How Investors And Business Owners Think About Opportunities: The Investing and Business Value Proposition of Vietnam

Susan
By Susan December 11, 2017 23:43

How Investors And Business Owners Think About Opportunities: The Investing and Business Value Proposition of Vietnam

The first thing that hits you is the heat, then it’s the number of people in such a relatively small space and then, the biggest thing of all is the chaotically efficient (or efficiently chaotic!) experience on the roads. I had landed in Ho Chi Minh City, the capital city of Vietnam with 10 million citizens and 5 million motorbikes.

 

How I researched a country for business opportunities

while on holiday

 

On the first morning of my ten-day trip, I enjoyed reading the Saigon Times over a Vietnamese coffee. I was particularly intrigued by this story: “Trade surplus reaches $2.18 billion”. One key thing stood out:

Data from the General Department of Vietnam Customs show Vietnamese exports to China posted the highest growth, compared to exports to other Asia-Pacific Economic Cooperation (APEC) member economies in January-October, at 52.9%.

From my childhood, I’ve observed the impact on an economy of selling to countries that are more developed than your own. Ireland has had exponential sales to the UK, the US and Europe over the past thirty years. This has had an enormous impact on our own economic growth, our increasing ability to serve those markets (as the country reinvested the money in building productivity and the smart economy), as well as the halo effect of being more attractive as a foreign direct investment destination.

Vietnam is not only exporting to one of the fastest growing economies in the world with a quickly expanding middle class, it’s outperforming its peers in its growing ability to do so. Economic development in Vietnam is striking, everywhere you look. There were cranes all over Ho Chi Minh City. I lost count of the amount of very large hotel resorts and complexes that I saw in construction between Cam Ranh and Nha Trang. The variety of accents that you hear while sitting in a tailoring shop in Hoi An is a testament to Vietnam’s international appeal.

 

A price advantage, a differentiating factor, or both:

how to compete in a marketplace

 

One of the earliest things I ever learned in business studies is that you can compete in a marketplace either because you have a price advantage, or because you have some differentiating factor for which people are willing to pay more. One of the most recent things I learned about strategy while doing my Masters is that, in today’s competitive economy, you need to “blue-ocean”: you need to have both cost effectiveness and differentiation to make the competition irrelevant.

Vietnam truly has both when it comes to their evolving tourism offering. The cost of wages, food, transport, accommodation, clothes, hospitality, etc., is so much lower than their main trading partners China, South Korea and Japan. In addition, their tourists come from China, Russia and Europe. Vietnam offers a low-cost destination with an exceptionally rich tourism experience. In just ten days, I was able to enjoy:

  • a luxurious spa experience at iResort close to Nha Trang,
  • the captivating gardens of Da Lat City from a cablecar,
  • breathtaking flora and fauna,
  • the incredible experience of learning about the Vietnam American war in the Cu Chi tunnels by the Saigon River,
  • the deep spirituality of Marble mountain in Da Nang and the jaw-dropping pagodas,
  • driving a moped through the An Bang countryside,
  • the unforgettable sights of Hoi An at night,
  • the spiralling roads up through the Vietnamese hillside.

The best thing of all about Vietnam is the people. They’re happy, welcoming, smiling, helpful, gentle and great craic!

 

How to get exposure to a new-to-you country

with Exchange Traded Funds

 

Within a couple of days of being in this wonderful country, I had observed many things that had suggested to me that this growth trend would continue, and I wondered how I might invest in the country. According to the World Bank, “Vietnam now is one of the most dynamic emerging countries in the East Asia region. Since 1990, Vietnam’s GDP per capita growth has been among the fastest in the world, averaging 6.4 percent a year in the 2000s.”

Vietnam used to be a centrally planned economy and since its shift to a market economy, it has progressed from widespread poverty to a lower middle-income country. I would love to see its fabulous people prosper and perhaps we too may look at doing business there in the future, so I set about looking for an Exchange Traded Fund (ETF).

An exchange traded fund is a fund that tracks an index and is a remarkably efficient way of availing of the full investability of a country, rather than picking and choosing stocks in an environment that you are not familiar with. Given the World Bank’s quote about Vietnam’s dynamic economy, I thought this would be easy, but I found it actually rather difficult. There are several emerging market ETFs that had some part of the fund exposed to Vietnam, but I was looking for an ETF that exclusively invested in the country.

I usually find what I’m looking for from the choice offered by the three biggest ETF providers: iShares, State Street’s SPDRs and Vanguard. I couldn’t find anything close to what I was seeking.

I arrived at the Van Eck “VNM” fund and saw that this had 75% of its assets invested in Vietnam-domiciled companies, and the remainder in companies that are incorporated outside of Vietnam but have at least 50% of their revenues or related assets in Vietnam. In addition, the fund may invest in securities of companies that (i) are expected to generate at least 50% of their revenues in Vietnam or (ii) demonstrate a significant and/or dominant position in the Vietnamese market and are expected to grow.

 

How I decide to pick an ETF: my checklist

 

I also looked out for several other factors. The Van Eck “VNM” ETF has 36 stocks. This offers a lot of diversification; I couldn’t have achieved that much diversification if I had tried to pick out a handful of stocks in a business and financial environment that I’m not familiar with yet.

The cost of the fund is 0.66%, which is on the high side, but there is little I can do about it given the lack of choice. In the last year, the fund has delivered 12.66%, and much of that was driven by the past month’s performance of 7%. The fund had a negative three-year performance and has delivered 3.19% every year for the past five years, including its annual dividend. I could have done much better in the US or the EU market. However, my intention is to leave this fund for long term, so the future is far more important than the past here.

I looked at the sector diversification and saw that the money is spread right across a range of defensive as well as cyclical industries, which I was happy to see. I also wanted to check the liquidity of the fund (my ability to turn my holding into cash) and saw that it has an average daily volume of around 190000 shares.

At that point, I decided to go right ahead and place a small part of my portfolio into this ETF and leave it alone for the long term. One might wonder why I feel that I can invest in all of Vietnam with only 36 stocks. The thing is that I don’t have much choice at this stage. I can’t invest directly in Vietnam’s growing SME architecture. There aren’t any sector-based ETFs given the country’s stage of development. Over the years, I expect this will change and will remain alert to this possibility.

 

And how about doing business in a new country?

Business to consumer, or business to business?

 

I also thought about the prospect of doing business in Vietnam and may consider this option in the future. Indeed, there is a growing economy, growing investment and a people that is growing in confidence.

However, it’s important to bear a couple of things in mind. If you’re thinking about selling business-to-consumer, the average salary in Vietnam is very low in comparison to Western countries. According to TradingEconomics, wages in Vietnam increased to 5080 VND Thousand/Month in the fourth quarter of 2016 (from 4933 VND Thousand/Month in the third quarter of 2016). At today’s exchange rate, that equates to about €200 per month. When I asked locals, most people told me that wages ranged between $200 – $300 per month.

Therefore, if you’re thinking of selling your products or services into that market, you need to be aware that your cost base may be very different to the price point that is suitable for the market now.

You could of course look at this another way and see that Vietnam offers great opportunities to employ people and so you could build your offering from there. After all, according to “Going Global”, Vietnam’s middle class is the fastest growing in Southeast Asia, reaching 33 million by 2020. The median age in Vietnam is just over 29 years. Nearly 70Vietnam by night Susan Culleton percent of the population is between the ages of 15 and 64. And about a quarter of Vietnamese are 14 years old or younger.

It is important to remember that Vietnam is developing strongly as an economy and there is a huge amount of international interest in the region. You will see many household names and corporates located in Ho Chi Minh City. This has boosted wages for professional services and, naturally, pushed up the monetary reward for staying in education for longer.

What’s more, global platforms have empowered locals to avail of global wage levels. As a quick-and-dirty experiment, I searched for graphic design services on Upwork and filtered specifically for profiles in Vietnam. I then did the same for the United Kingdom and found that UK prices were approximately 1.5 times that of Vietnam. Therefore, the differential on a global site like Upwork is much smaller than employing locals in their own environment.

 

That’s exactly what trade missions and trade agencies are for:

testing the waters in a new country

 

On the other hand, you may have a business-to-business offering and in my experience, the absolute best way to evaluate and then enter a new market is to stand on the shoulders of giants. In other words, go on a well-organised trade mission and leverage the experience, contacts and cost-effectiveness of a larger entity. For example, London Chamber of Commerce is planning a trip to Hanoi and Ho Chi Minh City in January 2018. Based on my own experience with this fantastic organisation in September 2015 when I participated in their mission to Dubai, Abu Dhabi and Sharjah, I can’t recommend this route (literally!) enough.

I also suggest that you engage with other opportunities that are going on while you’re there. For example, when I went on the trade mission to the UAE in September 2015, I noticed that, on the day before that mission started in Dubai, as luck would have it, the Irish Business Network Dubai had their annual conference. I went there a day early and met lots and lots of people before picking up with the London Chamber group. Eventbrite, Meetup and local event sites can be very helpful when in a new city for a business trip. I’ve used these to great effect over the years.

(Read: How to build your network in a new city, starting from absolute zero)

It is also a good idea to reach out to your local Embassy in a city that you’re travelling to. They tend to be very well connected, be a source of rich market intelligence and of course, your first port of call if you get into difficulty or need any legal direction.

Perhaps you can’t find a trade mission or you simply want to get some more information about this market first. The European Vietnam Business Network has a fantastic “SME Starter Kit”. This “covers a wide spectrum of topics ranging from Vietnam’s economic structure, legal framework, market entry conditions, investment, infrastructure, tax, intellectual property rights, finance, labour, business culture to dispute settlement.” In addition, they have an enquiry portal for any questions that you can submit directly to them.

That’s my process to think about new investing and business opportunities – what’s yours?

Positive Economist

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Susan
By Susan December 11, 2017 23:43