Working Together to Go Far

On December 31, 2015, the ASEAN Economic Community (AEC) was officially established - an important milestone of the ASEAN region. The AEC is a synergy of 10 member economies, namely Indonesia, Malaysia, the Philippines, Singapore, Thailand, Brunei, Vietnam, Laos, Myanmar and Cambodia. This forms a production, trade and investment zone with more than 600 million people and annual gross domestic product (GDP) of over US$2,000 billion. The AEC has created a new playing field in the region, with a stronger competition and more opportunities opened to Vietnamese companies, but it also poses new challenges. To learn about this, Vietnam Business Forum Magazine interviewed Dr Doan Duy Khuong, Vice President of Vietnam Chamber of Commerce and Industry (VCCI ) and Chairman of ASEAN Business Advisory Council (ASEAN BAC) Vietnam. Huong Loan reports.

 

The birth of the AEC is a turning point of comprehensive regional integration in ASEAN economies that moves towards an economic - security - social community and enhances regional economic competitiveness.

 

A remarkable achievement of a single market and a common production base is tariff reduction. After the ASEAN Free Trade Area was enforced, common tariffs among ASEAN-6 countries (six most developed countries in ASEAN: Brunei, Indonesia, Malaysia, the Philippines, Singapore and Thailand) were brought down to almost zero. As a result, over 70 per cent of intra-region trade transactions are free from tariffs and less than 5 per cent is taxed at over 10 per cent. With such low tax rates, the current priority is to remove non-tariff barriers in ASEAN.

 

Some other progress is achieved in promoting trade facilitation and investment liberalisation. An example is the National Single Window (NSW) - a fast-track single-window policy to speed up customs clearance in ASEAN-6 countries. These economies have now almost fully complied with international practices of investment liberalisation.

 

In general, by the end of 2015, the AEC realisation plan, which consists of 611 programmes and actions, has reached over 90 per cent of its contents. This is a premise for us to believe in the future success of the AEC.

 

Vietnam officially became the 7^th full member of ASEAN in 1995 and started to participate in the ASEAN Free Trade Area (AFTA) in 1996.

 

The idea of developing ASEAN into a community originated from the 2020 ASEAN Vision Declaration of ASEAN leaders in December 1997. And, at the 12^th ASEAN Summit in January 2007, ASEAN members decided to shorten the deadline of the AEC formation to 2015 from 2020.

 

The AEC is not simply liberalising trade and investment as other FTAs like TPP or VEUFTA, but it marks a comprehensive regional integration of Southeast Asian economies, enhances regional economic competitiveness, and helps ASEAN to become a large market with the purpose of ensuring the free movement of goods, services, capital, labour and professionals.

 

Structurally, the AEC and the EU have many points in common like moving towards the formation of a free trade area where capital, goods and labourers are free to move. Apart from institutional differences, macroeconomic scale and growth uniformity in general, the most fundamental difference is the existence of the euro zone and the Schengen Agreement in the EU. Meanwhile, the AEC does not have features similar to these.

 

Moreover, with its diversity, the AEC also aims to develop an equal, competitive economic development zone in order to narrow the development gap among member economies to compete and extend effective cooperation with the rest of the world.

 

 

ASEAN is one of key markets of Vietnam. The establishment of the AEC will thus be a chance for Vietnamese enterprises to expand the scale of production and business with better access to this market on the free mobility of goods, services, capital and labour.

 

Besides cooperation opportunities with other companies in the region, the AEC will also be the foundation for Vietnam to further enhance its position and expand business cooperation in important non-ASEAN markets.

 

The AEC also opens up opportunities for other ASEAN businesses in Vietnam. With similar commodity structures in all 10 ASEAN countries, the market opening not only entails active domestic market development, but also inevitably brings in huge competitive pressures on Vietnamese enterprises, especially those with weak competitiveness and previously protected industries. However, with its experience from the entry to AFTA in 1996, upcoming pressures will mainly descend on sensitive commodities, services (logistics, tourism, etc), capital markets and labour.

 

However, I am optimistic that this will be a good competition for Vietnamese companies to change their outlook on the domestic market, reform their apparatus, invest in human resources, enhance capital sources, upgrade management systems and adopt policies consistent with manufacturing strategies to capitalise on their home-market advantages to create better products and services to win over imported goods and better serve the people. Domestic market maintenance and development strategies plus progressive steps to expand regional markets will be important approaches of the business community for AEC integration programmes.

 

Vietnam is always highly valued for its cheap labour. Nevertheless, with low productivity, lack of skills, poor creativity and poor organisational effectiveness, Vietnam will come under huge pressure in this market as well as face difficulties in attracting large-scale, path-breaking investment projects. Since then, the gap between Vietnam and ASEAN countries with better fundamentals, such as Singapore, Malaysia, Thailand or Indonesia, will grow wider.

 

However, I believe that institutional innovation, economic restructuring and business restructuring, plus integration-based educational reform, will help mitigate and eliminate these pressures.

 

After five years entering the World Trade Organisation (WTO), AFTA and other trade agreements, Vietnamese enterprises have enjoyed great opportunities for increase exports by means of market opening and trade liberalisation. As a result, Vietnam’s commodity markets have been expanded and export prices have been on the rise. Not only increasing in volume, the export structure of Vietnam has also positively changed, featuring an increasing share of processed goods and a declining share of crude exports. However, while overall, the competitiveness of Vietnamese enterprises has been improved, the progress is not significant and the stability is low. Most Vietnamese companies have small scales, small market shares, weak scientific - technological potential, unpopular brand names and import-reliant production for export, and low quality human resources.

 

Because of these issues, Vietnamese companies are not currently aware of the challenges and opportunities of the AEC. They are quite optimistic that increasing labour mobility, reduced barriers to trade and freer investment flows will strengthen competitiveness, especially when there is combined investment in education and training. However, they lack preparations for competition with other competitors in the region, especially in the labour market. Only over 40 per cent of enterprises now fully understand AEC implications on their business - this is a relatively low rate compared to other ASEAN countries.

 

Limited or passive perception or no strategy will leave enterprises (particularly with 96 per cent of them classified SMEs) having difficulty taking advantage of AEC opportunities, resulting in higher opportunity costs and gradual loss of corporate competitiveness. Most businesses see the AEC as an opportunity to access markets and increase exports, but these benefits are relatively limited in the AEC. It is important to understand that the AEC is a deeper integration than we feel about the AFTA, which is primarily related to goods. Connecting a "single market and a common production base" is the main objective of the AEC and the long term benefit that ASEAN companies need to target. In that process, businesses both cooperate and compete.

 

In reality, although the AEC is about to take effect, intra-ASEAN trading is assessed low for member countries. Data from international organisations in 2013 showed that intra-ASEAN trading was very modest, accounting for just 25 per cent, compared to 60 per cent in the EU, 48 per cent in the NAFTA and 27 per cent in Latin American.

This is assessed as a weakness, but it is also a potential opportunity for us to expand intra-regional business cooperation. The formation of the AEC with basic elements of trade and investment will be the driving force to explore economic development potential in the region, including Vietnam. The very cooperation and competition in the AEC will open up new potential to increase the region's GDP and form a bigger single market with greater spending power instead of a small market with traditional export models. In that process, the business community will be the deciding factor in opening the way for trade and investment in ASEAN common market and production zone.

In my opinion, Vietnamese businesses firstly need to have positive thinking about integration, raising their awareness and understanding of integration and regarding economic integration programmes as economic commitments where there are both cooperation and competition. They need to see that ASEAN is as important as the US and the EU because these neighbouring markets help them reduce costs and boost potential business. They need to see ASEAN as the home ground and understand that if they cannot compete and develop in ASEAN, their deeper integration into the world market will be ineffective. They need to conduct deeper studies on the ASEAN market as well as supporting policies that the AEC brings to map out suitable business strategies, promote exports and invest more in ASEAN. 2016 is the first year of the AEC era. Laos will be the host of the ASEAN this year. Many ASEAN governmental and business activities, including the ASEAN Business and Investment Summit, will be held in Vientiane. Actively taking part in these activities will be a good opportunity for Vietnamese businesses to overcome these limitations.

 

In addition, they need to improve and promote their core values to sharpen competitiveness. A business must be regarded as a chain of added values generated by direct business and production activities and support activities. Production and business activities include product creation, marketing, distribution and after-sales service. Support activities include resources, input infrastructure, leadership, law and others. The capacity of a business is a collection of added value chain of those activities. Core values of a company are such capacities. Making a difference in core values will ensure that businesses will have comparative advantages to their competitors and bring profits for them. To identify such differences, they must have such competition analysis tools as SWOT (strengths, weaknesses, opportunities and threats), competitors and markets.

 

Especially, current business trends focus on general and cross-industry service value chains. Therefore, enterprises need to learn business competitiveness strategies from each other, participate in value chains, create economies of scale and better promote comparative advantages. When the AEC is formed, more foreign companies are expected to invest in Vietnam and they will enter and take market share from Vietnamese companies. To compete with foreign rivals, Vietnamese companies need to strengthen their cooperation to synergise the force of the community. They should also boost exchanges and dialogues with government agencies and business associations to capture information and policies, and reflect obstacles to relevant authorities to have appropriate adjustments in time.

 

Besides, Vietnamese businesses can also cooperate with other ASEAN partners in value chains as they have many points in common to jointly compete with ASEAN expanded partners.

 

In addition to improving the quality of negotiations and expanding the market, the Government and relevant authorities should have support activities and programmes to improve and disseminate knowledge of the AEC to the business community. Like institutional reform, building a consistent, open, transparent, public and predictable legal framework, and creating an environment more favourable for business and investment are very important. The Government should set a development roadmap with strategic planning for key commodities and industries to fully leverage advantages such as geographical location and human resources. It needs to have development strategies, protect the rights of enterprises, and prevent financial risks (especially for SMEs) in developing the domestic market and the ASEAN region.