Painful times for Vietnam's small businesses

CA - As Vietnam fights to beat back raging inflation, many of its small and mid-sized businesses - disadvantaged even in good times - are struggling to survive the battle.

Just ask Ngo Thi Bau, general director of Nguyen Tam Foci Garment, which a Vietnamese consumer magazine for years dubbed one of Vietnam's 100 strongest brands. This year, plunging revenue has led Bau to lay off 60 percent of her HCM City-based firm's 400 workers.

Her business has been battered by sharply higher consumer prices and the sky-high interest rates - up to 20 percent - that borrowers now face. "It's impossible to make a profit in manufacturing," said Bau.

Small businesses matter, as in the past decade they have become a key part of Vietnam's economy. They account for 96 percent of all companies and account for 40 percent of GDP, according to the Small and Medium Enterprises Association.

Bau said sales at her garment business dropped as people skipped non-essentials and have been forced to spend more on basic needs. Annual inflation in June has been nearly 21 percent.

In May and again in June, food costs surged nearly 30 percent from a year earlier, while transport was up about 20 percent. National retail sales were up a paltry 6.4 percent in the January to May period, discounting for inflation, state media reported. In 2010, full-year retail sales rose 24.5 percent.

Closedown

"We are in a tough situation, like others," said Bau. "Many factories have closed down since earlier this year. My factory is running irregularly."

But the pain that Vietnam's SMEs are enduring runs deeper than this latest macro-economic rough patch, with roots in policy shortcomings that experts say need to be addressed if the country is to shift to a more balanced and dynamic economic model.

Vietnam's reform drive has spawned hundreds of thousands of SMEs, whose association says these account for half of all non-farm jobs. But these firms are underdogs of the business world, third-class citizens behind state-owned and foreign invested firms, and they are bearing the brunt of inflation and tight monetary policy.

For the past five years, the government has tried to create state-owned conglomerates similar to South Korea's chaebols. These get preferential access to capital and have tight links to officials, valuable in Vietnam's environment of vague regulations.

Firms in which foreigners are investors generally are bigger, have higher profiles and get support from their embassies. Former central bank governor Cao Si Kiem believes one-third of the workers at small enterprises could lose their jobs this year, at least temporarily. An ex-government adviser thinks 30 percent of such firms have stopped operating since the end of 2010.

Complaints

Vu Kim Hanh, director of the Business Studies and Assistance Centre, said she has been shocked by the volume of complaints, even from companies that normally avoid making noise. "Smaller businesses "are being ambushed from ten sides," she said.

Last month the deputy director of a centre promoting SMEs at the state-backed Vietnam Chambers of Commerce and Industry challenged a conference room full of company bosses to climb the value chain, but was swiftly reminded why that isn't happening.