Find the law and practice and trends and developments to do business in Vietnam
Low Impact of COVID-19 on Most Domestic Industries, Foreign Investment and Trade
At the time of writing this contribution, Vietnam remains largely unaffected by the global economic fallout of the COVID-19 crisis. The country’s highly effective combating of the domestic spread of the virus, achieved through the implementation of carefully devised and readily prepared national action plans and emergency policies, had Vietnam’s economy (GDP) grow at a remarkable 2.9% in 2020. The country’s current COVID-19 death toll of fewer than 100 bears testimony to Vietnam’s outstanding position in times of global uncertainty and economic volatility.
Despite the pandemic and the related knock-on effects, which impacted even those economies managing to successfully "shut out" the virus, Vietnam’s outlook remains very positive. Forecasts for 2021 see Vietnam’s GDP grow at a staggering 6.6% and foreign investment into the country is already back at an all-time high. While some sectors of Vietnam’s economy have, of course, significantly contracted since the first quarter of 2020 (particularly in the tourism and hospitality sector), even to the most conservative and sceptical onlookers, Vietnam still shows quite impressive indicators. Considering the size and value of the local tourism industry before the COVID-19 crisis, which had to grind to a halt due to international travel restrictions and the suspension of international flights, these figures look even more awe-inspiring. Vietnam’s import and export turnover was USD543 billion in 2020, which constitutes a 5% increase year on year.
Even before the world went into a collective and involuntary shutdown due to the spread of the novel coronavirus, Vietnam had good reasons to be optimistic about the future of its economic development. Now, against the backdrop of regional and even global competitors falling behind, Vietnam has a chance to make another big leap ahead, as the world slowly starts opening up again. The Vietnamese leaders and lawmakers seem aware of the opportunity this crisis fosters for the country and are prepared to tackle the challenges that the accelerated influx of foreign capital and interest present for its domestic workforce and infrastructure.
Untapped Potential in Renewables, Infrastructure and Manufacturing
Renewable energy has been the focal point of several investment incentives given to foreign and local investors (and consisting of benefits, such as tax holidays or the provision of appropriate real estate at discounted rates). The Vietnamese government has doubled down on its efforts to develop the domestic power grid by attracting more overseas global players and other foreign investors to increase their interest in Vietnam.
As is common in Vietnam, the government has accompanied this development with a resolution (No 55-NQ/TW), which was published on 11 February 2020 and clusters around the “orientation of Vietnam’s National Energy Development Strategy to 2030 with a vision to 2045”. In this public statement, the Vietnamese government announced its plans to develop the national power supply and distribution towards a more sustainable and self-sufficient future. As one of its core motivations, it names “[...] Developing breakthrough mechanisms and policies to encourage and promote the strong development of renewable energy sources, so as to fully replace fossil energy sources.” With this in mind and following the government’s proclamation that it intends to double the capacity of domestic power production by 2030, the conditions for investment in the renewable energy industry are currently more favourable than ever.
Infrastructure is poised to remain one of the most important and lucrative segments for development and expansion in Vietnam for many years to come. Sectors including freight infrastructure (ports, warehouses, industrial zones, road and rail), water supply, waste treatment, or telecommunications infrastructure – much like the national electricity supply mentioned above – are currently underdeveloped and cannot cater to Vietnam’s hunger for growth. Foreign companies coming into this environment can add a lot of value through their know-how and expertise, which domestic contractors often lack. Here, Vietnam is also undergoing a gradual shift towards "Goldilocks conditions".
Recently, the regulations for public tenders have been relaxed to facilitate the admission of foreign bidders to the game. Additionally, the Vietnamese regulator has created the legal framework for entering into PPP agreements, which are supposed to further bolster the integrity and development of domestic infrastructure. As of today, Japan, China and South Korea lead the pack as the strongest foreign sources of domestic infrastructure development and know-how transfer. As an immediate consequence of the recent integration of the European and larger Asia-Pacific (APAC) markets through free trade agreements, an increasing shift of Western investment into Vietnam is in progress.
Manufacturing (alongside tourism) has long been the backbone of Vietnam’s domestic economic growth and – especially in recent times, driven by the political and economic tensions between the USA and China – has put Vietnam in the sights of many global companies, looking to redistribute liabilities and reduce manufacturing and tariff risks.
Compared to its much larger and better-developed neighbour, Vietnam boasts a lower cost of labour and a striking (and growing) number of free trade agreements with global trade partners (see below), which allow companies to creatively structure their import and export activities. As Vietnam has limited capacity to absorb the vast amount of business, which is currently spilling over the border from China to relocate to Vietnam and slowly filling up the remaining slots in free trade zones and industrial parks, first movers will be rewarded with better real estate in more favourable locations as well as lower costs and better access to affordable labour. With a low unemployment rate (oscillating around 2.0% for almost a decade), larger operations might struggle to fill their factories, if they do not wish to compromise on their budgeted expenses, paying above-market salaries to their local staff.
Promising Consumer Market
Vietnamese demographics suggest a sizeable – and growing – consumer market of nearly 100 million people, of which the majority are under 30 years of age and rapidly prospering. Over the last decade, the stability and beneficial circumstances for economic success in most sectors have created a Vietnamese middle class with increasing income and a highly sophisticated segment of wealthy Vietnamese, who are craving to develop an affluent lifestyle with all available modern amenities. This has created a large demand for consumer goods and luxury products, which can be distributed through a network of local (Vietnamese) distributors or through the establishment of a (foreign-owned) subsidiary in Vietnam.
Following other examples from the surrounding Association of Southeast Asian Nations (ASEAN) community of countries, e-commerce is also booming in Vietnam and bolstering the exponential growth of many local and regional businesses (eg, Grab, Tiki, Lazada, Gojek, Baemin – to name a few), which understand how to harness the huge potential of online marketing and sales in these developing markets. A very young and tech-savvy local population is thirsting for merchandise and lifestyle products to support the diversity of their life’s trajectories and individual preferences. Following the Chinese model, Vietnam has thus truly embraced the comfort and ease of online transactions for everyday purposes, as well as grown accustomed to executing one-off investments of significant value through online platforms. Foreign investors are therefore well advised to incorporate this aspect of the business into their prospect engagement in Vietnam and to create the infrastructure that supports this strong trend in domestic commercial transactions.
Bearing this in mind, the data protection and cybersecurity landscape in Vietnam is still in its infancy. However, Vietnamese lawmakers have recently stepped in to start closing this gap in the regulatory framework and devising fresh guidance on both of these hot topics (in both 2020 and 2021). In light of these developments and the increasing importance of (big) data in almost all branches of modern business, commerce and marketing, investors should ascertain compliance with these regulations early on. Especially, investors with a background in the European Union (which need to be General Data Protection Regulation compliant) or similar jurisdictions sensitive to data protection issues should sound off their respective business models with qualified local experts before entering the market.
Workforce: Well Educated, but Hard to Get
Vietnam’s workforce boasts a growing base of well-educated, young and motivated individuals, who are looking to bring their acquired skills to market. Confident and eager to bolster their personal and professional development, it is getting increasingly hard to source and keep young, local staff with high potential on the payroll, as Vietnamese employees are getting more versed and confident at voicing their demand for fringe benefits and, of course, monetary compensation. The same trend can be seen in the segment of unskilled or semi-skilled workers, who are partaking in the increasing market value of their labour, due to permanently low unemployment rates.
The market for qualified and reliable staff is therefore getting more heated and competitive each year – a trend that the COVID-19 crisis has also not been able to break. This will foreseeably have a mid-to-long-term effect on the level of salaries paid to local staff and therefore must be reflected in the business plans of potential investors, depending on their respective industries.
Incentives for Implementation of Hi-Tech Projects (Decision 38)
The recent Decision No 38/2020/QD-TTg (“Decision 38”) approving the “List of High technologies prioritized for development and investment” and the “List of High technology products encouraged for development” has fortified Vietnam’s political commitment to becoming one of South-East Asia’s hi-tech hubs in the coming decade. To further this goal, Decision 38 introduces and expands investment incentives for hi-tech industries by broadening the scope of defined “hi-tech” industries and products. Decision 38 took effect from 15 February 2021, replacing Decision No 66/2014/QD-TTg (“Decision 66") dated 25 November 2014.
Vietnam Tied in Favourably through Multilateral FTAs
Vietnam has positioned itself well, regarding its rank and importance in the global network of free trade agreements (FTAs).
AFTA (ASEAN) – 1992
The member states of the AFTA, the FTA backing the ASEAN community, are Brunei, Cambodia, Indonesia, Lao PDR, Malaysia, Myanmar, Philippines, Singapore, Thailand and Vietnam. The AFTA was first signed between its six original members on 28 January 1992 in Singapore.
EVFTA (Europe) – 2020
The EVFTA was ratified in mid-2020 and entered into force upon Vietnam’s ratification thereof. The EVFTA is an ambitious trade pact between Vietnam and the 27 member states of the European Union, providing the elimination of almost 99% of customs duties between the signatories, at a staggered rate over the next ten years. As per an estimate by the Vietnamese Ministry of Planning and Investment (MPI), the FTA is expected to help increase Vietnam's GDP by 4.6% and its exports to the EU by 42.7% by 2025.
RCEP – 2020
The Regional Comprehensive Economic Partnership (RCEP) is a free trade agreement that currently accounts for the world's largest trading bloc and marks an entry point for Vietnam to gain access to new export markets, regionally and globally. RCEP is a free trade agreement between the Asia-Pacific nations of Australia, Brunei, Cambodia, China, Indonesia, Japan, Laos, Malaysia, Myanmar, New Zealand, Philippines, Singapore, South Korea, Thailand and Vietnam. The agreement was devised to reduce tariffs and red tape between participating markets and jurisdictions. It includes unified rules of origin, which may facilitate international supply chains and trade within the region. It also counteracts or prohibits a number of tariffs and facilitates and unifies customs procedures.
UKVFTA (United Kingdom) – 2021
The UKVFTA establishes an economic partnership between the UK and Vietnam and is supported by a comprehensive free trade area between the two signatory states. As the UK exited the EU with effect as of 31 January 2020, the UKVFTA constitutes one of the first FTAs the UK has signed since its exit. Much like the EVFTA, the agreement contains several new provisions on preferential tariffs, tariff-rate quotas and rules of origin. It also touches on other measures to promote financial, e-commerce and other services, while upholding the EVFTA’s reciprocal access in public procurement, competition and subsidies.
With these strategic partnerships in place, Vietnam can now serve as western countries’ primary gateway into (South-East) Asia, for the most significant trade and investment streams. On the flipside, Vietnam has opened global markets for the export and distribution of its own domestic products, which will promote the growth of Vietnam’s economy for decades to come.
A chapter about a developing market would not be complete without giving a flavour of the local real estate market, which links in closely to the surrounding infrastructure, as detailed above. Vietnam forms no exception to that rule, as real estate and rental prices have skyrocketed over the last decades, particularly since the financial crisis of 2008.
As local foreign exchange regulations are tightly observed and enforced by the State Bank of Vietnam (SBV), Vietnamese citizens have limited access to investment into overseas assets. This fact further aggravates the situation and caused prices for office and residential real estate to multiply over recent years.
From the perspective of a foreign investor, however, real estate in Vietnam constitutes a bit of a "hot potato" that does not lend itself well to speculation. The Vietnamese Law on Land, in the tradition of its socialist ideals, is very restrictive towards the ownership of land – particularly towards foreigners (both individuals and foreign-invested entities, or FIEs). Even locals acquiring real estate will only obtain a so-called land use right (LuR), which explicitly does not equal ownership.
For foreign investors, these restrictions are even tighter, as Vietnam intends to prevent the sell-off of local land resources to foreign principals, as can be witnessed in surrounding states, such as Cambodia and Laos.
Foreign investors who require (large areas of) land to support their operations in Vietnam should therefore assess their needs together with experienced counsel, in order to obtain reliable information about the legal feasibility and ideal location of their endeavour.
Legal and Administrative Framework: Need for Speed
As a rapidly developing market for business and foreign direct investment (FDI), the domestic legal framework accompanying the surge of projects driven by an influx of MNCs and SMEs alike keeps lagging. As is common in less mature jurisdictions, new laws often lack clarity and require an in-depth understanding of the entire legal system, domestic policy and tax incentives, as well as good connections to the local authorities, in order to facilitate projects that are novel to a developing market.
The efficiency and shape of administrative procedures in Vietnam, particularly in areas where there still is pioneer work to be done, does not compare to what most providers of FDI would be used to from their home jurisdictions. Authorities work slowly and, depending on the envisaged business lines of an endeavour, multiple public offices will be involved in licensing and approval processes. Within the (sometimes very narrow) realm of provided regulatory guidance, authorities often have discretionary authority over final decisions, which negatively impacts the transparency of public procedures, but also allows the investor and their advisers to impinge on the authorities through strategic communication, negotiation and explanatory statements. Generally, the authorities are instructed to work together with investors to create "favourable circumstances" for foreign investment. It therefore can be a matter of negotiation and compromise to implement a project and/or transaction in the local market. In this case, hands-on experience in working together with Vietnamese authorities as well as a good local network and knowledge of the country can be crucial for the success of a project.
Overall, particularly in the areas that are attractive for foreign investment (eg, infrastructure, energy, real estate, trade), there is a strong need for further legal guidance, particularly on the implementation and enforcement side of most codified law. Laws and regulations are often too vague to provide the comfort and certainty needed for sound business and investment decisions made at the board level of foreign entities. It is therefore even more crucial to collaborate with trusted and experienced advisers, who understand the local landscape and help navigate the shoals of Vietnamese authoritative governance amidst an ever-changing but still quite restrictive legal framework.
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Source: CCIPV / ACSV Legal