December 07, 2013
Quite a few local firms are feeling uneasy with foreign invested enterprises (FIEs) to engage in commodity trading and related activities the Ministry of Industry and Trade is currently asking for feedback, FIEs will be allowed to distribute rice, crude oil and pharmaceuticals.
Meanwhile, Decision 10/2007/QD-BTM lists rice, cane and beet sugar, tobacco and cigars, crude and refined oil, pharmaceuticals, explosives, books, newspapers, magazines, gems and precious metals as the commodities FIEs are not allowed to trade in.
This decision will be replaced by the new circular, which is expected to come into force in 2014, according to the Ministry of Industry and Trade.
Domestic businesses worry
That FIEs will be involved in the local fuel market may not be a threat for some giant distributors who currently enjoy overwhelming advantages, but for the rest, it may.
To work in this industry, fuel distributors need substantial capital and experience. After joining the domestic fuel market, FIEs might just suffer losses in the first year before firmly establishing their position. Of course, consumers would benefit within a year or two as prices will go down when businesses compete with each other. But then, a variant of monopoly might occur, with foreign firms hiking fuel prices, and consumers would once again be the ones who suffer.
A CEO of a fuel importer in HCMC says it takes one or two years after a company’s date of market entry for the State to consider whether it has shown signs of dumping and monopoly or not. Yet such a period of time is enough for foreign companies to completely dominate the local market. An international energy company holds tens of billions of dollars in its hands while a local fuel wholesaler only has tens of millions of dollars. Given the huge capital gap, competition is meaningless, he added. Of course, local businesses must go on their own path by utilizing their storage facilities and networks of sales agents to cooperate or merge with foreign firms. The so-called cooperation is indeed a form of acquisition.
With FIEs to be allowed to distribute rice, domestic companies are afraid this would be a great challenge. Small-scale operation and meager capital resources make it hard for local enterprises to compete with their foreign rivals. Take the coffee industry for example. Local firms are getting weaker in the competition against FIEs.
The pharmaceutical market also witness a fierce competition between domestic companies and multinationals like Sanofi, GSK and Novartis. As input cost now makes up 50-80% of drug production costs, FIEs enjoy a competitive advantage against many domestic concerns.
FIEs have always had the upper hand when offering to purchase materials in large quantity, coupled with remarkable discounts and other incentives. Therefore, the input cost they have to bear is lower than that of smaller competitors. In addition, their flexibility and initiatives in managing material supply earn them another advantage as they receive raw materials from various sources (Europe, the U.S., Turkey, China, India and Pakistan, etc.) at the best prices, thus minimizing the risk of depending on a limited number of large partners.
Opportunity for reforms
While local businesses feel disheartened, economists believe that FIEs’ participation in goods distribution in the domestic market will eventually lead to a breakup of the monopoly held by State-owned enterprises as well as a fairer playground. Finally, the new situation will offer consumers long-term benefits.
For the fuel market operations, the role of the State should be fully promoted, say experts. The State should adopt measures to support local businesses, protecting them from being taken over by foreign companies without violating the WTO rules. For instance, the State can provide local enterprises with financial aid through the investment and development fund. Enterprises can use commercial loans to their best.
On the other hand, the State can put foreign firms under better “control” by imposing quotas or localization rates on fuels to restrict import of this commodity. The most important thing the State should do may relate to establishing a good mechanism for business competition. Once monopoly is abolished, some local businesses may struggle for a while, but there would still be chances for them to survive and reap success in the long term.
Similarly, when FIEs enter the domestic rice industry, Vietnam will have more opportunities to access capital and technology transferred from the countries where agriculture is developed. Furthermore, when FIEs are involved in rice distribution, farmers will be able to sell their products at a better price. The new condition will also urge rice exporters to undertake internal reforms to survive and prevent monopoly in rice export.
(By Son Nghia)