Hoi An and tourism

TOURISTS TO HOI AN. SOURCE: HOI AN DEPARTMENT OF STATISTICS

I’d have to say that Hoi An is my favorite city in Vietnam. The first time I was there was back in 2005, and it was just magical. I stayed at the Life Resort (which is now an Anantara). It was one of the few times in my life that I have run into anyone that I knew while abroad. It was my roommate for a summer in grad school - he was there at the same time with his wife. We had a wonderful time seeing the old city and eating and drinking.

Well, now the New York Times has written a “36 hours in…” column about Hoi An. That means it is over as an up-and-coming destination and is now a destination that has arrived. This may have been the case as far back as 1999, when UNESCO awarded the city World Heritage Site status.

We can see this in the tourist figures. Sadly, it is very difficult to get good figures, but based on older UNESCO reports (which have their own problems), and recent news reports, the number of visitors to the city has jumped. Back in 1999, there were about 150,000 tourists in Hoi An with about half Vietnamese. In 2005, when I visited, the numbers had risen to almost 650,000 (a 31% compound annual growth rate), but still a fairly equal mix of foreigners and nationals. Then in 2018, we saw another big jump. Total tourists were something like 3.3m in 2017, but in the first nine months of 2018, they had already reached 4.5m, with the international tourist figures alone (just for the first 9 months) was already ahead of the number for all tourist visits in 2017, almost a 20% growth rate.

So Hoi An is really seeing a massive onslaught of tourists. This in a city with just about 100,000 residents. The paradox of success for tourist destinations is that the more tourists come, the less magical it usually is. There are some exceptions: Paris, New York. But these smaller places, like Hoi An, are characterized by their quaintness and history. Having to shove some Western tourists with short shorts and a fanny pack aside to see the Japanese bridge, is less magical.

Having tourists, though, has its upsides. In a 2008 report, UNESCO reported some poverty data. The percentage of Hoi An households living with under VND260,000 (USD16.50) in income per month fell to 6.47%, compared to the national average of 14.7% for the nation as a whole. Data from a 2018 World Bank report shows the national poverty rate falling to 9.8%, with urban poverty down to 1.6%. Hoi An, although not explicitly mentioned, is classed in that urban poverty figure.

Hoi An needs to figure out a way to deal with the growth in tourists while also taking advantage of all the money coming in. If I were in charge, I would jack up the charge for people to visit the Old City (now about $6), try to upgrade the facilities to attract more well-heeled tourists, but also have a focus on cultural tourism (food, agriculture, religion, history). I think all of this would result in a more lucrative market but also one that hopefully preserves what I found most attractive about Hoi An when I visited 14 years ago.

Drugs

DRUG SEIZURES HAVE INCREASED. NOTE: IF NO DATA IS AVAILABLE, THEN THE YEAR IS LEFT BLANK. FOR EXAMPLE, THERE WAS NO DATA FOR OPIUM OR METH IN 2014. THAT DOES NOT MEAN THAT THERE WERE NO SEIZURES IN THAT YEAR. SOURCE: UN OFFICE ON DRUGS & CRIME

Vietnam has the death penalty for drug trafficking. Of course, judges have flexibility in sentencing, and the death penalty is only for large amounts of drugs. However, according to this source, capital punishment is most frequently used to sanction drug-related offences, followed by corruption, black-market and violent crimes.

That’s why I was surprised to see this story about finding 300kg of meth. This is after finding another 300kg of meth just last month in Central Vietnam (details here). If this keeps up, we could see a record amount of seizures.

This has been the trend over the past few years of increasing drug seizures. Some of this may have been more attention on drug trafficking (well done, Vietnamese police). But probably the increase speaks to more drugs being trafficked. The UN has data through 2016 on seizures, and it is clearly trending up.

PEOPLE IN TREATMENT BY COUNTRY. DATA REPRESENTS 2015 NUMBERS FOR VIETNAM AND LAOS, 2016 FOR THE OTHER COUNTRIES. SOURCE: UN OFFICE ON DRUGS & CRIME

That may be because Vietnam is just used as a transport hub from Cambodia and Laos. But it does also seem that drug shipments meant for the country are increasing.

Drug prevalence in Vietnam is still low. Only 0.22% of Vietnamese aged 15-4 use meth or ecstasy. That’s well below world levels of 0.70% for meth and 0.42% for ecstasy. However, deaths are actually pretty high. In Vietnam in 2009 (last year for which is data available), according to the UN data, there were 2,184 deaths, a very high rate of 36 per million people aged between 15-64. This is higher than any other country (although the data isn’t very comprehensive) except for Iran, which had a rate of 56 per million in the same age group (but for 2016).

Except for Thailand, Vietnam has the most people in treatment (at least according to 2015-16 data). Which is kind of surprising, given how harsh drug trafficking is being punished. But reading a bit more about these treatment centers, maybe this isn’t the best. See this report that takes a look at times when detainees broke out of these centers because of the poor conditions.

In the West, the conversation around drugs is changing. Marijuana is increasingly legal or decriminalized. There is somewhat greater emphasis on treatment, especially around opioids in the US. Even Thailand and South Korea have legalized medical marijuana. Vietnam probably needs to think about doing this as well, along with make real treatment a priority for drug addicts. But given how difficult this is in every other part of the world, I won’t hold my breath.

Two things

Sorry, but I can’t find anything that really hits me hard today, so I am going to work on a few other things for future posts. In the meantime, I saw two things that are mildly interesting:

First, this story, about the Vietnamese historian being kicked out of the communist party, has gotten some legs in the West. The New York Times covered it. It is an ancillary to the larger story about Chinese influence around the world, which is something that the New York Times, in particular, has focused on. And it is also part of the larger worldwide Facebook story, since Vietnam has strict laws around data in social media networks.

It will be interesting to see what the Vietnamese government will do to tamp down anti-Chinese sentiment. It’s a concern for them, given earlier protests against China’s moves into the South China Sea. Plus, it is quite interesting that nationalism, in the vein of anti-Chinese sentiment, has become such a complex path to weave in Vietnam. In some ways, the Vietnamese government was built on nationalism. From my view, and it could very well be wrong, the driving forces of the resistance to the US and the Southern Vietnamese government was nationalism, independence and reunification. And now, the government is facing difficulties containing a similar nationalism. As China flexes its muscles in Vietnam and around the South China Sea, this is going to continue to be an issue.

It’s funny that all of this came out around the same time that Cu Rua, a turtle that is a symbol of national resistance to the Chinese, was mummified and displayed.

HCMC WASTE PER DAY. SOURCE: DEPARTMENT OF NATURAL RESOURCES AND ENVIRONMENT

Second, I liked this short article about HCMC promoting waste-to-energy projects. In the article, if these numbers are correct, then the first waste project is extremely profitable. The plant treated 500 tonnes, then converted 35 tonnes to 7 million kWhs. It cost a total of VND7.5m (USD32.6k) to treat the waste (at a cost of VND1.5m per tonne). The revenue side was double. The 7m kWhs brought in USD735k (at USD0.15 per kWh). The figure per kWh is higher than feed-in tarrifs for solar (I wrote about this a bit more in a post on Feb. 19, 2019).

There are plans for more waste-to-energy plants. The owner of the first plant would like to expand it to take in 1,000 tonnes to produce 20MW a day. Another plant looks like it is in the works.

It’s funny that there are plants like this going up in Vietnam, but the rest of the world is trying to figure out what to do with all of its waste. Recent articles have all been about how China is no longer taking waste and the impact on recycling in the US. Not just the US, but Europe as well.

Vietnam is one of the places that has increased the amount of waste it is taking (according to that last article). But earlier this year it stopped issuing waste import permits. That’s because China stopped taking recycling for a reason: the environment issues it produces. Vietnam would do better trying to convert its own waste, get better at that, and then start to see if they can do the same with imported waste.

Counterfeits

There is a new report out from the OECD about counterfeiting in the world, and there were some interesting statistics about Vietnam in there that I wanted to highlight.

First, the main point of the report is that counterfeiting is big business. About 3.3% of all world trade is of counterfeit goods. The major categories are: pharmaceuticals, food stuff, perfume & cosmetics, leather goods, clothing & textiles, footwear, jewellery, electronics, optical/photo/medical equipment, and toys/games. About 22% of the value of seizures is in footwear, the largest category. Clothing is second at 16%. The United States is the country most affected by counterfeiting, with brands or patents from their making up about 24% of all fake products seized.

IN 2016, VIETNAM WAS NOT MUCH WORSE THAN ITS NEIGHBORS. NOTE: THE NUMBERS REFER TO THE 2016 GTRIC INDEX WHICH IS A STATISTICAL MEASURE OF COUNTERFEITING COMPARED TO IMPORT VOLUMES FROM THE RESPECTIVE COUNTRY. A HIGHER SCORE CORRESPONDS TO A GREATER LIKELIHOOD THAT THE ECONOMY IN QUESTION IS A SOURCE OF COUNTERFEIT GOODS. SOURCE: OECD, VIETECON.COM

IN 2016, VIETNAM WAS NOT MUCH WORSE THAN ITS NEIGHBORS. NOTE: THE NUMBERS REFER TO THE 2016 GTRIC INDEX WHICH IS A STATISTICAL MEASURE OF COUNTERFEITING COMPARED TO IMPORT VOLUMES FROM THE RESPECTIVE COUNTRY. A HIGHER SCORE CORRESPONDS TO A GREATER LIKELIHOOD THAT THE ECONOMY IN QUESTION IS A SOURCE OF COUNTERFEIT GOODS. SOURCE: OECD, VIETECON.COM

Even emerging economies, like China and Brazil, suffer from counterfeiting. It will be interesting to see how China starts to deal with IP issues when it is the victim. It will likely follow the trajectory of every developing country in the modern era, including the US, by promoting intellectual property rights when it matters to itself. The case of Huawei and 5G is a great example. The country is the largest owner of 5G patents, and it will likely get a large percentage of license fees for these patents. Of course they are going to want to defend them. My question is: will they defend them in Western countries where the legal regime is predisposed to support property rights while ignoring other IP violations at home that would affect its own manufacturers?

But to Vietnam. It looks like poor Vietnam is the #8 source of counterfeit goods in the world (in terms of the value seized), or at least it was in 2014. It fell below the top 12 in 2015 and 2016, according to the OECD (see Figure 3.1 here). But it is small potatoes compared to China and Hong Kong, which combined make up about 80% of all seized goods. Malaysia, Singapore and Thailand are other Asian economies that consistently rank higher than Vietnam. Generally, Vietnam isn’t that bad.

However, my caution is that trade in counterfeit goods correlates to trade in general, so more trade means more counterfeits. Vietnam’s exports have been rising in double digits: they more than doubled from 2011 (USD101bn) to 2017 (USD220bn).

CLOTHING, JEWELLERY AND FOODSTUFF ARE MOST SUSPECT FROM VIETNAM. NOTE: THIS IS THE SAME GTRIC INDEX MENTIONED ABOVE BUT FOR 2011-2013. SOURCE; OECD, VIETECON.COM

Diving a little deeper, there is an older OECD report that looks at what categories are most counterfeited by country. For Vietnam, it is clothing & textiles, followed by a tie between jewellery and foodstuff, with leather & handbags just below. These all have a GTRIC-e Index of between 0.23 to 0.26 (GTRIC-e is a statistical index that the OECD came up with. It’s complicated, but for our purposes, the higher the number the greater the likelihood that the economy in question is a source of these types of countefeit goods).

Interestingly, these goods usually transit through Hong Kong and Singapore onward to their other destinations. The UAE is another big transit spot, as is Saudi Arabia (which seems strange to me, given how expensive logistics are in the Kingdom).

Back to the original report, the main drivers of counterfeiting are weak governance (corruption), free trade zones (FTZs, example: UAE with the Jebal Ali port), low labor costs combined with weak labor regulations, fast logistics combined with a weak ability to track goods, and finally trade facilitation policies. Weak governance is key, because it means that it is easy to take advantage of all of the rest. If corruption is endemic, then having an FTZ makes it worse. Same with weak labor regs or trade facilitation policies that don’t put a stop to exports of counterfeits.

Vietnam is actually doing better than other countries. It is ranked #41 in terms of propensity to export counterfeits in the more recent report, but is the 21st largest export economy in the world. It may be helped by the fact that Samsung made up almost a quarter of Vietnam’s exports (2017). Samsung wants to protect its IP. Of course, with more exports from Vietnam including from Chinese companies exporting from the country, we will likely see these counterfeit figures from Vietnam increase, unless there is a countervailing crackdown from the government. Most of the recent corruption cases in Vietnam have been about land, so I haven’t seen much so far.

Big picture, though, I want to say that counterfeiting is just the way that developing countries develop. They copy and steal and manufacture copied/stolen IP. The US did it. Japan did it. China is doing it. But once a country actually owns sizeable amounts of IP, they start to care much more. You don’t see South Korea on these charts, because they have started to create their own IP. And that’s normal. Of course, it sucks for companies that own the IP, and potentially consumers that are hurt by shoddy goods. I am all for people defending their IP - don’t steal my blog! [Ed - actually, given that readership levels are low, I think it would be fine if they credited you somewhere]. But it’s never going to get to 100%, and that’s probably alright. Think of it is as a tax paid by IP owners to poor people in developed countries, a crude correction to income inequality.

Food in Vietnam

SOURCE: FREESTOCKS.ORG

A few headlines caught my eye over the weekend.

RATS: The first was this long-ish article in National Geographic about rats as a source of protein in Vietnam. I usually don’t like articles about weird foods in Asian countries, because I think they too easily turn into caricatures and/or lean into wild stereotypes about whole cultures. But I found this interesting, because rats are actually a pretty good source of protein. Plus, it’s a business:

The Mekong Delta alone produces up to 3,600 tons of live rats a year, at a value of about $2 million.

For Western readers, basically don’t think about our disgusting Norwegian rats that live in cities. These are a different species, with fewer diseases. And supposedly they taste like rabbit. [Ed - good job avoiding the chicken jokes.]

I firmly believe that alternative means of protein are going to be needed, and probably shortly. Livestock and its associated supply chain represents up to half of all greenhouse gas emissions, according to this article. A more reasonable estimate was done by the IPCC and said that the lifecycle of livestock represents 14.5% of all emissions. That’s a lot.

INSECTS: And Vietnam may be part of the new wave of alternative forms of protein. There is already a company based in Vietnam, Entobel, that is building a factory to produce insect protein for fish food. And Vietnam already eats a fair number of insects.

SOURCE: PERCY PHAM @PERCYTHAIPHAM

FISH SAUCE: On another food tangent, I also saw this article about the difficulties of the traditional fish sauce sector in Vietnam. It talks about new regulations that are going to hurt traditional makers to the benefit of industrial makers:

If the new criteria are applied, all traditional fish sauce making would end and there would be only industrial fish sauce left. Vu said the draft, in general, favours industrial fish sauce producers at the expense of the traditional fish sauce makers. “Recently, a whole village in Nha Trang that had made fish sauce for many generations has been wiped out and most households have shifted to producing materials for industrial fish sauce producers.

This is the second big test of the traditional fish sauce producers in Vietnam. The first was a scare in 2016 over arsenic levels in fish sauce. Later it turns out that the natural arsenic found in traditional fish sause is not poisonous.

In some ways this is a follow up to my article about cinema, in that I think traditional products are going to be very important for Vietnam over time. They help maintain culture, they can provide a livelihood for people, and they can be a significant revenue source for smaller enterprises. We have seen a big surge in the West of hand-crafted products. Vietnamese fish sauce can be a part of this. Just look at the difference high-end products can command. Red boat, a widely-sold and -prefered brand of fish sauce, is sold for $11.95 for 250ml, or almost $50 per liter, on Amazon. This is actually a bit higher than the lower-end brands. Even still, a high-end fish sauce goes for double that at $18.95 or 200ml.

The government should really think hard about how it supports all of the traditional makers of products, because they can be a real source of jobs and business as the country grows richer and wants to spend more for premium products.

Cinema in Vietnam

Movies! Hollywood! Bollywood! Nollywood! Is Vietnam going to be the next great cinema capital? Will there be a Vollywood, or Saigollywood? [Ed - I would go with Saigollywood.]

CINEMAS IN VIETNAM IN 2017. SOURCE; B-COMPANY

The Vietnamese would like to make “culture” (pronounced properly as “kultchah”) a priority according to this article. It is going to develop a modern film studio on a big plot of land and invest in other types of cultural products. Obviously the Vietnamese government is not immune to the pull of the Korean wave. That’s the big push by the Korean government over the past two decades to increase Korean cultural exports and Korean soft power (South Korea, of course). You can see in the figures from this paper how significant the exports have become. Korea is now a brand, and not just an Asian one, a global one. And this has helped the economy of Korea, and probably helped the global support it has generally.

I can see the Vietnamese government looking at that success and saying, "we should do this too.” Vietnam already has a somewhat successful export with its food, and the government is taking some steps to promote it. The Thai government did this, and it increased the number of Thai restaurants globally from 5,500 back in around 2001 to more than 15,000 as of last year. This has probably helped increase people’s understanding of Thailand, increased tourism to Thailand and may have even helped it geopolitically.

The Vietnamese government would do that with culture generally. Specifically for film, it would like to have 40-45 feature films a year by 2020 plus more animation, documentary, and other types of films. By 2030, the feature film figure is supposed to reach 55-60 per year. This seems eminently achievable, given that 40 feature films were produced in 2015. Total revenue was $105m back in 2015, and it has probably done more than $25m already in 2019.

And local films are actually doing quite well. The number one movie ever in Vietnam is Em chua 18 (Jailbait) that beat imports like Kong: Skull Island (which benefited from being shot in the country) and the Fast & Furious movies. This interview with a American-Vietnamese producers is very interesting. One thing that she says is that:

I mean, you know, before when I first came, if a movie, you know, was able to have a box office of one million dollars, that’s sort of like this far-fetched dream, you know. And then now it’s kind of, like, kind of average if you get a million. That’s sort of like maybe you’ll be okay depending on your budget, but you’re really aiming for like 4 or 5 million.

That’s a big change and should allow for much larger canvases for film makers.

Now, moving from a local product to one that can appeal abroad is going to be difficult. Indonesia was somewhat succesfull with the Raid franchise, but that was directed by a Welsh man. Thailand has success with art films and some action movies, but it really hasn’t made too much of a wave. Korea is really the best example, with lots of Korean movies crossing over.

Generally, I think it is good to promote local culture even if it never makes it globally. It is a way to preserve local culture and also reflect people’s world back on themselves, something no American movie is going to be able to do. In the West, people talk about representation and telling one’s own story, usually in the context of minorities that haven’t been able to do that. That is just as important for less rich countries that have only now started to have the ability to do the same. Let’s hope Vietnam is able to capitalize on this.

* Accidentally put the wrong date (March 14) on this post. Corrected to the actual date.

Golf in Vietnam

Golf. Just ugh, you know. Everyone hates golf right? Too bougie, too preppy, too exclusive and classist. But that’s the West, or the US in particular. In the US the number of golfers has fallen drastically from about 30m in 2006 to about 24m in 2017. That’s down more than 20%. The number of golf courses has fallen much less, it appears to me, meaning that each one is having problems getting enough paying customers and lots more are probably going to close over time. My mother-in-law used to live on a golf course in Arizona. It looked horrible, because they couldn’t get enough water to maintain the greens well (and they shouldn’t have), and it was losing money. The owners are finally selling it, and it will eventually be housing of some sort.

Europe will like trend with the US, at least parts of it. Participation actually increased in the US until 2009 but now is falling a bit every year, according to this EY report. The growth was likely mostly driven by eastern European countries that opened their economy. Not too many Soviet golf courses!

Vietnam is different. It’s a young country. They haven’t gone through the whole cycle of not knowing golf, then aspirationally playing golf, then hating golf and finally quitting golf. People are really trying to make golf happen in Vietnam. They see it as a luxury product that brings in wealthy people. So I wasn’t surprised to see an article today about how many golf courses are in development: 78 in place with another 43 in different stages of development. This is for a country that, according to a somewhat old (2015) FT article, has 10,000 golfers in total. That was back in late 2015, so even if it has doubled, that means 20,000 golfers. That’s 256 golfers per facility, and if we add in another 10,000 tourists, that rises to just 385. The US has 1,500 golfers per golf course, not counting tourists who come and play. That’s almost 4x the amount per course.

PHOTO BY MORGAN DAVID DE LOSSY @MORGANDDL

But building golf courses has been a trend all over the world. According to an R&A Report from 2019:

In the last twenty years there has been phenomenal growth in Asian golf, with Japan (3,169), Republic of Korea (798), China (599) and Thailand (315) now among the top-20 countries in course supply. Resort development has driven much of golf’s growth in this region.

That’s the crux of it. Many of these courses are built around real estate and resorts, rather than just golf on its own.

So it will be interesting to see what happens in Vietnam. China has seen a big boom in golf, but the government has shut down a number of courses that were illegally built.

I grew up playing golf, but I have always been bad at it, so take everything I say with a grain of salt. I do think there are some positives of golf, especially from an an economic perspective:

• It can help real estate developers and also is very pretty. There is a reason why people like looking out over the links.

• It can attract tourists. According to the FT article above, back in 2015 there were about 7,000 tourists playing golf in Vietnam. That could increase over time, especially as golf is taken up by more Chinese.

• Sport is something that should be promoted. Golf is a sport (although sometimes I question it). It’s good to get out there and walk the greens, be outside, get some exercise.

On the negative side:

• There is significant environmental issues around golf courses. Water usage is high, even for courses that work to reduce it.

• Pesticide and herbicide usage is extremely high in order to maintain the pristine green color.

• Mowing every day, which is what lots of golf courses do, uses a lot of fuel, and mowing equipment generally isn’t the most fuel efficient. Not to mention having non-native grass.

• Where golf courses are built also matters significantly. The better locations (near the ocean, in beautiful forested areas) may entail destruction of the natural habitats of birds and animals.

One one hand for developers, golf courses may be a no-brainer. They really drive demand. In Egypt, which has a lot of developers building homes centered around new golf courses, the golf courses are just something to look at - once built very few people use them. In a country that is mostly desert, it looked amazing! Vietnam is differental in that it is already quite green, but the same concept applies: a golf resort feels like a world away from urban environments. It’s a way of taming nature that allows people to enjoy it easily.

I personally think golf courses are probably a bad use for the land. Big parks, with areas set aside for soccer, hiking, and other community activities, would be a much better investment. That doesn’t have the same appeal to developers, so we are probably going to see many more golf courses in Vietnam over the next few years.

Payments

Back in 2001 I worked for a big US internet company that was moving into the payment space. I was on the business development team, and we spent a lot of time trying to figure out where best to play. Even then, it just seemed like such an uphill battle, because of the entrenched players (banks, Visa/Mastercard, payment processing companies). All of them benefited from the current system.

Now I am working with a small US non-profit that puts grocery stores in food deserts, and one of our big expenses is the cost of payments. We spend more than 2.5% of all transactions just to pay off all of these middle-men. That’s about what small businesses were paying back in 2001, and it hasn’t changed, despite all of the new companies coming into the space. The big problem in the United States is that interchange fees are still extremely high. For example, we still need a merchant processing company, and we still take credit cards. Each one wants a cut. The payment processing part of the chain has seen competition, but mainly on convenience. Fees are still high.

Places outside of the US has much lower fees. For example, the EU just negotiated a new deal with Visa and Mastercard that lowered interchange fees to just 0.2% for debit cards and 0.3% for credit cards. That would save our store more than 2% off every transaction, which would mean a lot for the bottom line, given that margins for grocery stores are so low.

In other countries, without the legacies that the developed countries have, we have seen significant advances in payments. Kenya is the premier example, with M-Pesa by Safaricom owning more than 3/4s of the mobile commerce market in 2018, and, according to one stat, in 2013, 43 per cent of the Kenyan GDP flowed through the service.

Vietnam is a ripe market, because there is little legacy that needs to be overthrown there. According to the World Bank, in 2017 almost 50 million adults (out of 71m in total) had no “transaction account” meaning no account to make payments either with a bank or a non-bank. That includes a mobile account that can be used to make payments.

Companies are going after this space..hard. There have been almost 80 companies set up in Vietnam. Momo is one of the bigger ones, and is now the best funded after a big investment round led by Warburg Pincus (sources say it could have been $100m). The company is growing quickly, has 2 million registered users, and can be used at 100,000 places in Vietnam.

TRANSACTIONS MAY NEED TO BE EXTREMELY HIGH ($100BN) TO JUSTIFY MOMO’S VALUATION. FEES MATTER A LOT, NO DUH! SOURCE: VIETECON.COM

Doing some quick back of the envelope calculations, let’s say that the lastest round at Momo valued the company at $500m (so Warburg and others bought 20%, which is just a guess). The PE guys want this to grow to $3bn (6x) before they exit in an IPO. And let’s make a big assumption here: that the company will trade at a 50x P/E when it goes public. This is probably too conservative. Paypal currently trades at over 50x. Visa trades at 30x and Mastercard at 40x. But let’s take this as a given, so at 50x and a valuation of $3bn, the company would need earnings of $60m a year at the time of the IPO. And let’s say they are able to make a profit of just 0.2% of each transaction. That means they need to have transactions of $30bn. Ouch. That’s a lot. Nominal GDP in Vietnam was $224bn in 2017.

I did a quick sensitivity in the table up at the right that shows what the transactions could be at different P/E multiples and transaction fees (assuming these are all profit, which is unlikely). If fees are really low, then the amount of transactions needed would be close to half of all transactions in Vietnam, which seems unlikely until you look at M-Pesa. Obviously the company could make money in other ways rather than just with fees: selling data, offering bank accounts, advertising, lots of different things. If they truly own all of the customer’s money needs, then the potential profits per transaction would be so much more than just 0.2%.

The reason why I started thinking about this is because I saw this story about cashless bus rides in HCMC. It’s steps like these that are going to be extremely important in driving cashless payments demand in Vietnam. And cashless payments are great for the government, because they get a much more comprehensive record of where money is going in the country. So we should expect to see much more of this over time. And Momo may be a beneficiary of all of it.

Measles

A news story caught my eye over the weekend about measles. It turns out that measles are an issue in Ho Chi Minh City.

MEASLES CASES IN THE US ARE ALSO RISING. SOURCE: CDC

Deputy Director of the municipal Department of Health Nguyen Huu Hung said from 2018 to February 2019, the city recorded 4,327 measles cases, including over 2,600 in the first two months of this year.

If I do the math, that means in 2019 the number of measles cases is already higher than in all of 2018. In 2018 in all of Vietnam, according to the government, there were only 1,963 cases. So 2019 is not looking good.

Vietnam is not the only place with measles problems. The US also has a measles problem, and it’s for the same reason: Not everyone is being vaccinated.

VIETNAM BACK IN 2004 WAS AHEAD OF ITS NEIGHBORS. SOURCE: WHO

I was surprised by Vietnam’s uptick in measles, because the vaccination rates in Vietnam are actually pretty high, at least for the first shot (96% in HCMC for the first shot and 80% for the second). If you follow any of the anti-vax stuff, and I do, you know that there is basically one legitimate reasons to not get vaccinated: if you health doesn’t allow it. Other than that, everyone needs to get the vaccination, specifically so that people that can’t get vaccinated are also protected by the herd immunity. And measles isn’t just a child’s disease that is easily overcome. A recent report by leading health organizations said:

Using updated disease modelling data, the report provides the most comprehensive estimates of measles trends over the last 17 years. It shows that since 2000, over 21 million lives have been saved through measles immunizations. However, reported cases increased by more than 30 percent worldwide from 2016. 

CASES OF MALARIA IN VIETNAM HAVE FALLEN DRASTICALLY. SOURCE: WHO

Vietnam has actually been pretty good on measles. Back in 2004, it was actually ahead of most of its neighbors with less than 0.3 deaths per 100,000 people. That was better than the Philippines, and not far off from Thailand and Malaysia, both much richer countries. And I can only assume that this statistic improved, as every other health measure has improved in Vietnam as the country has gotten richer. For example, here is a chart from the WHO that I pulled on malaria cases. They are down drastically since 2002.

The big problem with vaccines is that you need an extremely high rate of compliance to be completely effective. But getting to that high rate is hard. There is the 80-20 rule that says that you can get 80% of the way there pretty easily. But that the last 20% is the hardest - the hardest to reach, the hardest to convince to get the vaccine, the hardest to follow up with and get the second vaccine. That’s as true in the US as it is in Vietnam. The US has been too liberal with religious and other exceptions that hurt uptake rates, and Vietnam likely has education issues around vaccines that are similar in effect.

Ultimately, Vietnam is getting much healthier, but going the final step to making sure that measles is eradicated is expensive and time-consuming. And there are going to be periods where things get worse. Hopefully this will just be a hiccup in the long downward trend of measles cases and other diseases in Vietnam.

Metro costs in the world

I still have not completed a bigger piece on ride hailing, mainly because I haven’t done any work on it. So don’t get your hopes up.

But I did see two interesting articles that piqued my interest in metro rail building in Vietnam. The first is that the Ho Chi Minh City (HCMC) government said it would not ban motorbikes in the center of the city, which is good news. On February 26 (scroll down to see the post), I said that the government couldn’t ban motorbikes. They are too important to people’s transport in the city. Now the government has “clarified” things by saying that it hopes motorbike usage will fall with more public transport. Me too! I want to be able to cross the street! [Actually, I don’t have problems crossing the street. Just go - it’ll all work out.]

Motorbike traffic may fall, if the government gets what it will want. HCMC People's Committee Vice Chairman Tran Vinh Tuyen said that the city wants a public transport stop to be within 500 meters of every resident’s home. That’s crazy, but great. He’s not talking about only metro, but also bus rapid transit, water ferries, and railway. All of which play a part.

The second article is about the HCMC government proposing to the PM that the central government pay $93m to advance the HCMC metro. The city government has fallen behind on their payments, which has pissed off the Japanese and could lead to a diplomatic issue. This money would help avoid that. I am not sure what will happen to the request, but I hope it works out, because it would be a shame to not have a metro in HCMC.

These two articles and the fact that the HCMC metro costs really seem to have ballooned started to make me wonder how expensive it costs to build metro rail in Vietnam. The table below shows Vietnam versus other metro builds.

VIETNAMESE METRO’S AREN’T AS CHEAP AS I WOULD EXPECT, BUT THEY ARE GENERALLY CHEAP. NOTES: THIS IS BUILDING OFF OF THIS BLOG POST, WITH HELP FROM THIS ARTICLE AND THIS POST. FOOTNOTES: 1, 2, 3, 4, 5, 6, 7, 8, 9, 10, 11, 12, 13, 14, 15, 16, 17, 18, 19, 20, 21, 22, 23 [ED - SORRY FOR ALL OF THE TINY LINKS, BUT WE WANTED TO BE COMPREHENSIVE. ALSO, THE BEIJING NUMBERS CAME FROM WIKIPEDIA, WHICH I DON’T LIKE BUT IS HARD TO DO WITHOUT KNOWLEDGE OF CHINESE]

A few things about this data.

• First, I didn’t calculate it based on ppp (purchasing power parity), because, frankly, I didn’t want to do the work. What that means is that for emerging markets, of course, it is going to be a lower absolute figure (labor costs are lower, unions may not have power, regulations may be less strict, etc.). Based on other data I have seen, emerging market costs are higher than shown here on a PPP basis, meaning that these countries are paying a similar or larger portion of their income on these.

• Second, underground trains costs a lot and take a long time. This story on the Hanoi metro shows that most clearly. The elevated portions of the line are completed, while the underground parts have not. So basically, if possible, don’t go underground. But that brings me to the next point.

• Third, inputs are important and can vary lots. I see three major parts of the metro cost equation: 1) equipment, 2) labor, and 3) land. Equipment is probably going to be similar world wide. Steel costs might be a little less, but other than that, not much change, I would expect (I could be wrong). Labor costs are going to be significantly lower. But land could really vary. Underground lines may obviate some of the land costs, and elevated lines could also sidestep some of them (but not all). We see this with rail projects as well. If there is not a good corridor for the train tracks, then so much of the cost can be eaten up by land prices. It would be interesting to dig deeper into the actual costs of the projects.

• Fourth, the cost per rider could be quite low. In Europe is about 25,000 per daily rider. In the US, in some places it is much more. If HCMC meets its rider figures (160.000 daily at first rising to 800,000 by 2040), the cost starts at $13,125 per daily rider and falls to $2,625. The metro construction that I have the best insight into is Dubai, which ended up going way over budget and cost AED28bn ($7.6bn). It now has a ridership of more than 600,000 daily, which equates to a cost per rider of $12,715, on the low end of the Europe spectrum. Given how crowded it is in rush-hour, there probably is room for that ridership to increase if they can figure out how to get more trains on the track (at rush hour, there is a train at every station basically all the time - they all move from station to station at the same time).

Even though the costs are high in absolute terms for the metro systems in Vietnam, I firmly believe that it will be a good investment. This study by Dubai shows what the multiple can be (1.6x ten years after, rising to 4.3x by 2030), even for systems that go way over budget.

Swine flu and bigger project

I am working on a bigger project looking at ride-hailing, but I didn’t want to leave my ones of readers left without something to read.

This article on Swine Flu struck me, because I had though the government was serious about tacking the problem. The Philippines stopped the import of Vietnamese pork earlier. And all Vietnamese visitors to Taiwan were being checked for pork products, after authorities there found traces of the swine flu in a pork sandwich.

Pork makes up 75% of total meat consumption in Vietnam. I couldn’t find how that has changed over time, but overall calories from animal protein have doubled in the past 20 years, which is a fast rate. From the article: Vietnam produced 3.82 million tonnes of pork in 2018, equivalent to 72 percent of the country’s entire meat production, up 2.2 percent from 2017, the report said.

The government is taking the crisis seriously, with more than 4,000 pigs destroyed. The difficulty is that it appears to be coming from China, which is facing its own epidemic. Given how porous the border appears to be, the government will have to not only step up monitoring but also continue it to make sure that the virus isn’t re-introduced. Luckily, it isn’t harmful to humans, but just wait until it makes the jump.

On a happier note, a company is making rice flour straws, in order to decrease consumption of plastic straws. The new trend is getting rid of plastic - I think we are going to see more of this globally. People are increasingly becoming more environmentally conscious. The Ho Chi Minh City government has an initiative to decrease plastic bag usage too.

You heard it here first: The next big movement is to ban all plastics!

Investor visas to the US

I saw this interesting article in the Wall Street Journal about real estate developers looking to Vietnam for cheap financing. Just a little background. the US allows investors to get a green card after investing $1 million (or $500,000 in certain areas that have high unemployment). The investment has to create 10 jobs as well.

The US is not the only country to do this. Both Portugal (EUR250,000) and Canada (in Quebec it requires an CAD1,200,000 investment) have similar programs. . The benefit is that the destination country gets cheap capital and a guarantee of some jobs. In addition, it attracts immigrants that already have resources and may end up paying more in taxes.

In the US, the number of visas issued is pretty low, something like 10,000 people, with another potential 3,000 in a subsidiary program. No year has reached that; the most was 10,692 visas issued or status adjusted back in 2014. And it has remained close to that level for a while.

REPORT OF THE VISA OFFICE, US DEPARTMENT OF STATE

REPORT OF THE VISA OFFICE, US DEPARTMENT OF STATE

The surprising thing is that Vietnam has now become one of the larger countries. It represented 5% of all visas issued by the program in 2018, up from just 2% in 2017. The number is still low, but it is growing quickly. According to the article linked to above, it appears that developers have turned from China to Vietnam to get more interest in the program. Chinese investors, for multiple reasons, including a very long wait time as the US government caps visas given to citizens of any one country, have dropped off from a high of 9,128 in 2014 to 4,642 in 2015.

REPORT OF THE VISA OFFICE, US DEPARTMENT OF STATE

And now Vietnam has become the next great hope. It’s kind of surprising to me, because a friend in real estate finance told me that they have no real network in Vietnam (and they have networks all over the world). So it is interesting to hear that developers are able to do attract money from Vietnam on a retail basis, but attracting larger Vietnamese institutions to invest are not as successful. It helps that there is a network of marketers out there that are pushing this in return for commissions. Based on a quick search, one company is having two seminars in Ho Chi Minh City this year (one in March and one in September) to “educate” Vietnamese about these visas. I assume this is just the tip of the iceberg and that there are tons of people out there interested.

We can see this marketing has been successful by the numbers. At the peak of the program back in 2014, the figures for Vietnam were pretty minimal, but since then they have increase almost 6x.

It’s a great deal for the developers, because they get “cheap” capital that is not going to be that demanding. As long as they deliver the jobs, the investor gets the green card. But the investor would also like some return, and that’s where the investor’s likely inability to do much due diligence puts him at a great disadvantage. Fraud is a real problem, as you can see detailed in this article.

It’s been pretty good for the US. By my back-of-the-envelope calculations, total investment over the past 10 years was probably around $40 billion, and almost 750,000 jobs were created. That’s not nothing. Foreign Direct Investment (FDI) was just over $250 billion in 2017, with $9.7 billion in real estate. This compares to my estimate of around $5 billion from this program in the same year. [Timing on the investment versus when the visa was issued may not be in the same year, so this might not be like-for-like. My point, though, is that the investment is significant, especially for real estate FDI.] So almost half of FDI in real estate comes from this program.

The law is under discussion now, and we could see something come out pretty soon. Early releases for public comment showed that the Office of Management and Budget wanted to increase the investment requirement to $1.35 million ($1.8 million if not in a high-unemployment area), which everyone says will destroy the program. Also, the waiting list for Vietnamese applications had risen to 7.2 years as of last October.

My bet is that this all goes away in the next year or two, at least for Vietnam, and all of these brokers move on to the next country. South America is a ripe continent, as is Africa, both of which have seen a nice rise over the past few years. Hope those Vietnamese that wanted a visa got in before the door shut.

Back to normalcy

That headline’s not just for Vietnam, which is now back to normal after all the departure of SO MANY foreign leaders (Trump! Kim! Lavrov!), but also for me. Your friendly blogger was waylaid by a cold but am now back close to normal. Because I missed so much, I wanted to do a quick round-up of the interesting stories that I missed.

• Here is a good article by Michael Tatarski in the Atlantic about the summit and how the Vietnamese handled it. A few things struck me. Frist, the government of Vietnam just doesn’t know how to deal with international press. Second, authoritarian regimes are so much “better” at hosting these kinds of summits because they can just shut down everything, including protests. While leaders, even of democracies, prefer a totally controlled environment, us regulars probably should not. Protest is important, even more so when there are so few avenues for free speech in these countries. Of course Trump didn’t bring up any human rights issues with Vietnam (or Kim, for that matter, and Trump took Kim’s word about the death of Otto Warmbier, the American who died in North Korean custody). And finally, Tartarski’s big takeaway is that the government of Vietnam benefited the most, as I expected on February 22 (scroll down).

• As part of the summit, we saw lots of aircraft orders, $21 billion in total, according to this article. VietJet will buy 100 Boeing 737 Max jets valued at $12.7bn, although this was actually announced back in July 2018. GE will provide and service some engines for $5.3bn, and Bamboo will buy 10 Boeing 787-9 Dreamliner jets for $3 billion. So basically, not that much new but a good press release for Trump.

• Vietnam is having problems moving up the value chain in tea. It appears that almost every year this decade, tea exports from Vietnam have fallen, including in 2018 when they were down 8.4% in volume and 3.4% in value. 2017 was similar, as was 2016 and 2015. Basically, the world has too much low quality tea, and that’s not going to change. Vietnam, despite centuries (millenniums?) of tea growing, still cannot produce high quality tea at large volumes. This seems to be the case with lots of Vietnam’s agricultural exports (and other exports). The country is going to have to move up the value chain to really compete. It has the benefit of the current US-China trade war to grab some export volume, but it also needs to charge more for the exports they already have.

• The government is going to install traffic cameras nationwide by 2022. It will start with trials in Hanoi and Ho Chi Minh City by 2020. One the one hand, great! Too many vehicle and pedestrian deaths in Vietnam. Start slapping some real fines on people for reckless driving. On the other hand, the government already has a lot of control and surveillance over its people. The “gold” standard for this is London, where there is approximately 1 camera for every 14 people. As residential security camera prices fall, we could start to see this everywhere. I know lots of friends in Washington DC that have their own cameras, and new technologies for smart homes add cameras as well. So maybe Vietnam is just going the way of the developed world, but without the developed world’s view of individual rights.

• Finally, a small thing. Lufthansa is doubling its aircargo capacity to HCMC from one flight a week to two. This isn’t that big a deal, and it is hard to separate the reasons for this: is it Vietnam’s growing economy or the fact that Vietnam is taking business from China? But it’s good news. Better connections mean that things just become easier. If you need to get something to Frankfurt from HCMC or from HCMC to Frankfurt, you can now do it 2x a week.

I am not sure exactly what I am going to look at this week, so keep checking back to find out!

Follow up on vehicle data

Lots of global news today. First, what is happening with India-Pakistan? Why is no one talking about this, or at least not enough. These are nuclear-power states with long-time conflicts. Nothing has worked to de-escalate the recent flare up, and it sure doesn’t look like there is any adults in the room. It doesn’t help that the US has basically taken itself off the world stage since Trump took over. Where are the US diplomats speaking out about this, trying to help the situation. Of course, Trump himself is in Vietnam for the Kim summit, plus his former consigliere/fixer is testifying in front of the US Congress about all of the bad things that he did at the direction of Trump.

While I do not think that Trump is a good president, I believe he has not been as bad as George W. Bush was. Remember, W presided over 9/11, started the war in Afghanistan and quickly forget about it, started the war in Iraq without a plan, was responsible for Hurricane Katrina response, and ended his term with the worst financial crisis since the Great Depression. While Trump hasn’t been innocuous, he hasn’t done that much, and some of the things he has done (like upsetting allies, pulling out of treaties) could be rectified over time.

But now, we have a potential global emergency, and the US State Department and the Pentagon have put out bland statements or made calls to counterparts that doesn’t seem to have done much (yet, to be fair).

We really seem to be moving out of the Pax Americana and into a new world order, with no country really able to take leadership of scary situations. Maybe this will change with a better US president, or maybe China will step in at some point (don’t count on that). But it is not great.

Outside of commenting on that, I just wanted to do a little bit more work on how true it is to say that vehicle sales grow with GDP. I expanded the chart from yesterday to include all countries for which we have data - 134 in total. That’s a good amount of data. Looking at the chart, and it sure seems like the data fits - up and to the right. So more X (GDP per capita) means more Y (vehicle sales per 1,000 people).

The regression also works with a very high adjusted R-squared of 0.76 and tiny P-values for the X-variable. No surprise here. It would have been more surprising if it had not worked, but that’s what you get sometimes.

VEHICLE SALES SEEM TO TRACK PRETTY WELL WITH GDP PER CAPITA. THE MORE OF ONE, THE MORE OF THE OTHER. SOURCE: WORLD BANK, OICA, VIETECON.COM

Double V: Vietnam and Vehicles

VEHICLES IN THE RIDE-HAILING PILOT PROGRAM IN HCMC. SOURCE: HCMC DEPARTMENT OF TRANSPORTATION

I started thinking about vehicles and Vietnam because I saw this story about Go-Viet launching a ride-hailing app in Ho Chi Minh City (HCMC). There was a bit of data about how many vehicles are in this test pilot, which really seems more like a full fledged market than a test pilot at this point. It’s a full court press on ride-hailing, given that are more than 40,000 vehicles in the “pilot.”

There are four companies that are part of it, including Grab, a company that had bought Uber’s Southeast operations. It appears to have the largest share of the market, with more than 23,000 cars at the end of 2017. It recently went through a big court case, where it was fined for hurting the business of Vinasun, a taxi company. That fine (for just over USD200k) was later cancelled by a higher court ruling. And it now faces anti-trust concerns over its market share.

So, I found it interesting that all these ride-hailing companies are ramping up in HCMC, where public transport is not great. I also have been reading stories (like this and this) from early this year that the city was thinking about banning motorbikes in the city center. That just seems crazy to me, and it seems crazy to people. From the first story:

However, transport expert Nguyen Xuan Thuy said the plan to ban motorbikes from entering the downtown area was inappropriate as the country has some 45 million motorcycles and 4 million automobiles. Although there are more than 10 times as many motorbikes as cars, a motorbike occupies between one fifth and one tenth of the road surface area used by a car.

VEHICLE SALES IN VIETNAM, SOURCE; VAMA AND OICA

In terms of pollution, space and just sheer numbers, it is just impossible to consider motorbikes would be banned. This is in a city that doesn’t have a metro (although the city is shooting for a 2020 opening) and buses ain’t great.

This led me to wonder where Vietnam was in terms of car use. The numbers were actually pretty easy to find (this is a place where Vietnamese statistics appear to be pretty good, although a bit confusing at times) through the Vietnam Automobile Manufacturers’ Association (VAMA) and the International Organization of Motor Vehicle Manufacturers (OICA, initials taken from the French name, as per all good international organizations and terrorist groups).

VIETNAM IS AT THE START OF VEHICLE SALES, BUT AS IT GROWS RICHER, WE SHOULD SEE MANY MORE CARS SOLD. SOURCE: OICA, VAMA, WORLD BANK, VIETECON.COM ESTIMATES

The numbers have grown a lot, but seem to have plateaued a bit starting in 2016. Mostly that has to do with tariffs and regulations. Supposedly, people in 2017 were waiting for ASEAN tariffs to be phased out on Jan. 1, 2018, and then in 2018, right at the beginning of the year, the government required some new documentation on imports of cars, which meant that no imported cars were sold in January and February. Imports didn’t restart until March. To give an idea of the impact, total imports fell 6.2% in 2018 but total car sales grew 5.8%, with the difference from cars assembled (from kits, usually) in Vietnam.

The reason for the new regulation is to build an auto manufacturing business in Vietnam. The government’s goal is for its auto industry to source 35% to 40% of components domestically by 2020, up from about 10% now (sub req’d). VinFast is the first local-only car manufacturer, and by 2025 it aims to produce up to 500,000 cars a year with 60% of parts locally sourced. That would mean not only significant market share in the Vietnam market (in 2018 Toyota had 24% share), but also exports.

The reason why people generally are excited about Vietnamese car sales is because it is at the beginning of likely enormous growth in vehicle sales. As Vietnam grows incomes (and the government is expecting more than 6% real GDP growth in each of the next two years or around 10% nominal growth). That combined with pent-up demand caused by these new importing rules could mean a lot of cars sold over time, if importers can work out the documentation or companies produce more domestically.

Let me put my cards on the table here: I believe that car sales are going to start growing again very quickly, because they have artificially been constrained. Yet, I personally would hate to see that. Cars are great, don’t get me wrong. But the infrastructure in Vietnam is not there! And it doesn’t look like it is going to be there anytime soon. Motorbikes aren’t great, but they are probably better for the environment on balance (although Mythbusters says maybe not), and they definitely are better for congestion than having the same amount of cars.

I would prefer lots more public transport. Buses, scooters (preferably both electric), subways and trams. All these would be much better for the environment, for congestion, for the pleasure of getting around. And then high congestion charges on trucks, slightly lower ones on cars, and even lower ones for motorbikes. Of course people love cars for a reason - they provide more freedom than any of these alternatives. Americans love the dream of the open road, look at all the movies.

While I am not generally a fan of the ride sharing companies (I am just unsure about the economics and generally side with Izabella Kaminska at FT Alphaville), I could see them as an important part of the public transport mix, so the “test pilot” figures may be a smart component of this.

It will be interesting to see what happens in HCMC, which already has congestion issues. The government seems like it is testing out a few things that hopefully it will back away from. I just can’t wait to ride the metro in 2020!

Warning: Boring. IFRS and Vietnam

Just kidding. What could be more exciting than accounting rules! Any accountant will tell you that accounting is basically the most exciting thing there is. It’s just a lot of fun to look at numbers, add them up, subtract them, make estimations that people argue about.

There is a big push in the world to have one set of international financial reporting standards (IFRS). Back in 2005 there was a “big bang” with all EU countries adopting IFRS at once. Lots of other countries also adopted it. As of now, there are 166 jurisdictions recognized by the IASB (the International Accounting Standards Board), and 156 support a global standard. Only 8 have not publicly made statements in support, and 144 countries require IFRS for all or most domestic companies. (These figures are all provided by the IFRS Foundation - other sources have different figures, but basically all in the same direction: the world has generally adopted IFRS).

Vietnam does not! But there have been a few articles (here, and more recently here) about the government’s support for IFRS. In the latter story, the Deputy Minister of Finance Đỗ Hoàng Anh Tuấn said that the adoption of IFRS “would help Việt Nam create a more transparent business environment to attract foreign direct investment.” There is a stepped approach in the country according to EY in the first article. Basically, they are going to start with a few (30) key entities adopt IFRS, then have all companies adopt 10 to 20 IFRS standards by 2020. Full adoption by 2025.

The benefit of international standards is that global companies will have just one standard to apply across all of their subsidiaries, and investors will better be able to compare companies worldwide. But actually, it’s very unclear if the benefits actually accrue. A lecture on IFRS adoption has this to say about potential benefits:

A priori, there were many conjectured benefits from IFRS adoption, including more efficient cross-border transacting, enhanced informativeness of financial reports (increased transparency), greater inter-company comparability of financial data, better asset prices (efficiency), lower cost of capital, and balance sheets that facilitate more efficient contracting between companies and lenders. Whether these benefits have in fact materialized is difficult to say. For reasons discussed below, there is limited evidence to go on, and many of the studies are flawed or have been misconstrued.

One of the key issues is that while standards are adopted, they are not uniformly applied because of both politics (big and little, so from the state as well as politics within the company) and how commerce is done in each locality. This is particularly important for a big change in IFRS, fair-value accounting. This can often require estimates that cause significant variances between companies even in the same country. These differences can limit comparability across countries, which hurts some of the benefits.

But Vietnam also sees IFRS as helpful to increase transparency and accountability in the country among corporations. This only works if the adoption of these include lots of training and education. Plus a push by the government to actually enforce these standards.

I think it is going to be tough to reach the announced 2020 timetable of using certain standards, but we could see adoption by 2025, if Vietnam gets its act together. It needs the following:

• IFRS guidelines translated into Vietnamese. This is basic but doesn’t seem to be there yet.

• Accountants that understand the rules

• Some of the issues that might arise is over valuing certain instruments that are not widely used in Vietnam now. So, it would be helpful for the markets to develop further before the rules come into account. But the market may need IFRS before we see these instruments gain share.

• Plus regulators need to be trained in these issues as well and may be hired.

I think all of these are possible to overcome. But better education of everyone involved in the market is going to take time. The rewards should be positive, but in some ways we are going on faith.

Vietnam prepares for Trump-Kim summit

On Feb. 14, 2019, I wrote a small thing about how Trump (and the American government in general) would like Kim to see Vietnam as a potential model of opening up. Now of course there are a ton of articles talking about the same thing (WSJ here, Washington Post here). God, I am prescient.

In all of the coverage, I saw this headline from TPM, which I generally like: Trump Is Basically The Only One Excited About The U.S.-North Korea Summit. But that’s totally not true. Vietnam is extremely excited! Let me count the ways:

• Bars have gone all in. These are the drinks they are serving: Kim Jong Ale, Rock It, Man, Peace Negroniations. That’s all according to this Reuters article.

• And a barber is offering free Trump and Kim haircuts. Video here (warning: this hair is really bad). Hat tip to Mai Nguyen. I first saw her tweet.

• Lots of t-shirts are being sold too. At least 300 were sold with Kim’s face on them and “Roket Man” underneath. Not sure why Rocket is misspelled. I wouldn’t have put it past Trump to have misspelled it first, but he didn’t.

• One painter is making 60 paintings of the two of them. I kind of like them.

• Lookalikes are getting more business after the Singapore round. I would say that the Kim impersonator looks more “authentic" (?) than the Trump one.

But in all seriousness, it looks like Vietnam is trying to take advantage of this as much as possible. Singapore is a good example of what can happen. According to an Aljazeera report quoting communications special, Jason Tan:

"With the summit, we received a week of global coverage, positive brand halo, and genuine interest in Singapore as a country," Tan told Al Jazeera.

Also,

Greater than positive media exposure was the boost to Singapore's strategic importance on the world stage, said Vu Minh Khuong, an associate professor at the Lee Kuan Yew School of Public Policy at the National University of Singapore.

"The host enhances its strategic position as the place of choice for highly important events and showcases to the world it is a meaningful player in making the world a better place," he told Al Jazeera.

I think this really is a masterplay by Vietnam. It gets the halo benefits of having an important summit and it keeps Vietnam in the conversation. Plus, there is going to be tons of stories about Vietnam, its economy, its place as a tourist destination, and the openness of the people. And it will surely cost less than it did Singapore.

What lessons does the Billion Dollar Whale have for Vietnam

I just finished a recent book about a con man (alleged con man, I should say) titled Billion Dollar Whale: The Man Who Fooled Wall Street, Hollywood, and the World.

First, it is an amazing story and book. There was an extract from the book in the Wall Street Journal worth reading to get a sense of it (here, sub req’d, although you get a few free articles, and this should be one of them this month). It really shows the machinations behind the scenes of this massive con that extracted billions of dollars from Malaysia, and mostly to pay for what appeared to be really crazy parties and sick gambling. When I say billions of dollars, I mean that the main guy, Jho Low, allegedly stole $4.5 billion (!) from a Malaysian sovereign wealth fund (1MDB). Some of that money was allegedly kicked back to politicians in Malaysia and higher ups in the Middle East and elsewhere.

Of course, it wasn’t just one person allegedly doing it. Lots of bankers (from Goldman Sachs, Falcon Private Bank and others), wealth managers and accountants (KPMG and Deloitte) helped out. Low appears to have been very good at pushing legitimate institutions into illegitimacy and also using their names to deflect questions from others. And sometimes the venality of these other actors worked to his advantage.

But there were a few things that would have prevented the fraud sooner:

• Increase transparency of government accounts. This is a problem all over the world. Governments spend huge sums of money and act as guarantors of even bigger pots of money. Some of this can easily get into the wrong hands or be misused. This is not just an emerging market problem; developed countries have the same issues. Look at the US Department of Defense. There are always scandals (the first one that I was able to find with a quick search is this “Fat Leonard” scandal, also perpetrated by a Malaysia and also someone with “Fat” as a title. It was “Fat” Eric in the Billion Dollar Whale.) But the more transparency there is, the harder it is to hide the money flows. This can mean multiple bids for projects, public tenders, etc.

• Don’t allow people to remain in power for too long. An example from my old work, investment banking: Regulators have long asked investment banks to require two weeks vacation for employees. After a trader at SocGen (Societe General) run up €5bn in losses, most investment banks started doing so. The reasoning is that it is easy to hide something if you are already there to keep it hidden. Like if you are sitting on your bed at all times, no one can find the Playboys under your mattress. For Malaysia, former Prime Minister Najib Razak (who has been charged with corruption for his role in the 1MDB affair) was allegedly able to hide the losses and money transfers because of his hold on power.

• Support a rigorous press. This is a difficult one for politicians, because the press can make their lives hell. And not always fairly. We see this in the US, which was (in my opinion) very unfair to Hillary Clinton with the focus on her emails (something that was not that important). And is even sometimes unfair to Trump, a person that I generally feel deserves the opprobrium he receives. But the press was extremely important in ferreting out details of the alleged crime in this case. Specifically, the WSJ (the authors of the book are WSJ reporters), The Edge Malaysia, and The Sarawak Report.

• Be careful of institutions that have concentrated clients. What I mean by this is that sometimes institutions will make the wrong decisions because they need to please their client too much. I read a book about Enron (I wrote about it below, look at the Jan. 14, 2019 post), and it turns out that Arthur Andersen needed Enron just as much as Enron needed Arthur Andersen. The accounting firm was making so much money from Enron, it was willing to let Enron dictate terms. Banks were in similar situations. We saw that with private bankers for Jho Low, and even Goldman. Of course, Arthur Andersen paid a crazy price (it went under), and Goldman is still paying the price and may pay a lot more.

• Don’t trust people who went to Wharton. Example 1: Donald Trump. Example 2: Ivanka Trump (actually transferred in because she didn’t get in on her own at first). Example 3: Jho Low, who was the allegedly masterminded of this whole thing and is now a fugitive. Example 4: Your humble author [yes, really. You would think this blog would be more professional because of that, but…you would be wrong].

Vietnam does not generally have a strong free press, government transparency is just okay, and the party has maintained power for years. It is ripe for this sort of corruption. However, it would really pay for Vietnamese politicians to look at what happens when corruption gets out of control and people are fed up. In Malaysia, it led to the downfall of Razak in elections. In the Middle East, it led to the Arab Spring. The price can be extremely high, so it behooves the state to clean up its act. I see the recent push against corruption in Vietnam as a response to public opinion (at least in part) that should help limit some of the most egregious corruption. That is a positive signal, in my view. Let’s just hope it is enough.

The case of the disappearing Mekong delta

What’s happening?

SOURCE: UTRECHT UNIVERSITY. PAPER HERE.

A recent study (written up by the VOA here) exposed yet another potential environmental crisis in Vietnam (and the world). Basically, the Mekong delta is sinking underwater and could disappear entirely by 2100.

What’s driving the subsidence?

This time, the crisis is only partially caused by climate change. The bigger issue is groundwater extraction for agriculture and drinking water. The picture at the right shows the potential impact of increased groundwater extraction. For the past 25 years, groundwater extraction has increased as Vietnam’s population and economy have grown.

I reached out to an author of the paper, Philip Minderhoud, and asked him how much of the disappearance of the delta is due to groundwater extraction, how much to rising sea levels (climate change), or sand extraction or other things?

This is one of the ongoing research questions. But what we see presently is that the land subsidence due to groundwater extraction is on average for the entire delta round ~2.5-4 times higher than the rate of the rising sea level around the Mekong delta (3-4 mm yr). At the coastline, especially in the southern part of the delta, the subsidence rates due to natural compaction of young sediments can also reach subsidence rates up to several centimeters per year. And when the sediment supply in these areas is cut off, the mechanism to buffer these subsidence rates stops and these rates start to add to delta elevation loss.

As for sand extraction, it is more localized according to him, rather than a reason for the general subsidence. [I wrote about sand on February 13, 2019 - scroll down].

SOURCE: ANNE LIN THROUGH UNSPLASH

What does this mean for the people in the region?

Obviously, the Mekong is important. More than 18m people live in the area, and about 200m depend on the area for food. According to the VOA article I linked to above, the Mekong delta is responsible for 50% of the food Vietnam produces. For example, Vietnam is the third largest exporter of rice in the world, much of which is produced in the Mekong. This could all be at risk, and the impact could be severe.

In the short term, there needs to be significant investment in water resources for people in the region to replace groundwater extraction. This probably means piping in water from further away. Minderhoud said that they could be supplied with fresh water from the Mekong river branches, but during dry times or when there is salt-water intrusion, it might not be enough. So the distance might be far and will require money.

Given food security issues and the potential economic loss of agriculture lands disappearing, the cost would be worth it, in my opinion. But it takes foresight, initiative and the will of the government. Particularly when people have to start potentially paying more for water, either through taxes or fees.

Is the government working on this?

It sounds like the government is interested in the research. For example, Minderhoud said that “in Can Tho there was recently a new policy to reduce/stop groundwater extraction in the city, partly because of subsidence.” He didn’t know the specifics, but it does sound like the government is aware of the issue.

Vietnam is already facing the effects of climate change with severe weather events like typhoons, flooding, and drought. According to GermanWatch, Vietnam was the 6th most affected country in the world from the effects of climate change in 2017 alone. These effects have and will likely continue to impact the Mekong Delta more than any other part of the country. I hope that the government starts really investing in infrastructure to deal with this and climate change, such as investing in renewables rather than investing more in coal (more on renewable trends in Vietnam in my post yesterday).

Solar in Vietnam

Vietnam faces a significant power crunch because demand is growing in the double digits for energy every year. The government has invested and allowed investments in every type of power source, from coal to oil and natural gas to wind and solar. Hydro is also a big component of power supplied in the country.

McKinsey, in this report, says that the country could need USD150bn in investments in energy. There is some investment in solar and renewables (Electricity of Vietnam plans for 45 gigawatts of coal power and 18 gigawatts of renewables by 2020.

So I was interested to read this article about solar in Vietnam.

The latest data shows that a total of 332 solar projects have been registered with the total capacity of 26,290 megawatt peak (MWp), including 121 projects (7,234MWp total capacity) that will begin to generate electricity by 2020 and 211 (13,069MWp) awaiting approval. These figures have far exceeded the targets of the revised Power Development Plan VII. Additionally, more than 800 small-scale rooftop solar power projects with a combined capacity of nearly 11.6MW have been developed.

A good amount of this is driven by strong feed-in tariffs (9.35 UScents for solar) that should allow solid profits for investors. In the Middle East, developers have agreed to sell solar for as low 2.34 US cents per kilowatt-hour. Of course, it appears there are some subsidies and the Middle East likely has a bit better environment for solar (no rain, mostly sunny skies - having living in the UAE, I can tell you that every day is pretty much like the day before). But still, there is a lot of room for investment, especially as solar prices fall as predicted.

Based on people that I’ve talked to, there are some issues with high capital costs in Vietnam, and some fears over exchange rates and what happens over the arrangements with the national grid. Plus the feed-in tariff is in effect only for projects that start commercial operations by end of 2020. After that, we might see some negative changes

So there are risks, but I would love to see a even quicker take up of renewables. In 2017, Vietnam ranked as the 47th largest economy but the 27th largest emitter of greenhouse gases, so there is a real need.

What I would like to see if something like SolShare is doing in Bangladesh: building a residential power grid that takes advantage of solar panels on houses. There has already been at least some demand for residential solar panels, and if that continued, it would make sense to put together a peer-to-peer grid like is being done in Bangladesh.

There is going to be enormous investments in power generation in Vietnam over the next 20 years. I can’t see a world where things like solar and wind aren’t cheaper than they are today, and in the case of solar, really much cheaper. Even in the US, it is now cheaper to build a wind farm than to run an existing coal plant. I really hope that the country chooses to go the route of renewables, otherwise it is really going to be stuck with plants that are bad for the environment and are expensive.

*Update: I accidentally dated this post Feb. 15, 2019, but it was actually written and posted Feb. 19.