Local firms feel the heat of rising input costs

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Local firms struggling to manage soaring input costs and high interest rates will find government support critical for getting through tough times, experts say.

However, some of them are worried about the lack of resilience shown by some enterprises which they say does not augur well for the future when competition gets even tougher.

The director of a consumer goods manufacturer in Ho Chi Minh City's Binh Chanh District, who wished to remain unnamed, said his firm normally pays electricity bills of nearly VND100 million (US$4,800) per month.

With a 15-percent increase in electricity prices starting this month, rising costs for transporting raw materials from ports to the factory following a recent hike in petrol prices, as well as other increasing input costs, production costs will climb significantly, he said.

In addition, the firm will have to raise salaries for employees soon to offset inflation, he said, adding he was not sure the increased costs can be passed on to consumers.

Inflation quickened to a two-year high in February with prices rising 12.31 percent from a year earlier, compared with 12.17 percent in January.

"Input costs have increased more than 20 percent, while selling prices will go up by 10 percent at the highest," said Cao Tien Vi, chairman of the HCMC Young Business Association, "We don't know how customers will react to the new prices. If they don't accept it, consumption demand will decline. And businesses will suffer."

Huynh Van Minh, chairman of the HCMC Business Association, said sky-high interest rates are hitting businesses hard. Most firms are opting not to borrow money from banks now because they fear they can make no profit with the prevalent rates.

Tran Bac Ha, chairman of the Bank for Investment and Development of Vietnam, agreed with Minh.

"Compared with the current health of companies, the 17-19 percent per annum rates are high," he said.

"The deposit rate should be 12.5 percent, so that the lending rate is down to 15-16 percent. However, in the context of high inflation, it is not feasible to decrease the rates," said Ha.

He said interest rates could fall at the end of the second quarter or early in the third when the country's macroeconomic fundamentals improve and the money market stabilizes.

Minh said that only two groups of enterprises are taking bank loans now those that have signed high-value contracts with high profits and those willing to take the risk, no matter how high the interest rates are, because they need the funds badly to continue operations.

"Production companies don't dare to borrow money to import machines and equipment to improve their products. As a result, there will be a shortage of goods in the coming years. The competitiveness of Vietnamese products, which is now weak, will become weaker in the future," Minh said.

Economist Pham Chi Lan, a former advisor to the government, shared another concern.

Lan said she was worried that some companies were "˜surrendering' too soon by cutting production or shutting down some of its branches.

"More dangerously, some firms have imported goods, mostly from China, and then stuck their brands on the products for sale instead of importing raw materials and doing their own manufacturing.

"This might help businesses earn profits at a difficult time but it is extremely bad for the country's manufacturing sector in the long term. This phenomenon will tend to increase," she said.

In the southern province of Binh Duong, companies have to deal with not only rising input costs and high interest rates but regular blackouts.

Nguyen Thanh Phong, general director of a paint production company in the province, said his firm has had to face power cuts twice a week since the beginning of this month.

"We don't use the electric generator as we can't afford high fuel prices," Phong said.

Furniture maker Duc Loi has cut production for the same reason, said the company's general director Le Tri Thang.

"Less production means less income for workers. So, many of them have quit their jobs. The blackouts have also delayed production. As a result, we've made late deliveries to our overseas customers, prompting them to look for suppliers in other countries. In the coming time, export orders might fall further," he said.

Gov't support crucial

Pham Xuan Hong, chairman of the HCMC Garment, Textile, Embroidery and Knitting Association, said the government should grant tax breaks for businesses so that they can use the funds to cover production costs instead of borrowing money from banks at high rates.

Vietnam levies a corporate income tax of 25 percent, payable every quarter.

Meanwhile, Tran Hoang Ngan, a member of the National Monetary and Financial Policy Advisory Council, suggested the government cut the corporate income tax for small- and medium-sized firms in this difficult situation.

Vietnam is home to around 500,000 small- and medium-sized companies, accounting for 90 percent of the total number of firms. The sector contributes significantly to the country's gross domestic product.

Economist Lan said the government should work out detailed policies to support businesses which employ a large number of workers or those that are engaged in key sectors like agriculture and exports.

To help businesses deal with the global economic downturn, Vietnam had put in place a fiscal stimulus package early in 2009 valued at about 8.6 percent of gross domestic product. While experts assessed it in general as a successful policy, it was said later that it had failed to reach many target beneficiaries.

"If these firms struggle to continue their operations and cut jobs, there will be a lot of unemployed people. That will be a huge burden for our society," Lan said.

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