Vietnam's Chaebol Dream With Vingroup

Vietnam's Chaebol Dream With Vingroup
Vinhomes Central Park is located in Ho Chi Minh City. Photo: Nikkei.

On March 29, 2022, Reuters reported that "Vietnam's Vinfast has chosen the U.S. state of North Carolina to build a multi-billion-dollar production facility for its new line of electric vehicles in the past few days."

Vinfast is a part of Vietnam's largest conglomerate Vingroup. We want to introduce this article, first published by Luat Khoa Magazine on June 29, 2019, in a series we will have about the conglomerates in Vietnam. The translation is done by Lee Nguyen.

Vingroup is favored and protected by the state in Vietnam because it is viewed to be an internationally competitive corporation with the ability to control the domestic market while securing a future of rapid economic growth.

But even with this understanding, we cannot ignore the proven long-term consequences of the Korean chaebol model and the Japanese zaibatsu model of business.

Developing domestic economic power is welcome, but this should not be secured by the unnecessary involvement of the entire political system, especially when this trend is maintained through the harassment and intimidation of ordinary people just because they want a more transparent and constructive government.

Steel Fists

Regarding the influence of giant economic groups on the economies of many countries, we know that the total revenue of the top five chaebols in South Korea (Samsung, Hyundai, SK, LG, and Lotte) was equivalent to 58 percent of the country's gross domestic product (GDP) in 2015, up from 37 percent in 2008 and 45 percent in 2009.

The total market capitalization of these five chaebol accounts for more than 50 percent of the value of Kospi, South Korea's major stock market index.

Most people also know about the Tata Group when it comes to the Indian economy. India is an inefficient economy with low labor productivity, and as such, 53 percent of workers still rely on agriculture, which contributes only 17 percent of the country's GDP. Hence, India needs economic engines for industrialization and economic construction.

The Tata Group and numerous other Indian family businesses can provide that. Tata's revenue in one year is worth 3 percent of India's GDP. Soutik Biswas, a correspondent of BBC South Asia, said this about the economic giant: “If you wake up in India, you are likely to sip Tata tea, make early morning calls on your Tata mobile phone and take a Tata sedan to work. There is a good chance that you will be wearing a watch or shoes sold by Tata as well”.

Many experts have tried to explain why multi-industry economic groups are so prevalent in developing countries, especially in Asia.

A multi-industry company, also known as a conglomerate, is a group combined of multiple smaller companies and businesses in many different industries. Such groups often own significant capital, and valuable brand names, and have the ability to diversify business lines.

These economic giants can be called “qiye jituan” (企业集团) in China, "business houses" in India, "grupos económicos" in Latin America, and "chaebol" in Korea.

Regardless of the different names in each country, this economic model has been a staple in Asia, in general, and in developing countries, in particular.

During economic downturns, the revenues of economic groups somehow continued to increase enormously over the past decade, reaching a growth of 23 percent in China and India, and 11 percent in Korea.

The economic groups truly succeed in emerging markets where they account for 45 out of 50 of all India's largest companies, 40 out of 50 of these companies are in Korea, and 20 out of 50 in China.

Professor Siu-Lun Wong of the University of Hong Kong admits that the family firm model is relatively consistent with the agrarian cultural background in Asia. Meanwhile, intellectuals in the region often do not have the same confidence in start-up businesses as Western youths.

Asians love the fame, social standing, and stability that giant economic corporations can bring. Thus, although the family governance model is often not appreciated by professionals, it is able to attract talent in emerging markets.

In research conducted by Trung Quang Dinh and Andrea Calabro, the authors note that there are typical markets in Asia where business "know-how" is not more effective than business "know-who."

Cooperating and investing with a multi-industry organization involves having traditional relationships with many groups. Likewise, having connections to varying levels of public authorities in many different fields will definitely attract more investors and partners than a single-industry company.

The heads of Korean chaebol businesses. Photo: The Korea Herald.

Nurturing Vingroup with Chaebol Expectations

Korean, Chinese, or Japanese economic models have far-reaching influence in Vietnam. Their success has a significant impact on how the Vietnamese government looks for avenues of economic growth.

This is evident in the country’s current situation where most of the state-owned "steel fists" have not been able to continue leading and boosting growth, contrary to the expectations of many Party leaders.

In Korea, the formation of the chaebol business model came about because President Park Chung-hee believed that this was the primary way to rapidly develop the national economy.

Immediately after the coup in 1963, he quickly introduced a “guided capitalism" policy wherein companies selected by the government were allowed to carry out key projects with state-sponsored loans. This process helped create jobs, amass production experience, and accumulate capital at a high intensity, thereby building private "steel fists," with the support of the state, to create economic pillars.

Similarly, the Zaibatsu business model in Japan, which served as the theoretical basis of Park’s chaebol system, was the economic pillar, nurtured and maintained by the Japanese militarists before and during World War II. The financial ability of these groups was enough to sustain Imperial Japan with technological capabilities on par with any other country at the time.

The post-occupation Japanese government, backed by the US military after World War II, quickly requested the dissolution of the zaibatsu because of their monopoly of the market, adding to the already undemocratic nature of their economic activities. However, their successor, the keiretsus, continues to exist today despite being economically weaker and less pro-government.

It is not difficult to see that Vingroup has been successful on the road to becoming a multi-industry economic group. In addition to primarily being an infrastructure, real estate, and housing development company, Vingroup is also expanding its business lines with the expectation of acquiring, or at least being able to hold, a significant portion of the general market. Some of its other ventures include education, car manufacturing, retail, medical – pharmaceutical, and many other industries.

Vingroup's model of development and expansion is very similar to the chaebol or keiretsu. Due to its success compared to other economic groups that are on the decline, such as Hoang Anh Gia Lai, Vingroup is becoming a contractor for many key projects. At the same time, it is also investing sizeable resources in land accumulation and capitalization. This is similar to how President Park Chung-hee nourished chaebol conglomerates or how Japanese warlords favored the zaibatsu model.

Pham Nhat Vuong, chairman of Vingroup. Photo: Financial Times.


There are also signs of Vingroup's dominant influence on right-wing media. For instance, two massive fires which started on its property in Vinhomes Central Park, Ho Chi Minh City, were underreported by the press and almost no criticism about this incident was published.

According to VOA's observations, when Prime Minister Nguyen Xuan Phuc condemned the planning of a 50-story Vingroup building in Giang Vo, the articles that detailed the incident were quickly revised.

Many customers who sent complaints about Vingroup were immediately listed as slanderers and spreaders of false information who were then summoned by the police. Compared to Muong Thanh and Dai Quang Minh, which are often criticized for their lack of fire safety or of being shady in land and project concessions, Vingroup is almost immune to all kinds of similar attacks and criticism.

What makes Vingroup almost invulnerable to the court of public opinion in Vietnam?

Remember that just a year ago, social activist Nguyen Anh Tuan was harassed both online and in real life for re-posting and analyzing the information presented by state-owned media on the issue of Vingroup acquiring land in many localities across the country.

In two articles "The Stove Has Eyes" (Cái lò có mắt) and "Public Land Must Be Auctioned" (Đất công phải được đấu giá), Tuan pointed out that the current selective anti-corruption fight did not touch Vingroup and its land acquisition issues.

Tuan said that he was detained on May 26, 2017, and taken into police custody at Tan Son Nhat Airport, and was asked to remove his articles about Vingroup. He refused and insisted to keep these posts on his Facebook.

A protest by residents of Skylake Vinhomes, a project of Vingroup. Photo: Facebook/Unknown source.

Raising Tigers in the House

The economic development model of chaebol or zaibatsu has stark benefits. This model's ability to centralize capital and build a national brand at a fast pace is perhaps necessary for a small economy that lacks direction. However, there are also many arguments against it, considering the status and development orientation of Vietnam.

First, Vingroup's strength still focuses largely on real estate - which is a form of business that can be said to be protected by the state up to 95 percent due to Vietnam's oligarchical political system.

In Vietnam, collective ownership of land by the people with an unfair and less transparent land acquisition mechanism. Vingroup's prosperity depends more on real estate than on the ability to produce any new items.

We can compare Vingroup with the Korean chaebols.

Among the 17 chaebols named in the 2015 Fortune 500 rankings, up to nine generated their income mainly from electronics, industrial machinery, the automotive industry, and electric power. The other three operate in the service industry and only one operates in oil and gas, which has close ties to the state.

Most of them are high-tech companies with significant foreign markets which require transparency and which are marked by fierce competition. Meanwhile, Vingroup's total assets and revenue still rely mainly on the increase in real estate prices owned by the corporation.

Therefore, Vingroup still cannot generate regular foreign currency revenue or stabilize the national economy through the import-export balance as many Korean chaebol companies can do.

Moreover, even if Vingroup, with government backing, can successfully diversify its industries and get out of the real estate shadow, the chaebol model has not been proven to generate enough economic prosperity and social stability for the country.

Chaebol and Zaibatsu helped Korea and Japan to craft a story of economic miracles. However, many politicians and investors see this family business model as cultural relics not suitable for the 21st-century economy.

The value of shares and dividends of companies involved in chaebol is many times lower than that of their American and European peers. This phenomenon is commonly referred to as the "Korean discount" due to concerns related to intra-company cronyism, cross-ownership, and the possibility of political negativity.

The existence of chaebol and zaibatsu is inherently dependent on incentives set forth by the government. Thus, they are not as independent and stable as many people believe.

One reason for this is the tangled and opaque relationships between corporate leaders and politicians. The other is that the national economy is dependent on chaebol so the monopoly created by the state stagnates the market, making it difficult for other smaller competitors to start and flourish.

Business Korea once complained that the existence of chaebol leaves the groups of small and medium enterprises and startups with no space to flourish and develop. As a result, the Korean companies on the Fortune 500 list remain the same year after year.

Finally, political consequences are the most annoying thing that chaebol-zaibatsu dreams have to deal with.

Fortunately, the zaibatsu was forcibly dissolved by the United States, creating the opportunity for a new economic era for Japan with the birth of dozens of young financial giants.

With chaebol, its dissolution is not so simple. According to Professor Kim Sang-jo of Hansung University in South Korea, the Korean people were tired of concentrating national prosperity in the hands of a few individuals due to their relationships with the government.

They are also no longer willing to forgive the wrongdoings of chaebol leadership, even though the conglomerates still create massive amounts of jobs and fuel economic growth as they did decades ago.

South Korean officials are trying to assuage public anger. The year 2017 was a "revolutionary" one with a series of activities to clean up the relationship between state officials and economic groups in Korea.

Lee Jae-young, the heir and the acting chairman of Samsung, was sentenced to five years in prison for many crimes, and there was a campaign to prosecute former president Park Geun-Hye.

However, the fact that he was pardoned a short time later caused public outrage. In December of the same year, the 95-year-old founder of the powerful Lotte Group was also sentenced to four years in prison on embezzlement and bribery charges.

Even so, the efforts of current South Korean President Moon Jae-in in the battle to reform the chaebol system are still considered to have too many risks and dangers. The chaebol's enormous role in the South Korean economy frustrated most previous attempts at reform.

Furthermore, political links within the government and even chaebol could threaten President Moon's position in the future if he continues to take tough measures to crack down on these economic groups.

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