EVFTA implementation increases pressure on domestic market

Domestic distribution enterprises are susceptible to being conquered and lose a market share to foreign enterprises

With the EU-Vietnam Free Trade Agreement (EVFTA) set to come into effect in August, the nation must open its market for goods and services to an array of new partner countries. In addition to favourable opportunities, both the domestic market and local distribution enterprises are likely to be vulnerable with a large market share being lost to foreign enterprises.

Most notably, the overall competitive capacity of Vietnamese enterprises remains weak, due to their limited technological adoption, ultimately resulting in numerous difficulties in terms of participating in global value chains. This will significantly serve to affect the promotion of productivity and technology when attempting to attract investment from the EU.

According to the Ministry of Industry and Trade (MoIT), the Vietnamese distribution market boasts great potential for development due to its significant population size of approximately 96 million, whilst also featuring a young population structure, with 60% of the population aged between 18 and 50.

Moreover, household expenditure is anticipated to increase on average by 10.5% annually, reaching US$714 per month by the end of the year. Furthermore, the wave of domestic capital and foreign direct investment (FDI) will continue to pour into the nation's retail industry.

A representative from the Domestic Market Department under the MoIT, says that the commitment to open the local market for services, investment, and distribution is a crucial reason for major enterprises from EU member states seeking to boost investment in the country’s distribution and retail industry.

Elsewhere, the majority of Vietnamese enterprises are either small and medium-sized companies with limited resources. Only a few major firms such as Saigon Co.op, VinCommerce, Thegioididong, Green Department, Satra, and BRG Retail have the capacity to compete and maintain their position within the retail market. This indicates that there is a huge potential for the domestic retail market, although the race to gain a decent market share in this field is becoming increasingly fierce, the representative noted.

Offering an in-depth analysis of the EVFTA, the Domestic Market Department pointed out that the nation’s distribution market will face an array of challenges and be severely affected by the opening process as committed due to the policy system and law not keeping up with market fluctuations.

Despite this, the management infrastructure and legal regulations regarding e-commerce remains different from other countries in terms of food hygiene and safety issues. This is in relation to the circulation of imported goods within the domestic market, causing difficulties in balancing economic development, trade, social development, and environmental protection.

“There will be tough competition between domestic distribution companies with limited capacity compared with major distribution companies from EU nations that are very capable. This may lead to the possibility that domestic distribution enterprises are susceptible to being conquered and lose a market share to foreign enterprises,” warned the Domestic Market Department.

Playground replaces the concept of "home ground"

The Domestic Market Department representative added that the time to implement commitments set out in new-generation FTAs in general and the EVFTA in particular remains a large obstacle for the country. Whilst regular FTAs have a total implementation period for all commitments of 10 years, the EVFTA, will give the nation between five and seven years to fulfill its commitments, of which many regulations will have to be carried out immediately after the agreement comes into effect, with many agreements set to be deployed over the course of the next three years.

“Vietnam's development level is still at a moderate and low level. Therefore, the implementation of the EVFTA commitments also means that Vietnam must open its market for goods and services from the EVFTA's partner countries, at that time there will be no longer concept of "home ground". In particular, for the groups of goods that Vietnam has weak competitiveness in such as agriculture, husbandry, fisheries, and some other service industries, they will encounter many challenges,” said the representative of the Domestic Market Department.

Furthermore, the Domestic Market Department believes that due to weak links between FDI enterprises and domestic goods suppliers, the FDI sector may operate separately as opposed to playing the common role of growth catalyst.

According to a number of experts, despite the EVFTA putting great pressure on the domestic market as well as the distribution system, this can be viewed as a healthy and selective competition which can help with development under an appropriate roadmap. More importantly, because of the economic structure of both sides being highly supplemental, it is anticipated that competition pressure will not be as high as forecast.

Moreover, the nation’s open-door commitment is to an agreed-upon roadmap, especially in relation to sensitive product groups, so the trade deal can be viewed as a reasonable opportunity for Vietnamese businesses to adjust and make changes to their business practices whilst improving their overall competitiveness.