Astonishingly exotic with a unique heritage, Vietnam’s popularity as a tourist destination has surged in the last few years. And the country’s development as a business hub has put it firmly on the map.
Starting from a low economic base in the early 1990s, Vietnam’s move to a more market-oriented economy brought rapid growth. Despite slowing during the global financial crisis, the country weathered the economic downturn well. Today Vietnam, a one-party Communist state, is one of South-East Asia’s fastest-growing economies and aims to become a developed nation by 2020.
Relative political stability, broad-based growth, low wages and a strong economic outlook continue to make it an attractive place to do business; foreign direct investment (FDI) in export-oriented manufacturing in particular has been a boon, with Vietnam’s accession as the 150th member of the World Trade Organisation (WTO) in January 2007 playing a significant role as a catalyst for growth over the past decade. The economy grew 6.21% last year and, according to forecasts from the Asian Development Bank, GDP growth is projected to be 6.5% in 2017.
Vietnam’s economic success over the past three decades has been built on its openness to international trade and investment. A raft of free trade agreements (FTAs) has helped accelerate Vietnam’s integration into the global economy. Negotiations on the EU-Vietnam FTA were concluded in August 2015 and ratification is expected in 2018. Meanwhile Vietnam’s WTO commitments have largely superseded the protective legislation that was one of the greatest challenges to doing business in the country. It is now among the world’s most open economies, according to the IMF, its share of world trade having quintupled in the last 15 years alone, with combined imports and exports now equal to around 160% of GDP.
Vietnam’s location in the heart of south-east Asia provides access to the world’s major trade routes. Although agricultural activities in 2014 accounted for over 60% of the total workforce, the economy is shifting towards industry, manufacturing and services. The south has been the centre of manufacturing and trade, and is home to Vietnam’s major logistics hubs. However, the northern region has become a popular destination for foreign manufacturers looking to diversify their production bases, notably South Korean and Japanese companies. Today, manufacturing makes up more than a third of Vietnam’s $200bn economy.
But a combination of red tape and corruption continue to taint Vietnam’s reputation. The country is ranked just 82nd out of 190 in the World Bank’s Doing Business 2017 report, which provides objective measures of business regulations and their enforcement. Setting up a business in Vietnam remains a complex process. Foreign investors are usually required to obtain investment licenses, granted at the discretion of the ministries. In addition to permission from government, they must also get permission from each province. The process can take anything from three months on average for the service sector to a year for large-scale projects needing prime ministerial approval.
“If you’re running a business that needs several locations throughout the country, it’s very difficult,” warns Ian Lydall, a former head of PwC Indochina who has lived in Vietnam for the past 16 years, and now holds several non-executive directorships including independent director of PwC HR consultancy spin off Talentnet Corporation Vietnam.
“When it comes to starting a business in Vietnam, I’d recommend doing it through a good advisory company,” says Paul Smith, chairman of NashTech, the technology outsourcing arm of Harvey Nash Group, which set up in Vietnam in 2000 and is now the country’s second largest technology company. “It doesn’t cost a lot but it’s about the local knowledge.”
But trade barriers prevail, not least technical regulations, poor protection of intellectual property rights, unfair subsidies and onerous customs procedures. And attempts to address failings are thwarted largely because of the political structure of the country. “The regulatory environment is developing but change is difficult because the real balance of power lies in the Politburo. That lack of transparency can be quite frustrating,” Lydall says.
Pledges to beef up anti-corruption laws have yet to translate into effective action and anyone engaged in business in Vietnam may encounter, and should definitely prepare for, the challenges of corruption in one form or another.
Nonetheless, FDI is booming with a total of 22,280 projects by investors from 114 countries propelling the total FDI stock as of November 2016 to $293bn, according to government body the Foreign Investment Agency. Standard Chartered Bank and HSBC both have Vietnamese operations, as do British engineering consultancies Arup and Mott MacDonald; while around 70% of Samsung’s smartphones are now made in the country. Retail giant Marks & Spencer plans to have 20 stores trading in the country by 2020.
The tax system remains very Vietnam-specific and despite a commitment to move towards IFRS, the contentious issue of Fair Value remains a sticking point. And tax rules can be interpreted differently from province to province. “That inconsistency can be very important if you have branches in different parts of the country and can cost you money,” Lydall says.
Vietnam’s labour force remains a key competitive advantage. Around 60% of Vietnam’s total population of 95 million is under 25, and the country’s “golden population structure”, which means for every two people or more working, there is only one dependent person, provides Vietnam with a unique opportunity to take advantage of the young labour force and push its economic growth.
Perhaps more importantly, the work ethic is strong. “The people are what makes the country; they’re open, straightforward, friendly, incredibly bright and ambitious,” says Smith. “The difference between Vietnam and other South-East Asian nations is they are prepared to say no. And if you’re running a business a long way away from home, you really need that. We chose to set up in Vietnam because it’s low cost, there’s high productivity and the Vietnamese are really creative.”
Employing Vietnamese locals at senior levels is recommended – it paves the way for all-important relationships with local government officials and employees. NashTech’s entire business of 5,000 people is managed by a Vietnamese senior management team. “If you have to parachute people in, make sure they’re supported by Vietnamese locals,” Smith warns.
The government’s continued priority to develop its education system is paying off; more than 90% of the Vietnamese population aged 15 and older is literate with English the most widely-spoken foreign language. However, professional training for Vietnamese workers to meet the increasingly sophisticated requirements of investors needs attention. The number of professional accountants with an international qualification is still very limited; the ICAEW’s first batch of home-grown Vietnamese ACAs are due to qualify in 2019.
Opportunities for UK accountants in practice are abundant, but tend to be limited to advisory services, after the government stipulated that anyone providing accounting services – including foreigners – must take an exam in Vietnamese on the country’s economic, financial and accounting regulatory systems.
The WTO continues to encourage reform in a range of areas, including state-owned enterprises (which continue to benefit from preferential access to resources such as land, capital and political largesse), non-tariff barriers and regulatory reform, and while the FDI trend looks set to continue in 2017, analysts warn that the country will need to continue pushing reform forward, particularly in education and privatisation, if it is to maintain momentum in the longer run.
The British Business Group Vietnam (BBGV), a member of the British Chambers of Commerce, boasts 450 members. The group’s chairman Ken Atkinson arrived in the country 27 years ago to do a feasibility study with a client and never left. His business became part of the Grant Thornton International network and he is now executive chairman of Grant Thornton Vietnam. “Vietnam is a stimulating environment and there’s significant investment coming in particularly from Japan and Korea but UK companies are not tapping into that opportunity as much as we’d like,” Atkinson observes. “It’s quite challenging for SMEs to invest into that market – there are hidden costs, red tape and cultural challenges – but those that persevere are doing very well.”
Since many Department for International Trade regional services were contracted out to private organisations, the focus tends to be on the opportunities in Vietnam for large UK businesses and less on encouraging SMEs to export, Smith says. “Vietnam has a bright population, a burgeoning middle class that love British brands and want to buy products. It’s a real opportunity but not one that is being tapped to its full potential.”
THE LOCAL VIEW
Phan Vu Hoang, ACA, tax partner, Deloitte Vietnam
“The industries where investments, especially FDI, are being encouraged include high tech, environmental protection, infrastructure development and socialisation projects. This is mostly in the form of tax incentives, which include Corporate Income Tax holidays (some years of tax exemption plus some years of 50% tax reduction and a concessional tax rate as low as 10% for a number of years), import duty exemption and land rental rates.
“The regulations framework in Vietnam, especially the tax system, is more rule-based. For an emerging economy like Vietnam, it is understandable that the regulations are subject to frequent change: regulations are updated frequently to somehow follow the practice.
“However, despite being frequently updated, in many cases the regulations are viewed as ambiguous and cause disputes between tax authorities and taxpayers. In addition, taxpayers in many cases face difficulties because there are too many rulings for them to be aware of, or the regulations and rulings contain conflicts.
“Nonetheless, in recent years tax authorities have been making a lot of efforts to broadcast the regulations to taxpayers with various campaigns. The current government has also been very active in trying to encourage reform of tax regulation and the system towards more simplicity, clarity and transparency.”