Vietnam’s largest private company Vingroup earned no economic profits, but to beat the odds soon
Vingroup, the realty and retail giant with the highest market capitalization in the Vietnamese stock market, was performing a “hockey stick” graph of its operating profits from 2012 to 2019, but its economic profits were constantly negative. Since 2016, the company has been broadening its business activities to beat the odds and aims to become a global tech-industry-services powerhouse in the next 10 years.
*This is a personal analysis based on lectures in the “Economics and Accounting Basics for Journalists” course from Tsinghua University’s Global Business Journalism program and the “Leadership in a New Era” course from Tsinghua School of Economics and Management by McKinsey & Company.
Vingroup, Vietnam’s largest private conglomerate, was first ranked at 1992nd in the 2018 Forbes Global 2000, an annual ranking of the top 2,000 public companies in the world by Forbes magazine. The company fortified its presence in the chart in the next two consecutive years with expanding profits and sales, placing at 1534th worldwide.
Despite performing a “hockey stick” in the operating profits, Vingroup has witnessed a constant negative economic profit over the years, demonstrated by the fact that the return on invested capital (ROIC) of the company was much lower than its weighted average cost of capital (WACC) calculated by ACBS Research Department in the 2016 VIC Update-HOLD report.
Economic profits in the “power curve”
According to the “Principles of Economics” by N. Gregory Mankiw, an economist measures a firm’s economic profit as the firm’s total revenue minus all the opportunity costs (explicit and implicit) of producing the goods and services sold. When a firm is making economic losses (that is, when economic profits are negative), the business owners are failing to earn enough revenue to cover all the costs of production. Unless conditions change, the firm owners will eventually close down the business and exit the industry.
In 2018, McKinsey & Company published a bestselling book named “Strategy beyond the hockey stick” with the introduction of “hockey stick” and “power curve” concepts to illustrate the real economic profits of companies.
The “power curve” was the ranking from the lowest to highest average economic profits of the 2,393 largest non-financial firms by revenue over the period 2000 to 2004 and 2010 to 2014. The “hockey stick”, on the other hand, is a popular visualization of the business growth plan that most companies are using to earn approval from potential investors and shareholders.
“Every CEO presents their business plans with the hope that they’re actually going to move up that power curve,” said Martin Hirt, McKinsey senior partner at the Taipei office and one of the three authors of the book.
Based on McKinsey’s calculation methodology (as Vingroup was not in the scope of the study in 2000), for example, in 2014, the economic profit of Vingroup was approximately -350 million dollars*. If placed on the power curve, Vingroup would probably be on the left-handed side of the line.
But why did so many competitive firms stay in business if they made zero or negative economic profits like Vingroup? Every economics book would tell that in perfect competition, the economic profit is always zero, but the accounting profit is still positive, which could help firms compensate for the cost of production and pay dividends to investors. The real-life market competition is not that perfect, but would probably operate towards this equilibrium.
“Sixty percent of all these companies work really hard to essentially just keep pace with the market and just stay around the zero line,” Hirt said, adding that 80% of the world’s new capital would rather inject into the top 10% companies. “Economic profit is very unevenly distributed.”
He added that only eight percent of all the “middle” companies in the power curve managed to move up over a 10-year period, receiving a large amount of capital, while more than two-thirds stayed where they were in the middle, and the rest sank to the bottom.
The question is whether or not Vingroup is trying to move up the curve and beat the odds of losing behind?
Major moves into new industries
In 10 years, McKinsey analyzed 37 companies that moved up to the top of the power curve.
“Of those 37 companies, 34 moved with an industry,” Hirt said while showing the graph of 23 industry trends in 2020. “Which industry you play in is the most important choice that companies can make in terms of growth, and now it turns out also in terms of economic value creation.”
Indeed, Vingroup, while being widely-known as a realty and retail giant, announced in 2018 that the conglomerate would “put Vietnam on the global map of technology and industrials” with its new investment strategy focusing on technology, industrials, commercials, and services to become a global powerhouse in 10 years, marking its first massive pivotal strategy after more than 20 years in the market.
As you can see in the above graph, semiconductor, software, healthcare equipment, and technology hardware are among the top 10 fastest-growing industries. Vingroup is investing in all four in the last two years.
VinSmart, established in 2018, is Vingroup’s core arm to expand its business on a global scale. The products that VinSmart designs and manufactures include PCBA circuit boards, switches, antennas, molds, and completed products such as smartphones, connected devices (IoT), electronic products, electronics, refrigeration, computer equipment, and medical products.
During the COVID-19 crisis, VinSmart officially announced in August its cooperation with American Irish-domiciled Medtronic plc to produce components for Medtronic’s ventilators. 50,000 units of Vingroup’s ventilator components are set to be exported to the U.S. and Ireland over the next year.
Mark Mobius, the founder of Mobius Capital Partners LLP, told Bloomberg that the ambition of Vingroup is “astounding”, and “a huge win” to make Vietnam a global player.
“We want the company to tackle things that people think are relatively difficult, things that Vietnamese private enterprises have not done successfully,” Vietnam’s richest man Pham Nhat Vuong, founder and chairman of Vingroup, said in his interview with Bloomberg in June.
The most ambitious decision of Vuong would be to make Vingorup become the first and only firm in Vietnam producing cars, even though the industry was predicted to lag behind and the latest financial report of the company’s unit showed a notable loss.
Within only two years since the first manufacture house built in 2017, Vingroup has introduced to market four car models — VinFast Lux SA2.0, VinFast Lux A2.0, VinFast Fadil — with 19,400 car units ordered. Moreover, Vinfast’s order book showed a cumulative 50,000-units booking for its smart e-scooter models — Klara, Ludo, Impes, which allow both self-charge at home and battery exchange at 1,000 stations nationwide.
The decision of making cars might be questionable at the moment, but the electric vehicle line is definitely within the industry trend.
As the world is racing to cut emission levels to reach the goal of the Paris Agreement on climate change, the automobile industry is under considerable pressure. The biggest carmakers in the world like Volkswagen or Tesla are starting to produce electric vehicles and plug-in hybrids, serving the increasing demand in the European market next year, according to Financial Times.
In June, Vingroup’s spokesperson told Reuters that the company would hold a test-drive in January 2021 for its electric crossover car models designed by Pininfarina, a car design firm for long-established customers including Ferrari, General Motors, and Hyundai.
VinFast is planning for mass production of electric cars next July before foraying into the U.S. market, according to the U.S.-based online car publication Autoblog.com.
Innovation leading growth
VinTech, spun off from VinSmart, is researching artificial intelligence (AI), producing software, and developing new generation materials, primarily through its two research institutes, the Big Data Research Institute (VinBigdata) and the Vin Hi-Tech Research Institute (VHT).
The company is putting biotechnology innovation high on its agenda. The field is called “the next trillion-dollar market” by Deep Nishar, senior managing partner of Softbank Vision Fund.
In October, VinBigdata, a research institute under VinTech, partnered with five international prestigious research organizations and six leading universities to develop science and technology in precision medicine. VinBigdata and Vinmec, the healthcare social business of Vingroup, have also been conducting the largest research project on the Vietnamese genome, which is expected to tackle significant problems in cancer and inherited diseases of Vietnamese people.
“If you’re in the top 50% of research and development (R&D) investment in your industry, your probability of moving up the power curve is higher,” noted Hirt.
Vingroup, with its two funds — Vintech Fund and Vingroup Innovation Fund (VinIF), is the first Vietnamese conglomerate to establish funds for basic research, applied research, and commercialization of new technologies after the enaction of Decree 76/2018/NĐ-CP in 2018, certifying once again its leading position in the industry.
The last innovation strategy that could make Vingroup’s vision perfect is startup investment.
According to Forbes’s statistics in 2017, 75 of the Fortune 100 companies are active in corporate venturing, and 41 have a dedicated corporate venture capital (CVC) team.
“More and more companies want to do deals because it has multiple benefits,” said Arthur Shek, partner at McKinsey’s Hongkong office, citing four key reasons, which were to promote innovation to access novel technologies and new market opportunities, to defend against new competitors, to gain financial returns, and to raise intangible values like customer loyalty or talent attraction.
Vingroup established Vingroup Ventures in 2018, but, after two years without a single deal, announced its divestment from the unit this March and has delegated the ownership to its subsidiaries, as part of an internal restructuring exercise to penetrate into the industrial real estate sector, according to DealstreetAsia.
However, VinTech Fund has seen to invest some $3.7 million in 12 applied science projects last year, including several technologies of Vietnamese startups like Vbee, Earable, and Bonbouton.
While the full business vision of Vingroup in this field has yet to be revealed, by performing audacious innovation strategies, the company has successfully attracted overseas Vietnamese talents, such as the world-class Vietnamese mathematician Vu Ha Van, who was a professor at Yale University, and Dr. Hung Hai Bui, who worked for Google DeepMind, Adobe Research and had spent ten years at the AI Center, SRI International (formerly Stanford Research Institute).
Massive resource reallocation
Apart from the internal restructuring of its venture capital unit, last year, Vingroup abruptly and continuously declared its retreat from the airline, retail, and agriculture markets, with the exit of VinCommerce, VinEco, and VinPro. Investors well predicted this outcome as they looked at Vingroup’s recent financial reports.
Vingroup’s business results by unit. Graphics by Jamille Tran.
Although being acknowledged as a retail giant with constant year-over-year growth in sales and profits, Vingroup’s retail unit witnessed substantial losses in the last six consecutive years.
The airline business intention, which is facing high risk during the pandemic, was also dead in the water.
However, while Vingroup’s healthcare and industrial businesses have constantly made considerable losses, the company continues to place major resources in these sectors.
These two specific fields are being accelerated enormously, especially after the COVID-19 pandemic disrupted the global supply chain and health problems were at alarming levels. Even though the company has not explicitly spoken about this strategy, the future high growth potentials of those industries are said to be able to compensate for the deficits.
McKinsey pointed out that firms that jumped up the power curve also had considerable losses in the first phase. Microsoft, a company in the research of McKinsey, also started operating cloud services as a small part of its business in 2011, but then took an outsized proportion of resources as the manager saw huge potential in this industry. Later, the business grew rapidly from revenues in the hundreds of millions to several billion within several years.
Vingroup might be in the very first phase of implementing this plan with its reallocation plan and seems to start beating the odds soon
But leadership is not just about big moves
Belinda Wong, chairwoman and chief executive officer of Starbuck China, said that Starbuck placed its people and the local community in the heart of the company’s business model, which explained why it became one of the biggest success stories of an American brand in China.
“We put our people first,” she said, adding that the company gave its stocks for all employees, even the part-timer.
Wong emphasized that Starbuck had also uplifted its farming community in order to produce a “very proud coffee from Hunan that can enter the world’s stage”. “We have to love what we do. That’s how we grow.”
Starbuck and Vingroup and any other leading companies in the world are sharing this same mission.
Vingroup has a long-standing philosophy of improving the lives of the Vietnamese people from childhood through senescence, which is demonstrated through its business umbrella covering from hospital, house, school, entertainment, to transportation and shopping, all are of exceptional quality.
“It’s our mission and responsibility to develop a Vietnamese brand with a world-class reputation,” Vuong said, as Bloomberg described him as “a patriot above all else”.
Whether or not those are marketing stories or business strategies, Vingroup and thousands of successful companies around the world are continually creating intangible value for society, and at the same time, beating the odds to move up the curve of economic profits. It is how they become market leaders./.
(*) Economic profit was calculated by subtracting the capital charge (invested capital multiplied by the weighted average cost of capital, or WACC) from net operating profit less adjusted taxes (NOPLAT).
