The First Half is Over!

VNM ETF. SOURCE: YAHOO FINANCE

The first half of 2019 is over. That means that the good half of the year is just starting. Now, why do I say that? First of all, Christmas. Second of all, most vacation is in the second half of the year (including much of the month of August for me, I am turning European, I guess). Third of all, summer is upon us, which is nice. Then fall, which is beautiful. Then winter, of which we just get a bit of before it all turns into sludge and sleet in February.

SOURCE: VAN ECK, VIETECON.COM

I want to take some time to look at the stock market in Vietnam, given that the country has been on a roller coaster (as described a few days ago). Generally, things are positive for Vietnam, and it shows in the stock market, which is up 8.8%. Although, this is not that much higher than normal GDP. At one point (April 14, to be exact), the market was up 14.2%.

VNM ETF COMPONENTS BY 1H2019 RETURN AND WEIGHTING. WEIGHTINGS ARE FOR THE BEGINNING OF THE PERIOD EXCEPT FOR THOSE WITH A * WHICH ARE END OF PERIOD. SOURCE: VAN ECK, VIETECON.COM

For foreigners, the Vietnamese market is not easy to invest in. To get a basket of stocks is hard given some liquidity constraints of the index constituents (foreign ownership limits), and there are some other issues surrounding investing in Vietnam. Because of that, many foreigners, especially those that just want general exposure to it, can invest in an ETF, the VanEck Vectors Vietnam ETF. It has assets of around $444m, and trades on average almost $6m. That’s a low value traded but is still double what the largest stock, Vingroup, trades daily on average.

So looking at the ETF, I learned a lot of interesting things.

• The index actually has a lot of foreign (non-Vietnamese traded) companies. Mostly Korean. These make up 16% of the weighting. There are also companies from Taiwan and Japan (one company each) that represent about 9% weighting combined. Then there’s a London-listed stock (3.15% weighting) and a Hong Kong-listed one (1.69%). And some USD cash (0.4%).

• Because of that, currency depreciation/appreciation matters. I mean, it will almost always be the case because the ETF is traded in USD. Usually when you think of a country ETF, you might assume you have to worry about just that country’s currency. Turns out, VNM actually has 5 additional currencies to look at. The Korean Won is the most important. Unfortunately, it fell by almost 4% in the first half, hurting the performance of the fund.

• There have been two main additions/changes in the past six months. First, PetroVietnam Fertilizer (DPM) has been replaced by Petrovietnam Power (POW!). POW is more than 5 and a half times larger than DPM, so that’s probably why that swap happened. PetroVietnam has major stakes in both.

• The second change is to add Uti Inc from Korea (179900 KS). This one may be a little strange. The company makes glass for touch screens and cameras, an area that is growing. Lots of the company’s production is in Vietnam, although I doubt much of their sales are. I can’t tell when it was added to the ETF, but it is up 235% this year.

• Another Korean company, MCNEX, was up 122%. They also make camera components. It looks like both of these are benefiting from Samsung purchasing more components. MCNEX is expending its operations in Vietnam to service Samsung.

I have more insights that I want to get through, but I am running out of time today, so I will follow up this tomorrow.

Dogs

First, to follow up on yesterday’s post, Vietnamese stocks rose a bit today (+0.72%), partially bouncing back after the decline yesterday. Of course, the index is still down 1%. It seems like everyone is mostly shrugging off Trump’s implied threat, but I am a bit wary about that. A semi-government official said that there is no chance that Vietnam will face tariffs. That is a foolhardy statement in my book.

Second, congrats to the students who finished their high school exams this week. It sounds grueling and cruel.

DIFFERENCE BETWEEN SALARIES OF TERTIARY EDUCATION GRADUATES AND SECONDARY EDUCATION GRADUATES (COLLEGE VS HIGH SCHOOL). SOURCE: 2002 OR 2003 OECD DATA TAKEN FROM THIS PAPER

I went through the American system. We had exams, but they weren’t pressure cookers like in other countries.

But in Vietnam, these exams determine who goes to college and what and where they study. The difference between going to college and not is a big deal financially:

In 2018 an average worker earned a salary of VND4.6 million ($197.5) a month while those with a university degree got VND7.9 million ($339.2), a nearly 65 percent jump, according to the General Statistics Office.

The salary difference between those with a university degree and those without is also significant in developed countries. Vietnam is at the high end of that. The US is similar, with college grads making 72% more. The UK is right in line with Vietnam, but the difference in places like New Zealand are much lower.

SOURCE: 2002 OR 2003 OECD DATA TAKEN FROM THIS PAPER

In addition, employment rates are very different. for high school grads versus those that have a university degree. The difference in big OECD countries (for which there is more data) is around 10 percentage points (see chart on left). Average unemployment rates are also different - 6% for non-college grads, 3.9% for those with a degree.

The only concern is that over time, as we have seen in many Arab countries, college graduation rates rise, but the skills these students learn are limited (a nicer way to say non-existent), and then going to college actually increases your chance of being unemployed. In Egypt, “the unemployment rate increased with each level of educational attainment.”

Given the growing economy in Vietnam, this seems unlikely as long as the country continues to move up the skills ladder. And as long as colleges continue to teach real skills. The focus on standardized exams (like the exams students just took) may need to change to a focus on critical thinking and collaboration.

Third, and finally, some people waste time reading reviews of movies. Some by looking up hypothetical illnesses. Some with crosswords. I do all of those things, but today it is all about dogs in Vietnam.

• Here is a heartwarming but ultimately depressing story about a homeless man taking care of dogs.

• And a video about an “ugly dog.” His owner takes extraordinary care of him.

• A reunion of a blind dog and a mute shoeshiner!

• A dog that took care of his owner.

• And if you would rather eat them, Vietnam is your country. Five million dogs are eaten in Vietnam, according to some estimates.

Have a great weekend!

What to do about a problem like…Trump?

Poor Vietnam. It seems like they are on a roller coaster with the US. The China-US trade war benefits them! Then they host the North Korean Summit! Vietnam is on top! They are a global player! Trump’s number 1!

But uh, oh, there are rumblings about their manipulating their currency (see post on May 10).

Yet, they are saved! The US treasury, after reviewing further “evidence,” decides that Vietnam is not a no good currency manipulator (see post on May 28). Things are looking up again - this year is going to be killer!

Yesterday, on Maria Bartiromo’s* show on Fox Business, Trump said a lot of things, but the one that matters for this blog is that “Vietnam takes advantage of us [the United States] even worse than China.”

This drove down the stock market 1.67% today (the market was closed by the time of the interview yesterday).

Of course, Trump seemed to indicate that he might tariffs on Vietnamese goods. Juicy quote:

“Well, we’re in discussions with Vietnam. Vietnam is almost the single worst – much smaller than China, much, but it’s almost the single worst abuser of everybody,” eliciting a “wow” from his interviewer.

If you remember the 2016 election, Trump called China a currency manipulator and said one of the first things that we would do would be to label it as such, which could then lead to negotiations and eventually sanctions on OPIC (or the new DFC) from working in China. Trump never labeled it a currency manipulator (because Treasury never wanted to), but Trump did get his trade war.

That’s the worst case for Vietnam: It tries to negotiate something but is unable to meet US demands, and so tariffs are applied. I don’t think that will happen, because I think the Vietnamese will not push back as much as the Chinese have (and the manufacturing in Vietnam is not actually homegrown companies).

I think there is a real possibility that Trump will put pressure on Vietnam to buy more American goods (in the interview he says he likes that Vietnam buys West Virginia coal), and the Vietnamese will announce lots of initiatives to do so and implement some of them. Trump will then get to declare a win, and things will be almost exactly the same as they are now.

But the bigger issue for the US is that it is fighting on all fronts:

• Trump has a trade war with China

• Forced a renegotiation of NAFTA with both Canada and Mexico

• And after agreeing to revised terms, threatened tariffs on Mexico over asylum seekers (that were not implemented in the end)

• Put tariffs on European goods (in the same interview he said Europe is worse than China in terms of taking advantage of the US.

• Backed out of the Iran nuclear deal, pissing off all of the other partners in the agreement

• Then almost striking Iran, despite lacking credibility

• Pissing off Korea and Japan and other allies with a mooted plan to charge them for US bases

• Pulling out of TPP

This is a list of how NOT to win friends and influence people. I actually have mixed feelings about the trade war with China and the Huawei sanctions, but even if that is a good idea (and I am not saying that) it seems crazy to me that you would try to attack on every front at the same time. America has been blessed by a strong economy, so the repercussions have been minimal so far. But that may not persist, and when the economy starts to weaken, it is going to look ugly for the US. I don’t see anyone coming to Trump’s support in times of trouble.

*Side note: I remember her well from working at Citi during the Todd Thompson imbroglio - read about it. Private jets, alleged adultery, divorce, firings. It’s pretty crazy.

Grab bag

Having a bit of trouble today figuring out what to write about. There is a lot of stuff out there, but I don’t really have a good take. So, some thoughts on big stories:

Monthly plastic update: I have told you, dear readers, that plastic is going the way of the dodo (see my posts on May 6 and April 22). Now the airlines are going to phase out single-use plastic. Now, don’t get me wrong, I love plastic. Plastic containers are super helpful. I sous vide (pretentious cooking of plastic-wrapped food in water), and I can’t live without plastic wrap. But so much of the plastic that we use could easily be replaced and ends up polluting our environment.

Now, unfortunately, this move is probably going to mean very little. The cultural move away from using plastic is real, but each of the steps along the way seem kind of…limited. Like banning plastic straws. Plus, this is just such a minimal use of plastic. How much does each plastic bag weigh? They sell them by the ton which equates to something like 200,000 plastic bags. Straws even less.

I guess what I’m saying is that over time, these effects will be cumulative, but each step is minuscule.

PENDING PROJECTS IN INFRASTRUCTURE: FINCH BY WAY OF BLOOMBERG FOR INVESTMENT FIGURES. POPULATION FIGURES REPRESENT 2017 FROM THE WORLD BANK. CALCULATION BY VIETECON.COM

Lots of investment in ASEAN: Everyone is looking at China’s Belt and Road Initiative (BRI), but it turns out that Japan is easily beating them, at least in terms of infrastructure investment in ASEAN. China is rising in the ranking - last year, the differential between its investments and Japan’s was much bigger. (Feb 2018 figures put Japan’s projects at $230bn vs China’s $155bn).

In the chart on the right, I added a column for investment per capita, which is probably not that meaningful, but I thought it would give some perspective. Even limited investment in Laos can make a really big difference. Same with Timor-Leste.

Vietnam is right in the middle. I am surprised that China is not more involved, since Vietnam is starting to be part of its supply chain as Chinese companies shift some manufacturing to the country. Plus there is a pretty big border.

Indonesia/Vietnam maritime borders: It looks like after the elections in Indonesia, relations between the country and Vietnam are starting to improve. On May 22 (scroll down), I wrote about Indonesia’s concerns over maritime borders with Vietnam (mainly fishing by Vietnamese in Indonesian waters). Well, the two countries are starting new talks to demarcate their respective maritime borders.

Hopefully this will de-escalate the situation.

HCMC visits are up 10%: Foreign tourist visits to Ho Chi Minh City are up 10% yoy in the first half of the year (not sure how they got this figure, since we aren’t finished with the first half, but I guess they expect the numbers to remain consistent through the next few days).

The city received 17 million travellers in the January-June period, including 12.8 million domestic tourists, reaching 40% of its set target for 2019…In the same period, the city’s hospitality sector earned approximately VND73 trillion (US$3.15 billion) in tourism revenue, an increase of 16.6% against the same period last year.

It actually looks like the city is falling behind a bit, because it was targeting a 14% increase in foreign tourists and a 13% rise in domestic ones. However, revenues are doing better than expected - the city targets a 14.5% increase in those.

There is some concern that the city is just not ready for so many tourists. (See this article). If it gets really bad, then not as many people will come, so I assume it will be self-regulating. We will find out over time.

Currency mismatches

I read an interesting paper the other day that can shed some light on currency risks for Vietnamese companies. The paper (here) by Velentina Bruno and Hyun Song Shin is titled: “Currency depreciation and emerging market corporate distress.” It is a BIS working paper, which is a great resource on a number of topics. I now stan Hyun Song Shin.

Anyway, the thesis is that companies suffer from currency depreciation mainly because of a mismatch in the denomination of assets and liabilities. Let’s start from the basics: If assets are more than liabilities, companies have an equity cushion. The idea is that even if asset values fall, there will be room to pay off the liabilities. And if assets rise, then equity holders benefit.

Some of the biggest liabilities are debt. Companies, even in emerging markets, sometimes borrow in hard currencies. If there is a devaluation, the payments get harder for the companies to keep up with - basically they need to make more VND in order to convert them to the higher value USD and pay back their lenders. They can easily get into distress in the case of a big devaluation.

So why do emerging market companies borrow in USD? Given this, it can be weird for companies to borrow in hard currencies, but they do it for a few potential reasons: 1) hard currencies are helpful when they have to purchase capital goods or supplies in those currencies, 2) hard currency interest rates are generally lower. For example, in Turkey, many companies borrow USD or EUR for something like 6% or so, but to borrow in TRY would cost 11% plus (I haven’t looked at these numbers for a while, but the difference is generally high), 3) the lenders (banks or other financial institutions) want to lend in hard currencies, to match their own liabilities. Another reason posited is that foreign currency debt stems from the lack of monetary credibility (see this paper).

DATA ALL 2018. SOURCE: COMPANY DATA, VIETECON.COM

The differential between foreign and domestic interest rates is true in Vietnam as well. Take Vietnam Dairy: they have loans in VND that are between 5.4% (long-term) and almost 6% (short-term), but their USD-denominated debt is 4.11% and 4.59%. Other companies face a bigger spread.

Assets just as important as liabilities: A key point in Bruno and Shin’s article is that liabilities are what people focus on, but assets are worth a second look. The flip side of USD being cheaper to borrow is that interest income is higher in VND. So companies may stash their excess cash in VND rather than match their liabilities. So the lack of hard-currency cash/assets can be a red flag, if lots of liabilities are in hard currency.

How do Vietnamese companies look? So I wanted to look at a few of the bigger firms in Vietnam to see how they stand. It turns out most of them are actually pretty well situated. I took the five biggest non-banks in the index. You can see the data in the chart at the right above.

One point: the amount of cash held in hard currency was not immediately apparent in financial statements. I believe that almost all of them keep most of their cash in VND, but this is a big caveat that could change my analysis. If cash is held in USD, then currency mismatch doesn’t apply.

• Vingroup: The one with the biggest risk is probably Vingroup, because while its cash and investments are matched, it has a large amount of debt in USD (more than 30%). These are likely for its new forays into auto and smart phone manufacturing, both of which can result in higher foreign sales over time. But right now, these USD-denominated debts are a risk.

• Petro Vietnam looks bad, because about 70% of its debt is USD-denominated. But the risk is pretty low, because it has lots of cash, and its output can be sold abroad. (I couldn’t find data on foreign sales).

• Vietnam Dairy has a little bit less than 30% of its debt in hard currency, which is not a great number. But its foreign sales make up 15% of total sales, and the income from these sales was VND111bn in 2018, compared to USD-denominated debt of VND158bn. So they should be fine.

• Saigon Beer has 25% of its debt in hard currency, but lots of cash. Unfortunately, the company has limited foreign sales, so it really needs to be certain that there will not be a massive devaluation. The risk is mitigated by the fact that it is owned by ThaiBev, which may be able to support some of this debt. But that wouldn’t necessarily help other equity holders.

• Masan has lots more debt than cash/investments, but most of it is in VND (just 8% is in USD), and it also produces a commodity (tungsten, among other metals) that is sold for hard currencies. Foreign sales make up 17% of total sales at the company.

Basically, Vietnamese companies 1) do borrow in foreign currencies (mostly USD), but 2) balance sheets appear pretty strong, and 3) currency mismatches are not a big issue, at least now. The central bank has benefited from relatively low inflation worldwide. If this ever changes, then we could see pressure to raise interest rates, potentially pushing more companies to borrow in foreign currencies. Then the risk of default would be quite high.

Over time, I would like to expand this analysis to all companies, but that’s going to take time…

Outbound trips

The Vietnamese are starting to travel outside of the country. This is exciting! I truly believe that travel can open your mind to different people and experiences. And it can kickstart innovation back home - people see how things are done elsewhere and come back to make changes. Hopefully for the better (sometimes for the worse).

SOURCE: AGODA

Anyway, one of the bottlenecks in passports. It seems like most Vietnamese don’t have them. So lines to get a new one are quite long: the 1,000 person limit is being reached daily.

Where do Vietnamese travelers go?

Mostly they go to places in Vietnam. Da Nang is the #1 holiday destination this summer, according to a survey undertaken by Agoda (see right) this year. Out of the top 10 places, 7 are in Vietnam. Which makes sense - it is much more expensive to travel abroad. In past surveys, we have seen Paris in the top 10, but that didn’t come up this year. South Korea is one to watch as well, with lots of people looking to travel there, for both work and pleasure.

Outside of Vietnam, the top travel destinations are mainly neighbors in Southeast Asia, since ASEAN countries don’t require visas. That’s a big deal, because Vietnamese passport holders need a visa for all but 51 countries. In comparison, Japanese citizens can go almost anywhere: they don’t need a visa for 190 countries! And getting a visa to many Western countries can be quite difficult for the Vietnamese. The US issued 120,000 non-immigrant visas in Vietnam in 2018, and 28,000 immigrant visas. That’s a lot, but 26% of all applicants are refused. This is a bit worse than Thailand (22%) and much worse than Indonesia (13%) and Malaysia (5%) but about the same as the Philippines (27%).

SOURCE: MASTERCARD

Fun fact: Once abroad, Vietnamese do like to keep close to home in terms of cuisine. They prefer Chinese and Korean, although they mostly like Vietnamese food!.Maybe we should start to talk about Ugly Vietnamese, rather than Ugly Americans (just kidding, Germans are the worst :0).

How big is travel abroad?

According to the chairman of the Vietnam Tourism Association, Vietnamese spend $7-8 billion per year overseas. I don’t really believe this number (it could be right, it could be wrong), because I get such different numbers on the amount of Vietnamese traveling abrod. The Vietnam Society of Travel Agents says 10 million traveled abroad in 2018, while this survey from Mastercard said that 7.5 million will go abroad in 2021, up from an estimated 4.8m in 2016 (see chart on left). The Mastercard figures seem more reasonable to me, since the percentage of households traveling abroad is already relatively high at 25% in 2016 (that’s probably the last real number and not a forecast).

As Vietnam gets richer, we are going to see lots more outbound travel, but the main beneficiaries of a richer Vietnam will continue to be local Vietnamese destinations. That’s why so many companies, like VinGroup, are investing heavily in domestic resorts. Foreign companies, especially hoteliers, are getting in the game to service domestic and foreign tourists.

Grab and payments

Just a follow up to my post on payments earlier this week. It looks like consolidation is the name of the game. Two points:

1) MY FAVORITE TYPE OF BATH: A BLOODBATH!!! A like-minded analyst at ITR thinks that it will be (or already is) a “bloodbath.” That should be fun. Other metaphor: It’s a gold rush. He believes there will be just one winner or maybe two, max. I think we could see more, but depends on a lot of things, including regulation. Interoperability will be super important.

This brings me to my bigger issue with all of these “winner takes all” views on IT these days. Yes, lots of markets seem like they are winner-take-all, but that doesn’t have the be the case. Regulations could prevent that. And interoperability will be essential. If you have your payment account, but it is accepted everywhere, and you can also transfer it to someone else’s payment account, then couldn’t we see many of these? We see lots of mobile phone companies mainly because the government requires that for competitive reasons.

If it is winner-take-all, then the government really needs to start regulating price and/or profit, like they do for utilities. Seems pretty clear to me. It would be a mistake to allow a monopoly for a service that is essential. If you do, then that company is going to be noncompetitive, unresponsive and expensive. Like telephone companies were back in the day.

2) Grab is definitely getting in on this payments game. They tried to buy 2C2P but were unable - their offer of $200 million (!!) was rejected. Good for 2C2P. Let’s hope it is like Snap deciding not to sell to Facebook for $3bn. Then it IPOs for more than $30 billion (sadly now back to $19.5bn).

I am skeptical of the ride hailing business. I just don’t see it ever being profitable. And the shift to autonomous vehicles is going to cost so much capital that I don’t really see it working. Because of that, all of these moves by Grab away from ride hailing into more profitable businesses seem great to me.

Plus, Vietnam needs more payment options and needs to move away from cash, as I talked about previously. So this is all good, in my mind.

US Government policy on ASEAN

Today there was a panel on ASEAN within the larger US Indo-Pacific Strategy at CSIS (details and video here). I must have mis-read the panel, but I thought it was about energy (and it was to some extent). It was really about US policy towards infrastructure and energy investment in Indo-Pacific.

A few points:

State went hard on trade liberalization and technical assistance. Also, get ready for AsiaEdge to be the next big government slogan.

• A Deputy Assistant Secretary at the US State Dept had the unfortunate job of talking about the US strategy on the Indo-Pacific. There does seem to be a focus on helping countries in ASEAN put together good projects in order to attract Western investment. State and other US government entities are doing a lot around technical assistance (legal, procurement, transparency, etc), which is actually very positive. And the new DFC (see below) could be a big part of this.

• …but it is hard to talk about how you really want trade liberalization and the ability to compete effectively against China, yet when asked if there is any movement on TPP, the only answer is: No.

• Oh, and the government is focused on three areas: 1) infrastructure, 2) energy, and 3) ecommerce/digital economy. This was consistent across all government officials. I actually think focusing on these three areas is smart, but I am worried that any change in administration is going to upend all of this. This is the problem of the American system - inconsistency between administrations. It doesn’t help that Trump is actively trying to destroy anything that Obama touched.

Chevron talked its book on LNG.

• It sees a lot of growth for LNG in ASEAN. Asia represents about 48% of the company’s production, according to the 2018 annual report, but it sounds like they really want to find new customers in emerging markets, especially for LNG. This requires a lot of infrastructure.

• Chevron really wants people to step in and fund LNG infrastructure in ASEAN. Not sure why they aren’t doing more on their own. They are the ones that benefit the most. I guess they have resource constraints. Also, LNG is great and all, but Vietnam could probably do more exploration in their own backyard for their own natural gas. That plus renewables would probably be money better spent.

OPIC is becoming a bigger and better entity called DFC!

• Brian Churchill spoke for OPIC. He was probably the best speaker and sold OPIC well. Anyway, OPIC is rebranding as the US International Development Finance Corporation (DFC) I remember the debate over the past few years, mainly by Republicans, but also Democrats that were against OPIC (the Overseas Private Investment Corporation, which provides financing and guarantees for companies/banks/firms investing in emerging markets). There is a bit of crony capitalism feel about OPIC, because the knock against is was the it only helped big companies.

• The other side of the debate was the idea that we actually need to support our export businesses if we want to be competive. This is because allies like Japan and Germany are much more supportive of export businesses, and they are able to steal deals from US companies because of this support. Even worse, our “frenemies” like China are even more aggressive (see: Belt and Road Initiative), and if we want to counter their influence, we need to put some dollars behind it.

• So, the side supporting OPIC won: the US government decided to double down. The limit to DFC’s exposure was doubled to $60bn. But, as Churchill acknowledged, it is going to be spread over all of the world. ASEAN is a small part of that, and energy/infrastructure is just a part of that as well. So once it is cut down, it might be small, and lots of people are fighting over it. It’s not going to be pretty.

The most interesting comments came from Peter Raymond at CSIS framing the strategy as a response to China.

• In his comments, Raymond really framed much of the US strategy as a response to China’s Belt and Road Initiative. China has an industrial policy versus the US’s free market policy. Industrial policy can be quick and scale, but has risks around corruption, transparency and sustainability of projects. Free markets are usually slower, but generally more sustainable (meaning that they are less likely to fail quickly). The US push towards free markets can be very appealing, but its commitment needs to be real and consistent, something that has not been true during this administration.

The three things Raymond said the US needed to do were:

1. Signal direct support: This is the part about offering something real and actionable. Plus do it consistently. This can be the US alone or with partners. There has been some positive moves on this front from the administration over the past 12 months, but we need to do more.

2. Support: This includes a lot of the technical assistance that the US official talked about, but also includes advocacy for countries even when dealing with other funders. Push them to get better deals for their own sake.

3. Tools: This is DFC and any other funding that can be drummed up. Even private sector funding. Partners are a good source of funding as well. Japan has committed $200 billion to infrastructure. The DFC should also look at other potential products, such as around currencies or political risks or whatever is needed.

Overall, it was pretty interesting. I thought we would hear more about ASEAN government’s policies towards energy and infrastructure, but there were no panelists from the countries themselves. I would love to see this at some point.

Interesting fact: I didn’t realize this, but the amount of gas flared in the Permian basin (close to where your dear author grew up) could meet all residential demand in Texas! It’s hard to talk about how great natural gas is for the environment when so much is wasted…

Vingroup: VinFast to deliver first car

VEHICLE SALES IN VIETNAM SOURCE: VAMA AND OICA

Today is the first day of the rest of VinFast’s life. It is the day that the first VinFast car comes off the assembly line. It will be the first car produced in Vietnam by a Vietnamese company (some foreign brands are assembled in Vietnam).

I wrote about the automotive market in Vietnam back on February 26 (scroll or search for “vehicle”), and we had seen a plateauing of sales over the past two years. I attributed this to tariffs and changes in policy. But things are picking up: through May sales rose 18% yoy and, and passenger vehicle sales were up 33%.

SOURCE: VINGROUP, CHART BY VIETECON.COM

So while the market is growing, but maye still not fast enough. VinFast’s factories have capacity to produce 250,000 e-scooters (started in 4Q2018) and 250,000 4-wheelers. The company really needs to built its export markets to sell all of these cars and scooters. The domestic market for cars is just over 250,000 a year, so VinFast would have to take over the market, which is unlikely.

But if they are successful selling domestically and for export, I estimate (very broad estimate) that if they were able to sell 500,000 cars and scooters a year, the operating profit could be as high as $450m a year. Of course, this depends on a lot of things, particularly maintaining good operating margins (7% on cars, 10% on scooters). That might actually be quite difficult, because so many of the parts are from other manufacturers (the chasis is from Opel and BMW with components engineered by Magna Steyr).

The current market cap of VinGroup is around $15bn (VND350 trillion). So vehicles are a big part of the future of Vingroup. And this is just one of the big initiatives of the group at the company. They are also going into the mobile handset market with VinSmart.

Vingroup seems expensive to me, but we will have to see what happens with the car and scooter sales. If sales are good, and VinFast can start to export these cars (same with the phone business), then I will get more comfortable with the very high valuation (more than 90x trailing EPS).

Mobile payments

Sorry, but I don’t have much time today because of other pressing matters (my real job!). I saw this report about the merger of Vimo and mPos. They will rebrand as NextPay, raise $30m and expand to Myanmar and Indonesia in 2020. In a post on June 6, I talked about the digital payment space, but I didn’t even mention these two players. That’s because there are a lot of competitors. These include: MoMo, Moca, Viettel Pay, Zalo Pay, AirPay and ePay.

There is tons of work going on in the space. In late May, Vingroup bought another payment player (MonPay, which does eWallets). Singapore’s GIC invested in VNPay in April. Rumor is that it was around $50m.

SOURCE: GRAB BY WAY OF BOND INVESTMENT

So there is a lot of movement here. The chart on the right explains partly why this is happening: growth is just so significant, especially if you have customers through some other service (like Grab does, and so does Vingroup).

Of course the chart on the right is sort of meaningless because we don’t know the starting point. But for any service that really needs growth, a jump of 3x or more in one year is attractive. Even from a low base.

A few prognostications:

1) More consolidation: I bet there is going to be a lot more consolidation in the space. There are too many players. eCommerce is so nascent in Vietnam that lots of marketing will be just to educate consumers and acquire them. It may start to be more cost effective to just buy someone that already has customers. Especially the ones that have limited financial support.

2) More investment: There is going to be a lot more investment in the space, especially by foreign VCs and companies. They will likely see South East Asia as an attractive model over time, and given that China is too hard to compete in, they will likely go for other big population centers. SE Asia and Vietnam make sense, although the low per capita GDP may mean that they start with Malaysia or Indonesia first.

3) Every local bank needs to get in the game: At the same time, every local bank must get into mobile payments, either through an app or a full fledged product. They could do this by investing, partnering and/or starting their own product. My view is that It would make much more sense for them to invest and partner with that invested company, given that banks (especially state-run banks) have not historically been great at innovation. At the least, the banks need a working mobile app and some ability to do mobile payments.

Gotta go. Send comments to vieteconpg @ gmail.

Alcohol

UNIT: BILLIONS OF VND. SOURCE: THE LEADER VN

Continuing on our survey of drinks in Vietnam, today I wanted to look at the alcohol market. First, I saw this article on the battle between Heineken and Sabeco (which is majority owned by ThaiBev, famous for Chang beer).

The history here is that Sabeco had over 50% market share in in Vietnam back in 2011. In 2012, Heineken bought Vietnam Brewing Limited, which was the second biggest brewer at 30%.

Heineken is a fierce competitor and by the time Sabeco was bought by ThaiBev, it’s share had fallen below 40%. Now with a new owner, Sabeco is trying to take back some of that share.

But complicating matters is the fast growth of the craft beer scene in Vietnam. I couldn’t find numbers around craft beer, but I would assume that revenues are actually very small compared to the big ones - I would assume less than 5% on revenue and probably less than 1% in terms of volume (craft beer average prices are considerable more - like $5 vs less than $1). I am basing this on the US, where the long-developed craft beer market still makes up just 13%. Production in the US has gone up from 5.7m barrels in 2004 up to almost 26m in 2018, but still is just a small part of the overall market. I assume Vietnam is the same. I would expect these craft brewers in Vietnam to start to grow more quickly as they reach scale, and eventually I would assume that one or two would be bought by the big boys.

There is going to be more competition coming up, with beer giant San Miguel Brewery looking to build a much bigger brewery when “the market looks attractive.” I would think that would be now, but what do I know.

So there is a big battle for market share, but unlike in the US, there is actually growth in Vietnam.

Vietnam, Asia’s third-largest beer consumer after China and Japan, has seen beer volumes climb by an average 6.6% for the last six years compared to an increase of just 0.2% for consumption globally, according to market research firm Euromonitor International. 

In this growth environment, the shifting market share is not as big a deal, because volumes can still increase for everyone. Of course a company doesn’t want to see their product lose out, especially to a similar competitor. But if volumes and profits continue to grow, it is easier to take.

SOURCE: STATITA

Market share isn’t all important. Profit is also important, and on that metric, Heineken is actually much more profitable (see the chart above to the right). That’s on much lower revenue figures. In total, these two made around $500 million in profits in 2017. That’s a lot, and I bet that goes up significantly over the next 5 years.

Other alcohol sales: I also wanted to look at other alcohol sales in the market. The largest is rice wine, and there is some move to a premium product there (Son Tinh), but mostly it seems to be small distilleries.

I also think that wine will eventually become a bigger part of the market (it is tiny now - just 3% of the market in terms of revenue). This will be driven by rising per capita income at the high end, where people want to show off their wealth. We have seen that in Japan and then in China. There is a small movement now in Vietnam.

Would would benefit from a growing wine market? Australian wine sales should grow because of the new trade agreement that reduced tariffs, albeit over 10 years. Chilean wine imports grew because of its own free trade agreement with Vietnam.

It will be interesting to see how this all shakes out. In so much of the developed world we are seeing declining volumes and revenue (beer sales fell last year in the US), and so it is exciting to be in a market that is growing and has lots of opportunities.

Coffee

AG EXPORTS ARE RISING, BUT FALLING AS A % OF TOTAL EXPORTS. SOURCE: WORLD BANK

Let’s go over a few truths:

AG EXPORTS ARE RISING, BUT FALLING AS A % OF TOTAL EXPORTS. SOURCE: WORLD BANK

PRODUCTION HAS GROWN TREMENDOUSLY, PRICES NOT SO MUCH. SOURCE:

• Agriculture is a very important export earner for Vietnam. I saw it in the US, where Vietnamese shrimp and other products are big sellers.

• At the same time, it’s importance has diminished. We can see that in the percentage of exports that come from agriculture, which have fallen from 33% of total exports as early as 1997 to just 14% in 2017 (and undoubtedly more in the past two years).

• We see the same thing in terms of employment. The percentage of the population working in agriculture has fallen across ASEAN, but no more than in Thailand and Vietnam. The percentage is down c29 percentage points since just 1991.

• Despite the fall, except for Laos, Vietnam is the ASEAN country with the highest percentage still employed in agriculture (40%). This means that agriculture prices are extremely important for rural Vietnamese.

• Coffee is an important crop in Vietnam. Production has increased by a CAGR of 12% since 1990 from 79,000 tonnes to 1.8 million tonnes in 2018. It makes up more than 2% of national GDP.

• Prices have not grown that much, in fact, they grew just 2.5% annually in USD-terms over the same period. This is probably just below inflation in the US and well below inflation in Vietnam (although this is somewhat offset by the depreciation of the VND - in VND terms, growth is much more).

• The last year was not good for coffee production (which fell). And also bad for prices (which also fell).

• You can see the US retail prices in the chart to the right - they are definitely falling. The three main buyers of Vietnamese coffee are Germany, the US and Italy.

• Prices are likely to fall more because of increased production in Brazil, and the lower real. Coffee prices to growers have fallen consistently over the past two years. In May 2017, Brazilian Naturals (whatever that is) fell from above $1.25/lb to just over $1.00. That’s a massive decline.

• The real has come back a bit over the past year, but with a new regime, there is a good chance it will fall again. Plus production in Brazil is increasing. According to the International Coffee Organization, “For October 2018 to April 2019, shipments of Brazilian Naturals increased by 18.5% by 24.86 million bags, and exports of Colombian Milds grew by 8% to 9.07 million bags.”

• We are seeing the impact of these lower prices in the number of Central Americans coffee growers that are abandoning their farms to try to cross to the US. This Washington Post article makes a good case that a large number of coffee farmers have fled.

• There are more than 640,000 small holders that farm coffee in Vietnam, and I would assume that these farms support 3-4x as many people, so we are looking at c2.0-2.5m people that are supported by coffee in Vietnam. And it could be much more.

• The government and the private sector are trying hard to move up the coffee value chain from Robusta to higher-priced Arabica beans.

• At the same time, climate change has not been and will not be good for Vietnamese coffee.

• As coffee prices fall, it is going to be more and more important for the government to come up with a plan. On May 23, 2019, I talked about how some coffee farmers are trying to replace coffee plants with avocado trees. These sorts of things probably needed to happen 2-3 years ago. If there is no solution, Vietnam will likely see a big migration from the highlands into the city of farmers with no other skills, just like we are seeing in Central America.

If you want to know more about the history of coffee farming in Vietnam, here is a very interesting article about the growth of Robusta coffee in Vietnam. It was driven by government policy and mass migration of Vietnamese into the Central Highlands, displacing some ethnic minorities.

Review: The Best We Could Do by Thi Bui

BUI AS A CHILD AND AS AN ADULT.

Over the weekend, I read an amazing graphic novel by Thi Bui called The Best We Could Do. It is a memoir of growing up Vietnamese American. She fled Vietnam with her family and went through Malaysia to the US.

• It is beautiful. She is an amazing illustrator, and her drawings have real emotion to them. The small details really are illuminating. For example, the pictures on the right show her as a young girl and then as a woman right after giving birth. Such amazing detail and so emotional. She jumps around in time, and so these two illustrations follow one another in the story.

• Lots of Vietnamese families were both northern and southern. In her case, her father was from the North and grew up quite poor. Her mother was from a richer family in the South. Class issues were extremely important in her parents’ relationship.

• Her father’s father joined the Viet Minh, despite being the son of a wealthy landowner. After the war, he came to Saigon and found his son but was unwilling to associate with him. Eventually, Bui’s family fled to Malaysia and then the US.

• Borders were more fluid than we understand. Her father’s mother was abandoned and eventually moved to China with a man and had more children with him. And her mother was born in Cambodia and lived there until it became too dangerous.

• I was surprised that her parents divorced (I probably shouldn’t have been), because I thought that societal pressure would keep them together even if the marriage wasn’t working.

• She goes to Vietnam with her mother and siblings, but her father never goes back (at least in the book). While back in Saigon, a neighbor has to remind her mother where the house was, because her memory is slightly off. I always thought that you would never forget where you lived, but thinking about where I have lived, I’m not sure that I could find all of them. I have no idea what street I lived on in my senior year in college.

The subject of the book is ultimately reconciling her story with her parent’s to better understand where she stands in her family, in America and in Vietnam. It is a hopeful story about her own child and whether he will take on the trauma that she incurred and continues to deal with. Luckily, her seems to be his own person.

Here is a good interview with the author. Here is her personal website. Another interview here.

I highly recommend the book.

What is going on with the credit market in Vietnam?

Vietnam is growing. Growth generally requires credit. In developed markets, bonds are a popular way for big companies, but in emerging markets, bonds are rarer. Syndicated loans, with lots of banks joining together to lend to a company, are more often used.

SOURCE: STATE BANK OF VIETNAM, VIETECON.COM

These loans are growing massively in Vietnam, according to Bloomberg. They have increased to $2 billion, up 119% yoy. These loans are dollar loans, so interest and principle payments have to be dollars too. This is in contrast to domestic credit growth, which is up just 5% in the first five months. At the beginning of the year it was even slower - growth in the first two months of the year was just 1%. This compares to the government’s target of 14% growth in bank lending for the full year. That’s going to be hard. I don’t know why domestic lending has been so slow, but we can see that companies are going to external sources instead.

To give you a sense of the size of loans in the country, outstanding domestic credit in the Vietnamese economy is $334 billion. That’s a lot, but we really should compare the net change, which is just $9.9 billion. This means that the growth in syndicated loans is actually sizeable - something like 11% of domestic credit growth.

There are a few risks to these foreign loans. On April 8, I highlighted that external debt is actually pretty high, and much of it is private. Because of this debt, the government needs to maintain large and growing foreign reserves and a fixed foreign exchange rate. If the currency falls, it will make it harder for many of these companies to actually pay their debts. One mitigating factor is that a fair amount of the debt is for foreign investment, and if the investment is for export manufacturing, then there is less of a currency mismatch.

The other thing that disturbed me was the very high interest rates. From the original article:

Vietnamese deals are providing some of the fattest margins in the region. Consumer finance company VPBank Finance paid 275 basis points over Libor on its 364-day $215 million facility closed in March. The average margin for loans of a similar tenor from ASEAN borrowers was 105 basis points in 2018, Bloomberg data show.

That will be expensive over time. It is unclear if this VPBank is really representative, but if so, then it does not bode well for other borrowers. It’s surprising given how low interest rates are all over the world.

Risks to economic growth if credit growth doesn’t pick up

I am surprised that domestic credit growth has been so slow. It really is going to be hard for the government to reach its growth targets, unless domestic credit grows. Although one way to meet the target is through significant foreign investment (which is probably partially driving the high syndicated loan growth). More foreign investment can be good, but I am a bit wary of just export-led growth, since so much seems to be based on the trade war and low wages. Both of which can go away fairly quickly.

Credit growth is something that I will be watching closely. It’s strange to me that it has been so sluggish. I will have to look around for some answers.

Digital payments and a move away from a cash economy

Vietnam is still a cash economy. It’s so cash driven that Vietnamese buy houses with gold bars and cash. And people still hoard hard currency like euros and dollars. According to one statistic, Vietnam’s non-cash transactions are less than 5%. But lots of people are working to move Vietnam to a non-cash economy, including the government that sees a lot of benefits to moving away from cash. These include:

SOURCE: WORLDBANK

It is much harder to audit businesses that are cash based. The government likes this, because it can make sure that it is getting the taxes it likes. But businesses also benefit because their records are more transparent and can be used for loans, etc.

Second, it does cost money to print bills. I couldn’t find costs for VND, but for the USD, it costs 5.5 cents for $1 and $2 bills, but that jumps to around 11c for $5-50 notes. And the $100 bill costs 14c. Now, this is all profit in the US. But profits on non-cash are much higher for the Fed - they just add numbers to their ledger, and voila, they’ve created money with no real cost.

In Vietnam, given that many bills aren’t worth that much, the seniorage profit isn’t as large. For a VND1,000 note, if it costs 5 cents to print, the bank loses money since it’s only worth 4 cents. Of course, it probably costs less, and most bills are worth more. But still, printing money is supposed to be super profitable. When it is just a ledge at the central bank, then that’s the best.

SOURCE: E-CONOMY SEA 2018 BY GOOGLE TEMASEK

Third, cash is a temptation for thieves. Like I wrote yesterday, having lots of cash lying around attracts criminals. Plus, you have people making multiple trips to the bank to deal with all this cash. Sometimes I hear small store operators complain about credit card fees (which are unconscionably high in the US), but there is a cost to cash as well: tracking it, getting it from the bank, making sure you have the right change, etc.

Fourth, so much of modern day electronic commerce needs to be done cashless. In some parts of the Middle East, they still use cash for things like purchasing goods or Uber, but it is a real limiting factor because cash just makes every transaction more fraught. It’s just easier to get the payment digitally. Once everything can be done electronically, then so many transactions open up.

How fast is the move away from cash happening?

The government is working hard to change this by requiring a move to digital payments. But it is going to be a tough slog. Only 31% of people above 15 had a bank account or account with a mobile-money service provider in 2017, according to the World Bank. Only around 25% of people in Vietnam have adopted some digital service according to a report by Google and Temasek from late last year. It isn’t a lack of access: 70% of all young people have smartphones, so that isn’t stopping them - it really seems to be culture. Because of that, I think it is important to talk about the opportunity once the economy converts away from cash.

The government has really been pushing the conversion.

The prime minister is directing banks to reduce cash transactions to less than 10% by the end of 2020. E-commerce is being promoted at malls and supermarkets in major cities and the government wants at least 70% of Vietnamese aged 15 and older to have bank accounts…A new regulation in January [2019] mandated providers of public services -- from hospitals to schools -- to stop accepting cash by December.

If they reach these milestones, then the electronic payments space is going to be gigantic.

Everyone is trying to get into this space

Because of the government support and the massive potential, we have everyone and their mother working on a solution, from banks to cryptos. This has led to significant fragmentation. And growth, but it is still minuscule. As I said above, less than 5% of all transactions are non-cash, including bank transfers and credit cards as well as mobile payments.

It will be interesting to see how mobile payments and credit cards fill this gap. Banks are trying hard on all fronts. But it seems to me that mobile is going to be the way forward. In developed markets, there is already such a large base of credit card companies. But in developing markets, a system can be built from the ground up that is more secure and easier.

The big event last year was Momo, an digital payments company, closed something like $100m in a Series C round. They are now the gorilla, but there are a lot of competitors. I counted over 20. The top three appear to be: Momo, Nganluong and VTC Pay.

Solutions like Momo allow users to load their eWallet by connecting it to their bank account or loading it in any one of its 4000+ retail locations. Nganluong already works with more than 10,000 e-commerce merchants and supports over 500,000 eWallet customers and partners. VTC Pay has over 22 million active eWallet users and is accepted by over 30,000 businesses.

It is highly contested space. Because it is so immature, companies have really focused on the main urban centers, but that leaves out a large portion of the rural population. The needs there are great: “60% of the rural population is unbanked and face difficulties in accessing financial services.”

In the future, I am going to dive into these fintech startups, but I wanted to do a quick write up about the environment in Vietnam first. The problem is that cash is dominant. Someone will come in and fill this gap, helped by government support. The question is: will it just be a few players, or will it be a winner-takes-all? My first guess is that it will likely be one or a few major players, but that will likely depend on regulations. It will be interesting to watch.

Solar in Vietnam

STREETS ARE FLOODED IN HO CHI MINH CITY'S DISTRICT 2 AFTER A HEAVY RAIN ON MAY 7, 2019. PHOTO BY VNEXPRESS/HUU KHOA.

Dear reader, I have to be frank. I just don’t have any good ideas today. So a few interesting stories that came over the transom.

• A more walking friendly HCMC: Ho Chi Minh City’s Department of Planning and Architecture are building more pedestrian streets. Some of these are around upcoming metro stations. This has been a trend all over. In New York, part of Times Square is pedestrian, and Vienna has a number of pedestrian and mixed-use streets (cars, bikes and pedestrians can all use the street). Same thing in DC. I support this wholeheartedly. I love pedestrians area. I think they help build a fun, walkable city that allows a better sense of community. But that’s me.

• Flooding will persist. District 2 flooding will likely re-occur until the city acquires land for projects that should help alleviate it in the future. This is becoming a real problem and it will only get worse with climate change.

• Japan is outsourcing customer service jobs to Vietnam, and it is growing. This one company, transcosmos inc., has 5 centers with 1,750 workstations. I am totally surprised. I didn’t realize Vietnam had the Japanese language talent (although some of this work may not need Japanese language). But good for Vietnam. These can be mind-numbing jobs, but at least they aren’t back-breaking.

• Watch your bags on planes! Not sure how big a deal this is, but thought it was interesting: Chinese men are stealing passengers’ valuables on the plane. It seems like it would be much better to do it on the other side, with checked baggage, but probably not as much money. I was surprised that this happens (although I shouldn’t - it happens on every other form of transportation), and also that people carry so much cash around. eCommerce and credit cards would do a lot to stop this sort of thing, although I guess computers and phones are still valuable. Even those, though, are less valuable because they can be “bricked” from afar. One other thing: not sure how I feel about them highlighting that it was Chinese nationals. Maybe only Chinese nationals do this, but maybe not.

• Businesses are renting their roofs for solar power. This is very exciting. The government continues to promise to buy electricity from solar for 9.25 cents per kWh, which is quite good. And these companies aren’t doing anything with their roofs now. Plus there are a lot of loans for this. It sounds like there is a real business opportunity here. Saigon Co.op is one of the companies considering it. And a few factories.

• Households too: And it’s not just businesses. 1,600 households and enterprises have already installed solar panels.

• And companies! Plus a number of companies are building large solar farms, which will be necessary to really move to renewables in a major way. A Norweigan company is building multiple solar projects that should add up to 485 MW.

• Now for some bad news: yachts. Rich people are buying superyachts. Ugh. I guess rich people are gonna rich. And there are an increasing number of rich people in Vietnam: “Ultra-high-net-worth individuals, defined as those with investable assets of US$30 million or more, were minted faster here in percentage terms than anywhere else in the world between 2013 and 2018.” The marina projects are probably just real estate. Developers want to differentiate their high-end offerings, so they build a marina. Not cheap, but worth it if it raises the prices of homes. But still, I am not excited about Vietnam becoming a play thing for the rich.

World trade - is globalization reversing?

I actually think this is too big a question for today, but people are really freaking out about the trade wars. For good reason, I guess. We have been living in a state of increasing globalization since…well, since World War II? Is that right? Yes. And now that appears to be a risk.

But two separate things are happening.

First, this new thing over Mexico is a freakin’ mess. It doesn’t make much sense. The tariffs will only hurt US consumers and workers, considering the impact this will likely have on the automobile industry and a number of other supply chains. But there is a good chance that it never actually goes into effect. Mexico will tell Trump that they will be tougher, and Trump will back down.

The Mexican foreign minister will be here on Friday, and hopefully there can be some compromise.

Let me get my priors out here: I am all for immigration. I think most any level is fine. But I do worry that certain types of workers are hurt by the rising number of immigrants, and so I can see why people are worried about a big influx. I worry much less about cultural issues - I think most of these are just about racism, and that after a generation or two, everyone is absorbed pretty well in the US.

Right now most immigrants are coming to apply for asylum, which the US system is not built for. But the increase has happened under Trump’s watch. More than 100,000 have arrived each month, and there 800,000 cases waiting for a hearing in the courts. This is a total mess.

One top official said simply: “The system is on fire.”

I sympathize with people trying to come up with a solution. Unfortunately, Trump is not the right person for dealing with this. He has no sympathy but more than that, drives away his allies, threatens to cut aid to countries where the people are coming from, and is unable to put together a plan that makes any sense.

Trying to fight trade wars on multiple fronts just seems stupid to me.

AIR CARGO. SOURCE: WORLDACD

Second, the war on China could be either good or bad. It would be good if it is focused on a) making sure that China fights fair (no corporate theft, IP infringement, less state support, etc) and b) that China doesn’t export autocracy around the world (particularly through its Silk Road initiative). On the other hand, if this goal is to stop China’s rise all together, I don’t see that working out well.

There is a view that the Trump agenda is actually to decouple the Chinese and American markets. The story would be: Chain supplies would move back to the US for a number of goods, and China would also have to start producing some of its own goods, like semiconductor chips. I have to think about this more, but in the short term, it seems like US companies have just moved to other countries to source these goods rather than trying to manufacture these domestically.

Another short term impact: Lower trade generally. In the table above at the right overall trade is falling basically everywhere. And in some cases, by a lot. Asia Pacific is being hurt the most.

Vietnam, right now, is benefiting from these wars. According to a Nomura report, Vietnam gained about 7.9% of GDP from importers sourcing products from the country instead of China, as they look for substitutes. Oh, look all the way to right in the chart below: both the US and China are hurt by the trade war.

But as we saw with washing machines (see my post from April 26, 2019), manufacturing can actually move pretty quickly.

I don’t want to get too worked up about this, because I think there is a way out, but unless someone tries to descalate, I’m not sure what that way out is.

Adidas

Just want to say up top that I am sorry for missing my post on Friday. I got busy at the last minute and wasn’t able to get it done. Because we are in the summer, things are a little less regular. But I will do my best to make sure that there I maintain a regular schedule. Now back to Adidas.

Adidas makes 44% of its footwear (Adidas, Reebok, etc) in Vietnam. And 97% in Asia. How much in the US? 1%. And Europe? Even lower at 2%. So basically, where Adidas makes the majority of its money, it basically produces no shoes.

That is about to change. The company has invested in a new process called SPEEDFACTORY, where the production is mostly done by robots. It cuts the time from 60 days for production (plus another 60 days for shipping to stores in Western Europe or the US) to just a few days or weeks.

The facility opened in Europe and another opened in the US (Atlanta). Combined these two factories will make 500,000 pairs of sneakers each.

That seems like a lot of sneakers to me. Actually, it’s not. Adidas make 409 million pairs of shoes in 2018. So this is less than 1% of total sneaker production.

Vietnam is safe…for now.

FOOTWEAR PRODUCTION BY REGION. SOURCE: ADIDAS 2018 ANNUAL REPORT

The bigger concern is that these more automated factories will start to move production back from Asia to Western Europe and the US. Much of the work is being done by robots or 3D printers. The latter allow for very quick changes in styles of production. And that means companies can be much more nimble in responding to market demand. Also, shipping costs will be much lower. Overall, it could be much cheaper for companies. And potentially lead to greater sales.

For example, say a particular sneaker was a surprise hit. So the stores run out of them. The company could just use their on-shore production facility to quickly respond.

We might eventually see production actually match sales. Right now, 97% of Adidas sneakers are made in Asia (see chart up above), but Asia makes up just 33% of sales (this is overall sales, but let’s assume footwear follows the same trend as the overall sales).

Nike is doing a similar thing, moving more production on-shore by using cheaper Latin American markets plus automation.

Employees lose out

This will mean fewer employees at factories. The factory in Germany for Adidas has just 160 employees, compared to more than 500 at a factory in Asia (in Vietnam it is more like 1,000). As Adidas makes this work in Germany, it will probably move some of the automation to Asia as well. So that will mean fewer employees overall.

That’s probably going to be a bigger deal than the move to on-shoring. Even Adidas’s chief Kasper Rorsted thinks so:

“I don’t see full automation in the next five to 10 years,” adding that Asia’s semi-automated manufacturing is still significantly faster than any 3D printing technology. The automated plants will manufacture about 1m pairs of shoes annually — a tiny fraction of the 360m pairs the company sells globally each year.

This is why it is so important for Vietnam to start to move up to the more innovative parts of the market….

Book Review: The Road Not Taken

There are a lot of books about Vietnam. So many. But the vast majority of them are about the US war in Vietnam, not about the country itself. No doubt the war was important, not just for the Vietnamese (which suffered the most, on both sides) but for the rest of the world. Because of this, while I stay away from most of the books about the war, I read a few of the more important ones.

This book, The Road Not Taken: Edward Lansdale and the American Tragedy in Vietnam by Max Boot, caught my eye, because it was about a potentially different outcome of the war. Plus, it was a deep study in the father of counter-insurgency, which continues to be the weakspot in the US military. Edward Lansdale was a former advertising man that through his military and CIA work become close friends and confidants of Ramon Magsaysay, at one point president of the Philippines, and Ngo Dinh Diem, the president of South Vietnam. He was the US’s man in South East Asia throughout the 50s and into the 60s.

The book is interesting throughout. Although, at the beginning, there is a lot of talk about Lansdale’s personal life (he had a wife and a mistress, and after his wife died, he married the mistress), that I could do without. A few things that I took away:

• Lansdale’s view was that the US fundamentally misunderstood how to fight Communist powers. He believed that the US should persuade and cajole leaders to become more democratic and build more legitimacy for itself. And that by offering a better alternative to communism, South Vietnam would have been able to survive.

• Once the US military got involved in a big way, it was over. The civilians never had enough power or control to get things done nor were they able to change the rules of engagement to lessen civilian distrust. Basically, the military killed too many civilians indiscriminately, leading to a backlash against the South Vietnamese government and rising popularity of the insurgents. General Westmoreland, in particular, doesn’t come off well in this account.

• Almost all of the post-Diem leaders were corrupt and self-serving. All of them appeared to be completely short-sighted. None seemed willing to make the sacrifices necessary. And they ended up much worse than if they had been less power- and money-hungry. For example, Nguyen Cao Ky was vice president under President Nguyen Van Thieu and was part of the original junta that overthrew Diem. He ended up running a liquor store in Los Angeles.

• No leader was really a man of the people. Not Diem, not any of the generals that came after him. Diem came the closest, but he was nothing compared to Ho Chi Minh. He became increasingly autocratic over his rule, which was quite long - 8 years.

A good review of the book is here by Fredrik Logevall, who wrote a great book about the French in Vietnam, Embers of War. (Boot quotes Logevall very admiringly in his book). He believes that Boot is a bit too optimistic about the chance that the US could have changed the outcome of the war. The problems of corruption and authoritarianism by Vietnam’s rulers probably would have resulted in the same end. Plus, we forget how attractive communism and the North’s critique of the South’s government was.

Lansdale was very effective in the Philippines, helped by a very different situation and a charismatic and principled leader in Magsaysay. He was initially successful in Vietnam, in the sense that he became quite close to Diem and likely pushed him to be more democratic. But after that initial spurt, he was unable to sustain his role, given opposition from the US State Department and the military. He eventually helped lead the Bay of Pigs disaster and ended up going back to Vietnam. In this later iteration, he promoted Ky, who was seen, according to Logevall, as the symbol of corruption. Eventually, he returned to the US and was ignored by Nixon and his team.

I recommend the book, with reservations. It could have probably been a hundred pages shorter and not lost much. The details on Lansdale’s personal life were a bit too much. And the conclusion that if Diem had stayed, everything would have been different is probably too strong. But the section on the Philippines, of which I know very little, was very interesting. And it was informative to get a glimpse of Vietnam during the golden years of the mid-50s.

Second-tier cities

SOURCE: WIKICOMMONS

I lived a long time in Egypt, which for its history was generally centered around Cairo, but did have a large and important second city in Alexandria. With tourism, cities like Luxor and Aswan also became important. But the main city in the country was and is Cairo, both the administrative and economic capital of the country. It has taken all of the money and jobs from these other cities.

Many other countries have become increasingly like this. London continues to be the predominant city in the UK, and Paris in France. Germany actually has multiple centers, and the US is another alternative example, with many big cities: New York, Chicago, LA, SF, DC, Houston. Each has its own industry that attracts people, like Hollywood to LA and the government to DC.

I think it is helpful to have more than one big city: it increases competition among cities, it helps foster specialization. I believe that it is strategy for a country to be more inclusive to a larger group.

So this article about second-tier cities in Vietnam taking off raised my interest. It is mostly an article about Da Nang, which is in the middle of the country and is the fifth largest city in Vietnam.

The article is very anecdotal, mostly about difficulties recruiting people for jobs. I wanted to check and see if Da Nang really is growing as quickly as the article makes it out to be. I was able to find some good data sources.

The central coast city is growing, but not as fast as the provinces around HCMC. Since 2011, it has grown an average of 2.0% per year, the same as HCMC and faster than Hanoi, but much slower than Binh Duong (3.8%) and Dong Nai (2.3%).

ANNUAL GROWTH 2011-17. SOURCE: GENERAL STATISTICS OFFICE OF VIETNAM

The two large areas that are growing more slowly than the country as a whole are the Northern central area (everthing around Da Nang) that grew just 0.7% and the Mekong River Delta (0.4%). This is still very good growth. The US is growing about 0.6%, China the same, Germany 0.4%, while Italy and Japan are shrinking.

However, HCMC seems to be taking over so much of the country. It represents 14% of the country, once Dong Nai and Binh Duong are included. A similar calculation for Hanoi gets us to just 9.2%.

The mitigating factor is that while HCMC may get bigger and bigger, Hanoi is the center of the government, so it will always be important in its own right. Da Nang will likely continue to be the center of tourism, given strong investment there plus the closeness of Hoi An and Hue.

My recommendation to Vietnam is to build up smaller cities. This will take some of the pressure off HCMC and allow for more representation by people that may be feeling left out of the strong growth that the major cities are seeing.