As part of the Master of Global Supply Chain Management program, Daniel Wong and I lead the Supply Chain and Value Chain in Asia Field Study. This is a unique, on-the-ground opportunity to explore the challenges in globalized operations strategies. As we start our journey, we need to remember to consider our assumptions and consider when Western values do not apply. When working with global supply chains, social and environmental issues like child labor, unsafe working conditions and dumping of pollutants become core considerations.
The global marketplace
Through globalization, I learned the terms Develop and Emerging Regions from my bosses. Over a course of 25 years we moved a lot of places from one region to the other. What I never knew was where these terms came from. Certainly, they made sense, but I had no idea someone actually determined what country was in what category. When I sat down to write, I learned, courtesy of Morgan Stanley (MSCI), that there are actually people that do this as well as there are two more categories — Frontier and Standalone Markets.
MSCI (Morgan Stanley Capital International) is a global provider for various indexes for equity, hedge funds and multiasset portfolio analysis. Along with work, since 1988, MSCI, has also created indexes on determining Developed, Emerging and Frontier Markets.
Benchmarking the world’s marketplace
According to MSCI, the market cap weighted indexes are among the most respected and widely used benchmarks in the financial industry. Collectively, they provide detailed equity market coverage for more than 80 countries across developed, emerging and frontier markets, representing 99% of these investable opportunity sets. This provides investors with meaningful global views and the flexibility to segment cross-regional comparisons by country, size, sector, and industry and style characteristics for portfolios focused on specific market segments.
MSCI peer ratings
The MSCI Index is designed to measure the performance of the large and mid-cap segments of the market. As you search through this incredible database, things begin to match up, and trends emerge. Below, I was able to match SE Asian Emerging countries with Vietnam (a Frontier Region). Vietnam may have a booming economy, but it is still a Frontier market. Volatility, of these numbers can easily spook the marketplace. It is interesting to see that Thailand, Indonesia and Vietnam have managed to stay in positive over the past ten years.
For Vietnam, there are 16 components, covering approximately 85% of the equity universe.
Basic economic facts
Currency: Vietnam dong (VND) = 22,425 per USD
46th largest economy based on GDP
GDP growth rate: 6.81%
GDP = $220B USD
Agriculture = 15.3%
Industry = 33.3
Service = 51.3%
Trade Volume = $416B USD
Exports = $214.1B
Imports = $202.6B
Labor Force: 54.8M
Foreign direct investment
Driven by its continuous growth, Vietnam continues to attract Foreign Direct Invest (FDI). For the first half of the year there has been a 69% increase of $16.74B USD. Investment has mainly been driven by the trade war between the US and China, coupled with Vietnam’s entry into several trade agreements. As you can see, Asian countries make up the vast majority of FDI in Vietnam.
New direction for FDI
- Generate higher wages (through creating higher-value output per worker)
- Lead to increased local skills development, technology transfer and R&D
- Stimulate more efficient use of resources (not just energy, but also land, water, raw materials, etc.)
- Create opportunities for local entrepreneurs and investors to work with international companies as part of global value chains, and do not displace local investors and SMEs
- Increase the competitiveness of all businesses in Vietnam (e.g. by improving supply chains, logistics, etc.)
Source: Phan Thi Thanh Nhan, Ministry of Planning and Investment, Foreign Investment Agency
Using of tariffs as a weapon
Utilizing tariffs as a way punish the behavior of a trading partner has become the weapon of choice for some nations to correct long standing disputes and imbalances. There is currently plenty of uncertainty with the negotiations between China and the US on where all this is going. This situation along with rising Chinese wages has accelerated many supply chain realignments.
As the US-China trade war has progressed, not surprisingly, Vietnam has quickly been in a position to benefit. Trade with the US has surged since the beginning of the dispute by over 40%. Additionally, Nintendo recently announced it will move its game controllers to Vietnam in order to lessen its reliance on Chinese based production and to escape the increased tariffs.
Currently, Vietnam does not have any legal requirement for the certification of “Made in Vietnam.” Vietnamese officials say China is now mislabeling products to avoid the tariffs and have so far found this in textiles, fisheries and agriculture. Finally, as the trade surplus with the US grows ($25B since 2014), there may be pressure on Vietnam to balance its exports with imports. Already, the US has imposed duties of up to 456% on certain steel produced in South Korea or Taiwan, which is then shipped to Vietnam for minor processing and finally exported to the US.
According to Vingroup’s website, Vingroup is Vietnam’s largest private corporation. Its aim is to bolster the industrial development of the country, and spearhead its modernization to create a better life for the Vietnamese people.
VinGroup is a market leader in Vietnam in many sectors:
- Vinhomes: real estate, owning over 14,000 homes
- VinPearl: tourism, recreation, and entertainment with hotel complexes, golf resorts and theme parks
- Vincom: 46 retail malls and plazas
- VinMart and VinMart+: over 1,200 convenience stores and supermarkets
- VinMec: private hospitals and healthcare services
- VinSchool: private schools and universities with collaborative agreements with US educational establishments; currently educating over 19,000 students each year
- VinEco: spearheading the modernization of Vietnam’s farming sector
Founded 25 years ago, Vingroup is a $15B USD business. It recently listed successfully its largest business, Vinhomes, and raised $2.2B USD from the IPO, making it the largest capital raise in South East Asia in 2018. Vingroup’s three listed companies — Vingroup, Vinhomes and Vincom Retail — account for 25% of the entire value of the Vietnamese stock market. Group annual revenues are growing exponentially, from $305M USD in 2012 to $3.4B USD in 2017.
A subsidiary of Vingroup, VinFast is Vietnam’s first high volume automotive manufacturer. It is developing and manufacturing a range of innovative and world-class vehicles. VinFast is working with leading European design, engineering and component businesses to create products that meet international standards and customer expectations in terms of premium design, quality, dynamics, in-car features and ownership experience.
Deliveries of the first VinFast cars — a large saloon and a large SUV, both designed by Pininfarina — will commence in Vietnam from September 2019. These will be followed by a city car and a electric vehicle, as well as an electric bus, with exports to selected markets worldwide planned in the coming years. All VinFast cars will be manufactured at a plant in Hai Phong, This facility will also manufacture a range of electric scooters as well as passenger cars. VinFast aims to become Southeast Asia’s leading vehicle manufacturer, as well as a significant new player in the global automotive industry.
My observations working in Vietnam
First, since most businesses are starting from the beginning again by moving here, a Total Cost Model can be built and managed. Wages and taxes for starting a business are still manageable.
There is a gap in trained leadership as through the growth they have pushed the limits on their infrastructure, labor and management to the limit.
Consistency or leveling out the cycles is a lesson Vietnam needs to learn. Small businesses need to learn how to deliver, on time/ defect free to meet their customers’ expectations.