Foreign investors eyeing weak domestic enterprises

(ĐTTCO) - The sudden and unpredictable spread of the Covid-19 pandemic since early this year has caused several very healthy businesses to buckle under uncertain times and conditions, and has placed them in dire and difficult situations.
May 10 was one of hard hit enterprises in Q2.
May 10 was one of hard hit enterprises in Q2.

On the other hand, this situation has proved enticing for many foreign investors who can now invest their resources cheaply and even acquire weak domestic enterprises in the near future.

Complicated support packages

In the last few days, even though life has almost returned back to normal, the purchasing power of consumers is still very limited, especially for non-essential goods such as fashion clothing. This has become a cause for serious concern for one director of a children fashion clothing company. For him, inventory has piled up while overhead expenses such as wages of workers and payment for raw materials has still to be spent, as production cannot be stopped. All channels for raising capital have also been exhausted and there is a deep concern as to how long the company can continue to hold on.  

Almost all enterprises making goods for exports are also facing difficulties in cash flow to meet their daily overhead needs. Mr. Than Duc Viet, General Director of Garment Company 10, said that the period from mid March, when major partners in Europe, the US and Japan began cancelling or postponing orders, payments faced a deadlock as all costs are tied up in goods. Despite all efforts to continue to maintain production, Mr. Viet believes that in the second quarter, revenue in his Garment Company could decrease by 35% compared to the same period last year.

Shortage of cash flow for production and businesses is a common and overall concern of many businesses, especially small and micro enterprises. A recent study by the Association of Chartered Certified Accountants (ACCA) shows that the most severe impact on Vietnamese enterprises during the Covid-19 pandemic has been a severe shortage of cash flow, which has then directly affected the day to day running and subsequently the survival of enterprises. Upto 47% of businesses surveyed said that they are facing serious difficulties in cash flow, higher by 37% globally and 44% among common ASEAN businesses.

Earlier, a survey by the Vietnam Chamber of Commerce and Industry (VCCI) gave very worrying figures. Accordingly, nearly 85% of businesses said that the pandemic had narrowed their market; nearly 60% of enterprises lacked capital and had cut down on business costs; 43% of enterprises had reduced their labor size; 82% thought their revenue in 2020 woud be greatly reduced compared to 2019, with 30% of businesses seeing a decrease by 30-50% and 22% by 50%. The number of enterprises temporarily suspending operations in the past four months were around 33.6%. In the wood industry too, the pandemic has brought down production to just 7%.

Faced with this difficult situation, and the unpredictability of the disease, many businesses have chosen to slow operations or totally turn around their business plan. Now with the disease being somewhat contained, many businesses have not been able to bounce back and need the help of the State. The Government is well aware of the situation affecting enterprises and has launched many credit packages to support businesses to restart, but access to such support is not so simple. Many businesses shared that it is difficult to access loans due to strict and tighter regulations, appraisal conditions, and cumbersome procedures. If the application is not clear, it is difficult for small, medium and micro enterprises to access preferential policies. The supporting policies are also very different in all banks. Access to loans has been more difficult and it is not easy to make an application for interest rate reduction either.

Survey conducted by the Ho Chi Minh City Association of Enterprises on accessibility of Government support packages showed several concerns of enterprises. Upto 28% of businesses said the procedures were too complicated, 14% said that the information guidelines were not helpful, but the biggest bottleneck was that enterprises were required to show a collateral. How to simplify the loan conditions is what businesses, especially small and super small businesses expect at this time. Earlier, such businesses could quickly recover because of their flexibility, but could also completely disappear under severe financial losses.

Opportunity for foreign investors

Many domestic enterprises took a direct hit during the Covid-19 pandemic, and now are having complicated difficulties in accessing support packages, which has opened lucrative opportunities for foreign enterprises that have the potential to buy up huge number of shares and acquire domestic enterprises at lowered prices.

According to data of the Ho Chi Minh City Statistical Office, in the first four months there were only 369 new Foreign Direct Investment (FDI) projects with a total registered capital of around USD 200 mn, while there were 1,707 cases of foreign investors contributing capital and buying shares in several domestic enterprises, with a total capital of around USD 1 billion. This shows that the number of FDI projects were only about one fifth of the capital contribution and share purchases. Currently, Ho Chi Minh City accounts for more than 53% of total investment transactions in the country, while the entire country now has 3,210 times more capital contribution and share purchase by foreign investors.

In capital contribution and shares purchase by foreign investors, the investment of Chinese investors is very noticeable. According to data of the Foreign Investment Agency in the Ministry of Planning and Investment, in April alone Chinese investors increased a hundred fold. From the beginning of the year until now, the number of investors from China carrying out investment through M&A process of Vietnamese enterprises has reached a total capital contribution of around USD 230 mn compared to the same period last year. The amount of capital contribution and share purchases of Chinese enterprises in the last four months has increased by 154 transactions, an increase of almost 38%, amounting to an increase of about USD 65 mn.

Vietnam, with a population of nearly 100 million, and a robust growing economy, is an attractive piece of cake in the eyes of foreign investors. In recent years, many domestic enterprises have been acquired by foreign investors. The outbreak of the Covid-19 pandemic has certainly been a rosy opportunity for some foreign businesses to acquire potential Vietnamese brands at extremely low value.