Patience deemed necessary for EU-Vietnam fog to clear

Colin Kinghorn, COO of lpsos Business Consulting Southeast Asia

Up to now, the public attention has focused on politicians and business leaders. They, in turn, have been reliant on the ability of virologists and epidemiologists to study the distribution, patterns, and parameters of this new strain of coronavirus and identify the risk factors for disease and preventive health factors in a sufficiently robust manner to be able to draw conclusions that will shape policy decisions.

The challenge is that there is still insufficient reliable data available for these experts to be able to give us any definitive conclusions. While the updated information being released from China and South Korea would suggest that they are in the process of entering the stage of recovery, we are still waiting to see what happens next in both countries. Having looked at what is being written in authoritative journals, a prevailing view is that Europe and North America may not fare so well, given their relative lack of experience in handling such outbreaks compared to Asia. The lack of understanding in how and when the spread of this virus will be contained means that analysts are divided on the estimates of the economic damage which is likely to involve a contraction by between 6 and 8 per cent. Coincidentally, exports to the EU are also estimated to fall in the first quarter, according to the statement of the country’s Ministry of Industry and Trade made on March 20.

The EU estimates that the crisis will have a very large detrimental economic impact on the EU and the eurozone. They estimate that the direct impact through all channels will reduce real GDP growth in 2020 by 2.5 percentage points compared to a situation with no pandemic. Given that real GDP growth was forecast to be 1.4 per cent for the EU in 2020, this would imply it could fall to just over -1 per cent in 2020. The EU is forecasting that the bloc would see a substantial but not complete rebound in 2021. This seems to be a bullish estimate of economic damage and assumes that the member states will recover along the same lines, or better than China, when averaged across the bloc. The financial markets remain a concern and we have yet to see our political and business leaders overcome the collective paralysis that has gripped the international community. As one commentator said recently, “there seems to be no adults in the room.”

Preparing now

None of this bodes well for those Vietnamese companies whose business model places a heavy reliance on exporting goods to EU member states. Even if the border controls are resolved, there is still the question of when affected markets will rebound during 2021 and 2022. In addition to the potentially prolonged economic damage that arises in those sectors unable to trade, Vietnamese companies need to give some thought to the various scenarios in relation to what could emerge at the other side of this crisis in terms of the customer wants and needs.

We have already seen an immediate shift in consumer behaviour when the virus reaches their shores. While I can understand why many businesses have adopted a wait-and-see approach to the pandemic, our view is that this needs serious examination now with the objective of identifying the possible scenarios that could emerge and how you may need to adjust your business model, proposition, and brand communications post-pandemic as well as during it.

If the economic damage in certain industries turns out to be politically or financially painful, then it is not unreasonable to expect some actions to frustrate foreign player access to these markets. Now is the time to make contingency plans that are supported by a thorough analysis of the finances, people, technology systems, and operational changes that you have to be prepared for.

The world faces tough times and a lot will depend on the extent of the economic damage within each country, the effect that this pandemic has had on their citizens, the stimulus package put in place by governments, and also any emerging threats from countries that are more confident about their ambitions and see an opportunity to move to occupy a space that your industry previously controlled.

It is not that long ago that the EU was rocked by a sovereign debt crisis and is frantically working to keep the euro intact as a world currency. The fallout from the recent trade wars still lingers, and the ongoing turmoil in the financial markets (Softbank’s announcement about asset selling to secure funds to clear crippling debts must raise an eyebrow or two) and even EU member states are already regulating against each other in an effort to prepare for the wave of virus infections hitting their nations. It is almost certain that we will see some level of protectionism to shelter those industries that were the worst affected by the crisis and give them a chance to recover.

Some would argue that the EU has one of the biggest challenges ahead when looking at the task of mitigating the economic damage risks. The bloc is preparing for damage and trade disruption to go through the first and second quarters of 2020. The EU has issued a series of communiques to the European Parliament, the European Council, the Council, the European Central Bank, and the European Investment Bank to outline the need for a co-ordinated response to assist member states in coping with the economic damage.

The security and integrity of the Schengen border is of paramount importance to the EU and it seems clear that there will not be any hesitation in extending the period for these border controls should infection rates continue to present serious danger to the countries and their citizens. When it comes to border control, the EU expects member states to rigidly apply them at all times and this will be consistent in its application in every one. The world is waiting to see what the outcome is in countries like Italy and France, hoping that they win the fight to protect citizens and contain the virus. There seems to be no doubt that the authorities in both countries have taken strong action to deal with this pandemic.

Thinking about the EU trade preparations and contingency plans, initial assumptions seemed to imply that the EU expects to see signs of Italy and France coming out of recovery at the end of March or in early April. Nevertheless, then there is some reason to believe that the border controls will be reviewed and eased in line with response plan updates. If not, then we should be prepared for the border controls to be tightened further as well as their duration extended.

European companies have already been preparing investment moves ahead of the EVFTA. Photo: Le Toan

Medium-term effects

A recent survey by Ipsos, which is a global leader in market research, showed that three in four people in some of the world’s virus hotspots are in favour of their governments taking the same sort of drastic measures on border control as we saw in China and Russia. This sentiment is also shared in Vietnam, where 79 per cent agreed that the country’s borders should be closed during this pandemic.

With regards to investment flows from the EU to Vietnam, it is highly likely that investment will be delayed to some extent as some investors will be compelled to turn their attention to their core market which could be hardest hit. The turmoil in the financial market, share prices in a freefall, and potentially mounting corporate debts could influence the foreign direct investment outflows from the EU in the medium term, depending on the level of support that the EU offers to businesses and EU citizens to facilitate recovery.

Looking at this issue another way, it is not unrealistic to think that the Asian countries and their economies might be seen to come out of this global crisis in better shape than the EU and the US, both in terms of how they initially responded to the pandemic and also the pace by which the situation was stabilised.

With the EU being a somewhat stagnant economic bloc whose GDP growth is not that attractive even in the best of years, we may see foreign investors looking more closely at those Asian economies that have a track record of strong growth and were seen to cope better in managing the rate at which the infection spread. Vietnam may be facing an opportunity to significantly accelerate what was an already impressive growth rate for FDI in recent years.

Again, it is too early to know how and when the pandemic will subside and we see the extent of the fallout around the world – economic damage, companies lost, and unemployment rates. But if Vietnam can keep its infection rates from getting out of control and maintain a stable economy, there is good reason to believe that it can come out of this in a stronger position than many other countries.

The border controls will become even tougher if the EU estimates of infection rates across member states prove significantly wrong. We could then see individual states suspending the free movement rules and the Schengen principles. The logistics, tourism, and retail sectors will likely see some companies collapse and business and consumer sentiment taking a tumble and industry segments supplied by Vietnamese companies suffering. We could see a situation where Vietnamese companies struggle to get their goods into the EU bloc only to find that the customer needs are no longer there.

Scenario planning and a revamp of the sales strategy need to be started as part of leaders’ work to protect their company, its stakeholders, its employees, and its customers. This is not about making business continuity plans or a simple contingency plan in case we lose some market share. Now is a time for regulators, trade bodies, and businesses to come together and work as a unit when assessing each development with regards to the crisis and determine the likely impact on markets and companies and deciding which direction to lead the team towards. We need leaders and we need them now.