Interview with Bradley LaLonde, Co-founder, Partner and CEO, Vietnam Partners, LLC.
Interview by Keith W. Rabin
Hello Brad, good to see you again. Before we begin can you tell us a bit about your background, how you came to be involved in Vietnam and the work of Vietnam Partners?
I moved to Vietnam in 1994 as CEO of Citbank Vietnam shortly after the trade embargo was lifted and lived there for 5 years. In 1999 I moved back to New York and worked for Citibank for 3 years and then left after a 23 year career to found Vietnam Partners with Jim Lewis, a former Morgan Stanley banker. We started with an office in NY and then expanded to Hanoi and Ho Chi Minh City. Our investments include the first foreign direct investment (FDI) into Vietnam's domestic securities industry consisting of a 10% holding in Saigon Securities, the largest private securities company in Vietnam. We also participated in a number of early privatizations and a joint venture to form a fund management company with the second largest bank in Vietnam.
Tell us about Vietnam and the nature of its economy. What areas represent the most attractive opportunities for both corporate and portfolio investors?
Vietnam is a rapidly growing emerging market of about 90 million people. It is well located in the center of Southeast Asia with significant natural resources including minerals, food, a long beautiful coastline and hardworking, energetic and capable people. Finally it has pro-growth, pro-trade economic policies that have been implemented since the late 1980s. It is no longer a closed economy and this opening is helping it to realize its potential. Vietnam has an open mindset toward FDI and is allowing foreign investors to obtain a reasonable share of its market. It has the needs and resources, so this is a good time to get involved. There is also a strong willingness to engage Americans. That is because they have a keen sense of their long-term interest and believe American involvement will help them meet their economic and security goals. They see the US economy as critical to their market and to gaining technology. US involvement is also important from a security standpoint to balance the region.
What are their needs?
Vietnam needs capital, technology and business partners. They need partners who will help them market their products in international markets. Infrastructure is also a big concern. Vietnam's needs are across the board. There are 15 sectors within its macroeconomy including banking, services and industry. All of them are growing and can benefit from foreign involvement.
Southeast Asia has been attracting a lot more interest from investors these days though Vietnam -- which had been seen as one of the most promising and best performing markets only a few years ago -- is now seen as a laggard. Have things changed?
A few years ago many fund managers raised a lot of money for publicly-listed investment funds given the positive media attention Vietnam was receiving -- but they got a bit ahead of themselves and had a hard time deploying all the capital given the scarcity of tradable investments as we are still in the earlier stages of its development. And in 2008 the market soured because inflation exceeded 20%. The Central Bank realized they had a problem and moved to tighten just before the financial crisis hit. But ironically the global financial crisis then helped cool off the inflation and it went from the high 20s to single digits.
That said last year Vietnam was one of the largest recipients of FDI last year and on a per capita basis it is larger than China and India.
What about the difference in opportunities for private vs portfolio investment?
It is still very early hard to make a sophisticated, diversified portfolio out of Vietnamese securities and even ones that are public listed are generally still early stage concerns. There are good opportunities -- but these should be seen more as opportunistic than mature opportunities.
It is easier to analyze specific projects, rather than a fund, which may not be able to deploy all its capital given there is more money available than opportunities in the secondary market. It is also difficult to employ a private equity strategy, as it is very difficult to gain a controlling share of companies and then to have your way in terms of the management control usually required to realize desired returns in these kind of transactions.
While international investors increasingly recognize the potential of Asia they are usually focusing attention on opportunities on China and India. How does Vietnam compare to these two locations and why should businesses and investors focus resources there as opposed to these larger markets?
I think Vietnam's underlying growth potential is strong and attractive and it is a market where forecasted double-digit growth itself will create lots of opportunities. It seems to be an exponential phenomenon. Take for example the auto market. Vietnam's auto markets is about 1/10 that of Thailand but its population is much larger. So you have to believe over the next ten years or so with the right policies the existing market will double or more. But if you go into a Thailand you will not have the same growth. So if you invest in an early stage company or set up a company here you can participate in this growth.
There are few countries you can say that about. For that reason I describe Vietnam as an undersized/undervalued economy. When I came there in 1994, the per capita income was $250. Today it is over $1,000 and continues to grow.
Is Vietnam better seen as an alternative to China or is it a complementary part of a more integrated Asia?
It is probably both complementary and an alternative to China. I do believe many companies need to be in China -- but you don't want to be totally dependent on China, and Vietnam makes a good alternative. Our cost structure is advantageous and the quality of Vietnamese products are quite good, so all of these factors make it a great option. China is also one of Vietnam's largest trading partner and we supply them with many raw materials. They are also the largest source of tourists in Vietnam, and China is becoming a major investor giving them an ability to take advantage of Vietnam's increasing competitiveness.
We are seeing a growing recognition that the long-term attractiveness of emerging Asia rests more on its potential to deliver growth and demand rather than to serve as a platform to lower production costs. Operating to sell and market products within these markets, however, requires a very different orientation than export manufacturing for export. Are you also seeing this shift and what do US and European companies need to do to take on the challenge of shifting from a "supply" to "demand" focused business development strategy?
One of the most interesting things about Vietnam is that even though its cost structure is lower than China's, its quality is often superior, particularly in value-added products. I have heard that about furniture as well as garments and other textile products. Companies are also competing quite effectively in the IT market in outsourcing and Vietnam can also deliver services in Japanese which gives us an advantage over places such as India.
The most compelling and powerful story in Vietnam, however, is the emergence of the middle class. Sixty percent of its population is 30 years old and younger so there are a lot of consumers entering the market now and in the foreseeable future. They need housing and a range of services and offer a growing labor pool that aspires to a modern way of living. That is the key driver of just about everything so the country is developing a moneyed class just like China.
P&G, Ford, Chrysler, Citibank, JP Morgan, are all operating in Vietnam. So are Coca Cola and Pepsi. There is also a new franchise law and Pizza Hut and KFC have also entered the market. We expect to see an acceleration of this activity in coming years.
One of the major themes in economic development both in developing as well as developed markets is how to promote the growth of small to medium-sized enterprises, many of which lack the resources needed to plan and implement international expansion strategies. In contrast large multinationals can take a longer view and make commitments over time. Do you see Vietnam as a viable opportunity for small to medium-sized enterprises? What do they need to know and what areas are likely to provide the greatest potential for success?
The answer is yes, Vietnam's investment law is quite liberal and its needs are across the board. A company can come in and establish themselves and many markets have not been taken and are not yet dominated by foreign or domestic companies. These companies need, however, to give thought to a strategy as to whether they want to do it alone or as a JV, license it or set something up on their own. Most of these questions can be answered as there are people who have been through it all before. A lot of major law firms and accounting firms and business development consultants have experience and incoming firms can tap into those channels.
When comparing Vietnam and other Southeast Asian markets to China and India many point to the potential of the Association of Southeast Asian Nations (ASEAN) as an economic community with the EU as an organizational model. In fact Economic Ministers from ASEAN countries met in Danang in August to discuss movement toward an "ASEAN Economic Community" and creation of a regional free trade zones by 2015. Do you look at Vietnam more as a national or a regional opportunity?
ASEAN plus 3 (Japan, Republic of Korea and China)
Trade barriers are coming down in ASEAN and it is becoming more favorable environment. ASEAN also is potentially attractive as collectively it is a large market. I think regional trade is rising so these countries do not have to be as dependent on US and other developed markets and can focus more on regional opportunities. That is a growing trend and a future opportunity.
While Vietnam undoubtedly has vast potential it remains a Communist country. How much of a barrier does this represent and what steps should businesses take to ensure they can safeguard investments that are made? Is it primarily a case of emphasizing flexibility and relationships over the more contractual approach we see in the US? If so how can companies achieve the level of certainty needed to fund expansion and operate ongoing concerns?
I think Vietnam has made many legal and regulatory changes, which have allowed greater movement toward rule of law and predictable and stable system. As a result it is far less subject to political whim as many political risks have lessened. And their accession to the WTO came about because of this and now the rules and regulations are far more compatible with a market economy with necessary protections and fair treatment, so the overall environment has improved.
They still have a way to go - and one has to test enforceability and searching for land at reasonable rates is a problem. The key is finding the right partners and to take a closer look at what you are doing before you do it. That is because you can't fall back as easily on the legal system as you would in the US given that the conflict resolution system is less transparent and developed.
Thank you Brad, any final words you would like to leave with our readers?
Vietnam has come a long way in the last 10 years. In many respects, economically and socially, it is hardly recognizable. I think the same will be said another 10 years from now as the country accelerates into a new phase of growth across a broader and deeper institutional base. Now is a good time for investors in many sectors to get invested in Vietnam.
This interview is part of an ongoing series highlighting Asia-related business, trade and investment opportunities and issues.