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 / Winter 2008 /Issue 53(originally published by Booz & Company)


Growing Pains in Vietnam

Still, Vietnam’s troubles rep­resent an opportunity for multi­national firms. As the nation’s speculative investment bubble bursts, real estate and construction costs will decline along with inflation. The Vietnamese government will then be able to resume public outlays for the infrastructure projects necessary to support foreign partici­pation in the economy and sustain real long-term growth. In the wake of these events, foreign investors will be able to capitalize on a market that is again hungry for jobs and products to purchase. Onetime costs for real estate and facilities will be significantly re­duced from to­day’s historic levels, and negotiation of investment in­centives packages with the gov­ernment or acquisition of local com­panies will be sig­nificantly eas­ier and more cost-effective. In short, multinationals with the wherewithal and foresight to remain in Vietnam — or to go there for the first time — during its current dark pe­riod will find their patience generously rewarded.

Indeed, there is precedent for this in the region. Prior to 1997, Asia attracted almost half of the FDI flowing into developing nations. Thailand, Malaysia, Indonesia, the Philippines, Singapore, and South Korea all experienced annual GDP growth greater than 8 percent during the late 1980s and early 1990s. The growth was so spectacular that the phenomenon was dubbed “the Asian economic miracle.”

These fast-growing countries, much like Vietnam today, were heavily dependent on exports, had large current account deficits, and produced few productivity gains. Then came the 1997 crash. Currencies across Asia collapsed; in Thailand, for instance, the baht lost more than half of its value. Banks were shuttered as borrowers de­faulted on loans and most investors sought shelter elsewhere. Indonesia, Malaysia, the Philippines, Singapore, and Taiwan experienced an average inflation rate of approximately 15 percent that year — as compared to Vietnam’s present rate of 27 percent. GDP across the Asia-Pacific region, which had grown 7.5 percent in 1996 and 6.1 percent in 1997, fell to approximately 4 percent in 1998.

Some of the countries tried to raise interest rates to cool down their economies, but even that failed to attract the capital needed to pre­vent additional economic hemor­rhaging. Conse­quently, the International Monetary Fund offered the most deeply af­fected economies a series of bailout packages on the condition that they institute wide-ranging economic reforms, including changes designed to eliminate monopolies, trade barriers, non­transparent corporate prac­tices, and other impediments to growth, as well as instituting new efforts to protect social spending and monitor the financial system.

Eleven years after the crisis, the region overall is far wealthier and has fewer people living in poverty than ever before. The rate of this recovery, however, varied widely. South Korea was the first country to exceed its pre-crisis peak level of per capita GDP, at the end of 1999. Malaysia and Thailand followed in 2000. Economic growth rates for developing countries in East Asia hit 10.2 percent in 2007; the current global slowdown will likely reduce this figure to approximately 8.5 percent in 2008, the region’s lowest growth rate since 2002 — but still a very healthy number.

Significantly, the multinational com­panies that moved into these markets immediately after the crash were able to capitalize on reduced costs of doing business in a market desperate for jobs, construction work, and investment. To cite one example: U.S. minerals producer AMCOL, through its subsidiary Chemdal (since acquired by the German firm BASF), invested in a superabsorbent polymer manu­facturing plant in Thailand in late 1997. The company purchased in­dustrial land for 30 percent less than the standard asking price from a domestic company that needed to quickly sell surplus property. In this atmosphere of economic uncertainty, experienced employees were easier to recruit and hire, and, because the Thai government was eager to court investors, the investment in­centives application and approvals process was accelerated. As Southeast Asia’s economies recovered, this formerly distressed facility became Chemdal’s most productive and profitable plant. Chemdal also ag­gressively entered the post-crash Korean market, which had lifted many of its restrictions against foreign acquirers, by purchasing a domestic bentonite mineral processing company for 20 percent of its former value.

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