Can Vingroup Upgrade Vietnam’s Auto Industry?
If you want to watch the video, it is below
I think it makes sense to release this one considering the recent news that Vinfast, the Vingroup EV subsidiary is doing a huge SPAC deal to give it an enterprise value of $27 billion.
I was quite charitable in the video, but I think that the company faces difficult odds when it comes to the global EV industry. Vingroup is a real estate developer. Critical success factors for real estate development is how close you are with the local government. How well does that translate to being a product-oriented electronics company? They need a hit and need it fast.
Founded and run by an instant noodle entrepreneur who hit it big in Ukraine, Vingroup is today Vietnam's biggest private company.
The sprawling conglomerate's rise has been rapid.
Today Vingroup owns and operates schools, hospitals, resorts, amusement parks, and Vietnam's tallest building.
But it is the group's recent venture into electric vehicles that has gotten a particularly large amount of publicity.
In this video, we are going to look at Vietnam’s very own chaebol - Vingroup.
Beginnings
For such a sprawling conglomerate, Vingroup is surprisingly young. Just about 30 years old.
Founder Pham Nhat Vuong was born in 1968 in what was then the Democratic Republic of Vietnam. His father served in the Air Force and his mother sold tea on the streets.
Their family was quite poor and struggled to survive. But Pham was fortunately gifted enough in mathematics to receive a scholarship to study mining in the Soviet Union.
Such a thing was the dream of many Vietnamese students at the time. In his third year in college, he started his first business selling goods out of his dorm, which unfortunately failed.
He graduated in 1993 just as the Soviet Union collapsed - ushering in a new era of chaos but also opportunity. Pham married and moved to Ukraine.
Noodles
Once in their new home, Pham borrowed $10,000 to start a Vietnamese restaurant in Kiev. The restaurant attracted many visitors, and Pham had a new idea.
He borrowed even more money to import some production equipment from Vietnam to produce instant noodles. He then sold them under the brand name Mivina.
As Pham recalled, "Ukrainians were very poor and very hungry." And who hates instant noodles? The company - Technocom - is considered to be the ancestor of Vingroup, and was founded in August 8th, 1993. In a year, Pham sold a million noodle packages.
Soon thereafter, Mivina came out with instant mashed potatoes, dried herbs, and soups - the name becoming synonymous with fast food. Mivina products were exported all over Europe.
Technocom grew to employ some 1,900 people and supposedly generated a $100 million in revenue. By 2004, 97% of Ukrainians had eaten at least one pack.
Also, something I’ve noticed is just how many Asian fortunes were made in instant noodles. Whether it is Salim Group in Indonesia or Mivina in Ukraine - it is a little interesting.
Vietnam's Eastern European Wealthy
Pham's rise as an instant noodle king in Ukraine was not actually that strange.
A generation of Vietnam's smartest people - as selected by university exams - went to Eastern Europe for school. They were well positioned for post-Soviet capitalism.
For instance, Ho Hung Anh and Nguyen Dang Quang also founded an instant noodle company in Russia. They ended up bringing it back to Vietnam, creating Masan Group - one of Vietnam's largest private conglomerates.
And Pham Thi Phuong Thao and her husband Nguyen Thanh Hung set up a Soviet trading company in 1992. They first became wealthy by importing heavy equipment into Vietnam.
Pham later became Vietnam's first female billionaire when her company VietJet went public. VietJet is known as Vietnam's first truly private airliner.
Businesses
Vietnam retained its private sector throughout the central planning years.
However, the country's red tape made it difficult to found new companies in the 1990s. Each new private enterprise had to be approved by the relevant political figures.
Furthermore, new businesses found it hard to obtain funding. The banking system still largely lent to the country's state owned enterprises - as directed by the Party.
The Vietnamese economy went through the Asian Financial Crisis of 1997 with little damage - with growth slowing down only slightly to 5.8% and 4.8% in 1998 and 1999.
Nevertheless, in 1999 the Vietnamese government decided that a larger private sector was necessary to attract foreign direct investment and drive future growth.
They passed the 1999 Enterprise Law, which reformed their business formation laws - simplifying procedures and abolishing the need for things like sub-licenses.
The new law immediately sparked a wave of new company formation - Pham's included.
Back to Vietnam
Chinese and Hong Kong billionaires agree.
However you might make your first bucket of the gold, the way to real riches would be to then plow that gold into real estate.
In 2000, shortly after the new business laws were introduced, Pham traveled to the beach city of Nha Trang for a vacation.
Nha Trang is a tourist city located on Vietnam's south central coast. Despite this, the city did not have a five-star hotel.
Pham decided to invest the earnings from his Ukrainian instant noodle business into developing this Vietnamese real estate.
In 2001 he founded the company Hon Tre Tourism Trade and Service, which was later renamed to Vinpearl. Vinpearl focuses on resorts and tourism.
A year later, he founded a second company, Vietnam General Trading or Vincom, which focuses on commercial real estate development.
Flagships
Vinpearl's first real estate development project opened up in 2003 - the five-star, 500 room Vinpearl Resort in Nha Trang.
A year after that came Vincom Center Ba Trieu, developed by Pham's commercial real estate company Vincom. Vincom Center Ba Trieu was Hanoi's first commercial tower complex. The place has become a luxury destination for both domestic and local shoppers.
In order to learn how to run these sprawling retail operations, Pham traveled to Phuket to study tourist resorts. And to Singapore in order to study commercial malls.
In 2006, Vinpearl opened Vinpearl Land in Nha Trang - its first amusement park. It is quite impressive. You take a 3.3 kilometer cable car over the ocean to get to the area, which includes a five-star resort and luxury restaurants.
A Big Bet
In 2009, Pham and his companies made a savvy bet that paid off in a huge way.
After a big run up from 2007 to 2008, Vietnamese real estate prices crashed some 30% thanks to a combination of the Global Financial Crisis, new restrictions on real estate lending, and higher interest rates.
Pham and Vincom saw an opportunity for a well-funded, financially stable company to buy at cheap prices, build up a huge land bank, and take leadership in the Vietnam real estate industry.
In order to fund this effort, in 2010 Pham sold Technocom's Ukrainian manufacturing factories and instant noodle brands to Nestle for about $150 million.
Then in November 2009, Vincom raised some $100 million by selling convertible bonds in Singapore. Vincom's ability to tap the international markets gave it an advantage over local real estate companies, which suffered prime interest rates from 9-20%.
A year later, the real estate markets started to turn and Vincom seized their chance - launching a series of projects that hit the market at exactly the right time.
Vingroup
In 2012, Pham restructured the whole company, merging Vinpearl and Vincom to create Vingroup.
Today, Vingroup is the Vietnam's second most valuable company and the largest one not to be a state-owned enterprise.
The company's bread and butter has thus far been real estate development. Its publicly traded residential real estate division Vinhomes builds and sells residential apartments to Vietnam's rising middle class.
One of Vinhomes flagship projects is Landmark 81, Vietnam's tallest building, a 1,513 foot supertall skyscraper - part of a massive commercial development known as Vinhomes Central Park.
Vincom Retail handles commercial projects like shopping malls and office buildings. Vincom has developed over 80 commercial projects across Vietnam - including Vincom Mega Mall Royal City, Asia's biggest underground mall.
The resorts and amusement park businesses were re-organized into two other branches of the company - VinWonders and the aforementioned Vinpearl.
Diversification
Pham envisioned a complete ecosystem for Vietnam's rising middle class.
He envisioned Vingroup not only providing a person's home, but also their healthcare, food, entertainment, and even transportation.
In the same year as the merger, Vingroup founded Vinmec International General Hospital, a high class hospital modeled after a resort hotel.
This hospital soon became a chain, with 10 such international clinics across the country.
In 2013, Vingroup founded Vinschool - a nonprofit with the goal of educating people who bought and lived in Vinhomes's real estate complexes.
Vinschool started with a preschool, elementary school, middle school, and high school across 27 campuses. They opened their own university, Vinuni, a few years later.
In November 2014, Vingroup entered the supermarket and food retail sector with Vinmart. They launched with nine supermarkets with the goal of eventually having consumer retail contribute half of the combined group's revenues.
In 2017, Vingroup founded an automobile subsidiary - VinFast - as well as an electronics subsidiary a year later - Vinsmart. More on those two later.
Other subsidiaries include a beauty brand, a fashion brand, an animated film studio, and a casino - the somewhat unfortunately named Corona Casino Phu Quoc.
Cheung Kong and Supermarkets
Vingroup's diversification efforts seem a bit random. But we can look to similar situations elsewhere for some insight.
Take Li Ka-shing's Cheung Kong Holdings - now CK Hutchison. Cheung Kong started as a real estate development company but then entered the telecommunications, supermarkets and utilities spaces.
Li's diversification strategy was brilliant. By purchasing dominant location-dependent franchises like the ParknShop supermarket chain as well as recurring revenue streams like telecom and utilities, CK built an impregnable global business.
Vinmart attempted to aggressively grow and consolidate the industry in a similar way. In just a year of operations, Vinmart tripled its supermarket count to 27 and convenience store count to 200.
By 2016, it had become Vietnam's single largest retail chain with 65 supermarkets and 1,000+ convenience stores. But also turned heavy losses amidst fierce competition in what turned out to be a brutal, low-margin industry.
By contrast, Hong Kong's tight real estate market and strange price competition laws cemented ParknShop into a comfortable, profitable oligopolist position alongside Wellcome.
Vietnam's retail industry on the other hand not only featured foreign entrants like Japan's Aeon, 7-Eleven, FamilyMart, Korea's Lotte ...
But also domestic players like Saigon Coopmart, Satra, and Hapro.
Finally in 2020 Vingroup called it, having lost hundreds of millions of dollars in the venture. They sold a majority stake in their retail operations to the aforementioned Masan Group.
Masan then promptly closed 700 locations, many of which were some 50% below their breakeven threshold.
I have not seen Vingroup attempt to enter the utilities and telecom services businesses - perhaps because those businesses are already run by the state.
Samsung and Electronics
Another interesting comparison to make is with South Korea's chaebol - namely Samsung.
The company's crown jewel is Samsung Electronics, South Korea's biggest business.
Thusly in 2018, Vingroup also entered the electronics business with their Vinsmart subsidiary. Vinsmart's goal was to become Vietnam's first globally recognized smartphone brand.
Just four months after their founding, the company released four phones priced from about $110 to $270. Which seems a bit fast.
In 2020, they announced a deal with AT&T to sell 2 million phone units into the US. The key technology feature for these phones would have been a camera positioned under the screen.
But a few months later in 2021, Vinsmart announced that they would withdraw from the smartphone and television businesses in order to focus all their resources on cars.
2020 seemed to have been a year of reckoning for Vingroup, as the company also considered selling its education and health units then in light of the pandemic. Though it seems like they ended up keeping them.
VinFast
VinFast was founded in September 2017 as Vingroup's 7th core business.
Its vision is to become one of the world's leading electric vehicle companies - producing cars, buses and scooters.
They quickly began work on a highly automated factory in an economic zone in Hai Phong City. At about 335 hectares large, it would be the world's third largest such facility.
Then in October 2018, they unveiled a prototype sedan and SUV at the Paris Motor Show.
To acquire technical competency, VinFast struck partnerships with foreign companies like General Motors and Siemens.
The company intends to export their production around the world, including the United States. In 2022, they opened six flagship VinFast stores in California.
Cars in Vietnam
VinFast's efforts come in context of the Vietnamese government's attempts to ramp up their industrialization efforts.
Cars have been “manufactured” in Vietnam for a while. Over 17 automakers have entered the Vietnamese market since 1995.
However, almost all of these are “knock down assembly” type partnerships in which a foreigner like Toyota ships over a kit for a local assembler like Thaco - Vietnam's largest auto manufacturer - to put together.
This isn't the worst situation ever, but it does relegate the Vietnamese native partner to simple manual labor. So the government wants to absorb technology and localize more production, but local content ratios have consistently failed to hit their targets.
The government’s goal was to hit 20-25% by 2005, and 40-45% by 2010. As of 2022, they have stayed at 7-10% - the same as they were in 2016. It is a sign of Vietnam's subpar and persistently lagging performance in car part manufacturing.
Challenges
As a nimble, private enterprise, Vingroup seems capable of competing in the fierce EV auto market. But there are also a lot of challenges.
First, Vingroup is big but it might not be big enough. In 2021 the whole group generated about 125 trillion Vietnamese Dong. Which sounds like a lot but is about $5.3 billion dollars.
That is less than what Tesla made in a single month - based on 2022 revenue.
VinFast can't rely on its parent for money. So it has tried various methods to raise funds - SPAC, IPO, etc. And that apparently has been challenging.
In 2022, the company moved its Financial HQ to Singapore so to better attract investors.
Second, the company does not have the technical expertise and the companies who have it are pretty good at withholding it.
Many places have tried foreign partnerships to jumpstart their local automaker industries - Taiwan, Thailand, China, Australia, the list goes on. Thus far, the list of native automakers these partnerships have nurtured is pretty small.
Furthermore, VinFast can’t much rely on its local market. The Vietnamese car market is relatively small. Based on 2021 sales, Vietnam’s car market lags behind those in Thailand and Malaysia despite a far larger population.
This means VinFast has to rely on export sales to reach scale - a difficult proposition since the global EV markets are already so competitive with BYD, Tesla, VW, and everyone else in the pool.
Two Paths
There are a million branching pathways from here. But I want to look back at two interesting waypoints.
The first is Samsung Motors. Samsung had long wanted to join Hyundai and Daewoo in the Korean auto space - striking an alliance with Nissan for technical assistance.
They built a massive $6 billion automaking facility in Busan and started shipping cars just in time for the Asian Financial Crisis.
The crisis upended plans, forcing the car maker to sell itself to Renault before it could find its niche in the market and achieve scale.
As part of the Renault-Nissan-Mitsubishi Alliance, things at Samsung Motors - now Renault Korea Motors - have been doing quite well.
The second path is that of another real estate development company that recently jumped into the electric vehicle space - China Evergrande New Energy Vehicle Group Limited.
Evergrande had been China's biggest real estate developer. And kind of like Vingroup, they have also diversified into various, unrelated businesses.
Their EV expansion was especially random. The subsidiary used to be a health clinic chain before literally switching gears. My guess is that Evergrande was trying to soak up local subsidies in line with the government's push towards electrification.
As their parent company struggled with literally hundreds of billions of dollars of liabilities and fell into bankruptcy, Evergrande New Energy ambled on.
Finally in October 2022 they announced deliveries of their first EV model - the Hengchi 5 SUV. The SUV was first shown at a Concept Event in 2020.
A month and a half later in December 2022, Reuters reported that Evergrande New Energy is suspending mass production of the Hengchi 5 due to a lack of new orders.
The whole situation has been ominous considering that Vingroup also depends on real estate development for their core revenues as well - though their debt situation isn't anywhere near as bad.
Conclusion
We shall see if VinFast ends up being more like Samsung Motors or Evergrande New Energy Vehicle Corp.
Vietnam's search for a domestic carmaking champion is reflective of the Vietnamese government's overall industrialization challenge.
In 1996, the Communist Party of Vietnam declared its intention to turn Vietnam into an industrialized economy by 2020. 20 years later in 2016, it had to admit it failed to do so.
Reforming the country's manufacturing base has been hard with much of Vietnam’s economy populated with large and slow-moving state-owned enterprises.
The Vietnamese government is starting to lean more on private enterprise to drive reform and deliver growth. Hopefully Vingroup can lead the way for the rest of the country in taking that huge step.