|International lenders could provide an enormous boost to SMEs, provided they grow up to their requirements, Photo: Le Toan |
Vietnam is becoming an appealing destination for foreign investors looking to move to new markets in the region. Thanks to its strategic location and low labour costs, the country is emerging as an important part of the “China plus one” strategy of various manufacturers from around the globe.
“Even before the on-going trade tensions, a lot of foreign investors already looked into diversifying their businesses to Vietnam because of the rising labour costs in China,” said Pham Hong Hai, CEO of HSBC Vietnam. “The tensions only accelerate that process. Moreover, Vietnam has a benefit of having a ready supply chain in electricity, and textile and garment industries, making it easier for other companies to move here.”
According to bankers, this shift is creating a significant number of opportunities for Vietnam-based lenders, especially in the field of supply chain finance. Broadly speaking, supply chain finance is a set of technology-based business and financing processes that can link parties in a transaction such as buyers, sellers, and financing institutions to lower financing costs and improve business efficiency.
More specifically, supply chain finance is a partnership between a buyer, who is often a multinational company, and a bank. This collaboration allows Vietnamese suppliers – who in this case are small- and-medium-sized enterprises (SMEs) – to sell their receivables to the bank, who then delivers to the buyer. This approach helps SMEs gain the funding they need to join the global supply chain, in a quicker, more reliable, and more affordable manner.
This is especially important in Vietnam, where SMEs take up more than 90 per cent of businesses and often struggle to qualify for bank borrowings. When SMEs do get a loan, they are often subject to high lending rates, which increase financial costs and lower their competitiveness in the market. As Vietnam joins global manufacturing lines, it is more important than ever for these domestic suppliers to find capital for their future expansions.
At last week’s Vietnam Venture Summit, Nguyen Hoa Cuong, deputy director of the Enterprise Development Agency (EDA) at the Ministry of Planning and Investment, pointed out that SME development is a key area for Vietnam in the years ahead. Besides new supporting laws, Cuong hoped that SMEs in the country will get the necessary help in trade finance and technology, which can boost the growth of the domestic supply chain. “We hope that banks will also explore options in the infrastructure segment, because this is also crucial for supply chain development,” he said.
Utilising the lenders
Nirukt Sapru, CEO of Standard Chartered Bank Vietnam, told VIR that international banks have a distinctive edge in this segment. First, institutions usually provide supply chain services to SMEs who already bank with them, because this means the business in question already has a stamp of approval in terms of corporate governance and sustainability. These are also two key qualities that buyers in the global supply chain look for.
“Second, international banks can also bring their networks together to help companies expand their own list of potential clients. Besides finance, multinational banks can also offer advice and incredible networking opportunities thanks to their presence around the globe,” said Sapru. He emphasised that supply chain finance is one of the most important reasons for big banks like Standard Chartered to set up its business in Vietnam.
In a similarly excited tone, Eun-Young Jung, CEO of HSBC Korea, recently told VIR that the bank is active in helping South Korean conglomerates shift their manufacturing chain to Vietnam, as part of the country’s New South Policy. With strong presence in both countries, the bank can connect companies on both sides, which ranges from supply chain finance to consulting services on local regulations.
“For South Korean buyers and investors, their financing requirement can be quite complex with project financing, advisory or liquidity management – which means they need the help of international banks like HSBC, because we understand the local markets wherever we go,” said Jung.
Although bankers generally embrace opportunities in the supply chain sector, they also voiced concerns about the creditworthiness of Vietnamese SMEs. Sapru, for example, said that there is still a lot of room for them to improve their corporate governance, environmental policies, and social impact activities.
Financial reports by Vietnamese SMEs are also not up to standards, and their preference for cash transactions also make it harder for them to prove their profitability to the banks. Vuong Thi Huyen, deputy CEO of Vietnam International Bank, noted that a robust ecosystem should be built for Vietnam’s supply chain, in which big buyers are anchors that can lead and support SMEs in terms of transparency and efficiency.
“A lot of bankers are excited about supply chain finance, including ourselves. However, we must say that there is still a long way to go and we must be patient because SMEs in Vietnam are still very fragmented,” said Huyen.
According to bank leaders, the cost of monitoring each and every SME is very high, and they want enterprises to team up, create mini supply chains, or set up associations that can boost their bankability, standardise financial reports, and help share experience with each other.
Both bankers and SMEs have called for a more supportive legal framework for supply chain finance, and partnership between foreign companies and Vietnamese counterparts in general.
As of December last year, only 300 SMEs in Vietnam’s supporting industries were present in the global supply chain. The local buying rates of Japanese investors in Vietnam, according to reports by the Japan External Trade Organization, is only 20 per cent, much lower than nearby markets.
The lack of partnership with foreign partners, besides missed business opportunities, also means that Vietnam’s SMEs are not bankable enough. Financial institutions, especially those from abroad, usually want to see an existing relationship between Vietnam’s SMEs and foreign partners to consider whether they should fund one or not.
In response, EDA’s Cuong said that the Vietnamese government will continue to push the collaboration link between multinational buyers and Vietnamese suppliers, and will carry out strategies to improve the country’s supporting industries. “The goal is for Vietnam’s domestic supply chain to meet 70 per cent of market needs by 2030,” Cuong added.
One possibility is collaborating with similar companies in regional markets. The ASEAN as a bloc is gaining attention from multinational companies, and most ASEAN countries go through a similar path of development.
Bee Han Theng, president of the Malaysian Chamber of Commerce in Vietnam, told VIR that he hoped to facilitate more exchange between Vietnamese and Malaysian SMEs, especially in the area of trade and finance.
“Vietnamese SMEs need exposure to global markets in order to understand what international buyers want, which in return will boost their creditworthiness. Malaysia has found its footing in recent years and I believe our SMEs can be good partners for Vietnamese companies. We can share experience, work together to buy resources from each country, and prove to the world that the ASEAN can produce for the world,” said Theng.