Thoughts on the Vietnamese economy

September 24, 2019

F1 and Tourism

Just saw this article about the upcoming F1 race in Hanoi (upcoming in the sense that it is April 2020). It will be hosted by VinGroup, which is both surprising and not. This will be the first time that Hanoi hosts the F1. Notably, a bunch of the F1 sites in developing markets have fallen by the way-side over the years. Specifically:

• The Malaysian Grand Prix was an F1 race 1999 to 2017 (and an prior race went back to 1962 in Singapore). The government decided to stop hosting it because: “The race costs £50 million just to win the rights and the government were unable to justify the ongoing spend. ‘I think we should stop hosting the F1. At least for a while,’ said Malaysia’s youth and sports minister Khairy Jamaluddin. ‘Cost too high, returns limited. When we first hosted the F1 it was a big deal. First in Asia outside Japan. Now so many venues. No first mover advantage. Not a novelty.’”

• The Korean Grand Prix was held from 2010 until 2013. It looks like there was a dispute between the Korean organizers and F1 management. In 2012, the Koreans were already saying it was too expensive. “This year [2012], the local organizer expects a loss of more than $26 million.”

• The Indian Grand Prix was another short one - 2011-2013. This time it was tax issues with the government - they wanted to characterize the race as entertainment and levy an entertainment tax. Also, “the organisers have already been struggling with rising costs and poor revenues.”

I am sure there have been more countries that hosted races and no longer do, but basically it looks like figuring out how to make a profit is a big issue. The F1 parent machine gets lots of money from all of the fees they charge. The organizers also have to pay to put on the race and to market the race. That doesn’t count the cost to build a track or fix up the street for a race. For example, Abu Dhabi built the Yas Racetrack for $1.3bn. Even a street race can cost $1bn for 10 years of hosting. Vietnam’s race is expected to cost $200 million, all funded by private companies.

There is a lot of revenue to justify these expenses: TV rights and ticket sales. These are a lot, but not always enough to cover the costs. And in a country where it is hard to charge very high ticket prices (like India and Malaysia) and TV rates are lower, it just can’t be justified.

And sponsorship revenue is falling, not helped by restrictions against tobacco companies sponsoring teams. That means that teams have moved on to tech (whose interest is…disappointing), fashion and beverages (Red Bull and Martini being the big ones).

But of course, the worldwide audience for these races is high: 490 million people in 2018, according to the F1 organization. Although that seems like a crazy and untrue number. Supposedly it fell 18% in the past 11 years, which, if I am doing my calculations right, would mean that almost 600 million people watched a F1 race on TV back in 2007. That’s more than 9% of the world’s population. For a race that is only held in 21 countries and hasn’t been consistently held in India or any of the Americas. Seems crazy to me, and very unlikely. But I guess they have internal numbers.

Why is Vietnam doing this? Vietnam is expecting a boost to tourism revenues from all the people visiting, and it wants to show the world that it is a real country that plays with the big boys like Japan, Europe, the US, etc. And Vietnam has been trying to host more of these worldwide events, just like the Trump-Kim summit earlier this year.

Unless they got a great deal with F1, VinGroup will surely money on this, but they can write it off as marketing. And the government will be happy with them.

I have my fingers crossed.

September 23, 2019

Vietnam beats renewables goal a year early

Sorry about the missed post on Friday, I have been busy working on the website. Hopefully things will be finished shortly.

Big news out from Vietnam - the country has already beat its target for energy from renewables. The government had set a target of 7% from renewables by 2020, and it is already at 9%, according to this story.

As of July the country's solar energy capacity was 4,543 megawatts (MW) and wind power capacity was 626.8 MW, Le Hai Dang, a strategy board member at Vietnam Electricity (EVN), said at the opening of the 2019 Vietnam Renewable Energy Week held in Hanoi on Tuesday.

Looking at a few different sources, it looks like right now the government would like to have 21% of energy coming from renewables by 2030. Those renewables include biomass, small-scale hydro, solar and wind. Of that 11% of the total energy mix should be wind and solar.

Part of the big success is due to this new solar farm in the south, about 100 km from HCMC, and which will power 320,000 households. There are 10 projects in this one province, Tay Ninh, with 9 of them already in production. Another province, Dong Nai, also in the south, is proposing 8 projects with 5,400 MW capacity on the Tri An lake. The big rush to approve these projects by the end of June was due to the expiry of its feed-in-tariff (FiT) agreement:

Vietnam saw rapid construction of new renewable power plants in the first half of this year as investors sought to beat a June 30 deadline to enjoy price incentives of 9.35 U.S. cents per kWh feed-in tariff for the next 20 years.

This is despite somewhat weak PPA terms that have kept some investors away (as I have heard personally and as the IEFFA reports). The big concern, and we have talked about this before, is that the utility EVN can terminate the agreement or curtail buying electricity if the grid doesn’t hold up. Also, “international investors have lacked confidence in the credit standing of…EVN.” But even with these, the companies have been able to get these plants built. I would assume it is because the pricing is good and they have reassurances that the grid will be able to take any electricity produced. EVN is starting to work on upgrading its grid, so that probably helps.

As I said, the FiT ended June 30, and there is not yet a new feed-in-tariff (FiT) agreement from the government, so we will see a slow down in new capacity builds in the near future. There is a draft FiT right now, but it hasn’t been approved.

Long term, fossil fuels (coal and natural gas) are tough competitors for renewables in Vietnam. First, the country has a fair amount of coal plants, and they are somewhat cheap. Because of that and their need for lots of energy, Vietnam doubled coal imports in the first four months of the year. Tied to that, expectations are for natural gas prices in the US to continue to be extremely low (less than $2 per mmbtu). This has already lead to the gas-powered electricity plant we talked about in the last post.

I really hope that the government continues to prioritize renewables through their new solar FiT, for the sake of health, climate change, but also the current account balance. Ultimately, renewables are going to be cheaper than the alternatives. But it might take some time before everyone realizes that.

September 19, 20190

Even more on gas

Tech note: the blog is loading very slowly because of the way that I set it up (as one long page). I am working to fix that. One day you will open to a page that loads more quickly and is a completely different format. Until then, sorry about the snail’s pace of the page.

I grew up in Louisiana, USA, and I have a very soft spot for the state (motto: Thank God for Arkansas!). It has it’s problems, and my views is that it is partly due to the oil and gas industry, which has just such perverse effects. There are a lot of rich people in good times, and that trickles down some, but then there is a bust, and everyone gets poor. Right now we are coming off the fracking riches.

But because fracking has drastically changed the natural gas market in the US and driven down natural gas prices (see price chart on right), two companies have built LNG terminals in the state. One in Baton Rouge just signed a long-term contract with a new power plant in South Vietnam.

The contract with Delta Offshore Energy and the government of Bac Lieu province will be for 2 million metric tons of LNG annually for 20 years.

You can read a press release here about the project, which is expected to begin operations in 2023. Total capital invested is $4.3 billion according to this article.

So big investment in power plants in the south. Pretty interesting. Also shows how the US gas market is searching out new markets and is successful in finding them.

Natural gas is better for the planet than coal but not as good as renewables. But given that Vietnam is drastically increasing its greenhouse gas emissions at the same time it is suffering from climate change, this may be the only way to limit that increase.

September 18, 2019

More on oil and gas in the South China Sea

A while ago I read Daniel Yergin’s book, The Prize, which is all about oil and the oil business (to be honest, I didn’t read the whole thing: it’s long!). Two things stuck with me: 1) Germany and Japan basically lost World War II because they didn’t have enough oil/fuel. And 2) Russia lost the Cold War because oil prices fell and wrecked its economy.

I starting thinking about that today because I am seeing stories about China, South China Sea and its efforts to stop Vietnamese oil and gas production. Or I guess, China needs oil, and the South China Sea is the closest oil field readily available.

The biggest near-term threat to Vietnam’s efforts in the sea is to its Ca Vau Xanh project, or Blue Whale, a project that Exxon is working on with PetroVietnam. There is speculation that China is putting pressure on ExxonMobil and/or Hanoi to stop the project. The speculation comes from social media, news outlets and and experts writing in these outlets. An alternative theory is that Vietnam is haggling over gas prices, and that is stalling the project. These negotiations may be happening but they are very unlikely to stop the project - Vietnam needs it too much. .

We talked yesterday about Vietnam being a small new fuel importer, but that small is going to turn into big if projects like Blue Whale don’t go through. Plus, while it is somewhat easy (albeit expensive) to import fuel, you have to build power plants that can convert that fuel into electricity to power your booming manufacturing base. That is already a problem in Veitnam’s south, and is expected to result in country-wide shortages in 2021. According to the this article:

Vietnam Electricity, PetroVietnam and Singapore’s Sembcorp are currently holding talks to build and operate two power plants to convert the gas [from Blue Whale] to 2 Gigawatt of electric power. This would amount to ten percent of Vietnam's current total power demand.

Vietnam needs this project. And China really doesn’t seem to want Vietnam to have it. Needing to have physical access to the oil wells seems a bit weird to me these days. Oil and gas are globally traded. And, while occasionally expensive, have generally been available. I guess in the case of war that’s not true (remember Yergin), but it seems like war is a ways off.

So what would happen if Exxon pulled out:

• Gas prices would like rise, because Vietnam would have to import more fuel.

• Manufacturing businesses would suffer, because they would face higher costs for electricity, and, if shortages come through, potential lack of stable electricity supplies.

• There would also be pressure on the current account side, because the country would have to import more fuel.

• And pressure on the fiscal budget. According to the last article, the Vietnamese government is expected to make $20 billion from this project. That’s a lot of ducats that need to be replaced.

• Vietnam’s use of coal would jump, because there is no domestic replacement for this gas. But there is domestic coal, a fair amount of it, in fact.

• There would be more investment in renewables. This would be very positive in the long term, but will be costly for Vietnam in the short term. And doesn’t replace the lost revenue.

• There would likely be more riots against Chinese companies, because regular Vietnamese would think (rightly or wrongly) that China pressured the company to pull out.

Vietnam is not able to pull out of this deal, so I expect that from the government’s side, it will do whatever it can to make sure it still happens. The US government also wants it to happen. ExxonMobil’s calculation is more difficult, because China is such a large importer of fuel. It will be interesting to watch.

September 17, 2019

Oil prices

I probably should have written about this yesterday, but I didn’t. Anyway, oil prices are way up (15% yesterday, although down 1.5% today) after the attack on Saudi Arabia’s oil infrastructure. And if the US decides that it needs to attack Iran, then we could see more spikes.

But looking closer, I am not sure that we need to be so worried. First, oil prices are not that high. Brent was above $70 per barrel at one point yesterday, but well below where they were in August 2018 (close to $90).The world didn’t explode then.

We are seeing slowing GDP growth plus increased investment in renewables and public transport globally, so I am not sure that we are going to see tons of pressure on oil prices long term. That means this might be a big spike for a few months but likely well below the highs we saw back in the early teens. Remember from February 2011 to September 2014, oil prices were consistently above $100 per barrel. Of course, predicting oil prices is a mug’s game, but, what the hell, I don’t think we are going to see that $100 price again.

Second. Vietnam just doesn’t import that much oil. According to the CIA (!), it imported just 23,700 barrels a day, or 8.7m a year, which would cost the country $606m. If the oil price went up to $80 per barrel, then that would be $692m. Vietnam is a net importer of fuel, and the trend is negative (one reason why I believe the country should invest in renewables), but it is still relatively small. Net fuel imports were about $4bn in 2017, which pails in comparison to the almost $14bn in net electronics imports (most of which likely went into goods that they they exported). The country has a big current account surplus, so they are fine if oil (which is well below 10% of merchandise imports) rises a little.

So ultimately, Vietnam should be able to weather this much better than other countries. For example, Japan imports 3.2m barrels a day, so a $10 increase in oil prices raises its yearly import bill by $11.6bn. In ASEAN, Indonesia is the largest importer at 907,900 bbd, so that same $10 increase costs it $3.3bn a year. That’s low compared to its GDP, but still a lot of money. Thailand would face a similar bill, but on a GDP that is about half of Indonesia, so it’s even worse for them.

Basically, Vietnam is in better shape than its ASEAN neighbors in regard to energy.

September 16, 2019

Work patterns and joining the labor cycle at different points

Let’s start with telephones: In many developing countries, it used to take forever to get a telephone line. In India, a customer requested a telephone line in 1965, and by 1983, still had 5 more years to wait! Egypt, where I lived, was similar. It was key to rent a place that actually had a telephone, because there was no way you would get one. After many years, mobile phones arrived, and boom, everyone had one. In 2015, there were just 26 million landlines, compared to 970 mobile phones in India. Basically, India had a sclerotic telephone company that couldn’t service the country (for both economic and regulatory/monopoly reasons), and then mobile phone companies were able to leapfrog the fixed line company very quickly for much less - just a transmission station rather than lines to every home.

Electricity is the new frontier: We are seeing a similar thing with solar electricity generation. It can be very expensive to bring in power lines to remote villages in Africa or India, but a solar panel allows for cell phones to be charged, lights to work at night and water pumps to be electrified.

Vietnam has been a beneficiary of these trends as well. There were only 14m landlines in Vietnam in 2017, but 128m mobile phones (more than the number of people, because some people have more than one). There is even off-grid renewable electricity in Vietnam.

This is a bit of a jump, but another area where we might be seeing some of this leapfrogging is in retail. The formal retail market in Veitnam is growing (as I talked about last week with VinGroup/VinCommerce), where consumers are moving from traditional markets to formal stores like grocery stories, etc. But in the West, we are hearing a lot about the “retail apocalypse,” with a number of stores closing as e-commerce grows.

Now there is a study out by the Institute of International Finance that looks at this through the lens of employment and productivity:

Job losses in US retail have been a persistent feature of the US labor market for many years…The underlying issue is a wide efficiency gap between “brick-and-mortar” retail and e-commerce. We calculate the number of employees needed to generate $1 million in sales per year in different parts of the retail sector. Department stores need 8 employees, while electronic shopping & mail-order houses, the category that captures e-commerce in the establishment survey, need as few as 0.6.

Now this doesn’t count all of the people that are involved in delivery the products to the final customer. Right now, getting to the store and picking up product is all from the customer. Going forward, this will be partially taken over by delivery people, who are likely to be paid less (but maybe not too much less) than retail salespeople. So fewer people, paid a bit less.

As e-commerce sales grow, there will be fewer jobs in brick and mortar retail that are unlikely to be replaced by delivery people 1:1. And retail employs a lot of people. In Vietnam, the service sector makes up 34.4% of all employment, and wholesale and retail trade makes up about 20% of all employment, the third largest sector (after agriculture and manufacturing). According to the World Bank (and we have talked about this before), farm workers made up 65% of the labor force in 2000 but that declined to 46% in 2015. That’s a gigantic decline, and those people have to go somewhere! And this is only the start.

Right now, most go into manufacturing, but that will depend on Vietnam continuing to be attractive to manufacturers, and the trade war puts some of that at risk. Other could go into retail stores, which requires not much education (good for rural workers who don’t have as much access to secondary or tertiary education).

But Vietnam may find that these retail jobs just aren’t there, because they have been made redundant by e-commerce. This is no idle threat: e-commerce gross merchandise value has grown from $400m in 2015 to $2.8bn in 2018. And it is expected to grow to $15bn in 2025.

This should be helped by a growing delivery market. We can see this in online transport and food delivery, which was $200m in 2015, grew to $500m in 2018 and is forecast to grow to $2bn in 2025. So some jobs will go into delivery, but the live of a delivery person, even if paid as well, is just not as good as a store salesperson.

To counteract this, Vietnam really needs to educate people so that they can find better service jobs and also hopefully higher-end manufacturing. Having local innovation would be a key part of this. But that’s quite up the curve from where the country is now. Korea did it, although had a better head start and an industrial policy that was very smart. I am not sure that I am seeing that in Vietnam. At least not right now.

September 13, 2019

Big news: Central Bank lowers interest rates!

So the big news today is that the Vietnamese central bank cut policy rates by a quarter of a point to 6.0%. This is the first cut since 2017. And back then it had been almost 2 years before that the rate had been cut (by 50bps). So this is a big deal. And it appears mainly driven by concerns over global economic conditions, not because of weakness in Vietnam’s economy. So what happened and why:

• The stock markets rose. Ha Noi (HNX30) is up 1.2%, while HCMC’s market (VNINDEX) rose a similar 1.14%. Stocks love lower rates, especially if the move isn’t especially a signal of recession (and even if it is).

• When rates fall, stock prices rise for a few reasons. Companies benefit a bit from lower interest payments, although it’s fairly marginal. Also, bonds will look less attractive than stocks on a relative basis (the return is less). Plus, the present value of future cash flows is a bit higher (it is discounted at a lower rate, which is positive for present value).

• The reason the central bank could do this is because inflation really is not a concern. Not in Vietnam, not in ASEAN (see chart to right), and not globally (CPI rose just +1.7% yoy in the US). Consumer prices rose 3.5% in 2018. This year doesn’t seem to be a concern - the forecast is below 3%.

• This is another example of a central bank focusing more on global trends than on local ones. We talked this in the context of the Fed yesterday, but it turns out that it’s true for every central bank.

• This might make it a bit harder to maintain the exchange rate, although there didn’t seem to be much stress on the currency market today. Why? Well, you might see investors less interested in buying Vietnamese bonds. If they aren’t buying bonds, then they aren’t buying the currency, and the currency might fall. But the VND isn’t floating, so that’s not happening.

• This leads me back to my perennial concern: debt not denominated in VND is dangerous and doesn’t allow as much leeway with local interest rates. But no one is going to listen to me. Probably for good reason.

Congrats to all the people that made money on this surprise announcement!

September 12, 2019

Equity versus Debt

I saw this article in Bloomberg about capital raising in Vietnam. Quick summary: equity raising (at least through the public markets, like IPOs or secondary transactions) have been very small, but debt has grown quickly. According to their numbers, debt issuance has been $5 billion compared to just $45m for equity raised.

A few points:

• Debt issuance is always much bigger than equity raising. That’s the way of the world. In Vietnam, the external debt stock in 2017 was $104bn, compared to GDP of $224bn. That doesn’t include internal debt. Market cap to GDP was 52%, which is close to just the external debt of Vietnam.

• It doesn’t seem like all equity investments in public companies are being counted. The article says that only $45m has been raised in equity (I assume on the stock market in IPOs or secondary offerings), but we talked two days ago about $1.5bn in capital that Vingroup raised in 2019 so far. This vastly exceeds the amount that VinGroup raised in debt ($360m according to this article). Once you add in $1.5bn to $45m, it doesn’t seem so dire.

• It also discounts private equity investment. Just looking at startups, they raised $246m through June and are expected to reach $800m, according to venture capitalists. And that doesn’t count equity investments in non-startups.

• I think the point of the article is true: the stock market has not been performing up to expectations. We glanced on this a few days ago when we talked about correlations. The market (as evidenced by the VNM ETF) is up 7% (good), but not as much as the S&P (20%). That’s in the context of a booming Vietnamese economy that should be boosting earnings and therefore valuations.

• Debt priced in USD is rising, and that’s not necessarily good. We have talked about this before, the mismatch between currencies with so many emerging market economies issuing debt in USD, but their revenues are mostly in local currencies. I used to cover Turkey, and Turkish companies would always issue USD-denominated debt because rates were so much lower (5% vs 18%+). But the currency would then depreciate, so in TRY-terms, the debt was much more expensive. And it happened all the time. You would think they would learn! Oh, and the currency usually depreciates when the economy is doing poorly, so it’s a double whammy.

• Too much USD-dollar debt outside of the US can hamper Fed policy makers. Basically, if the Fed raises rates, then these companies may face a double threat of higher interest payments in an appreciating US currency. That would then hurt the economy, which, given globalization, will likely impact the US, forcing the Fed to lower rates. Or at least that is a path. The Fed probably won’t be raising rates any time soon, but they will at some point, and companies better be prepared for it.

September 11, 2019

Round up

There is a bunch of news about Vietnam, but nothing that is so big that it deserves a longer blog post. So today, I thought I would try to run through a few major stories:

Vietnam Airlines can now fly to the US directly: This is long time coming, but Vietnam Airlines can now officially fly directly to North America. Cities included are: LA, San Fran, NYC, Seattle, Dallas, Vancouver, Montreal and Toronto. The big surprise on the list is Montreal. People with Vietnamese-origin made up just 1% of the city’s population and less than 50,000 total in the province in 2016, and the airport itself isn’t highly ranked in terms of traffic. I guess they just wanted to be comprehensive. I am more surprised by the cities left off: Chicago and Atlanta (huge hubs) and Houston (hub plus large ethnic ties).

Now, I doubt that Vietnam Airlines will start flying to all of these places. I assume it will start with LA and then expand if LA works. But it will be good to finally have a direct flight to/from the US.

Metro delayed, again: One step forward, one step back for transportation. You can now fly direct to LA, but you can’t ride a subway in HCMC until 2021. And they are talking about opening in the fourth quarter, which all but guarantees it won’t open until 2022. And the second line won’t be completed until 2024-2026 (so 2027). Traffic is a real problem. A metro is a real solution. Let’s do better people.

Vietnam will buy more US goods: This was another unsurprising announcement last week (in a Sept. 6 Financial Times story), and something I advised the government to do (see post on September 4, and, yes, I am sure that high level officials of the Vietnamese government read my blog). The Vietnamese government is worried by Trump’s rhetoric, and so it is trying to be as vocal as possible about how it doesn’t like the situation either. It will buy as many American goods as it possibly can, or die trying, goddammit! I expect this will do nothing to the trade balance, but it might help modulate Trump’s anger, which is arguably more important.

Swine flu claims almost 5 million pigs: I love pigs, and hypocritically, I also love pork. So it really kills me that 4.7 million pigs have been culled in Vietnam so far because of swine flu. They don’t get to live, and we don’t get to eat them! That’s almost a fifth of the country’s pigstock. It will probably get worse before its get better. When I had written about this before (July 11), 2.9m pigs had been culled. And there hasn’t been any progress on a vaccine, at least as far as I can tell. This might get worse unless the farmers and government get a handle on it.

Foreigners also causing traffic accidents: Foreigners are involved in 500 road accidents a year in Vietnam. Now that’s basically nothing compared to the number of total traffic deaths (around 23,000 in 2016, based on WHO data). But still, not a good luck for the foreigners. The video attached to the article is pretty funny. Lots of Western guys basically saying: I didn’t know the rules! Or the guy that rented me the motorbike should pay! Or lots of Vietnamese do it too, why am I singled out! I do think that educating the rental companies would be helpful. But ultimately, if you drive in a country, you gotta follow their rules.

September 10, 2019

VinGroup gets even bigger

News came out today that VinGroup received a $500m investment from GIC, the big Singapore sovereign fund. It is specifically in the VinCommerce subsidiary. This is the second big investment in VinGroup. Back in May 2018, it invested $853m in VinHomes prior to the IPO. In total, VinGroup has received $6.9bn through 15 transactions since 2013.

VinGroup is a beast with a market cap of $16.2bn (VND373tr), and VinCommerce is just a small portion of the business. VinCommerce is, as far as I understand it, the VinFast and VinFast+ stores plus some e-commerce. VinFast are supermarkets (121 in total), and VinFast+ has more than 1900+ convenience stores. Revenue at the division was VND19tr in 2018, a small portion of the VND122tr in total revenue for VinGroup. However, it is growing fast. Revenues in 1H were already VND14tr. One caveat is that is very difficult to know if the segment details in the financials/presentation, match revenues that GIC invested in. It could be that the subsidiary is more circumscribed that the full segment shows in the presentation.

These stores are losing money right now. According to the 1H2019 segment profit/loss, revenues for “retail services” were VND15tr resulting in a loss of VND2.2tr. Even adding back depreciation, the loss would still be almost VND2tr. In the presentation, consumer retail in the presentation had slightly lower revenue of VND14tr, and a gross profit of VND2.1tr. That’s a pretty low gross profit for a grocery business (even if it accounts for payroll), because other expenses like sales & marketing, overhead, etc, probably eat up the rest.

This is a big bet on VinGroup making grocery retail work. The revenue growth is there, in that they should really be able to get scale with all the stores they have now. And gross margin has improved drastically - gross profit was more in 1H2019 than it was in all of 2018. So the company is figuring it out.

Valuation? Based on VinGroup’s financials, it owned 64.3% of VinCommerce as of the end of 2Q. After this GIC investment, it still owns a majority stake. Let’s assume GIC got the best it could possibly get and VinGroup owns just 50.1% now. That means VinGroup sold around 14% of the sub for $500m, implying a total valuation of around $3.5bn, or about 20% of Vingroup. That equates to a P/S of 3.2x on a trailing basis. If the company just does what it did in 1H again in 2H, then P/S would be less than 3x. And it would be about 20x P/Gross profit.

Key points:

• GIC is doubling down on VinGroup. It has a lot of other investment in Vietnam (back in October 2018 it was reported that GIC owns 5% of VietJet) as well.

• A Korean company, SK Group, invested $1bn in Vingroup earlier this year. Part of this went into VinCommerce as well, so lots of foreign investors at looking at the sector and choosing VinGroup.

• VinGroup’s strategy is to grow quickly through building, but also to acquire competitors. It bought Queenland Mart’s 8 supermarkets, and 87 convenience stores from Shop&Go in April. I couldn’t see acquisition costs, but

• Market share is shifting away from traditional markets that should benefit all competitors. According to this article, 50-70% of essential food commodities come from traditional markets. And the traditional markets are not standing still - it looks like the government wants to support them. But I bet that a big portion of this consumption will move to more modern stores.

• And because lots of companies agree with me, the retail market is extremely competitive, especially in the big cities. Circle K, 7 Eleven, Lotte Mart are all big foreign companies that are investing. And there are local competitors as well, including Co-op, which is as large as VinCommerce (in terms of supermarkets).

• If we look at other very competitive markets, like the UK, competition really hurt grocery gross margin, because there was so much pricing pressure. Plus, stores need a certain level of sales in order to bear the costs of overhead, staff, and other non-variable costs. We could start to see this as the market matures.

• It will be interesting to see if VinGroup can roll up stores quickly enough to forestall greater competition. They are getting the cash for it.

Ultimately, the investments in VinCommerce (based on my estimates, which could be off) seems really expensive. I did a quick scan of other grocery store chains, and most trade well below 1x sales. Even emerging market chains are trading below sales - MPPA, an Indonesia chain, trades at 0.1x, but even they don’t have the growth.

VinGroup itself is expensive. But it continues to attract a lot of money, and based on its filings, it would like to find 3 other big foreign investors.

Also, look for an IPO of VinCommerce. It is coming! Credit Suisse looks to be in the fast lane for this, based on the GIC investment.

September 9, 2019

Market correlations

So, I have been worried about my portfolio these days (which mostly consists of index funds), because of all the volatility around the trade war and Trumps tweets. Not to mention rising recession fears. But it turns out that the S&P 500 really hasn’t been that bad, down just 1.75% since its high, up 20% since the beginning of the year and still above where it has been for most of the year.

Surprisingly, the Vietnamese ETF, VNM, that I follow the closest (because it has the best data) has been a mess. It’s up 6.6% YTD, but down 8.5% from its high and below where it has been for most of the year.

If I was starting from first principles, I would have thought the reverse. While both performed not great in 2018 (the end of the year was a disaster), the S&P index is up 50% in the past 5 years while VNM fell 31%. Given a predilection to revert to the mean, you would think that VNM would do much better in 2019. And the story about Vietnam is just so strong: real GDP growth of almost 7%, main beneficiary of the US-China trade war, and an increasing political spotlight because of the US-N. Korea summit. Plus, no real inflation concerns, which can really hurt equity returns.

Well, I would have thought wrong. Still, I wanted to see how correlated the S&P500 and Vietnam’s stock market are. With the transmission mechanism being that Vietnam is a big trading partner with the US, gets lots of capital from the US, and, frankly, lots of stock markets internationally seem to be correlated. Based on data in this article, though, the S&P500 is not correlated well with an index of international equities when it is in a bull market, but is correlated when it is in a bear market (which is unfortunate for US investors that was diversification).

US & Vietnam stocks are loosely correlated: This data isn’t necessarily true for Vietnam. I ran a regression of changes in the S&P Index vs changes in VNM for the past 5 years. The adjusted-Rsquared is pretty low (0.3), but has a very low P-value, meaning that it is probably somewhat accurate. This equates to a the correlation found in times when the S&P is in a bull market. But it hasn’t been in a bull market over the past 5 years - both 2015 and 2018 were bad. So Vietnamese equities are somewhat different from international equities as a class.

But the markets do move in the same direction most of the time! I also did another test. I wanted to see if at least directionally the markets move together. When VNM is positive, is the S&P positive? Remember, over this period, VNM was down 31%, but the S&P was up 49%. So you wouldn’t think they would be moving together much. Well, you (and I) would again be wrong: They moved together 2/3rds of the time. I counted each time when both were up and when both were down.

That is strange. Not sure what that actually means, but it thought it was interesting. I wonder, if you just put a small bet on the S&P every day given what happened with the VNM, would you actually make money? It looks like it, or you would have over the past 5 years.

What I’m telling you is that if you use this proprietary data to make money, you owe me 2 and 20.

Not really. Good luck. It’s your grave.

September 6, 2019

Labour trends in Vietnam - urbanization

Continuing on from my post on August 2, I wanted to keep looking at the key insights from this ILO study of the labour force in Vietnam. Lots of interesting stuff here.

One that piqued my interest was urbanization. On April 15, 2019, in the context of MMT, I talked a bit about urbanization, but I wanted to dive a little bit deeper now.

Where do we stand with urbanization in Vietnam?

• In 2017, according to the World Bank, just 35%. So there is a lot of urbanization still to come.

• In 1991, Vietnam was only 20% urbanized, and if we went back to 1960, it was just 15% urban.

• Within ASEAN, Vietnam is similar to Laos and is only better than Cambodia. That seems strange to me. Vietnam is much richer than either one.

• Malaysia is the most urban with 75% urbanization.

Looking ahead, urbanization is going to continue to be a major demographic change in the country.

• The average annual growth of the urban labor force is 2.5% per year while the rural labour force rises just 0.4% per year.

• Over the past few years, we have seen a significant decrease in the percentage of people working in agriculture. These are two sides of the same coin: there is urban migration to get away from agriculture jobs, but as farms consolidate (even at these nascent stages in Vietnam), that pushes urban migration.

• At the same time as we are seeing all this urban migration, we are seeing more and more factories opening up, so manufacturing jobs. Again push and pull. More factories open up, means that more jobs pull people out of rural life. But also, factories come because they see that there are a lot of people.

One of the issues the report points out is that because most rural migrants are uneducated or under-educated, they face more difficulties finding a job.

In 2016, the unemployment rate of migrants was 9.3%; the unemployment rate among the youth migrants was up to 13.7%.

This probably overestimates the actual rate, because many of these migrants join the informal economy. But still, given that the unemployment rate was less than 2% at the end of 2017, there is a big discrepancy here.

This also means that these urban migrants are unlikely to push Vietnam to become a middle-income country. Education levels are low overall, but especially for the rural population. And that is going to take some time to fix.

Importantly, Vietnam, like China, has a residency system, so you can only get social services (including education) at your recorded residence. Updating your residence can be very expensive. In China, this effectively stops migrants from accessing services and moving up to the middle class. In Vietnam, they are making changes to at least the book itself (putting it online) in order to make it easier and more straightforward to update. There are still issues with accessing services, though, and this will likely cause problems for migrants’ ability to move up the economic ladder. Hopefully, with the system’s new database (expected in 2020), change will come faster.

September 5, 2019

Frogger in Vietnam

I saw this article a few weeks ago, but wasn’t sure there was much to say about traffic in Vietnam. It’s bad! It’s crazy! Us Westerners have problems crossing the street.

The point is that even the Vietnamese authorities know that it’s crazy, and they are starting to take steps to address traffic issues. Maybe not by reducing it or getting people off the road, but to get them to drive a little bit safer. That includes drunk driving, which is really low-hanging fruit, but also speeding (a harder nut to crack) and “lane violations,” whatever that means.

I wanted to see how bad driving is in Vietnam. Well, it turns out, pretty bad. I found some stats from the WHO that says that the situation is getting worse, at least from 2013 to 2016. In that latter year, 26 people for every 100,000 died from a road accident. Only Thailand is worse at almost 33 people, which was also up from 2013. In ASEAN, Singapore is the safest at 2.8 deaths, helped by very high car taxes, lots of cameras and a very punitive ticketing system.

I am someone who generally hates tickets, and I never believe I deserve them. So I can see why people in Singapore might complain about all of this. But to be frank, look at the results! They have one-tenth the number of road deaths than Vietnam and less than that for Thailand. The Philippines and Indonesia, while still much worse than Singapore at just over 12 deaths per 100,000 people in 2016, are still less than half of Vietnam.

If we look at the cause of death, only Cambodia has a higher percentage of people that die from injuries. Their road deaths were “only” 17.8 people per 100,000 in 2016, so there are a lot of other injuries that kill people. Both Thailand and Vietnam are at 10% of all deaths caused by injuries. Southeast Asia as a whole is at 8%.

So, good for HCMC trying to deal with this. I wish they would do it by getting people off the road and only public transportation, but at least this is something.

September 4, 2019

Baby’s back! Plus trade data

I am finally back after a long time away. Hope you haven’t missed me too much, but I was busy doing…other things. Now I am back and will be posting regularly again.

The big thing that happened while I was away, at least in terms of economics, is that the trade war between the US and China has escalated, throwing markets (physical and stock) in disarray. That combined with weak manufacturing data in the UK, Malaysia, the US, Germany, among others, means that the sentiment is pretty negative worldwide. We are starting to see that with consumer sentiment in the US, where it has fallen to the lowest level since Trump took office. This is bad for Trump, and it is starting to show up in his polling. A majority of Americans disapprove of Trump’s handling of the economy. That’s new, and worrying for Trump. My view is that Trump’s overall approval ratings have held up only because of a strong economy. If the economy is bad or even if people just think it is, it is going to be hard for him to win reelection.

So what does this have to do with Vietnam. Well, just that the trade deficit is something that Trump talks about a lot, and Vietnam is now quite high up there, #6 in terms of balance of goods deficit. The charts below show the balance in goods for June 2019 and year-to-date as well as comparative figures for 2018. (The one on the left includes China, but then it is hard to see the rest, so the one on the left takes China out to see the rest). Vietnam has gotten much worse in absolute numbers rising from a deficit of $18bn to $25bn, although the ranking has remained the same.

If I were the Vietnamese seeing these figures, I would be pretty nervous. It is by far the most vulnerable of any of these countries - the EU can stand up for itself, and China too. Mexico is already negotiating, so that leaves Vietnam along with Malaysia and India as the ones that are under threat.

There is very little that Vietnam can do about this, especially because it continues to attract manufacturing and foreign direct investment. The most recent manufacturing PMI continues to be above 50 (an indication of expansion), albeit at a fairly low level. Unless it lets its currency rise (or forces it to), it seems unlikely to stop the trend.

But that’s fine! Just remember, these deficits have to be counterbalanced by capital & financials accounts. So the current account for the US is negative, but that means the capital and financial accounts have to be positive. It’s an equation that has to balance. So the deficit in the current account just means that the US is attracting money into its capital/financial accounts, lots of which is going into treasuries. But also into bonds and the stock market and businesses. Given that the US prints its own currency, it is very unlikely it will face a dangerous reversal in balances that could threaten the country.

Having said that, Trump really hates trade deficits, and the US has a big one with Vietnam. If I were going to advise the Vietnamese government, I would tell them to make as many declarations as possible about their desire to lower the deficit in the short term. And hope that Trump is too busy with China that he forgets about Vietnam. Then he loses in 2020.

August 13, 2019

Real estate investments in Vietnam - the case of Keppel

This is actually from a few weeks ago, but Keppel, a Singaporean conglomerate, is making another big investment in Vietnam, purchasing a large (6.2 hectares or about 670,000 sqft). On it, they will build 2,400 premium apartments and about 160,000 of commercial space. This makes Keppel’s pipeline in Vietnam around 20,000 homes.

The article linked here actually has a fair amount of information on costs, so I thought it would be fun to try to NPV this investment. Of course, this entails a lot of assumptions, but let’s just assume that the figures are pretty much in the ball park.

First, we know the land cost (VND1.3tr) and the construction cost (VND6.1tr), as well as the apartment info and commercial space. Let’s assume that the sales price per sqft is around $230 (VND5.4m). That fits in with this article on pricing in HCMC.

These are supposed to be premium apartments, but let’s assume that the sizes are not too large at around 750 sqft on average, in order to keep the average price low at around $175,000 (VND4bn).

Then assume that the shops are sold (which is probably not the most realistic, but I didn’t want to model out a long-term rental, because…I’m lazy). I assume relatively small profit from the shops of VND189bn in total (or $8.2m).

• Based on this, we get an NPV (at a cost of capital of 10%) for the project of VND643bn, or $28m and an IRR of 20%. (The full details are at the bottom of the post).

• I would assume that this is fairly conservative, mainly given the size of the apartments are very low. If they were 1,000 sqft each, that would increase the NPV to more than $100m and IRR to 31%.

• If separately, we lower the cost per sqft to $200 on average, the NPV actually turns negative (-$6m), but the IRR is still 13%.

• If we combine both of those (lower cost per sqft but larger units), the NPV is above our base case at $62m and the IRR is 25%

• We also assumed a cost of capital of 10%, which is quite high. I bet it is lower than this. If it is 1pp higher, NPV falls to $21m, but at 1pp lower, it increasesto $35m. Subtracting 2pp from the cost of capital gets us to $44m.

(See the table to the right for the sensitivity).

This is a pretty good deal for Keppel, as long as prices and demand hold up. The crackdown on corruption in Vietnam has made people nervous about selling land. That’s hurt supply as developers don’t have land to build on. After this deal Keppel has lots of land and a big pipeline of homes. Plus, they expect to start construction pretty soon (1Q2020) so they might be able to deliver why there is still limited inventory.

One more point, in our analysis, we assumed that Keppel doesn’t do any off-plan sales, meaning selling units and taking deposits well before units are delivered. If they can sell in advance and also pay their contractors on a delay, the cash returns just get better. That’s what all of the companies that I looked at in the Middle East did. It is a good way to juice returns on a smaller capital base.

August 6, 2019

On Earth We’re Briefly Gorgeous by Ocean Vuong

Dear Readers: I forgot to tell you, I am taking some vacation over the next month (what it being August and all), and so I will be posting sporadically. Don’t worry, if something important comes up (remember, I don’t think anything is all that important in the great scheme of things), I will post something.

I just finished the book On Earth We’re Briefly Gorgeous by Ocean Vuong. This is one of the big books for the summer in the United States and the United Kingdom, although it’s not really a summer book. The reviews are very good. The Washington Post calls it “permanently stunning,” while NPR says it is “gorgeous all the way through,” and The Guardian says Vuong “mines his extraordinary family story with passion and beauty.”

The book is an epistolary novel in form – it is letter written to his illiterate mother. The form is only loosely used throughout the novel, but he does use the second person (you) to good effect. Also, it reads like memoir at points, probably because a part of it have been published as memoir (this part in the New Yorker).

The story is lyrical. It circles back on itself multiple times. It is also two parts smashed together. The first part is about his grandmother and mother, the second is about his first love with another boy named Trevor.

Interspersed are a few chapters that are basically prose poetry, or even just poetry, that alternate between varying subjects, including Tiger Woods and the opioid crisis in the US.

I found the first part almost too opaque, meaning that it was so difficult to follow what he was talking about that I put the book down and didn’t pick up for a week. The second part is more straightforward, even though there are those interspersed sections.

I don’t really like lyrical books. I like my poetry here, and my prose there. I guess I am just a plot person – I need plot to keep me interested. There is plot here, but that’s not why to read the novel.

In fact, I found the book a little bit annoying at times, because there were so many phrases that were just opaque and in some cases maybe too meangingful. So meaningful that they mean nothing. Like this:

It’s late in the season—which means the winter roses, in full bloom along the national bank, are suicide notes.

But then he writes something like this;

They say nothing lasts forever but they’re just scared it will last longer than they can love it.

Or this, which another reviewer point out:

The one good thing about national anthems is that we’re already on our feet, and therefore ready to run.

I really felt that the writing on the relationship between Trevor and the narrator was excellent. It showed a queer coming of age story that was so real, including very frank talk about sex between men. These scenes weren’t always beautiful (sex isn’t always), but it was entrancing.

I came away glad that I read the book and very much looking forward to reading more from Vuong. But I can’t say that the book itself was completely cohesive or really kept my attention at all times. That of course could be the fault of me, rather than Vuong.

In terms of Vietnam, Vuong, despite being born in Vietnam and speaking Vietnamese fluently, comes at the country as a tourist rather than a native. There is a scene with drag queens that come to help distract a family after the death of someone. That was fascinating, and something that I haven’t seen before and didn’t know about.

Overall, the book is worth reading, with some caveats that at times it is slow going and overly lyrical.

August 2, 2019

Emerging market flows

Yes, I am feeling much better. Thanks for asking (Editor: No one asked). Must be a summer cold or something. Still a little under the weather, but not too bad. (Editor: Yeah, no one really cares.)

Anyway, I promise to get back to the ILO report, because there is a lot in there. But right now, I wanted to talk about something that just came out in the news.

Emerging market flows fell a lot in July: $1.3 billion. Bond investments also fell by $100m. It was mostly China (negative $500m net inflows) and South Africa (negative $600m), but even Vietnam saw falls. In ASEAN, only Thailand saw inflows.

We actually haven’t seen an impact on the VNM ETF, which rose by a very small amount (+0.7%) from the end of June to today. That’s despite the depreciation of the VND.

Looking over the past few years, Vietnam has been doing quite good in the context of ASEAN. Net inflows since 2010 have been $4.35bn, compared to $8.3bn for Indonesia, $1.6bn for Malaysia and $11.7bn Thailand. On a per capita basis, Malaysia is doing just a bit better, $50 per person compared to Vietnam’s $46. Also, putting it like that, the investment seems pretty small!

But still, Vietnam had a great year last year (Indonesia, Malaysia and Thailand all had net equity outflows in 2018), and this year has been pretty good as well, despite July. Net equity inflows to China, meanwhile, are down almost 60% through June. That’s gotta hurt.

We have talked about this before: live by foreign capital, die by foreign capital. It can come and go quickly and capriciously. If you then have to invest a lot of hard currency to service this investment (say in energy, in inputs), a country could quickly come into problems with the currency, and then with defending the currency. It’s risky and limits maneuverability. That’s why I advocate at the least, heavy investment in renewables.

But good on Vietnam for taking advantage of the current trade war. Good luck not getting burned by the Trump administration going forward..

August 1, 2019

Sick day

Sorry, everyone, not feeling well today. Will catch up tomorrow.

Thanks!

July 31, 2019

Labour trends in Vietnam - aging

I am reading through a very interesting report on Vietnamese labor trends by the International Labor Organization. Full report here. It covers the period from 2012-2017 (although some of the data goes back more than that. A few things that seem to be key:

• The country had a demographic dividend (lots of young people) that is fading away as the population ages. We have talked about this before, but it bears repeating, especially as all these new foreign companies come to manufacture. It seems like the cut off age for these workers is something like 35, because it is just tough work. After that, they just don’t have the capacity to do it. Or not at the same level.

• Right now (2018), the population is close to evenly split between above 35 (45%) and below (55%). This is expected to get worse over time. For example, people above 65 are 7.4% of the total population. This almost doubles to 14.7% by 2035, which is only 16 years away. The dependency ratio will increase to 50% by the same time, meaning that every 2 working age person needs to support an old or young person (with the increase mostly driven by old people).

• What this means is that manufacturing really is only going to be a driver of growth for the next few years, before these people age out of it. Manufacturing will continue to be a big source of economic activity, but not of growth. And as the population ages and there are fewer workers, wages will likely rise. Conditions will also have to improve, in order to induce older people to work at the factories. But these new “costs” will very likely drive investors to put their factories in different countries.

• The big drivers of job growth have been manufacturing and services. Eventually, growth will have to come from service jobs, which are less strenuous and allow people to work for longer.

Now, just to give a bit of support to these figures: I didn’t make up the figure for age 35 off the top of my head. This is something that is understood by both worker and employer. In fact, this story states it explicitly:

“It’s been like that for Xuyen for over 13 years. And soon, the factory is going to dismiss her because people over 30 are “not welcomed” there….Eighty percent of female workers over 35 in industrial facilities either quit or are forced to quit, according to the Ministry of Labor, Invalids and Social Affairs.”

Plus, there seems to be a view that two-thirds of the Vietnamese population is under the age of 35, but that’s not what the World Bank figures show - it is just 55% of the population (I double checked!).

More insights from the report tomorrow.

July 30, 2019

Trade and Beyond Meat

Just wanted to follow up on a few things:

First, US pressure on Vietnam is increasing, with the US Trade Representative, Robert Lighthizer, telling US lawmakers that “US businesses face a host of unfair trade barriers in Vietnam.” Through May the US had a trade deficit of more than $15bn with Vietnam. That’s a third of the total trade deficit with ASEAN. It’s the US’s sixth largest deficit in the world, similar to 2018 (see chart to the right). One of the problems, mentioned in the Politico story linked to above, is that the US has not been able to negotiate a trade deal with Vietnam, but Europe and the members of TPP have had trade deals implemented. That has allowed them to increase their exports to Vietnam, crowding out American goods. At the same time, more countries are moving production to Vietnam, mainly to export to the US, given the tariffs on Chinese goods and a few other products.

Second, just a quick update on Beyond Meat, which I wrote about on May 3, 2019 (scroll down to see that post).

• The stock is way up since the IPO, almost 700%. That’s a great return. I should have bought some rather than pooh-poohing it. But I still think my analysis was correct.

• The stock is way down: 17% from its high on July 26 and 12% today.

• Results (announced yesterday) were good, and they have raised their guidance for revenue in 2019 to $240m, that’s way better than I had forecast and up $30m from new guidance in 1Q. They now look for adjusted EBITDA profit (which excludes a fair amount of stock expenses and some restructuring costs), compared to just break even. So it is very likely that they will get to profitability faster than I expected.

• But the stock is down, because investors are selling stock. About 3.25m, compared to the initial IPO, where just 10m shares were sold. Of the new share sales, 250,000 are from the company directly. If it gets $200 per share, that would be $50m in additional cash for the company. I bet it will come in below that but still a good amount.

• It already has $277m in cash, but spent about $33m in 1H2019. Since sales are increasing so quickly, we should expect working capital and capital expenses to be high, so the cash burn will likely continue for the next year or two at least.

• One of the biggest cash expenses is Accounts Receivable, which grew to $34m at the end of 2Q2019. That’s a DSO of 76 days, up from 52 days at 2018 and 40 days at 2017. This means that it takes two and a half months for Beyond Meat to get paid for its sales. Tyson Food’s DSO is just 16.5 days.

• This is partially offset by an improvement in Inventory Days, which were 93 days at the end of 2Q, compared to 157 days at 2018 but up from 85 from 2017. While the figure in 2Q is an improvement, it is still crazy high, especially for a perishable item. For comparison, Tyson Food has a DSO of 38 days, which still seems high but maybe it has something to do with the chickens being counted as inventory. That could be the issue with Beyond as well, they have to count the raw materials that stay at the factory longer.

• So if DSOs and Inventory days fall, we should see some real improvement in the cash burn, and that seems like it will be pretty easy. That plus the cash balance they have now means that Beyond should be very well placed to grow, develop new products and get their name out there.

• But I would still be wary about buying the stock, because it is super expensive. It is trading at 200x 2019 sales! SALES!!! ! That’s even with the updated revenue figure. This multiple falls pretty quickly, but unless they have a revenue CAGR of more than 60% through 2024 and/or have an operating margin of above 20%, I don’t see them trading below 50x P/E or 23x Price/Sales. That’s crazy high. Remember, this is a vegetable burger with implied sales of $1.5bn.

• Right now the stock is in the dog house because of this extraordinary (in the sense of out of the ordinary) follow-on share sale so soon after the IPO. Once that is over, and if they beat estimates in 3Q, I bet we will see the stock start to perform well again.

• Remember, I am not saying that the company is in trouble. The company is doing great, and the additional share sale is probably fairly smart. All’s I’m saying is that the stock is too expensive, and it is not worth getting ahead of the share sale.

July 29, 2019

Vietnam wins and loses some in the trade war, but mostly wins

Just wanted to put a few pieces together about the US-China trade war and US tariffs. On the positive side for Vietnam:

• Apple is going to trial AirPod production in Vietnam, according to this story.

• More mattresses in the US are coming from Vietnam. “Vietnam’s mattress imports are running at a current annualized rate of 1.3 million units, a level far below the 6.2 million unit rate peak achieved by China earlier this year, Raymond James noted.” Still, that seems pretty good to me.

• Hasbro (a company I covered a really long time ago and the second largest toy company in the US/world) is moving manufacturing away from China to Vietnam and India. Still, there’s this: “Hasbro hopes to have only 50% of its products coming from China by the end of 2020.” So China is doing pretty well.

Here is an article that summarized the trends pretty well.

But some companies in Korea were too cute and tried to evade the trade war by sending production through Vietnam.

• Turns out, the US Commerce department doesn’t buy that the steel is actually being manufactured in Vietnam, so it is slapping enormous tariffs on it. “The Commerce Department responded by slapping tariffs as high as 456.23 percent on those imports.”

Just a point here. So many companies have said that it would be impossible to shift supply chains or that it would take a long time. Remember when everyone said that Apple couldn’t move out of China. Well, it turns out that, sure, it can be hard to move production, but give it time, and things can be moved. It’s like the difference between fixed and variable costs. Over a certain time period, everything is variable! Over time, everything can be moved.

Also, some of this shifting supply chain is “a long time coming.” That’s because labor costs are rising in China, as are regulatory requirements around environmental issues. That’s on top of the uncertainty around trade.

The IMF just lowered world economic growth to 3.2% (from 3.3%), including China (-0.1pp) and ASEAN (-0.1pp), mostly because of weaker Chinese growth. It kept its forecast for real GDP growth at 6.5% for the next few years, but I wonder if China really starts to slow what that will mean for Vietnam. Right now the shifting trade looks good for Vietnam, but if China ever went through a recession, then Vietnam is going to do the same. As the cliche does not go, when China catches a cold, Vietnam sneezes.

July 26, 2019

South China Sea

This week I went to the Ninth Annual South China Sea Conference at CSIS. In the link, you can listen to all the panels, and you might even hear better than some of us did in the room! Surprisingly (or maybe not), this conference was just packed. There were very few empty seats in a room that probably sat more than 300 people. Many were professionals that work in the area, along with students and embassy folk. It was interesting to see.

A few takeaways from the first panel

• Indonesia: Probably won’t do much of anything, because Joko Widodo, the recently re-elected president, is really focused on domestic politics.

• Philippines: Duterte has decided not to make a big deal about Chinese encroachment of Filipino waters, and so we have seen more and more Chinese fishing boats in them. The military is not happy about this, nor are the Filipino people, especially given fairly significant environment destruction by Chinese clam fishing. See this article about Chinese warships moving through Filipino waters without the government knowing.

• Vietnam: Hanoi is pushing back against Chinese “survey” ships that are watching the Rosneft exploratory oil rig. It has continued operating despite the Chinese survey ship (see pics on right). The US is backing Vietnam in a way that it hasn’t before. Back in 2014, there was a similar dispute that resulted in first peaceful protests then violent protests in industrial zones against China. That hasn’t happened yet, and the government doesn’t really want it to.

• China: According to the ex-Chinese Naval officers, China really just wants what the US has: freedom of navigation. It is not trying to militarize the South China Sea but every time that it is provoked by the US (he sited B-52 fly overs), it reacts by speeding up its deployment.

One thing that I found interesting was an answer to a question by Gregory Poling, who directs the Asia Maritime Transparency Initiative, which uses satellite imagery to show Chinese incursion in the South China Sea. He said that China controls the South China Sea more than it did 5 years ago, and that in 5 more years, unless someone does something, we just will have to all agree that it is theirs.

For Vietnam this has meant that oil & gas exploration has been limited by the Chinese activity. Vietnamese fishermen have also been harassed by the Chinese. This will likely get worse, unless Vietnam reaches some agreement with China (unlikely).

The second panel was about the history of the dispute. The best speaker was Bill Hayton, who was extremely clear and quite funny. He pointed out that a Chinese general recently said that “China had never invaded another country or taken land”. Of course, that seems to be countered by a number of times when China invaded islands or had border disputes. But in China’s eyes, all of these disputes were others encroaching on its sovereignty. It owned the land, so by definition it couldn’t be an invasion or seizure of land.

Hayton went through the history of China’s claims, and it sure seems like most of them are not serious/invented, mostly in 1948 (officially). Most of these claims won’t hold up in court (as we saw with the Philippines winning in the Permanent Court of Arbitration). Also, Taiwan has all of the records and could easily use them to discredit China’s claims. But that would result in repercussions against Taiwan, and it was unwilling to do that, unless there was support from the other claimants.

Stein Tonnesson had a slightly different timeline with a similar takeaway. Namely that China can’t really make a good case for most of these islands, but neither can anyone else. So they should just negotiate a solution with Vietnam taking some of the Spratleys, some of the Paracels, maybe Philippines and other players get different islands. China gets some too.

The ASEAN guy, who was a bit hard to follow, seemed the most optimistic about disputes with China. Maybe because he is Thai and has less of a dog in this fight.

Finally, Hayton made the point that these islands (in some cases, just features – not sure what that means, exactly), are small and meaningless. Who cares! Just divide them and move on! But I think the concerns the first panel had over fishing rights and oil & gas exploration means that these disputes are really not meaningless .

I do wonder why it matters so much for the US? It is a major seaway for a lot of trade, including to the US and Europe. Plus, it could be a spark that sets off conflict between China and its neighbors that could draw in the US.

“China is now capable of controlling the South China Sea in all scenarios short of war with the United States,” U.S. Admiral Philip S. Davidson said last year.

July 25, 2019

Minh Phu - Buy Case

So today, I wanted to present a buy case for Minh Phu. There are a few reasons why I like the company:

Solid revenue growth: They seem very likely to get to at least exports of USD800m, which would boost sales by almost 9%. Guidance is for USD850m, but I am a bit worried about the second half, because the company is a bit behind what they did last year.

Long-term growth from Mitsui relationship: Overall, I think sales will benefit from the Mitsui relationship. Exports to Japan fell 6% last year and 17% through May of this year but has started to pick up (up 5% in June). The company did have a joint venture with Mitsui previously. In 2013, it invested in Minh Phu Hau Giang JSC (MPHG), a processing plant affiliated with Minh Phu.

New initiative could boost prices for Vietnamese shrimp: We talked about this two days ago, but the push towards inspections and sustainability may be able to push prices for Vietnamese. It will take a while, but in the long run could have a very big payoff. It helps that the company has $100m in additional powder from the Mitsui share sale. This is being invested in expanded farms, refrigeration in export markets and a breaded shrimp factory. All of which should help boost sales in the long term.

Shrimp consumption will continue to grow: One research report forecasts a 6.3% CAGR through 2024 for shrimp consumption. That’s seems fairly reasonable, given the push away from meat and towards more seafood in the West. I expect Vietnam will continue to be a big player in the market, and, especially if it can improve its reputation through these sustainability inspections, will be able to take share. MPC should also be able to take some share from smaller, less equipped exporters.

The change in ownership of MPHG boosts profits. MPC bought out Mitsui’s stake of 31% in MPHG which means that all earnings from the subsidiary will go to the parent now. Overall profits should improve by about VND50bn or 6% in 2019 and another VND50bn in 2020. This is based on 2018 minority interest of VND100bn. Let’s say that VND100bn represented the 31% ownership in MPHG, so that the subsidiary made around VND320bn. Based on this, the purchase of these shares was a good deal for MPC. It purchased the stake for VND872bn, or about 8.7x, in line with their 2018 P/E, so it wasn’t expensive. If revenue grows around 9% this year at the subsidiary, likely profits there will grow about 10%, so that the VND100bn is more like VND110bn. That makes the forward P/E just 8x, which is a good deal.

Valuation is very reasonable: We estimate the company is trading at a forward P/E of 7.6x. This would be 7.1x forward P/E if the company reaches guidance. Forward EV/EBITDA is 8.2x on our numbers. Those are extremely low, and much lower than any of the companies in the sector worldwide. We have 13 comps, with the cheapest one trading at 9.9x forward P/E. Clearwater and Huon Ag are a bit cheaper in terms of EV/EBITDA, but the rest are well above that, and the average is much higher.

Dividend helps provide floor: The company paid a dividend of VND5,000 per share in 2019 (off 2018 earnings. That is almost a 14% yield on today’s share price. They may not be able to keep this level, but even at half of that level, the yield would be good. The owners may be having cash flow issues of their own, which would like push them to keep making dividend payments at these levels. That helps other shareholders as well.

Upside from ETF: If MPC is added to the VNM ETF, there would be an underlying buyer at size (especially at the beginning), which should push the stock up.

Risks: I feel like the biggest risks are around revenues - prices for shrimp are falling, and MPC may not be able to offset that. Lower prices are likely to translate into lower margins as well, for a double hit. There is already the risk that MPC will not meet its guidance, which would likely hurt shares in the near term. But the longer term risk is that shrimp from Vietnam continues to be devalued in export markets. That’s why the sustainability initiatives are so important.

Target price: I don’t have a strong opinion on this. I would say if they were able to trade at 15x P/E, they would still be well below the average for comps, and it would be almost double from current levels, so I am setting my target is VND70,000 per share.

Continue to follow Vietecon.com to see how I do.

July 24, 2019

Minh Phu

Yesterday, we talked a little about Minh Phu (MPC), one of the largest (if not largest) shrimp producers in Vietnam. They have about a 20% share, or did in 2018. It looks like it will be about the same this year or a bit more. That is despite a slightly worsening market for shrimp prices (and volumes). In the first half of 2019, prices fell again (2.4% yoy compared to 1H2018), although were up 2.3% versus 2H2018.

Revenues for the company have been all over the place, as you can see in the chart on the right. In fact, I am a bit worried that the figures for 2016 are incorrect, but they come straight from the horse’s mouth, as it were. What we can see is that generally revenues are trending up, but also more importantly, the gross profit is increasingly somewhat steadily.

That’s resulted in a much improved return on equity, which was negative in 2015 (the company had a net loss of VND19bn) to 22% in 2018. That’s a gigantic jump. At the same time, leverage is falling, as net debt fell from VND5.5tr to VND4.1tr in the same period.

As operations improve, the company has attractive interest from investors abroad. As I talked about yesterday, the company recently received a cash infusion from Mitsui, a large Japanese trading company. Minh Phu sold it 60m shares at a price of VND50,630 for a total of VND3.0 trillion, or $132m. That’s 30% of the company. The current market cap is VND7 trillion, or just over $300m. Unfortunately, this is still a fairly small cap stock, so many big investors can’t really invest in it. The reasoning is this: if you have $300m in assets to invest in Vietnam, you probably don’t want to put even one-twentieth of your fund in a stock that trades less than $500,000 a day. With 5% of your assets, you would need to buy $15m worth of stock, which would take more than 15 days to buy, and potentially more than that to sell, especially if things don’t work out and shares were falling.

However, MPC isn’t too far off from the lower end of market cap for stocks in the VNM ETF. A few stocks (NT2 VN, TCH VN) are just slightly bigger than MPC. The company could be a candidate for inclusions if the stock continues to rise.

Tomorrow I am going to look at valuation and what could drive the stock higher.

July 23, 2019

Shrimp from Vietnam

People in the West are having more and more concerns about where their food is coming from. This is especially true for seafood. Look at this list from EcoWatch, which is a list of all the seafood that I like to eat - the advice is to not! Then there is this article about shrimp from Consumer Reports (on EcoWatch’s website) - 60% of raw shrimp bought at US supermarkets tested positive for bacteria. Vietnam was on the list at 58% of the samples tainted, but even for Argentina and US wild caught shrimp, bacteria levels in samples were high (33% and 20%, respectively). Many samples also had antibiotic residue, which likely means that the shrimp were fed antibiotics, something that is not great for antibiotic resistance globally and should have stopped these from entering the US.

Seafood Watch by the Monterey Bay Aquarium is the main organization that makes recommendations in the US. In the UK, one organization is the Marine Conservation Society. I am sure other countries have the same thing. And they are sounding alarms about the source of most seafood.

Because of this background, I was happy to see this article about the Minh Phu Seafood company partnering with Seafood Watch to improve the sustainability of the Vietnamese shrimp business. The plan is to have self audits and independent audits in every province so that buyers can be assured that what they are buying is safe to eat. It will be interesting to see how they implement this.

The goal is to increase the sustainability and health of shrimp supplies in Vietnam. And of course to help exports, which are a big business. Shrimp exports are expected to exceed $4bn in 2019, up after a weak 2018 ($3.55bn, down 7.8% from 2017). See the chart on the left below with food exports from Vietnam.

Minh Phu actually bucked the overall trend, with the value of total exports up 8% in 2018, mostly due to volume (prices fell slightly). However, they did miss their guidance of $800m, but did $751m for the year. This equated to 21% market share, compared to 18% in 2017.

Year-to-date (through June), Minh Phu’s total export value was up just 1% ($286m), but signed contract value is for $425m, exactly half of their 2019 guidance of $850m. (See chart below on the right). The second half is always a bigger season. Again volumes are up more (3%) than value (1%), because of lower prices. This new initiative is clearly supposed to help the company’s and Vietnam’s competitive positioning, which should help volumes and potentially prices, if Vietnam can actually due sustainable aquaculture.

I am going to spend a few days on Minh Phu, because I find it an interesting case study. The stock is actually trading at a fairly reasonable valuation (8.8x trailing P/E, 8.7x trailing EV/EBITDA). It recently sold a big chunk of shares (60m, or 30%) to Mitsui, a Japanese conglomerate. And interestingly their exports to Japan in the first half of this year were down 15%, so hopefully this investment will allow Minh Phu better access to the Japanese market. More tomorrow.

July 22, 2019

Go-Viet and the gig economy

All over the world, gig workers are finding that the companies that “employ” them are cutting their pay rates. That’s just the way it works in the life cycle of these startups. A gig service starts, it spends a lot of money finding customers (with lots of discounts, low prices, specials) who order a lot of cars/food/handymen, and the company then needs to spend a lot of money getting workers to sign up.

This goes on for a while with venture capital money funding both the discounts to customers and bonuses for the workers. Hopefully the company becomes a quasi-monopoly, with little competition, and it slowly can start to peel back those customer discounts and employee bonuses, because both sides are committed to the model. As long as it is only a little bit more expensive, or a little worse pay, then people are fine with this. They understand that a business needs to make money.

From a worker’s perspective, ratcheting down pay is annoying, but one can make it up through a bit longer hours. After a few rounds of that, and before the realize it, people are working 12 hours and making much less than minimum wage. Read this article in the New York Times about a guy who tries to be a food delivery man, and ends up making less than $10 an hour (it sounds high, but is actually $5 below New York City’s $15 minimum wage). It also sounds extremely strenuous and dangerous. Even good delivery people make about $15 an hour.

In Vietnam, we are seeing these trends play out with Go-Viet. It has changed its bonus system (which was fairly straightforward and is now more complicated - see to the right). Basically, to get the biggest bonus of 180,000, a driver had to do between 14 and 28 rides a day. That was already hard. Now they have to do between 20 and 40 rides a day to get a bit more (VND240k). If a driver got 5 rides during rush hour, it would still have do to 30 more rides during the rest of the time, which is probably impossible and definitely impossible in a regular 8 hour workday.

The drivers are protesting, which is unsurprising and fits in with this larger discussion about worker’s rights that we talked about last week (see post below from July 17). Go-Viet says that it offering surge pricing for drivers, which should offset somewhat the lower bonuses, but the workers aren’t buying it. The strike continued into the second day at least (see this article from Nguoi Lao Dong). I don’t know if it is still going on.

Unfortunately, Go-Viet has around 100,000 drivers in Vietnam (according to the company), and 300 protesters are just not going to make a big enough ruckus to make management change its mind, For exampe, we saw a much bigger protest in in the US, with LA drivers for Uber striking after a big pay cut (see here), but the strike was unsuccessful. It’s my view that these gig economy jobs depend on these new drivers not really understanding unit economics. Hopefully as they get smarter, they can put pressure on companies, or if that doesn’t work, regulators. In New York City, pressure led to a minimum wage for drivers of a bit over $17 after expenses.

I doubt that we will see that in Vietnam. But with low unemployment, and a big search for workers by all of this foreign investment coming in, the gig economy companies may have to raise pay at some point, to retain drivers/workers. We can only hope.

July 19, 2019

Huawei

Vietnam made the front page of the New York times (or at least the front of my web version of the New York Times). The title of the article is great: “Is Huawei a Security Threat? Vietnam Isn’t Taking any Chances.”

The basic gist is that Vietnam is not using Huawei tech for 5G (we have talked about this before - see the post on May 20, 2019). The Vietnamese carriers have chosen to go with other providers (see table to the right). Vietnam says it is not because of their fear of China (no, not at all), but because they have just decided to go a different way.

Vietnam is in a tricky position. China has always been the dominant force in the neighborhood. And the Vietnam war was, in a way, a war over Chinese and Soviet control of Vietnam, at least according to the US participants. It turns out that Vietnam has a complicated and sometimes antagonistic relationship with China, and maybe the US didn’t have many reasons to be worried about Chinese control. And that complicated relationship continues, with a brewing brouhaha in the South China Sea, where Vietnam is forcefully defending its territory. But the government is also worried that people will protest Chinese encroachment of the sea, as they did last summer, and so it is not being bellicose about its military actions.

Like every other country in the world, Vietnam needs China’s investment and market, but it also wants to safeguard its own sovereignty. Of course, Vietnam is much smaller (but still quite big) and poorer (but growing, and a place for Chinese investment). Both need each other, but ultimately Vietnam needs China more than China needs Vietnam. Because of this, the Vietnamese government will have to make a lot of tough decisions, like this 5G technology issue, that prioritize certain things (national security, technology) but don’t piss off the Chinese too much.

Ultimately, looking at the US, it has been unable to force countries to go along with them, even with lots of money (see Pakistan). China may start to see it is running into the same problem, especially as people in these countries protest.

Vietnam is not alone in walking a tight line as it deals with China’s rise in South East Asia. Cambodia has a big resort that everyone is worried will be taken over by the Chinese. And Sri Lanka already lost a big port to China. Vietnam is trying to ensure it doesn’t run into the same problems, but it is going to be difficult.

July 18, 2019

Trash

Everyone’s favorite topic: garbage. Turns out Vietnamese cities have a fair amount of it, and they (like everyone else) are having problems figuring out what to do with it. A few points:

• People don’t like to live near landfills, especially if they are smelly. That’s a real problem in the Phu My Hung area in District 7. People are protesting, and truly does sound like the smells are noxious.

• Ho Chi Minh City is not the only place. The government was going to invest in Da Nang’s landfill to add a waste-to-energy plant, but neighbors protested at the site to stop it. They believe there is going to be more pollution because of it, which is probably true. Reducing pollution from plants like these cost money, and it is probable that the city government won’t spend it.

• Hanoi residents protested at a landfill after not receiving promised compensation to move, resulting in trash piling up around the city.

• According to the UN, Vietnam will produce more than 0.8 kg of urban waste per capita, (or 22m tons). Most of this waste is not sorted, and therefore is just dumped into open landfills. There is little waste-to-energy, little incineration, few sanitary landfills, and while program in place, there is little follow-through on implementation of projects.

• This is basically the same as in most of ASEAN, except for Singapore. Less than 50% of all waste is sorted at the source for almost every country except the Philippines. Most of the waste is food or organic waste, which may be compostable. However, the same UN study said that most farmers don’t want to use compost in Vietnam, so maybe the end market is just not there.

This is a real quality of life issue, and it is probably going to get worse as Vietnam gets richer. There is a movement to reduce single-use plastic (I wrote about it on June 25, 2019 - scroll down to read), but ultimately there is going to be more waste, and the government should start investing in this now. It will improve quality of life, it will reduce pollution, and it will make the air smell better for these poor people.

Just to add another hitch, I saw this article today about containers filled with plastic in the port in Sihanoukville, Cambodia. The government is trying to find out who is responsible (which doesn’t seem like it would be too hard). This is just one more in a line of poor countries refusing to take trash from wealthier countries. Malaysia, Thailand and Vietnam have done the same.

This means that wealthier countries need to find a solution in their own countries, which is going to be hard. The problem is exemplified by this story in the US (read it here) about a train filled with treated New York poop was stopped in Alabama, because communities didn’t want it transported through their town. At some point, wealthy parts of the US (and other rich countries) will have to start figuring out what to do with all of this waste.

Maybe there will be some technological solution. If not, everyone is going to have to drastically reduce waste.

July 17, 2019

Labor news

Vietnam ratified the International Labor Organization’s fundamental convention on collective bargaining in mid June (convention 98). This is convention 98, which protects against anti-union discrimination. There is another Convention (87) that allows for independent trade unions., and Vietnam plans to ratify that by 2023.

Right now there is just one union, the Vietnam General Confederation of Labour (VGCL) which is part of the communist party. And this brings up an interesting (but naive) question: why does Vietnam need labor unions, if it is a socialist republic led by the Communist Party of Vietnam? Surely worker rights should be protected as a matter of course. But it doesn’t seem to be the case.

There are a number of strikes in Vietnam, around 300-500 strikes a year, based on government figures that are somewhat suspect. The majority are in Ho Chi Minh City and its neighboring provinces - 60-80%. These are mainly against foreign companies, but increasingly private domestic companies as well. While strikes are legal (since 1994), for all intents and purposes it is impossible to have a legal strike. So all of these wildcat strikes are illegal. And they get results! (You can read about details of a strike at a shoe company here).

But back to joining the ILO. This article in Jacobin, my favorite socialist periodical/blog, talks about how the new ILO ratification comes for two reasons. First, new international treaties require more worker rights than previously given by the government. And second, because the government wants to reduce strikes and wants them to move into a formal negotiation between workers and employers.

What we may see is some sort of short-term union that is formed just to negotiate with the employer. But that these unions will not be able to grow beyond negotiating basic wages and conditions because the government doesn’t want them to. The government has increasingly been uninterested in civil action and has cracked down on protests or anti-government speech. I doubt this will change. I think that will limit unions ability to play a bigger role in society and politics. But for the small (but very important) role of negotiating between company and workers, it could be helpful (this article is much more optimistic). Unfortunately if workers demands push wages too high, we will likely just see a shift of manufacturing to the next cheapest place on the list (Bangladesh? Cambodia?).

Minimum salary: In other labor news, the government will raise the minimum salary by 5.5% in 2020. It will be VND4.42m ($191) per month in urban areas (HCMC, Hanoi), and VND3.92 for Region II, rural areas of the two big cities and smaller cities like Da Nang, Can Tho, Hai Phong). Region III will not be at VND3.43m, and the rest of the country at VND3.07m. The difference between cities and the rural areas are 44%.

This increase is basically in line with what the country has done recently: “Vietnam increased regional minimum salary by 7.3 percent, 6.5 percent and 5.3 percent in 2017, 2018 and 2019, respectively.”

Finally, workers needed! Ho Chi Minh City will need 155,000 new workers in the second half of 2019, according to the municipal government.

July 16, 2019

Flooding in Ho Chi Minh City

Ho Chi Minh City sometimes reminds me of New Orleans, mainly because it sits in a delta and is always flooding. New Orleans is actually below sea level, or some of it is. HCMC is at an average of 0.5-1.0m, so a little bit better, but not by much. Of course, climate change is also not helping, and the rainy season is long with high precipitation throughout.

The city has started to make some changes. The first is to do remote sensing in the short term, in order to help redirect traffic. If the water level gets above a certain level, the sensor will send out an alert to everyone on the alert, telling them to find another round. This seems like basically unhelpful in the long term (it doesn’t solve the flooding problem), but it will be nice in the short term. Also, the more sensors out there, the better the response to flooding, because the city will have data about what is flooding and where it is worst. Second, the government is implementing some infrastructure solutions that should help the problem on a key street (where the sensor is being placed), but this won’t be ready until after the 2020 rainy season!

Another idea is to for consumers and businesses to do more rainwater harvesting, with the idea that if every home collects a little rainwater, then millions of cubic meters of rainwater can be diverted from streets. This seems very unlikely to have much of an impact, but if enough people do it, maybe something could happen. Plus, it would be good to recycle this water. It would help offset the load on the system a bit.

In terms of real responses to flooding and climate change, this study suggests that increased elevation (build new buildings on top of sand in order to raise their elevation a bit) and dryproofing buildings can really help against future flooding.

Climate change and this flooding are quite difficult to deal with, but at the same time, other countries would love to have this amount of rain. For example, Vietnam gets 1,821 mm of rainfall a year, while Egypt gets 51! Jordan just 111. Iran 228. These are dry countries that face drought conditions on a daily basis. Vietnam, if it could just direct some of that rain away from the streets and store it for the dry season, would never be thirsty. But that’s hard to do.

July 15, 2019

Eclat Textiles

So some big news out about Eclat Textile. This is a Taiwanese textile company. For a long time it had operations in China (starting in 1998), and then it moved into Vietnam back in 2004 (with the factory starting production in 2006). So it has been in Vietnam for a long time. It is especially important because Eclat makes up 4.5% of the Vietnam ETF (VNM). We discussed Eclat a bit two weeks ago, when we talked about the performance of the index.

Eclat was actually up 14% in the first half of 2019, but the TWD was down slightly (1.4%), so some of this positive performance was offset. Overall, it probably increased the ETF price by about 0.6%, all included.

This stock was helped by good revenue growth in 2018 (13.8%), with an improved operating margin of 28.8% (it had been averaging around 28.0% and was just 27.5% in 2017), so operating profit was up a monster 19% in the year.

But of course, as Trump’s rhetoric against Vietnam heats up, the company is looking to diversify away from Vietnam (where most of its garments are sewn). It looks like Cambodia is the next frontier, with a garment factory already there. It also is looking at Indonesia, Bangladesh, India and Mexico.

Although, the headlines seem much worse than they actually are: the company is just not expanding in Vietnam over the next 3 years. I think one of the real reasons is that Vietnam is actually at capacity. A fellow CEO hints at this:

But the rush to nearby Asian nations is also reaching a saturation point. “Vietnam, for example, is full, completely full,” Spencer Fung, chief executive officer of Li & Fung Ltd., the world’s largest supplier of consumer goods, told Bloomberg earlier this month.

I am not sure if Fung is saying that there’s not room for more production because of real estate, logistics or staff. Maybe it’s all those things. Vietnam has not been completely underutilized - the unemployment rates aren’t crazy high, there’s not a ton of commercial inventory just sitting empty. We have talked before about productivity-weighted wages in Vietnam: they actually aren’t as low as people expect. So I can see why some are looking to other countries for production. It has the added effect of diversifying their manufacturing, in case the trade war consumes more countries.

It will be interesting to see what other companies do, particularly those that can divide their production easily.

Finally, the VNM index may need to change as well. Eclat was already 4.5% of the index in early July. It may make sense for this weighting to fall over time, although it will take years - until Eclat really moves production elsewhere.

July 12, 2019

Ports and investments

Japanese companies bought into Gemadept, a Vietnamese port operator and logistics operator.

Sumitomo teamed up with compatriot logistics company Suzuyo and a Japanese public-private fund specializing in infrastructure investment to take a 10% interest in Ho Chi Minh-based Gemadept. The trading house provided more than half of the roughly 4 billion yen ($37 million) the team paid to a local fund for the stake.

Total market cap of Gemadept is just $350m, which is less than I expected, given the number of ports that it owns (7 in total, with varying ownership levels). I estimate that it has capacity of more than 5m TEUs (ton equivalent units, an metric to judge how many containers can come into the port. It is adding at least 1.5m or almost 30% more in the next year or so.

Gemadept has more than 10% share of the market, or 1.7m a year. About 14 million container equivalents of goods are shipped in and out of Vietnam annually. If we assume similar to GDP growth, that would be 22.5 million by 2025. I personally think that could increase even more, given that exports have growth 13.8% annually over the past 5 years. It seems like 10% growth would be reasonable, which would mean that by 2025 Vietnam could see 27m container equivalents. That’s almost double.

Given this backdrop, Gemadept’s stock has not performed that well, despite the strong positive tailwinds from exports, the China-US trade war or this purchase. You would think people would be excited about potential for better utilization and greater ability to invest in new ports. But they aren’t.

I will have to look into this more, but I am surprised that it is trading so low. The stock is trading just 4.4x trailing P/E, but 11.5x forward P/E. There was a big divestment in 2018 which boosted profits, so the 2019 figure is more realistic to describe its ordinary operations. Isn’t too low - DP World (a UAE ports operator and the world’s largest) is trading at just 10x - but still surprisingly given the growth in the market.

I am going to do more work on ports and Gemadept, but I thought I would just finish here on this summer Friday! Happy Weekend!

July 11, 2019

The health of swine – swine flu outbreak

Just an update on the swine flu. Good news on at least one front: the government says it is close to producing a vaccine against swine flu. That’s great news.

Just to give you a sense of what has already happened:

• The flu has spread to 61 of 63 counties. Let’s just assume it is everywhere now; I don’t see how it could not be. 

• Over 2.9 million pigs have been culled.

• This is more than the number of pigs culled in China (1.1 million).

• But the Chinese figures for how many pigs are infected are probably too low.

• This is likely the worst animal epidemic the world has ever seen.

That 2.9 million figure is likely to go up and represents about 10% of all pigs. That is going to mean a big decline in pork products in the market. As a reminder, pork represents about 70% of meat consumption in Vietnam. (Previously I said 75%, but it is hard to get a real number - let’s say it is somewhere between 2/3rds and 3/4ths).

Trade effects:

• Imports of pork products have risen 6.7x to $24m, and this has helped keep prices reasonable. The article says that imports are around $3-5 per pound.

• Funnily enough, pork exports have risen 1.8x in the first four months of the year to $25m, just slightly above imports. This is a fairly small amount, given that total agricultural exports are around $30bn, but I assume that these exports are mainly to China and Hong Kong, which have suffered from the flu.

Farmers are really being hurt, and families, because there are tons of families that raise their own pigs. Of course, not all of these will cull their pigs, meaning that the disease is more likely to spread and continue.

I first wrote about the swine flu back in March 7 when I said the government is taking it seriously. I think they are, but they clearly aren’t doing enough to stop it. Maybe it will start to subside, like China says it has, but I bet eradication won’t happen until there is a vaccine. Hopefully, this government vaccine is real, but scientists don’t think so.

Final thought: I bet if this keeps up, there is going to be significant changes in diets and trade because of the flu. It will take Vietnam some time to recover, and in the meantime imports will continue to flood in and people will look to other sources of protein.

July 10, 2019

The health of humans - Dengue outbreak

Something you should know about me: mosquitoes love me (maybe you shouldn’t know that, but it is what it is). My mamma always said that it was because my blood was sweeter than others. Well, it turns out this is a real thing, some people are sweeter to mosquitoes than others.

All of this to say that I follow closely any news of mosquito-borne diseases, and it looks like Vietnam is having an outbreak of dengue fever. In the first six months, 81,132 people have been hit, (representing a 310% increase for the country as a whole. Of these cases, more than 24,000 are in Saigon, or a 176% increase over last year. From 2004-10, the average number of dengue fever cases in Vietnam was 91,321.

Not to make it all about me, but I know I’m going to get dengue.

A few stats about the disease:

• 1 in four people infected with dengue will get sick, with symptoms either mild or severe.

• 1 in 20 people who get sick with dengue will develop severe dengue. Severe dengue can be life-threatening within a few hours and often requires hospitalization.

• There is no cure for dengue.

• A recent vaccine in the Philippines actually made people worse (we talked about this when talking about measles in the Philippines, scroll down to May 24, 2019). It is still approved for use in the EU and the US, but only with pretty severe restrictions.

• Four people have died in Vietnam so far this year.

• “According to the World Health Organization, there are approximately 50 million infections worldwide each year and 2.5 billion people are at risk of contracting dengue.”

Vietnam has actually been much better than other countries in ASEAN in terms of cases and deaths from dengue. It was lower than Thailand and many other countries. This is for both deaths and DALY (or disability-adjusted life year), which calculates the number of years lost to sickness, disability and death. (See charts above to the right) This year will probably change these statistics a lot.

What can countries do to stop dengue?

It doesn’t seem like a vaccine is going to come along anytime soon, so countries are trying for other solutions. Interestingly, only female mosquitoes bite, and only Aedes aegypti and Aedes albopictus spread dengue, yellow fever, zika among other bad diseases. Mosquitoes of the Anopheles genus spread malaria.

Singapore and Indonesia are trying novel ways of limiting dengue. The main way is by distributing mosquitoes infected by the Wolbachia bacteria, which does allow males to fertilize females and also protects females from dengue and Zika. It looks like it is working so far in Singapore and in Indonesia. According to these reports, Vietnam is also trying it, but obviously it hasn’t started working.

In that New York Times article, the kicker is that eventually, effectiveness will drop off, and we will have to find some new way to fight mosquitoes and mosquito-borne illnesses. Maybe a vaccine will come through at some point that will limit the negative effects. Of course, then we have to worry about anti-vaxxers, which are already a problem in Vietnam.

July 9, 2019

Electricity use - surprising cost of generating GDP

I saw this story yesterday about the use of electricity by bitcoin. It turns out that bitcoin uses a lot of electricity. More than Switzerland, or 64.15 TwH per year.

This got me started thinking about electricity usage in Vietnam as well, and I realized I had no idea how Vietnam stacked up. It turns out, Vietnam is the 15th largest country in the world by population, but it is ranked #25 according to how much electricity it consumes. That’s based on 2016 figures.

China and the US are numbers #1 and #2, although I was a little surprised that China was already so much further ahead than the US. That’s mainly because it has just so many people. India, despite having a similar number of people, still hasn’t surprised the USA and remains the third largest consumer of electricity.

Of course, this is sort of a mix of countries ranked by population but also by how many natural resources the countries have. That’s why a country like the UAE is the 31st largest consumer of electricity, despite being the 92nd largest country in the world. Saudi Arabia is the 41st largest country but consumes more electricity than Italy, which has almost twice the population.

Because of these anomalies, I also looked at KwHs consumed per capita. This is also pretty interesting. Surprisingly, the US is not as bad as I thought they would be. They are 9th in terms of electricity usage per capita. The largest is Iceland, with over 50,000 KwH annually, but that turns out to be mostly aluminum (75% of electricity goes to aluminum manufacturing). Electricity is very cheap and sourced from renewables (86%) in the country, so the fact that the country consumes so much isn’t too problematic. In contrast, the oil- and gas-producing countries are also high on this list, and that is not great for climate change.

Finally, I looked at the efficiency of electricity to generate GDP. This was interesting, because the countries that do well on this metric are the poorest ones. Chad is number #1 on the list (not on the chart to the right) with $48 in GDP generated from every KwH.

Vietnam is way down on this metric at 179th with $1.43 of GDP generated for every KwH. Nigeria is much higher, as is the UK, Singapore, among others. In fact, of all of ASEAN, Vietnam is the worst. Not really sure why this is. Maybe productivity (but then lots of countries in ASEAN have worse productivity than Vietnam). Maybe the fact that Vietnam is actually pretty electrified, but GDP production in these smaller villages is relatively minimal. Something to look into.

The problem is that Vietnamese electricity prices aren’t especially low, meaning that GDP is being generated at a pretty high cost. Or another way to think of it, more of GDP is going to electricity generation/purchase than in most other countries.

July 8, 2019

Korea and Japan trade spat: could it affect Vietnam?

There is a political-historical dispute between Korea and Japan that moved into a trade spat earlier this month. Quick recap: the Korean courts allowed individuals to sue Japanese companies for their treatment during the Japanese invasion and occupation of Korea. About 14 individuals won their cases and were awarded some money (around $90,000 each). This is not much money, but there are a flood of cases coming through that could result in much bigger payments.

The Japanese refused to pay, so the courts said that the individuals could seize assets in Korea. Then the Japanese retaliated by putting export controls on certain high tech products (list here). Specifically, these export controls are targeted at Samsung Electronics, SK hynix and LG Display.

So basically, this is a big mess, and who knows how it will be resolved. The Koreans are trying diplomatic tools, but don’t appear to be willing to force the courts to change judgments. So, it could persist for a while. Some Korean analysts think it might help domestic suppliers:

While the reliance on Japanese exports of these products makes these new restrictions a cause for concern, industry experts seem optimistic about South Korean companies’ ability to survive on reserves in the short term and then begin to shift supply chains to accommodate the change. Some even expected manufacturers to shift more toward domestic Korean suppliers, which would make Japan’s harsh policies more of a boon for the South Korean economy in the long run.

What does this have to do with Vietnam? The following are important to remember:

• From our most recent series on the VNM ETF, Korean tech companies make up about 16% of the index. These appear to be highly dependent on Samsung and other big companies.

• Samsung by itself is responsible for about a quarter of Vietnam’s exports. For the whole country! That’s a lot. If Samsung’s supply chain has difficulties, it could mean weaker exports for Vietnam.

• LG decided to move its phone production from South Korea to Vietnam earlier this year, so they also are at risk.

Global trade is great until there is a hitch in the system. And since supply chains seem to be getting more and more complex, we could see even more areas where a bottleneck hurts everyone down the line, including countries.

It is unclear at this point if 1) Japanese companies could export these products directly to Vietnam (not sure if this is possible or feasible) or 2) that the Vietnamese plants even need these materials, because they may not need these inputs (although it seems likely that they do).

I can’t see any reports on these plants, but it will be interesting to see what happens. I would expect that the VNM ETF is probably not going to do well over the next few weeks.

July 5, 2019

Happy Fourth of July (or Fifth of July) to all of my American readers! (all 3 of you).

Today, I thought I would look at some good news about Vietnam and the world. I found this project, the Maddison Project, that tries to get a very long historical series of economic data. For a few countries, there is data that goes back to the year 1! In France at year 1, per capita GDP was $1,050 (using 2011 dollars). Egypt was $1,225. After that, a lot of years are skipped, but for France the data goes back mostly to annual data in 1280 ($1,053 - no real growth for 1200 years!). Data starts for Sweden at 1300 ($955), Poland at 1400 ($1,050), then Portugal in 1530 ($985). Mexican data starts at 1595 ($562). At 1700, we get yearly data for the United Kingdom - real GDP of $1,591 compared to France at $1,350.

Interesting point: data for South Africa starts at 1700 with GDP of $3,546, which is double the next highest (Spain at $1,730). That must be from all the gold and diamonds. The per capita GDP fluctuates a fair amount but then from 1773 to 1781, it falls 51%. With just a cursory look at timelines, it’s hard to say what drove this. There were some conflicts between colonizers and natives, plus smallpox, but it could be gold and mining prices as well. Real GDP rises again later, but it doesn’t get back to those high levels until 1906 ($3,871). That’s post Boer war and before WWI.

The first piece of data for Vietnam is in 1820 with GDP per capita of $713. This is pretty low, but still higher than Thailand ($692) and the same as the Philippines ($715). Malaysia was well ahead at $1,031. This is the last time that Vietnam is richer than Thailand (according to this data).

Per capita GDP in Vietnam was basically unchanged from 1913 until the 60s, when it started to improve, reaching $1,210 in 1964. But it fell during the later years of the year and didn’t return to that level until 1988. That was momentary before it fell again until 1991. This was after the initial reforms of the Doi Moi, including the Law on Private Enterprises. From then on, it just rose and rose and rose.

We can really see that the war had a very negative impact on the country. Communism didn’t help. Once Doi Moi started and the country opened up, real GDP per capita jumped five times. This is the fourth best among all the countries in the world. And given its strong growth, it probably continued to be up there if we extended it to 2018.

But looking at the overall trend from 1950, Vietnam did not perform as well as many other countries, including its ASEAN neighbors of Thailand and Singapore. Almost 60% of the best performers over this time period are in Asia. Vietnam grew a respectable 6.8x from 1950 to 2016, but again, almost all of that comes from after 1990, when it grew 5.0x to 2016.

If we thought about this in terms of population, things would be more striking, mainly because of the growth of China (16.3x). This is very impressive. India rose just 4.2x (it actually grew more from 1990 to 2016: 4.6x). The US just 3.5x. So China really stands out for its rate of growth for a very large country.

However, Vietnam’s growth is also quite impressive, especially in such a short time period. Let’s hope the country can keep it up, because real GDP per capita was still quite low at $6,031 in 2016.

* Maddison Project Database, version 2018. Bolt, Jutta, Robert Inklaar, Herman de Jong and Jan Luiten van Zanden (2018), “Rebasing ‘Maddison’: new income comparisons and the shape of long-run economic development.” Maddison Project Working Paper, nr. 10, available for download at www.ggdc.net/maddison. Please refer to www.ggdc.net/maddison for documentation and explanation of the data series.

July 3, 2019

ETF Returns broken down…part 3 and final

For a final post on the ETF returns, I wanted to see if I could summarize what really drove the changes. Remember, the index rose around 9.1%.

• VinGroup raised the index by 2.5pp.

• All other Vietnamese companies were effectively neutral.

• The Koreans added about 4.5pp to 9.0pp (not counting currency). The big difference here is that Uti Inc./Korea was added sometime during the half (I was unable to find out when). That makes a big difference.

• All other foreign companies added 3.3pp (not counting currency).

• Currency had an impact, but I am having some problems calculating this. It is between -0.1% to -1.0%, which is basically not helpful. I will have to think more about this, but I am pretty sure it is somewhere in this range.

• Cash was 1.2% of holdings at the beginning of the period and 0.41% at the end.

• VNM the ETF was trading at a slight discount (-0.65%) to the NAV value of the fund. It was a similar discount (-64%) at the beginning of the period.

Ultimately, I think if you were right about 1) the foreign companies and 2) Vingroup, you would be fine. And maybe hedge the currencies.

It’s weird to think that the only ETF for Vietnam is ony 2/3rds Vietnamese-traded companies and that so much of the returns in this go around were driven by the 1/3rd not traded in Vietnam.

July 2, 2019

ETF Returns broken down…continued

Yesterday we went through the returns of the Vietnamese index in 1H2019. Key insights: foreign companies are important to the index, and these actually did quite well. But depreciation of the Korean Won (-4%) was negative Other than that, additions/changes to the index were somewhat important (6.6%).

Today I want to delve into the Vietnamese companies and their results. Within the Vietnam companies, there are five that really stand out for their outstanding performance:

• Vingroup (VIC) - this is the biggest weight in the index (8%) and the largest in the market. The launch of the phone and the car are probably driving the solid 1H return, but its valuation is expensive at 92x P/E (even though of course P/E is not a good guide to future performance).

• Vietcombank (VCB) - VCB is the largest bank with a weighting of 6%. The bank is growing quickly. Pre-tax profits were almost $800m in 2018, and the bank is guiding to $1bn by 2020, or 12% annual growth rate. The stock was up 32% in 1H, so it might be moving ahead of its growth trajectory. It is now trading at 4.1x P/B with an ROE of 21.9%.

• Vincom Retail (VRE) - Right below VCB is Vincom Retail, which is 5% of the weighting and rose 19% in 1H2019. It is owned by Vingroup, as is VHM, which is also part of the index. Revenue was up 65% in 2018.

• Hoang Huy Investment Financial Services (TCH) - We are starting to get to the smaller components of the index. TCH has just 1.8% weighting but was up 18% in 1H. The company is a conglomerate - it does financials, real estate, and trucks. In 2018, trucks made up about 87% of all revenue, but that’s changing as some real estate projects start to be delivered.

• Vietnam Construction and Import-Export (VCG) - With a weighting of 1.6%, VCBG was up 21% in 1H. VINACONEX is a construction and real estate company. It looks like most of the stock’s rise is due to more property investment.

Looking at the ones that dragged down the results, it was mainly three companies:

• FLC Faros Construction (ROS) - While the weighting of Faros is not in the top 10 (3.8%), it fell 19%. That had a significant impact on the index. The P/E is still very high (48x). Since November 2017, the stock has just fallen and fallen and fallen. The stock price back then was VND176k and is now VND23k. People have seen this stock as a risk to the index for quite some time: see this article in Barron’s and this article.

• Bao Viet Holdings (BVH) - With a weighting of 4.6% and a decline of 12.5%, BVH also drive returns down. P/E continues to be high at 52x and a P/B of 3.8x. It’s an insurance company. Maybe the growth is not as attractive right now.

• Thanh Thanh Cong (SBT) - SBT is a sugar company. Weighting is at 2.7% and the stock lost 13% in the half. It is part of a larger conglomerate. It’s not particularly expensive (15x P/E) and there is lots of growth on the revenue side (less on the profit side). But it is hard to find information on the company. I will have to look harder.

By sector, tech (the Korean companies) and health care (the Japanese company) and banks were the most impactful. In the chart above, we take the weighted returns of each sector to show the effect on the index.

Just a note here: Vincom Group makes up about 20% of the index. While the three companies are in different sectors, they clearly are important to each others (not to mention that Vincom conglomerates the other two). If Vincom starts to perform badly, then the index is probably going to underperform as well.

Correction: Finally, I said yesterday that the stock market was only up 8.8% compared to economic growth of c7%, but this is not like-for-like. It should be annualized, and on that basis the stock market is growing much faster than the economy. I do wonder, though, if economic growth and the stock market are correlated as much as people think. I would say no, but it’s something to look at. Some studies (pointed to here) have observed a negative correlation. Also, the impact of multinationals (which would be significant for VNM) is also a consideration.

July 1, 2019

The First Half is Over!

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.

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%.

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.

June 28, 2019

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.

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.

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!

June 27, 2019

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.

June 25, 2019

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.

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.

June 24, 2019

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).

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…

June 20, 2019

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).

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%).

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.

June 19, 2019

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.

June 18, 2019

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…

June 17, 2019

Vingroup: VinFast to deliver first car

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%.

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).

June 14, 2019

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.

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.

June 13, 2019

Alcohol

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.

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.

June 12, 2019

Coffee

Let’s go over a few truths:

• 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.

June 11, 2019

Review: The Best We Could Do by Thi Bui

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.

June 7, 2019

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.

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.

June 6, 2019

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:

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.

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.

June 5, 2019

Solar in Vietnam

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.

June 4, 2019

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.

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.

June 3, 2019

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.

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….

May 30, 2019

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.

May 29, 2019

Second-tier cities

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%).

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.

May 28*, 2019

Catching up

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

May 24, 2019

MMs: Measles and manufacturing

Two stories caught my attention today.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

May 23, 2019

Trade and avocados

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

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

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

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

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

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

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

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

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

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

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

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

May 22, 2019

Indonesian-Vietnamese relations, not that great!

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

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

My thoughts:

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

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

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

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

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

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

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

What to take away from all of this

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

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

May 21, 2019

Resilience

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

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

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

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

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

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

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

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

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

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

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

May 20, 2019

5G

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

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

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

What is all the hullabaloo with 5G?

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

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

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

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

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

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

What is the role of China in this?

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

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

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

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

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

May 17, 2019

Stock listings

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

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

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

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

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

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

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

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

What does this mean?

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

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

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

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

May 16, 2019

Tax simplification

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

There are a few interesting points in this story.

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

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

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

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

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

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

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

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

May 15, 2019

African Swine Flu

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

May 14, 2019

Cost of renewables in Vietnam

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

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

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

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

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

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

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

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

May 13, 2019

Fitch upgrades Vietnam debt outlook

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

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

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

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

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

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

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

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

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

May 10, 2019

Vietnam: A currency manipulator?

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

The three things that the US Treasury looks for are:

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

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

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

Vietnam meets all these criteria right now.

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

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

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

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

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

May 9, 2019

Electric vehicles cars are coming to Vietnam!

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

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

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

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

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

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

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

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

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

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

May 8, 2019

Press center opens

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

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

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

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

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

May 7, 2019

Drugs

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

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

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

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

That comes from this article, which is excellent throughout.

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

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

May 6, 2019

Luxury

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

A few key points from the report:

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

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

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

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

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

And I thought this was a crazy stat:

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

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

A few points about the Vietnamese luxury market:

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

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

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

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

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

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

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

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

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

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

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

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

May 3, 2019

Beyond Meat - great IPO, lousy stock?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

May 2, 2019

The Vietnam Provincial Competitiveness Index

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

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

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

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

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

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

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

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

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

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

May 1, 2019

Babel and language learning

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

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

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

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

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

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

Few interesting items:

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

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

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

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

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

April 26, 2019

Washing machines

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

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

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

The main question the report tried to answer was this:

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

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

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

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

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

What can we take away from this?

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

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

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

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

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

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

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

The study looks at the net affect:

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

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

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

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

April 25, 2019

Infrastructure

Infrastructure. Vietnam needs it. Train is not good. Roads aren’t great. No metros. Airports at capacity. Big transport expressways to other countries not great. But this should soon change, at least in the south.

The government is proposing a new road from HCMC to the Cambodian border. At a cost of $459 million, hopefully funded by the private sector in a public-private partnership (PPP). The provinces will pay for the land clearances which are 28% of the total cost. The overall cost is $8.6 million per kilometer (including land clearance, $6.2m without). Recently, construction on an expressway in the north (from the Van Don Economic Zone to Mong Cai) began, also funded by a PPP. That will cost $6.1 million per kilometer, but I am not sure if it includes land clearance, and even if it does, land probably costs less there than around HCMC.

At some point, I want to look at road construction cost in different countries. That’s on my list.

I have been hearing that transport is a real bottleneck for Vietnam. So I wanted to do a little work on where the country is, in terms of infrastructure. I found this Logistic Performance Index (LPI). It is an index created by the World Bank to see how countries are doing in terms of trade logistics.

Where does Vietnam stand? Well, they aren’t that bad and are improving. Hitting well above their weight. The country is something like 159th in terms of GDP per capita, but is 39 on this LPI. Infrastructure is a bit worse than that with a rank of 47th overall, but that’s still not bad, well into the top third. And Vietnam was as low as 64th in the world but has been consistently in the mid-50s for overall and high-60s on infrastructure.

Among its ASEAN siblings, it is ranked very well, better than all except Thailand. On infrastructure specifically, it is a bit worse than both Thailand and Malaysia, but just a bit. I can’t help think that Singapore pulls Malaysia up a bit. Singapore is ranked 7th in the world. Among low-income countries it is the best.

What needs improving? Well, lots of stuff. But according to a survey of logistics professionals, rail needs the most improvement, then roads and warehousing. Ports are alright, airports a bit better and telecom and IT pretty good. And in terms of improvement, 70% of respondents say that trade and transport infrastructure has improved. (See 2018 survey results below).

So while there needs to be big investment in infrastructure, Vietnam is actually doing pretty well. If it continues to want to compete, it probably needs to do even more investment. These PPP projects are probably a good way to help sidestep some of the capex, in the near term.

April 24, 2019

Scooters!

Ok, got to be honest here, this is not a post about Vietnam. I am endlessly fascinated by the sharing economy, and especially the companies that are in public transportation. In Vietnam, that’s mainly Grab and Go-JEK. Grab has the pole position, but Go-JEK just hired the former head of Facebook Vietnam (who co-founded Misfit, acquired by Fossil in 2015). Plus, there are a lot of smaller companies that are competing. These all have interesting business models that may not be sustainable. I think that the cost of switching these ride-hailing services (from the passenger and the driver perspective) is so low that there is really no barrier to entry. That means if a player pushes on prices or wages, they will win, at least in the short term.

But so far, none of these companies have brought in scooters to Vietnam, which have been the big new thing in the US and Europe. Bird went from nothing to 10 million rides in one year. None of the companies in Vietnam have these scooters yet, but I could see this as a potential market over time, if the unit economics work.

Oh, and scooters do not mean mopeds or bikes, but the tiny things that used to be the exclusive domain of children.

The big stumbling block is the economics on a per unit basis. According to some research, scooters at the beginning of the trend had revenues of just $75 over their lifetime, but cost $550. That is not good. That’s a big $475 loss per scooter.

To answer this concern, a VC, Mark Suster, wrote this Medium post. He is an investor in Bird, the largest scooter company in the US, so he is definitely “talking his book.” His view is that unit economics have been bad, but they are going to get much better. Plus, the technology will be so good that it will mean both a profit and barriers to entry for new competitors. Plus, while it is capital intensive at first, over time that will not be true. A few points:

• I feel like everyone at the beginning of this journey thought that scooters would be like other ride-hailing companies. Not capital intensive, but then realized they need to provide all the scooters. I am sure that is not true, but it kind of seems like it. They need to buy lots of scooters, then buy lots more scooters when those fall apart.

• In the US, there are about 250 million people that live in urban areas, but if you look at those that live in dense neighborhoods, it’s more like 20% of this, or 50 million. If 5% of these people take a ride once a day (which seems fairly high), that would be 2.5 million riders a day.

• Assuming each rider averages 2 rides per day, that would mean 5 million rides. Scooters generally make 5 rides a day now, according to data from the Information and Louisville. That means there need to be 1 million scooters on the road at any time. Over time this will likely fall, as the average utilization could rise from 5 rides per day to 10.

• Scooters are currently expensive. Bird said that it spent $550 at the beginning, and that it wants that to fall to $360 for a more durable scooter. Over time, these costs may fall (as battery prices fall) or increase in order to make them more durable. Suster doesn’t really talk about scooter costs, just that the new scooters are 60% more efficient and durable.

• If there need to be 1 million scooters at an average cost of $360, then that’s $360m for scooters at a time. Assuming these last 3 months, the companies need to spend $1.4bn per year. This could fall to $720m as rides per scooter per day increases and then down to $360m as the life of the scooter increases to 6 months.

We could easily reach a situation where gross margins for scooters are high (based on certain assumptions, I could see them reach 32% after depreciation. And if the numbers are large enough, that would cover staff and R&D (operating expenses outside of COGS). See table above (as you move left, I make changes to the costs/revenues to reflect improvements to see what has the largest impact - at the end, we get high gross profit per scooter).

But one of the problems is that we are going to have some people that ride a lot. Say 3-4 times a day, 5 times a week. If the cost to that person is the current revenue of $3.65 to the scooter company, that means the weekly cost is $73. You can buy a scooter for just 7 weeks of riding. So your power users could just buy their own to save money. Maybe this would only be a small problem, but it would mean that some of your best users may leave the service.

Otherwise, completely outsourcing the manufacturing of scooters, like companies did at the beginning, is not a good model. Bird has to invest, with its manufacturing partner, lots of time and effort to get the right scooter. Other companies will have to do the same, and that will be expensive. Bird is also looking to franchise the model into other countries, in order to lower their capex. Given current unit economics, paying another 20% of revenue would be unprofitable.

Ultimately, I thought that Suster put out a compelling narrative but without numbers. I think it will be interesting how all of this changes over time. I have ridden a scooter in Santa Monica (highly recommend) but it was extremely expensive (more expensive than for an Uber ride over the same ground). I think there is a place for scooters, and it will probably be in cities with good weather, public transport that is good but not amazing (so one needs a scooter for the last mile), and at a reasonable price.

April 23, 2019

Climate change and what it has already done to us

Usually when we think about climate change, we think about the impact it will have on our children, our children’s children, our children’s children’s children, our children’s children’s children’s children….. Maybe we also think about floods, hurricanes, fires, melting glaciers, all of the things happening now that are caused (in part at least) by global warming. We don’t generally think about climate change as something that has already had a major impact.

That’s why I was surprised by a new Stanford study that says that climate change has already hurt economic growth and widened income inequality.

The gap between the economic output of the world’s richest and poorest countries is 25 percent larger today than it would have been without global warming

The theory is that certain temperatures are good for economic growth. Richer countries are actually the colder ones right now, and they have benefited from warming. Meanwhile, many hot countries are poor, so that additional warming actually hurts their economic growth.

The majority of the world’s population is worse off. India’s economic growth is 31% lower in the period 1960 to 2010 than it would be. Other big countries have also been hurt a lot: Nigeria (-29%), and Brazil (-25%). But even China (-1.4%) and the US (-0.2%) are worse off. Colder countries like Canada, Norway and Sweden, and even countries that are not really considered to be so cold, like France and Great Britain have all seen higher economic growth since 1960.

ASEAN has been hard hit. Every country has been impacted negatively. Vietnam’s GDP per capita would be 11% better without climate change, while Indonesia is 16% off. But all of the countries have estimated GDP losses, and all are impacted by climate change. Future warming is going to much worse for these countries as well, because they are already hot.

There are a few questions that I have:

How were colder countries richer, if temperature is so determinative of economic growth. My answer would be that there are a number of reasons why these countries grew rich. Also that the change in climate is more important than levels, especially the changes we have seen already in a short time. There is a small hint of this in the write-up of the research:

The study builds on previous research in which Burke and co-authors analyzed 50 years of annual temperature and GDP measurements for 165 countries to estimate the effects of temperature fluctuations on economic growth. They demonstrated that growth during warmer than average years has accelerated in cool nations and slowed in warm nations.

Also, these are just estimates of potential economic growth (decline), not objective measurements. Scientists have a good idea of how much warmer countries are already, and the researchers estimated how GDP changes for each level of warming. They then ran lots of scenarios and came up with potential ranges, of which these numbers represent the median.

But even with these, it seems like the trends are correct and are scary. We will see if this continues to stand. But it is not good for Vietnam or the rest of ASEAN or the world.

April 22, 2019

Plastic bags

On March 7, I wrote a small post on a company making straws out of rice flour instead of plastic. Now two chains are using banana leaves to wrap some vegetables.

Vegetables such as squash, spring onions, maize and okra wrapped in banana leaves can be seen in the stores of the supermarket chains Saigon Co.op and Lotte Mart…Le Minh Hieu, a representative of Saigon Co.op, said that many Co.opmart supermarkets, Co.op Xtra hypermarkets, Co.op Food stores and Co.op Smile convenient stores in HCM City are carrying out the practice…“We don’t charge more for vegetables wrapped in banana leaves. You might think that natural wrapping costs more, but, in fact, it doesn’t,” he said. “While we have to employ a machinery line for plastic packaging, banana leaf wrapping requires manpower,” he explained, adding that banana leaves remain fresh for one to two days.

It’s amazing to me that people are trying to move away from plastic so quickly. Of course, I recently listened to a podcast with David Wallace-Wells, who wrote The Uninhabitable Earth, and he said that it was not really a solution. But he said, and I agree, do something, but understand that what you do is of little importance. Because it is a collective action problem, we need a bigger solution than something that any individual can do.

In other environmental news, USAID launched a $183m clean-up of an Agent Orange site. It is an old airbase near HCMC that the US military used to store the chemical:

At Bien Hoa, more than 500,000 cubic metres of dioxin had contaminated the soil and sediment, making it the "largest remaining hotspot" in Vietnam, said a statement from the US development agency USAID, which kicked off a 10-year remediation effort on Saturday…The dioxin amounts in Bien Hoa are four times more than the volume cleaned up at Danang airport, a six-year $110 million effort which was completed in November.

The US is not that great dealing with its past sins. Look at the Native Americans in the US. For Vietnam, it still doesn’t admit a link between the chemical and birth defects. But Vietnam has decided to move beyond that, and the US has started doing a few things to help people. Good.

Finally, a good investment summary of Vietnam can be found here. Conclusion:

Vietnam is still one of the most favoured markets amongst frontier investors given its robust economic growth, stable macroeconomic outlook, ability to attract foreign direct investments and now an increasing consensus that the country is expected to benefit from the trade tensions between China and the U.S.

Happy Easter, belatedly, for all those that celebrate. Happy Passover for those that celebrate that.

April 19, 2019

South China Sea

This blog has entered into the political realm more than I expected (or wanted), over the past few days. I think it is probably because I am intensely interested in politics, plus, we are seeing that politics are extremely important in economics. For example, the trade tension (war?) between China and Vietnam is having significant effects on all the countries of Asia and the world. Vietnam, in particular, is seeing increased foreign investment because of this. And politics matters a lot to economic growth and therefore predictions of economic growth.

So I was interested to see more news on the South China Sea, specifically, Vietnam has built up 10 islets there. These are in the Spratley islands, which are claimed by China and the Philippines as well. And the government hopes the islets are self-sustaining and are not easy for China to take over easily.

CSIS, the home of the panel I attended yesterday, has a Asia Maritime Transparency Initiative that follows all of this. A recent report from them said:

“Development of military-controlled islands that Vietnam has occupied for decades in the South China Sea’s Spratly Island chain involves landfill work plus installation of solar panels on some buildings, the initiative report says. The report points also to 25 “pillbox” forts that Vietnam has built on sometimes submerged reefs or banks.”

The original VOA story says that any disputes between the ASEAN countries have been easily settled, but the bigger dispute between China and these countries are more difficult. I found two quotes interesting and somewhat mutually exclusive.

• China normally leaves Vietnam alone at sea because they have shown a willingness to “bump shoulders” with Chinese vessels if pushed, he said.

• China and the Philippines have complained occasionally to Vietnam over the years because its islets fall into their claims. But the complaints fade because the other countries do not see Vietnam as a threat, scholars believe.

Foreign policy experts see conflict in the South China Sea as one of the major concerns in the near- to medium-term. Japan and the US have been supportive of the Philippines and Vietnam in their disputes. As we talked about two days ago, the Thucydides trap is real, and South China Sea could be a flashpoint. Vietnam’s strategy of building defensive forts in the sea is probably the best way to go, although the more there are and the bigger they grow, the bigger the threat.

Lots of pictures of these tiny islands in the South China Sea can be found here.

April 18, 2019

Indonesian Elections

Today, I had the luck to go to a small panel discussion at CSIS on the just-completed Indonesian elections. I know even less about Indonesia than I do about Vietnam (which is saying a lot), and so it was very interesting to me. Also, shame on me for not knowing more about the fourth largest country in the world, and the largest in ASEAN.

It sounds like the results (Joko Widodo won the presidency) were a bit different than the polls, and maybe a bit surprising in terms of trends but not in final results (Widodo was the favorite). The first speaker, Ann Marie Murphy, pointed to a few negative trends in campaigning:

• The rise of Islamic majoritarianism, not just the rhetoric (which was not great), but also the fact that Widodo was forced to take on Ma’ruf Amin as his vice president. (Although, personally as an Arabic speaker and Middle East fan, I feel pretty comfortable in this sort of milieu, plus the names make sense to my ears). One interesting stat was that in 2016, 42.3% of Muslims objected to non-Muslims holding office, which is shocking. More shocking is the fact that it is getting worse: 54.6% objected in 2018. (Murphy sourced this from Mietzner).

• Widodo’s response was to co-opt the Islamic movement by appointing the VP, giving patronage to the NU, and demonstrating personal piety. But he also reacted by banning an Islamist party, targeting Muslim preachers from Prabowo’s camp, and used security forces to stop anti-Joko protests. This last is especially troubling, because it is the first time that the security forces have been used in this fashion since Suharto.

• The decline of political parties. There was a change in 2009 in election laws that moved parties from closed party lists to open lists. Party identification fell from 80% to 10-20% after this change. The impetus behind this was to ensure that politicians were accountable to local voters. But now without party funding, local elites (who fund the campaigns) control the politicians. Also, local bureaucrats are advantaged as well.

The other speaker, Adam Schwarz from Asia Group Advisors, was a bit more positive. His view is that Widodo has the more pluralistic, open and liberal worldview, and he won cleanly. The “more Trump-ian view of the world” held by Prabowo lost.

• One point is that the Indonesian government asked all 240,000 candidates to fill out a small questionnaire with basic data (name, age, marital status, whether you have been convicted of corruption), but also to include a small personal statement on why you are running. 100,000 candidates filled it out the form, and of those 60-70,000 included a statement. But only a small minority made overt appeals to religion.

• Generally, the national candidates leaned on religious rhetoric, but the local candidates did not.

• On the subject of VP Amin, Widodo is very unlikely to use him much. He didn’t lean on Kalla, the previous VP, who had much more experience.

In Schwarz’s view, Widodo’s focus on infrastructure really came through in the first term. He built 10 new airports, 800km of toll roads, 100,000 kms of roads, will get to about 15gw of new power generation. He kept the deficit down (less than 3% of GDP), despite limited tax revenues. In fact, Widodo may have been too conservative (which at first glance I agree with - see my series on MMT last week).

Schwarz’s wish list for the the next term are:

1. Increasing the tax ratio from 9% (see my post from yesterday about Vietnam’s tax ratio, which is almost double).

2. Handle state enterprise growth (which have assets equal to 50% of GDP and are moving into ancillary businesses), which are starting to crowd out domestic and foreign private businesses.

3. Deregulate and loosen regulations to improve competitiveness.

4. Engage more with the global economy (Indonesia is not in the TPP)

5. Greater coordination and control of policy implementation (there needs to be greater focus on implementation than new policy).

There were a bunch of interesting questions from the moderator and the audience (lots of old Indonesian hands attended). The best was on Prabowo. The questioner said that he was the “biggest a$$hole” he had ever met and wanted to know if would he leave the scene after this defeat. Both speakers seems to think that Prabowo would no longer be a force, but that his vice presidential candidate, Sandiago Uno, is now well-placed. Others agree.

I think it will be interesting to see if Indonesia takes a greater leadership role within ASEAN over the next presidential term. Vietnam surely is vying for a bigger role, especially after the Trump summit. But the absence of the most populous country is noticeable.

April 17, 2019

TAXES!

This is the week for taxes in the US, and I was listening to a podcast on taxes and the IRS and the sh!t-show that is the US tax system. So of course, I started to think about Vietnamese taxes, specifically personal income taxes. Which at first glance seem higher than I expected, although after digging a bit deeper affect very few people. The high end of the scale is 35%, which hits after $42,000. But with standard deductions of VND9m a month plus more for children, it hits very few people. Two simple calculations:

• High-level expat manager making $150,000 a year. Turns out the expat part is meaningless. She will pay taxes like all Vietnamese. Let’s assume she has 2 kids, and is able to deduct VND3.6m monthly for each, along with a starting VND9m monthly deduction. So that means: VND3480 - (108 + 3.6 x2x12) = 3480. Tax = 60 x 5% + 60 x 10% + 96 x 15% + 168 x 20% + 240 x 25% + 336 x 30% + 2,425 x 35% = VND1066. Ultimately that means 31% of gross income. As you get higher and higher, it gets closer and closer to 35% tax.

• Expat teacher making $30,000 a year. This looks like an extremely high salary, based on what I’ve seen. Assume 2 kids as well. That results in a tax of VND111m, or 16% of gross income.

There are other contributions to be made (unemployment, health insurance). But in some ways those are payments of services, or potential services.

More importantly, the government has a VAT, which is 10% for most goods. The government tried to raise this to 12%, but reversed itself after pushback. A property tax is in the works as well, but of course real estate people are up in arms. Remember, no one likes taxes.

By my calculations, if someone has a $100,000 property, then they will pay just $279 a year. Doesn’t seem that big of a deal, to be honest. And if someone has a $100,000 property in Vietnam, they can probably afford $279 a year.

Anyway, putting this all together, it looks like all taxes are pretty comprehensive, albeit with personal income starting at a fairly high level so poor earners don’t pay that much. Look at the deductible: it starts at VND9m and goes up by the number of dependents. Compare that to the average monthly salary for highly skilled employees of around VND11m. Unskilled is much less than that. So basically, most people don’t pay the income tax.

So it is still somewhat surprising that the government revenue as a percentage of GDP is 17-18% (2010-12, the latest dates for which data are available). Corporate taxes are 20%, plus there are higher taxes on oil & gas and other natural resource enterprises (32-50%). It adds up to a figure well above ASEAN and the OECD levels. The US is only at 12%! Of course these tax figures exclude most social security contributions, which make up a big portion of “tax” payments in developed markets.

In the past 10 years, in 7 of them, the government made it easier to pay taxes (business or personal), either by simplifying them, lowering them or making some other change that “makes it easier to do business” in Vietnam. This is according to the World Bank. So it looks like the trend is for these taxes to go down. And the pushback on VAT and property taxes means it will be hard to raise them.

It will be interesting to see that figure of taxes fall or rise over time. Surprisingly (or not), government expenditures are above 21%, so taxes aren’t fully funding the government; debt and printing money are big portions of it. If it were only domestic debt, that could be fine, but as we discussed in my MMT posts, external debt brings its own issues.

April 16 , 2019

A few items

I’m a bit busy today, so a few things that struck my eye today.

1) Law firms, litigation and Vietnamese businesses: I am not sure if I am surprised by this, but it does seem a bit weird: The most fashion forward US law firm (Boies Schiller) is joining what appears to be the most aggressive Australian law funder to “help” Vietnamese businesses sue. Basically, they are going to put up $30m in order to fund litigation for small Vietnamese firms that have potential cases. That would presumably include the lawyer’s time but mostly its for the other expenses that need to be paid (expert witnesses’ testimony, etc.). These expenses can be really high.

Some of this will probably be great. Let’s help the poor small Vietnamese businesses! Let’s make these fights fairer! These little guys are getting kicked around by these big firms! Now those baddies are gonna have to face a 10-ton legal gorilla. And for the Australian readers: “That’s not a knife. This is a knife.” [Yes, I know you probably hate that, but I can’t help myself.]

And some of this will be horrible. Some small Vietnamese company will have a too-vaguely worded patent that then Boies Schiller uses to sue a big firm that pays. Most of the fees go to the lawyers/funders, the world is worse off.

I am not so excited about exporting the US legal system abroad. It doesn’t seem the best thing about America. And I didn’t know that Australian law was similar. Learn something every day.

I asked a lawyer friend about it, and this is what he said:

Litigation funding is becoming much more normal - I’ve thought about it in some cases but haven’t used it before.  I know some folks here [at his firm] who have. The thing that’s a little odd here is that Boies Schiller is out in front advertising this with the litigation funder.  I haven’t seen that before.

As I said, fashion forward.

2) More meth: Looks like Vietnam is having its own Breaking Bad. On March 21, 2019 (scroll down to read the post), I wrote about a police seizure of 300kg of meth. Well, looks like that didn’t do much to deter future criminals. There was a 600kg meth seizure on Monday (April 15, 2019) in Central Vietnam. According to the article,

Opium and heroin are the drugs of choice among older users, but youngsters are increasingly turning to party drugs such as ecstasy, meth and ketamine which have flooded the market…Last year seven young people died of suspected overdoses at an electronic music festival in Hanoi.

The laws are already strict, so not sure what the solution is. I generally don’t think laws work that well in deterring drug use. Culture is much better at preventing young people from becoming addicts. Also, I have a hypothesis that legalizing the less addictive drugs, like marijuana, may actually lead to less hard drug use. But the proof isn’t really there. Here’s a study that marijuana use actually decreases injection drug use (in this case heroin, crack, meth and cocaine). One reason for this is that as marijuana becomes legal, people don’t interact with dealers of hard drugs. So if you don’t have access to a dealer with a wide range of drugs, then you won’t go seek them out.

Not to harp on marijuana legalization, there is a second theory that marijuana decriminalization decreases alcohol use. This 2016 survey review seems not to bear that out, because there is also evidence for the competing theory that marijuana is complementary with alcohol use. Here’s a more positive study about how marijuana decreases alcohol use.

So what am I saying? Not really sure. Just that meth ain’t good. And Vietnam may need to look to alternative ways to combat its spread.

3) Vietnam continues to build its Navy. According to Prashanth Parameswaran, the Vietnamese navy has become one of the more capable navies among Southeast Asian states. All of Asia is fearful of a rising Chinese, and a key flash point is the South China Sea. Vietnam already cancelled a contract to drill there because of Chinese pressure. It seems to be building up its Navy as a showy response to this encroachment.

But ultimately, China is going to do what China’s going to do. And Vietnam will just have to take it. The more economic, diplomatic and military resources that Vietnam has should give it a better negotiating position. But it needs to make sure that it doesn’t cuase China to overreact. Weaving that road will be hard.

The US could help, but my view is that the US missed its best chance to build a big block that could counteract China in Asia: the TPP (Trans-Pacific Partnership). It should go back and join it. And it should work harder to build up relations with and among all of the other Asian nations. Vietnam is key to that, and is already predisposed to the US. Trump’s summit with Kim (which I think was kind of stupid), was helpful for improving ties.

A stronger response to China probably is good for both the US and Vietnam, but ultimately the key is to avoid Thucydides’ trap: “when a rising power threatens to displace a ruling one, violence is the likeliest result.”

April 15, 2019

Employment

Following up from my posts last week on MMT, one of the main reasons (as far as I know) that people want MMT and control over their monetary and therefore fiscal policy is so that governments can reduce unemployment. But Vietnam may not really have a problem with unemployment .

Of course, there are some issues in Vietnam.

Youth unemployment: First, while the unemployment rate is low (2.1% in 2018), the youth unemployment rate is significantly higher at 7.3%.

Public employment: The State is actually a big employer at 9.6% of total employment. That probably doesn’t count employment in public enterprises, which add another 10 percentage points (according to the ILO). So about a fifth of the total workforce works for the government in some way, if these statistics are correct.

Vulnerable employment: A large portion of employment is vulnerable. This is when people are employed by their families or are self-employed but work alone. This figure is actually pretty high at 55.8%, although it has fallen a lot over time. The fall has been the greatest out of the larger South Asian countries (see chart on left), and the figure is approaching Thailand and Indonesia.

Rural employment: Since the rural population is still pretty high (65%), and agriculture is important (16%), that drives down unemployment. Basically, as my economics teacher told me a long time ago, unemployment basically doesn’t exist on a farm: You don’t have a job, you work in the fields. There has been massive urban migration since 1989 - the population was 80% rural then and has fallen to that 65% figure in a short time. This will likely continue, especially because of better earnings in cities. And I would assume that farming will be more consolidated over time, as we have seen all over the world.

Growing population: Finally, Vietnam is a young country. Around 1.6m people enter the labor force every year, and those people need a job. In addition, Vietnam is becoming more educated, but there is a risk that the jobs wouldn’t be appropriate for college-educated workers. We see this a lot in the Middle East, where lots of people graduate from college and have no job opportunities, except for very crappy unskilled jobs that they don’t want.

What does this mean all together. The Vietnamese government actually seems to be taking care of its population pretty well, mainly through direct or indirect employment. This is one of the main advantages of MMT, universal employment. But Vietnam is pretty close to that, helped by fairly de-consolidated agriculture. Over time, we are going to see more urban migration, consolidation with agriculture, and finally greater tertiary education for young people. To be able to deal with that, the government needs to provide employment of some sort, either through their own programs or the private sector. Right now, the big influx of FDI has been a big part of it, but will it continue. Also, should it continue, if it really doesn’t help upgrade the economy. More about this tomorrow.

April 12, 2019

MMT part three

So, yesterday, I was looking at monetary sovereignty, and wanted to see how close Vietnam was to true sovereignty. And as I get more into MMT, I find it difficult to understand exactly how developing countries, actually any countries, can actually get to monetary sovereignty. Does it really just mean autoarky? If so, that’s not that compelling. Countries really do benefit from trade.

Maybe the key is that it exists on a spectrum with few countries actually existing on the side of almost complete sovereignty, with the US being the main example right now. On the other side, you have countries like Ecuador that just use the US dollar. Ironic given that the Ecuadorian government is pretty anti-American, or was (a bit less now).

The European Union, Japan and Canada are all pretty sovereign, basically they may have some non-Euro/-Yen/-CAD-denominated debt, but generally debt is denominated in their own currency. Exchange rates are flexible. They don’t need large reserves, and they are able to print their own money as they see fit. The Euro is a good example.

Emerging economies have not gotten that far, or most of them haven’t. Even China, cares a great deal about foreign (dollar) reserves. Vietnam also cares, and it has tried to keep high levels of reserves. It led us to the hypothesis that the government is trying to increase exports in part to make sure that it can keep high enough reserves in order to maintain export levels - our treadmill. Let me be clear this is just a hypothesis, and something that I continue to examine.

But today, I wanted to look at some of the main components of exports and imports that are basically “required” for the country. One of the main ways to move up the scale of monetary sovereignty is to not worry about imports. That means trying to be self-sufficient in the most important imports necessary for life, but have luxury good prices susceptible to whatever the floating exchange rate is.

Looking at the main points that Kaboub raised as necessary for monetary sovereignty (see my April 9 post for more info about Fadhel Kaboub’s views on MMT), then Vietnam should be mostly independent for food, energy and then try for high-value exports.

So, looking at exports and imports (charts above), let’s see where Vietnam stands.

• Fuel: Not looking good. Vietnam is a net exporter, and its exports of oil have fallen pretty significantly. The oil and gas potential of the South China Sea is quite high, but, as we have talked about before, difficult for geopolitical issues. My view is that the government should go all in on renewables. It’s a sunny country, and it could easily produce enough electricity from that. Then switch to electric scooters, etc. Plus, it has a fair amount of hydro as a fairly reliable base of power production, plus gas.

• Food: Here Vietnam is fine. It’s a net exporter. Of course it would need to import some food, but that’s fine.

• Pharma: This is a category that I wasn’t looking for but is part of the IMF data set, and so it was interesting to see how much it costs the country to import pharmaceuticals. I don’t see this changing.

• High-value manufacturing products: Here, we can see the impact of Samsung’s production. The Korean company accounts for a quarter of Vietnam’s exports. That shows up in telecom equipment exports, but electronics are actually significant net imports.

In summary, Vietnam is doing well in terms of food production, but needs to import fuel, pharmaceuticals and high-value add goods, but is able to pay for it partially through its low-value clothing exports and the help of Samsung.

That’s not the worst situation, but not sure it is the best. Plus, Samsung may be getting the best of that, with the profits transferred up to the parent. According to this older Quartz article, the company imports almost as much as it exports. If a company comes in with all the components and uses local labor for the assembly but without really transferring the know-how, there is little ability for the country to actually move up the ladder of skilled production.

So in terms of moving to greater monetary sovereignty, it seems like the best way to do that would be to heavily invest in renewables and higher value-add exports (as it is doing with its ventures in auto and mobile phone production).

Over time, the government could start to allow the currency to float without worrying about inflation in the most important goods (energy, food). That could allow it to focus more on domestic lending, and would allow it to relax its high levels of reserves.

These are just preliminary thoughts. Now, I want to think a bit more about employment (as I talked about in my earlier posts), but also how sustainable Vietnam’s reserves are currently. This paper by the IMF offers some proposals in gauging reserve adequacy. I might look at these for Vietnam.

April 11, 2019

Food, glorious Asian street food!

Since I wasn’t able to post yesterday, I thought I would post twice today. Lucky you, dear reader!

But this is just a quick one.

Netflix is doing a new show on Asian Street Food. It will drop on April 26, and since it is created and owned by Netflix, it should be available everywhere, including Vietnam.

It looks like it will cover lots of Asia (see subjects here), which, as the crosswords say, is where most of us live.

Sadly, no Hanoi here, just HCMC. It looks like it will cover snails, pho, bahn mi and com tam.

It sounds exciting, although my only concern is that it is by the same people that did Chef’s Table, which I kind of found dull. Also, if it is similar to that show, you need to really like slow-mo. It seems like it would be hard to make street food in Asia boring, but I wouldn’t necessarily put it past the creators.

April 11, 2019

More MMT

So, as I said two days ago, I wanted to look a bit more into what is driving the increase in external debt in Vietnam. It didn’t appear to be the trade deficit, which would be an obvious answer. But I was unsure, so I wanted to extract “primary income” from the calculation and look at just imports/exports (for services and goods) to see. In that case, there has been a deficit but since 2012 the country has been in surplus.

Plus, I also looked at remittances, which is another source of foreign exchange. Remittances have increased drastically in Vietnam, mostly from the US (around 60% back in 2017).

But remember that a current account surplus, actually means that there is more savings than investment. Plus, for the current account to be in surplus, then the capital and financial account must be in deficit. This is just an accounting fact of life: Current Account Balance+Financial Account Balance+Capital Account Balance=0. So we should see a capital account deficit, and this appears to show up mostly in the foreign exchange reserve.

Basically, the country has been exporting a lot. And to make sure the exchange rate is stable, it has had to increase its foreign exchange reserves (although they are actually fairly low at 2.9 months of imports as of May of 2018 - it hops around between 2.5 and 3.5 months).

If I am thinking through this correctly, the country exports a lot, more than it imports. And that means that it is saving a lot of that money. Which results in a capital account/financial account deficit. But what is that deficit made up of: a lot of it is foreign reserves, and it has foreign reserves in order to maintain stability in the exchange rate. And it needs stability in the exchange rate to make sure that inflation doesn’t get out of control (for imported items), and so that there is not a liquidity issue because of all of the external debt. Which is being built up to make sure that there are reserves to stabilize the exchange rate. So that there is enough money to pay the external debt.

This is very simplistic and I need to think it over a lot, but I get where these MMT theorists are coming from. With external debt, then you need to keep a stable currency in order to maintain payments on that debt. But that ultimately means that you are saving (by holding large amounts of dollars) and not investing.

The reason why MMT theorists want to implement MMT is to reduce unemployment (or that’s part of it), basically to make sure all human resources are used in an economy. That’s just not Vietnam’s problem, right now. Unemployment is quite low, helped by a very large public sector. I will look into that tomorrow.

But the original point of being on a treadmill to maintain a fixed exchange rate is probably something that needs to be investigated. I want to also look at what is driving imports to see what could be replaced. As I said two days, the big ones for most countries are food, energy and capital goods. Let’s see if that’s the case in Vietnam.

April 9, 2019

MMT

So I wanted to follow up on the end of my post yesterday where I said I wanted to talk about Modern Monetary Theory (MMT). It is all the rage, as I said. Lots of people are looking into it, some of which looks really interesting, especially for big countries like the US. Current interest rates clearly seem to indicate that deficits don’t matter (and yes, I know that’s not all there is to MMT). But there has always been some concern that MMT cannot apply to emerging markets, to phrase it another way, would these economies be able to implement MMT effectively.

I listened to this podcast by Fadhel Kaboub, a professor at Denison University in the States. He clearly believes that it is possible, but it takes monetary sovereignty.

For him, monetary sovereignty isn’t just about printing your own currency, although that’s part of it. It also means that taxes are paid in the currency, that the currency floats and that the government sets interest rates. The government must be able to purchase anything that is for sale in that currency. Finally, external borrowing is a no-no.

The last is the hardest, especially in an open economy. As this author argues, most countries will have to borrow at some point. If monetary sovereignty exists on a spectrum, then for Vietnam, the country is only partially sovereign.

1) It prints its own currency, the Vietnamese dong (currently around 23,000 to the USD).

2) It controls interest rates.

3) Taxes are paid in VND.

4) The government can buy most of what it wants in VND. Only imports require other currency.

5) The currency isn’t really floating. It is “stabilized” with the government keeping it within a band. The central bank has a standing offer to buy the currency at various rates (VND23,200 currently). If the Central Bank is stuck with that, then it means that the country does not have monetary sovereignty. The chart on the right above shows how little depreciation there is compared to inflation. That means the government needs to keep attracting foreign exchange in order to support the currency.

6) And of course it has a lot of external borrowing, as we discussed yesterday.

What’s surprising to me is that there is so much external borrowing, when it really seems like the balance of payments isn’t that bad (based on my calculations). The chart above shows a pretty close balance with exports and imports increasing in tandem. I need to look into this a bit more.

As part of the balance of payments, I want to look at some key drivers for current account deficits/surpluses in emerging markets:

• Energy imports/exports. Vietnam has been an exporter of oil, but it also imports oil and soon gas. As long as the country needs to import energy, it will be hard to have real monetary sovereignty. This ties into my view that the government should just be investing in renewable energy.

• Food imports/exports. Food production is actually pretty strong, especially for rice, which is the main staple. So this is unlikely to be a big threat.

• Imports of high-value equipment. Is Vietnam importing high-value products and exporting low-value products? If so (and probably is true) means that the country will be stuck on this hamster wheel. What I mean by that is that they need more imports to export more, and so they never really get to any sovereignty.

Anyway, just some quick thoughts on MMT and Vietnam. I want to do much more of this, but I personally need to do more research into it. It is an interesting way to look at economies, especially developing economies.

April 8, 2019

Back! And sovereign debt…

Hope you didn’t miss me too much while I was away on my vacation. It was nice, thanks for asking.

Anyway, this week is spring meetings of the IMF. As part of that, the Jubilee Debt campaign is trying to get people interested in debt service for low and middle income countries. Their point is that “external debt payments by developing country governments grew by 85%, as a proportion of government revenue, between 2010 and 2018.” Of course, this by itself doesn’t mean much. Who cares if debt is growing. US government debt has been increasing by crazy amounts partially because of the budget and partly because of lower taxes. That hasn’t stopped the economy from growing and government spending from increasing. But the Jubilee Debt campaign says that actually for these countries, per capita spending falls as debt service increases.

Jubilee Debt Campaign has also calculated that in the 15 countries with the highest debt payments, in ten of them public spending per person fell between 2016 and 2018. Across the 15, public spending fell by an average of 4%. The largest cuts were in Egypt, Cameroon, Angola and Mongolia, all of which are on IMF loan programmes.

In some cases, more debt could mean more per capita spending. But it looks like for many countries (maybe just lower income countries), more debt means less spending.

I, of course, wanted to look at Vietnam. What I have been hearing is that the Vietnamese government is trying to bring in foreign investment so that they won’t have to pay for things like infrastructure themselves (and increase deficits/debts). That’s why there has been such a push on public-private partnerships (PPP). PPP has been quite impressive, although lawyers think the legal framework for PPP has not been supportive, according to Giles Cooper, a lawyer from Duane Morris:

From 1990 to 2016, the country completed 84 PPP projects amounting to US$16.2 billion, with 79 percent of the projects in the energy sector. However, since the issuance of the PPP pilot programme in 2011, no PPP project has been signed under this framework. Compared with regional neighbours, foreign investment in infrastructure in Vietnam is lagging behind.

But back to debt, Vietnam, at first blush, doesn’t look too bad. External debt payments have been less than 10% of GDP. These were 7.0% in 2018, which is up a bit from the low of 4.8% in 2006, but well below the figure in 1999 of 24.5%. The low and middle-income average is 12.2% and the median is 9.0%. Within lower middle income (the group Vietnam is in), the mean is 13%, so Vietnam is well below that. It’s a bit surprising that it has grown so quickly for Vietnam, given strong GDP growth (meaning that debt has increased quick fast, and faster than GDP), but it still isn’t a crazy high amount. And it is volatile, meaning that it can fall a fair amount year-to-year (but also rise year-to-year).

That’s external debt payments. I wanted to look at total debt to get a sense of how risky this is, and it turns out that things don’t look great. Total debt was around 61.5% of GDP in 2017, with the majority of this composed of external debt (3x as large as local debt). If it were in local currency, there would be a lot more flexibility for debt to increase. While on a global relative basis, it doesn’t look that bad (although it is on the higher end of the spectrum, especially for countries without monetary sovereignty), given that so much of it is external means it doesn’t look great.

Obviously, it is going to be interesting to see how these debt figures change over time. No wonder the government is trying to reduce its external debt. I am not sure how well Vietnam is able to source debt locally, but that would be one solution.

Tomorrow, I want to talk about all of this in the context of MMT (Modern Monetary Theory), which is all the rage these days. But to conclude, it appears that Vietnam’s external debt is concerning, especially since the government has been managing the currency, which adds another dimension to it.

April 1, 2019

Not April Fool’s Prank: Out Fishin’

Sorry to disappoint all three readers, but I am out of pocket for most of this week. Back to regular programming next Monday, unless I find something interesting to say in the interim.

Thanks!

March 29, 2019

Education spending

Following up to my post yesterday about R&D spending, education is another area of spending that I feel strongly is determinative of future growth.

I thought it would be easy to prove. We could just look at the inputs: years of education and/or government spending on education, and use that as a barometer of education. And those countries with higher numbers should have much higher growth. Vietnam actually has fairly high spending on education, at least as a percentage of GDP. It is up there with South Korea and is much higher than Japan (more below).

But looking into it a little bit more, it is not true that education is the be-all, end-all for economic growth. If you look at literacy rates these days, they just don’t determine economic conditions. For example, Georgia (the country, of course) has a literacy rate of 100% (99.59% to be exact). Kuwait has a lower literacy rate of 96%, but has a national income almost 8x as much. Now of course Kuwait is blessed with lots of oil. So let’s look at Spain: literacy rate of 98%. Much richer than Georgia. The European Union overall has a slightly lower literacy rate than Georgia, but of course it’s much richer.

Maybe it is the change in education rather than the absolute level that drives economic growth. China has one of the highest growth rates in the world, and in 1990 only 78% of the population was literate! That means that almost a quarter of the population was not even poorly educated, just not educated. But China has really turned that around. The literacy rate increased to 95% by 2010, and during that period, as China became much better educated, it had extremely high growth rates.

And here there is some data that backs it up. This article seems to show that increases in educational expenditure boosts growth.

Averaging across all studies, the effect of educational expenditure on growth is positive - albeit modest - in the order of a 0.2-0.3% increase in growth for an increase in expenditure by 1% of GDP.

Of course, that looks at all education as if it is the same. But I think that might miss some differences in education quality. This World Bank paper points to a slightly different conclusion – mainly that the outputs (learning achievements) are more important than the inputs.

So basically, we have three things that probably are important here: the absolute level of education (meaning, how much is spent, how many people actually go through education). Then positive changes in education, the change in absolute levels. Finally, we have the underlying quality of the education: are students being taught well.

Well, where does Vietnam stand on these three measures. Actually, quite well. As shown in the charts above, Vietnam is spending a fair amount. Also, literacy rates are high. So the absolute levels are high.

And we have seen a big change in education in the past 40 years that shows a significant upgrade. The percentage of students that make it to the last grade of primary school is well over 95%, up from 46% in 1978 (the War really destroyed and destabilized generations, something that I sometimes forget when thinking about present-day Vietnam). That’s a big difference.

Finally, in terms of quality, the education provided seems to be good. I looked at the PISA* test results for Vietnam and its Asian neighbors to see how the country is doing relatively. Spoiler: really well. Better than the OECD (read: rich countries) average for math and just behind Korea and Japan. Basically similar trends with slight variations for reading and science as well. Plus, Vietnam is well ahead of its developing South East Asian siblings for all three scores. (Just a note, I don’t think that standardized testing is the perfect measure, but at least this gives some indication of how these countries are doing against each other. To read criticism of the tests, here is a good article.)

Looking at GDP growth figures, maybe this explains the lower volatility of growth of Vietnam than of its neighbors. It also helps that the government has been fairly stable since the end of the war (not always the case for its neighbors) and growing from a much lower base. But this speaks well to the potential of Vietnam over time. If they could also invest in R&D, that would be even better.

*“The Program for International Student Assessment (PISA) is an international assessment that measures 15-year-old students' reading, mathematics, and science literacy every three years.”

March 28, 2019

R&D spending

I started to think about Vietnam and R&D with the announcement that VinGroup is building its own smartphone (with help from foreign partners). And I was hoping that this is a trend in Vietnam, companies really research and developing their own products rather than just selling commodities or other people’s products.

Plus, in my mind, R&D spending is key to competitiveness, productivity gains and economic growth. If you think of economic growth as being driven by just two things: population growth and productivity growth, then R&D spending can be key to the latter. But then I started to wonder if that is really true, so I worked backward and tried to find something to back up my ill-formed opinion. I quickly found this:

The panel data analyses show that for the OECD countries examined in the study an increase of one percentage point in R&D expenditure in the economy as a whole results in a short-term average increase in GDP growth of 0.05 percentage points. The time series models for Germany exhibit an even stronger effect that is almost three times as high in the preferred specification.

So it’s real. And it is important. I remember in grad school, a foreign professor said that he thought the US would stay on top is because they invested so much in R&D. And it’s true. The United States spent 2.7% of its GDP on R&D in 2016. Because the economy is so big that equates to USD511 billion. That’s 30x Sweden, which is #10 in total spending.

In Asia, there are a number of countries that are extremely aggressive in their investments into R&D, even going back many years. For example, South Korea in 2016 spent 4.2% of GDP on R&D (that’s almost $60bn). That’s #5 in the world in total spending (in current USD, so doesn’t account for purchasing power parity). But even going back to 1996, South Korea has been a consistently high spender on R&D - it was 2.3% at the time, albeit in a much smaller economy. But that 2.3% probably paid the salaries of a lot of Korean scientists!

Sadly, looking at Vietnam, the figures are not pretty. In 2015 (the latest data point available), Vietnam spent just 0.4% of their GDP on R&D, or just USD852m. Even at purchasing power parity, it is something like USD2.5bn or 1/200th of the US’ spending. Malaysia spends 3x as much as a percentage of GDP(1.3%) and even more in absolute terms, Thailand is also higher (0.6%), and so is Egypt (included here because I have a soft spot for the country, and it seems similarly situated in some respects). Only Indonesia and the Philippines are behind Vietnam.

These numbers are a few years old (mostly 2015 for the developing countries). Vietnam, in particular, has seen significant growth, lots of FDI, and even some national players trying to really upgrade their systems (the aforementioned Vingroup). But they really need to be much higher to drive lots of long-term economic growth.

March 27, 2019

Japan and Vietnam

Vietnamese are studying and living all over the world, but the big jump in Vietnamese residents of Japan surprised me, or at least made me interested in looking into it a bit more.

First, the numbers around Vietnamese in Japan have just soared in the past few years. Since 2011, the numbers have grown in double digits, and not 11% or 12%, more like 38% or 47%. See the chart to the right. Overall foreign residents have also been increasing at a good pace - 7-8% in each of 2016-2018. In total there are 2.7 million foreigns resident in a nation of 127m.

Japan has a population problem, or let’s say situation. Their population is declining. In 2018, the birthrate dropped to the lowest rate since 1899, when data gathering began. By 2049, the population could be less than 100m, and by 2036, one in three could be elderly (these stats from this article). Japan has a reputation for not welcoming immigrants, but the government is trying to allow more workers in.

From the Vietnamese side, it appears to be a lot of technical training, about half, according to this article. And a good amount are also overstaying their welcome - 11,131, up 64.7%!

Overall, ties between Japan and Vietnam are pretty strong, with Japan investing a lot of money in the country. This has been a pretty consistent upward trend since about 2000 (except for a big jump in 2012 and 2013 that reverted back in 2014).

Japan was the largest investor in Vietnam in 2018, and it has been in the top 5 for many years and lead for overall investment in Vietnam.

This leads me to a tangential question about Japan itself. With a declining population and little appetite for a big increase in foreigners (still below 3% of the total population, and many of them not treated perfectly), one response would be to invest abroad and repatriate the profits to support the domestic population. Basically, move the capital to the population, but then have the returns come back to the mother land. And we have seen that more and more.

I pulled some data on the ratio of GNI to GDP. GNI measures all income for a nation (including income from investments abroad), while GDP is just what is produced locally. Over time, we have seen a pretty big increase in this ratio (mean more production outside) for Japan. It still is not to the level of the UK back in the seventies (where the ratio reached 1.084), but there is a noticeable upward slope. I also looked at the US, where the ratio sits right around 1.00 with some oscillations.

The data on Vietnam is a lot more volatile, and I am not sure why. But it does appear that now GDP is much higher than GNI (the GNI to GDP ratio is 0.95, or like the UK back in 1995), the reverse of Japan. It will be interesting to see if Japan's figures continue to move in this direction. Given the population, I don’t see how it wouldn’t.

And Vietnam is well placed to get investment from Japan, which will push this ratio up. I think that’s what ties these two ideas together: more Vietnamese in Japan means there are more Vietnamese than understand Japan and Japanese people. They can go back to Vietnam eventually and work for Japanese companies there. They will be the bridge between the two cultures, or, to mix metaphors, they can be the funnel that takes Japanese investment and makes it work in Vietnam. Let’s see if it works.

March 26, 2019

Baby got (buy)back

There were a few reports out today about how big share buybacks were in the US in 2018. Goldman had expected as much as $1 trillion in share buybacks, but that was a bit too optimistic (pessimistic? depending on your viewpoint), and only $806.4 billion. That’s a lot! Of course, it was helped by the corporate tax cuts . And it turns out that there just isn’t that much to invest in, or most corporate managers don’t think so. If you are looking, you see that in the big volumes of money chasing Lyft right now - investors are looking for anything to invest their money in.

As I was reading all this, my mind started to wander to Vietnam, as it is wont to do, and I wondered what the trend has been here. Surprisingly, I wasn’t the first to look at this. There is a good report (here) that examines share buybacks from 2005-2014 in Vietnam. It turns out that there weren’t that many buybacks (122 firms bought back in that period). Interestingly, the authors reach the conclusion that the main reason Vietnamese managers buy back stock is because the value is low. And that shares outperform after the buyback. The subsequent outperformance was quick but didn’t persist for small firms, but for larger firms it took longer but lasted.

If this is still true, here’s a way to make some easy money: buy when companies repurchase shares! Simple as that. If you do, you will outperform the market, at least according to this data. (Note that some of the outperformance is due to the period studied, including up to 5 days before the buyback announcement - so maybe you have to know a buyback is happening, which is harder to do).

In undergrad, a portfolio manager for a small fund came through and said that their whole strategy was similar. They just bought with insiders and sold with insiders, with the heuristic that managers know their companies better than investors do.

Counterpoint: Enron. (See this story titled: Enron workers lost everything.)

I will have to do more work on this to see if it persists to this day. But it is an interesting data trend. Companies continue to buy back shares in Vietnam, so something to watch out for.

March 25, 2019

Cryptocurrencies in Vietnam

Vietnam is going to have a cryptocurrency exchange. Right at the end of the bitcoin hype cycle, so at least they are on trend!

It is quite difficult to understand exactly what is going on with this exchange, but it appears Kronn Ventures want to do something about high exchange rates between currencies. That seams a worthy goal. If you look at the cost of converting money, it is outrageous. If you do it carelessly, it could cost you more than 15%.

But cryptocurrencies don’t seem to be the best way to solve that problem, because it can be quite expensive to use them in exchange. The problem right now is that you would have to pay the exchange fees on two transactions. Let’s say you have money in Vietnamese dong, but want to visit Thailand and need baht. First, you need to convert Vietnamese dong to bitcoin or whatever cryptocurrency is created/used. Then transfer that to an account either in Thailand or in Vietnam. Then convert your bitcoin into Thai baht. Of course there are probably ways to bypass all of this if the service just automatically made the exchange behind the scenese using the cryptocurrency as just the base. The could potentially set low transaction fees as long as they weren’t taking too much risk.

Basically if there were too many dong coming into the exchange but not enough baht, then the currencies wouldn’t be netted out at the end of the day/hour/minute. The exchange itself could be unwittingly long dong, and it would need to somehow offload this risk in order to make sure that they weren’t just a passive speculator on currencies.

International currency exchange companies already do all of this pretty well. All it would take is to charge a bit less for their service to compete with this new exchange. And wouldn’t someone just go to the more reputable brand?

I follow Matt Levine religiously, and he has this view that most cryptocurrency uses could just as easily be done by a robust and trusted centralized database. Of course there are some cases when having a distributed ledger is actually an improvement, like here.

But back to Vietnam, the actual press release is pretty vague, and I doubt that anything will come of this. The government made cryptocurrencies illegal after $660m were stolen from hapless Vietnamese investors. That’s a crazy amount for Vietnam. And a little less than a year ago, the government shut down the largest bitcoin exchange, Bitcoin.vn.

Plus, isn’t Bitcoin over? Prices of all cryptocurrencies are down 85%, and the chart itself looks scary. It was worth almost $20,000 and now is worth less than $4,000. There have been so many scams, including the death of someone that resulted in $137m in cryptocurrencies stranded/lost. Or that was the initial story, and then maybe the currency was already gone from the account…and maybe the guy didn’t die…

Anyway, there is a lot of sketchy behavior around ICOs and cryptocurrencies. Plus a lot of very strong opinions on both sides. My view is that having a deflationary currency is a bad idea. Plus, if bitcoin is only going to be used for ransom, then no thanks.

Maybe the Vietnamese government will ultimately decide that they do want to lead the world in cryptocurrencies, and they will start an exchange. But given how untraceable cryptocurrencies generally are, then it seems unlikely that the Vietnamese government will be so excited about it. Let’s see.

March 22, 2019

Hoi An and tourism

I’d have to say that Hoi An is my favorite city in Vietnam. The first time I was there was back in 2005, and it was just magical. I stayed at the Life Resort (which is now an Anantara). It was one of the few times in my life that I have run into anyone that I knew while abroad. It was my roommate for a summer in grad school - he was there at the same time with his wife. We had a wonderful time seeing the old city and eating and drinking.

Well, now the New York Times has written a “36 hours in…” column about Hoi An. That means it is over as an up-and-coming destination and is now a destination that has arrived. This may have been the case as far back as 1999, when UNESCO awarded the city World Heritage Site status.

We can see this in the tourist figures. Sadly, it is very difficult to get good figures, but based on older UNESCO reports (which have their own problems), and recent news reports, the number of visitors to the city has jumped. Back in 1999, there were about 150,000 tourists in Hoi An with about half Vietnamese. In 2005, when I visited, the numbers had risen to almost 650,000 (a 31% compound annual growth rate), but still a fairly equal mix of foreigners and nationals. Then in 2018, we saw another big jump. Total tourists were something like 3.3m in 2017, but in the first nine months of 2018, they had already reached 4.5m, with the international tourist figures alone (just for the first 9 months) was already ahead of the number for all tourist visits in 2017, almost a 20% growth rate.

So Hoi An is really seeing a massive onslaught of tourists. This in a city with just about 100,000 residents. The paradox of success for tourist destinations is that the more tourists come, the less magical it usually is. There are some exceptions: Paris, New York. But these smaller places, like Hoi An, are characterized by their quaintness and history. Having to shove some Western tourists with short shorts and a fanny pack aside to see the Japanese bridge, is less magical.

Having tourists, though, has its upsides. In a 2008 report, UNESCO reported some poverty data. The percentage of Hoi An households living with under VND260,000 (USD16.50) in income per month fell to 6.47%, compared to the national average of 14.7% for the nation as a whole. Data from a 2018 World Bank report shows the national poverty rate falling to 9.8%, with urban poverty down to 1.6%. Hoi An, although not explicitly mentioned, is classed in that urban poverty figure.

Hoi An needs to figure out a way to deal with the growth in tourists while also taking advantage of all the money coming in. If I were in charge, I would jack up the charge for people to visit the Old City (now about $6), try to upgrade the facilities to attract more well-heeled tourists, but also have a focus on cultural tourism (food, agriculture, religion, history). I think all of this would result in a more lucrative market but also one that hopefully preserves what I found most attractive about Hoi An when I visited 14 years ago.

March 21, 2019

Drugs

Vietnam has the death penalty for drug trafficking. Of course, judges have flexibility in sentencing, and the death penalty is only for large amounts of drugs. However, according to this source, capital punishment is most frequently used to sanction drug-related offences, followed by corruption, black-market and violent crimes.

That’s why I was surprised to see this story about finding 300kg of meth. This is after finding another 300kg of meth just last month in Central Vietnam (details here). If this keeps up, we could see a record amount of seizures.

This has been the trend over the past few years of increasing drug seizures. Some of this may have been more attention on drug trafficking (well done, Vietnamese police). But probably the increase speaks to more drugs being trafficked. The UN has data through 2016 on seizures, and it is clearly trending up.

That may be because Vietnam is just used as a transport hub from Cambodia and Laos. But it does also seem that drug shipments meant for the country are increasing.

Drug prevalence in Vietnam is still low. Only 0.22% of Vietnamese aged 15-4 use meth or ecstasy. That’s well below world levels of 0.70% for meth and 0.42% for ecstasy. However, deaths are actually pretty high. In Vietnam in 2009 (last year for which is data available), according to the UN data, there were 2,184 deaths, a very high rate of 36 per million people aged between 15-64. This is higher than any other country (although the data isn’t very comprehensive) except for Iran, which had a rate of 56 per million in the same age group (but for 2016).

Except for Thailand, Vietnam has the most people in treatment (at least according to 2015-16 data). Which is kind of surprising, given how harsh drug trafficking is being punished. But reading a bit more about these treatment centers, maybe this isn’t the best. See this report that takes a look at times when detainees broke out of these centers because of the poor conditions.

In the West, the conversation around drugs is changing. Marijuana is increasingly legal or decriminalized. There is somewhat greater emphasis on treatment, especially around opioids in the US. Even Thailand and South Korea have legalized medical marijuana. Vietnam probably needs to think about doing this as well, along with make real treatment a priority for drug addicts. But given how difficult this is in every other part of the world, I won’t hold my breath.

March 20, 2019

Two things

Sorry, but I can’t find anything that really hits me hard today, so I am going to work on a few other things for future posts. In the meantime, I saw two things that are mildly interesting:

First, this story, about the Vietnamese historian being kicked out of the communist party, has gotten some legs in the West. The New York Times covered it. It is an ancillary to the larger story about Chinese influence around the world, which is something that the New York Times, in particular, has focused on. And it is also part of the larger worldwide Facebook story, since Vietnam has strict laws around data in social media networks.

It will be interesting to see what the Vietnamese government will do to tamp down anti-Chinese sentiment. It’s a concern for them, given earlier protests against China’s moves into the South China Sea. Plus, it is quite interesting that nationalism, in the vein of anti-Chinese sentiment, has become such a complex path to weave in Vietnam. In some ways, the Vietnamese government was built on nationalism. From my view, and it could very well be wrong, the driving forces of the resistance to the US and the Southern Vietnamese government was nationalism, independence and reunification. And now, the government is facing difficulties containing a similar nationalism. As China flexes its muscles in Vietnam and around the South China Sea, this is going to continue to be an issue.

It’s funny that all of this came out around the same time that Cu Rua, a turtle that is a symbol of national resistance to the Chinese, was mummified and displayed.

Second, I liked this short article about HCMC promoting waste-to-energy projects. In the article, if these numbers are correct, then the first waste project is extremely profitable. The plant treated 500 tonnes, then converted 35 tonnes to 7 million kWhs. It cost a total of VND7.5m (USD32.6k) to treat the waste (at a cost of VND1.5m per tonne). The revenue side was double. The 7m kWhs brought in USD735k (at USD0.15 per kWh). The figure per kWh is higher than feed-in tarrifs for solar (I wrote about this a bit more in a post on Feb. 19, 2019).

There are plans for more waste-to-energy plants. The owner of the first plant would like to expand it to take in 1,000 tonnes to produce 20MW a day. Another plant looks like it is in the works.

It’s funny that there are plants like this going up in Vietnam, but the rest of the world is trying to figure out what to do with all of its waste. Recent articles have all been about how China is no longer taking waste and the impact on recycling in the US. Not just the US, but Europe as well.

Vietnam is one of the places that has increased the amount of waste it is taking (according to that last article). But earlier this year it stopped issuing waste import permits. That’s because China stopped taking recycling for a reason: the environment issues it produces. Vietnam would do better trying to convert its own waste, get better at that, and then start to see if they can do the same with imported waste.

March 19, 2019

Counterfeits

There is a new report out from the OECD about counterfeiting in the world, and there were some interesting statistics about Vietnam in there that I wanted to highlight.

First, the main point of the report is that counterfeiting is big business. About 3.3% of all world trade is of counterfeit goods. The major categories are: pharmaceuticals, food stuff, perfume & cosmetics, leather goods, clothing & textiles, footwear, jewellery, electronics, optical/photo/medical equipment, and toys/games. About 22% of the value of seizures is in footwear, the largest category. Clothing is second at 16%. The United States is the country most affected by counterfeiting, with brands or patents from their making up about 24% of all fake products seized.

Even emerging economies, like China and Brazil, suffer from counterfeiting. It will be interesting to see how China starts to deal with IP issues when it is the victim. It will likely follow the trajectory of every developing country in the modern era, including the US, by promoting intellectual property rights when it matters to itself. The case of Huawei and 5G is a great example. The country is the largest owner of 5G patents, and it will likely get a large percentage of license fees for these patents. Of course they are going to want to defend them. My question is: will they defend them in Western countries where the legal regime is predisposed to support property rights while ignoring other IP violations at home that would affect its own manufacturers?

But to Vietnam. It looks like poor Vietnam is the #8 source of counterfeit goods in the world (in terms of the value seized), or at least it was in 2014. It fell below the top 12 in 2015 and 2016, according to the OECD (see Figure 3.1 here). But it is small potatoes compared to China and Hong Kong, which combined make up about 80% of all seized goods. Malaysia, Singapore and Thailand are other Asian economies that consistently rank higher than Vietnam. Generally, Vietnam isn’t that bad.

However, my caution is that trade in counterfeit goods correlates to trade in general, so more trade means more counterfeits. Vietnam’s exports have been rising in double digits: they more than doubled from 2011 (USD101bn) to 2017 (USD220bn).

Diving a little deeper, there is an older OECD report that looks at what categories are most counterfeited by country. For Vietnam, it is clothing & textiles, followed by a tie between jewellery and foodstuff, with leather & handbags just below. These all have a GTRIC-e Index of between 0.23 to 0.26 (GTRIC-e is a statistical index that the OECD came up with. It’s complicated, but for our purposes, the higher the number the greater the likelihood that the economy in question is a source of these types of countefeit goods).

Interestingly, these goods usually transit through Hong Kong and Singapore onward to their other destinations. The UAE is another big transit spot, as is Saudi Arabia (which seems strange to me, given how expensive logistics are in the Kingdom).

Back to the original report, the main drivers of counterfeiting are weak governance (corruption), free trade zones (FTZs, example: UAE with the Jebal Ali port), low labor costs combined with weak labor regulations, fast logistics combined with a weak ability to track goods, and finally trade facilitation policies. Weak governance is key, because it means that it is easy to take advantage of all of the rest. If corruption is endemic, then having an FTZ makes it worse. Same with weak labor regs or trade facilitation policies that don’t put a stop to exports of counterfeits.

Vietnam is actually doing better than other countries. It is ranked #41 in terms of propensity to export counterfeits in the more recent report, but is the 21st largest export economy in the world. It may be helped by the fact that Samsung made up almost a quarter of Vietnam’s exports (2017). Samsung wants to protect its IP. Of course, with more exports from Vietnam including from Chinese companies exporting from the country, we will likely see these counterfeit figures from Vietnam increase, unless there is a countervailing crackdown from the government. Most of the recent corruption cases in Vietnam have been about land, so I haven’t seen much so far.

Big picture, though, I want to say that counterfeiting is just the way that developing countries develop. They copy and steal and manufacture copied/stolen IP. The US did it. Japan did it. China is doing it. But once a country actually owns sizeable amounts of IP, they start to care much more. You don’t see South Korea on these charts, because they have started to create their own IP. And that’s normal. Of course, it sucks for companies that own the IP, and potentially consumers that are hurt by shoddy goods. I am all for people defending their IP - don’t steal my blog! [Ed - actually, given that readership levels are low, I think it would be fine if they credited you somewhere]. But it’s never going to get to 100%, and that’s probably alright. Think of it is as a tax paid by IP owners to poor people in developed countries, a crude correction to income inequality.

March 18, 2019

Food in Vietnam

A few headlines caught my eye over the weekend.

RATS: The first was this long-ish article in National Geographic about rats as a source of protein in Vietnam. I usually don’t like articles about weird foods in Asian countries, because I think they too easily turn into caricatures and/or lean into wild stereotypes about whole cultures. But I found this interesting, because rats are actually a pretty good source of protein. Plus, it’s a business:

The Mekong Delta alone produces up to 3,600 tons of live rats a year, at a value of about $2 million.

For Western readers, basically don’t think about our disgusting Norwegian rats that live in cities. These are a different species, with fewer diseases. And supposedly they taste like rabbit. [Ed - good job avoiding the chicken jokes.]

I firmly believe that alternative means of protein are going to be needed, and probably shortly. Livestock and its associated supply chain represents up to half of all greenhouse gas emissions, according to this article. A more reasonable estimate was done by the IPCC and said that the lifecycle of livestock represents 14.5% of all emissions. That’s a lot.

INSECTS: And Vietnam may be part of the new wave of alternative forms of protein. There is already a company based in Vietnam, Entobel, that is building a factory to produce insect protein for fish food. And Vietnam already eats a fair number of insects.

FISH SAUCE: On another food tangent, I also saw this article about the difficulties of the traditional fish sauce sector in Vietnam. It talks about new regulations that are going to hurt traditional makers to the benefit of industrial makers:

If the new criteria are applied, all traditional fish sauce making would end and there would be only industrial fish sauce left. Vu said the draft, in general, favours industrial fish sauce producers at the expense of the traditional fish sauce makers. “Recently, a whole village in Nha Trang that had made fish sauce for many generations has been wiped out and most households have shifted to producing materials for industrial fish sauce producers.

This is the second big test of the traditional fish sauce producers in Vietnam. The first was a scare in 2016 over arsenic levels in fish sauce. Later it turns out that the natural arsenic found in traditional fish sause is not poisonous.

In some ways this is a follow up to my article about cinema, in that I think traditional products are going to be very important for Vietnam over time. They help maintain culture, they can provide a livelihood for people, and they can be a significant revenue source for smaller enterprises. We have seen a big surge in the West of hand-crafted products. Vietnamese fish sauce can be a part of this. Just look at the difference high-end products can command. Red boat, a widely-sold and -prefered brand of fish sauce, is sold for $11.95 for 250ml, or almost $50 per liter, on Amazon. This is actually a bit higher than the lower-end brands. Even still, a high-end fish sauce goes for double that at $18.95 or 200ml.

The government should really think hard about how it supports all of the traditional makers of products, because they can be a real source of jobs and business as the country grows richer and wants to spend more for premium products.

March 15*, 2019

Cinema in Vietnam

Movies! Hollywood! Bollywood! Nollywood! Is Vietnam going to be the next great cinema capital? Will there be a Vollywood, or Saigollywood? [Ed - I would go with Saigollywood.]

The Vietnamese would like to make “culture” (pronounced properly as “kultchah”) a priority according to this article. It is going to develop a modern film studio on a big plot of land and invest in other types of cultural products. Obviously the Vietnamese government is not immune to the pull of the Korean wave. That’s the big push by the Korean government over the past two decades to increase Korean cultural exports and Korean soft power (South Korea, of course). You can see in the figures from this paper how significant the exports have become. Korea is now a brand, and not just an Asian one, a global one. And this has helped the economy of Korea, and probably helped the global support it has generally.

I can see the Vietnamese government looking at that success and saying, "we should do this too.” Vietnam already has a somewhat successful export with its food, and the government is taking some steps to promote it. The Thai government did this, and it increased the number of Thai restaurants globally from 5,500 back in around 2001 to more than 15,000 as of last year. This has probably helped increase people’s understanding of Thailand, increased tourism to Thailand and may have even helped it geopolitically.

The Vietnamese government would do that with culture generally. Specifically for film, it would like to have 40-45 feature films a year by 2020 plus more animation, documentary, and other types of films. By 2030, the feature film figure is supposed to reach 55-60 per year. This seems eminently achievable, given that 40 feature films were produced in 2015. Total revenue was $105m back in 2015, and it has probably done more than $25m already in 2019.

And local films are actually doing quite well. The number one movie ever in Vietnam is Em chua 18 (Jailbait) that beat imports like Kong: Skull Island (which benefited from being shot in the country) and the Fast & Furious movies. This interview with a American-Vietnamese producers is very interesting. One thing that she says is that:

I mean, you know, before when I first came, if a movie, you know, was able to have a box office of one million dollars, that’s sort of like this far-fetched dream, you know. And then now it’s kind of, like, kind of average if you get a million. That’s sort of like maybe you’ll be okay depending on your budget, but you’re really aiming for like 4 or 5 million.

That’s a big change and should allow for much larger canvases for film makers.

Now, moving from a local product to one that can appeal abroad is going to be difficult. Indonesia was somewhat succesfull with the Raid franchise, but that was directed by a Welsh man. Thailand has success with art films and some action movies, but it really hasn’t made too much of a wave. Korea is really the best example, with lots of Korean movies crossing over.

Generally, I think it is good to promote local culture even if it never makes it globally. It is a way to preserve local culture and also reflect people’s world back on themselves, something no American movie is going to be able to do. In the West, people talk about representation and telling one’s own story, usually in the context of minorities that haven’t been able to do that. That is just as important for less rich countries that have only now started to have the ability to do the same. Let’s hope Vietnam is able to capitalize on this.

* Accidentally put the wrong date (March 14) on this post. Corrected to the actual date.

March 13, 2019

Golf in Vietnam

Golf. Just ugh, you know. Everyone hates golf right? Too bougie, too preppy, too exclusive and classist. But that’s the West, or the US in particular. In the US the number of golfers has fallen drastically from about 30m in 2006 to about 24m in 2017. That’s down more than 20%. The number of golf courses has fallen much less, it appears to me, meaning that each one is having problems getting enough paying customers and lots more are probably going to close over time. My mother-in-law used to live on a golf course in Arizona. It looked horrible, because they couldn’t get enough water to maintain the greens well (and they shouldn’t have), and it was losing money. The owners are finally selling it, and it will eventually be housing of some sort.

Europe will like trend with the US, at least parts of it. Participation actually increased in the US until 2009 but now is falling a bit every year, according to this EY report. The growth was likely mostly driven by eastern European countries that opened their economy. Not too many Soviet golf courses!

Vietnam is different. It’s a young country. They haven’t gone through the whole cycle of not knowing golf, then aspirationally playing golf, then hating golf and finally quitting golf. People are really trying to make golf happen in Vietnam. They see it as a luxury product that brings in wealthy people. So I wasn’t surprised to see an article today about how many golf courses are in development: 78 in place with another 43 in different stages of development. This is for a country that, according to a somewhat old (2015) FT article, has 10,000 golfers in total. That was back in late 2015, so even if it has doubled, that means 20,000 golfers. That’s 256 golfers per facility, and if we add in another 10,000 tourists, that rises to just 385. The US has 1,500 golfers per golf course, not counting tourists who come and play. That’s almost 4x the amount per course.

But building golf courses has been a trend all over the world. According to an R&A Report from 2019:

In the last twenty years there has been phenomenal growth in Asian golf, with Japan (3,169), Republic of Korea (798), China (599) and Thailand (315) now among the top-20 countries in course supply. Resort development has driven much of golf’s growth in this region.

That’s the crux of it. Many of these courses are built around real estate and resorts, rather than just golf on its own.

So it will be interesting to see what happens in Vietnam. China has seen a big boom in golf, but the government has shut down a number of courses that were illegally built.

I grew up playing golf, but I have always been bad at it, so take everything I say with a grain of salt. I do think there are some positives of golf, especially from an an economic perspective:

• It can help real estate developers and also is very pretty. There is a reason why people like looking out over the links.

• It can attract tourists. According to the FT article above, back in 2015 there were about 7,000 tourists playing golf in Vietnam. That could increase over time, especially as golf is taken up by more Chinese.

• Sport is something that should be promoted. Golf is a sport (although sometimes I question it). It’s good to get out there and walk the greens, be outside, get some exercise.

On the negative side:

• There is significant environmental issues around golf courses. Water usage is high, even for courses that work to reduce it.

• Pesticide and herbicide usage is extremely high in order to maintain the pristine green color.

• Mowing every day, which is what lots of golf courses do, uses a lot of fuel, and mowing equipment generally isn’t the most fuel efficient. Not to mention having non-native grass.

• Where golf courses are built also matters significantly. The better locations (near the ocean, in beautiful forested areas) may entail destruction of the natural habitats of birds and animals.

One one hand for developers, golf courses may be a no-brainer. They really drive demand. In Egypt, which has a lot of developers building homes centered around new golf courses, the golf courses are just something to look at - once built very few people use them. In a country that is mostly desert, it looked amazing! Vietnam is differental in that it is already quite green, but the same concept applies: a golf resort feels like a world away from urban environments. It’s a way of taming nature that allows people to enjoy it easily.

I personally think golf courses are probably a bad use for the land. Big parks, with areas set aside for soccer, hiking, and other community activities, would be a much better investment. That doesn’t have the same appeal to developers, so we are probably going to see many more golf courses in Vietnam over the next few years.

March 12, 2019

Payments

Back in 2001 I worked for a big US internet company that was moving into the payment space. I was on the business development team, and we spent a lot of time trying to figure out where best to play. Even then, it just seemed like such an uphill battle, because of the entrenched players (banks, Visa/Mastercard, payment processing companies). All of them benefited from the current system.

Now I am working with a small US non-profit that puts grocery stores in food deserts, and one of our big expenses is the cost of payments. We spend more than 2.5% of all transactions just to pay off all of these middle-men. That’s about what small businesses were paying back in 2001, and it hasn’t changed, despite all of the new companies coming into the space. The big problem in the United States is that interchange fees are still extremely high. For example, we still need a merchant processing company, and we still take credit cards. Each one wants a cut. The payment processing part of the chain has seen competition, but mainly on convenience. Fees are still high.

Places outside of the US has much lower fees. For example, the EU just negotiated a new deal with Visa and Mastercard that lowered interchange fees to just 0.2% for debit cards and 0.3% for credit cards. That would save our store more than 2% off every transaction, which would mean a lot for the bottom line, given that margins for grocery stores are so low.

In other countries, without the legacies that the developed countries have, we have seen significant advances in payments. Kenya is the premier example, with M-Pesa by Safaricom owning more than 3/4s of the mobile commerce market in 2018, and, according to one stat, in 2013, 43 per cent of the Kenyan GDP flowed through the service.

Vietnam is a ripe market, because there is little legacy that needs to be overthrown there. According to the World Bank, in 2017 almost 50 million adults (out of 71m in total) had no “transaction account” meaning no account to make payments either with a bank or a non-bank. That includes a mobile account that can be used to make payments.

Companies are going after this space..hard. There have been almost 80 companies set up in Vietnam. Momo is one of the bigger ones, and is now the best funded after a big investment round led by Warburg Pincus (sources say it could have been $100m). The company is growing quickly, has 2 million registered users, and can be used at 100,000 places in Vietnam.

Doing some quick back of the envelope calculations, let’s say that the lastest round at Momo valued the company at $500m (so Warburg and others bought 20%, which is just a guess). The PE guys want this to grow to $3bn (6x) before they exit in an IPO. And let’s make a big assumption here: that the company will trade at a 50x P/E when it goes public. This is probably too conservative. Paypal currently trades at over 50x. Visa trades at 30x and Mastercard at 40x. But let’s take this as a given, so at 50x and a valuation of $3bn, the company would need earnings of $60m a year at the time of the IPO. And let’s say they are able to make a profit of just 0.2% of each transaction. That means they need to have transactions of $30bn. Ouch. That’s a lot. Nominal GDP in Vietnam was $224bn in 2017.

I did a quick sensitivity in the table up at the right that shows what the transactions could be at different P/E multiples and transaction fees (assuming these are all profit, which is unlikely). If fees are really low, then the amount of transactions needed would be close to half of all transactions in Vietnam, which seems unlikely until you look at M-Pesa. Obviously the company could make money in other ways rather than just with fees: selling data, offering bank accounts, advertising, lots of different things. If they truly own all of the customer’s money needs, then the potential profits per transaction would be so much more than just 0.2%.

The reason why I started thinking about this is because I saw this story about cashless bus rides in HCMC. It’s steps like these that are going to be extremely important in driving cashless payments demand in Vietnam. And cashless payments are great for the government, because they get a much more comprehensive record of where money is going in the country. So we should expect to see much more of this over time. And Momo may be a beneficiary of all of it.

March 11, 2019

Measles

A news story caught my eye over the weekend about measles. It turns out that measles are an issue in Ho Chi Minh City.

Deputy Director of the municipal Department of Health Nguyen Huu Hung said from 2018 to February 2019, the city recorded 4,327 measles cases, including over 2,600 in the first two months of this year.

If I do the math, that means in 2019 the number of measles cases is already higher than in all of 2018. In 2018 in all of Vietnam, according to the government, there were only 1,963 cases. So 2019 is not looking good.

Vietnam is not the only place with measles problems. The US also has a measles problem, and it’s for the same reason: Not everyone is being vaccinated.

I was surprised by Vietnam’s uptick in measles, because the vaccination rates in Vietnam are actually pretty high, at least for the first shot (96% in HCMC for the first shot and 80% for the second). If you follow any of the anti-vax stuff, and I do, you know that there is basically one legitimate reasons to not get vaccinated: if you health doesn’t allow it. Other than that, everyone needs to get the vaccination, specifically so that people that can’t get vaccinated are also protected by the herd immunity. And measles isn’t just a child’s disease that is easily overcome. A recent report by leading health organizations said:

Using updated disease modelling data, the report provides the most comprehensive estimates of measles trends over the last 17 years. It shows that since 2000, over 21 million lives have been saved through measles immunizations. However, reported cases increased by more than 30 percent worldwide from 2016. 

Vietnam has actually been pretty good on measles. Back in 2004, it was actually ahead of most of its neighbors with less than 0.3 deaths per 100,000 people. That was better than the Philippines, and not far off from Thailand and Malaysia, both much richer countries. And I can only assume that this statistic improved, as every other health measure has improved in Vietnam as the country has gotten richer. For example, here is a chart from the WHO that I pulled on malaria cases. They are down drastically since 2002.

The big problem with vaccines is that you need an extremely high rate of compliance to be completely effective. But getting to that high rate is hard. There is the 80-20 rule that says that you can get 80% of the way there pretty easily. But that the last 20% is the hardest - the hardest to reach, the hardest to convince to get the vaccine, the hardest to follow up with and get the second vaccine. That’s as true in the US as it is in Vietnam. The US has been too liberal with religious and other exceptions that hurt uptake rates, and Vietnam likely has education issues around vaccines that are similar in effect.

Ultimately, Vietnam is getting much healthier, but going the final step to making sure that measles is eradicated is expensive and time-consuming. And there are going to be periods where things get worse. Hopefully this will just be a hiccup in the long downward trend of measles cases and other diseases in Vietnam.

March 8, 2019

Metro costs in the world

I still have not completed a bigger piece on ride hailing, mainly because I haven’t done any work on it. So don’t get your hopes up.

But I did see two interesting articles that piqued my interest in metro rail building in Vietnam. The first is that the Ho Chi Minh City (HCMC) government said it would not ban motorbikes in the center of the city, which is good news. On February 26 (scroll down to see the post), I said that the government couldn’t ban motorbikes. They are too important to people’s transport in the city. Now the government has “clarified” things by saying that it hopes motorbike usage will fall with more public transport. Me too! I want to be able to cross the street! [Actually, I don’t have problems crossing the street. Just go - it’ll all work out.]

Motorbike traffic may fall, if the government gets what it will want. HCMC People's Committee Vice Chairman Tran Vinh Tuyen said that the city wants a public transport stop to be within 500 meters of every resident’s home. That’s crazy, but great. He’s not talking about only metro, but also bus rapid transit, water ferries, and railway. All of which play a part.

The second article is about the HCMC government proposing to the PM that the central government pay $93m to advance the HCMC metro. The city government has fallen behind on their payments, which has pissed off the Japanese and could lead to a diplomatic issue. This money would help avoid that. I am not sure what will happen to the request, but I hope it works out, because it would be a shame to not have a metro in HCMC.

These two articles and the fact that the HCMC metro costs really seem to have ballooned started to make me wonder how expensive it costs to build metro rail in Vietnam. The table below shows Vietnam versus other metro builds.

A few things about this data.

• First, I didn’t calculate it based on ppp (purchasing power parity), because, frankly, I didn’t want to do the work. What that means is that for emerging markets, of course, it is going to be a lower absolute figure (labor costs are lower, unions may not have power, regulations may be less strict, etc.). Based on other data I have seen, emerging market costs are higher than shown here on a PPP basis, meaning that these countries are paying a similar or larger portion of their income on these.

• Second, underground trains costs a lot and take a long time. This story on the Hanoi metro shows that most clearly. The elevated portions of the line are completed, while the underground parts have not. So basically, if possible, don’t go underground. But that brings me to the next point.

• Third, inputs are important and can vary lots. I see three major parts of the metro cost equation: 1) equipment, 2) labor, and 3) land. Equipment is probably going to be similar world wide. Steel costs might be a little less, but other than that, not much change, I would expect (I could be wrong). Labor costs are going to be significantly lower. But land could really vary. Underground lines may obviate some of the land costs, and elevated lines could also sidestep some of them (but not all). We see this with rail projects as well. If there is not a good corridor for the train tracks, then so much of the cost can be eaten up by land prices. It would be interesting to dig deeper into the actual costs of the projects.

• Fourth, the cost per rider could be quite low. In Europe is about 25,000 per daily rider. In the US, in some places it is much more. If HCMC meets its rider figures (160.000 daily at first rising to 800,000 by 2040), the cost starts at $13,125 per daily rider and falls to $2,625. The metro construction that I have the best insight into is Dubai, which ended up going way over budget and cost AED28bn ($7.6bn). It now has a ridership of more than 600,000 daily, which equates to a cost per rider of $12,715, on the low end of the Europe spectrum. Given how crowded it is in rush-hour, there probably is room for that ridership to increase if they can figure out how to get more trains on the track (at rush hour, there is a train at every station basically all the time - they all move from station to station at the same time).

Even though the costs are high in absolute terms for the metro systems in Vietnam, I firmly believe that it will be a good investment. This study by Dubai shows what the multiple can be (1.6x ten years after, rising to 4.3x by 2030), even for systems that go way over budget.

March 7, 2019

Swine flu and bigger project

I am working on a bigger project looking at ride-hailing, but I didn’t want to leave my ones of readers left without something to read.

This article on Swine Flu struck me, because I had though the government was serious about tacking the problem. The Philippines stopped the import of Vietnamese pork earlier. And all Vietnamese visitors to Taiwan were being checked for pork products, after authorities there found traces of the swine flu in a pork sandwich.

Pork makes up 75% of total meat consumption in Vietnam. I couldn’t find how that has changed over time, but overall calories from animal protein have doubled in the past 20 years, which is a fast rate. From the article: Vietnam produced 3.82 million tonnes of pork in 2018, equivalent to 72 percent of the country’s entire meat production, up 2.2 percent from 2017, the report said.

The government is taking the crisis seriously, with more than 4,000 pigs destroyed. The difficulty is that it appears to be coming from China, which is facing its own epidemic. Given how porous the border appears to be, the government will have to not only step up monitoring but also continue it to make sure that the virus isn’t re-introduced. Luckily, it isn’t harmful to humans, but just wait until it makes the jump.

On a happier note, a company is making rice flour straws, in order to decrease consumption of plastic straws. The new trend is getting rid of plastic - I think we are going to see more of this globally. People are increasingly becoming more environmentally conscious. The Ho Chi Minh City government has an initiative to decrease plastic bag usage too.

You heard it here first: The next big movement is to ban all plastics!

March 5, 2019

Investor visas to the US

I saw this interesting article in the Wall Street Journal about real estate developers looking to Vietnam for cheap financing. Just a little background. the US allows investors to get a green card after investing $1 million (or $500,000 in certain areas that have high unemployment). The investment has to create 10 jobs as well.

The US is not the only country to do this. Both Portugal (EUR250,000) and Canada (in Quebec it requires an CAD1,200,000 investment) have similar programs. . The benefit is that the destination country gets cheap capital and a guarantee of some jobs. In addition, it attracts immigrants that already have resources and may end up paying more in taxes.

In the US, the number of visas issued is pretty low, something like 10,000 people, with another potential 3,000 in a subsidiary program. No year has reached that; the most was 10,692 visas issued or status adjusted back in 2014. And it has remained close to that level for a while.

The surprising thing is that Vietnam has now become one of the larger countries. It represented 5% of all visas issued by the program in 2018, up from just 2% in 2017. The number is still low, but it is growing quickly. According to the article linked to above, it appears that developers have turned from China to Vietnam to get more interest in the program. Chinese investors, for multiple reasons, including a very long wait time as the US government caps visas given to citizens of any one country, have dropped off from a high of 9,128 in 2014 to 4,642 in 2015.

And now Vietnam has become the next great hope. It’s kind of surprising to me, because a friend in real estate finance told me that they have no real network in Vietnam (and they have networks all over the world). So it is interesting to hear that developers are able to do attract money from Vietnam on a retail basis, but attracting larger Vietnamese institutions to invest are not as successful. It helps that there is a network of marketers out there that are pushing this in return for commissions. Based on a quick search, one company is having two seminars in Ho Chi Minh City this year (one in March and one in September) to “educate” Vietnamese about these visas. I assume this is just the tip of the iceberg and that there are tons of people out there interested.

We can see this marketing has been successful by the numbers. At the peak of the program back in 2014, the figures for Vietnam were pretty minimal, but since then they have increase almost 6x.

It’s a great deal for the developers, because they get “cheap” capital that is not going to be that demanding. As long as they deliver the jobs, the investor gets the green card. But the investor would also like some return, and that’s where the investor’s likely inability to do much due diligence puts him at a great disadvantage. Fraud is a real problem, as you can see detailed in this article.

It’s been pretty good for the US. By my back-of-the-envelope calculations, total investment over the past 10 years was probably around $40 billion, and almost 750,000 jobs were created. That’s not nothing. Foreign Direct Investment (FDI) was just over $250 billion in 2017, with $9.7 billion in real estate. This compares to my estimate of around $5 billion from this program in the same year. [Timing on the investment versus when the visa was issued may not be in the same year, so this might not be like-for-like. My point, though, is that the investment is significant, especially for real estate FDI.] So almost half of FDI in real estate comes from this program.

The law is under discussion now, and we could see something come out pretty soon. Early releases for public comment showed that the Office of Management and Budget wanted to increase the investment requirement to $1.35 million ($1.8 million if not in a high-unemployment area), which everyone says will destroy the program. Also, the waiting list for Vietnamese applications had risen to 7.2 years as of last October.

My bet is that this all goes away in the next year or two, at least for Vietnam, and all of these brokers move on to the next country. South America is a ripe continent, as is Africa, both of which have seen a nice rise over the past few years. Hope those Vietnamese that wanted a visa got in before the door shut.

March 4, 2019

Back to normalcy

That headline’s not just for Vietnam, which is now back to normal after all the departure of SO MANY foreign leaders (Trump! Kim! Lavrov!), but also for me. Your friendly blogger was waylaid by a cold but am now back close to normal. Because I missed so much, I wanted to do a quick round-up of the interesting stories that I missed.

• Here is a good article by Michael Tatarski in the Atlantic about the summit and how the Vietnamese handled it. A few things struck me. Frist, the government of Vietnam just doesn’t know how to deal with international press. Second, authoritarian regimes are so much “better” at hosting these kinds of summits because they can just shut down everything, including protests. While leaders, even of democracies, prefer a totally controlled environment, us regulars probably should not. Protest is important, even more so when there are so few avenues for free speech in these countries. Of course Trump didn’t bring up any human rights issues with Vietnam (or Kim, for that matter, and Trump took Kim’s word about the death of Otto Warmbier, the American who died in North Korean custody). And finally, Tartarski’s big takeaway is that the government of Vietnam benefited the most, as I expected on February 22 (scroll down).

• As part of the summit, we saw lots of aircraft orders, $21 billion in total, according to this article. VietJet will buy 100 Boeing 737 Max jets valued at $12.7bn, although this was actually announced back in July 2018. GE will provide and service some engines for $5.3bn, and Bamboo will buy 10 Boeing 787-9 Dreamliner jets for $3 billion. So basically, not that much new but a good press release for Trump.

• Vietnam is having problems moving up the value chain in tea. It appears that almost every year this decade, tea exports from Vietnam have fallen, including in 2018 when they were down 8.4% in volume and 3.4% in value. 2017 was similar, as was 2016 and 2015. Basically, the world has too much low quality tea, and that’s not going to change. Vietnam, despite centuries (millenniums?) of tea growing, still cannot produce high quality tea at large volumes. This seems to be the case with lots of Vietnam’s agricultural exports (and other exports). The country is going to have to move up the value chain to really compete. It has the benefit of the current US-China trade war to grab some export volume, but it also needs to charge more for the exports they already have.

• The government is going to install traffic cameras nationwide by 2022. It will start with trials in Hanoi and Ho Chi Minh City by 2020. One the one hand, great! Too many vehicle and pedestrian deaths in Vietnam. Start slapping some real fines on people for reckless driving. On the other hand, the government already has a lot of control and surveillance over its people. The “gold” standard for this is London, where there is approximately 1 camera for every 14 people. As residential security camera prices fall, we could start to see this everywhere. I know lots of friends in Washington DC that have their own cameras, and new technologies for smart homes add cameras as well. So maybe Vietnam is just going the way of the developed world, but without the developed world’s view of individual rights.

• Finally, a small thing. Lufthansa is doubling its aircargo capacity to HCMC from one flight a week to two. This isn’t that big a deal, and it is hard to separate the reasons for this: is it Vietnam’s growing economy or the fact that Vietnam is taking business from China? But it’s good news. Better connections mean that things just become easier. If you need to get something to Frankfurt from HCMC or from HCMC to Frankfurt, you can now do it 2x a week.

I am not sure exactly what I am going to look at this week, so keep checking back to find out!

February 27, 2019

Follow up on vehicle data

Lots of global news today. First, what is happening with India-Pakistan? Why is no one talking about this, or at least not enough. These are nuclear-power states with long-time conflicts. Nothing has worked to de-escalate the recent flare up, and it sure doesn’t look like there is any adults in the room. It doesn’t help that the US has basically taken itself off the world stage since Trump took over. Where are the US diplomats speaking out about this, trying to help the situation. Of course, Trump himself is in Vietnam for the Kim summit, plus his former consigliere/fixer is testifying in front of the US Congress about all of the bad things that he did at the direction of Trump.

While I do not think that Trump is a good president, I believe he has not been as bad as George W. Bush was. Remember, W presided over 9/11, started the war in Afghanistan and quickly forget about it, started the war in Iraq without a plan, was responsible for Hurricane Katrina response, and ended his term with the worst financial crisis since the Great Depression. While Trump hasn’t been innocuous, he hasn’t done that much, and some of the things he has done (like upsetting allies, pulling out of treaties) could be rectified over time.

But now, we have a potential global emergency, and the US State Department and the Pentagon have put out bland statements or made calls to counterparts that doesn’t seem to have done much (yet, to be fair).

We really seem to be moving out of the Pax Americana and into a new world order, with no country really able to take leadership of scary situations. Maybe this will change with a better US president, or maybe China will step in at some point (don’t count on that). But it is not great.

Outside of commenting on that, I just wanted to do a little bit more work on how true it is to say that vehicle sales grow with GDP. I expanded the chart from yesterday to include all countries for which we have data - 134 in total. That’s a good amount of data. Looking at the chart, and it sure seems like the data fits - up and to the right. So more X (GDP per capita) means more Y (vehicle sales per 1,000 people).

The regression also works with a very high adjusted R-squared of 0.76 and tiny P-values for the X-variable. No surprise here. It would have been more surprising if it had not worked, but that’s what you get sometimes.

February 26, 2019

Double V: Vietnam and Vehicles

I started thinking about vehicles and Vietnam because I saw this story about Go-Viet launching a ride-hailing app in Ho Chi Minh City (HCMC). There was a bit of data about how many vehicles are in this test pilot, which really seems more like a full fledged market than a test pilot at this point. It’s a full court press on ride-hailing, given that are more than 40,000 vehicles in the “pilot.”

There are four companies that are part of it, including Grab, a company that had bought Uber’s Southeast operations. It appears to have the largest share of the market, with more than 23,000 cars at the end of 2017. It recently went through a big court case, where it was fined for hurting the business of Vinasun, a taxi company. That fine (for just over USD200k) was later cancelled by a higher court ruling. And it now faces anti-trust concerns over its market share.

So, I found it interesting that all these ride-hailing companies are ramping up in HCMC, where public transport is not great. I also have been reading stories (like this and this) from early this year that the city was thinking about banning motorbikes in the city center. That just seems crazy to me, and it seems crazy to people. From the first story:

However, transport expert Nguyen Xuan Thuy said the plan to ban motorbikes from entering the downtown area was inappropriate as the country has some 45 million motorcycles and 4 million automobiles. Although there are more than 10 times as many motorbikes as cars, a motorbike occupies between one fifth and one tenth of the road surface area used by a car.

In terms of pollution, space and just sheer numbers, it is just impossible to consider motorbikes would be banned. This is in a city that doesn’t have a metro (although the city is shooting for a 2020 opening) and buses ain’t great.

This led me to wonder where Vietnam was in terms of car use. The numbers were actually pretty easy to find (this is a place where Vietnamese statistics appear to be pretty good, although a bit confusing at times) through the Vietnam Automobile Manufacturers’ Association (VAMA) and the International Organization of Motor Vehicle Manufacturers (OICA, initials taken from the French name, as per all good international organizations and terrorist groups).

The numbers have grown a lot, but seem to have plateaued a bit starting in 2016. Mostly that has to do with tariffs and regulations. Supposedly, people in 2017 were waiting for ASEAN tariffs to be phased out on Jan. 1, 2018, and then in 2018, right at the beginning of the year, the government required some new documentation on imports of cars, which meant that no imported cars were sold in January and February. Imports didn’t restart until March. To give an idea of the impact, total imports fell 6.2% in 2018 but total car sales grew 5.8%, with the difference from cars assembled (from kits, usually) in Vietnam.

The reason for the new regulation is to build an auto manufacturing business in Vietnam. The government’s goal is for its auto industry to source 35% to 40% of components domestically by 2020, up from about 10% now (sub req’d). VinFast is the first local-only car manufacturer, and by 2025 it aims to produce up to 500,000 cars a year with 60% of parts locally sourced. That would mean not only significant market share in the Vietnam market (in 2018 Toyota had 24% share), but also exports.

The reason why people generally are excited about Vietnamese car sales is because it is at the beginning of likely enormous growth in vehicle sales. As Vietnam grows incomes (and the government is expecting more than 6% real GDP growth in each of the next two years or around 10% nominal growth). That combined with pent-up demand caused by these new importing rules could mean a lot of cars sold over time, if importers can work out the documentation or companies produce more domestically.

Let me put my cards on the table here: I believe that car sales are going to start growing again very quickly, because they have artificially been constrained. Yet, I personally would hate to see that. Cars are great, don’t get me wrong. But the infrastructure in Vietnam is not there! And it doesn’t look like it is going to be there anytime soon. Motorbikes aren’t great, but they are probably better for the environment on balance (although Mythbusters says maybe not), and they definitely are better for congestion than having the same amount of cars.

I would prefer lots more public transport. Buses, scooters (preferably both electric), subways and trams. All these would be much better for the environment, for congestion, for the pleasure of getting around. And then high congestion charges on trucks, slightly lower ones on cars, and even lower ones for motorbikes. Of course people love cars for a reason - they provide more freedom than any of these alternatives. Americans love the dream of the open road, look at all the movies.

While I am not generally a fan of the ride sharing companies (I am just unsure about the economics and generally side with Izabella Kaminska at FT Alphaville), I could see them as an important part of the public transport mix, so the “test pilot” figures may be a smart component of this.

It will be interesting to see what happens in HCMC, which already has congestion issues. The government seems like it is testing out a few things that hopefully it will back away from. I just can’t wait to ride the metro in 2020!

February 25, 2019

Warning: Boring. IFRS and Vietnam

Just kidding. What could be more exciting than accounting rules! Any accountant will tell you that accounting is basically the most exciting thing there is. It’s just a lot of fun to look at numbers, add them up, subtract them, make estimations that people argue about.

There is a big push in the world to have one set of international financial reporting standards (IFRS). Back in 2005 there was a “big bang” with all EU countries adopting IFRS at once. Lots of other countries also adopted it. As of now, there are 166 jurisdictions recognized by the IASB (the International Accounting Standards Board), and 156 support a global standard. Only 8 have not publicly made statements in support, and 144 countries require IFRS for all or most domestic companies. (These figures are all provided by the IFRS Foundation - other sources have different figures, but basically all in the same direction: the world has generally adopted IFRS).

Vietnam does not! But there have been a few articles (here, and more recently here) about the government’s support for IFRS. In the latter story, the Deputy Minister of Finance Đỗ Hoàng Anh Tuấn said that the adoption of IFRS “would help Việt Nam create a more transparent business environment to attract foreign direct investment.” There is a stepped approach in the country according to EY in the first article. Basically, they are going to start with a few (30) key entities adopt IFRS, then have all companies adopt 10 to 20 IFRS standards by 2020. Full adoption by 2025.

The benefit of international standards is that global companies will have just one standard to apply across all of their subsidiaries, and investors will better be able to compare companies worldwide. But actually, it’s very unclear if the benefits actually accrue. A lecture on IFRS adoption has this to say about potential benefits:

A priori, there were many conjectured benefits from IFRS adoption, including more efficient cross-border transacting, enhanced informativeness of financial reports (increased transparency), greater inter-company comparability of financial data, better asset prices (efficiency), lower cost of capital, and balance sheets that facilitate more efficient contracting between companies and lenders. Whether these benefits have in fact materialized is difficult to say. For reasons discussed below, there is limited evidence to go on, and many of the studies are flawed or have been misconstrued.

One of the key issues is that while standards are adopted, they are not uniformly applied because of both politics (big and little, so from the state as well as politics within the company) and how commerce is done in each locality. This is particularly important for a big change in IFRS, fair-value accounting. This can often require estimates that cause significant variances between companies even in the same country. These differences can limit comparability across countries, which hurts some of the benefits.

But Vietnam also sees IFRS as helpful to increase transparency and accountability in the country among corporations. This only works if the adoption of these include lots of training and education. Plus a push by the government to actually enforce these standards.

I think it is going to be tough to reach the announced 2020 timetable of using certain standards, but we could see adoption by 2025, if Vietnam gets its act together. It needs the following:

• IFRS guidelines translated into Vietnamese. This is basic but doesn’t seem to be there yet.

• Accountants that understand the rules

• Some of the issues that might arise is over valuing certain instruments that are not widely used in Vietnam now. So, it would be helpful for the markets to develop further before the rules come into account. But the market may need IFRS before we see these instruments gain share.

• Plus regulators need to be trained in these issues as well and may be hired.

I think all of these are possible to overcome. But better education of everyone involved in the market is going to take time. The rewards should be positive, but in some ways we are going on faith.

February 22, 2019

Vietnam prepares for Trump-Kim summit

On Feb. 14, 2019, I wrote a small thing about how Trump (and the American government in general) would like Kim to see Vietnam as a potential model of opening up. Now of course there are a ton of articles talking about the same thing (WSJ here, Washington Post here). God, I am prescient.

In all of the coverage, I saw this headline from TPM, which I generally like: Trump Is Basically The Only One Excited About The U.S.-North Korea Summit. But that’s totally not true. Vietnam is extremely excited! Let me count the ways:

• Bars have gone all in. These are the drinks they are serving: Kim Jong Ale, Rock It, Man, Peace Negroniations. That’s all according to this Reuters article.

• And a barber is offering free Trump and Kim haircuts. Video here (warning: this hair is really bad). Hat tip to Mai Nguyen. I first saw her tweet.

• Lots of t-shirts are being sold too. At least 300 were sold with Kim’s face on them and “Roket Man” underneath. Not sure why Rocket is misspelled. I wouldn’t have put it past Trump to have misspelled it first, but he didn’t.

• One painter is making 60 paintings of the two of them. I kind of like them.

• Lookalikes are getting more business after the Singapore round. I would say that the Kim impersonator looks more “authentic" (?) than the Trump one.

But in all seriousness, it looks like Vietnam is trying to take advantage of this as much as possible. Singapore is a good example of what can happen. According to an Aljazeera report quoting communications special, Jason Tan:

"With the summit, we received a week of global coverage, positive brand halo, and genuine interest in Singapore as a country," Tan told Al Jazeera.

Also,

Greater than positive media exposure was the boost to Singapore's strategic importance on the world stage, said Vu Minh Khuong, an associate professor at the Lee Kuan Yew School of Public Policy at the National University of Singapore.

"The host enhances its strategic position as the place of choice for highly important events and showcases to the world it is a meaningful player in making the world a better place," he told Al Jazeera.

I think this really is a masterplay by Vietnam. It gets the halo benefits of having an important summit and it keeps Vietnam in the conversation. Plus, there is going to be tons of stories about Vietnam, its economy, its place as a tourist destination, and the openness of the people. And it will surely cost less than it did Singapore.

February 21, 2019

What lessons does the Billion Dollar Whale have for Vietnam

I just finished a recent book about a con man (alleged con man, I should say) titled Billion Dollar Whale: The Man Who Fooled Wall Street, Hollywood, and the World.

First, it is an amazing story and book. There was an extract from the book in the Wall Street Journal worth reading to get a sense of it (here, sub req’d, although you get a few free articles, and this should be one of them this month). It really shows the machinations behind the scenes of this massive con that extracted billions of dollars from Malaysia, and mostly to pay for what appeared to be really crazy parties and sick gambling. When I say billions of dollars, I mean that the main guy, Jho Low, allegedly stole $4.5 billion (!) from a Malaysian sovereign wealth fund (1MDB). Some of that money was allegedly kicked back to politicians in Malaysia and higher ups in the Middle East and elsewhere.

Of course, it wasn’t just one person allegedly doing it. Lots of bankers (from Goldman Sachs, Falcon Private Bank and others), wealth managers and accountants (KPMG and Deloitte) helped out. Low appears to have been very good at pushing legitimate institutions into illegitimacy and also using their names to deflect questions from others. And sometimes the venality of these other actors worked to his advantage.

But there were a few things that would have prevented the fraud sooner:

• Increase transparency of government accounts. This is a problem all over the world. Governments spend huge sums of money and act as guarantors of even bigger pots of money. Some of this can easily get into the wrong hands or be misused. This is not just an emerging market problem; developed countries have the same issues. Look at the US Department of Defense. There are always scandals (the first one that I was able to find with a quick search is this “Fat Leonard” scandal, also perpetrated by a Malaysia and also someone with “Fat” as a title. It was “Fat” Eric in the Billion Dollar Whale.) But the more transparency there is, the harder it is to hide the money flows. This can mean multiple bids for projects, public tenders, etc.

• Don’t allow people to remain in power for too long. An example from my old work, investment banking: Regulators have long asked investment banks to require two weeks vacation for employees. After a trader at SocGen (Societe General) run up €5bn in losses, most investment banks started doing so. The reasoning is that it is easy to hide something if you are already there to keep it hidden. Like if you are sitting on your bed at all times, no one can find the Playboys under your mattress. For Malaysia, former Prime Minister Najib Razak (who has been charged with corruption for his role in the 1MDB affair) was allegedly able to hide the losses and money transfers because of his hold on power.

• Support a rigorous press. This is a difficult one for politicians, because the press can make their lives hell. And not always fairly. We see this in the US, which was (in my opinion) very unfair to Hillary Clinton with the focus on her emails (something that was not that important). And is even sometimes unfair to Trump, a person that I generally feel deserves the opprobrium he receives. But the press was extremely important in ferreting out details of the alleged crime in this case. Specifically, the WSJ (the authors of the book are WSJ reporters), The Edge Malaysia, and The Sarawak Report.

• Be careful of institutions that have concentrated clients. What I mean by this is that sometimes institutions will make the wrong decisions because they need to please their client too much. I read a book about Enron (I wrote about it below, look at the Jan. 14, 2019 post), and it turns out that Arthur Andersen needed Enron just as much as Enron needed Arthur Andersen. The accounting firm was making so much money from Enron, it was willing to let Enron dictate terms. Banks were in similar situations. We saw that with private bankers for Jho Low, and even Goldman. Of course, Arthur Andersen paid a crazy price (it went under), and Goldman is still paying the price and may pay a lot more.

• Don’t trust people who went to Wharton. Example 1: Donald Trump. Example 2: Ivanka Trump (actually transferred in because she didn’t get in on her own at first). Example 3: Jho Low, who was the allegedly masterminded of this whole thing and is now a fugitive. Example 4: Your humble author [yes, really. You would think this blog would be more professional because of that, but…you would be wrong].

Vietnam does not generally have a strong free press, government transparency is just okay, and the party has maintained power for years. It is ripe for this sort of corruption. However, it would really pay for Vietnamese politicians to look at what happens when corruption gets out of control and people are fed up. In Malaysia, it led to the downfall of Razak in elections. In the Middle East, it led to the Arab Spring. The price can be extremely high, so it behooves the state to clean up its act. I see the recent push against corruption in Vietnam as a response to public opinion (at least in part) that should help limit some of the most egregious corruption. That is a positive signal, in my view. Let’s just hope it is enough.

February 20, 2019

The case of the disappearing Mekong delta

What’s happening?

A recent study (written up by the VOA here) exposed yet another potential environmental crisis in Vietnam (and the world). Basically, the Mekong delta is sinking underwater and could disappear entirely by 2100.

What’s driving the subsidence?

This time, the crisis is only partially caused by climate change. The bigger issue is groundwater extraction for agriculture and drinking water. The picture at the right shows the potential impact of increased groundwater extraction. For the past 25 years, groundwater extraction has increased as Vietnam’s population and economy have grown.

I reached out to an author of the paper, Philip Minderhoud, and asked him how much of the disappearance of the delta is due to groundwater extraction, how much to rising sea levels (climate change), or sand extraction or other things?

This is one of the ongoing research questions. But what we see presently is that the land subsidence due to groundwater extraction is on average for the entire delta round ~2.5-4 times higher than the rate of the rising sea level around the Mekong delta (3-4 mm yr). At the coastline, especially in the southern part of the delta, the subsidence rates due to natural compaction of young sediments can also reach subsidence rates up to several centimeters per year. And when the sediment supply in these areas is cut off, the mechanism to buffer these subsidence rates stops and these rates start to add to delta elevation loss.

As for sand extraction, it is more localized according to him, rather than a reason for the general subsidence. [I wrote about sand on February 13, 2019 - scroll down].

What does this mean for the people in the region?

Obviously, the Mekong is important. More than 18m people live in the area, and about 200m depend on the area for food. According to the VOA article I linked to above, the Mekong delta is responsible for 50% of the food Vietnam produces. For example, Vietnam is the third largest exporter of rice in the world, much of which is produced in the Mekong. This could all be at risk, and the impact could be severe.

In the short term, there needs to be significant investment in water resources for people in the region to replace groundwater extraction. This probably means piping in water from further away. Minderhoud said that they could be supplied with fresh water from the Mekong river branches, but during dry times or when there is salt-water intrusion, it might not be enough. So the distance might be far and will require money.

Given food security issues and the potential economic loss of agriculture lands disappearing, the cost would be worth it, in my opinion. But it takes foresight, initiative and the will of the government. Particularly when people have to start potentially paying more for water, either through taxes or fees.

Is the government working on this?

It sounds like the government is interested in the research. For example, Minderhoud said that “in Can Tho there was recently a new policy to reduce/stop groundwater extraction in the city, partly because of subsidence.” He didn’t know the specifics, but it does sound like the government is aware of the issue.

Vietnam is already facing the effects of climate change with severe weather events like typhoons, flooding, and drought. According to GermanWatch, Vietnam was the 6th most affected country in the world from the effects of climate change in 2017 alone. These effects have and will likely continue to impact the Mekong Delta more than any other part of the country. I hope that the government starts really investing in infrastructure to deal with this and climate change, such as investing in renewables rather than investing more in coal (more on renewable trends in Vietnam in my post yesterday).

February 19, 2019*

Solar in Vietnam

Vietnam faces a significant power crunch because demand is growing in the double digits for energy every year. The government has invested and allowed investments in every type of power source, from coal to oil and natural gas to wind and solar. Hydro is also a big component of power supplied in the country.

McKinsey, in this report, says that the country could need USD150bn in investments in energy. There is some investment in solar and renewables (Electricity of Vietnam plans for 45 gigawatts of coal power and 18 gigawatts of renewables by 2020.

So I was interested to read this article about solar in Vietnam.

The latest data shows that a total of 332 solar projects have been registered with the total capacity of 26,290 megawatt peak (MWp), including 121 projects (7,234MWp total capacity) that will begin to generate electricity by 2020 and 211 (13,069MWp) awaiting approval. These figures have far exceeded the targets of the revised Power Development Plan VII. Additionally, more than 800 small-scale rooftop solar power projects with a combined capacity of nearly 11.6MW have been developed.

A good amount of this is driven by strong feed-in tariffs (9.35 UScents for solar) that should allow solid profits for investors. In the Middle East, developers have agreed to sell solar for as low 2.34 US cents per kilowatt-hour. Of course, it appears there are some subsidies and the Middle East likely has a bit better environment for solar (no rain, mostly sunny skies - having living in the UAE, I can tell you that every day is pretty much like the day before). But still, there is a lot of room for investment, especially as solar prices fall as predicted.

Based on people that I’ve talked to, there are some issues with high capital costs in Vietnam, and some fears over exchange rates and what happens over the arrangements with the national grid. Plus the feed-in tariff is in effect only for projects that start commercial operations by end of 2020. After that, we might see some negative changes

So there are risks, but I would love to see a even quicker take up of renewables. In 2017, Vietnam ranked as the 47th largest economy but the 27th largest emitter of greenhouse gases, so there is a real need.

What I would like to see if something like SolShare is doing in Bangladesh: building a residential power grid that takes advantage of solar panels on houses. There has already been at least some demand for residential solar panels, and if that continued, it would make sense to put together a peer-to-peer grid like is being done in Bangladesh.

There is going to be enormous investments in power generation in Vietnam over the next 20 years. I can’t see a world where things like solar and wind aren’t cheaper than they are today, and in the case of solar, really much cheaper. Even in the US, it is now cheaper to build a wind farm than to run an existing coal plant. I really hope that the country chooses to go the route of renewables, otherwise it is really going to be stuck with plants that are bad for the environment and are expensive.

*Update: I accidentally dated this post Feb. 15, 2019, but it was actually written and posted Feb. 19.

February 14, 2019

Phuong My

Phuong My became Vietnam’s first designer to show at New York’s fashion week. This is very exciting to me, because 1) I love fashion and 2) I think it really says something important about a potential path for Vietnam, if it chooses to go this way.

About Phuong My: She is based in Ho Chi Minh City, born in 1988 (young!) and graduated from the Academy Of Art at the University San Francisco. She is known for impeccable tailoring, striking silhouettes and beautiful feminine details. She was invited to show at NY Fashion Week for the first time this year after opening the Vancouver fashion week last year. I couldn’t really find any reviews of the show, but I personally found it exciting. See the pics below that I took from Phuong My’s website.

More importantly, this is a Vietnamese company that is actively competing on the world stage, at the highest level (or second- or third-highest, depending on whether you think Paris, Milan and/or London are more important fashion shows - personally, I think NY Fashion Week is the edgiest and most open of the big four). The label already distributes in more than 20 countries,

If Vietnamese companies are going to grow, they need to start competing as aggressively as possible globally. And it is going to require skilled workers, something that Vietnam needs desperately, preferably by growing them “in-house.” Right now the textile market in Vietnam is basically unskilled, with a few innovations coming from foreigners (see my post dated January 17 and titled: “A quick break from hotels: environmental investments.”

So Phuong My is a great example of a local Vietnamese (with some training from abroad) able to grow a business that can compete internationally. What a story! The only thing that makes me hesitant us that Phuong My is not really upgrading local talents as much as she can, because she purchases her more luxurious fabrics from abroad, even though Vietnam has a very large textile business, as indicated in this article.

Rather than accepting the limitations of local fabrics available to other local designers in Vietnam, Phuong My established a very clear strategy for her own brand. PHUONG MY’s fabric production is entirely outsourced
to select partners in Paris, Milan and Hong Kong, thus providing the optimum blend of both materials and exclusivity that has proven to be successful for the brand.

Hopefully over time, Phuong My will source materials locally and then export all of these beautiful creations abroad. I can’t wait. This is what all Vietnamese companies should be shooting for.

All pictures from the Phuong My website.

February 14, 2019

Vietnam as an example for North Korea

As I wrote yesterday, there are a few articles that talk about Vietnam as an example of a path for North Korea and Kim Kim Jong-un.

The reasons are numerous:

• Vietnam was the winner of a war with the US. The Korean war was very different, but ultimately, North Korea was able to maintain a separate regime from the South and its allies.

• North Korea has been isolated from much of the Western world, much like Vietnam was after the war.

• The government of Kim Jong-un wants to maintain power, but would probably be amenable to greater living standards, especially for the elite.

• Vietnam has already gone through a transition like this and has generally succeeded. The Communist Party remains in control, people’s living standards are higher, and the elite are better off.

• Vietnam is one of the few countries in the world where America is seen positively and that number is growing. According to a Pew Research poll, in 2017 84% of Vietnamese have a favorable view of the US, up from 76% in 2014. From America’s perspective, if something like that happened with North Korea, it would be a major win.

Now we have the Trump-Kim summit coming up in the next few weeks in advance of which the Vietnamese foreign minister made a trip to N. Korea this week. So it looks like the magic could start to work soon!

My opinion is this: no f*ing way.

First, it’s great that Vietnam has opened up its economy, but it has a not great human rights record and that seems to be getting worse with recent crackdowns. The only area where it is improving is in its campaign against corruption, but most Vietnamese do not have the right of free expression, assembly, etc. It is not a great example of an open system.

Second, if Kim decides North Korea should be like Vietnam, does the world need another market-friendly dictatorship ? A system like that can raise living standards, but at the expense of opening up of the economy to real freedom. I believe that economic freedom is maybe necessary but by itself is insufficient to be true freedom. Sometimes its not freedom at all, if corporations just take the place of government in all aspects.

Many people believe that when countries open up their markets they will eventually be forced to open up their political systems as well. Exhibit A is China. Exhibit B is Vietnam! Both countries have pretty open markets, and yet, neither are democracies.

Now, is it better for North Korea to be tied to the world economically rather than isolated? Yes, I would say so. And it would likely decrease the chance that the government would actually launch one of their (non-existent, according to the US government) nuclear weapons. It could also help the world better understand North Korea and North Korea understand the world. That would all be good.

But going from here to there seems really difficult. North Korea’s won’t give up its nuclear weapons program. The rest of the world won’t allow a nuclear-powered North Korea. Until one side backs down, the regime will continue to be isolated.

In a dream world, Kim would go to Vietnam, see how advanced the country is, and decide that he needed to open his country. He would make a real deal to get rid of his nuclear weapons' program in exchange for aid and trade with the outside world. Eventually, the country would open up so much that the demilitarized zone could actually be demilitarized and the border with South Korea open. Let’s all hope that happens, but I sincerely doubt it.

PS By chance I just saw that the New York Times magazine published an article about North Korea and its opening up. Maybe Kim does want to open up, but what will Trump ask in exchange, if anything.

February 13, 2019

Sand in Vietnam

I feel like I didn’t really do justice to all of the aspects of land yesterday, so I will try to return to it at a later date. Specifically, I didn’t talk about how the revenues are calculated, how land is allocated, corruption surrounding land allocations, what that means for property developers, farmers, etc. Land is a big issue, and I really just skimmed the surface.

But, I found two interesting stories. The first was about hopes that North Korea would use Vietnam as a model for engagement with the world. I will try to write about this tomorrow, because I think it bears some reflection.

The second, which is definitely less thought about that North Korea is: sand. Turns out, if you didn’t know, we are running out of sand in the world. Or specifically, the right type of sand that is used in construction. And lots of sand is used in construction, in glass making, a molding material for metal works, landscaping, also, of course, sandpaper. In construction, it’s mainly used to make mortar and concrete and asphalt. Concrete is actually just cement mixed with sand, water and rock. And cement is made from sand too.

Just a quick calculation. To make concrete, you use 1 part cement, 2 parts sand and 3 parts gravel. So sand makes up a third of the volume of concrete. Based on this report, the world makes 10 bn tonnes of concrete each year, so that would require 2.8bn tonnes of sand. And it has to be a certain type of sand. The total consumption of sand is said to be 15bn tonnes. Cement production is about 4bn tonnes a year, with about half of that going to make concrete. And cement can use sand as well.

In Vietnam, total production was just over 90m tonnes in 2018, of which 60m were used domestically. If I assume about 50% is used to make concrete (which may be low but appears to be the usage world wide), that means almost 220m tonnes of concrete were made, using 60m tonnes of sand. That’s a lot of sand, around 30m cubic meters. Another source says that the country needs 50-60m cubic meters a year, almost double my calculations.

That’s a big amount of sand. About the size of Vancouver.

What I was surprised about is that Vietnam is actually cracking down on illegal sand exploitation. HCMC’s People’s Committee fined two companies for illegally extracting sand, and they also confiscated sand and some equipment. The fines were small (VN95m), but the confiscation was real, worth VN10bn for each company, according to the article.

Of course, sand is related to climate change, since sand helps moderate the impacts of extreme weather, like flooding. And of course saltwater intrusion into rivers, like the Mekong, can be worsened by the lack of sand.

The construction industry is an important and growing part of the Vietnamese economy, so it will be difficult for the country to do with this, but better regulations plus potentially some incentives to use other materials rather than sand to make concrete would be helpful.

February 12, 2019

Land in Vietnam

I started thinking about land recently, probably because I have real estate on the brain, and I thought I would see what I could find about land in Vietnam. Basically, how does land work in Vietnam. I found out some interesting facts:

• Land is collectively owned. No surprise for a Socialist Republic. The government can assign land use rights to people, or lease them. These leases can be paid annually or in a chunk at the beginning. If you pay at the beginning, you have more rights, if I read things correctly.

• While land leases may be strange to some investors, they are actually quite normal in the UK. It works fine there (look at property prices in London!), although most leases run for 125 years or longer. I guess it helps to have royalty.

• Land fees are a big part of city budgets, according to this story about land fees. Last year, Ho Chi Minh City (HCMC) collected VND16.5tr for land-use purpose changes, VND5.38tr in leasing land and VND6.34tr in land-use fees. In total, it collected VND28.2tr in all types of land fees. This represents 11.5% of all domestic revenues and 7.5% of all revenues collected by the city. It was more than the city got in crude oil revenue, which is falling.

• This reminds me of stories (here, here, here, and here) about Chinese local governments’ addition to real estate sales. They can make up as much as 35% of government revenues. First, it is/was unsustainable (although these articles go back to 2012) because the sale can only happen once. Second, if there is a downturn, revenues from taxes and fees are probably already going to fall, and this is going to be a double whammy. Third, it really pushes cities to develop profitable real estate rather than parks, schools, government buildings, even if it is necessary.

• However, looking at Vietnam in comparison, the real estate market, and revenue from it to the government is much less of a worry. As mentioned above, it is only 7.5% of revenues in HCMC. In the US, it can be significantly more. Overall in 2015, it made up 30% of local government budgets, and 17% of total state and local budgets.

• Foreigners can only lease land, and that is for 50 years (70 years in certain exceptions) and renewable. And they still have the ability to sell the property. At least in late 2017, foreign sales were minimal, according to this article. But these numbers appear to be increasing.

February 11, 2019

Three things on my mind

Just a few things on my mind as we get back to work on this Monday post-Tet.

First, smoking. I read an interesting paper on smoking in Vietnam that indicated that a price increase of 2.8x (from VND22,000 to VND62,000) would cause 56% of smokers in Da Nang to quit. I love that the study put such an exact figure on the amount needed to stop smoking. It’s totally unrealistic. Heavy smokers will smoke no matter what, even if they can’t afford other things. And casual smokers will probably still buy, even at higher prices, because it is usually just an impulse purchase that ultimately is not a big part of their overall spending.

The big knock on cigarette taxes is that it falls disproportionately on the poor. For the poor that are addicted, they will still buy cigarettes and have much less money for other things. As a former smoker, I feel in my bones that this is true. Smokers will just find the money. But I still think it is worth it to stop people, especially young people, from smoking in the first place. If you never smoke, then you never need to quit. I know that sounds like a tautology, but it’s actually quite meaningful. Quitting is hard, really hard, but not smoking is easy. Quitters say that there is a part of them that always misses smoking. While a non-smoker, misses nothing.

I also found it interesting that there is room for the Vietnamese government to raise taxes without decreasing the volume of cigarettes, or at least not by much. Given what we know about the health affects of cigarettes, it makes sense to start raising taxes now to pay for the cancer coming in the future.

If you want to know what the most popular brands are in Vietnam, here’s your chart. Malboro is the most popular, like in the UK and the US, but lots of competition. And Australia has the most expensive prices for cigarettes, more than New York City.

Second, other types of tourism. The Guardian reviewed a new hotel in Vietnam. It is at the bottom of the Yen Tu mountain, the tallest mountain between Ha Noi and Ha Long Bay, so potentially a nice stop between the two destinations. The mountain itself has 6km of steps and paths up to the monastery. The hotel looks wonderful, and I can’t wait to go.

More important than my Vietnam bucket list is what this represents for tourism in the country. Vietnam actually has a lot of various tourist attractions, with cool urban centers, beach resorts, and history, both imperial and of the war. There has also been some adventure tourism, but mostly smaller groups organized by small companies. Now, I like these kinds of small groups, but I see the appeal of more mass market tourism. And something like Yen Tu can appeal to both. It allows some hiking, a religious experience, a cultural experience for foreigners, hopefully wrapped up in fancy hotels that result in more spending by tourists. It is quite difficult to add these types of experiences, especially in poor countries, but it really can drive tourism numbers.

The key is to not let these unique destinations be swamped, like we are seeing in Ha Long Bay. The government should start restricting numbers (and raising prices) for the most important destinations, but then funnel people to other, also interesting places. It’s extremely hard to do, but is essential.

Third, Brexit. I was listening to a Financial Times podcast on UK politics about Brexit, and the journalists were saying that Britain has been quite unsuccessful in signing new trade deals post-EU, or even signing up countries to roll over the EU deals to Britain. I started to wonder about Vietnam and their exports and imports to Britain. According to one source, UK exports to Vietnam are USD0.74bn, and Vietnam exports almost USD5bn to the UK. If I read these statistics correctly, merchandise trade was high as well, with GBP209m in exports from the UK and GBP1.2bn in imports from Vietnam in 2018. Vietnam was #11 in terms of exports from the UK, but only #5 in terms of imports. Again, these look to be only merchandise.

The issue is that Vietnam is currently in the final stages of negotiating a big deal with EU that should be signed in 2019. Now the UK has to ask for a separate deal post-Brexit. The UK government says that it will join the CPTPP, which is in place now, but that might take some time and depends on the UK’s status with the EU post-Brexit. If it is still part of the EU customs union, it might not possible or worthwhile, since the EU already has or is negotiating free trade agreements with 9 of the 11 countries in the CPTPP, like it is with Vietnam already. If not in the customs union, then Britain would probably like to join the CPTPP quickly, meaning it would have little leverage in negotiations, meaning it would get no say in the details.. But it would be able to show this success quickly while focusing on the much more important agreement with the EU.

It is hard to see how all of this is going to play out. I have always felt that the UK leaving the EU is not only bad for the UK, but also distracts it from doing anything else on other important issues. If you think about the real problems in the world (climate change, lack of faith in democracy, globalization leaving people jobless, inequality), Brexit addresses none of these. But it has taken up every iota of attention in the UK since the referendum back in June 2016. What a waste.

February 8, 2019

Corruption and firm size

I came across this recent paper (here) that looked at corruption/bribery in Vietnam and found that as firms grew larger, they faced less corruptions/had to pay smaller bribes. The paper is called “Firm Growth and Corruption: Empirical Evidence from Vietnam” by Jie Bai, Seema Jayachandran, Edmund J Malesky, and Benjamin A Olken.

We find that firm growth reduces bribes as a share of revenues. We propose a mechanism for this effect whereby government officials’ decisions about bribes are modulated by inter-jurisdictional competition. This mechanism also implies that growth reduces bribery more for more mobile firms; consistent with this prediction, we find a larger effect for firms with transferable rights to their land or operations in multiple provinces.

Obviously, corruption is a big issue in Vietnam. It was tied at 117 by Transparency International’s 2018 Corruption Perceptions Index 2016, with a score mostly unchanged since 2012. Also, Vietnam is unique in that much of business and bribery is done on the provincial level, which allowed the researchers to test inter-provincial competition.

Reading through, it does seem like companies with good property rights, large employment and the ability to move (so competition between provinces is a real possibility) can face lower corruption/bribery.

One thing that I would have liked examined is whether there is a limit to bribery in absolute dollar amounts. What I mean is that as firms get larger and larger, to have the same percentage in bribery would mean that they are paying out big sums . So a company that had revenue of $100m could face something like $2m in bribes, which might be reasonable, but a company with $10bn in revenues would have to give away $200m in bribes. Maybe the officials would be wary about accepting that much in bribes. How would they “launder” it? They might be concerned that their national bosses would be jealous of their new wealth, especially if it was spread among a small number of officials.

Having said that, my experience in Saudi shows that bribes/corruption can be very high. The government said they recovered more than $100bn in assets.

Anyway, the paper is extremely interesting and well worth a read.

February 7, 2019

Hotels: A market-sizing exercise (part 10 of ???)

So for my final part on HCMC hospitality, I wanted to see how spending is needed to construct the number of hotel rooms anticipated for our tourist estimates in 2025. I went through the details of my estimate of additional hotel rooms yesterday and came to a conclusion of something like 250,000, but up to 300,000 total hotel rooms needed in 2025. That’s up from about 190,000 or so now. That means an additional 60,000 all the way up to 110,000 new rooms in the next 7 years.

I’m not going to re-estimate the cost per hotel room. I did that earlier (scroll down to part 6), when I looked at the cost of adding hotel rooms for the country as a whole. I estimated that it would cost around $175,000 per 5-star room, $125,000 for 4-star, down to $85,000 for 3-star and the remainder, which is really the bulk of the additions, at $20,000 (all US dollars).

Total cost of more than $2.5bn: That results in a total cost of between $2.5bn to $4.7bn. Within this estimate, I believe the biggest risk is really the cost of the smaller hotels, because the range is likely very high (with some rooms costing very little and those close to the 3-star costing much more), but it is hidden in the average. Also, the range is quite high, mainly because the range of the hotel rooms needed is high. My gut is that hospitality investment will be at least $3bn in HCMC, some portion of which, will be foreign investment. That’s something that I might look at later.

Conclusions: My main conclusions to the HCMC hospitality exercise are these:

• There are likely going to be more than 12m visitors to HCMC in 2025, unless something drastic happens. And I could easily see this reaching close to 15m.

• Domestic tourists/travelers could be as high as 50m, although not all of these will stay overnight.

• The city needs to build at least 60,000 hotel rooms, and probably more. That’s a big jump over the 190,000 we estimate currently (which might be a bit high).

• The cost of building all of these hotel rooms will be more than $2.5bn, and could reach as high as $4.7bn.

• If all the building happens, but the tourists don’t come because of bottlenecks at the airport (which I see as a real possibility), then occupancy rates are going to fall drastically. That would mean lower returns for investors and a slowdown in construction.

Please tell me where I’m wrong!

February 6, 2019

Hotels: A market-sizing exercise (part 9 of ???)

Adding on to what I did yesterday, now I want to come up with some estimates on the number of hotel rooms that needed to be added in HCMC over the next few years. Like I did for the country as a whole, I wanted to show two scenarios, one with high growth and one with lower growth. I am taking the figures we got from yesterday as the high growth and then making some assumptions on what the lower bound would be. In this lower growth case, I assume that foreign travelers only grow to 12m a year, less than the 14.5m in our earlier assumption. And for domestic travelers, I assume 45m a year, not 49.2m.

If we use the same assumptions before on the duration of stays (5 nights for foreign tourists, 2.5 for domestic travelers) and also assume that only half of the domestic visitors stay overnight, we reach the following scenarios:

• Scenario 1: Foreign guest nights rise to 72.4m. Domestic nights are 61.5m.

• Scenario 2: Foreign guest nights rise to 60m. Domestic nights are 56.3m.

Now, if we assume that there are one and a half guests per room, that would get us to 78-90m room nights, meaning rooms that are occupied by guests. And if we assume an 80% occupancy rate (which is high), we would get to more than 300,000 rooms needed, on the high end, by 2025. Even the low end of the estimate is more than 260,000, or almost 100,000 more than we estimate there are hotel rooms now.

Where could we be wrong?

• Room nights: The one area where we definitely could be wrong is the number of room nights for foreign visitors. Right now, the average stay is longer than I would expect. In Thailand, people stay on average 9.4 days, based on government data. I would assume that Bangkok would only get a portion of that, and probably less than half. Singapore, in a 2017 government survey, showed an average length of stay of 3.5 days, which was falling as more short-term Chinese tourists came to visit. If we lowered our assumptions for Vietnam to 4 nights for foreigners and 2 nights on average for Vietnamese travelers, then hotel rooms needed would only be 210,000-250,000.

• Occupancy rates: I also feel that the 80% occupancy rate is probably too high over time. A higher rate reduces the number of rooms needed. If we lowered it to 70%, then rooms needed would rise to 350,000 in 2025e at the high end and 300,000 at the low end. Of course, if hotels don’t get built, then occupancy will be higher than even 80%. And that would drive more construction going forward. As long as there are enough rooms in total, then the occupancy rate allows for flexibility in the rate of construction. One caveat: we don’t deal with seasonality in this. Some periods could be significantly busier than others (it appears to be late summer/early fall), and that could mean occupancy rates extremely high in some periods and much lower in others. This could require or result in more construction.

Conclusion: Taking into account those sensitivities, I estimate that something like 250,000 rooms will be needed in Ho Chi Minh City by 2025e to accommodate all of the tourists coming to Vietnam. That is about 80,000 more rooms than currently exist. We will look at that figure in the context of potential costs tomorrow.

February 5, 2019

Hotels: A market-sizing exercise (part 8 of ???)

Ok, yesterday I did a bunch of estimates of hotel rooms to get a sense of where the Ho Chi Minh City (HCMC) hospitality market is right now. Based on my estimates, it was around 125,000 rooms in 2015 and 145,000 in 2017. Let’s go forward from there and see what future needs are using the same methodology.

But first, we need to make some estimates on visits to HCMC in the future. The government has a target of 8.5m foreign and 32.77m domestic visitors in 2019, a 14% and 13% growth rate, respectively. The figures we already came up for the country as a whole for foreign visitors were 13.6% growth in 2020 and then 8.4% a year after that until 2025. For domestic, it was 7% annual growth the whole period through 2025. If we do that, then HCMC would see 14.5m foreign tourists in 2025, or just under half of all visitors to Vietnam. And domestic travelers of just under 50m, or 38% of all domestic travelers in the country.

For reference, Bangkok had 21.47 foreign overnight visitors in 2016. Based on that, HCMC’s 14.5m seems very doable, especially as the country builds up capacity. But one reason for Bangkok’s success is that the airport funnels so many more people through the city. The Suvarnabhumi Airport has a capacity of 45m passengers, which it is currently exceeding by as many as 15-20m a year. It is expanding now, and the first expansion should be completed by 2020 and increase the 45m capacity to 60m (see this article for details, sub req’d). Then a future expansion will increase capacity to 90m by 2022. The second airport in Bangkok, Don Mueang, has a capacity of 30m passengers, but did more than 38m back in 2017, and is expanding to a capacity of 53m by 2020. In total, Bangkok has a capacity of 75m passengers through its’ two airports, and both are already exceeding that capacity.

HCMC’s airport is significantly smaller. The Tan Son Nhat airport handled 36m passengers a year, and is looking at expansions to raise this to 51m by 2025. It is the only airport serving HCMC, so this could be a real bottleneck for travel.

Having said that, I think that sticking with our estimates for the country seem reasonable for HCMC. Even at 65m visitors in 2025, if we assume that a large portion of the domestic ones come by car, train or motorbike (!) and only half of them stay overnight, the capacity at the airport should be enough.

The main risk to our estimate, in my view, is that the government tries to funnel more people to specific resort destinations, like Pho Quoc, or Ha Long Bay, or a central Vietnam destination like Nha Trang or Da Nang, both of which have seen significant hotel construction.

I am running out of time today, so more on the HCMC hospitality market tomorrow in this never-ending series on Vietnam’s hotels.

February 4, 2019

Hotels: A market-sizing exercise (part 7 of ???) [Updated 5 Feb*]

Eventually, I have gotten back to looking at the hotel business in Vietnam. I wanted to focus on Ho Chi Minh City and Hanoi over the next few posts, because I think we are going to see lots of investment in these two cities. Then there are a few others that are tourist hubs, like Pho Quoc, Da Nang, Nha Trang, and Hoi An which may also be worth looking into, at least cursorily.

I started with Ho Chi Minh City (HCMC) because it has the largest number of tourists, almost 7.5m foreign tourists in 2018 and 29m domestic travelers. There are no good stats on how many hotel rooms there are in HCMC, so my first step is to try to come up with a figure of hotel rooms. I have a few statistics around the figure. First, in 2016, the Vietnamese Department of Tourism said there were 2,200 hotels in HCMC. We also know how many hotels there were in 2015 in all of Vietnam: 355,000, also according to the D of T. And we have the number of upscale and luxury hotel rooms in the city, 10,174 in 2014, according to HVS, a hospitality consultancy.

This is an important point to make - when doing market sizing, most of the time you don’t have the number you actually want, but you have a bunch of numbers that allow you to make some calculations and test them out.

Calculation 1: Using hotels to estimate rooms: For the country as a whole, based on figures I have from 2000 to 2015, there were on average 20 rooms per hotel. If I use this and multiply by the 2,200 hotels, then I get 44,000 rooms, which is way too low, even for 2014 (as you will see in a minute).

Calculation 2: Using the number of hotel rooms in the country as a whole (355,000), let’s assume that HCMC has a portion based on the percentage of foreign and domestic tourists it garners. So in 2015, there were 7.9m foreign visits in Vietnam of which 4.6 came to HCMC, or 58%. Domestic tourists to HCMC were only 30% of the total of all in the country. If I weight foreign and domestic tourists equally, then the percentage would be 33%, but if we double the weight of foreigners, because they generally stay 2x as long, then we get 35%. That would equate to 124.250 rooms, which may be more accurate.

Calculation 3: Using the figure for upscale & luxury hotel rooms in HCMC of 10,174 in 2014, let’s use the same percentages reported for the full market to reach a figure for total hotel rooms in HCMC. In 2014, 5-star hotel rooms were 5.3% of the total, 4-star were 6.8%, and 3-star were 8.0%. HVS doesn’t tell us what they mean by “upscale & luxury” but I would assume 4- and 5-star. Of all rooms in Vietnam, 12.1% were of this grade. Taking that would imply that there were 84,000 hotel rooms in Vietnam. We also have a figure for 4-star and 5-star rooms in 2018. According to the HCMC Tourism Department, there are 6,257 5-star and 3,500 4-star hotel rooms, or 9,757 in total. That would mean only 80,500 hotel rooms.

Calculation 4: Work from the number of guests and occupancy rates to come up with the number of hotel rooms. First, we take the number of foreign guests, of 7.5m in 2018. Then assume they stay 5.21 nights per stay (this is based on this story, it’s for 2017, but let’s assume it is the same for this year). And then I assume there are 1.5 guests per room. That means the 7.5m foreign tourists stay 38.9m nights but take up 25.9m room nights.

Let’s do the same for domestic travelers. There were 29m of them in 2018, and I assume only 50% stay overnight. Based on the same survey as for foreign tourists, they reportedly stay 3.6 nights per visit (which seems high to me). And again, 1.5 of them stay per hotel room. That means of the 29m domestic travelers, only 14.5m stay overnight, but they stay a total of 52.2m nights, equating to 34.8m rooms used.

Let’s combine these two figures to reach 60.7 room nights, and assume that hotels had an occupancy of 70%, that means there needs to be 238,000 hotel rooms to accommodate all of these visitors. This figure is so much higher than the results of my other caulciatons, I am a bit worried.

If I make some changes here, say that foreigners only stay 5 nights, and that domestic travelers only stay 2.5, plus assume that the hotels are at 80% occupancy, we reach a total of 168,000 rooms needed. This is also much higher, but more realistic.

Conclusion: We have four different estimates of total hotel rooms. The estimates go from a low of 44,000 to a high of 238,000. Some of these are different years, but even so, the range is extremely high. Out of the four calculations that seem most logical to me are calculations 2 (124,250 hotel rooms in 2015) and 4 (144,007 in 2017). Those are close to each other and use assumptions (e.g., 35% of all hotel rooms are in HCMC) that are reasonable.

Tomorrow, I will use these two calculations to come up with estimates throughout the time period and get to a figure of what were the total number of hotel rooms since 2000. Then on Wednesday, I’ll take you dear readers into the future.

*Updated to add calculation tables and final chart.

February 1, 2019

Welcome to the month of LOVE!

That’s right, we are in February. One month down, 11 to go in 2019. The year seems to be moving pretty quickly to me, not sure why. Of course, February is the month of love. I am quite disappointed in the Vietnamese for getting suckered into this greeting card “fake” holiday. I guess I should be happy that people are celebrating love, but the consumption aspect of it all maddens me. I’m married, and I don’t think I am getting crap from my partner. And I’m sure as hell not buying anything. [Reader, I do love chocolate, so feel free to send some.]

Anyway, we have a much more important holiday coming up, Tet! There are a lot of stories out about prices in the run up to Tet, like this one about how petrol prices are unchanged.

The retail prices of oil and petrol will be kept unchanged for the next 15 days, the ministries of Finance and Industry and Trade announced on Thursday…The two ministries review fuel prices every 15 days to keep domestic prices in line with swings in the global market…The two ministries decided to maintain the petrol prices to support production of domestic firms and control inflation prior to 2019’s Lunar New Year.

Or this article about how shipping fees are increasing wildly ahead of Tet. Bus passengers have to pay extra surcharges, and the fees for shipping motorbikes have doubled.

But stores are actually lowering prices. Co.opmart and Co.opXtra are discounting goods to get shoppers in the store.

From now until February 4, the 30th of the last lunar month, many fresh and ready-to-eat foods like green-skin pomelo, American red apple, round watermelon, pickled vegetables, shrimp, uncooked pork paste, and braised pork and eggs in caramel sauce are being sold at 12 – 25 per cent discounts.

Of course, the difference between prices for shipping and prices for goods at stores is due to two main reasons: 1) the difference in fixed costs and 2) that there is more of a limit on volumes in shipping.

First, on fixed costs: Trucks/buses have high fixed costs and minimal variable costs, especially for each trip. So a bus with 50 passengers and a bus with 100 passengers will cost the company about the same (minus a bit of a lower fuel bill). For stores, the fixed costs are just being open but their cost of goods are variable, depending on how many goods are sold. So shipping companies have an incentive to raise prices to maximize every space in their vehicle, because they will never get the chance to sell that space again. Airlines face the same issue. They try to sell every seat on every plane, even at discounts, because once that plane takes off, they can never recoup any empty seat’s revenue. It’s gone for all time. They may make some more money on the next flight, but the flight with empty seats will not be maximized.

Second, when we think of volume for shipping and stores, stores have so much more flexibility. They can stock up for weeks ahead of time and drive more and more volume. Of course, there is risk that inventory won’t be sold (and therefore some cash is tied up for some time or lost entirely), but stores can just increase discounts even more to move product. Plus, for goods with a long shelf life, stores can just not order new ones as they sell out their excess inventory, minimizing the impact. Shipping, in contrast, depends on space in the bus or truck or whatever. And for most companies, they can’t increase their bus/truck trips without limit. Store have more room to build up inventory - they could just fill every available space with goods.

As for fuel, well, no government wants to see higher petrol prices, especially at sensitive times. And gas prices aren’t facing a lot of pressure from higher oil prices (although there is likely some).

It is interesting to see the trends around Tet. I wonder if some of these discounts that we see in the stores will continue post-Tet if stores have excess inventory. That’s a good indication of how good their purchasing is.

Anyway, not sure that I have explained all of these perfectly, but I think it is interesting to think of prices ahead of holidays in these terms. If there is scarcity (such as in shipping) and high demand, we should see higher prices. But for goods that are easily supplied, high demand can result in a focus on volume than pricing.

January 31, 2019

Things that caught my eye in the news

A few things that caught my eyes in the news recently were:

Mangrove forests: Here is a large article on mangrove forests and the impact they have on combating floods and rising seas causes by climate change. Vietnam appears to be a bright spot in South East Asia (another country that surprised me was Abu Dhabi in the UAE, where mangrove forests are being preserved). One of the reasons is that the country has provided electricity to 99% of the population, so there is little need to gather mangrove wood for fuel. Also,

“Several years ago, Vietnam began carrying out several programs for the rehabilitation of mangroves for coastal protection, while at the same time improving awareness among local people,” Pham Trong Thinh, director of the Southern Sub-Forest Inventory and Planning Institute in Ho Chi Minh City, said in an email. “Illegal logging in mangrove forests and wetlands is not a big problem in Vietnam at the moment.”

Over the past few years there have been significant flooding in Ho Chi Minh City (HCMC), and it seems like the government may be trying to deal with some of those issues. One way would be to continue to preserve and expand mangrove forests.

Positive news for Vietnamese airlines: The US Federal Aviation Administration (FAA) is expected to grant a category 1 rating to Vietnam soon, according to US officials (lots of stories say the same thing, here is one). This would allow direct flights between the US and Vietnam - there are none currently. It also should help boost the Vietnamese airline industry as it is seen as safer. We could also see things like corporate jets increase as well. There are only 4 corporate jets registered in Vietnam currently! Although, there is this study, which I love, because I hate fat cats, that says: “For firms that have disclosed this managerial benefit, average shareholder returns underperform market benchmarks by more than 4 percent annually.” That’s a crazy high number. So maybe this is not the best news to come out!

Gas-to-power with Exxon: Siapem, a JV between Exxon and Production Vietnam Limited, won a front-end engineering design (FEED) for a gas-to-power project, according to Saipem. This usually takes about a year, and the end result is used as the basis for bidding to execute the project.

Should the “Blue Whale” project advance beyond the FEED stage, ExxonMobil will lead its construction and operation, the supermajor noted.

Exxon is saying that it could produce up to USD20bn to the Vietnamese government. The gas would be used for power generation, which is severely needed in Vietnam. One issue is that lots of the gas and oil are found in the north or central parts of Vietnam (mostly offshore), but lots of demand comes from HCMC in the south. Somehow that power needs to be sent to the south. It will be interesting how Vietnam deals with that, either through better investments in the grid or through investment in power generation in the south.

Corruption trial ends: Two big police ministers and a business tycoon were jailed by a Vietnamese court Wednesday, according to Reuters. This is one of a string of convictions, including earlier convictions of the tycoon, “Aluminum Vu.” The ministers will be jailed for 30 and 36 months as they were found guilty of “lack of responsibility.”

A lot of government watchers have been skeptical of the corruption crackdown, seeing it potentially as a consolidation of power by the new president (who was previously and still is the Communist party chairman). But there have been quite a few ministers, important officials and business men that have gone to jail. Many of them quite high up, at least from my outsider’s perspective. I need to start tracking this more. As I do, I will try to put it together for readers what’s happening.

January 30, 2019

A break for China…

I will get back to hospitality, but I am all hospitality-ied out , and I thought I would look at smaller issues that are also important. An article in the WSJ last week, which I can’t find, piqued my interest. I can’t remember what the whole column was about, but the author was talking about correlations between China and the rest of the world and said it had been increasing.

Of course, many publicly-traded companies around the world depend on China, and I am pretty sure that Vietnam as a country depends a lot on China, given its historic ties (both positive and negative) and because of trade, tourism and investment that flows between the two countries. So I thought I would look at the correlation of the stock markets to see if I could see something.

Spoiler: I did, but it isn’t too significant. First, I just looked at the chart of the Vietnamese index and the Shanghai index since 2014. As you can see to the right, there are times when they seem to track each other quite closely, but not too much.

I then just did a quick test, how often do the indexes trend in the same direction, positive or negative. Surprisingly, about 55% of the time, they trade the same (meaning the Chinese index goes up when the Shanghai index does or vice versa).

I just did a quick check to see if there has been a big difference by year and there was little difference except in 2014. In 2018, 54% of the time, the indices moved in the same direction. In 2017, it was 55%, then 59% in 2016 and 56% in 2015. The big change was in 2014, when they moved together only 48% of the time.

I also did a regression on these trends, and it was found to be significant (the p-value was below 1%), but the effect is small (the adjusted R-squared was .005. Basically, I took a dummy value, with 1 being positive and 0 as negative. If China is positive, then you can put it in this formula, Vietnam = 0.51 + 0.08 x 1 = 0.59. If China is negative, then Vietnam = 0.51 + 0.08 x 0 = 0.51. If China is positive, then the expected value of the Vietnamese index performance is positive about 59% of the time (if I am reading this correctly, and I am not sure that I am entirely). And if China is negative, then there is about a 51% chance that Vietnam will be positive.

I also did a regression of the change in the index values as well and found a similar story. The p value again was significant (well below 1%), so the performance of the Chinese index did explain the performance of the Vietnam index, but only with an adjusted R-squared of 0.03.

Overall it appears that there is some movement together, but it isn’t as great as I would think. The actual correlation between the change in each index is less than 0.2, so positive but not massive and basically in line with what the regression says. (Can you tell that I am not always sure of my statistical acumen?)

The fact that correlation is so low is kind of surprising to me. But maybe the ties between the two countries aren’t as great as I thought they were. If we look at exports/imports, the US is actually the largest destination of Vietnamese exports (in 2016) at 21% compared to 13% to China. Imports are different, with Chinese imports making up 31% of the total (again from 2016). The figures were similar in 2017.

And FDI shows similar trends - there are countries more important than China. According to the Vietnamese Ministry of Planning and Investment Hong Kong and China ranked 4th and 5th, but even combined were well behind the first two (Japan and Korea) and just a bit more than #3 (Singapore). This might change over time if the Chinese economy slows and/or the trade war with the US continues. But as of now, investment flows from China are much less than Japan and South Korea.

In conclusion, correlation between China and Vietnam may not be as strong as people assume.

January 29, 2019

A break for demographics

Two demographic stories caught my eye today:

The first was about child trafficking, or actually, trafficking of expectant mothers to China to sell the children. And the price was so low, at least to my Western eyes – a child is worth just $1,750 to $3,500 or so! So sad.

One of the reasons for this is the Chinese demographic imbalance, with a significantly higher number of boys than girls. Normally, the sex ratio of most species is 1:1, or 1 boy for every girl. According to the World Health Organization (WHO), the human sex ratio is actually 105:100 or 5 more boys born for every girl. As the WHO explains:

Nature provides that the number of newborn males slightly outnumber newborn females because as they grow up, men are at a higher risk of dying than women not only due to sex differentials in natural death rates, but also due to higher risk from external causes (accidents, injuries, violence, war casualties).

The number of men and women should normalize to something like 1:1 in a population, as men die of stupidity, among other causes.

In some countries, the figure never normalizes because of a preference for girls, sadly. In China, there are around 105.5 men for every 100 women. And this will likely rise to a high of 106.3 to 100 in 2020 before it slowly starts to fall. Because every number in China is a big number, that means there are more than 40m more men than women. That means there are 40 million men that are unable to marry or start a family because there aren’t enough women for them.

Vietnam is the opposite, with a larger number of females than males, by a small, albeit growing, number.

It appears that Vietnamese children may be seen as a way to fill in the imbalance in China by some unscrupulous people.

The second piece of news I saw was about the risk that Vietnam will “get old before it gets rich,” according to an article in Asia Times. In positive news, the Vietnamese life expectancy is quite high at 76 years, and it should grow over the next few years. We are seeing slowing population growth rates in Vietnam at the same time, meaning that the average age of the population will climb (it is currently one of the fastest aging populations in Asia, according to the article).

The ratio that is important here is the dependency ratio or the ratio of people dependent on working adults. This will increase to 62.4 by 2050, with more than half of this (35) from the elderly. This is up from a low of around 42 in 2013. That was the peak and it will get steadily worse as we move forward in time.

There are multiple ways to fix this. Vietnam could increases its population growth rate by getting people to have more children. Given the trends in the rest of the world, this seems unlikely. Trends in other countries show lower and lower fertility rates, driven partially by choice and partially not. Higher living costs don’t help.

Or there could be more immigration to Vietnam. It’s a poor country, though, so probably only people from even poorer countries would think about immigrating, like Cambodians or Laotians, both of which have lower incomes. Neither are large countries, which means that Vietnam is unlikely to see a big wave of immigrants from either. Plus, both could go to richer countries that are also close, like Thailand. Language issues, at least for Laotians, would be much lower there. Immigration has its own challenges, as most of the Western world has seen. It can result in some very strong reactions. See: Brexit, Trump, the rise of right-wing governments in Europe.

We will have to see what happens, but these two paragraphs from the article scared me:

An International Monetary Fund (IMF) report last year argued that “Vietnam is at risk of growing old before it grows rich.” Indeed, when Vietnam’s working age population, or the number of people aged 15 to 64, reached its demographic peak in 2013, annual gross domestic product (GDP) per capita was just over US$5,000.

South Korea and Japan, by comparison, reached this peak demographic when their average incomes were $32,000 and $31,000, respectively. Vietnam is not even close to that income growth trajectory: the government projects GDP-per-capita won’t reach $10,000 until 2035.

I need to do more work on this, but I found these two stories interesting today…

January 28, 2019

Hotels: A market-sizing exercise (part 6 of ???)

Over the past few days (weeks?!?!), I have been estimated potential hotel needs in Vietnam. The goal was to get a few estimates: Guests, hotel rooms needed for those guests, and now, the subject of today’s post, how much will it cost to build these hotels?

The first step is to take my estimates for new hotel rooms, between 350,000 to 500,000, and figure out how many are going to be in each class. Now this is hard and involves some strong assumptions. Based on data that we have from 2013-15, 5-star hotel rooms made up 5.9% of all hotel rooms, 4-star 7.3% and 3-star 8.7%. This leaves the remainder at 78.1%. If we apply this to our figures, we get the numbers in the table below.

Now, I need to figure out how much these are going to cost. I would say this has been some of the harder data to find. I did find an old CBRE presentation from 2011 (CBRE is a real estate advisory company) that says that upscale hotels in Vietnam cost about $10m for a 100-room hotel and that midscale hotels costs about $5m for the same size hotel. If I take these figures, that works out to $100,000 and $50,000, respectively for hotel rooms. But we need to account for inflation, so I used a 7% CAGR (reflecting growth and inflation) to come to around $175,000 per upscale room and $85,000 for the midscale room. These figures don’t include land or FFE (furniture, fixtures, and equipment), just the construction itself.

I also saw a news report from early 2017 about a Japanese company building a large upscale hotel that worked out to about $160,000 per room, which jives with our estimate for upscale hotels.

Another story said that:

The thirst for land in central business districts and the escalation of the land price in HCMC have led to a higher investment rate in the hotel sector. Twenty years ago, the rate was $120,000 per room, but the figure now is $150,000.

It is unclear if this is including the land price or now, but seems like it has to not include the land, based on our other estimates.

So, at the high end, let’s assume $175,000 per 5-star room, $125,000 for 4-star, $85,000 for 3-star and just make a wild guess at the rest at $40,000 per room. That would still mean that a low end hotel with 50 rooms could cost $2,000,000, quite a lot for Vietnamese entrepreneurs. But that average can hide a lot of variation – rooms could cost $20,000 or $60,000. Here I think it makes sense to do a sensitivity around the non-starred hotels, so see how high or low the estimates could go.

Putting this all together, I get between $20 billion to $30 billion in hotel investment (not counting land or FFE) over the next 7 years. And if lower-end hotel rooms cost just $20,000, then the overall spend would be $15-21bn, quite a bit difference from our current estimate but still a large number.

Either way, it’s a lot of investment and spread all around the country (although lots in HCMC and Ha Noi). Some of it is already in the works. This investment would buy us 350,000 to 500,000 rooms, more than sufficient supply for all the visitors to Vietnam. Remember, our assumptions included an occupancy rate of 70%. If it was 80%, then hotel needs would be about 50,000 less.

Next, we will look at specific hotel markets in Ha Noi and HCMC.

January 25, 2019

Hotels: A market-sizing exercise (part 5 of ???)

Now that we have both domestic and foreign travelers nights (see yesterday’s post), I can combine them into one estimate for needed hotel rooms. At the low end of my estimate I have 310m guests in 2025, up from around 180m in 2018. At the high end, I have 370m. This implies either around 210m or 250m hotel rooms are occupied in a year (this assumes 1.5 guests per room).

Now to translate these into hotels, we need to take into account occupancy rates. Generally, hotels like to target at least 80% occupancy rate – that’s really good. It takes into account weak periods and down times. It also means that the hotel is fully occupied or close to fully occupied a good portion of the time. It is very hard to a hotel to get above 90% occupied, because that means that even in down times, the hotel is basically close to full.

Vietnam has been averaging well below that 80%. The government reported hotel occupancy from 2006 to 2012, and the average occupancy rate was 58%. Only in one year was it above 60%, and that was 60.7%. In 2006 it was as low as 50%. In more recent years, it appears to have improved, at least at the higher-end hotels. Grant Thornton reported that 4-star hotels showed a 72% occupancy rate in 2017 and 5-star’s a 75% rate. This is well above from the 62-63% rates seen in 2015. So let’s assume that the figure increases to 70% for the market as a whole, that rate would imply that the country needs almost 1 million hotel rooms at the high end of our forecast, up from something like 460,000 in 2018 or an 11.1% CAGR. At the low end, the country would need a bit over 800,000 hotel rooms (8.3% CAGR).

Let’s say all of these estimates are correct. Then the country would need to build between 350,000 to 500,000 hotel rooms over the next seven years, or between 50,000 and 70,000 new hotel rooms a year. On Monday, we will use these figures to see how much investment will be needed over the next few years.

January 24, 2019

Hotels: A market-sizing exercise (part 4 of ???)

Today, I am going to combine everything I’ve done so far to get estimates of future guests. I will estimate the foreign and domestic guest nights and use those to come up with a total guests nights. As a reminder, guest nights is how many nights do all guests stay in a hotel. A Japanese couple that stays for 4 night would have 8 guest nights. I take this number and divide it by 1.5 to get to hotel nights. The 1.5 is how many guests stay in one room on average. Basically, the Japanese couple would (probably?) share a room. A single traveler wouldn’t. After reaching the hotel rooms occupied every night, I can use it to make assumptions about occupancy to get the needed hotel rooms and what that would mean for new builds.

First, the foreign visitors. I have already made two different assumptions on growth. The first was to 30m international tourists by 2025, and the second was to 35m. If we use these, and the same assumptions on stay duration (5 nights) then that gets us to between 150m and 175m guest nights for foreign visitors by 2025.

Second, I did not actually make any forward-looking estimates for domestic travelers, so I need to do that first. The latest stats show that domestic tourists reached 80m in 2018. However, there is greater volatility in domestic travelers, as we have already seen. Some years, the figures rise only a small amount, while in others they rise 48%. The CAGR from 1995 to 2018 is 11.2%, but if I take the figures from 2014 to 2018 (after the big spike in 2014), this falls to 8.8%. Domestic travelers reached 80m in 2018, which is almost 85% of the population. If I assume 7% annual growth, that means by 2025 there will be about 130m travelers, and if I take 10% growth that gets me almost to 160m. These points seem reasonable to me, given the growth in the country overall and the population.

Tomorrow we will move on to combining these and seeing what it means for foreign growth.

January 23, 2019

Hotels: A market-sizing exercise (part 3 of ???)

Now back from the break, I continue my ongoing analysis of the hospitality market in Vietnam. Now where were we? I had put together estimates for international visitors. And I had backed into estimates for domestic tourists and hotel nights. Now I wanted to do two things, which will probably mean that the posts will be split over two days. First, I wanted to check and see what happens if I take my estimates and apply them to historical numbers. Do they make sense? Are they at least close enough that I can feel comfortable that they are correct?

So, how do we test our estimates? First, we go backwards in time. I had assumed the following: that only 50% of domestic travelers stay overnight; that foreigners stay 5 nights but domestic overnights are for only 2.5 nights on average; that there are on average 1.5 guests per hotel room. I then calculated the total guest nights, which is rooms x 365 x guests per room x occupancy rates. That gets me the “estimated guest nights” in the chart to the right. I then used actual figures for foreign and domestic travelers to come up with estimated foreign and domestic guest nights, again using 5 nights for foreigners and 2.5 nights for locals.

As you can see in the chart, the line fits actually pretty well. It is a bit of an underestimate in some periods, which is my bent – I would rather underestimate than overestimate long term forecasts. But overall, I am pretty happy with this.

Tomorrow, we will use these figures to get future estimates for hotel guests and hotel rooms needed.

January 22, 2019

Martin Luther King, Jr. and Vietnam

On the occasion of Martin Luther King, Jr. Day in the United States, I thought I would take this opportunity to remember what King thought about Vietnam and the Vietnam War. As a proponent of non-violent action, he was generally against war. He gave a speech in April 1967 where he publicly came out against the war, and was excoriated for it. But his reasons, reading it now, seem especially prescient. He had seven main reasons, from taking attention and resources from the poor in America to a need for solidarity with oppressed people around the world.

One portion that spoke to me, because it really points out how the US mis-read the situation in Vietnam from the start, was this:

[The Vietnamese] must see Americans as strange liberators. The Vietnamese people proclaimed their own independence in 1954—in 1945 rather—after a combined French and Japanese occupation and before the communist revolution in China. They were led by Ho Chi Minh. Even though they quoted the American Declaration of Independence in their own document of freedom, we refused to recognize them. Instead, we decided to support France in its reconquest of her former colony. Our government felt then that the Vietnamese people were not ready for independence, and we again fell victim to the deadly Western arrogance that has poisoned the international atmosphere for so long. With that tragic decision we rejected a revolutionary government seeking self-determination and a government that had been established not by China—for whom the Vietnamese have no great love—but by clearly indigenous forces that included some communists. For the peasants this new government meant real land reform, one of the most important needs in their lives.

As usual, King was ahead of this time. A majority of Americans supported the war when he gave the speech. And King himself was assassinated a year after the speech, and well before Americans turned on the war “Not until August 1968, according to Gallup surveys at the time, did a majority -- barely, at 53% -- call it an error.” It took another 7 years before the US fully pulled out of Vietnam.

I like that in the speech King talks about the impact of the war on the US, but spends a greater amount of time talking about the poor Vietnamese and how they have suffered, and how the Southern government wasn’t the party of the peasantry and therefore cannot build their support. Yet, he starts saying that the speech is not “an attempt to make North Vietnam or the National Liberation Front paragons of virtue.” And he makes a statement which speaks to me now, in a period where the US has seemed to decide to pull back from promoting democracy and justice around the world, but is pushing in the opposite direction.

We must not engage in a negative anticommunism, but rather in a positive thrust for democracy [applause], realizing that our greatest defense against communism is to take offensive action in behalf of justice. We must with positive action seek to remove those conditions of poverty, insecurity, and injustice, which are the fertile soil in which the seed of communism grows and develops.

That is what is missing in US foreign policy today, especially in the time of Trump. The US president has sided more often with dictators and autocrats than with elected officials in our closest allies. Rather than trying to be an example of how great democracy is leaders in countries like China point to the US (and the UK with the fiasco that is Brexit) as a reason to avoid the chaos of democracy. Rather than trying to make conditions inhospitable for terrorism by improving the lives of people that live under threat, the US bombs them with un-manned drones.

But if anything, the tragedy of Vietnam shows that the US and the world have been in bad situations and yet were able to move forward. There has been a great deal of progress since 1967, with the number of people in dire poverty falling drastically, life expectancy growing and major diseases like measles and polio almost wiped out. Democracy reigns and human rights are protected in many more countries than ever. The key is to keep continuing on this path.

Let’s all try to look at Martin Luther King, Jr. as an example of what we should strive for. As George Orwell said: “To see what is in front of one's nose needs a constant struggle.” Happy belated MLK day!

PS A good reading of the speech by Viet Thanh Nguyen is here.

January 18, 2019

Hotels: A market-sizing exercise (part 2 of ???)

Two days ago, we looked at the size of international visitors and came up with two potential paths, one to 30m visitors in 2025 and the second to 35m in 2025. I have a conservative bent, so I would lean to the 30m figures, but I’ll use both in future calculations.

But now that we have an idea of international visitors, we need to think of domestic hotel guests, both tourists, businessmen and any other visitors (say people visiting family). I have found a fair amount of data on domestic tourists and two things surprised me.

First, domestic tourists have grown from 28m in 2010 to 80m in 2018, according to the Vietnamese government. I am somewhat suspect about these numbers, because they go up so quickly, especially 2014 when the numbers jumped from 38.5m to 57m (48%). No other period saw growth like this.

I want to focus attention on this for a second. Just remember, when looking at data on emerging markets, I find that it is worth really looking into the numbers and see if they are realistic. I don’t think this jump is realistic. But figures for 2015-2018 show a much slower growth rate. One interpretation is that the government started counting domestic tourists differently in 2014. And then after that used this new counting method. The second is that the numbers overstate all domestic figures.

One thing to look at would be hotel guests, if possible. I found a few things. First, 48% of all domestic travelers stayed overnight in the first two months of 2016. This is the only data that I was able to find [if I find more, I will update this]. So, let’s say this is true for all periods and make it 50% to make the math easier. That means in 2015, with total domestic tourists of 64.6m, only 32.3m stayed in hotels. And I found another stat from 2017 that says domestic travelers to HCMC stayed 3.6 days on average. For the country as a whole, let’s say 3 nights (to account for less popular destinations). That gets us to 32.3 x 3 = 96.9m nights. Foreign visitors in 2015 were 7.9m and the same 2017 stats said the average duration of stay was 5.2 nights, so let’s round down to 5. That gets us to 39.5m. But let’s say on average 1.2 foreign guests stay in one room, but 1.5 domestic guests stay in a room. That results in 47.4 foreign room nights and 145.35 domestic room nights for a total of 192.8m nights occupied. In 2015, there were only 355,000 rooms in the country making for just 130m hotel nights.

This is too high. Sometimes this happens. You do all the work, and it just doesn’t look right. I would say what seems wrong is the average nights stayed. I bet this is less than we suspect, for both foreign visitors and locals.

Back to certain ground

What I like to do when this happens, I like to go back to what we actually know and strip out all the assumptions. So what do we know? We know foreign visitors. That number seems pretty certain. I also think that 5 nights is probably pretty realistic, although it is hard to say. That gets us to basically 40m guest nights, out of a total of 122m. That leaves 82m for domestic travelers. I am concerned that the 50% figure and the nights stayed of 3.5 could be too long. If 50% is correct, then duration of stay needs to be 2.5 nights. That seems long to me, but is conceivable.

Just one more check, we have a bit of data on guests at 4- and 5-star hotels: 80% of them are foreign. Now there were 51,591 rooms at 4- and 5-star hotels in 2015. If occupancy is 62% (based on Grant Thornton figures), that means 11.7m hotel nights. Now if there are 1.2 guests in a room, that is 17.5m guest nights or almost half of the total international guest nights. That means the majority of foreigners were staying at 3-star rooms and below. As a reference there were 30,734 3-star hotel rooms in 2015, adding another 8.4m guest nights (at the 63% occupancy rate, 80% foreign and 1.5 guests per room). Some people came on cruises, or stayed with families, or in hostels. I guess. It’s plausible but does raise some issues.

So, in conclusion, we have some key estimates that seem relatively true now:

• Foreign visitors were 7.9m and they stayed on average 5 nights per stay and there were 1.5 of them in each room.

• Domestic travelers were 65.6m, half of which stayed overnight (the rest were day trippers), they stayed 2.5 nights on average and there 1.5 of them in each room.

• These figures get to our 122m guest nights, which is based on 355k rooms, occupancy of 63% and 1.5 guests per room.

Well, it took longer than I expected to get to this point, but that’s fine. That’s why it’s my blog! I don’t have to cut it down. Sometimes it is just helpful to show the work.

Anyway, next week, let’s take these number and run them backwards to check them and then forwards with our estimates through 2025. Then we can see how many hotel rooms we will need.

January 17, 2019

A quick break from hotels: environmental investments

I will continue my hotel market-sizing series tomorrow, but I saw a really interesting article in Bloomberg about an environmentally-conscious jeans maker in Vietnam. You can read it here.

A few things I found interesting:

• “Saitex invested $2 million in the water system alone to prove it’s not only possible to make environmentally safe blue jeans, but you can turn a profit doing it.” Later in the article, the company says it cut its water bill by half from $700,000 to $350,000. Based on a 10-year life for the water system, which is pretty long, the IRR is 11.7%. This falls to just 5.3% for a seven-year life and rises to 13.8% with a 12-year life. Not bad, but I thought it would be better. Obviously there are externalities that aren’t being accounted for here: 1) the public benefits from having less “blue toxic sludge” and 2) the company can sell themselves as an environmentally-conscious denim maker.

• My first thought is that someone should just go in to all of these factories and offer this technology for a percentage of the savings. Assume that over time the $2m in initial investments can be done more efficiently, say $1.5m, and the life of the investment/contract is 10 years, then the IRR is 19.4%. Now if the company keeps 25% of the savings then the IRR for the firm providing the funding falls back to 11.7%. If the costs can fall a bit more and the efficiency increases by 10% or more, then it would be a great business model. The big risk is if something happens to the company (bankruptcy, closure) within the 10 years. It takes 6 years, in our $1.5m/25% example, to just make back the money.

• Overall Bahl says that he saves $1.7m a year vs his similarly-sized competitors. It cost $2m for the water system, and he also put in solar and biomass generators, plus a system for air-drying the denim and new washers. There is no figure on the total amount of costs, but if I had to make a wild guess, I would say $10m for everything. If so, that gets us an 11% IRR, going up to 13.6% if the investment was just $9m, and 16.7% return at $8m. Then it really starts to get interesting.

• Textiles and clothing made up 16% of Vietnamese exports ($34bn) in 2017. That’s a lot. And that means there are a lot of factories that could take advantage of this. Scale likely matters, but even smaller ones could probably benefit from some of the efficiency.

• Energy and water management businesses could be very big business, but they are hard to manage. The Smartest Guys in the Room really opened my eyes to how very smart people could go wrong in a business if they are unable to manage the details (scroll down for more info on that on Enron).

• The World Bank and Vietnam’s Ministry of Industry and Trade jointly launched a $102 million project to support the efforts of industrial enterprises to adopt energy-efficiency technologies and practices in late 2018. This is funding that goes through financial institutions. The details aren’t totally clear, but seem positive. More here. The Green Climate Fund is also involved in projects in Vietnam.

My conclusions are that Saitex seems like a real leader in this sort of change in the textile industry. That energy efficiency can be quite profitable, but the upfront costs are hard to fund. The investments need to be carefully considered, because changes in assumptions mean a big difference in returns. And that these are very long-term investments. A commitment under 6 years really makes no sense.

I’ve reached out to the CEO of Saitex to see if he has any comments. I will let you know if I hear anything.