Following free trade deals, businesses will earn rewards

Pham Hong Hai, CEO at HSBC Vietnam

A new generation of trade pacts have paved a strong ground for foreign-invested enterprises (FIEs) to enter a dynamic Vietnamese market while providing home-grown enterprises with unprecedented opportunities to apply more strident global standards.

Major trade pacts such as the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) and the EU-Vietnam FTA (EVFTA) will be seen by Vietnamese with international aspirations and FIEs seeking opportunities in Vietnam with equal enthusiasm.

Let’s take the CPTPP. This is an ambitious deal expected to bring significant economic gains to all 11 member states. For Vietnam alone, the agreement is expected to boost both exports and imports. In particular, exporters operating in leather footwear, textiles and garments and other labour intensive sectors, are best placed to take advantage of improved trade regulations. Foreign investors will be eyeing opportunities in Vietnam on the back of the deal. In addition to raising labour and environmental standards, the agreement provides efficient and transparent custom procedures to make it easier to move goods in and out of member markets.

With rising flows of investment from both domestic and foreign companies pouring into Vietnam’s economy as a result of major trade agreements, it is predicted that manufacturing facilities will scale-up to take advantage of economies of scale. This has the potential to benefit Vietnam’s manufacturing sector and lead to an increase in production scale and industrial deepening, which ultimately drives productivity growth.

Increasing foreign direct investment (FDI) will also fuel the development of upstream suppliers and manufacturers in supporting industries following implementation of the trade pacts. In recent years, large electronics manufacturers have expanded their production base in Vietnam, creating potential market opportunities for local parts and component suppliers.

All the trade deals have sent a very positive signal in favour of market openness and trade liberalisation, and provided strong messages to both local and foreign-invested companies about economic rewards that a member country of such deals should reap. Companies with a broader view of the trend of their business and having an appropriate strategy taking all the details of the pacts into consideration will be the ones who make the most of these rewards.

How local businesses can capitalise

To make the most of these opportunities, companies should start developing strategies best suited to these new trade agreements. First and foremost, they should have a strong understanding about trade pacts that could have an impact on their business. They can review their current trade relationships to identify the gaps and understand where the greatest potential is to create new ties and tap into some of the fastest-growing consumer markets.

Looking at how their current supply chains map against the links between the members of a specific trade would also help. Those who work now to understand how the deal could impact their business model will reap the greatest benefits in the future. An in-depth understanding of the deals and their impact on tariffs for each group of goods and services will be critical for firms to reassess their pricing strategies and maintain their competitive advantage when they want to go abroad.

As of August 2018, Vietnamese businesses have invested in 29 countries and territories, and this trend will continue strongly in the future when we move up on the value chain. Adapting new higher regional or global standards with higher quality should also be considered to enable businesses to access other markets.

Digital technology and the Internet have changed the landscape of going global. In the past, business would take many years, even decades, to build up scale, platform and resources to be able to go regional and then global.

Companies from emerging markets often struggled with that journey as they didn’t have enough capital to invest and expand. However, with the internet and digital technology, small companies in emerging markets can scale up very quickly and go global if their solutions work globally. They also get to know very quickly who could be suitable partners in different markets.

This would present an exciting opportunity for local business to take advantage of trade pacts and technology to expand internationally.

How FIEs can localise in Vietnam

Vietnam has witnessed strong economic growth with growing FDI inflows. As of November 20, 2018, the country boasted more than 27,000 foreign-invested projects with the total registered capital of around $337.81 billion.

Foreign investors clearly have seen great potential in the country, and Vietnam as a member of the ASEAN is among their attractive investment destinations.

International corporates with strategies to enter Vietnam’s market or expand their operations in the country could be facing some challenges such as complex regulatory frameworks, adaptation to market conditions, socio-cultural factors, and a good understanding about consumer needs. They might need to create a connection between the brand and consumers from different cultures and socio-economic backgrounds, thus changing their perspective from global to local. The products and services need to be relevant to local consumers. So corporates that get to grips with the country’s culture, consumer habits, market trends, legality and regulatory frameworks will have a big advantage. Understanding the macroeconomy, infrastructure, and labour movement of the country will also help FIEs shape their business strategy.

The Vietnamese market is full of potential though the market is not easy to conquer. We have seen many FIEs fail to grow in Vietnam as they come in with very simple mindset, adopting the same successful strategy of other markets in Vietnam. They later find that Vietnam is different. Varying parts of Vietnam are also diverse, so companies would need to have strategies to service different parts of the country. There is no quick win here. Only companies with long-term commitment to the country will have a good chance of success.

On the other hand, multinational corporations should focus on providing globally-standardised, reliable products and services which are easily recognisable to all. The products and services should have a globally-consistent quality, and are perceived by consumers as trustworthy when they are provided with the standard services and exact same quality in any market.

To facilitate local navigation or business expansion abroad, businesses have teamed up with local partners to pursue their investment strategy. We can see a strong trend of mergers and acquisitions in recent years. In the first 11 months of 2018, overseas companies were estimated to spend $7.64 billion on acquiring shares in Vietnamese companies, up 44.4 per cent on-year.

They can choose a financial organisation that has an international network as well as strong expertise in the local market to support their plans. For Vietnam alone, the fragmented nature of the country’s banking market means that investors may also want to choose a partner that is well-entrenched in the domestic market and can offer a full range of services.

Our long commitment to the Vietnamese market, combined with our comprehensive suite of banking services, means HSBC is well-positioned to meet the needs of investors from preparation to operation.

In addition, international banks with a global network and extensive local know-how such as HSBC Vietnam, are ideally-placed to support the growth and expansion of foreign-invested companies into Vietnam and local enterprises to explore markets in the region or across the wider world.

As one of the leading international banks in Vietnam, we are proud to be in a very good position to bring corporates closer to their partners and suppliers. In future we continue to encourage potential FIEs to better understand and invest in Vietnam while also assisting the country in successfully going global.