern, including the future of trade in the region – an issue of heightened importance considering the demise of the TPP. APEC is a key trading bloc, comprising 39% of the world’s population, 59% of its GDP and 48% of its trade. It is also a proponent of free trade, and since its inception in 1989 average tariff rates among members have fallen by nearly two-thirds – from 13.3 per cent in 1989 to 5.1 per cent in 2015, while intra-regional trade has risen more than seven-fold. Vietnam’s average most-favoured-nations (MFN) tariffs declined from 18.5 per cent in 2007 to 9.5 per cent in 2015.

 

All APEC member economies have set trade and investment liberalisation as a priority, through reduced trade barriers and the promotion of the free flow of goods, services and capital among APEC economies.

 

The region as a whole has enjoyed strong economic growth, and Vietnam is considered an attractive investment location, with opportunities bolstered by an emerging middle class, a young population, a skilled labour force, competitive labour costs, strong GDP growth and a stable political climate.

 

Indeed, the trade liberalisation process encouraged by APEC is having a positive effect on FDI inflows into Vietnam. Japan in particular is showing a healthy interest, currently positioned as Vietnam’s second-biggest foreign investor, with 3,523 valid investment projects, registered at US$46.15 billion. Even without the TPP, Vietnam’s involvement in a number of other free trade agreements helps improve the country’s attractiveness to foreign investment.

 

If Vietnam continues adopting APEC-promoted institutional reforms, and thus reduces the fees and risks associated with doing business in the country, this attractiveness can only improve. Currently, more needs to be done to create a business-friendly investment environment and reassure businesses that trade and investment disputes can be resolved with little fuss. Reassuring investors is a key priority for Vietnam to maintain its growth trajectory. The successful involvement of the country in forums like APEC helps to present an image of economic stability and strong leadership underscores its commitment to issues raised at the summit.

 

All eyes on Danang

 

Through hosting the 2017 summit, Vietnam has the opportunity to showcase itself as a business tourism and conference destination. Discussions in Danang will seek to establish new drivers for economic growth and cement the role of APEC in tackling common challenges in the region. Vietnam’s position of leadership will enhance its stature on the world stage and initiatives raised could attract global interest.

 

Large-scale FDI projects from APEC members have already made significant contributions to Vietnam’s socio-economic development. Giants like Samsung, Intel and Honda have established a presence in the country and could consider increasing their investments. Smaller players may also see similar potential.

 

For local businesses, the APEC meeting presents a golden opportunity to promote trade and investment with foreign partners. Representatives from thousands of international enterprises are expected to descend on the beachside resort, allowing for prime networking and the establishment of partnerships. Vietnam’s investment climate has improved markedly since it last hosted the summit in 2006, so observers can expect even more deals to come out of Danang.

 

For more information about Vietnam and APEC, please contact Giles at GTCooper@duanemorris.com or any of the lawyers in our office listing. Giles is co-General Director of Duane Morris Vietnam LLC and branch director of Duane Morris’ HCMC office.

Public debt puts the squeeze on government guarantees, stifling project finance projects in Vietnam

Vietnam’s economic success story is evident in the rapid development of its big cities. However, while the country’s growth has outpaced its neighbours, so has its debt; a factor that threatens to de-rail growth.  Not least of all because of the impact on the government’s ability to give guarantees to underpin privately-financed infrastructure.

 

Over recent decades, the government has spent significantly. Priority has been given to roads, export zones and other critical infrastructure. This is evident across the country, where highways, tunnels, factories, airports and metro systems are being expanded, or built from scratch, at an incredible pace.

 

The biggest macroeconomic challenge facing Vietnam today is sustaining that growth. The government needs to be more rigorous about how it spends money, leveraging it better to attract and benefit from private funds rather than prop up State-owned entities.  The looming spectre of public debt will need to be tackled before the country finds itself in a precarious position.

 

Vietnam’s total public debt as of mid-July 2017 reportedly stood at US$94.6 billion, or about US$1,038 per capita. In fuelling the country’s celebrated growth, public debt has increased consistently, from 36% of GDP in 2001 to about 62.4% in 2016. According to an IMF forecast, it will hit 63.3% and 64.3% in 2017 and 2018, respectively, while the self-imposed public debt ceiling is set by the government at 65% of GDP for 2020.

 

Vietnam’s public debt compares unfavourably with the rest of the region, with Thailand coming in at 41 percent of GDP and Malaysia at 56 percent, according to the World Bank.

 

The annual growth of public debt during 2011-15 was 18.4 per cent, triple the annual GDP growth rate, which averaged about 5.9 per cent over the period.

 

A squeeze on guarantees

 

In an effort to tackle the ballooning public debt, the Ministry of Finance (MoF) announced changes to regulations on Government guarantees earlier this year. The adjustment is one of the regulations stated in the Government’s Decree 04/2017/ND-CP (Decree 04), superseding Decree 15/2011/ND-CP (Decree 15), issued on February 16, 2011.

 

Taking effect from March 1, the maximum level of Government guarantees for a programme or project was reduced from the previous level of 80 percent. Decree 04 replaces this with a three-tiered cap on the amount of guaranteed debt as a percentage of the investment capital depending on the size or importance of the project, each lower than the cap established in Decree 15.  In all cases this is far lower than the golden days of Vietnam’s early privately financed infrastructure projects like the Phu My 3 and Phu My 2.2 power projects which both enjoyed near total guarantees.

 

The current highest level of guarantee, set at 70 percent, applies to projects that must be implemented on an urgent basis, and have been approved by the National Assembly or the Prime Minister. Secondly, for projects whose total investment is at least VND2.3 trillion (US$102 million) and have been approved by the Prime Minister, the maximum proportion guaranteed by the Government is 60 percent. A cap of 50 percent will be applied to other projects.

 

In continuing to restructure of the country’s public debt with more stringent monitoring of projects, the decree aims at tightening the provision of Government guarantees and enhancing the management of public debt.

 

However, at a time when Vietnam needs to develop much infrastructure, notably in the energy sector, and requires substantial foreign investment to do so, Decree 04 makes it more difficult for private investors to obtain MoF Guarantees for projects.

 

Ticking debt time bomb

 

Taking the energy sector as an example, questions remain over EVN’s economic health. Tariffs on electricity have long been maintained at below cost levels. The policy of low subsidised tariffs to maintain the competitiveness of domestic industry and keep consumers happy is putting pressure on the government and EVN’s balance sheet.

 

The average retail electricity tariff stood at just above US$0.08/KWh as of 2016, the lowest in Southeast Asia, and only just above EVN’s average generation cost of US$0.075/KWh (excluding transmission and distribution costs). This has depressed sector cash flow and contributed to EVN’s rising debt.

 

This has raised concerns among private sector investors over EVN’s ability to pay for electricity generated as the single buyer, while the current low retail tariffs mean that investors are not confident of negotiating adequate prices for generation projects.

 

With the situation likely to continue, EVN’s financial position will surely deteriorate, leaving it with unsustainable debt and unable to finance capital expenditure. This would force private sector investors to seek increased government guarantees. Unfortunately, as mentioned above, the government is looking to rein in such largesse. As Vietnam’s economy grows, the previously abundant soft loans and ODA are beginning to dry up, meaning that the sources of support for private finance are becoming harder to find.

 

In order to reduce risk, the developers of major infrastructure projects may need to seek out private insurance groups or institutions like the World Bank’s Multilateral Investment Guarantee Agency (MIGA). However, these options obviously don’t come without their own costs. Investors, and ultimately end consumers, will have to take the hit.

 

Much of Vietnam’s current fiscal position can be blamed on poor management. The state-owned giants that have lost their repayment ability on Government-guaranteed loans are passing on the burden to the Government.

 

The sluggish privatisation of State-owned enterprises means that inefficiency will continue. The sooner this process is completed, the better for the economy as a whole. Measures like reducing government guarantees may be prudent, but if Vietnam wants to maintain its economic momentum serious action is needed to first untangle the mess of intra-State bad debt.

 

For more information about project finance matters please contact Giles at GTCooper@duanemorris.com or any of the lawyers in our office listing. Giles is co-General Director of Duane Morris Vietnam LLC and branch director of Duane Morris’ HCMC office.