Striving for a made-in-Vietnam digital economy
Striving for a made-in-Vietnam digital economy
Phrases such as online purchase, online taxi booking or online food orders have become familiar. The benefits for consumer welfare are clear, but do Vietnamese firms stand to gain too?
Five or seven years ago, it seemed unlikely that people would be able to purchase practically everything, from groceries and clothes to expensive goods such as television sets, fridges or even houses, in the comfort of their home.
Escalating growth
The year of 2018 and the first nine months of 2019 witnessed the phenomenal growth of the digital economy in six Southeast Asian countries, with the total value of this industry surpassing US$100 billion. The latest report on the digital economy by Google, Temasek and Bain & Company shows that Indonesia and Vietnam boast the fastest growing digital economies in the region (49% and 38% compared with 2015).
Vietnam’s digital economy is expected to reach US$12 billion, accounting for 4.2% of GDP, in 2019 and balloon to US$43 billion in 2025. E-commerce, online travel, online media and transport booking will take the lead. Financial services have also been on the rise.
E-commerce is the fastest growing and most lucrative (estimated at US$5 billion in 2019 and US$23 billion in 2025). A study by iPrice in 2018 showed that Vietnam accounted for five out of 10 most popular online shopping platforms in Southeast Asia, including Shopee, Tiki, Lazada, Sendo and Thegioididong.
Vietnam, with 61 million Internet users (almost two-thirds of the population), offers an enticing market for local firms. However, are they able to tap into this opportunity?
Foreign players
Most major e-commerce platforms in Vietnam are dominantly owned by foreign investors. Alibaba has held an 83% stake in Lazada since the acquisition in June 2017. Tencent boasts the lion’s share of Tiki while Shopee is a subsidiary of Singapore-based SEA. Even FPT’s Sendo has a foreign ownership rate of 57.31%.
The same trend occurs in the transport booking market, with Grab capturing most of the market share in Vietnam after taking over Uber in Southeast Asia. According to ABI’s investigation, the number of online transport bookings via Grab in the first six months of 2019 was 146 million, followed by Be (31 million), Go-Viet (21 million), FastGo (two million) and the remaining applications (200,000).
In contrast, online travel and financial services still offer many opportunities. According to the Pacific Asia Travel Association (PATA) and Oxford Economics, the percentage of Vietnamese households with access to online travel is 66%. However, Vietnam’s online travel service providers have met only a fraction of local consumers’ demand (20%). Foreign online travel platforms such as Agoda, Booking and Hotels remain far more dominant (80%)
Despite their sizzling growth, the digital economies in Indonesia and Vietnam lag behind when it comes to financial services. According to the World Bank, the share of cashless transactions in Vietnam is among the region’s lowest (4.9%, compared with 60% in Thailand and 90% in Malaysia). Ninety percent of Vietnamese use ATM cards to withdraw money instead of making e-payments(5). The number of Vietnamese who fully use banking services is also the lowest in the ASEAN 5 group.
In other words, local firms have yet to thrive in the digital economy. New companies that fare well are often acquired by foreign investors almost immediately due to lack of capital. Meanwhile, big companies seem to be inflexible or lack the necessary creativity, resources and skills to compete with their foreign counterparts. Why so?
Causes
Capital plays a part. The digital economy requires vast amounts of capital. For example, e-commerce platforms rely on promotions to boost their market share and influence consumption habits, accepting enormous losses in the process. Consider, for example, Lazada (VND5.339 trillion in 2018), Shopee (VND2.708 trillion), Tiki (VND1.395 trillion) and Sendo (VND229 billion in 2016). Home advantage does not count much. What matters, instead, is a host of resources that boost competitiveness.
Moreover, Vietnam has yet to develop a comprehensive legal framework for the digital economy. Consequently, its companies must navigate their way through murky legal waters.
Besides, cybersecurity is vital for nurturing consumer trust in the digital economy. Unfortunately, according to Kaspersky Lab, Vietnam was the country most susceptible to ICS attacks and the third most prone to cyber threats in 2018. Unless there are improvements, consumers may be wary about the digital economy.
Solutions
While foreign firms have dominated Vietnam’s digital economy, protectionism is inadvisable as it will spell trouble for competition and consumer welfare.
To support local firms, Vietnam should foster an equal business environment, an innovation-friendly legal corridor, a good network of infrastructure and a digital ecological system in the economy.
The legal framework for e-commerce in Vietnam is extremely outdated and problematic. A better legal corridor that helps enterprises overcome challenges and catch up with their foreign peers will be immensely useful.
It is important to tackle oligopolies in the telecom and Internet service market by helping many firms enter these markets and eliminating regulations that benefit only the currently dominant State-owned enterprises (especially rules that dictate charges and promotion limits). Without healthy competition, innovation is impossible and there will be no digital ecological system where firms collaborate.
Vietnam should also upgrade its online infrastructure so that consumers can access high-speed Internet. Educational initiatives that raise IT literacy are crucial. The Government should encourage consumers to participate more actively in the digital economy and offer discounts for cashless payments. Korea succeeded in this regard, pushing the rate of people using e-payments to 80% in 2017.
Besides, cybersecurity and personal data administration should be enhanced via specific and effective policies. Companies that want to collect, extract or analyze consumer data in Vietnam must comply with local regulations on data protection, cybersecurity audit, illegal content removal and protection of children.
