Vietnam’s most bullish investors believe the country’s economic development could outstrip China’s at the same point in their respective histories if private sector companies are able maintain the same growth trajectory over the coming decade as they did over the last.
Many newly minted corporate players are not only successfully riding the wave of rising domestic consumption, but also laying plans to establish a regional presence for the first time as well.
Typical is the view of Terry Ting, founder of private equity firm Valence Capital Asia and formerly head of growth private equity in Asia ex-India at Goldman Sachs.
“Vietnam’s private sector is, in many ways, more dynamic than China’s was at a similar point after the country’s re-opening in the mid 1990s,” he commented.
Today, the Vietnamese private sector accounts for 43.22% of GDP according to figures from the Ministry of Planning. Add that to the contribution from multinational corporations and the total stands at 71.31%.
Like-for-like comparisons with China are somewhat complicated by the latter’s state-controlled foreign joint ventures. But the Brookings Institute calculates that state-owned enterprises (SOEs) still control over 30% of China’s economy, a figure that was well over half two decades ago.
Vietnam reached its tipping point despite opening up later than China. Vietnam's economic reform programme, Doi Moi, was launched in 1986 compared to Deng Xiaoping’s open door policy in 1979.
And life continued to be difficult for at least another decade until the private sector was formally recognised in 1992 and the US lifted sanctions in 1994. Tran Qui Thanh, founder of fast moving consumer goods company (FMCG), Tan Hiep Phat Beverage (THP), is one of the new tycoon-class who started his career during the difficult years.
“Businessmen like me were regarded as class enemies,” he recalled. The government kept introducing a new currency every couple of years, largely so it could confiscate the people’s wealth.
“Conditions were so harsh that many Vietnamese just left,” he added.
One group, which left, did so at the behest of the victorious North so they could learn how central planning worked from their Communist brethren in Eastern Europe. Instead, the Russian mafia, as they are known locally, witnessed its demise.
They returned with a very different mindset and applied it to create some of the country’s leading private sector groupings: Masan Group (consumer, resources and banking), VP Bank (banking and consumer finance) and VTP (technology).
A second group fled the South after the fall of Saigon in 1975 for Western countries. One of them was Bang Trinh, who was born in Vietnam, grew up in the US and returned to his homeland nearly a decade ago to become Morgan Stanley’s country manager.
Access to capital
He recently joined private equity firm Rivendell Partners and says it is noticeable how access to capital has improved over the past decade.
“GDP per capita has nearly doubled since I arrived in 2009 to $2,200 today,” he commented. “That wealth base is now high enough to really accelerate the financing of Vietnam’s GDP, particularly in key cities like Ho Chi Minh where GDP per capita is above $5,000.”
And that capital is increasingly coming from the private sector too. In Vietnam, six out of the 10 most profitable banks have private sector owners.
In China, by contrast, state-owned banks still dominate. Indeed, one of the most remarkable aspects about the way China’s private sector companies rose is how they did so without recourse to traditional banking channels.
Some believe Vietnam’s private sector has been able to flourish so quickly because the overall economy was only under the “dead weight” of central planning for one generation compared to three in China.
The state-owned sector still dominates heavy industry, but the private sector has taken full advantage of the population’s increasing disposable income to dominate consumer-related sectors. And THP’s Dr Thanh believes companies are still on a very steep domestic growth trajectory.
He cites Mexico as a prime example of where Vietnam could be in a few years. “We have similar sized populations,” he commented. “But Mexicans drink 400 litres per capita per annum compared to 100 litres in Vietnam. Their beverage sector is a $10 billion industry compared to our $2 billion one.”
THP fought off Western multinationals like Coca-Cola and Pepsi in the noughties to establish a leading 31% market share in the ready-to-drink tea segment as of 2016 according to Euromonitor. Like many of his consumer-facing peers, Thanh is now keen to replicate that success in neighbouring countries.
He has ambitious revenue targets: $1 billion in 2023 and $3 billion in 2027 compared to $500 million in 2016. THP is looking for a partner or a strategic investor, which will help the group build exports to 10% by 2023.
Asian partners
If Vietnam’s FDI indicators provide a good guide, then that investor is more likely to be an Asian rather than a Western multinational.
Fellow FMCG company, Kido Corp, provides an example of how that process is already playing out. Like THP, its founders (brothers Tran Kim Thanh and Tran Le Nguyen) were part of the group of 1975 who stayed behind and struggled their way to the top.
Group CFO Kelly Wong says the 2007 stock market crash taught Vietnam a valuable lesson.
“The country needs money to accelerate growth, but the key question is where from,” he explained. “The 2007 crisis demonstrated how fleeting foreign fund managers’ interest in a country can be.”
Wong suggests Vietnamese companies should pay greater heed to Asia’s private families offices, or strategic investors.
“Thanks to ultra low interest rates, they’ve built up considerable reserves over the past decade,” he stated. “They’re far more willing to invest their money in Asia and over a longer time period than many other types of international investors.”
Kido Corp has four listed entities: the most recent being Kido Frozen Foods, which priced its IPO in April and has just started trading on UPCoM, Vietnam's unlisted public companies market. But Wong says the group’s preferred strategy is establishing corporate partnerships with comparable companies in neighbouring countries to expand their footprint and its business.
One example is a potential tie-up with a Thai company to build a dipping sauce brand together.
This is the kind of partnership the Vietnamese government is keen on rather than the full-blown M&A some of Thailand’s leading consumer groups have been engaging in. Central Group, CP Group and TCC Group have all sought to escape Thailand’s lower growth trajectory by expanding into Vietnam instead.
However, the government worries their retail chains (Metro, Big C) will increasingly stock Thai brands at the expense of Vietnamese ones. Groups like Masan, THP and Kido Corp are responding by expanding across more market segments to meet them head on.
Yet everyone interviewed for this article emphasised just how flexible Vietnam is compared to China with its long history of attempting to wrest technology transfers from foreign companies by forcing them into a joint venture with a local one.
“China’s 1.379 billion strong population gives its government the clout to set the agenda,” said Valence’s Ting. “Vietnam and its much smaller 92.7 million population, has been more welcoming.”
As a result, groups like Samsung, which has invested $17 billion in the country, fully-owns its assets.
As of September, Vietnam’s two biggest FDI investors were South Korea and Japan. The South Koreans have outsourced production to Vietnam and the Japanese have provided considerable government-to-government lending for infrastructure development.
China’s role
The missing piece of the jigsaw is China; the neighbour that ruled Vietnam for almost 1,000 years until the French decided it was their turn. Local players say anti-Chinese sentiment remains strong at the government level and sometimes among the general population too – many small towns feature statues of national heroes who helped foment revolt against the Chinese.
However, Chinese tourists are pouring into the country and their money is following them into the domestic property market. At the corporate level, the desire to forge links is also strong.
Trinh says one focus for Rivendell will be fostering stronger links.
“Many companies are exploring how they can form partnerships and expand their distribution into China,” he said. “There are a number of industries, which can benefit from having access to the China market including manufacturing, agriculture, F&B, FMCG and TMT.
“Similarly, we’re seeing many Chinese companies that wish to access the growing Vietnamese market,” he added.
However, while Vietnam is already selling a lot of agricultural products like seafood across the border, the sector is still fragmented and exports are at the basic commodity level. The next step will, therefore, need to be consolidation and branding to maximize the revenue potential.
Valence’s Ting also added that shortages at managerial levels are a second factor propelling Vietnam’s outward face.
“Vietnam doesn’t yet have the same deep pool of managers trained at foreign MNCs to draw on that China did during the 1990s and noughties,” he said. “But this will change over the coming decade as Vietnamese working at MNCs migrate to domestic private sector firms, or start their own businesses.”
Debt financing
One very important question regarding Vietnam’s flourishing private sector is whether it can avoid the hubris, overexpansion, debt traps and crony capitalism, which have plagued other countries in the region.
THP’s Thahn says he prefers to finance expansion through cash flow rather than debt. But not every company feels the same way.
Kevin Snowball, CEO of Ho Chi Minh-based PXP Asset Management highlights the recent actions of Vingroup, one of Vietnam’s emerging private sector conglomerates.
It built its name in real estate, but in September announced plans to spend $3.5 billion to design and manufacture a “Vietnamese” car. Snowball points out that car manufacturing is a sector the company has no experience in and is spending 60% of its market cap to try and achieve it.
HSBC’s country manager, Pham Hong Hai, argues that Vietnam’s best private sector companies currently have a foresighted approach to debt financing.
“Traditionally, companies continually rolled over short-term loans because they were nominally cheaper,” he explained. “But it’s noticeable how bigger private sector groups are locking in longer-term funding to make their debt structures more sustainable.”
Some have also sought international ratings and executed private placements: Vingroup in 2012 and Novaland in 2016. None have yet approached the public bond markets and bankers do not expect them to do so within the next couple of years while domestic credit remains so plentiful.
Corporate governance
Hai also notes how some private sector groups are streamlining their multiple family-owned businesses into corporate structures that make them more understandable to outside investors and introducing strategic partners to improve corporate governance even if the journey could be very challenging.
“This is very encouraging as it shows that Vietnamese private businesses recognize the importance of sustainable growth,” he said.
Masan is an example of streamlining and Novagroup is a standout in regards to corporate governance, having brought the IFC on board.
Ask the corporate sector how they would like the government’s help and two answers tend to emerge. Both THP’s Dr Thanh and Kido Corp’s Wong say they would like the privatization process to be speeded up so private sector companies have more opportunities to develop.
Wong also says he would like the government to be more inclusive. “We get all the circulars and are asked for comments and suggestions,” he said. “But we’d appreciate more involvement shaping the way policies are implemented.”
Private equity investors Trinh and Ting are both confident that Vietnam’s Communist-led government will head down the same road as China’s, acting as a facilitator for reform and restructuring.
“If you think back to the mid 1990s, no-one was quite sure which road China would go down as there were competing schools of thought within the country between the reformers and conservatives,” Ting concluded. “There’s a lot less opposition with the Vietnamese government to the reform agenda.”
