Manufacturing plummeted during the first half of 2011 as Vietnam's economic woes seemed to deepen.
Some 6,000 firms in Vietnam go bankrupt or dissolve each year, but the number of bankrupted firms doubled in the first half of this year over the same period last year, according to the Vietnam Chamber of Commerce and Industry.
The situation is not expected to improve in the coming months. Purchasing power is expected to fall, worldwide, while Vietnam's inflation and interest rates are anticipated to remain high.
"This year's economic outlook is even more difficult and complicated than 2008," said economist Le Dang Doanh. "Market and demand shifts will become the main challenges for firms."
Inflation played a significant role in the downturns of both 2008 and 2011, but businesses were still stronger in 2008. This year, they have been weakened significantly, following a prolonged period of difficulty.
Last month, Vietnam's inflation rose to 22.16 percent from a year earlier, the highest level in Asia, according to the General Statistics Office. The government said it hoped to keep inflation at 15-17 percent this year.
Pham Thi Sum, chairwoman of the management board of sugar producer Bien Hoa, said high interest rates presented this year's greatest difficulties.
"We've even had to cut prices, taking on losses, so that we can recoup enough capital to cover our interest payments," she said. "Our interest payments rose to VND27 billion in the first half of this year alone."
Sum's firm is not the sole company being hurt by high interest rates.
Tran Van Quang, general director of the Dong Anh electric equipment manufacturer said, "Given the high interest rates and low purchasing power, the more firms produce, the bigger their losses."
His firm has cut back on staff, he said. "We have no hope of fulfilling our initial profit target of VND50 billion this year."
Following major losses, many firms have gone bankrupt or considered changing their business. Tran Thi Hong, a small home appliance trader in Hanoi's Hai Ba Trung District said she has closed two shops following major losses.
"Now we only have one shop on Minh Khai Street to maintain a moderate business," she said. "We may reconsider our direction after selling out our inventory."
"The difficult economic situation has strongly affected business," said Cao Sy Kiem, chairman of the Vietnam Association of Small-and Medium-Sized Enterprises. "Up to 30 percent of firms have been on the verge of bankruptcy, and only a few of them want to expand production."
According to a recent weekly report of the State Bank of Vietnam, lending rates are now as high as 25 percent a year. Many businesses have complained that the rates are too high, making it difficult to sustain production.
Despite accepting high interest rates, many firms still find it hard to access loans. The director of one commercial bank said 80 percent of their capital is short term, so it is difficult for small firms to depend on bank loans. They have to seek long-term capital sources from private investment funds, or other local funds.
Lower purchasing power in both foreign and local markets will also present a major challenge for businesses, in the coming months.
Do Dinh Dinh, the director of garment producer Hung Long, said many garment manufacturers chose customers early in the year based on their volume of orders, only to see those customers shift their attention to China.
"The number of orders late this year may fall by 20 percent," he explained. "A few months ago, when we had many orders, we could not employ enough laborers to fill them, so customers have moved to other markets."
Vietnamese producers have also raised prices due to rising input costs. Cotton, for example, has jumped 40 percent since late last year.
Importers are now turning to China, which can afford to offer lower prices due to cheap labor resources in its western regions, he said.
Vo Ta Tuan, head of the sales department at woodwork producer Constrexim, said, "We don't expect the situation to improve, late this year, because of increasing input costs."
With the increasing material and labor costs, Vietnamese woodwork has become less attractive than the same products from other countries, he said.
His firm now taps Asian markets such as China, Singapore and Malaysia, which require lower quality at lower prices, Tuan said.
"We only want to maintain our profit margin," he said. "During the first half of the year, our profits were only 40 percent of the same period last year."