Wednesday, July 23, 2008

Vietnam gloom forces SME rethink

Many are looking at ways to reduce exposure or diversify income streams

Oh Boon Ping in Singapore

The fortunes of a number of Singaporean small and medium-sized enterprises (SMEs) have been affected by adverse economic developments in Vietnam, and some are taking steps to cut their exposure to the market.

A check with a number of small firms shows that they have sought to either diversify their income stream or shift their focus to higher value-added industries to cushion any impact from any economic slowdown.

The banking group HSBC told Business Times that the number of Singapore firms that had inquired about ways to mitigate their exposure to Vietnam has leapt tenfold in the past few weeks.

This came as Vietnam's inflation number hit a high of 25.2% in May this year, triggering strikes and labour disputes, while the Vietnamese dong also weakened significantly against major currencies.

Motley Resources, which sells semi-processed agro-commodities, said its exports of cashew nuts to Vietnam have fallen to 50% of its supply from West Africa - down from 75% - since the advent of the credit crunch and adverse developments in Vietnam.

As a result, its managing director Bipin Jha said, the firm had to try selling the excess products to "alternative customers in India and allow our customers to, and help the Vietnamese customer secure different types of letter of credit to reduce the high interest burden".

The chemical exporter Asia Polyurethane (APU) said it had shelved a planned US$3 million investment early this year due to the worsening economic conditions both in Vietnam and in other parts of the world.

Said chief executive Erman Tan: "We are putting the planned investment on hold so that we can further evaluate the economic conditions."

Even though the firm currently does not sell directly to Vietnam, it said it would price its products "in an internationally accepted currency when doing businesses with Vietnamese partners. This avoids the forex losses from a weaker dong".

According to Pan Asian Water Solutions, the Vietnamese government is expected to cut back on various non-essential developmental projects due to rising construction costs and higher interest rates. However, the water piping specialist does not expect demand for water infrastructure projects to be affected.

Meanwhile, AP Oil International, a lubricant and chemical specialist, said it will continue with its business plans there.

Its CEO Ho Leng Woon said that the "environment for industrial growth is still very conducive" while inflows of foreign direct investment (FDI) into Vietnam continued to be strong.

For example, FDI in first half of 2008 amounted to US$31.6 billion, representing 370% increase compared to that of the same period in 2007.

"The falling dong may, in fact, reduce operational costs. Even if temporary wage increases have to be paid out to placate a disgruntled workforce, manpower costs are still very attractive."

In fact, AP Oil has just established a new joint stock company, AP Saigon Petro JSC, with state-owned oil company, as it continues to see opportunities there.

Mr Ho added that the weaker currency should not be a deterrent to firms with "solid plans to invest in Vietnam", as the cost of investment is now lower, in Sing-dollar terms.

According to Jonathan Speight, HSBC Singapore's head of trade and supply chains, "if you invest in Vietnam you have to be in it for the long haul. Vietnam is not for people looking to make a quick buck and get out".

"While the economy is feeling some strains at the moment, Vietnam is still an opportunity for Singapore business people with patience and vision."

Specifically, there are significant opportunities for retail and service companies, while "manufacturers that need access to an affordable and skilful workforce and those wishing to benefit from what we expect to be one of the fastest-growing economies in the world over at least the next 10-15 years should take a look at Vietnam".

To mitigate the impact from Vietnam, Pan Asian Water Solutions said it would be more selective in taking on new projects "and only go for projects where funding is secured directly by the Vietnamese government or established international financial institutions such as the World Bank", said its managing director and CEO Francis Koh.

Motley Resources does not expect a worsening of the situation in Vietnam, but said: "If the current situation continues for more than six to eight months, we may need to diversify our product mix to hedge against the downturn."

Standard Chartered advised SMEs here to consider factors such as whether the business's cash-flow situation "is adequate to compete with a competitor that may have deeper pockets".

"Also, does your business have the right mix of management skills to drive the expansion? SMEs should also ask themselves if they are ready to embrace a different culture," said a spokesman. "We also advise customers to identify a trustworthy overseas partner when planning for overseas expansion."

Published in Business Times (Singapore) on July 15, 2008