CHAPTER 4
Vietnam
THE TIGER CUB OF ASIA
China is the Asian tiger. It will grow for many more years before its story is finally told. But, if it’s real growth that you are looking for, you need to look just a few hundred miles away toward Vietnam. I liken the country to a tiger cub, tucked safely away near its mother, but with much more growth ahead.
The funny thing about Vietnam is that there is still a big difference between the North and South even though it is again one country. Hanoi, the capital, is so close to the Chinese border that I couldn’t get on Facebook while I was there. Now, the only other place I know where Facebook is unavailable is China. If you really want to know who the boss is in the region, you have your answer.
Hanoi is not a very attractive place in the winter. It’s cold, damp, and cloudy. And, it’s a pretty boring place unless you are into eating endless bowls of noodles and practicing a suicidal version of jaywalking. There are a few museums, lots of restaurants, a beautiful lake in the middle of town, and a token high-end shopping district. There are lots of memorials and statues of Ho Chi Minh, the Marxist revolutionary leader who was instrumental in the creation of the Democratic Republic of Vietnam (it was neither) after World War II and the Peoples Army of Vietnam. He played a major role in the Vietnam War until his death in 1969. He is so revered that the government changed the name of Saigon in the South to Ho Chi Minh City in 1976. Many people still refer to it as Saigon, however—it has a better ring to it.
Looking out of my window from the Hanoi Hilton (yes, there is a real Hilton in Hanoi, and I am not referring to the prison nicknamed the same) I could see the opera house built in classic French style and modeled after the Palais Garnier opera house in Paris. It’s in excellent condition and, like the Hilton, is at the heart of the city. I would strongly recommend the location for any visit. The most surprising thing I saw from my window was something not native to Vietnam, a Bentley Continental GT. The same car costs about $180,000 new in the United States; in Vietnam, it probably cost twice that amount. It was parked in front of a set of wrought iron gates, next to a Porsche Cayenne. Now, these cars are a dime a dozen in places like Singapore, but that’s to be expected since the per capita income in Singapore is north of US$44,000 per year (compared to the $47,000 in the United States). But, in Vietnam, the per capita income is right there above Moldova . . . around $3,400 per year!
When I see things like the Bentley in a third-world country, it catches my attention. Now, Hanoi and Saigon are really not like your average third-world dumps (Managua firmly occupies that space in my mind). They have beautiful city centers, lots of neon-covered high rises, good streets, great restaurants, lots of shopping, and very nice people. But, they are third world as far as economic development is concerned—that’s also where the opportunity lies.
Vietnam’s recorded history goes back some 2,700 years—it’s been around for a while. It’s long had a relationship with China and was actually under Chinese rule for many hundreds of years from 236 BCE to around 938 CE. Since that time it has remained mostly independent, although the Chinese, the Mongols, and the French have retaken or colonized the country on several occasions. In the end, none ended up keeping Vietnam, and the country has been fiercely independent since the French were defeated in 1954. The same spirit and ability to resist domination by superpowers is now manifested in the will of the new Vietnam to succeed on the world stage as an economic up and comer. Now, Bill Gates and Warren Buffett are worth more than Vietnam’s 2010 gross domestic product just to put things in perspective for a moment. The same can be said for many other small countries. But, what sets Vietnam apart is its proximity to China and the work ethic of the population. If I had to make a bet on the one emerging market that will succeed in the long term and make the transition from Tier 2 to Tier 3 in the next decade, Vietnam would top that list.
Long Days, Hard Work, and Education
There is a pattern for success amongst the Vietnamese who want to succeed. It’s not dissimilar to the formula for success embraced by people all over the world who want to succeed. It’s a combination of a strong work ethic, education, and the will to succeed. There are a lot of places that fit the Vietnamese profile as a small third-world country, but they will never succeed because there is not a spirit of avoiding failure. My contacts in Vietnam introduced me to many people from all walks of life—older folks who survived the Vietnam War and the 20- and 30-somethings of the younger generation. The older generation has suffered the worst that the country’s Marxist system and the ravages of war can bestow on a population. You see them working still, but besides being extremely friendly to foreigners, especially Americans, they are resigned to living out their lives in much the same fashion as they did over the past few decades.
The younger generation is different. They have tasted from the fountain of capitalism and heard the buzz that is spreading like a wildfire across Asia. China might border the North, but it is Thailand that borders the South, and Thailand is anything but a sleepy neighbor. This generation is all about succeeding. It can be intimidating to watch. They wake up early, work hard at jobs that aren’t particularly glamorous, live with a polluted climate, ride around on scooters with at least one other person on board, and then, after work, they go to school. The field of choice is information technology.
Hustle and Flow
If you visited either Saigon or Hanoi and not both, you’d come away with the completely wrong impression of Vietnam. The two cities, and the North and South could not be more different. As I wrote, Hanoi is a grey place, especially in winter, both in terms of weather and personality. It’s southern counterpart, Saigon, is not. It’s sunny, hot, and lively.
Hotels with rooftop bars, karaoke music, cold beers, and loud company abound. Saigon was the refuge for U.S. servicemen during the Vietnam War, and many of the bars in the city that date back to that time are frequented by veterans making the trip back—I met several during my visit there. It’s a happy place laced with sad memories.
The South Vietnamese were not fond of the communists from the North. They embraced a much more freewheeling lifestyle. It shows in the daily flow of traffic and life in Saigon. The day starts early, for sure, but the hustle and bustle is much more carefree and less regimented than in Hanoi. There are many beautiful hotels that line the Saigon River, which runs through the city. From my window at the Renaissance Saigon, I could see a beautiful skyline dotted with small skyscrapers, pleasure boats and barges navigating the river, and merchants plying their wares to the tourists walking along the developed boardwalk. Around the corner from the hotel about a block away, a high-end nightclub called Apocalypse Now was banging out tunes while the bouncers stood guard at the entrance. A few blocks further away there’s a Hard Rock Café that is set in an upscale plaza on Le Duan Avenue. Saigon rocks!
To get around Saigon is an adventure in itself. Scooters rule. Many of the side streets are narrow and pedestrian traffic and rickshaws are the second most dominant form of navigation. Beware though: Traffic will not stop for you and if you are crossing the street, the last thing you want to do is stop dead in your tracks. You will be hit. The drivers and scooter riders are counting on you to keep moving and they will navigate their vehicles around you, not vice versa. It’s an adrenaline rush that I repeated many times during my visit.
Hyper Growth
Lying in the shadows of China, bordering bustling Thailand, and next to emerging Cambodia, Vietnam occupies the sweetest spot in the region. It is nowhere near as developed as Thailand but much further ahead than Cambodia or even Laos. It has a massive coastline (almost 2,000 miles); huge, navigable rivers; fertile land; and easy road access to its neighbors. It has a hardworking population that is interested in education.
Over the past decade Vietnam has grown at between 6 and 7 percent per year. GDP in 2010 came in just north of $100 billion, a number that is projected to quadruple over the next 15 years. One can easily see where the growth is coming from: exports. Vietnam’s exports totaled more than 60 percent of its GDP, and those exports—things like rice, fabric, electronics, and even crude oil—found their biggest home in the United States, followed by Japan and then China. Those countries will continue to dominate the export horizon, but their order will shift. Vietnam’s biggest import partner is China, and I believe China will also become the country’s largest export partner within five years.
China needs Vietnam more than Vietnam needs China. While Vietnamese inflation has been out of control recently, approaching the mid teens, that is a consequence of high growth and increasing consumption locally and easy money that has financed the growth. It is not unusual in the least for countries that are doubling their GDP every five to seven years to have high inflation. The key is for the inflation to show signs of moderating after a few quarters of hyperinflation; otherwise, a major recessionary period will set in as governments impose strict policies to curtail growth. The biggest pain suffered in Vietnam has been by investors who have seen the stock market plunge by as much as 75 percent from its highs to current levels. And the currency, the dong, has depreciated by 25 percent in five years versus the U.S. dollar. Yet, the future for this socialist country remains extremely bright if forces that contributed to inflation can be moderated. The one thing that cannot be stopped is the growth that has led to massive declines in poverty in the country.
China is getting expensive by third-world manufacturing standards. Its growth has outstripped that of even Vietnam, and that is for a country that measures its GDP in trillions not billions. A result of China’s growth is an increase in living standards, higher wages, and higher costs. Now, some of the business that found a home in China, particularly manufacturing, is moving to places like Vietnam—even Chinese businesses are setting up shop across the border. In 1999, China had 76 projects in Vietnam with a total investment value of $120 million. In 2009, that number was almost 700 and the value exceeded $2.5 billion. Early Chinese projects were focused in areas like hospitality and consumer products. Today, more than 70 percent of the projects are in the manufacturing sector. That trend will continue for the foreseeable future. China will have no choice but to engage its much smaller neighbor, and Vietnam will gladly accept the crumbs that fall from the Chinese tables. That is what makes Vietnam a compelling investment opportunity—the most compelling in my opinion—in the region. My optimism is only enhanced by the fact that Vietnam’s stock market has plunged and many companies’ stocks can be had for half price or less. The Vietnam ETF (NYSE:VNM), which I mentioned earlier, is by far the easiest way for nonlocals to invest in the country.
But, if you are looking for a local way to invest, perhaps in the manufacturing sector or in real estate in places like Saigon, you must do your due diligence. Laws do exist, but experience has taught me that laws really don’t mean much when your money is tied up more than 8,000 miles away in a country where the language barrier is huge, the government is corrupt, and the investing dynamic changes daily. Vietnam is not a first-tier emerging market, or a second-tier emerging market. It is still a third-tier market that is on the cusp of becoming a second-tier market. What’s holding it back is the lack of transparency in the legal system, the markets, and from the government, and also the lack of investment options for foreigners.
Ha Long Bay
A visit to Vietnam would not be complete without a trek out to Ha Long Bay, about a three-hour ride from Hanoi. Ha Long Bay is a UNESCO World Heritage Site—a designation that usually means that the place is something special. Not always. But, in this case, I am thrilled to tell you that it is one of the most fabulous places to not only visit but to spend a few days lazily exploring in a luxurious houseboat.
The road to Ha Long is quite interesting. It is a two-lane highway that is prone to traffic jams and accidents. A three-hour trip can easily be double that with just one accident on the road. But even then, it’s worth the trip. Along the way you’ll see hundreds of roadside stands selling freshly cored sweet pineapple—a perfect snack at about a dollar for a whole small pineapple. Coconut milk fresh from the husk is another treat.
One of the things that you will notice is that the Vietnamese only paint the front of their homes. Many homes are multifamily (the same family) and rise up a story each time more people move in. The houses are usually quite narrow but very ornate. The reason they only paint the front is because there is so little room between the homes that side windows are few so painting the sides would be a waste of money and paint since most people only look at your home from the front. The first floors of most homes, especially on the main roads, are little shops. They all sell the same goods: chips, cookies, and other dry packaged goods. There must have been at least a thousand of them between Hanoi and Ha Long Bay.
A word about the people. We were delayed by an accident on the way to Ha Long. Quite a few members in the group I was traveling with needed to use restrooms. We approached a small shop owner and he graciously allowed many to use the bathroom in his house. Of course, his generosity was well rewarded as we cleaned out most of his stock of chips and cookies to sustain us for the rest of the ride! He was as pleasant and polite as all of the people I met on my trip. It is a culture of hospitality and foreigners are treated with great respect and kindness. I was surprised, honestly, considering the number of occasions where foreigners had devastated the country through war.
Ha Long Bay (Descending Dragon Bay) contains a series of mountainous outcroppings (limestone karsts) that jut out of the water. These aren’t just little rocks, but little islands dotted with small mountains some of which are more than 100 feet high—and there are more than three thousand of them! The houseboats, rowboats, and sailboats navigate through the misty channels stopping at some of the 500-million-year-old structures so that visitors can disembark and explore the hollows and caves, which feature some of the most breathtaking stalactites and stalagmites I have ever seen. One cave in particular (don’t worry, you’ll be taken there by your guide) is so large that the government has set up a light show inside it, and it can accommodate several hundred people at a time.
Once back on the boat you can feast on local seafood delicacies to your heart’s desire. Along the way numerous little boats will approach with hawkers selling everything from fresh fruit to costume jewelry—the fruit is cheap, the jewels are extremely overpriced by local standards. Wait until you get to the markets in Saigon to buy or better still, if you’re headed to China, you’ll find everything at the Pearl Market in Beijing for a tenth of the price.
Vietnam is a land of many wonders, both geographic and economic. It will be a major player in Asia given time. Along the way, the market will crash (as it currently has) and provide the astute investor an opportunity to trade Vietnam for significant gains. A move back to the old highs would result in a gain of more than four times invested capital, and it’s something I feel will happen again within the next five years.
Strengths
The country has a young population that is eager to learn and to work. Its proximity to China, Laos, Cambodia, and Thailand is a plus. It is self-sufficient in many respects, including agriculture and energy. The country has a history of perseverance and the ability to bounce back from crises of horrific proportions. A market and exchange system that tends to work well for a third-world emerging market. The ability for foreigners to invest, albeit through indirect channels. Infrastructure that is taxed but works. Strong sense of hospitality toward foreigners.
Weaknesses
Corruption exists in all ranks of government. Vietnam has a weak per capita GDP and a centralized planning system that is still run by the Communist Party. Housing for the massive urbanization that is taking place. Issues with neighbors like China regarding territorial boundaries. Dependence, for now, on the regional success of its neighbors.
Opportunities
Manufacturing. Vietnam has the capacity and manpower to take on projects that would once have gone to China but are finding a home in a cheaper place. Tourism is vastly underdeveloped, and the country is only beginning to exploit the thousands of miles of coast and river lines. The market is cheap by historical standards and that provides a place for foreign investors to allocate some capital, which will eventually find its way down the chain.
Threats
Inflation is now rampant and that could result in social unrest. Prices are on pace to double every four years while incomes are lagging that rate significantly. The ruling party is corrupt and that is impeding growth and encouraging the existence of a massive black market for goods and services. The country lacks a tax structure for public works projects. Threats from China regarding territorial boundaries could escalate, though this is doubtful. China is the major player in the region and influences the Hanoi government in matters of social policy—one has to remember that China played a major part in the support of North Vietnam during the Vietnam War, and the history of both countries has seen numerous instances of both cooperation and hostility. Old ties are hard to break. Vietnam could also suffer competitive threats from Cambodia and Laos at some point; however, in the regional pecking order, it’s China first, then Thailand, and then Vietnam. Laos and Cambodia are a very distant fourth and fifth.