Make or break: private sector crunch time

Private sector growth stalls in the face of overbearing institutional setup

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Are they big enough?

“Big” companies in the Vietnamese private sector are still relatively small compared to big companies around the world, despite their significant growth in recent years. The total revenue of the ten largest Vietnamese companies in 2015 was $7.23 billion, only 3.4 per cent of the $211.32 billion total revenue of the top ten of Fortune 500, the list of the 500 biggest corporations in the US.

Similarly, the bottom ten companies in Vietnam’s Top 500 earned a total revenue of $80 million, only 1.5 per cent of the $5.19 billion revenue generated by the bottom 10 of the Fortune 500. Apparently, Vietnam’s largest companies are tiny compared to US giants.

In fact, they are classified as small and mid-sized enterprises as per US standards. Among these domestic giants, Vinamilk earned the most revenue in 2016 with $2.08 billion, which only amounted to 28.9 per cent of Hanwha Chemical’s revenue, the South Korean company which ranked 2000 globally in the same year.

Despite the modest revenue by global standards, Vietnam’s largest firms hold a vast share of national assets.

The total assets of Vietnam’s Top 50 were greater than the national GDP both in 2014 and 2015. The total assets of the Top 500 amounted to double the country’s GDP. These large companies apparently make up the majority of the Vietnamese economy.

A closer look reveals that the Top 50’s total assets grew by nearly 10 per cent in 2015, higher than the year’s 6.6 per cent GDP growth.

Fated to be meagre?

In terms of the number of companies, the private sector is taking up the majority of Vietnam’s Top 500. Their number has been rising steadily over the past five years.

In 2007, only 103 private-sector companies were included in the VNR 500, the list of the 500 largest Vietnamese enterprises by revenue. In 2012, this number more than doubled to 225.

However, in terms of their contribution to the economy, little has changed since 2007. State-owned enterprises (SOEs) have always contributed a larger share among Vietnam’s top companies. In 2015, the public sector accounted for 58 per cent of the total revenue of the top companies, higher than in 2007.

The total revenue among the largest private sector enterprises in 2015 only accounted for 20 per cent of the VNR 500, a slight decrease since 2007.

Insurmountable constraints?

Although dwarfed by SOEs, the Vietnamese private sector is solidifying its position in the economy.

Last year’s data on Vietnam’s 2017 Top 500 list showed that the top companies in the private sector employed almost 40 per cent of labour, generated 22 per cent of the revenue, and held 35 per cent of assets, as well as earned 22 per cent of the total after-tax profit. These companies have been dynamic and effective in striving for high growth in recent years. Notably, many of these companies are in the food and beverage and the manufacturing sectors, both fields that require long-term investments.

However, surveys and interviews with business leaders in the Vietnamese private sector suggested that many big companies face obstacles to further growth.

The first general lament was about market constraints, especially as the pace of the public sector reform is slow and the divestment from SOEs has all but ground to a halt. The very big presence of SOEs in many industries continues to restrict the private sector.

Second is access to resources, given the lack of fair competition and red tapes in the market for economic inputs, such as land and capital.

Third, the legal framework for property rights is weak, particularly the mechanisms to resolve disputes between companies and between companies and government agencies. Therefore, many company owners hesitate to make long-term investments.

Fourth, management abilities remain a weakness. Espionage and embezzlement are rampant in many big private sector players. Internal controls are circumvented. External oversight exists, but with little to no effect. Both these problems damage the long-term prospects of large companies, hurting shareholders as well as the economy.

With these impediments, big players in the private sector find it difficult to pursue all three long-term strategy options: (1) investing in high technology to achieve efficiency, (2) ramping up export and investment in foreign countries, and (3) diversifying and expanding into new industries.

As a result, many companies resorted to short-sighted strategies, leading to wasting capital, unnecessary investments and expansions, and damage to the environment. Their global competitiveness, therefore, is barely improving.

It all hangs on policy

Clearly, despite their recent growth and dynamism, big companies in the private sector are facing insurmountable challenges. Radical changes to the Vietnamese business environment are crucial to help these companies to grow and compete globally. The healthy growth of Vietnamese private-sector companies is closely tied to the progress and success of institutional reform.

First, the removal of monopolies, unfair treatment doled out by authorities, and administrative barriers would cut the costs of doing business.

Second, SOEs should be reformed and the state’s stakes should be sold in companies where controlling ownership is not necessary.

Third, it should be ensured that the market determines who gets resources, especially land. Public investments should be better managed.

Fourth is building a project on encouraging the development of large private companies from now to 2025.

In summary, big companies in the private sector play an important role in the modernisation of the Vietnamese economy. However, in reality, they face several constraints and their sustainable future growth will depend on the progress and success of the reforms of the institutional system as well as the structure and direction of the economy.