Apr 24th 2008
From The Economist print edition
Business of all kinds is booming
VINAMILK is a company based in Ho Chi Minh City, made up of various dairies left behind by the Swiss, Dutch and Chinese after America withdrew from Vietnam in 1975. A recent study of Vietnam's leading firms by the UN Development Programme describes how the firm was shuttled from one ministry to the next after being nationalised. Despite this neglect, the firm became one of the first state enterprises to extend its operations across the whole of the reunified country. Today Vinamilk is a flagship for the government's huge programme of “equitising” state firms, and most of its shares are privately held. TNS, a market-research firm, reckons that Vinamilk is the second-fastest-growing brand in the country.
In the dark post-war days all that Vinamilk could offer its customers was tinned sweet condensed milk. Gradually it expanded into powdered milk and later fresh milk. Now that it is free to set its own strategy, the firm is pushing upmarket. Tran Bao Minh, its marketing chief, says it is promoting a “Pure Premium” fresh milk brand that costs 10% more than the equivalent product of Dutch Lady, a European competitor. It is also moving into drinking yogurts, fruit juices and other health drinks. Under state control it could never have been so bold, says Mr Minh.
Thanks to Vietnam's rapid economic development, demand for dairy products has been soaring, though from a low base: as yet only one in five Vietnamese drinks milk. Last year consumption rose by 20%. There is growing competition from big foreign dairy groups, but at least Vinamilk is in there with a chance.The privatisation programme has moved in fits and starts. The government has been anxious to avoid accusations of selling state assets too cheaply but has sometimes leant too far the other way. The number of state firms, about 12,000 in the early 1990s, has dropped spectacularly. Counting them is tricky because many are bunched into holding companies, subsidiaries and sub-subsidiaries, but Vu Tien Loc, the chairman of Vietnam's Chamber of Commerce and Industry, says only about 2,000 are still fully owned by the state. By 2010 only some 500 will be left, mainly in sensitive areas such as defence.
Late last year the government launched an initial share offering in Vietcombank, one of five state-owned commercial banks. The rest will follow in the next few years. They are having to shape up quickly against competition from fast-growing privately owned Vietnamese banks and from foreign giants such as HSBC.
Foreign multinationals are now piling into a huge range of projects across the country, from golf courses to microchip factories. America's General Electric is opening its first plant in Vietnam this year, to make turbine components. Stuart Dean, the firm's South-East Asia chief, says the main consideration was the quality of the workforce, not its low cost. But the multinationals also see Vietnam as an attractive market in itself.
Perhaps the most dynamic sector of the economy is made up by the Vietnamese-owned private firms that have come from nowhere since being legally recognised in 2000. The country's latent entrepreneurialism has burst back into life.
This private-sector activity is difficult to measure. Some workers in state enterprises are holding on to their jobs, despite pitiful salaries, waiting to get their share allocations when the firms are equitised. Meanwhile they are running private firms alongside their jobs, sometimes siphoning business from their state employers.
Perhaps the most dynamic sector of the economy is made up by the Vietnamese-owned private firms that have come from nowhere since being legally recognised in 2000. The country's latent entrepreneurialism has burst back into life.
This private-sector activity is difficult to measure. Some workers in state enterprises are holding on to their jobs, despite pitiful salaries, waiting to get their share allocations when the firms are equitised. Meanwhile they are running private firms alongside their jobs, sometimes siphoning business from their state employers.
Home-grown sparklers
Until 2000 the country had no stockmarket, but by the end of last year 221 firms (including partly privatised ones) with a combined market capitalisation of $28.7 billion had listed on the Ho Chi Minh market and the smaller one in Hanoi. A slew of recent laws will remove the current bias in favour of state firms, making it easier for private companies to raise capital.
Until a couple of years ago most of these private firms were small, but some of them are growing rapidly. For example, THP, a drinks firm that started out brewing beer, moved into fizzy soft drinks and is now, like Vinamilk, slaking the growing thirst for healthy beverages. The firm's Khong Do (“Zero Degree”) carbonated tea drink is thought to be the country's fastest-growing brand, with sales almost doubling last year. The firm's owner, Tran Qui Thanh, is determined to build THP into a multinational using world-class marketing and distribution techniques.
Back in the mid-1990s, when most private firms were technically illegal, he set up in business with the army, at first using home-made machinery. When the business reached a point where heavy investment was needed, the military men pulled out, says Mr Thanh, leaving him to raise money from friends and relatives. This remains a popular way of financing business in Vietnam. But it has become much easier to raise money from banks: HSBC's boss in Vietnam, Mr Tobin, reckons that businesses with good collateral can now borrow up to $50m without much trouble.
By 2000, as THP was moving from beer to soft drinks, Coca-Cola and Pepsi had entered Vietnam and were using their financial strength to create big distribution chains. THP sought to tap into Pepsi's distribution chain, selling small quantities of an energy drink called Number 1. As sales gradually rose, distributors insisted on continuing to carry it despite Pepsi's objections. Mr Thanh says that when he got started in the 1990s, he had to spend a lot of time persuading the authorities just to let him do business. Now, he says, the government sees people like him as “soldiers in an economic war”.
Some businesses are taking advantage of the growth of an aspiring class in Vietnam's cities. One such is VTI, which owns a chain of fancy coffee shops, Highlands Coffee, as well as a smaller chain selling genuine Nike sportsgear. The firm's owner, David Thai, fled Vietnam with his family in the 1970s but returned when things were beginning to look up. He says that when his smartly furnished Highlands Coffee shops first opened, selling drinks for up to $4, people could not believe that his targets were Vietnamese customers, not expats. Mr Thai thinks affluent urban consumers are looking for something—whether it is a tall latte or a pair of expensive trainers—that says “I have arrived”.
Some Vietnamese firms now hope to compete internationally. The largest, PetroVietnam, is already exploring for and producing oil in several countries, from Algeria to Cuba. Its contribution to the government is equal to 30% of the state budget, so its continued success is vital to Vietnam's future. Vinamotor, a state-run maker of cars (among other things) is building a bus factory in Dominica and two lorry factories and an asphalt works in Venezuela, but as yet Vietnam is not a mass producer of cars.
Until a couple of years ago most of these private firms were small, but some of them are growing rapidly. For example, THP, a drinks firm that started out brewing beer, moved into fizzy soft drinks and is now, like Vinamilk, slaking the growing thirst for healthy beverages. The firm's Khong Do (“Zero Degree”) carbonated tea drink is thought to be the country's fastest-growing brand, with sales almost doubling last year. The firm's owner, Tran Qui Thanh, is determined to build THP into a multinational using world-class marketing and distribution techniques.
Back in the mid-1990s, when most private firms were technically illegal, he set up in business with the army, at first using home-made machinery. When the business reached a point where heavy investment was needed, the military men pulled out, says Mr Thanh, leaving him to raise money from friends and relatives. This remains a popular way of financing business in Vietnam. But it has become much easier to raise money from banks: HSBC's boss in Vietnam, Mr Tobin, reckons that businesses with good collateral can now borrow up to $50m without much trouble.
By 2000, as THP was moving from beer to soft drinks, Coca-Cola and Pepsi had entered Vietnam and were using their financial strength to create big distribution chains. THP sought to tap into Pepsi's distribution chain, selling small quantities of an energy drink called Number 1. As sales gradually rose, distributors insisted on continuing to carry it despite Pepsi's objections. Mr Thanh says that when he got started in the 1990s, he had to spend a lot of time persuading the authorities just to let him do business. Now, he says, the government sees people like him as “soldiers in an economic war”.
Some businesses are taking advantage of the growth of an aspiring class in Vietnam's cities. One such is VTI, which owns a chain of fancy coffee shops, Highlands Coffee, as well as a smaller chain selling genuine Nike sportsgear. The firm's owner, David Thai, fled Vietnam with his family in the 1970s but returned when things were beginning to look up. He says that when his smartly furnished Highlands Coffee shops first opened, selling drinks for up to $4, people could not believe that his targets were Vietnamese customers, not expats. Mr Thai thinks affluent urban consumers are looking for something—whether it is a tall latte or a pair of expensive trainers—that says “I have arrived”.
Some Vietnamese firms now hope to compete internationally. The largest, PetroVietnam, is already exploring for and producing oil in several countries, from Algeria to Cuba. Its contribution to the government is equal to 30% of the state budget, so its continued success is vital to Vietnam's future. Vinamotor, a state-run maker of cars (among other things) is building a bus factory in Dominica and two lorry factories and an asphalt works in Venezuela, but as yet Vietnam is not a mass producer of cars.
A mountain still to climb
Private firms are bounding ahead despite bureaucracy, corruption, poor regulation, a feeble legal system and a creaking infrastructure. In the World Bank's latest annual league table measuring the ease of doing business in different countries, Vietnam does not come out well, though overall it now beats Indonesia, the Philippines and India. Compiling tax returns in Vietnam takes longer than in almost any other country, according to the World Bank. Likewise, the corruption index produced by Transparency International, a not-for-profit organisation, shows Vietnam as a poor performer, but better than some of its local competitors. At least it is an orderly sort of place, so businesses may be able to find out whom they must bribe, how much and how often, which makes it somewhat more bearable if still costly.
Investors excited by opportunities in Vietnam should note that standards of corporate governance are pitiful. Even stockmarket-boosters admit that companies' accounts are 
largely works of fiction. The World Bank says that there is no legal mechanism to hold rogue directors to account and it is extremely hard to enforce contracts. Sin Foong Wong of the World Bank's private-sector arm, the International Finance Corporation, explains that with the stockmarket booming until recently, it was so easy to raise money that firms were under little pressure to improve standards of governance. Now that the equity bubble has deflated, companies may have to do more to coax investors back. Tung Kim Nguyen, a director of Indochina Capital, an investment bank, says the lack of openness in companies and financial markets still makes it hard to find good firms to invest in, despite the obvious potential for growth. Office space and industrial land is scarce.
Against all that, Vietnam's labour costs have remained pretty low as China's have taken off, despite increasing numbers of wildcat strikes over pay claims. Highly skilled people are hard to find, but that is true everywhere. At least, say foreign firms, their Vietnamese staff are hard-working, disciplined and eager to learn.
Plenty could still go wrong. Vietnam's novice regulators have not yet had to prove themselves in an Enron or Northern Rock disaster, but the time may come. Who knows if some of the country's shining corporate stars, and some of the fast-growing private banks, have taken shortcuts on the way up? Many firms have been dabbling in property and shares, but with the stockmarket now sliding and talk of the property bubble bursting, some could be sitting on big, undisclosed losses. The country's bankruptcy laws are rudimentary and if there were a high-profile failure the authorities might well mishandle it.
largely works of fiction. The World Bank says that there is no legal mechanism to hold rogue directors to account and it is extremely hard to enforce contracts. Sin Foong Wong of the World Bank's private-sector arm, the International Finance Corporation, explains that with the stockmarket booming until recently, it was so easy to raise money that firms were under little pressure to improve standards of governance. Now that the equity bubble has deflated, companies may have to do more to coax investors back. Tung Kim Nguyen, a director of Indochina Capital, an investment bank, says the lack of openness in companies and financial markets still makes it hard to find good firms to invest in, despite the obvious potential for growth. Office space and industrial land is scarce.Against all that, Vietnam's labour costs have remained pretty low as China's have taken off, despite increasing numbers of wildcat strikes over pay claims. Highly skilled people are hard to find, but that is true everywhere. At least, say foreign firms, their Vietnamese staff are hard-working, disciplined and eager to learn.
Plenty could still go wrong. Vietnam's novice regulators have not yet had to prove themselves in an Enron or Northern Rock disaster, but the time may come. Who knows if some of the country's shining corporate stars, and some of the fast-growing private banks, have taken shortcuts on the way up? Many firms have been dabbling in property and shares, but with the stockmarket now sliding and talk of the property bubble bursting, some could be sitting on big, undisclosed losses. The country's bankruptcy laws are rudimentary and if there were a high-profile failure the authorities might well mishandle it.
Political risk is significant, even though there is little prospect of a change in the ruling party. Regulators sometimes overreact, criminalising civil disputes or suddenly coming down hard on fairly widespread fiddles. In 2006 staff at ABN AMRO, a Dutch bank, were put under house arrest after the firm was blamed for foreign-exchange losses it had run up (though a subsequent report by government inspectors held the central bank responsible). In 2005 the French-Vietnamese boss of Dong Nam, an importer of mobile phones that competed with a big part-state-owned firm, was sentenced to 20 years in jail for dodging $6m of taxes.
Many foreign investors and multinationals have paid large sums for stakes in firms that are still controlled by the government, with foreign ownership remaining restricted. The government talks of continuing liberalisation but there is no guarantee that this will happen. Some investors may find that their fingers get burned.As a big exporter, Vietnam would be hurt by a global downturn, but its economy is already fairly diversified and becoming more so. Besides exporting a wide variety of farm produce, it is also a sizeable producer of furniture, clothes, shoes and crude oil. Exports of electronic components and software will rise as factories built with foreign money come on stream. Dominic Scriven of Dragon Capital, an investment firm, sees five driving forces that will propel Vietnam's economy in the next ten years: the China-plus-one strategy for multinational manufacturers; producing and processing food and drink; non-food agriculture (eg, rubber); tourism; and the “intellectual economy”. To demonstrate Vietnam's potential in this last area, Mr Scriven notes that the country won all eight gold medals for chess at the 2005 South-East Asian Games.
The biggest risk facing Vietnamese firms may be that they will end up like many in the rest of South-East Asia: bloated, over-diversified, too dependent on their contacts with those in power and not especially good at what they do. Such “crony capitalist” firms in neighbouring countries may struggle as globalisation advances and stronger, more focused firms encroach on their turf.
So far the signs in Vietnam are good: instead of handing monopolies to cronies, the government is encouraging free competition. A few promising Vietnamese firms are trying to professionalise their management, business plans and marketing to reach for world-class status. THP's Mr Thanh dreams of creating a renowned Vietnamese brand on a par with Japan's Sony one day. But it won't be soon.
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