Catching up

A few things that caught my eye while I was gone:

The African swine flu is out of control, with the number of infected provinces and cities now up to 42. The government has culled 1.7m pigs. A few things here:

• This will be almost impossible to stop unless the government takes it seriously, including paying farmers much more for the culled pigs. This is just a fact of life. The farmers are being rational - they need money. And the meat is safe to eat (at least as far I have read). So raise the prices, and more farmers will comply. The flu will continue to spread unless the farmers are on the side of the government.

• Soy bean prices are going to continue to fall, most likely. China continues to have a big problem, and now Vietnam is worsening. There is always a chance that it spreads to other parts of the globe.

• Farming is tough. Weather is fickle. Disease can rip through all of your crops/stocks. Yet, we have seen food prices fall over the long term. This is because of efficiencies, better crops, scale, consolidation, etc. These trends are not going to stop. This will likely mean a further shift from agricultural work to factory work in Vietnam. Also, we will likely see bigger consolidation of plots.

• Poor pigs. I believe that if this lasts for a long time, consumption patterns will change away from pork. Hopefully to chicken or vegetable-based protein. But also probably beef (which is worse than the others for the environment).

Saigon really needs to clean up its waterways. This is just a statement after reading this horror story. What a mess. My initial take is that people are disgusting (fitting take for someone that is a misanthrope).

But I also have a prior that generally people don’t like to see their environment defiled, and if it weren’t too difficult they would find an alternative. The system is the problem, not the people. So the government needs to make it easier for trash to be deposited. By carrots (maybe paying for recycling, better trash places, etc), and sticks (fines, arrests for the most egregious).

This is a public health issue but also a quality of life issue. People want to live in a nice environment. They can get used to crap, but they won’t ever like it.

Coal is still doing very well in Vietnam. This is a gigantic mistake in my view. It would be much better to put up solar or wind, for clean air reasons, for cost reasons, and for long term energy independence reasons.

On that last point: Right now, the government imports something like 20 million tons of coal. This is set to grow.

Markey said imports are forecast to peak at 80 million to 110 million tons between 2030 and 2040, against current demand of 63 million tons. [Around 40 million tons are produced internally, based on these figures.]

This will cost the country a fair amount of money. Depending on the type of coal needed, it could cost around $50 per ton, so that would be $5bn or so a year. That’s not chump change (although it will be versus a much bigger GDP, so probably won’t matter that much).

The US will not brand Vietnam a currency manipulator. The Vietnamese government “sent over some new data” to forestall the government from tagging Vietnam as a currency manipulator. Seems like both sides probably wanted to make sure this didn’t happen, and they were able to conjure up some “data” that could be used as a pretext to dismiss the case.

This is good for Vietnam. Probably fine for the US. But doesn’t really speak to a hard line on trade, like Trump promised. But there are other trade issues on which the US needs support, and it probably doesn’t make sense to piss off Vietnam right now.

*I accidentally dated this as May 25, 2019. It was posted May 28.

MMs: Measles and manufacturing

Two stories caught my attention today.

First, the Philippines are facing a massive measles outbreak. Since January, according to NPR, there have been more than 33,000 cases and 466 deaths from measles. That is crazy. Especially for a country that had basically eliminated measles back in the 90s.

There is one main reason for it: fewer children are getting vaccinated. It looks like routine vaccinations have generally declined, but also there was a scandal over a dengue-fever vaccine two years ago. Basically a French pharmaceutical company, Sanofi Pasteur, stopped a dengue fever vaccine program because it was raising the risk of death for people that had not had dengue fever previously. More than 60 children may have died after receiving the vaccine, according to the Filipino Department of Health.

It looks like the outbreak is slowing somewhat, helped by the fact that the government has vaccinated 5.5 million people against measles. It hopes to reach 20 million by September. That’s 1/5th of the population.

In the NPR article, there was also this statistic on Madagascar: more than 1,000 people have died of measles there. The US has seen increased cases, and measles from Vietnam were exported to Melbourne as well. So this is a worldwide issue.

In Vietnam, measles have increased this year. I wrote about this previously (March 11), but I thought I would highlight it again, because of what’s happening in the Philippines and also a recent article reporting that there are about 90 cases of measles in Hanoi a week (about 1,200 since the start of the year, at least through May 15).

Not getting vaccinated is a real issue. There can be a number of reasons for that: cost, time, transportation. All of those can be overcome, especially by a government that really wants to get it done. But there is another reason why people don’t want to get vaccinated: fear.

• Fear of contracting a disease or even dying, like those poor Filipino children did, is one. But that’s based on facts. The dengue fever vaccine was not safe for children, and should not have been given to them.

• The other type of fear is fear based on untruths or lies. One paper in Nature implying a link between vaccines and autism started the anti-vax movement in much of the Western world.

Overcoming these fears are extremely hard. One thing that might help is, sadly, the sickness and death of people suffering from measles. People forget the horrors of many of these diseases because they haven’t been exposed to them. The current outbreak is a sad wake-up call for many people. Otherwise, I believe education may be somewhat helpful, but also what I think of as extreme empathy. Really trying to understand why these people are afraid of vaccines, treating them as intelligent people, acknowledge their fears but also try to work through them. This article explains a bunch of steps to take that lay this out well.

It is very hard to convince someone to do something that goes against their beliefs. But it is critical to the world for us to try.

DATA: INVESTING.COM; CHART: HARRY STEVENS/AXIOS

Second, economists are worried about manufacturing. PMIs for the Eurozone came in at 47.7, implying a contraction in manufacturing, and it has been below 50 since February. The US was just 50.6, the lowest score since 2009, and Japan appears to be in contraction based on an early reading. (Hattip: Axios).

I checked on Vietnam, and it is bucking the trend. PMI scores in Vietnam have increased to 52.5 in April, up from 51.9 in March and a fourth month high. Since November 2014 (reading 49.4), it has been above 50 and basically improving.

SOURCE: NIKKEI, IHS MARKIT

This is probably due to the increased trade, some of which is secular, some of which is short term and driven by the US-China trade war and US tariffs.

But it makes me worried that manufacturing is falling most everywhere, and the economic growth generally is at risk. Vietnam, in that situation, may find it difficult to keep growing at these high (6% plus) levels.

The next PMI for Vietnam comes out on June 3 at 00:30 UTC, so I will check that out.

Note that Vietecon will be away on Monday and back to my regular schedule on Tuesday, May 28, 2019.

Trade and avocados

Right now, America’s avocados come from Mexico. Specifically, 75-80% of all avocados imported in the US are from Mexico (only about 16% come from California). Most of these are actually from one state, Michoacan. Trump, as we know, is in a trade war with Mexico and Canada (although there has been some reprieve for steel and aluminum), and this has already started to impact prices. Avocados were up 34% in April, which may be related more to delays at the border because of the increased numbers trying to cross or apply for asylum.

So it makes sense that other countries would see this as an opportunity to get in the market. Avocados are like bananas, you pick them and they ripen on the way to market. This makes it a perfect fruit for world trade. There are a few good books about the early banana trade, such as Bananas and also Bitter Fruit, that talk about this as well, if I remember them correctly.

IMPORTS OF AVOCADOS (LESS THAN ACTUAL CONSUMPTION). SOURCE: HASS AVOCADO BOARD

So avocados is the next great trade crop, and the world is trying to take advantage of this. This story caught my eye about how Vietnamese farmers are starting to grow avocados, which the article attributes to the Mexican .

However, it really seems like these articles (at least the headlines) are wrong to blame Trump’s trade war. A few facts about avocados:

• Avocado trees take something 5 and 13 years to reach fruition, although using high-density planting, it could be as quick as 2 years after planting (potentially after a year in the greenhouse).

• Avocado sales are growing year over year worldwide. See the chart to the right above. The increase from 2016 to 2018, imports of avocados have increased 25%. Coffee production actually decreased in 2018 and is growing much slower.

• Domestic consumption of avocados is also increasing in Vietnam. Also in China: “The country imported only two tons in 2010; last year, it brought in 32,100 tons.”

• Coffee prices have been falling and are lower than avocados. Farmers are trying to replace coffee with avocados. Coffee prices have been quite volatile and are now are just around $0.90, while avocado prices are about $1.20. Prices in Vietnam are even lower at around $1.33-1.36 per kg.

• Avocado production can be as high as 30,000 pounds per acre at full utilization. That is so much more than coffee, which looks like produces just 3,000 pounds per acre at the high.

• Mexico was the largest trading partner of the US in the first two months of this year. So maybe Vietnam is not going to displace Mexican production.

Combining all of this, I realized that farmers in Vietnam are just seeing the market trends, realize they are not able to compete in a flat or declining coffee market and decided to move into a market with better returns and potential. This has absolutely nothing to do with problems between Mexico and the US, except for the fact that avocado prices increased. But with such a lead time - 3 years at the earliest, and probably more like 5 on average before avocado tree fruition - it makes absolutely no sense to base decisions on today’s prices. Farmers are looking at potential and deciding that it is huge.

I think so many of these articles on the trade war (US vs. China, US vs. EU, US vs. Canada, US vs. Mexico, [do you see a trend here?]) the business decisions being made are actually much more long term. Chinese labor costs are increasing, and competition there is increasing, so companies are looking for alternatives. Like they did with textiles before.

Indonesian-Vietnamese relations, not that great!

I am a bit behind about this, but I saw this article from May 14, 2019 about a maritime clash between Indonesia and Vietnam. I have a bunch of thoughts about this, but the thing I was most surprised about this is how strong the opprobrium is of Indonesians towards these Vietnamese fishermen.

SOURCE: @ADELINAPOLI

Quick rundown of what happened: A Vietnamese fishing surveillance vessel rammed an Indonesian naval vessel near Indonesia’s Natuna Islands. It rammed the naval vessel in order to prevent the Indonesians from seizing Vietnamese fishing vessels. Indonesia does seize a lot of Vietnamese fishing vessels (Indonesia destroyed 51 vessels back in April 4, most of them Vietnamese). About half of all vessels Indonesia seized are Vietnamese. The fisherman are taken into custody at the same time, forcing the Vietnamese to request their release, and potentially increasing tensions.

SOURCE: @BOEDESA

My thoughts:

• ASEAN is shooting itself in the foot here. The big conflict over the South China Sea, it appears to me, is the conflict between China and all of the other countries rimming the sea. (I talked about this on April 19, 2019.) ASEAN needs to present a combined front to China, and this clash shows they are not. China will more easily be able to divide and conquer. As the author says in the article linked above: "This is not a good look for ASEAN.”

• Vietnamese fishing vessels probably are pushing too far into Indonesian seas, and so I understand why the Indonesians would be unhappy. Especially because they are trying to limit fishing in their waters.

• The Indonesians are very mad. See pictures up to the right. There is a twitter hashtag #StopVietnamIllegalFishing with lots of tweets. The estimated reach of the hashtag was more than 700,000, which isn’t that much, but still pretty high. Most of this was in early May. (The data comes from from Brand24.com.)

• This was a political decision on the behalf of the Indonesian Minister of Marine Affairs & Fisheries, Susi Pudjiastuti. It got her a lot of attention and showed that she was aggressive in defending Indonesia. Her strong stance will likely allow her to keep her position in the second term of President Widodo. Or maybe even get her a bigger job. Also, she’s a badass woman with tattoos and smokes. Amazing.

• It’s not just Vietnamese fishing vessels that are being seized by Indonesia. Chinese fisherman have been arrested, and the Indonesians fired at a Chinese fishing vessels.

• But Pudjiastuti’s efforts have been very successful in safeguarding Indonesian fisheries. The WWF gave her an award for her work on sustainability. Because she stopped illegal fishing by others, overall fishing fell 25% but the local/domestic Indonesian fishermen (fisherpeople?) have benefited. (It’s a bit more complex than this, see the article for more details. Here’s another write up about it.)

• I talked earlier (April 18) about the Indonesian elections. One thing I took away from the panel is that Widodo has little interest in foreign policy. That’s not great when ASEAN needs to defuse tensions among themselves and cooperate in facing China.

What to take away from all of this

It’s unfortunate that ASEAN is not dealing with China collectively. Collection action can work! See: unions, NATO, UN. But “illegal” fishing is also something that needs to be curtailed. Fisheries globally are declining precipitously, and even countries that are willing to limit fishing for their own citizens are unable to deal with that if illegal fishing continues. But there is probably a way to deal with foreign fishermen that doesn’t have to be so explosive. All of the countries involved should work to deescalate this tension. That will require cooperation, and it should start with ASEAN countries. And then they go to China as a group.

That’s my 2 cents. Let me know where I’m wrong!

Resilience

RANKINGS OF ALL COUNTRIES. A LOWER RANK IS BETTER. SOURCE: FM GLOBAL.

Everyone wants to be resilient. Resilience means the ability to take hits and bounce back without total catastrophe. I find that I am somewhat physically resilient, but emotionally, not so much…You can talk to my therapist more about that.

In terms of countries, it’s the ability to withstand shocks, say from higher oil prices, natural disasters, or cyber attacks. An insurance company, FM Global, ranks countries by resilience every year, compiling a score based on three areas: economic, risk quality, supply chain.

In the 2019 ranking, Vietnam was 88 out of 130 countries and territories (China and the US are broken up into territories). So not great, but not horrible. I couldn’t find the 2018 index, but in 2017, Vietnam was ranked 95.

The country scores best in terms of supply chain (47.8 out of 100), where FM Global looks at corruption, infrastructure, governance and supply chain visibility. This is also the area where Vietnam improved the most (the score was 31.4 in 2017).

Within ASEAN, Thailand improved the most since 2018, according to the company:

Rising 16 spots in the index this year is Thailand (ranked 73). Thailand, an Asian supply chain hub, showed significant improvement in supply chain visibility and corporate governance. However, Thailand remains heavily exposed to extreme weather and would see an additional rise in the index ranking by improving the quality of its natural hazard risk management.

We actually have looked at a number of the inputs already. On April 25, I looked at infrastructure using the data that goes into this index. And on February 8, I referenced the Corruption Perceptions Index, which is also an input. Basically, this is just an aggregation of a number of these rankings and scores.

Still, it gives us a helpful idea of how Vietnam is resilient relative to other countries. Norway is #1, helped by a very strong economy, basically no corruption, limited dependence on oil (which is a bit surprising to me, given Statoil), and great infrastructure. Vietnam obviously has work to do in all of those areas, but it is partially a chicken and an egg thing. So many of these metrics would improve if the country was richer, but they may not be able to get richer without improvements in these areas.

Vietnam has focused on improving infrastructure in order to boost exports, which is paying off. And corruption is under attack. However, in terms of natural disasters, Vietnam is woefully underprepared. There is a section called Natural Hazard Risk Quality, which is: ‘The quality and enforcement of a country’s building code with respect to natural hazard-resistant design (80%), combined with the level of natural hazard risk improvement achieved, given the inherent natural hazard risks in a country (20%).”

Vietnam got a ZERO on this. The UK is 91.5 and the US is 87.8. Thailand is 30.2. That is real room for improvement. That combined with low productivity (a score of 4.9 out of 100, although few countries are above 50 including the US and UK) and low urbanization rate (18.5 out of 100) hurt the ranking. Urbanization is happening in Vietnam, and so is productivity (albeit slower than people would like). But the area where the government could prepare better is to require stricter building codes in areas that are at risk of natural hazards (like floods). This is hard and expensive, but probably saves money in the long term.

I expect Vietnam will continue to move up, but it will be a fairly slow ascent, unless there are massive infrastructure investments, especially of buildings that are more resilient.

5G

Viettel announced that it will soon start the country’s first 5G pilot in Hanoi in cooperation with Ericsson. This is a big deal, because 5G is the future of telecommunications and will likely change whole industries. Plus, there is the geopolitical dimension, with China at the forefront of the technology, and state-owned Huawei leading the charge. (The supposition that Huawei is state-owned is contested, but seems pretty clear to me that it is state-owned, see the paper linked.)

SOURCE: SOUTH CHINA MORNING POST

The Philippines and Thailand are both countries that are opting to use Huawei equipment, while the US, Australia, New Zealand and Japan are trying to stop them and other countries from doing so.

Vietnam is actually a place where Huawei has been unsuccessful. The three major telecom networks are not using Huawei technology, and Viettel, the largest carrier and the one that has moved abroad into 10 other countries, is trying to build its own equipment.

What is all the hullabaloo with 5G?

People are excited about 5G because it is seen as the future of technology. If you look at the changes in tech over the past 5 years, so much of it has been due to advancement of mobile phones and 4G/LTE speeds as the phone has become the central repository for…well, everything. Payments, internet, email, advertising, social, etc.

5G should continue this advancement because it is better in three areas:

TOP 5G STANDARD-ESSENTIAL PATENTS (BASICALLY THE PATENTS THAT WILL COST YOU). SOURCE: IPLYTICS GMBH

Faster speeds: 5G is significantly faster than what is out there currently (4G also called LTE – good explanation here). That will mean much faster video download speeds, and generally faster speeds for everything. Right now that means video, including virtual reality, but will likely be much more over time.

Capacity: 5G also increases capacity. The expectation is that more and more devices will be connected to these networks, and many of them will not be traditional mobile phones but rather things like speakers, refrigerators, watches, cars. These together are known as the Internet of Things, and 5G allows all of these devices to connect.

Ultra-low latency: This is “the time it takes one device to send a packet of data to another device.” It takes much less time over 5G than under current technology. This is especially important for cars, which may need to connect to another device to know about upcoming traffic. In the VOX article linked above, the example is sensors that let your car know that an accident has happened ahead, allowing your car to brake.

TOP COMPANIES MAKING TECHNICAL CONTRIBUTION TO THE 5G STANDARD. SOURCE: IPLYTICS GMBH

But the real impact from 5G will take some time to know. For example, the shift from desktop to mobile computing took years and continues today. I find myself using my phone for more and more things as they get better.

What is the role of China in this?

Ultimately, China wants to set the standard for all communications going forward, just like the US did a big part in setting the standards for the internet and mobile phones. They are doing this is by investing a great deal into 5G development, not only in building equipment (that they have been successful in selling) but also in developing the standards and the intellectual property behind 5G. Huawei has made the most technical contributions to the 5G standard of any company (US companies are way down there). And they have the second most patents considered essential for 5G (see chart up to the right).

In some ways, setting the standard is just money. They set the standard that utilizes their patents, and users need to pay the patent holders. This can be lucrative, but isn’t the real reason that the US is concerned. The US appears more worried that Huawei’s equipment will be used to nefarious purposes politically, like shutting down communications in countries that are opposed to China. Probably from experience, since the NSA built backdoors into security protocols. Of course these backdoors backfired, since some hackers found out about them and used them for their own purposes.

Basically, the US is worried that China will do the same thing that it did, but against the US. Seems like a legitimate fear. And not just for the US, other countries aren’t excited about China haven’t control over their communications. But the fact that the US has done this since WWII does put the US in an awkward position. “Don’t let China do what I did.“

Right now, Vietnam is fine going along with the US line. Probably because they have long been concerned about Chinese influence, but also to help promote their ties to the US.

I’ll continue to follow the progress of 5G in Vietnam. It’s exciting and could mean a lot for the country. If the infrastructure is built out quickly, it could really help them advance ahead of their developing country neighbors.

Stock listings

The number of stock listings in developed markets is generally drifting lower. At the same time, the market capitalization of these stocks are increasing, meaning that there are fewer but bigger companies. Lots of people are worried about one or both of these things. A few reasons:

SOURCE: WORLD BANK

SOURCE: WORLD BANK

SOURCE: WORLD BANK

• For many people, investing in public equities is the only way to diversify away from bonds and home equity, especially in developed countries. Some people may be able to invest in private companies, either because they are owners/employees, or because they have enough money to meet the requirements to be an “accredited investor” in the US or “experienced investor” in the UK and EU. People saving for retirement benefit from the higher returns we have seen in equities, and need them more as defined benefit pension plans go the way of the Dodo bird.

• Public companies provide transparency, which is helpful for other companies. They provide better benchmarking and better understanding of industry dynamics. And for investors, public companies provide much more transparency than private companies. That can be true even for investors in private companies. For example, some wealthy clients of Morgan Stanley were able to invest in Uber, but they weren’t provided basic financials.

• Public companies provide much greater liquidity for investors. You can buy a stock, then turn around and sell it the next day (not investment advice). You can’t do this with your private company (although liquidity has increased somewhat with changes in rules).

• Larger companies in the public markets also may be bad. Historically, small stocks have had higher returns than large cap stocks, and there are fewer small stocks now.

SOURCE: WORLD BANK

Now, what does this have to do with Vietnam. Well, I wanted to see if this was a trend in Vietnam as well. My supposition was that in emerging markets, the trends were still positve: that both the number of companies listed would be increasing as would their market cap. This isn’t exactly true.

Looking at ASEAN countries (see the chart above), Malaysia and the Philippines have seen the numbers of domestic companies listed either be flat for decline. Market cap of listed companies in both have increased, but not that much. In contrast, the number of companies listed in Vietnam and Thailand have increased, as have their market caps.

In Vietnam, at the end of 2018 there were 373 listed companies, which had a market cap of USD124bn or 52% of GDP. That’s well up from 2008 when it was 162 companies worth 10% of GDP.

What does this mean?

First, it should allow more regular Vietnamese people to invest in the stock market, maybe through retirement funds or something like that. Or even day trading (which is dumb - don’t do it: not investment advice). It basically broadens the amount of people that have exposure to public equities, which is a good. [Ed. please remember the author, as an ex-sell sider, is biased in favor of public equities.]

Second, it helps attract foreign investment, although of the kind that can quickly leave, given the liquidity in public markets.

Third, it opens up a number of companies, including state-owned enterprises, to more scrutiny and disclosure, and forces them to be more efficient. This month, Vietnam Airlines was listed with the hope that it would be more competitive, as the airline market sees increased competition.

These are just my initial thoughts. It’s not great for the number of companies listed worldwide to fall, and even worse than the average size of the companies left is growing. For multiple reasons. But as developed markets contract (in certain ways) emerging markets are where the action is. That is positive for their own citizens and for investors everywhere that want to diversify into faster growing economies.

Tax simplification

I am a few weeks behind on this story, but Ho Chi Minh City (HCMC) is looking to increase taxes on luxury goods, including mobile phones. Uh oh. Apple won’t be happy with that. Or Samsung. Although now Xiaomi and Oppo are big players as well.

There are a few interesting points in this story.

First, it appears that this was a proposal by the HCMC People’s Committee to the Finance Ministry, who usually makes these sorts of changes. It will be interesting to see if this is positive for the proposal or negative.

SOURCE: WORLD BANK

Second, it seems like there is a proposal to raise VAT every year, but then people get upset and puts pressure on the government. Then the government steps back and “studies” it again. This is their third bite at the apple, depending on how you count.

Third, the story got lots of headlines because of the mobile phone tie-in, but it is a broader proposal for simplification of taxes. VAT on luxury items, also called a special consumption tax (SCT), is 15%, normal VAT is 10%, but lots of goods and services are taxed at 5% (basic foodstuffs, transport, etc), and others are not taxed at all (such as fertilizers, exports, and agricultural feed, among others).

“[T]oo many items are exempt from value-added tax (VAT), the people’s committee said. Normally countries have some four to eight groups of excluded items, but Vietnam has 25, it pointed out.”

If implemented, VAT exemptions would be cut drastically to just a few items. The proposal ties these changes (which broaden and therefore raise taxes) with cuts to personal income tax and higher allowances for middle income earners, so that these people would have less of a tax burden. The tax burden in the country is relatively high: Vietnam collects more tax as a percentage of GDP (according to the World Bank) than other countries (see the chart above).

Generally, people talk about the goal of taxes to be efficient (meaning they don’t discourage good economic activity) and equitable. For me, that means the holy grail of taxes is to have them simple, widely applied, consistently enforced, and progressive so that lower income people face less of a burden (which I believe is equity). That might not be the most “efficient,” because some high income earners would be disincentivized, but greater simplicity would lessen some of these concerns.

The problem with the HCMC proposal, which actually checks many of my preferred boxes, is that the headline about mobile phones may gin up opposition for no real purpose. We won’t get to simplification, because everyone will be riled up about a 5% additional tax on their mobile phone.

But this could be a negotiating stance: start high and compromise lower. Maybe, but if I look into my crystal ball, I feel this proposal, like the ones in 2017 and 2018, will be dead on arrival.

African Swine Flu

SOURCE: UN FAO

We should probably all be vegetarians. Or at least that is what the universe is telling us right now. Beef causes global warming. Chicken waste run off ruins rivers and lakes. And now pigs are sick with African swine flu and have to be culled. It’s quite sad. And Vietnam and China are the worst hit.

To give you a sense of how many pigs there are in China and Vietnam, I found these stats from the UN Food and Agricultural Organization (FAO). In 2017, there were 1.4 billion pigs worldwide, of which China accounted for 31% at 441 million and Vietnam 2% at 27 million. That’s a lot of swine. And much more than in other ASEAN countries, even the Philippines. Of course countries like Malaysia and Indonesia, which are majority-Muslim, would have many fewer pigs.

Vietnam recently culled 1.2 million pigs out of the current total of 30 million. According to the same article, pork accounts for 75% of meat consumption. About half (29) of all of its provinces have reported swine flu. And 2.5 milion households are “currently actively engaged in pig farming.”

What I am surprised about is that the government didn’t get ahead of this, like the UN FAO advised back in March. But it difficult, with the virus spreading very easily (it can be carried on clothes or basically anything and stays around for a while).

It seems like it could last quite a long time. From another story:

[Vincent Martin, the FAO representative in China] warned that it could take years before the outbreak was completely contained…"I'm not sure we can say it is under control because we know how complex the disease is," he said. "We have experience in other countries where it took years to get a handle on these diseases."

What is the economic impact? In trying to think this through, there are a few key points to consider:

• The immediate culling of pigs will hurt income of these farmers. In China, the government is recommending farmers wait six months before restocking their herds. One of the reasons why it has been hard to control in Vietnam is that the provinces didn’t have enough money to compensate farmers.

• Rabobank thinks that pork production in Vietnam will fall 10% and in China drop 25-35%.

• Pork prices will continue to rise (they have already).

• Other proteins will benefit. This includes chicken, fish, and beef, along with others. At least in China, where the damage is larger, we could see some secular shifts away from pork. If it is to beef, that’s not great for the environment. The stock of Tyson Foods, the large US agricultural company, has already risen.

• Countries like Argentina, Brazil, the US and EU are all pork exporters. They should benefit, but how much depends on import restrictions and tariffs.

• Feed demand will fall. That includes soybeans, corn, cassava and whey. You could see yogurt companies (which have excess whey) being hurt by lower whey prices.

• China’s tough stance on a trade deal with the US may be hard to keep if the swine flu turns into an economic crisis. Currently there is an extremely high tariff (62%) on pork products from the US. I assume that this tariff will fall, as the government faces pressure from consumers who see their food bills increase.

• If the flu continues to spread, it will likely reach other parts of the world, like the EU (Eastern Europe already has a problem with it), the US and South America. That would be horrible for the world.

The interconnected world can be a double-edged sword. Trade has been wonderful in lifting people out of poverty worldwide. But it also helps the spread of diseases. On the other side, production elsewhere can help replace some of the lost pork products. So both good and bad.

Cost of renewables in Vietnam

I saw this article a few days ago about two new power plants using solar and wind. There are two plants.

• The first is actually a cluster of three solar plants in the south central province of Ninh Thuan. Total yield is 600 million kWh per year, serving 200,000 households. It cost VND7 trillion ($301.3m)

• The second is in Thuan Bac and is both a solar and wind power plant. Yield is expected to be 423 million kWh of solar and 577 million kWh of wind, for a total of 1bn kWh. It cost VND10 trillion.

Combined, the total cost was about $740m for an annual yield of 1.6 billion kWh. Now if we make a few small assumptions*, this turns out to be something like $0.04 per kWh, which is extremely good, and much cheaper than current energy costs.

Of course, there is a lot of upfront cost to these, and I can see why the government may not be interested in fronting these. Also, it is unclear from the article if this is all in costs (like land or whatever else might be needed).

If you look at Vietnam Electricity (EVN), they are investing in renewables, but only a bit. In the 2017 annual report, which actually covers 2016 (despite being published in 2018), about 80% of their future plants are thermal (most likely meaning coal) and combine cycle gas turbine power plants (CCGT) utilizing natural gas. There are some solar and hydropower, but not that much at just 20%. So out of a total of 13,000 MW, just 2,500 MW are renewables.

SOURCE: VIETNAM ELECTRICITY 2017 ANNUAL REPORT

While it seems like the economics of solar/wind are attractive according to my numbers (unless my numbers are incorrect, and they could be!), Vietnam Electricity is not putting real dollars into this type electricity generation. [Just to be frank, it was not totally clear who is responsible for building these future plants - just EVN or a public-private partnership.] This feels to me like a missed opportunity.

* Note: I assumed a life of 18 years, maintenance cost of 2% of the original cost, and declining yield of the plants of 1.75% a year (yield falls to 75% of capacity in year 18).

Fitch upgrades Vietnam debt outlook

Fitch, one of three major credit rating companies, upgraded the outlook for Vietnam’s sovereign debt rating from Stable to Positive. Vietnam has a BB rating, or just below investment grade. If this continues, we could maybe see Fitch upgrade Vietnam to BBB at some point.

SOURCE: TRADING ECONOMICS

The revision of Vietnam's Outlook to Positive from Stable reflects an improving track record of economic management, which is evident in strengthening external buffers from persistent current account surpluses, falling government debt levels, high economic growth rates and stable inflation

The Vietnamese government has focused on debt levels, which have been trending up. For example, government debt to GDP was just under 60% but well to 57.5% in 2018. Much of this is due to very strong economic growth (which raises the denominator) of c7%, that allows more flexibility for the country. But the government has stopped guaranteeing some projects and is more rigorous about issuing debt.

RATINGS CLOSE TO VIETNAM SOURCE: TRADING ECONOMICS, VIETECON CALCULATIONS

To be honest, I was a bit surprised that Vietnam is still a BB. It has a lower rating than its southeast Asian neighbors. Singapore has the highest rating (no surprise there), but even the Philippines (which I didn’t think was known for its economic management), and Thailand (which has gone through a fair amount of political instability) have higher ratings. Malaysia is doing the best of the emerging players.

Countries similar to Vietnam are Guatemala, Turkey, Paraguay and Georgia. That is surprising to me, but I guess Vietnam’s strong economic performance is still pretty recent. Looking at Moody’s ratings for Vietnam over time (see chart below), it has been pretty consistent. The first rating was in 1997, and it was the same as the one that we see today (Ba3, equivalent to BB-).

SOURCE: MOODY’S

What does this mean? Well, a lower/worse rating generally means a higher borrowing rate. But that isn’t the case these days. Yields on Vietnamese bonds (10 year) are 4.761%, down 43bps in the past 6 months. It is up 21bps over the past year, but it hit a low in early 2018 along with the rest of the world. It has lower yields than India, Russia and Brazil. Just a few years ago (2011), the yield was as high as 12.53%. it has been steadily down since then. This saves billions and billions of dollars for the country.

Of course ratings and interest rate payments are not correlated that closely based on what we can see from Vietnam. Remember bonds also reflect supply and demand, and we have seen significant demand for yield globally. Because interest rates are so low, investors are willing to search for higher-yielding assets (like emerging market debt). They may not always be judging risks appropriately. Lots of emerging markets have benefited from this search (see Uzbekistan issuing a Eurodollar $500m bond for 4.75% earlier this year).

It will be interesting to see how long this low interest rate environment can last. Back in 2017, I thought it was over and that we would see slowly increasing interest rates everywhere, but then we saw another dip to the lowest levels in 2018. And this year has been down again. It is great for borrowers, not so greater for investors that need yield. Now that may seem unimportant, but lots of old people all over the world need a certain return from their savings in order to live. When I think of my retirement, I assume that 4% is a conservative and very do-able yield. If it’s not, I need to plan better now meaning work longer and spend less, and I don’t want to!

But good for Vietnam. If it keeps this up, it may be able to drive its borrowing rates even lower.

Vietnam: A currency manipulator?

GOODS TRADE SURPLUS WITH THE US, 2018 FIGURES. SOURCE: US CENSUS, BY WAY OF BLOOMBERG

News is out that the US Treasury might add Vietnam to its watchlist of currency manipulators, or even go all the way and just name them a currency manipulator. They have not been on this watchlist before.

The three things that the US Treasury looks for are:

• Significant bilateral trade surplus at least USD20bn. Vietnam has had this since 2014.

• Lots of foreign exchange intervention. This means buying foreign exchange and selling VND, which helps drive down the price (basic supply and demand - the more of a thing, the less it costs. It works for money too).

• A current account surplus of 2% of GDP (this was previously 3%). Since 2008 there has been a massive reversal. Back then, the country had an extremely high current acount deficit (-10.9% of GDP), but it trended up until 2014 and it has stayed high. It was 3% of GDP in 2018.

CURRENT ACCOUNT SURPLUS SOURCE: WORLD BANK

Vietnam meets all these criteria right now.

We have talked about the current account surplus a bit previously. Remember that a current account surplus has to be matched by a capital account deficit - the balance of payments must balance. Meaning that a country that is exporting more than they are importing must also be attracting lots of capital. This capital may be invested in things that are then exported.

In some ways, branding Vietnam as a currency manipulator may be working. The currency has depreciated this year, and it seems to have accelerated in May and is now down 1% YTD (see the orange in the chart to the left). In 2018, the depreciation was about 1.5%, so it has already been matched.

SOURCE: STATE BANK OF VIETNAM

What does it mean if Vietnam is considered a currency manipulator? Well, first the law requires the US government to negotiate with the offending government for a year before retaliating. But even if it gets beyond that step, the retaliatory actions are actually quite small. The administration could suspend OPIC (the Overseas Private Investment Corporation) from working in Vietnam, but there are currently only 2 projects in Vietnam with a total value of just $5.6 million.

Of course, Treasury could always put tariffs on Vietnamese goods, just like the administration is doing with China. That would be very severe. But that’s unlikely: India and South Korea are on the wach list right now (so they have not been formally declared as currency manipulators), and they haven’t really suffered much.

My view is that Vietnam has liked the fact that its relationship with the US has improved (see the US-NK summit in Hanoi) and that the US’s trade relationship with China has worsened. The latter has led to increased foreign investment in Vietnam as a manufacturing alternative to China. Because of all of this, the government will likely make some concessions on the exchange rate (even if it hurts their exports). Currently it seems like analysts are looking for just 2% depreciation. I would expect it the State Bank of Vietnam to maybe allow a bit more floating than this, say 3-5%. This would help placate the US. Plus, exports are trending up, so the impact of a more expensive currency may be quite minimal. Let’s see what happens.

Electric vehicles cars are coming to Vietnam!

I love me an exclamation point, if you haven’t learned, dear readers. But this post actually makes me excited. There are going to be electric buses in Vietnam! Also cars! And scooters! I am excited about this, because I truly believe it is the future. Even the WSJ car reviewer agrees with me. In last 2018, he said that he has bought his last internal combustion engine, and his next car (in a few years) will be an electric vehicle.

So the news is that a subsidiary of VinGroup (the company making the first Vietnamese cell phone) will also manufacture electric buses and electric cars. The buses make me most excited, because it just seems like such a straightforward idea. The routes are predetermined. They aren’t that long. Battery life is important but can easily be managed. But the benefits are big: It reduces pollution, plus electric motors are less complex, meaning there is less maintenance. If the economics aren’t too bad, then it makes perfect sense. And once you add in pollution, even if the costs are tilted against EVs, it would still make sense.

“VinBus will start transport services with up to 3,000 e-buses in five major cities from March 2020…you may expect to see electric buses in the following five cities in Vietnam: Hanoi, Hai Phong, Da Nang, Ho Chi Minh City, and Can Tho from 2020.”

SOURCE: EV-VOLUMES.COM.

Hanoi has a bus system with more than 100 routes, and probably has around 400 buses, based on what I have seen for HCMC. That’s a total of 1,000 buses at most for both cities. Then adding in Hai Phong, Da Nang and Can Tho, that means a wholesale replacement of buses in major metropolitan areas in Vietnam.

I haven’t been able to find any good information on ridership, but it appears to be not great. Just like everywhere, buses are not a high-prestige form of transport. And the ubiquity of scooters probably doesn’t help, since they are relatively inexpensive travel options. But overall this should still be a net positive.

NORWAY EV SALES AE ALMOST HALF OF ALL VEHICLE SALES SOURCE: STATISTA

On the car front, this has been reported earlier: VinFast announced it would manufacture three new cars in Vietnam, two would be internal combustion and one would be electric.

Electric vehicle sales are booming all over the world, up 64% in the past year. Norway is very close to surpassing the tipping point – in 2018 49.1% of all cars sold were electric. That is by far the best number by country, but there are other important data points. Overall vehicle sales fell 3% in China last year, except for electric vehicles, which grew 78%.

NOTE: THESE PRICES ARE AS OF MAY 6. THE COUNTRIES WITH * HAVE PRICES UPDATED WEEKLY. THE REST ARE UPDATED MONTHLY. SOURCE: GLOBALPETROLPRICES.COM

So there is real room for EVs in Vietnam. Especially because gasoline prices aren’t cheap. In May, they were $0.96 per liter, higher than the US ($0.85) and almost double Malaysia. Actually, throughout southeast Asia, prices are high, except for Malaysia and Indonesia (both of which export oil).

Relatively high gas prices help push the adoption of EVs, because the economic tradeoff is better. So let’s hope the country continues to raise prices on gasoline, and offers subsidies for EVs. It would be good for exports/imports, and it would be good for the environment.

I wrote about the automobile market in detail back on February 26, 2019. Scroll down to read it.

Press center opens

Vietnam has a press center! It’s going to be open every day! It will allow unobstructed access to the government by journalists!

I have some personal knowledge of press centers in the US, and I will tell you that they are used for propaganda, even in Western countries. It makes sense. Countries want to show off their best side, not showcase their problems. Reporters are steered to happy stories. That makes sense. No one wants sad stories all the time. I care deeply about climate change, but if I have to read another g*dd$m story about how all species are dying out and soon the earth will no longer be habitable, well…Journalists should write about good stories!

But also journalists need to break news about bad things happening. By the government or by private actors that need to be stopped by the government.

The good thing about a press center is that it may allow journalists to get to know more government officials, and hopefully learn more about what the government is thinking day-to-day. In the US, there is a “bullpen” of reporters that sit in the State Department building that actually works pretty well.

But in Vietnam, I am worried that this will just be another excuse to put government minders between journalists and officials. If that’s the case, then no thanks.

Drugs

I don’t know why, but I am just fascinated by the drug market in Vietnam. Illegal drugs, not pharmaceuticals. I have written a few posts about it, maybe because these stories come up all the time. I wonder why the international press highlights these. Probably not for good reasons.

Anyway, drug seizures in Vietnam grew to 6 tonnes in the first quarter. That’s up year-over-year and is also triple that of 2017. According to the news report, only 20% of the drugs seized were for the local market.

It looks like the government is starting to get worried. The authorities said the drug scene is becoming problematic, with the city becoming a transit point for drugs thanks to its logistics and infrastructure.

Hot tip, your Vietnam Airlines pilot may just be a drug smuggler, or at least carry money back for drug lords. Especially from Australia. There are two cases where pilots have been convicted.

That comes from this article, which is excellent throughout.

I don’t want to minimize the problem of drugs in Vietnam. The government should try to limit drug use and trafficking. But some of these stories seem to be anti-Laotian (like many American reports tar Mexicans as all either being drug mules or drug lords – no middle ground), and focus on the horror stories.

I think it is right that the government is focused on dealing with the drug problem, because the crimes associated with the drug trade are really bad. But if we have learned anything by America’s experience, tough penalties don’t reduce drug sales. Ultimately, when farmers make just $1,000 a year, but get paid $200 per journey (both stats from the article linked above), it is going to be really compelling. Development and education are probably the most important way to change the culture of drug use and trafficking.

Luxury

McKinsey has a new report on the Chinese luxury consumer, and I thought this might be a good time to talk about the luxury consumer in Vietnam. My hypothesis is that Vietnam is a decade behind China in terms of consumer spending but that it will follow a similar trajectory, especially for luxury.

A few key points from the report:

• “Young Chinese consumers view ownership and affiliation with designer brands as a form of social capital; not just something to wear, but a lifestyle choice that marks them as part of a distinct and exclusive community.”

• “Research for the 2019 McKinsey China Luxury Report shows that the majority of these young consumers are fresh to market, presenting both a tantalizing opportunity and an implicit imperative for brands to stay current, or risk losing out to more digitally savvy rivals.” [See note at the bottom of the post.]

• “What’s more, while some fashion houses excel at various aspects of online marketing and commerce, even the most popular luxury brands have yet to establish a comprehensive presence across the digital ecosystem.”

• “China’s luxury market has yet to develop the widespread sophistication necessary to sustain demand for truly niche or boutique brands, as has been the case in the West.”

• Sales staff are extremely important in driving purchases, “including in the form of WeChat messages.” Consumers want sales people “who keep in touch, more as a friend than merely a salesperson.” [I can only say ugh to this. I do not want salespeople to be my friends. Although, God knows I need some.]

And I thought this was a crazy stat:

• Mini Yang and Angelababy each have around 100m followers on Weibo. It’s not actually that high, in that it compares to Katy Perry, Justin Bieber and Barak Obama on Twitter. And there are actually a few Instagram stars that have more than this: Cristiano Ronaldo (164m), Ariana Grande (153m), Selena Gomez (149m), the Rock (140m) and the Kardashians. But still, so many followers!

For Vietnam, the luxury market is very nascent. The growth will be quite strong as the country develops, especially if like everywhere else, the top 10% gain the most. And remember, these luxury consumers do not have to make hundreds of thousands of dollars. In the McKinsey report, the minimum income is RMB300,000 or just over $40,000. That’s high for Vietnam (per capita GDP is USD2,300), but there are people that fit that, and there will be more.

A few points about the Vietnamese luxury market:

• Right now, fast fashion stores like Zara and H&M are considered luxury in Vietnam. They are doing extremely well.

• Back in 2017, there were 160 malls in Vietnam, and so many more are coming up. These are mostly located in HCMC and Hanoi where 22% of retail sales happen (compared to a population of around 17%). I am actually surprised that this is so low. I would expect retail sales in the two cities would be more like 30% compared to a population of 17%, just because salaries are higher in these cities. And there are more retail shops.

• Online makes up less than 3% of the market (2017 figures). But it is growing very fast: around 35%.

• “Affluent Vietnamese themselves, are frequent travelers. On the average, our data found that…they travelled 6 times overseas and 14 times annually – one of the highest in Asia.”

• Foreign brands like Zara and H&M are making buckets of money in Vietnam from the start.

• People still love traditional markets. Not just for food, but also apparel and other goods.

• I think we might also see a boom in healthy and natural products, because consumers are looking for it. Given the attention on air pollution, climate change, plastic [see my many posts about reducing plastic], I think this is going to be a significant trend world-wide. People will pay for health.

Vietnam is where China was a decade ago (based on purchasing power parity). As there are more and more of these luxury consumers, even at lost incomes, it will add up. If 1 million people buy a few small special items every year, it will add up. For example, let’s say there are 1 million people that can consume “luxury” goods, and they spend $500 (right now the luxury consumer in China, according to the McKinsey report spend something like $5,000-10,000 a year, so much less than this). That’s $500m, while in early 2018, the whole fashion retail market in Vietnam was just $358m.

It is very likely that buyers of luxury goods will use them to stand out, to differentiate themselves from the crowd. As they have been used forever and everywhere. Recognizable brand names, therefore, will be the most popular. In the West, you see lots of people with brand-name fashion or bags or shoes, but there is also the search for the new, for the unique, for the piece that no one else has. At the beginning, I think that will be unlikely for Vietnam. Consumers will probably opt for the big names: their Gucci, their Fendi, their Louis Vuitton. Over time this will change, but not for quite some time, as we have seen in China.

This could mean that local Vietnamese brands will find it hard to compete. There are some brands, like Phuong My, (that I wrote about on Feb. 14, 2019) that are trying to build a luxury name for both the Vietnamese and the foreign market. It may be quite hard.

There is lots of potential in Vietnam for so many things. In terms of luxury, it will be interesting to see how the local brands are able to compete against the foreign brands (Western brands at the high end, Chinese brands at the low end). I am rooting for the local brands. It’s always more interesting to have something with its own terroir.

Note: One thing about point 2: For years, I hear complaints that so much advertising is geared towards younger consumers, rather than adults who actually have spending money. Well, there is a clear reason for this. For a long time, a brand felt that if they were able to attract a young consumer, that person would be loyal through their life. If I decide I am a Bud Light drinker, then I will be forever. Or a Marlboro smoker. Or a Levi’s wearer. I think this is true, for the large part. You can see why brands are so focused on getting these younger consumers in order to lock in that lifetime loyalty.

Beyond Meat - great IPO, lousy stock?

I have been increasingly interested in environmental issues, and sometimes I move away from Vietnam to talk about something interesting in this arena. Beyond Meat (Ticker: BYND) just IPO’ed the other day in the US. It is an alternative to meat. The first product was a hamburger made completely out of plant protein and has expanded to other meat products (sausages, ground meat). It has taken off in the US, and is now available in most grocery stores (big ones like Whole Foods, Albertson’s, Krogers, among others) and food chains (Del Taco, Carl Jr.’s).

It has competition. My favorite is Impossible Foods, which has quite a tasty burger. The big difference between them so far is that the Impossible products are only available in restaurants (but including Burger King, in the US at least), while Beyond is also available in supermarkets. Beyond’s push into restaurants is new, but they are being very aggressive (they increased their SG&A headcount by 224% in 2018).

There are a lot of reasons why I think this is interesting and important.

• First, for health reasons, these foods may be better for people (excluding the much higher sodium than regular hamburgers - about 16% of a person’s daily recommended allowance). I often find “healthy” foods increase the amount of sodium to improve taste. That’s clearly what is happening here. But there is no cholesterol and they have the same amount of protein.

• Second, for moral or religious reasons, people may want to decrease their consumption of animals. I have mixed feelings about this, because I am not a vegetarian, so almost anything I would say would be hypocritical. Basically, I continue to eat meat by avoiding any thought of animal welfare. But for those that care, these are a great alternative from meat.

• Third, for environmental reasons, eating less meat is essential to slowing climate change. Animal agriculture is responsible for between 13-18% of greenhouse gas emissions. It’s either #2 after burning fossil fuels for energy or #3 after deforestation. Many people in developing countries have been too poor to eat red meat, and the worry is that all of these people will get richer and the amount of meat eaten (and therefore produced) will have to grow exponentially. Of course, as a Westerner, it is hypocritical of me to say “don’t do what we do," but…for the sake of the earth, don’t do what we do.

There are also companies growing meat in labs, which is another interesting solution. But so far, the plant-based alternatives that taste and look like real meat are making headway.

So back to Beyond. They had an IPO. The IPO price was $25 (at the high end of a raised range), then opened at around $46 per share. And it is now trading above $70 for a market cap of $4bn. In 2018, the company had revenue of $88m and a loss of $30m. So nice pricing for the company. Of course, people are valuing the company on expectations of strong future profits, and growth has been crazy - revenues grew 170% in 2018. And gross margin has gotten above 25%, which is quite high compared to other food manufacturers. For example, Tyson’s has a gross margin of 13%, while Hormel is just at 20% and Pilgrim’s Pride has been around 15% (although fell to 8% in 2018). So it is an exciting business.

Having said that, the valuation is crazy. There have recently been some purchases of fast growing food manufacturers. This include White Wave (which produces Silk soy milk) was bought by Danon at a 3x revenue multiple. Annies, which makes healthy frozen foods, sold to General Mills at 4x. And a bit back, Dean Foods bought Horizon (organic dairy products) for a 4x revenue multiple.

Even at a very aggressive $200m in revenues this year, Beyond would trade at 20x revenues.

I put together a quick and dirty model with a discounted cash flow analysis. I was pretty aggressive about assumptions (CAGR of 33% through 2027 for revenue, 42% for gross profit). I also didn’t include too much capex ($91m seems reasonable given the amount of food that needs to be produced). I did use a fairly high weighted average cost of capital (WACC), but their debt rates are actually pretty high (“The interest rates on the 2018 Revolving Credit Facility and the term loans at December 31, 2018 were 6.25% and 9.50%, respectively.”), so we need to assume that equity rates would be higher.

Put all of that together, we get a value of $1.9bn in total, or $33.23 per share (see table below). So to get to $70 per share, we would have to grow revenues 41% and gross profit 50%. That’s every year for 9 years straight. Pretty intense. Or we could lower the cost of equity capital to 6.75% (which seems pretty low given an expected beta and the debt rates).

Of course, there are investors that just love growth stocks, and think that Beyond could take a much bigger share of the global meat market ($270bn in the US in 2017 or $1.4 trillion worldwide) than we are anticipating (right now much less than 1%). Or a big food conglomerate may decide that they need to make a really big move into the non-meat meat and overpay for the company.

But I don’t think that is compelling for me. I started to look into potentially buying shares in BYND, because I wanted to be a part of this trend. I feel strongly that these meat alternatives are essential for the environment. But at these valuations, it doesn’t seem like a great buy.

Source: Vietecon.com

The Vietnam Provincial Competitiveness Index

I am a bit late to the story here, but there is a new version of the Vietnam Provincial Competitiveness Index (PCI) out (in late March), and it has tons of interesting points. It is mostly composed of survey data, so it is practitioners view on changes int he economy. Key positive data:

• Corruption seems to be declining. Only 55% of firms are paying bribes (! That’s still crazy high), down from 66% in 2015. And just 7% of firms pay over 10% of their revenues in “informal charges.” That also seems crazy to me. Uncoincidentally, the main author of the report has already appeared in these pages - February 8, 2019 on competition and firm size. Scroll down to see more.

• The business environment is less biased, meaning biased towards FDI (which I have some issues with - see the series on MMT) and state-owned enterprises (SOEs). So smaller local private firms feel that they can compete better.

• Local governments are more efficient and friendlier, both of which have improved about 9pps from 2015. Overlapping inspections are lower, and time to completion of administrative procedures is faster for a small number of firms.

Of course, not everything is hunky dory. The “worrisome” trends:

• Regulatory procedures are cumbersome, and are getting worse in some cases. It takes longer to finish all steps to start operations (from 10% of firms in 2014 to 16%). And the number of firms negotiating with the tax authority has increased (39% in 2013 to 53% in 2018). And about a third have difficulties with obtaining certificates.

• Companies still don’t have access to planning documents, and relationships are still important to get access to provincial documents (according to 69% of firms). This reminds me of my time in Egypt, where it was always so difficult to figure out when government land auctions actually took place. So this is not only a Vietnam problem.

• Also, land supply is an issue, at least for a small but significant portion of firms (19%, up from 15% in 2017).

The major points are shown in the graphics below. I will probably write more about this, because I was very surprised at some of the provincial data. Surprisingly, HCMC and Ha Noi, while high, are not even in the top 10% of provinces in terms of rank or overall score.

I will write more on this as I work through the document, but interesting points

SOURCE: VIETNAM PROVINCIAL COMPETITIVENESS REPORT

SOURCE: VIETNAM PROVINCIAL COMPETITIVENESS REPORT

Babel and language learning

I am traveling today, so I don’t have tons of time to work on my blog. I thought that I would give a quick review of a book that I am reading: Babel by Gaston Dorren.

I heard him on a podcast, Lexicon Valley (yes, I listen to too many podcasts)

His thesis, or discovery or just interesting fact, is that if you speak the 20 languages he dives into, then you would be able to talk to half of the world in their mother tongues. Just a bit of math there, with Mandarin, Spanish, Hindi-Urdu, and English, you reach about 3.9 billion according to his numbers. He kind of fudges with English, since English is not really a mother tongue. But that’s the only way you get to more than half of the world’s population. I’ll allow it, so many people do speak English.

I love books about language and studying languages. I have tried my hand at learning a few, and I now speak two languages well (English and Arabic), two somewhat (French and Spanish), and one a tiny bit (German, mostly forgotten). Plus, I am learning Vietnamese, slowly.

Each chapter is a different language, and he orders them from least spoken to most spoken, so from Vietnamese to English. Vietnamese is also the only language that he tries to learn while writing the book. (He speaks a bunch of languages, so he is not a novice at language learning).

Spoiler: he fails to learn Vietnamese. It seems to me like he just doesn’t spend enough time on it. As any language learner knows, you have to put in the time. You can shrink that time needed by having better study habits, but ultimately you need to memorize a lot of vocabulary. And that can take time, especially as you get older.

Few interesting items:

• Vietnamese just doesn’t borrow that much from the West, so it is hard for him to take advantage of cognates like he would in German or French. According to him, 30-60% of vocabulary is from Chinese, but very little from French or English, or even Russian (except for Chu Nghia Mac-Lenin or Marxism-Leninism), despite the long period of Soviet cooperation.

• Another thing that he talks about is how Google translate doesn’t work that well for Vietnamese. This is interesting, because it has gotten so much better for so many languages. And supposedly is also better than it used to be for Vietnamese. Some people are worried that these translation machines will eventually mean that we won’t have to learn other languages, but it seems unlikely to me. I think this is a clear 80:20 problem - getting 80% of the way there is easy (or easier, it’s been pretty hard), but fixing that last 20% may just not be possible, at least now. By that I am mostly talking about a translation that is perfect, like of a novel or a legal document. But the strides in just general conversation and vocabulary have been amazing.

• He never gets that far in learning Vietnamese, partially because of the tones. This is something that Westerners really have a problem with. I have heard stories where Americans learn Vietnamese well enough to understand Vietnamese people but not well enough to make Vietnamese people understand them! But then again, I have a Thai friend that knows plenty of farang that speak Thai well. And tons of Americans have learned Chinese.

Overall, I found the book very interesting, but some chapters are better than others. The section on Persian was especially interesting. Also Turkish. Both of these are languages I have dabbled in, so it was exciting to learn more about then. I felt like the chapter on Arabic was a bit basic, but I speak Arabic and have studied it for years. So maybe the book works best for people that have some knowledge already of the languages.

As I am studying Vietnamese, I don’t know if this book makes me more excited or more depressed. Do I want to beat him and learn Vietnamese really well, or does this reinforce my feeling that Vietnamese is too hard and I will never learn? Guess will see over the next few months. Check back.

Washing machines

AVERAGE HOUSE SIZE SOURCE: VALUATION & PROPERTY SERVICES DEPARTMENT, UNCHS AND THE WORLD BANK

I have lived in Austria, and the US, among other places. What is amazing about the US was the size of the washing machines. So large, nay gigantic. You can put every piece of clothing you own in them at one time. And don’t get me started about the dryers. Yes, I know they are bad for the world, but frankly who needs the world when you have fluffy warm towels! (I kid).

It helps that US domiciles are large enough to house these enormous machines. Other countries just don’t have the square footage. Homes in the US were 2,438 sqft on average in 2010, up from 983 sqft in 1950. The UK is just 818 sqft. Bigger home allows for a bigger washing machine. Bigger houses equal greater energy consumption. We need more renewables.

That actually is not the topic of my post today. What I really wanted to talk about was tariffs. Specifically American tariffs on washing machines. There is a new study out by a Fed staff member and two professors from U of Chicago on tariffs imposed by the US in 2012, 2016 and 2018.

IT’S A BIT HARD TO SEE IN THIS, BUT 2017 SAW A BIG INCREASE IN WASHING MACHINES FROM THAILAND AND VIETNAM, BUT THAT FELL OFF IN 2018 AND HAS FALLEN OFF MORE SINCE THEN. SOURCE: USITC

The main question the report tried to answer was this:

“Prominent among these questions is the incidence of tariffs: whether the amount of import taxes is passed through to consumers in the form of higher prices or absorbed by the foreign producer by lowering their export price.”

This is surprisingly hard to study in a large country like the US, partly because many tariffs have been on intermediate goods and so it can be hard to track the direct effects. Washing machines, though, are a place where the data can be examined.

In 2012, the US imposed dumping duties on washing machines produced in Mexico and Korea. That caused production to move to China. Then in 2016, the US imposed dumping duties on China, which lead to production in Thailand and Vietnam. Supported by parts from Korea. US imports remained mostly unchanged.

Finally, with new duties on all washing machines in 2018, the two main Korean companies (Samsung and LG) opened plants in the US and prices rose. A fair amount: 12%. Interestingly, prices for dryers, not subject to the tariffs but clearly a complimentary good, at least in the US, also rose.

“Moreover, we show that prices of a complementary good—clothes dryers—also jumped at the same time by a similar magnitude [around 12%], despite the fact that these products were not subject to any new tariffs during this period.”

What can we take away from this?

US WASHING MACHINE SHARE SOURCE: TRAQLINE

First, production moves: Well, basically if you put up tariffs, production can pretty easily move to avoid the tariffs. Thailand exported 23,000 washing machines to the US in 2015, this grew to 1.6m in 2017 and is now back to very low levels (even in 2018 it was down by 50%). Vietnam is similar with almost no exports in 2015 (according to the data I have), up to 1.69m in 2017 then down 59% in 2018. It helps if the manufacturers are already located in multiple geographies. These Korean manufacturers (which have very high market shares) were already manufacturing things in China, and in Vietnam. So it was easy-ish to move.

But the problem is that if production can move once, it can move again. What a pain? I personally hate moving, so I can’t believe how these companies did it. But if they are still manufacturing the most important parts in Korea, then it might not be too hard to just ship those to another place, and assemble them there.

This is pretty scary for Vietnam, which is really hoping that it will benefit from the China.

Seaborne Vietnamese exports to the United States jumped by 17.3 per cent in January and February altogether, even as Chinese shipments to the US fell by 4.9 per cent in the same period, he noted.

But it can just as easily go away, as we saw when tariffs increased on all imports, not just imports from selective countries.

SOURCE: WHIRLPOOL (VIA AXIOS)

Second, consumers hurt: REM was wrong, at least regards trade wars. Not everyone hurts, just consumers. Which is actually most of us. Diffuse harm, concentrated benefit. Whirlpool and GE do well.  Look at Whirlpool’s 1Q figures. Units down 7%, but profits up 6%.

So lots loose out, except American manufacturers, and, it turns out, including the Korean subsidiaries. Both have opened plants in the US.

The study looks at the net affect:

“Absent additional factors, the reports of increases in domestic employment attributed to this policy of roughly 1,800 workers would result in an average annual cost to consumers of over 815,000 USD per job created (after netting out the collected tariff revenues).”

If you see other subsidies (say around Amazon moving to New York) the cost seems really high.

That means New York is offering $61,000 in incentives for each job at Amazon while Arlington is shelling out about $23,000 for each new job.

Plus, those Amazon jobs are much better than these manufacturing jobs (average salary $150,000). So maybe this $815,000 per job isn’t a great deal for the American consumer…