Vietnam's private sector has by and large impressed foreign businesspeople with its vibrancy and strong entrepreneurial spirit.
Last month the private equity arm of Standard Chartered Bank, SCPE, announced it had acquired a significant minority stake in the Golden Gate Group, a Vietnamese restaurant chain operator, through an equity investment of $35 million. While far from being the leading private enterprise in Vietnam, the Golden Gate investment was nonetheless dubbed a smart move on SCPE’s part and is another clear sign that fund managers and private equity firms have been impressed by the performance of the country’s growing private sector. “We are excited to have the opportunity to partner with one of the highest quality management teams in the region, a team that has demonstrated a remarkable track record of developing successful dining concepts within Vietnam,” said Mr. Bert Kwan, Head of Southeast Asia at SCPE.
The private sector has undoubtedly become a tremendous foundation for the rise of Vietnam, making a substantial mark on the country’s economy and the lives of its people. Strong private enterprises cannot be created overnight, but Vietnam has actually made pretty quick progress. The Golden Gate Group is just one of a number of names, such as the Hoang Anh Gia Lai Group and the Masan Group, that are admired by their foreign competitors.
Since Vietnam is now well on the way to integrating into the global economy, doing business with private enterprises is no longer a new experience for foreign business leaders and fund managers. When it comes to describing the country’s private enterprises, there is a common view among foreign entrepreneurs that their development since the early 1990s has been nothing short of spectacular. “The private sector is many things, from the Masan Group to street traders and everything in between. Their strength is in entrepreneurship,” said Mr. Hans Christian Jacobsen, Managing Partner at PENM Partners, which has equity investments in Masan, the Hoa Phat Group, and Eurowindow.
The entrepreneurial spirit is certainly a feature of the local private sector. The owners of private enterprises, as acknowledged by foreign entrepreneurs, have an incredible amount of motivation, optimism, energy, and desire to succeed. They are not scared of risk and they see things differently. Besides, owning and managing a private enterprise is rewarding psychologically, as owners are responsible for their own successes and there is freedom to make decisions, not to mention that the financial rewards can be quite high.
Vietnam’s private enterprises, according to Mr. Andy Ho, Managing Director & Head of Investment at VinaCapital, are characterized by being able to reflect consumer preferences in local markets, leading to a loyal and expanding customer base. “Private enterprises must have their finger on the pulse of customers in order to do well,” he said. Importantly, they respond to real needs among their customers and serve a useful social function while making money for shareholders. He also believes that private enterprises make efficient use of production technologies and have well-trained workforces, all of which contribute to their success.
Shareholders tend to be involved in the management of most private enterprises in Vietnam. In many start-ups for example, shares are often held by family members. “Private enterprises are trying to maintain good corporate governance with the appointment of high-quality Boards of Directors and Management,” believes Mr. Ho. “We have participated as directors on many Boards and our opinions are always taken seriously by management.”
Since Vietnam launched its “doi moi” process in 1986 and encouraged the development of private enterprises, the sector’s role has become bigger and better and appreciated by the public. Their extraordinary success over time has become the driver behind authorities’ ongoing efforts to accelerate the equitization of State-owned-enterprises (SOEs). But there are also a wide range of issues facing the local private sector.
For a start, private enterprises in Vietnam often demonstrate a lack of management skills. For example, management broadly includes planning, leading, organizing and controlling across all the major activities of a business. Private enterprise owners generally have one or a few strong skills that prompt the start-up of the enterprise, but other skills in the important areas of finance, sales and marketing, and human resources are generally lacking. “The greatest challenge for most private enterprises is to build their management teams and apply best practices, and most don’t do this due to a variety of excuses and concerns,” said Mr. Chris Freund, Managing Partner at Mekong Capital.
More importantly, private enterprises lack access to credit and capital at reasonable cost, and a level playing field in obtaining credit is very much needed to provide financial resources for business expansion and production improvements. Overall, business insiders say that private enterprises can be created even if their owners have little money or experience. But due to those reasons, the majority of start-ups fail and those that do survive don’t always reach full potential.
When an enterprise reaches saturation point in its home market it makes sense for it to look for growth opportunities overseas. “This will come as private enterprises grow bigger and stronger; once they are the biggest and best in Vietnam they will expand, first to Southeast Asia then to all of Asia and then maybe even further,” said Mr. Jacobsen.
“The overwhelming weakness of Vietnamese private enterprises is that they haven’t invested in developing strong management teams, through recruiting experienced managers from multinational companies, investing in training, hiring international experts to introduce best practices, etc.”
Mr Chris Freund, Managing Partner, Mekong Capital
“Vietnam’s private enterprises are characterized by (i) being a good reflection of consumer preferences in local markets, leading to a loyal and expanding customer base. They respond to real needs among their clients and serve a useful social function while making money for shareholders; (ii) making use of efficient production technologies and a well-trained workforce; and (iii) maintaining good corporate governance with the appointment of high-quality Boards of Directors and Management.”
Mr Andy Ho, Managing Director & Head of Investment, VinaCapital
For example, the trend of overseas investment has gradually increased in Vietnam, with the participation of more and more outstanding private enterprises. The Hoang Anh Gia Lai Group has been in the process of developing a major building project for a complex in Myanmar’s capital Yangon, which will include a five-star hotel, a shopping mall, office blocks and residential apartments. Besides Myanmar, the group’s foreign investment in Laos, Cambodia and Thailand amounts to more than $1 billion. Another major investor is the C.T Group, which was one of the first Vietnamese enterprises to enter Myanmar. Last year the group began construction of a $150 million residential-commercial complex for lease and invested nearly $24 million in two factories in the country that make wheat flour and instant noodles.
However, when private enterprises consider expanding abroad, the prospect of having to contend with two types of formidable competitors often gives them pause. One type is global enterprises, which have large resources and strong brands. The other type is the local players in foreign markets, which have a strong understanding of consumer needs and enjoy close relationships with suppliers, distributors, retailers, and sometimes government bodies. “I would say the strength of Vietnamese private enterprises is that they value the importance of relationships and are willing to take risks,” said Mr. Freund. “But this is not enough to make them internationally competitive.”
Global expansion is not necessarily the best way to grow for Vietnamese private enterprises but moving abroad can protect them against the risk of any decline in local markets and, more importantly for some owners, significantly improve their overall growth potential. Basically, their approach should focus on finding an opportunity that lies in a market space between what global giants find attractive and what local firms find feasible.
The most important thing Mr. Freund sees for Vietnamese private enterprises “going to the big sea” is to start by finding mentors in other countries who have already built similar businesses and get them involved as coaches or mentors and maybe even as shareholders or directors. “Vietnamese enterprises would benefit greatly from getting overseas experts involved as consultants, and especially by getting value-added independent directors on their Board of Directors,” he said, adding that enterprises like MobileWorld and FPT are in the process of doing just that. “I also think that Vietnamese enterprises should be more proactive about hiring foreign managers who can introduce best practices,” he said.