Challenges for Vietnamese domestic enterprises after ENT requirements elimination

1. About ENT requirements

ENT, short for Economic Need Test, is an economic needs inspection activity in accordance with Vietnamese law, applicable to foreign-invested economic organizations ("foreign-invested enterprises") establish a second or more retail outlets in Vietnam.

According to its name, the ENT procedure aims to inspect the economic needs of the domestic market, which is the basis for allowing foreign-invested enterprises to expand the market. Specifically, in the course of carrying out this activity, the competent authority shall carefully and thoroughly assess and consider the need and demand of the domestic market in a certain geographical market area and the ability of the domestic market to meet these needs based on criteria prescribed by law, thereby making a decision on whether or not to license a foreign-invested enterprise to establish more retail outlets, in addition to the first retail outlet already established in Vietnam[1].

2. The routes to eliminating ENT requirements

Although Vietnam's commitments to join the World Trade Organization ("WTO") since early 2007 have mentioned ENT activities in the establishment of retail outlets (other than the first retail outlet) when determining market access conditions for foreign-invested enterprises[2], however, in Decree 23/2007/ND-CP[3] issued on 12 February 2007, does not mention this activity. Until Circular 08/2013/TT-BCT[4] was issued on 22 April 2013, the requirement for ENT was officially mentioned in the provisions of Vietnamese law. However, the provisions on ENT, including cases requiring ENT, ENT criteria are still quite sketchy generally still based on Vietnam's WTO commitments. On 15 January 2018, Decree 09/2018/ND-CP officially took effect, accordingly, this Decree has concretized the provision on ENT, which help foreign-invested enterprises to better identify this activity, thereby preparing all necessary dossiers and conditions as required, simultaneously, it helps the competent authorities have clear grounds to inspect economic needs.

On 14 January 2019, the Comprehensive and Progressive Agreement for Trans-Pacific Partnership ("CPTPP") officially entered into force in Vietnam[5] and then, on 01 August 2020, the EU-Vietnam Free Trade Agreement ("EVFTA") also officially came into effect[6]. These two agreements are considered as two free trade agreements with a wide scope of commitments and the highest level of commitment of Vietnam so far. One of the commitments that Vietnam makes in these two Agreements is the elimination of the ENT requirement for foreign-invested enterprises when setting up retail outlets (other than the first retail outlet) after 05 years from the date of entry into force of these Agreements[7]. Accordingly, the elimination of ENT will start from 14 January 2024 for CPTPP and from 01 August 2025 for EVFTA.

3. Challenges for retailer in Vietnam

With its large population size and steady economic growth, Vietnam has always been an attractive market for foreign retail brands. Many foreign investors established enterprises in Vietnam many years ago to do business in the retail sector, competing directly with domestic enterprises. These can be mentioned as Big C (currently Tops Market), Mega Market, Lotte, Uniqlo, Family Mart ... brands that have affirmed their names in the Vietnamese market.

Currently, foreign-invested enterprises wishing to establish additional retail outlets (in addition to the first retail outlet) are required to implement ENT. The ENT requirement limits the market expansion capacity of these enterprises if through the ENT process, the competent authority determines through the ENT process that in the area where retail outlets are opened, the supply of the domestic market has met the corresponding demand, the opening outlet of additional retail outlets may not be allowed. In addition, the competent authority also relies on many other criteria to inspect economic needs, such as[8]: The size of the geographic market area affected by operation of the retail outlet; The number of existing retail outlets in the relevant geographic market; the impact of the retail outlet on the market stability and operating activities of other retail outlets and traditional markets in the relevant geographic market; Impact of retail outlet on traffic density, environment hygiene, fire safety in the relevant geographic market; Potential contribution of the retail outlet to the socio-economic development of the relevant geographic market, in particular: (i) employment creation for domestic workers; (ii) potential contribution to the development and modernization of the retail sector in the relevant geographic market; (iii) improvement of the environment and living conditions of the inhabitants in the relevant geographic market; and (iv) potential and actual contribution to the state budget. All these factors create certain barriers for foreign-invested enterprises.

However, from the moment the ENT regulations are abolished, the outstanding advantages that domestic enterprises have over foreign-invested enterprises will disappear (foreign-invested enterprises still have to go through the procedures for licensing the establishment of retail outlets, however, but ENT is no longer required), or in other words, domestic enterprises may face several challenges, such as:

Firstly, with the advantage of the availability of capital from foreign investors, foreign-invested enterprises will comfortably invest in expanding the market without encountering barriers in inspecting economic needs in Vietnam. Owning many retail outlets helps these brands to increase their awareness and easily bring their products to more customers.

Secondly, most foreign retail brands in Vietnam are well-know brands that have a place to stand in foreign markets. Therefore, the non-financial resources of foreign-invested enterprises that own these brands are also significant, for example, the diversity of goods sources, and input price advantages are all advantages that not all domestic enterprises have. With the current trend of consumers' shopping habits shifting, from shopping in supermarkets and hypermarkets to shopping in convenience stores, and specialty stores, owning many retail outlets with diversity in each item is a great advantage for foreign-invested enterprises.

Thirdly, a challenge that local enterprises need to pay attention to is that the retail sector has always been one of the areas where M&A activity is active[9]. Foreign-invested enterprises can directly or indirectly increase the number of ownerships of their retail outlets through mergers and acquisitions.

However, the removal of the ENT requirement also shows that Vietnam is ready for deeper and broader integration into the common game of the world, where domestic enterprises will be tested by fierce "tests" on competition from foreign-invested enterprises, from there, select retail brands capable of meeting the needs of the market, directly improving the quality of products supplied to consumers. At the same time, with investors from countries with developed economies such as the European Union (for EVFTA) and Australia, Canada, Japan, Singapore,... (for CPTPP), domestic enterprises have many opportunities to cooperate, take advantage of the advantages of partners from these countries to develop their brands in Vietnam.

In conclusion, the ENT requirement is only valid for a short time, therefore, domestic enterprises need to carefully prepare their operating strategies to be ready to receive challenges from foreign-invested enterprises soon. Simultaneously, domestic enterprises should also make changes, renew themselves to improve the "resistance" of enterprises and become more valuable in the process of cooperation with foreign partners.