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Vingroup's irresistible rise

Vietnam is rapidly becoming the land of Vin-everything, reports the Financial Times in a fascinating and deeply researched profile of Vingroup, the country's largest private company

Today, a middle-class Vietnamese man or woman might live in a Vinhome, send their children to a Vinschool (and, from 2020, a VinUni), holiday at a Vinpearl resort and charge their VinFast electric scooter at a VinMart. And, as the piece goes on to say, when Formula 1 stages its first race in Vietnam next year, Vingroup will be the exclusive sponsor. 

Having started in pot noodles and real estate, Pham Nhat Vuong, the company's founder and now Vietnam's richest man, has diversified into resorts, supermarkets, schools, healthcare and most recently smartphones and cars. With the tailwinds of a rapidly expanding economy, a growing and inceasingly wealthy population and often explicit government support, the group has been powering ahead. Last year, it recorded revenues of more than $5 billion, a healthy 11% profit margin and plans to invest $3.5 billion into its car venture -- constructing its first state-of-the-art factory in less than 21 months.

It is a fascinating story (and the FT piece is well worth reading), but is the rise of Vingroup ultimately a good thing for Vietnam? Financial theory suggests that conglomerates tend to destroy value and that investors are better off buying into focused businesses and creating diversification at the portfolio level. There is also no doubt that any business that becomes systemically important (not just banks) run the risk of damaging the economy if they stumble or fail -- and may end up being bailed out at the taxpayer's expense. Just look at the trouble China has had, over decades, in trying to restructure its lumbering state-owned enterprises.

To be fair, Vingroup is private and more like a South Korean chaebol than a Chinese SOE. But like Samsung, Hyundai and LG, it can be accused (as the FT reports) of enjoying overly close links with the government and politiians and becoming increasingly intolerant of criticism. Such links do not have to spill over into outright corruption for them to have a dampening effect on entrepreneurship and the establishment of small businesses -- which end up creating most of an economy's jobs. This has long been an accusation levelled against the chaebol and, indeed, against Japan's often slow-moving and overly bureaucratic keiretsu.

On the other hand, in a free market companies must be allowed to become as large and successful as they can. If they overreach or stagnate, new competitors will naturally spring up to replace them, so there is no cause for regulators to constrain them as long as they behave legally. In the meantime, they will have created a lot of jobs and and wealth; and if management is smart, it will have spread the gains beyond shareholders to all stakeholders. In fact, management is a key word here. At a certain stage of development, the greatest shortage in the economy may be of managerial skills. In that case, a conglomerate structure that can attract talented managers and spread them across many businesses makes sense. If it can allocate capital efficiently too, so much the better. 

This suggests that Vingroup's rapid rise so far has been a good thing for Vietnam and that its continued expansion into new businesses may remain a net positive for years to come. As the economy matures, however, good managers, and cheaper capital should become more widely available, allowing greater focus and specialisation to drive growth. At that point, Vingroup is unlikely to still be at the forefront of innovation and if it has become too dominant and too protected, it may become a drag on the economy. How Vietnam handles the future of its biggest company will be a pointer to how free and mature an economy it has become by then.  

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