New Vietnamese Circular May Threaten Local Business
May 30 – The Vietnamese government recently promulgated Circular No. 08, which stipulates that foreign invested enterprises (FIEs) that are licensed to export products may now only buy materials from Vietnamese businesses that either have the proper business certificates or are legally allowed to import products and distribute goods. FIEs are now also not allowed to develop their own collection networks.
Officially, the new law does not prohibit FIEs from buying goods directly from farmers to make finished products or from processing and exporting the products they buy. The main change is that FIEs are now prohibited from directly buying any unprocessed products to be exported from local Vietnamese farmers.
This change will likely affect many of Vietnam’s industries, particularly the coffee industry. The Ministry of Industry and Trade has reported that FIEs currently collect between 60-70 percent of the total coffee output in Vietnam, or about 1.3 million tons. This figure is expected to drop due to the new Circular, with some experts expecting a drop of up to 50 percent.
The new Circular has received criticism regarding its potential implications. Many have noted that the regulation shows the “short sighted vision” of the policy makers since it does not take into account how the policy may affect Vietnamese companies.
Domestic companies in Vietnam commonly only buy materials to be sold to foreign companies for export – they do not have long-term business plans and therefore are not keen on processing the materials prior to selling them to the FIEs. Furthermore, their coffee products generally receive a better price if sold directly to the FIEs.
Ultimately, if Vietnam prohibits FIEs from buying products from domestic businesses, then these FIEs may leave the Vietnamese market for other countries with less invasive regulations. In effect, Vietnamese businesses (in this case, farmers) will receive a lower price for the same products (in this case, coffee).
The policy is expected to take effect on June 7.
Dezan Shira & Associates is a specialist foreign direct investment practice, providing corporate establishment, business advisory, tax advisory and compliance, accounting, payroll, due diligence and financial review services to multinationals investing in emerging Asia. Since its establishment in 1992, the firm has grown into one of Asia’s most versatile full-service consultancies with operational offices across China, Hong Kong, India, Singapore and Vietnam as well as liaison offices in Italy and the United States.
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