Vietnam private sector squeezed by rising costs

An annual report that ranks Vietnam’s 500 largest companies based on revenues, profit, growth rate, assets, and number of employees shows that returns are declining for private companies.

One of the most respected economists in the country, Pham Chi Lan, weighs in on the issue.

The number of private companies in the list of 500 largest enterprises in Vietnam, the VNR500, has risen from 118 in 2007 to 188 now. But their efficiency is falling. The average return-on-assets ratio of the private sector dropped to 2.4 percent in 2011 from 3.1 percent in 2007, while the return-on-equity ratio fell from 34.9 percent to 16 percent. What do you think about this trend?

Pham Chi Lan: Around 2009 and 2010, some research institutions like the Central Institute for Economic Management also issued reports on industries and business sectors in Vietnam. These reports all showed that the return ratios in different sectors were falling in recent years. I think it’s not unusual to see the private sector posting smaller returns, considering the recent economic conditions.

Can you elaborate further?

Inflation has risen very fast since 2008. Property prices increased too and the real estate bubble has not burst yet. The accumulation of land resources happened at a fast pace among state-owned enterprises. For private companies, land and shop rents rose every single year.

In 2011 alone, the official land prices, which are used for tax and valuation purposes, have been raised in many cities and provinces, including Hanoi, by between 30 and 50 percent. Such increases were too much for businesses since they translated into higher operation costs and lower profits.

There are other cost factors like electricity and fuel that were also rising. They caused prices of materials to surge, pushing production costs upward.

Then salaries had to be raised amid high inflation, otherwise companies would lose their employees. Rising labor costs in Vietnam in recent years are a problem for even foreign-invested companies.

Higher transaction costs and commissions amid the current economic situation are another burden that businesses have to bear.

Even though all costs have increased, businesses can’t raise their prices as the market is getting more competitive. Consumers are not willing to pay more in these tough times.

So lower profits are understandable. Companies in the VNR500 list fare better, but like all other businesses, they still have to face higher input costs.

According to VNR500 statistics, state-owned companies also became less efficient throughout the years, but their return-on-assets ratio was quite okay, even rising from 3.7 percent in 2007 to 5.2 percent in 2010, before easing last year. What do these numbers tell us?

State companies have performed better because they have certain advantages. First, they have land allocated by the government or leased at a fixed rate for a long time. They even have surplus land to lease to others. This income source can help offset losses incurred in other business activities.

Then comes preferential treatment in terms of credit. Sometimes state companies don’t have to apply for loans from banks. They can access loans at low rates from the government or from official development assistance (ODA) funds. On the contrary, private companies have to pay high interest rates. This is a factor that leads to high input costs at private companies while state enterprises enjoy much lower borrowing costs.

Besides, state companies are allowed to exclusively trade in some products and they can raise prices without having to lose customers. Even if a single company gaining a monopoly over the market is not the case, there are still companies working in groups to fix prices. A study released by the Central Institute for Economic Management in March 2010 also indicated that state enterprises reported reasonably higher profits than private businesses.

It has been said that the statistics should not be used as proof that private companies are operating less effectively because some private firms may try to hide their profits to evade tax. Do you agree with this point of view?

It’s true that there have been arguments among scholars and researchers about private companies trying to hide profits. But this happens at all sectors – private, state-owned and foreign-invested ones. And I don’t think this is a big issue because tax officials are thorough enough to prevent tax evasion. Moreover, it’s a real trend that business efficiency is falling, and it’s not just about statistics.

Source Thanh Nien News

Tags: Vietnam companies, Vietnam enterprises, Vietnam SMEs