♠ Posted by Emmanuel in Southeast Asia at 9/24/2010 12:04:00 AMVietnam has received much attention in recent years as a China mini-me. Their most obvious shared characteristic is being among the last few communist states (we too have the Lao People's Democratic Republic in ASEAN). One must remember, though, that these two states didn't get along well for a very long time over Vietnam invading Chinese client state Cambodia during its Khmer Rouge years. And, among ASEAN members, Vietnam most strenuously contests dominion over the South China Sea islands with China. So there's not much love lost here.
In this day and age, I don't suppose there is anything exceptional about states wanting to retake the commanding heights given the outward success many observe in China: "See? The Chinese Communist Party can have its cake and eat it too!" In recent years, Vietnam has been trumpeted as the world's second fastest growing economy after the PRC. However, recent reports suggest Vietnamese state capitalism is more brittle than the Chinese variety. In fact, the largest state-owned enterprise in Vietnam, shipbuilder Vinashin, is on the brink. Plied plentiful cheap credit by national banks, it is now coming undone. From the Wall Street Journal:
About a third of Vietnam's economy, however, is controlled by state-owned companies—part of a policy to ensure that key industries such as oil, mining and shipbuilding stay under Vietnamese control. Now the dangers of that strategy are becoming clearer amid a deepening financial scandal at Vietnam Shipbuilding Industry Group, or Vinashin, that is raising questions among investors about how much longer the country can afford to pump up its state enterprises.Is this fiasco confined to Vinashin? Other Vietnamese SOEs have also expanded quickly, often diversifying into unrelated businesses in dreams of becoming the next Korean-style conglomerates. Just as South Korea got into shipbuilding in a big way, so too did Vinashin--and a number of other players in different industries:
In recent weeks, Prime Minister Nguyen Tan Dung has removed two successive bosses at Vinashin after its debts ballooned to over $4.7 billion, pushing the company, one of Vietnam's largest, to the edge of bankruptcy. Former chairman Pham Thanh Binh was arrested in August for allegedly falsifying the shipbuilder's financial statements and breaking other laws; his replacement, Tran Quang Vu, was arrested later that month, pending an investigation into his activities running the company's shipyards.
Neither Mr. Binh nor Mr. Vu could be reached for comment. Legal analysts say that under Vietnam's legal system, they might not be assigned a lawyer until their cases reach court. Three other executives, a former financial controller and two subsidiary managers—none of whom could be reached for comment—are also being detained. In an interview with local media prior to his arrest, Mr. Vu said he was "dizzy" at the speed with which Vinashin unraveled.
Vinashin's fundamental problem, according to internal government documents viewed by The Wall Street Journal, is that it expanded too aggressively in its bid to become a major global shipbuilder. Lax oversight and a pervading disregard for financial regulations added to the crisis, the documents said. Some independent analysts say the company's strong political connections also prevented the scale of the problems at Vinashin from emerging until the company was on the brink of disaster.
The chairman, Mr. Binh, invested heavily in businesses outside the company's expertise, such as hotels, brewing and insurance, while buying up obsolete vessels for Vinashin's sea cargo business, the government's analysis of the situation says. One of the ships Mr. Binh bought was made in Poland in 1973 but couldn't be put into service because of cracks in its steel hull.
Many of Vinashin's businesses were "out of control," concluded one government report, dated Aug. 4 and shared with creditors. Governance over "state-owned enterprises and economic groups in general and Vinashin in particular [is] inefficient and inadequate," the report added. In addition, Vinashin faced challenges in an industry where barriers to entry are high and South Korean and Chinese companies are already established...
Analysts and investors say there's no evidence Vietnam's other major state-owned companies, which include national oil company Vietnam Oil & Gas Group, or PetroVietnam, are in trouble. The broader Vietnam economy continues to expand despite Vinashin's problems. Still, the missteps have alarmed investors. While equity markets in nearby Indonesia and the Philippines breach record highs, Vietnam's main stock index has dipped 8.3% since the start of the year, as investors worry about the sustainability of the country's boom.
Many of Vietnam's 4,000 state companies have expanded their reach in recent years as capital flowed into the country. PetroVietnam expanded into tourism, set up financial subsidiaries and is building a five-star hotel in Hanoi. The state electricity company, Electricity Vietnam Group, invested heavily in mobile phone networks and pumped $250 million into a beach resort development. That move angered businesses and residents who have to put up with frequent power outages thanks to government caps on power prices that deterred investment in EVN's core business, even though power demand is rising 15% a year.It's very curious indeed. China and Vietnam probably won't top anyone's corporate governance list, but it seems the former gets away with more than the latter. Cheap loans for national champions certainly isn't a surefire recipe for success. I figure having a billion plus folks as potential customers works in the former's favour, but I could be wrong.
In many cases, Vinashin and other state companies were encouraged to expand and take more risk by a government eager to turn them into global powerhouses, economists say, much like South Korea's famous chaebols—-the giant conglomerates that helped direct that country's rapid industrialization and spawned household names such as Hyundai and Samsung.
More often, though, the companies are too inefficient to compete on the global stage, analysts say. Private-sector businesses expanded their industrial output by 16% year-on-year in August; the state sector expanded its output by barely 8%. Government instructions to state-run banks to extend inexpensive loans to government-linked companies, especially during the global financial crisis, triggered resentment among smaller, private businesses that have been struggling to secure credit, local analysts say.