Quick reversals expected as new normal gradually replaces lockdown gloom

The recently published KPMG CEO Outlook for 2021 has reported a remarkable uptick in confidence among CEOs since your Pulse report at the beginning of the year. What was the reason for this?

Warrick Cleine, chairman and CEO of KPMG in Vietnam and Cambodia

There is a huge psychological impact of being told to stay at home and seeing your office empty or your shop close, even if only for a few weeks. People find it difficult to see past their difficulties but then the restrictions are lifted and it all bounces back very quickly. We have seen this last year when – after what we then thought was lockdown – consumer sentiment and business confidence were restored.

However, the pandemic has most certainly left its mark. As shown by the KPMG CEO Outlook report, it has rearranged the priorities of CEOs across the globe, including in Vietnam.

In the early surveys, the vast majority of CEOs anticipated having less office space and permanently working from home. That perception has changed: they will maintain floor space and expect everybody to return to work in a world of hybrid working and flexible, agile workplaces. CEOs are settling on the middle path, which is probably more like the pre-pandemic than we thought it was going to be during the pandemic.

This was to a certain extent expected, partly because of what we saw last year. The bounce-back could take a few months, but you can already see a strong desire in the government and the industrial sector to get business back to normal to avoid further supply chain disruptions and closed factories which could damage Vietnam’s reputation.

Amid the short- and long-term trends of increasing and reducing headcount as well as reducing physical footprints, Vietnam is also struggling with a shortage of skilled workers. How are these trends going to play off of each other?

Putting aside COVID-19, you have two competing and contradictory forces pushing and pulling economic activity. On one hand, Vietnam’s competitive strengths in manufacturing, sourcing, large customer base, along with domestic reforms are driving people to relocate here.

On the other hand, many issues arise from this growth story, like skills shortages, the quality of education, and infrastructure deficits. Challenges like decarbonisation could also threaten Vietnam’s reputation.

However, amid all these influences, prospects are bright because the positives are strong and a lot of the negatives – such as the skills shortage – are equally true for other parts of the world.

Some high-profile investments to relocate production to Vietnam have been halted because of the labour supply situation, which has been made worse by mobility restrictions during COVID-19 and labour law changes. Various things came together at a bad time for Vietnam, but the good news is that the government has listened to the business community and is responding to the labour mobility challenges by revising the law.

At the same time, the overall skill shortage is nothing new for Vietnam. The way I see it though, it puts pressure on companies to be good employers. Those who treat people right and make the right investments in their personnel will manage this deficit – while bad employers will find it harder going.

It is a supply-demand situation, which may not be a bad thing for Vietnam as it looks to leave behind its status as a low-cost labour destination and climb higher in the value chains.

Another point in the KPMG CEO Outlook report was the growing realisation among CEOs of the importance of environmental, social, and governance (ESG) standards. How much weight do CEOs in Vietnam give these considerations?

In more mature markets, CEOs have more pressure on them on ESG issues from regulators, pressure groups, and the public – which is not yet so acute in Vietnam.

The pressure here is less direct but CEOs are already starting to feel the press, much of which comes from Vietnam’s trade partners. It is reflected in trade agreements as Vietnam’s ability to export now often hinges on its compliance with certain standards.

With Vietnam being an importer of capital and exporter of goods and services, it needs to be responsive to the requirements of the rest of the world. Vietnamese companies could start in areas like financial reporting, especially since the country is moving to adopt the International Financial Reporting Standards which will support companies in improving disclosure on the governance aspects of their business.

The environmental side is going to be driven by export markets and clients whose environmental, quality, and labour standards we will have to comply with – and you can already see high ESG standards at factories producing for export to developed markets.

Likewise on energy production: multilateral organisations such as the Asian Development Bank, the World Bank, and others will no longer finance certain types of energy production while some global funds are also refusing to invest in companies that engage in certain activities.

Vietnam is embracing the ESG challenge, but they are going to need more help from boards and the C-suite. However, I think we are going to see a big shift in the next year or two.

The report also highlighted increasing urgency for multilateral cooperation on a global tax system. How compliant would you say Vietnamese tax reporting practices are with international standards?

Compared to age-old systems in other countries, Vietnam’s system is quite modern and has adopted early on things like transfer pricing rules and a modern corporate income tax system. The standards of taxation and compliance are also high and need no massive reforms. The foreign investor community shows fairly good tax compliance in tax audit results. There are few prosecutions for tax evasion or big tax scandals involving foreign businesses, so I would say the larger challenges are around the domestic economy and getting more people into the tax system. However, with banking and e-commerce, transactions are far more traceable now than 10 years ago.

As the financial and investment sector gets more sophisticated and you have more structured products and more people investing, Vietnam needs to make sure everybody pays their fair share of tax.

Another challenge is global value chains. A branded shoe, for example, can be made in Vietnam for $3 and sold in the US for $300. Where should the profit be taxed – the consumer or the producing countries?

There is no clear agreement yet, but the Organisation for Economic Co-operation and Development (OECD) and the new US administration are pushing towards a common global tax regime.

Aware of its vested interest, Vietnam is an active part of the discussion at the OECD and the Ministry of Finance have people weighing in to create an equitable global tax framework where no-one is the loser.