Strangely, more than 50% of businesses did not make any profit over a long period of time. Super small and small businesses make up 93.7% of total number of companies, but the gross profit margin during the 2011 to 2018 period remained negative. According to the White Book on Vietnamese Businesses in 2020, super small and small enterprises still make up a majority of total number of enterprises, but the total capital is only about 22% in the entire business sector. This percentage remained almost unchanged throughout the 2011 to 2019 period, which indicates that super small and small businesses had difficulty accumulating capital and accessing capital source.
Small businesses on brink
As a result, super small and small businesses always tend to teeter on the brink of bankruptcy, even in normal times when there is no pandemic. Now with the Covid-19 pandemic, these financially strapped businesses have fallen deeper into debt and have moved closer to the edge of bankruptcy. Several relief policies, such as deferment of Corporate Income Tax (CIT) payment have not actually worked on 93% of businesses that fall under this group. Worse still, businesses that are in this group have had trouble accessing loans from banks due to business losses, meager profits and lack of any collaterals.
However, it is a curious paradox that figures from statistic agencies always show that these businesses do not run at a loss. This is because statistic agencies collect information from records of businesses, and tax officers do not accept details provided by the businesses. This explains why the financial statements provided by businesses often show negative profit margin, but reports by a tax agency show a positive result. This may be one reason why private households do not want to become companies.
The average profit margin of the whole business sector, such as state-owned businesses, private businesses and FDI companies, over the period from 2016 to 2018 was at 2.5%. It was not only lower than the deposit interest rate at banks, but also lower than the Customer Price Index (CPI). This means, further production and business activities could erode the capital, land and other resources. Among these, private enterprises had the lowest profit margin while FDI companies earned the highest profit margin.
Profits fall every year
The national business registration figures show that by 31 December 2019, the whole country had 758,610 live companies, increasing by 6.1% over the whole of 2018, whereas the number of live companies by the end of 2018 reflected a 9.2% year-on-year increase. These companies made up around 85% of the total number of live companies. With regards to profit however, the profit margin of the whole business sector in GDP showed a decrease every year, by about 1.5% to 2%, which was 46% GDP in 2017, 44% GDP in 2018 and 42.5% GDP in 2019.
The net profit margin of the whole business sector over the period 2011 to 2019 was only about 11%. That is to say, a net profit of VND 100 only produced VND 11 in added value, including employee salary, profit and depreciation of fixed assets. The added value in the business sector was so low because production activities in most manufacturing businesses were basically metalwork or assembly, producing very low added value. Making things to order or manufacturing their own products are basically under metalwork, with most of the raw material imported from other countries.
The biggest concerns facing many businesses now include inspection by a competent agency, and complicated government decrees and laws, such as the insurance law. Therefore, the best relief package at this time for all super small or small enterprises is a comfortable business environment with few inspections and removal of unreasonable provisions within circulars and decrees on tax management.