Vietnam’s Construction Contractors Struggling, Profits Down to 2% and Even Operating at a Loss
Vietnam’s construction contractors are facing a tough situation, with profit margins as low as 2% and some even operating at a loss. This was highlighted by Mr. Nguyen Ba Duong, Chairman of Newtecons Construction Contractor, during a conference. He attributed the difficulties faced by many contractors to the challenges in obtaining permits in the real estate market after the Covid-19 pandemic.
According to Mr. Duong, there is a reluctance to sign contracts to alleviate the difficulties in the real estate market, especially in the process of obtaining permits. He emphasized the need for the government to ease the permitting process to stimulate the real estate market and create more job opportunities for contractors.
The scarcity of new projects has resulted in contractors considering a 2% profit margin to be high. However, poor management and delayed payments from investors can lead to further losses. Mr. Duong provided an example of the challenges faced when seeking construction permits, describing a situation where permission had to be sought from the National Assembly instead of the local authorities. Delays in obtaining permits have a significant impact on investment plans and construction timelines.
Another issue discussed at the conference was the slow economic development and the surplus of funds in banks, making it difficult for businesses to secure capital. Mr. Le Viet Hai, Chairman of Hoa Binh Construction Group, noted that the decrease in money supply for real estate projects has hindered companies from accessing funds. He emphasized the importance of implementing the social housing construction project, which aims to provide one million affordable housing units over a ten-year period. However, progress has been slow, with only 1% of the target achieved after four years. This limitation in project implementation continues to create challenges for construction contractors in terms of job opportunities.
Mr. Hai proposed a competitive bidding mechanism that encourages flexibility and cooperation among construction contractors. He believes that Vietnam’s construction industry should expand its scope and aim to tap into the global market by positioning itself as a major player. The global construction market has a value of $400 billion, eight times larger than the domestic construction market.
To protect the domestic market, Mr. Hai suggested that Vietnamese contractors should start by subcontracting international projects and then gradually establish themselves as main contractors in the domestic market. This approach would reduce competition within the country and contribute to the overall economic growth.
Regarding competition among contractors, Mr. Cao Tung Lam, Chairman of Phuc Hung Construction Contractor, proposed a pre-bidding discussion mechanism for projects worth over 1,000 billion VND. This collaborative approach would allow contractors to discuss project details, funding sources, and strengths to avoid disadvantageous competition and conflicts. Mr. Lam emphasized the need for a government mechanism to classify contractors based on their capabilities. Contractors are willing to cooperate and share resources to address this issue.
Mr. Nguyen Khac Hai, Deputy General Director of Vinaconex Corporation, highlighted the importance of infrastructure projects in providing employment opportunities for contractors. He mentioned that out of the 63 provinces and cities in Vietnam, only 46 have transportation, airport, highway, and port projects. By 2024, approximately 500 trillion VND will be allocated for infrastructure development, which is a significant source of potential projects for construction contractors.
Mr. Hai suggested that the government should not directly intervene in contractor grouping and avoid creating conflicts between businesses. Contractors should work together to ensure a balance between large and small contractors and increase subcontracting rates. This approach should be regarded as collaboration rather than a bidding process that carries risks. The implementation should abide by laws, explaining the mechanisms and regulations to protect the rights of construction contractors.
Responding to the opinions expressed at the conference, Mr. Nguyen Quoc Hiep, Chairman of the Vietnam Association of Construction Contractors (VACC), stated that although construction contractors have faced many difficulties in recent years due to the stagnation in the construction market and legal obstacles in real estate projects, there are still many opportunities and potential ahead.
He highlighted the passage of new laws related to real estate, investment, and bidding, which will address various concerns and create opportunities for real estate projects. Additionally, Vietnam’s construction industry is shifting towards underground construction projects in the next 5-10 years. The government has allocated a significant budget for infrastructure investment in 2024, totaling 220 trillion VND, with an additional 500 trillion VND available for future projects.
Notably, the National Assembly has allowed the government to develop a pilot project to allow commercial housing projects to proceed through agreements on land use rights. This will resolve issues faced by investors who possess land rights for non-residential purposes but require approval for commercial housing projects. This change will increase the housing supply and provide job opportunities for construction contractors. However, the construction industry currently faces a shortage of skilled labor.
Mr. Hiep emphasized the need to enhance the quality of human resources and the capabilities of contractors to meet the future demand for advanced technology in construction projects. He also emphasized the importance of government support and the application of laws and regulations to mitigate legal risks and protect the rights of construction contractors.
In conclusion, Vietnam’s construction contractors are encountering numerous challenges, including low profit margins, difficulty in obtaining permits, and a surplus of funds in banks. However, there are still opportunities for growth, particularly in the social housing and infrastructure sectors. To thrive in this competitive environment, construction contractors need to enhance their capabilities, collaborate effectively, and adapt to changing market demands.