Special Report: Vietnam capitalist roaders follow China’s trail

Motorists go past a poster promoting the Vietnam Communist Party Congress in Ho Chi Minh City January 4, 2011.

Credit: Reuters/Kham

By John Ruwitch and Jason Szep

HO CHI MINH CITY, Vietnam (Reuters), Jan 13 – Nguyen Duc Tai was on a mission one sweltering January morning in Vietnam’s commercial capital, Ho Chi Minh City.

Flush with cash from his annual bonus, he wanted to buy his wife a new mobile phone, a gift for the coming Tet lunar new year holidays. In a country where the average annual income is about $1,100, a good phone is a big investment. Tai wanted to make the right choice with his 5 million dong ($250).

“It was so confusing. I went to two shops, but no one could give me the full picture of what I could get for my money. They showed me one or two phones. That’s not enough. If they could show me 10 at similar prices I could make a decision.

The 35-year-old smelled opportunity. “I said to myself, ‘There’s something wrong here. I have money. I’m willing to pay. But I cannot find what I want. There is a mistake somewhere and if I can fix that, the customers will support me’.”

Fast-forward six years and Tai is chief and co-founder of Mobile World, Vietnam’s largest cellular phone retailer, part of a new breed of fast-growing companies tapping a swelling middle class in the Communist-run country of nearly 90 million people.

Vietnam has emerged over the past decade from the hangover of war to play a central role on Asia’s factory floor, producing everything from footwear to computer parts. An economy once built around carpet-bombed rice paddies now boasts gleaming shopping malls and towering skyscrapers. BMWs and Rolls Royces jostle for space on streets clogged with motor-scooters and bicycle rickshaws.

As northern neighbor and former imperial ruler China begins the transition from sweatshop economy to consumer society, Vietnam hopes to follow. Companies such as Mobile World could lead the way.

But in recent months, Vietnam’s problems have overshadowed its promise – from spiraling inflation to a stumbling currency, red tape, a debilitating trade deficit and creaking infrastructure. Policymakers face critical choices in the next few years that could either make Vietnam the world’s next emerging-market star or deepen its economic malaise.

That forms a sober backdrop to the ruling Communist Party congress that began on Wednesday, where delegates will give their nod to maintaining policy goals aimed at delivering economic growth of up to 7.5 percent a year for the next five years. Addressing Vietnam’s urgent problems is not on the formal agenda, although stabilizing the economy is a hot topic behind the scenes. Even without bold reforms, nimble companies are shaking up the private sector, led by executives inspired by success stories from China.

Despite Vietnam’s chronic economic problems, Mobile World for instance has grown from seven stores to more than 70 over the past three years with nearly 4,000 staff. Revenue doubled last year to $150 million and is projected to double again this year. Net profit, $5 million last year, is expected to triple this year to $14 million. “We don’t care about politics,” laughs Tai. “We care about the customer.”

Interviews with business executives, investors and independent analysts reckon Vietnam’s burgeoning prosperity trails China’s by a decade or so. Young executives, and the overseas’ investors who back them, have settled on a simple premise: what works in China, should work in Vietnam.

“China is basically five to 10 years ahead of Vietnam. So it is a good leading indicator for what’s coming,” said Chris Freund, managing partner at frontier-market investor Mekong Capital, whose funds invest in 21 Vietnamese companies including Mobile World.

Early signs suggest he may be right.


Take Le Hong Minh, the 34-year-old founder of Vietnam’s dominant Internet group VNG Corp – an online gaming company that is fast becoming the country’s answer to Yahoo Inc and Facebook.

Modeled on China’s most valuable Internet company, Tencent Holdings Ltd, VNG has expanded from 100 staff to 1,300 in five years, attracting investment from Goldman Sachs and boasting millions of users a day with ambitions to compete with global companies.

After poring over Chinese kung-fu novels as a child, Minh surfed the Internet for the first time at Monash University in Australia where he studied business, discovering along the way a passion for martial arts videogames.

Returning to Vietnam, he landed a finance job that paid the bills but failed to slake his inner gamer. To do that, he traveled to Daejeon, South Korea where he represented Vietnam at the 2002 World Cyber Games. Though not a winner, he saw how high-speed Internet and videogames were more than playthings. They were big business.

At the time, more than half of South Korea’s Internet users were watching soap operas and sports on their computers. But in Vietnam, the Internet barely functioned. Minh set up a “gaming room” with friends — a precursor to today’s Internet cafés – in 2003. But for the first six months, there was no Internet connection, just 40 computers with standalone videogames.

Minh remembers when that changed, almost to the hour. It was July 3, 2003. The government opened its first registration for broadband Internet. He was among the first in line. “We said ‘this is heaven’,” he recalls. “That’s the moment online games were born in Vietnam.”

“I kind of understood the investment opportunities and we had the passion of a bunch of guys who liked to play games, so we formed the company in 2004 and put together a business plan.”

“VinaGame” was born. A year later, backed by venture-capital firm IDG Ventures, they launched their first product, licensing a martial arts game from Chinese software developer Kingsoft Corp Ltd. About 20 friends fanned across the country to promote “Vietnam’s first online martial arts game,” plastering posters in about 5,000 gaming rooms in three cities.

They calculated they could turn a profit if they had 100,000 customers their first year. “We had that number in one day,” recalls Minh. “In the first month we had 500,000, and then after three months we nearly had a million users.”

Five years on, now named VNG, they compete directly with Yahoo, reaching 60 percent of Vietnam’s 27 million Internet users, compared to Yahoo’s 50 percent, according to VNG’s own data. Their http://www.zing.vn portal offers entertainment, news and social networking. “For e-mail and for instant messaging we’re not able to really compete, but we win with other services.”

They’ve also developed Vietnam’s first locally made online game and are venturing into e-commerce. As they grow, they are shaking up Vietnam’s image as a country dominated by textile manufacturers, computer component makers and rice growers. Plans for a public offering are in the works.

“Our mission is to make the Internet change Vietnamese lives,” said Minh, whose disarming style and unfussy headquarters project the youthful zeal of a Silicon Valley Internet startup. Bean-bag chairs rest against a boardroom wall. He drives a yellow Mini Cooper and his passion for videogames has not diminished.

“My wife still complains a lot about me playing games until one, two o’clock in the morning.”

On a recent Tuesday afternoon at VNG’s 8,000 sq ft, warehouse-style office over a grocery store in Ho Chi Minh City, dozens of staff crammed into a conference room where finalists in a “VNG’s Got Talent” contest performed on stage – an internal morale boosting event inspired by the American reality TV series “America’s got talent.” Some sang. Others dressed in drag.

It underscores the biggest challenge facing VNG and other fast-growing Vietnamese companies: staffing. “Finding qualified people is very, very hard,” said Minh. “And then growing people is even harder because we have a very limited pool of talented and experienced people. When you are able to grow them, they are going to be approached by so many others.”

Despite those concerns, VNG is attracting interest, including a strategic partnership with China’s Tencent, known for its online games, China’s largest instant-messaging platform and foray into English-language products.

Henry Nguyen, managing general partner at IDG Ventures Vietnam, reckons VNG is still 5-6 years from its peak. Fueling his optimism is Vietnam’s young population. Ninety percent are below or within the working age, according to United Nations data. To paraphrase former U.S. President Bill Clinton’s 1992 campaign slogan, he said, “To us, it’s the demographics, stupid.”

Vietnam’s middle-class has more than doubled in the past decade to 64 percent in urban areas, according to Asia-Pacific research consultants Cimigo. Sixty percent of the population is under 35 years old. The economy more than tripled to over $100 billion from $30 billion just a decade ago, along with per capita wealth, although off a low base.


But doubts are growing over whether authorities can pilot the economy deftly enough to turn Vietnam into Asia’s next tiger.

Some signs are not encouraging, such as the Finance Ministry’s decision to sign away proceeds of Vietnam’s first international bond to state-owned Vietnam Shipbuilding Industry Corp, or Vinashin, in 2005, handing over all $750 million from the oversubscribed 10-year issue.

The arrangement was part of the Communist Party’s plans to try to keep the state sector in control of the “commanding heights” of the economy by bankrolling the big ones, monopolizing the sectors they operate in, and creating state-owned conglomerates modeled on South Korea’s powerful chaebols.

Despite the huge sum, Vinashin’s chief executive Pham Thanh Binh said at the time the amount was barely a quarter of the funds needed to reach its ambitious shipbuilding targets over the next five years, during which he expected 30 percent growth. So he sought more cash – from the government, the capital markets and foreign lenders.

Instead of focusing on producing more and better boats, though, Vinashin sprouted subsidiaries at an alarming rate, often in unrelated fields such as hotels, motorbikes and stockbroking.

Then the global economic downturn struck, sucking the wind out of the shipping industry’s sails. Vinashin’s debt problems were too big to avoid at some $4.4 billion by the middle of last year. The Communist Party declared the firm on the brink of bankruptcy and the government ordered it re-organized. Binh and other executives were sacked and later arrested.

Vinashin has become a prime example of the risks inherent in the government’s industrial policy and has sparked heated debate within the party, according to sources close to the communist leadership.

The government ordered Vietnamese banks to freeze their loans with Vinashin to give it breathing room. But as the company drifted toward default last month on a $600 million loan by international creditors, all three ratings agencies downgraded Vietnam, raising the cost of capital when it critically needs to raise funds to improve infrastructure.

Such problems deepen Vietnam’s macroeconomic troubles. Annual inflation hit a 22-month high in December of nearly 12 percent, the currency has lost nearly 25 percent against the dollar on the gray market since the end of the first quarter of 2008, and the International Monetary Fund said foreign exchange reserves had sunk to just 1.8 months of prospective imports by the end of September.

State-owned enterprises (SOE) have been sucking up capital and increasing risk in the banking system without producing big advances in economic growth and job creation.

“In the long term, it’s just not sustainable what they’re doing,” said Jonathan Pincus, dean of the Fulbright Economics Teaching Programme in Ho Chi Minh City and a former economist for the United Nations in Vietnam.

“What’s going to happen when the chickens come home to roost on Vinashin? I think they’ll just run out of money. It’s going to get very expensive for them to get debt and they’re broke, so what happens if a couple of banks blow out? They’re not China. They’re not sitting on $3 trillion in reserves.”

A study by Vietnam’s Central Institute for Economic Management and the National University of Singapore’s Lee Kwan Yew School of Public Policy presented to the government last month showed Vietnam’s incremental-capital output ratio, or ICOR, a measure of the efficiency of capital use, was actually worsening because of money poured into SOEs.

Vietnam’s ICOR averaged 4.8 in 2000-2008 and 5.4 for 2006-2008, substantially less efficient than Taiwan, South Korea and Thailand during similar phases of development.

By John Ruwitch and Jason Szep

HO CHI MINH CITY, Vietnam | Thu Jan 13, 2011 12:33am EST

Yet the party seems as committed to the state sector as ever, a decade after enacting an Enterprise Law that opened the floodgates for private businesses. The result is a warped competitive environment that puts private business at a disadvantage.


Examples are plentiful.

Jetstar Pacific, an airline partly owned by Australia’s Qantas Airways Ltd, has had many setbacks in Vietnam, where the skies are dominated by flag carrier and SOE Vietnam Airlines. In April 2008, for instance, it had trouble securing deliveries of fuel from the state jet fuel monopoly, Vinapco, a company under Vietnam Airlines.

In the grocery store space, South Korean supermarket Lotte Mart, part of Lotte Shopping Co Ltd, opened its first shop in Ho Chi Minh City in 2008 but faced long delays getting approval to open a second in the city where home-grown and state-owned Saigon Co.op Mart has been eager to cling to its market share.

The excuse, said Fred Burke, a managing partner at international law firm Baker & McKenzie, was that it did not meet an “economic needs test” that Vietnam was allowed to retain under its 2007 World Trade Organization agreement. In reality, he said, it was pure protectionism.

“The SOEs really do see it as their right to monopolize the market,” Pincus said.

Big investments in the state sector squeeze the fiscal balance and exacerbate inflation pressures. More state spending, plus inefficient use of capital translates into less output per dollar and higher prices for goods. Preferred access to land and capital only make the problems worse.

Deputy Prime Minister Nguyen Sinh Hung has made privatizing state enterprises a priority over the next four years after about 144 sold shares to the public last year. That’s good news to Andy Ho, managing director and head of investment at VinaCapital, the country’s largest private equity firm.

“We look at dilapidated, beat up companies where we can make a difference. We love the SOEs,” he said. “We invest in a lot of businesses that cater to the consumer growth.”

But Vietnam’s war-scarred past poses unique issues for private equity. Years of war and communist central planning wiped out a generation of entrepreneurs. Big investments by overseas-backed funds are often accompanied by training for local CEOs or, if the state retains control of a newly privatized firm, extensive talks to convince bureaucrats to think of the bottom line.

“We sit down with them and say, ‘there are certain changes you need to make to grow your business’.” About 75 percent of the companies listen, said Ho, whose firm manages $2 billion of investments.

Mekong Capital’s Freund, a Chicago native and religion scholar from University of California, Santa Cruz, runs classes for executives teaching them to think like Buddha.

“If I go in and say ‘American management gurus say you should do this, and this and this’, it is in one ear and out the other. But if I ask them who was Buddha being as a leader, they will get it and try to apply it,” said Freund, a former Templeton Asset Management Ltd portfolio manager who founded Mekong Capital in 2001.

A simple look at Vietnam’s stock market shows how the country dearly needs such leaders.

The global liquidity that coursed through the world’s emerging markets last year missed Vietnam, whose 10-year-old Ho Chi Minh City Stock Exchange lost about 3 percent in the year compared to gains of more than 40 percent in both Thailand and Indonesia.

Ho at Vinacapital says his clients thought the risks were just too great but are now taking a second look, partly due to extraordinarily low valuations, the cheapest in Southeast Asia. The Vietnam Index is down 59 percent from its March 2007 peak.

“We’re already seeing some investors coming back,” said Ho, citing gains in VinaCapital’s exchange-traded funds listed in London. The VinaCapital Vietnam Opportunity Fund Ltd is up about 9 percent from mid-November, better than the Thai market’s two percent rise in the same period.

“We’re seeing signals people are interested in Vietnam.”


Henry Nguyen, of IDG, is effusive about Vietnam’s prospects but he isn’t blind to the risks.

His background gives him unique perspective. In 1975, at the end of the Vietnam War at age two, he fled the Communist invasion of South Vietnam with his family. He spent seven months in a refugee camp in the Philippines before moving to Virginia, where he grew up with little interest in his former homeland, answering his parents’ Vietnamese with English and going on to Harvard University.

He only returned in the mid-1990s, reluctantly, as a travel writer for the Harvard student-run Let’s Go series. “I fell in love with the place,” he said.

After finishing medical and business school, he worked as a tech stock picker at Goldman Sachs in New York under famed Microsoft analyst Rick Sherlund, but soon felt the pull of Vietnam again.

He returned in September 2001, arriving on the day the World Trade Center in New York was attacked. He watched the aftermath on TV, trying to contact friends.

“I think something tripped inside me, and I thought maybe not living in the U.S. is not such a bad thing,” he said. Three years later, he got an offer from Boston-based IDG’s founder Pat McGovern to open shop in Vietnam. He now oversees two funds, one worth $100 million, the other $150 million.

Not only did he fall in love with the country, Nguyen soon fell in love with, and in 2008 married, Prime Minister Nguyen Tan Dung’s daughter.

Yet he is frank about Vietnam’s challenges.

“There are three issues that keep me up at night long term,” he said.

At the top of the list is physical infrastructure – a long-standing problem in Vietnam, where from the early 1900s until the early 1990s development was on hold by conflict and ill-conceived collectivist policies.

“Even when I say Vietnam is China circa ’97-’98, it’s actually much further behind in terms of physical infrastructure,” he said. Vietnam’s existing ports are overstretched, it lacks highways and the electricity grid is chronically short of power making blackouts common.

Second is governance and corruption. “In the end most people feel pretty cynical about government, and probably in most cases rightfully so.”

And third is education, perhaps the most common refrain among business owners and investors. He notes, for instance, that nearly 2 million students sit for exams annually for 750,000 seats at full-time universities.

The quality of tertiary education in Vietnam is failing, too. “It’s a crying shame when you have people who are so ambitious, want to try hard, want to work hard, and most of them are getting the crappiest of education that you can imagine,” he said.

Those barriers have kept many competitors out of Vietnam’s growing consumer market – from McDonald’s Corp to Starbucks Corp and Wal-Mart Stores Inc, all of which have made big inroads in China.

Starbucks chairman and chief executive Howard Schultz said in July he wanted to “explore opportunities” to enter Vietnam. But thick red tape might force the world’s biggest coffee chain to franchise its stores, something it does not do in most other countries.

Red tape is “Vietnam’s biggest non-tariff barrier,” said Burke at Baker & McKenzie.

Policymakers, he added, have deeply rooted concerns over competition, including a fear of Chinese companies taking control of Vietnam’s rice supply if they open private trade too quickly.

“Protectionism is still a problem,” said Burke, a founding member of the American Chamber of Commerce in Vietnam.

But he is encouraged by a three-year-old reform plan known as Project 30 that promises to cut administrative procedures by 30 percent.

The World Bank’s 2010 “Doing Business report” says it takes on average 44 days and nine administrative procedures to start a business in Vietnam, compared with an average of 39 and eight in the rest of Asia.

While Starbucks ponders its future in Vietnam, local chain Highlands Coffee is snapping up choice real estate and gaining share in a country whose thirst for caffeine sipped at Parisian-style cafes dates to French colonialism.

Its founder, Vietnamese-American David Thai, saw Starbucks rise from his hometown of Seattle into an international coffee powerhouse. He sniffed opportunity and now operates 40 cafes.

“Right now, foreign retailers have not made a dent in Vietnam,” said Freund at Mekong Capital. “If Wal-Mart, for example, wants to come in and set up huge stores that will transform the future of retailing in Vietnam, they are going to have to jump through a lot of hoops.”

Wal-Mart has no plans to enter the market, said spokesman Kevin Gardner. Compare that to China, where Wal-Mart operates 189 outlets with more than 50,000 workers.


Perhaps not surprisingly, Nguyen Duc Tai, the chief of fast-growing Mobile World, does not fear foreign competition. But he’s using technology and exploiting the Internet to keep his position safe.

Before setting up his company with four friends, he knew he had to solve the problem that vexed him while trying to buy a phone for his wife. Consumers need good information, he reasoned, so before opening his first store he set up a website detailing the prices and specs of phones he would sell.

It was the first of its kind on Vietnam and a hit. But that led to another problem: how to keep prices the same on his website and in his growing network of shops, especially in a market prone to surges in demand and currency fluctuations.

His solution: digital price tags that are centrally updated twice a day and linked to the website. That paved the way for a primitive e-commerce system in which customers buy goods by inputting their phone number. Within 30 minutes, a Mobile World official calls, takes the order and sends a courier on a motorbike to deliver the phone and collect the money.

The website generates about $1 million a month, enough to make Mobile World Vietnam’s biggest player in e-commerce, an industry in its infancy in a country where most people do not have credit cards and use cash for almost every transaction.

“This is a good weapon for us to compete with other retailers,” said Tai, leaning forward in a chair in one of his shops.

Another weapon is Dinh Anh Huan, his business development director, who travels once a month to China to study how companies there operate. “In Vietnam, the culture and the economy are very similar to China’s. So every month I go to China. I go to the stores. I see the suppliers, the manufacturers, I go to their factories. I buy the products. I watch and study. I go back home and every day I study Mandarin,” he said, referring to the main Chinese dialect.

In the northern capital of Hanoi, Dao The Vinh also has a taste for China. The 38-year-old chief executive of Golden Gate Trade & Service, a fast-growing restaurant chain operator, is modeling his business on China’s Little Sheep Group Ltd which has more than 350 chain stores around the world.

“That is our case study,” he said, “But of course our culture is different and we have to find our way of doing things.”

Five years ago, Vinh and two friends set up a restaurant specializing in “mushroom hotpot” — a savory mix of mushrooms, meat and vegetables boiled in a salty broth and eaten from a gas-fired vessel. Within two years, he had six shops. By last year, he had 34.

“Our vision is in the next three years to increase profits 40-50 percent a year, and at the end of 2013 to have about 90 or 100 restaurants,” he said.

His rival, seven-year-old Pho 24, a network of soup noodle shops that has become the biggest restaurant chain in Vietnam with 60 stores, has expanded abroad with 19 restaurants. Founder and chief executive Ly Qui Trung said he expects the number of franchised stores to double or triple in the next five years.

But mom-and-pop shops still hold sway over the Vietnamese consumer .

In congested Ho Chi Minh City, a city of about eight million people, shoppers elbow their way through crowded Saigon Plaza, whose two floors of small rented stalls sell everything from clothing and jewelry to knock-off handbags and children’s toys.

“There’s a lot of variety here and the prices range from low to high. Best of all, you can bargain,” said Te Vinh Loc, a 34-year-old designer as he snaked his way through a maze of second-floor stalls on a Thursday afternoon. “Sometimes I look at the high-end places, but they don’t have what I’m looking for so I come here.”

A few shops away, saleswoman Quynh Thi Bich Lai sells a blue-and-white soccer shirt with the Adidas logo for $6.

“It’s just good business,” said Quynh, who moves about 200-300 units of clothing a month in a stall no bigger than 2 sq meters. Retailers at Saigon Plaza pay rent of about $600 a month and generate about $2,000 in revenue, pocketing about $500 a month in profit.

Down the street, at the sparkling new Vincom Center, store attendants sat quietly in mostly empty stores, some thumbing messages on their phones. At a Versace store, women’s handbags were on sale for around $2,600 each – more than double the annual salary of an average Vietnamese worker. Business is “not good but ok,” said salesman Nguyen Anh Tuan. The shop attracts about 50 shoppers a day, he said, though only about five make purchases.

But the potential for future growth means the luxury brands can’t afford not to be in Vietnam.

In usually staid Hanoi, paparazzi at a rope line snapped celebrities arriving in stretch limos for the September opening of a Gucci store opposite the landmark century-old opera house and Hanoi stock exchange building. Most days, however, shoppers are scarce.

On a Monday afternoon, Nguyen Trong Minh had the plush shop to himself while buying a pair of sunglasses for his mother. The 24-year-old consultant, who recently returned to Vietnam after studying for five years in Minnesota, paused when asked how long it would take for a store like Gucci to really take off. “It’ll be a while.”

(Additional reporting by Bradley Dorfman in Chicago; editing by Bill Tarrant)

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