HO CHI MINH CITY/HANOI (Reuters) - Nguyen Nam owns an engineering services firm in Ho Chi Minh City that pays no taxes nor any salaries. The flip side is it earns no revenue either.
Nam calls it a “zombie”, a familiar term in communist Vietnam, where the government’s priority of luring foreign multinationals and resuscitating its own inefficient firms has left small and medium-sized enterprises (SMEs) in dire straits.
Small enterprises are a vital link in Vietnam’s aspirations to become a global manufacturing dynamo as the country gears up to sign a slew of international trade deals, but many of these firms are uncompetitive, poorly managed and sunken by debt.
A record 67,800 companies were shut last year - 60,737 in 2013 and 54,277 in 2012 - in an astonishing run of closures.
“It’s really a waste,” said Nam, 34, who laid off staff as margins shrank. “It hurt, because it’s like...your own child and if you find it dying, you’ll feel very sad about that. That’s exactly what I felt.”
SMEs make up nine-tenths of local companies, but firms such as Nam’s, survive only in name, accounting for millions of dollars in unpaid loans and taxes.
It’s a headache for the state, which injected stimulus of $9 billion to rescue firms in 2009, with limited success. Prime Minister Nguyen Tan Dung has said Vietnam’s half-million companies are too few and too weak to compete, even at home.
Vietnam is climbing out of a half-decade slowdown but manufacturing and exports of the $184 billion economy are largely driven by multinationals and state-owned energy and textile firms.
Supportive industries are woefully weak and few firms have the capital or expertise to join a supply chain for resident giants such as Samsung Electronics Co Ltd (005930.KS), LG Electronics Inc (066570.KS) Microsoft Corp (MSFT.O) and Intel Corp (INTC.O).
Such weaknesses could expose Vietnam as it braces for an influx of investment once a Trans-Pacific Partnership (TPP) is agreed that will slash tariffs among 12 countries worth 40 percent of global GDP, including Japan and the United States.
A European Union trade deal and an integrated Southeast Asian market coming soon are also putting Vietnam on the radar of investors drawn by tariff perks, infrastructure improvements, cheap labour, tax breaks and political stability.
However, the government has a lot more to do to win over foreign firms, which have invested an average $11.3 billion a year since 2010.
Most still import raw materials and can’t find good local suppliers, such as Samsung, which has $11.2 billion of pledged investment in Vietnam but uses its firms only for packaging.
“SMEs’ limited knowledge of the market become even more limited amid deeper integration,” said former central bank governor Cao Si Kiem, now chairman of Vietnam’s SME association.
That strain is showing in the $138 billion retail market, where weak spending has hurt local shops, compounded by expansion of operators keen to exploit the fast-swelling middle class, among them Aeon Co Ltd (8267.T), Robinson Department Store (ROBINS.BK) and Lotte Shopping Co Ltd (023530.KS).
Shunned by banks, saddled themselves with bad debt ratios that are among Asia’s highest from careless lending, many SMEs are stuck in a credit trap.
What irks business owners is that SOEs, notorious for graft and wastefulness, account for half of Vietnam’s credit and many non-performing loans but still get preferential treatment.
Nguyen Son has a publishing firm in Ho Chi Minh City that has published nothing since 2011. He says he paid a bribe to get a loan - with interest at more than 20 percent.
“For ordinary people like me, it’s very difficult, but for big businessmen with support from authorities, from politicians, it’s easy,” he said.
To be sure, a government paper last month outlined plans to improve domestic competitiveness, “with a socialist orientation”. It said bad loans would be settled, local goods promoted, procedures simplified and SMEs given better credit access. However, it did not say how the aims would be achieved.
There are scattered signs of hope though. Vietnam’s textile factories are punching above their weight and could eclipse China in TPP markets. Last year, it shipped $31 billion of garments and footwear, including a tenth of the world’s shoes.
And as firms close in their droves, new ones are also setting up - 74,842 last year and 76,955 in 2013.
Key to their survival, according to former government adviser Le Dang Doanh, is a shift in the state’s priorities to building a domestic business bedrock.
“We’re excessively chasing after foreign firms...we can’t industrialize on the basis of foreign firms. We cannot say our brand is Samsung,” Doanh said.
“Vietnamese firms will have to reform and change direction very strongly.”
Writing by Martin Petty; Editing by Jacqueline Wong