17:34 | 23/07/2015 Investment
Vietnam’s great potential in its mounting middle income class has become a target for future merger and acquisition deals.
The clear potential
During the last few years, LNT & Partners law firm conducted an average of five mergers and acquisitions (M&A) per year for foreign investors-mainly Japanese. In 2014 alone, the law firm carried out six M&A deals without going through the stock exchange.
According to LNT & Partners’ founding partner Le Net, the number of M&A deals is on the rise with a raft of new regulations and agreements currently coming into effect. These include the expansion of foreign ownership limits, the Law on Investment and Law on Enterprises, the formation of the ASEAN Economic Community (AEC), and the Trans-Pacific Partnership.
Net said that the M&A appetite will focus on areas such as food processing, beverages, consumer goods, real estate, and high-quality services to serve up the ever-increasing demand of the rising middle class.
HSBC Global Research predicted that by 2020, the country’s middle class could rise as high as 30 million people, up from just 12 million people in 2014. When this happens, Vietnam likely becomes a large-scale consumer base for overseas-made products.
‘The rising middle class will edge up the demands for shopping, healthcare, and premium services. The potential of the middle class will become the target of many M&A deals in the coming time”, commented Net.
The vast opportunity
Investors from Japan, the Republic of Korea, and Thailand have stepped into the local market with a long-term strategy to gain a market share in the consumer and service sectors here.
Thailand, for instance, has entered Vietnam via a number of recent M&A deals, and has done so easily thanks to its similarity in geography and culture.
HSBC (Thailand)’s data revealed that Thai companies had partaken in at least 377 projects in Vietnam, with the total registered capital amounting to US$6.7 billion. Thailand has been ranked the 10th biggest foreign investor in the country and is proactively improving its position at present. Both countries have also set their turnover target for two-way trade at US$15 billion by 2020.
Vietnamese consumers like Japanese and Thai products as they satisfy the quality criteria and are not too expensive compared to European-made-products. In addition, locals also like to shop in convenience stores, mini-sized supermarkets, and modern retail outlets.
According to HSBC Global Research, the Vietnamese government has plans to spend approximately US$80 billion in the next 10 years to develop its transport infrastructure including bridges and subway systems as well as projects on roads and highways. This, in turn, will create a towering demand for construction materials.
Pitipong Matianaviroon, the Bangkok-based managing director of AWR Lloyd-Asia’s natural resources and strategic industries specialist, said that the AEC would come about in conjunction with liberalisation in many areas, which would in turn facilitate more investment.
And while waiting for the AEC formation at the end of this year, many Thai companies have been trying to gain access to Vietnam’s market as soon as they can. Some of Asia’s largest conglomerates in retail, construction materials, and natural gas such as Charoen Pokphand Group, Siam Cement Group, and the Berli Jucker Company have invested heavily in Vietnam either directly or through M&A deals.
The process of state-owned enterprise equalisation in Vietnam, coupled with past experience, indicates that M&A boom will focus chiefly on prospective sectors that meet the demand of the middle-in come class, such as telecommunications, construction, retail, and tourism.
The associated challenge
While foreign investors previously chose Vietnam as an M&A target for its cheap production and processing costs, they are now looking at services and the manufacture of high-quality products to supply the domestic demand.
These investors have a competitive advantage in products, yet they are at an obvious disadvantage in domestic distribution. If they want to expand in Vietnam, they will no doubt seek assistance from local partners that are willing to adhere to international standards.
Vietnamese firms, instead of fighting with these foreign investors, know that they can actually learn much from their production practices as well as their professional working style.
In the years to come, the market will be expecting more M&A deals between local firms and foreign investors.
According to Koichi Hori, chairman of the Tokyo-based Dream Incubator, in order to facilitate future M&A deals on a win-win basis, both parties must first and foremost understand each other’s working culture.
In addition, M&A parties should really reinforce the transparency and clarity in their human resource and financial management systems/ Professionalism is the foundation upon which both parties can build confidence and trust, Hori added.
According to many foreign funds, local businesses ought to step out of the family business model and try to reach the standard of a multinational corporation in a bid to establish themselves as an equal partner to Japanese, Korean, or Thai companies.
Net of LNT & Partners said that any local businesses that were able to compete with other large-scale international firms operating within their own country would be well-equipped to compete with other regional and worldwide businesses./.
Source: Vietnam Investment Review