Thứ Bảy, 13 tháng 7, 2013

PESTEL analysis for Vietnam zinc coated steel sheet industry

A PESTEL analysis is a framework used to analyze and monitor the macro-environmental factors that have an impact on an organization. The result of which is used to identify opportunities and threats which is used in a SWOT analysis.
PESTEL stands for:
    P – Political
    E – Economic
    S – Social
    T – Technological
    E – Environmental
    L – Legal
Let us study in turn these factors:
*      Political factors
-          Plan of decreasing corporate income tax: On May 29th, 2013, at the plenary session of the National Assembly discussed the Draft Law of amending and supplementing a number of articles of the Law on Corporate Income Tax, the majority of delegates agreed to decrease corporate income tax from 25% today down to 22% in the 2014 and 2015 to help enterprises overcome difficulties, to expand production, increase competitiveness [1].
-          Policy of licensing restrictions on steel sector investment: The hot development of steel industry: The investment boom of the steel industry in Vietnam, especially in the recent years have been too high. It has overcome the "Vietnam's steel industry development plan for 2007-2015, with a vision to 2025" of government. According to checking results by the Ministry of Industry and Trade last year, announced that, to date, there have been 32 projects not on the list has been approved the investment certificates[2]. In the coming time the government will adopt measures to alleviate the investment rate on the steel industry, for example, applying the high price of electricity to the steel industry. Actually, in 2012, the Electricity Regulatory Department considered to increase the electricity price for steel production sector and cement industry[3].
-          The policy of exchange rate is not stable, led the businesses in the steel industry have to add the cost to purchase foreign currency to import raw materials. In addition, the VND devaluation affects the profit of steel company, especially, the debt is financed by foreign currency. The adjustment of USD exchange rate of 9.3% in 2011 did many enterprise face difficulties. Many companies expressed concerns about commitment of fluctuation level in exchange rates that the State Bank has announced is 2-3% this year[4].
*      Economic factors
-          High demand of steel in Vietnam: According to Vietnam's National Center for Social - Economic Information and Forecast- Operations Center: Developed countries (For example G7): consumption of steel per-capita steel annually is 250-500kg because they had finished industrialization. For the newly industrialized countries (NIC), for example at 2003, consumption of steel per-capita steel of Korea is 995Kg and Taiwan is 878Kg[5].
Meanwhile the Vietnam's steel consumption per capita is still very low 149.7 kg of steel / people year (2010), compared with a world average of 193 kg and 275 kg of the ASEAN region.
Figure 2.1: Vietnam’s per-capita crude steel consumption ranks ninth in Asia (2010)[6]
Source: Credit Suisse Securities Research & Analytics
-          High growth of demand in domestic market: According to the Vietnam Steel Association, the forecast of consumption capacity for galvanized steel products in Vietnam market in 2015 will reach 450 thousand tons, 600 thousand tons in 2020 and by 2025 will reach 720 thousand tons. For PPGI products will reach 700 thousand tons in 2015, in 2020 reached 950 thousand tons, and in 2025 will reach 1.1 million tons. That means the coated steel sheet industry has an average growth rate of 6-7% per year from now to 2020[7]. In fact, three items have a high growth rate of the steel industry in 2012 are galvanised steel and cold rolled steel, have an impressive growth of 28% [8]. Consumption of GI steel and cold rolled steel pipes has increased recently: In 2010, consumption was 568,830 tons, raised up 632,826 tons in 2011 and slowdown 649,706 in 2012[9].
-          Imbalance development: Developing fast but unsustainable, imbalances between developed upstream and downstream. Overcapacity of cold rolled steel and galvanized steel, while imports 100% hot rolled coil steel from abroad. Currently, hot rolled steel coils, hot rolled steel sheets and stainless steel, each year needs to import 5 million tons[10].
-          High growth potential of export: Currently, PPGI (Pre-Painted Galvanized Iron) products, galvanized (GI) products of Vietnam won significant market share in Malaysia, Thailand. In 2012, exports of steel products reached 2.33 million tons, turnover of more than $ 2 billion USD, export of PPGI and Galvanised product increased 28%, Chairman of the Vietnam Steel Association (VSA), Pham Chi Cuong said[11]. Recently, the companies in the industry have increased the export share, such as Ton Dong A's export sales reached 23% in 2011 and increased to 32% in 2012[12]. Hoa Sen has export revenues in 2011 accounted for 26%, and 2012 increased 37.2%[13].
-          Real estate market is in slow down: Changes in the real estate market from 1991 -2011: after prices reached a peak in 2007, the real estate market began to decline from 2008 to 2011. This is a long period of decline in this market in the history of real estate development in Vietnam, according to[14].
Figure 2.2: Growth Rate of Real Estate Market 1991-2011.

-          GDP growth rate is decreasing recent years: The relationship between the increase in steel consumption and GDP growth is clear, with economy has high GDP growth rate, we need to develop infrastructure, roads, transportation, housing and real estate to meet the capacity development needs. Therefore, growth in the construction sector is very high resulting in significantly increased the demand of steel.
Figure 2.3: The relationship between GDP growth and steel consumption 2001-2007.

Steel consumption, ‘000tons
GDP, million USD

Source: Elaborated by this study
Unfortunately, GDP growth in recent years has decreased significantly because of the internal weaknesses of the economy also affected of the global recession. This obviously will affect significantly on Vietnam's steel consumption currently. GDP growth in 2010 reached 6.8%, 2011 was 5.9% and in 2012 only reached 5%.
Figure 2.4: Vietnam GDP growth rate 2004-2012
-          High interest rates: According to the data of Return on Investment (ROI) in the past 5 years (2008-2011) of nearly 1,000 businesses in Vietnam, the average ROI of 14% per year (Stox Plus), but in 2008, sometime interest rates to nearly 25% / year. During 2011 and 2012, lending rates typically more than 20% / year, higher than from 3-4 times higher than other countries in the region such as China, Thailand and Malaysia. With interest rates at over 20% / year as at that time, Vietnam was put into the countries with the highest interest rate on the world[15].
-          Interest rate is decreasing recently: However, the government attempting to operate monetary policy to cool the interest rates. Currently, the VND deposit rate period less than 12 months at 7.5% / year, therefore, interest rate of loans are likely to be 12% / year.
Figure 2.5: Interest rate fluctuations in recently
Source: Vietcombank/ Gafin.
-          Threat of imported steel products: International economic integration is an important issue in the current globalization trends today. Join WTO / AFTA brings many advantages for the Vietnamese economy, such as: the principle of non-discrimination, elimination of quotas, for example, for textiles. However, economic integration also brings disadvantages such as tax cuts will lead to goods from other countries will quickly swept into the Vietnamese market. For instance, 11/2011, the government issued Circular 162/2011 for taxation cut under the roadmap of Agreement of Free Trade Area between ASEAN and China in 2012-2014 period, valid from 2012. Herewith, the majority of cold-rolled steel products, galvanizing steel, PPGI from China has tax cut to 0-5%[16].
-          China’s export possibility:
*      Social factors
-          Corporate Social Responsibility (CSR): Social responsibility is not merely the implementation of humanitarian activities as understood by many companies, but also includes responsibility for ensuring economic growth, efficiency, compliance with laws on wages, insurance, occupational safety issues for workers, business ethics and share with the community difficulties.
In addition to economic efficiency when implementing social responsibility, enterprises can also benefit from the creation of images with business partners, engagement and employee satisfaction, attract highly skilled workers. Currently, the social responsibility associated with the sustainable development of enterprises is an inevitable trend in the integration of the businesses, by social responsibility benefits for enterprises, society and enhance competitiveness of enterprises. The implementation of good corporate social responsibility is a strategic investment for long term business growth and sustainability of businesses[17].
-          Attitudes toward product quality: Before, the building materials industry used to use bricks, tiles or asbestos-cement for roofing and wall covering. Through the years, along with the expansion of industrial zones and urban areas, most of the factory buildings were used galvanized sheets, about 10 years ago tend to use zinc- aluminum coated steel increased. Besides the demand for PPGI is also high, using of PPGI ensuring durability for work: anti-corrosion, waterproof, heat-resistant, and high aesthetic also increases.
-          Workforce is abundance and unbalance: Redundant of unskilled labor and shortage  of skilled labor.
Statistics show that in 2011, Vietnam in the labor force aged 15 and over accounted for 51.39 million, up 1.97% over 2010[18]. In 2011, the demand for unskilled labor recruitment decreased 6.06% compared to 2010 and increased recruitment of skilled and qualified. However, this section of human resource lacks of both quantity and quality. The financial and accounting sector always exceed the number of job seekers on recruitment needs of the business at around 30%, but companies still lack experienced personnel and skilled professionals. Power sector, construction, architecture, information technology, processing technology would only meet about 60% of recruitment needs[19].
*      Technological factors
-          Backward technology in steel production of Vietnam.
According to VSA’s statistics, there are nearly 30% steel enterprises use outdated technologies, more than 40% of the technology used in the average. Only about 30% using advanced technology and modern[20]. Outdated technology will be suffering the consequences of fuel costs and higher production materials, while the quality of products are very low. Pressure on updating of new technology: New technology could produce high quality products, low raw material and energy consumption, less environmental pollution. Applying advanced manufacturing technology can bring competitive advantage for enterprises in the context of today's economic downturn.
-          Pressure on tasks Research and Development : Competitive pressures are increasing, not only from domestic competitors but also from very strong opponent from overseas forcing companies to establish the Department of Research and Development (R & D): Study and develop products (Product R & D), research and develop technology (Technology R & D), research and develop production processes (Process R & D)
-          Pressure from information technology: Electronic commerce and web technologies evolve rapidly, providing many advantages as well as difficulties for businesses, such as fading business decisions in a very short time. This issue be resolved only when the enterprise management system supported by an information technology system (MIS-Management Information System).
*      Environmental factors
-          Urbanization rate: The urbanization rate measured by the percentage of urban population in the total population. Vietnam is entering the critical phase of the urbanization process corresponds to the current process of economic development, the Vietnamese government has particularly focused on the development of urban system.
Since the renovation in 1986, the urban population in Vietnam began to increase rapidly. Vietnam is in the first stages of urbanization, and will soon move to the intermediate phase with the current rate of urbanization: the current urban population accounted for 34% of the national population, with speed of growth of 3.4% per year[21]. As we know, the process of urbanization will increase the demand for means of transports, roads and bridges as well as housings.  All these elements make steel demand grow in Vietnam.
Figure 2.2: Vietnam’s urbanization rate 1995-2035

Source: World Bank (2011)
-          Depleted fuel sources could not be revived such as oil, leads to the prices of traditional fuels, such as D.O., F.O. and LPG increased, then, made the cost of production substantially increase. Businesses want to have competitive prices, they have to find the alternative energy sources which cheaper. Based on the figure 2.2, we can see the increase in oil prices over the years significantly, though oil production output increased[22].
Figure 2.3: Crude oil production and prices- OPEC Countries from 1990-2011.

Source: WTRG Economics (2011).
-          Power shortage: According to the Ministry of Industry and Trade, from now to 2015, Vietnam will continue to face power shortages in the dry season. Industries, especially cement and steel, the power consumption is greatest. Electricity demand of these two industries increased by 3 times in recent years and will continue to increase 3 times in next 20 years. Currently, the power supply for Vietnam is mainly supplied from the hydroelectric plants (37%), followed by imports and other sources (32%)[23]. In 2013, threat of missing 1.43 billion kWh in dry season, equivalent to 2.2% of electricity production[24].
-          Power cost is quickly increasing recently: For example, in Feb 2011, the government has decided to raise the country’s power price by a record 15.3 percent, up from the current VND1,077 per kw/h to VND1,241 per kw/h, starting March 1, 2011. Increased 5 percent in 2012 and expected to raise 7 percent in 2013[25].
Figure 2.4: Average electricity retail tariffs.

Source: Tuan, N.A. (2012). "A Case Study on Power Sector Restructuring in Vietnam". Pacific Energy Summit. 2012 Summit Papers.
-          Shortage of land area for developing the steel projects around HCM City area: The Industrial Zones in Tan Thanh District, Ba Ria - Vung Tau province now is limited of land area. It is so difficult to find a land remaining with around several hectares, a limit area for setting up a steel factory.
Other industrial parks will not have the most advantages of Phu My I and II, My Xuan A and B Industrial parks in Ba Ria-Vung Tau Province, such as,  convenient position for river and inland transportation, is located in the ex-import hub by means of the most dynamic sea-port system of Vietnam. The IZ is located in the planned area for port cluster with several major ports under operation and available for big loading vessels such as Phu My port, SP-PSA international port, Sai Gon International Terminal Vietnam port (SITV), Cai Mep International Terminal (CMIT), etc.
Another important factor is that these industrial zones located near the sources of cheap energies, such as Natural Gas, Hydrogen and Nitrogen, is very necessary for producing steel.
*      Legal factors
-          Threat of dumping lawsuits: Indonesia has applied anti-dumping for Vietnam's steel products, the additional import tax from 5.9 to 55.6% will be applied during the three years since 3/2013. Malaysia and Thailand also expressed concern to the dumping of cold rolled steel, color coated sheet and galvanized sheet of the Vietnamese companies[26].
-          Environmental protection law came into being in 2005. Amendment Proposed environmental  protection laws in 2013 will emphasize the implementation of waste processing of the business. Manufacturing enterprises or service firms have to build the environmental management, report of environment periodically. Businesses will have to build cleaner production processes, invest the wastewater treatment, the exhaust treatment better. Greenhouse gas emission and concerns to the environment will raise some extra costs for the companies. Before 2012, fee of pollutants in wastewater for COD from 100 to 300 VND / kg and for TSS from 200 to 400 VND / kg, according to the new decree 67/2012/ND-CP, the fee is expected to rise from 300 to 1,000 VND / kg of COD and from 600 to 1,200 VND / kg for TSS, fees up more than triple[27].
Figure 2.5: Greenhouse gas emission estimates from power production and energy use.
Source: United Nations- Vietnam. (2013). "CLIMATE CHANGE FACT SHEET: Greenhouse gas emissions and options for mitigation in Viet Nam, and the UN’s responses". Version of 5 February 2013.
-          Resolution of the Government of 02/NQ-CP valid from June 01, 2013: On a number of solutions to remove difficulties for production, assistance market and resolving bad debts. Accordingly, the government will provide 30 trillion VND to support the employees and armed forces to buy house by mortgage with the interest rate 6% / year. The real estate market is waiting the good signs of this resolution[28].

Phan Dinh Long

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