The Attractiveness of Vietnam as a Target For Incoming
FDI, With a Case Study in the Retail Sector
Thesis
By
Huyen Kateřina Nguyen
Submitted in Partial Fulfillment
Of the Requirements for the Degree of
Bachelor of Science
In
Business Administration
State University of New York
Empire State College
2016
Reader: Tanweer Ali
Acknowledgements:
I would like to express my special thanks of gratitude to my mentor Tanweer Ali for guiding me through the whole thesis and giving me valuable feedbacks. I would also like to thank my family and friends for the continuous support during my studies.
Table of Contents:
I. Introduction ...... 5 II. Theoretical part ...... 7 II A. Division of FDI ...... 7 II B. Factors Influencing FDI Decisions ...... 7 Country indicators ...... 7 Institution indicators...... 9 Economic indicators ...... 11 II C. The impacts of FDI on the economy ...... 13 II D. Impacts of FDI on society ...... 14 III. Competitor Analysis In Theory ...... 15 IV. Foreign Direct Investment in Vietnam ...... 17 IV A. Development of the FDI in Vietnam ...... 17 IV B. Vietnamese FDI determinants ...... 20 V. Vietnamese - Korean investment relationship ...... 30 V A. Influence of Korean media Industry ...... 32 VI. Competitor Analysis Of Lotte ...... 33 VI A. History of Lotte group ...... 33 VI B. Financial Results Of Lotte Shopping ...... 34 VI C. Lotte Group SWOT Analysis ...... 35 Strengths ...... 35 Weaknesses ...... 36 Opportunities ...... 37 Threats ...... 38 VI D. Porter's Five Forces Lotte Mart in Vietnam ...... 38 Rivalry Among Competitors ...... 38 Supplier Bargaining Power ...... 40 Consumer Bargaining Power ...... 41 Barriers to Entry ...... 41 Threat of Substitutes Products ...... 42 VI E. Business Strategy Recommendation ...... 43 VII. Conclusion ...... 48 Work Cited ...... 50 Bibliography ...... 55
ABSTRACT:
This thesis is focused on the development of Foreign Direct Investment (FDI) in
Vietnam. It also researches the reasons for FDI in Vietnam and the factors, which influence the investment decisions. It further examines the FDI impacts on growth of the economy, as well as the advantages from the international cooperation.
The purpose of the case study in the retail sector is to assess the overall profitability of the companies investing in Vietnam. However, from an observation, these investments seem to be unprofitable, and therefore the case study analyzes the biggest FDI investor in Vietnam, which is South Korea. The thesis describes the relationship between the two countries, and provides the reader with reasons why Vietnam is an attractive investment destination for South Korea.
The case study in the retail sector analyzes the competitiveness of one of the biggest
Korean Conglomerates active in Vietnam called Lotte. It also provides the reader with further recommendations regarding the strategy and improvements that should be done in order to sustain the business in the Vietnamese market. The result of the analyzes shows that despite the losses Lotte has been having in its subsidiaries, there is a big potential in the growing consumer market in Vietnam.
I. INTRODUCTION
Foreign direct investment (FDI) is an important driver of technology transfer, economic growth and development. By definition FDI is an investments made by foreign governments or companies to a certain country, while acquiring assets or establishing operating processes in host companies. What is also different between the FDI and portfolio investments is that FDI is characterized by having voting rights in a company in which they acquired the stakes (Jenkins, 2006). According to IMF, the international minimum of voting rights should be at least 10% to be characterized as FDI. However, this is very hard to determine because the foreign investors may have an influence by owning assets, such as machineries, equipment, or factories.
As FDI is a very important part of today's international cooperation and globalization, it is very important to assess the impacts of FDI on the economic growth of countries. The supporters of FDI say that it is an important instrument for the developing countries to reduce poverty and inequality by having more efficient global economy. On the other hand, the opponents of this argument claim that FDI has a negative impact on the economy, as it creates dependence on the investor countries. It is claimed that it also destroys small domestic competitors and may lead to higher unemployment (Answar &
Nguyen, 2010).
However, the FDI inflow to the CEE region is one of the successful historical examples, where FDI raised the overall quality of living of the citizens in this region. The FDI inflow to these post-communist countries brought capital and know how, which helped the country to transition from planned economy to market oriented economy.
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As Vietnam is becoming a very attractive destination for FDI, this paper will assess the
FDI development and its impact to the economy in Vietnam. Vietnam has experienced a rapid increase in the growth in the FDI, but not all of them seem to be financially feasible. The biggest portion of the FDI take up the greenfield vertical investments, where foreign countries operates some of their processes in Vietnam, as the costs are much lower than they have at their domestic country. Some of the biggest companies, which outsourced their manufacturing to Vietnam are: Samsung, Dewan, or Tex Hong
("2014 FDI Report").
However, this paper will be focused on the horizontal FDI, mainly on Korean investors, who are the biggest FDI contributors in Vietnam. Even though the biggest sector for
Korean investment is the vertical FDI, this paper is going to assess the profitability of one of the biggest Korean retailers, Lotte Shopping, and its competitive positioning on the Vietnamese market. It will further proceed with strategy recommendation on what the retail companies should focus on in the upcoming future.
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II. THEORETICAL PART
II A. DIVISION OF FDI
The FDI are classified into two main forms - vertical and horizontal. Vertical FDI are investments, in which the companies act as distributers or suppliers, while taking advantage of lower costs of labor. On the other hand, horizontal FDI is a way to gain better access to the local economy, by opening branches that are similar to the business as in their domestic country.
FDI can also be achieved by two strategies. The first strategy is through so called greenfield investment, in which the company builds and sets up the factories or operational units in the foreign country. The second strategy is called brownfield investment, which a company acquires or merges with foreign company, to gain market share through already established companies or already established operations (Qiu and
Wang, 2011).
II B. FACTORS INFLUENCING FDI DECISIONS
According to Nunnenkamp (2001), there are three main investment factors, which influence the investment decisions made by investors. The three factors, which attract
FDI, are: country indicators, institution indicators, and economic indicators.
Country indicators
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Market size is one of the factors influencing FDI decisions. However, this factor is mainly relevant for the horizontal FDI, which is focusing on targeting the local consumers. According to Artige and Nicolini (2005), the measure of determining whether the market size is big enough is the GDP per capita. Higher GDP per capita means bigger purchasing power and possible expanding markets. In these conditions, the companies would prefer to invest in countries with stronger purchasing power than in countries, which have lower GDP.
The level of openness is another factor, which has been widely discussed for determining the inflow of FDI into a country. According to Charkrabarti (2001), there have been two points of views on this factor and how it influences the investment decisions. On one hand, less openness and trade restrictions may attract market-seeking investments, as these investments prefer to have less competition on the market.
However, for export seeking companies, trade restrictions may demand additional costs, and therefore prefer to invest in countries with more open market economy. In literature, this factor is measured by having a sum of imports and exports as a percentage of GDP.
Infrastructure has been shown to correlate with the amount of FDI into a country. It has also researched that the quality of FDI distribution influences both productivity and the inflow of FDI into a country (Kinoshita and Campos, 2003). There are many proxies that are used to determine the level of infrastructure such as, the telephone network, amount of public investments into road constructions, or a capacity to generate electricity.
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Distance with home country is definitely a factor, which determines the countries that will be investing into a specific region. This distance between two countries represents the transportation costs that the investors would incur. However, for efficiency seeking
FDI, such as companies which focus mainly to outsource some of their operations into countries with lower costs, the distance with home country may not be that relevant.
These companies are able to get return on their investment very quickly, as the lower costs in host countries would compensate for the larger initial investment (Yu & Walsh,
2010).
Institution indicators
Law and social norms play a very important part in attracting FDI into a country.
According to Dunning (1998), many countries have very similar means of attracting
FDI, which makes the FDI environment very competitive. However, new institutional theory says that there is a high correlation between institutional factors and the amount of FDI in a country, as strong political, social and legal institutions reduce the costs of transactions, as well as reduces the uncertainty of doing business in a foreign country
(Martinez & Allord, 2009).
What is interrelated with law and social norms is regulation enforcement. Regulation enforcement and its effectiveness and the speed of applying new regulation are also a determinant of riskiness of doing business in a country. What is also important for the investors is the complexity of administrative and regulatory obstacles, which the company has to overcome while opening a business abroad. What raises confidence in investors is also the regulatory framework and its enforcement, as it gives them more security in doing business transactions, as well as firm foundations for settling disputes 9
(Sun, 2002).
Especially in developing countries, where the institutional policies are not very sound, the country needs some additional FDI incentives related policies, which would help the country with bringing in more investments from abroad. As already mentioned the
FDI competition among countries is very high, and therefore it is essential to offer investors additional attractions, such as tax breaks, profit repatriation, or low domestic content requirement (Dunning, 1998).
Education and human capital has been widely discussed for its contribution of being one of the determinants of FDI inflows. For developing countries, it has been argued that education and human capital is not very significant as a factor, as companies use unskilled labor-intensive processes to take advantage of the low wage countries.
However, according to Miyamoto (2003), efficiency seeking multinational companies have been searching for target countries with high-skilled labor, as there is an evidence, which shows that FDI inflow correlates with the quality of human capital.
Political stability (corruption) is an indicator, which determines the inflow and outflow to the country. According to Kim, corruption is positively correlated with the FDI inflow, whereas low level of democracy is negatively correlated with the inward FDI.
Kim's research agreed with the study of Lucas', which proved that developing countries with instable political environment attract FDI from developed countries. On the other hand, according to Jaspersen et al., the political instability is a negative factor but is not completely a decisive one for making FDI decisions. He argues that there is no clear evidence of political instability discouraging investors from engaging into activities in the specific country. He claims that if the company is still able to generate profit in the country of activity, without excessive risks facing their staff and capital they will
10 continue operating their processes, as other risks can be mitigated. For example, the company is able to build its own infrastructure, if the conditions in the country are so advantageous it would be still feasible to invest in additional necessary activities.
Economic indicators
Labor costs and productivity is inevitable one of the factors that influence the decision of making investment the most. Mainly MNEs, seeking efficiency, resource and market driven FDI, reflect the skillfulness of the workforce, and more importantly the costs of it. According to Dunning (1998), companies are motivated to outsource some of their operations to other countries to exploit the lower cost inputs. Therefore, foreign production is much more likely to take place if the wages in the host country are lower than at home. However, the author also states that the skillful and knowledgeable workforce is able to offset the unattractiveness of more expensive labor market, if the output is more efficient and productive.
According to Parcon, flexibility of the labor market is an important indicator, which has been in many academic researches overlooked. He claims that labor market standards and regulation imposed by the state may impact the investing companies with higher costs resulting from the rigidity of the market. This, therefore, implies that countries with less flexible labor market attract less FDI inflows. However, other literatures indicate that having a regulated labor market enhance labor productivity, as relations are more defined and enhanced. The secure job market may then have positive effect on
FDI inflow, as the society may be more socially stable.
When the potential recipient countries have similar conditions regarding the labor costs, the decisive determinant is macroeconomic stability. Macroeconomic stability is not on 11 its own a decisive factor for investors, but the other implied factors, such as inflation, volatility of exchange rate, fiscal and social policies may influence the overall investing plans. Companies engaged in countries with volatile macroeconomic policies face a lot of risk, which they have to mitigate, but on the other hand can leverage this risk to their advantage.
The impact of inflation has been widely discussed. Most of the countries prefer to have their inflation in slightly positive numbers, as it contributes to the overall economic growth and diminishes the risk of having deflationary economy, which may result in having the country sink in depression. Investors fear the causes of deflation, as their products and services may be more demanded if the price is getting cheaper, but when consumers start to expect even lower price, companies would be caught in competitive price war, which further reduces the companies’ profits. However, excessive inflation is a very negative indicator of economic health of a country, which results in investors not having returns and rather losses on their investments. As the host’s currency loses its value, it has a negative effect on FDI, and governments engage themselves in policies, which would reduce the uncertainty and risks associated with inflation in the country
(Dermirhan & Masca).
However, slight depreciation of a currency can positively affect the FDI activity, as it reduces the production costs and wages in the hosting country. Therefore, the lower costs are more attractive for investors and it also increases the overall rate of return for the potential investors. Depreciating currency also means that they are able to be more competitive while bidding for assets abroad (Goldberg, 2006).
Competitiveness is one of the most important determinants, especially for market seeking FDI. New markets are an opportunity for new, not only foreign, entrants to
12 grow within the economy, and therefore develop scope or scale economies. MNEs tend to follow their competitors, as they are afraid of losing a potential market share to their rivals (Yu and Walsh, 2010).
Governments are also engaged in competition, as they try to appear attractive for their potential investors. Governments attract the foreign capital by having favorable policies, taxes, or FDI agreements. However, one of the determining factors for companies is the level of subsidy for domestic sectors. Governments sheltering newly emerged domestic markets would have naturally higher barriers to entry, as they need to limit the competition on the minimum level. This is unfavorable for the companies, as this means that they will need to incur higher costs when entering the market and have to put more effort into sustaining the business.
II C. THE IMPACTS OF FDI ON THE ECONOMY
According to Jenkins and Thomas, benefits from having FDI opportunities in the host country will result in acquisition of new technology, employment creation, human capital development, and integration to an international trade. Moreover, more tax revenues would be collected from the income taxes made from FDI. All these factors contribute to the growth of the country. This theory is supported by the neoclassical model, which suggests investments and efficiency increase the economic growth of the country.
However, there have been conflicting evidence proving the contribution of FDI on the growth of the economy. Some of the studies have shown that FDI impact on the economy is insignificant, or even negative. According to Bende-Nabende and Ford
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(1998), this may arise because of the lack of sufficient data from the time the research was conducted. The existing literature does not clearly indicate the causal relationship between the two variables, and therefore the impact of FDI is rather inconclusive.
There have been also studies that support both of the theories saying that FDI has a positive impact on the economy only when it is invested in particular sectors. According to Carkovic and Levine (2002), their study has shown that investment into manufacturing sector brings positive impact in comparison with services, where investment into services have a negative impact on the growth of the economy.
II D. IMPACTS OF FDI ON SOCIETY
Even though there has not been clear evidence on the impact of the FDI on the economic growth, many scholars still believe that benefits of FDI including human capital development and employment creation is associated with higher economic and employment activity, which helps to reduce the poverty in the country. However, poverty reduction does not only depend on the amount and quality of the FDI inflow, but also on the business and social environment in the hosting country. What is particularly important, is the institution and policies and quality of the labor market
(Mayne, 1997).
Hayami (2001) argues, that FDI inflow complements the domestic businesses, provides a source of capital, and generates new job positions, which helps the targeted country to break out of the vicious cycle of underdevelopment. According to Tran, there are indirect and direct impacts on poverty. Indirect impact of FDI is through improvement of living standards, which is caused by increase in GDP. The increase in GDP is due to
14 higher productivity and efficiency, which resulted from adapting more advance technology. The direct effect of FDI can be seen through the demand for a workforce and creation of job position, which consequently reducing the number of people living below the poverty line. Moreover, the lives of the citizens are improved also because of implementation of higher working environment standards.
III. COMPETITOR ANALYSIS IN THEORY
When entering a new market, especially the foreign companies need to understand the environment, which they want to do business in. Some of the models are used to determine the adjustments and changes that need to be done, in order to make the business competitive on the market.
SWOT Analysis is one of the most commonly used analysis among the business strategists. It is proven to be one of the most effective and valuable tools to use in the discovery and evaluation phase of the strategic planning. It is used as an audit of the company and the environment that surrounds the organization. The SWOT analysis is usually the most effective, when managers across the departments share their opinions about the company. Making sure that all judgments are considered in the model assures the all points of views would be included, and therefore the company would gain as much as possible from the company. The SWOT analysis identifies four components –
Strengths, Weaknesses, Opportunities, and Threats. The SWOT analysis should tell the company, what position it has relative to its competitors, identify the best opportunities, as well as warn about the current and future threats (“SWOT Analysis”).
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PORTER’S FIVE FORCES model is another commonly used model to assess and evaluate the competitive positioning of the company. The model is based on the assumption that there are five forces that determine the competitiveness and attractiveness of the market. This model helps the business realize, where its powers lies, which is very useful to understand the company’s current position, and possible future opportunities. However, it is also useful in terms of identifying risks, and helps to improve weaknesses, as well as avoiding mistakes.
The five forces are divided into:
Threat of new entrants: The level of new entry into the market is determined by the presence of entry barrier and how it impacts the behavior of existing competitors. The less the entry barriers, the more it is easier for new entrants to emerge in the market, which is a threat that the companies have to take into account.
Competitive rivalry: As companies in the same market are influenced by the activities of one another, it is important to analyze the competitors that may pose a threat to the business’ operating activities. Several factors need to be analyzed, including number of competitors, rate of industry growth, or capacity.
Threat of substitute products: Products that are of a similar type or that can satisfy the customer’s needs are considered as substitutes, which means customers have more choices to choose from and switch to, if the prices increase. This reduces the power of suppliers, as well as the attractiveness of the market.
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Supplier power: This factor analyzes how easy it is for the suppliers to drive the prices up or reduce the quality. It is determined by the availability of the product, that the company offers and size and strength of the supplier.
Buyer power: In comparison with the supplier power, this factor analyzes the ability of consumers to drive the prices down or demand higher quality from the suppliers. The buyer or group of buyers are powerful, if they purchase a large amount of seller’s goods, if there are a lot of other alternative suppliers and the switching costs are minimal, or if there are only few buyers on the market, and they are more likely to dictate the terms of the purchase or service (“Porter’s five”).
IV. FOREIGN DIRECT INVESTMENT IN VIETNAM
IV A. DEVELOPMENT OF THE FDI IN VIETNAM
In 1986 there was a reform called Đoi Moi (New Age), which changed dramatically the economy in a way it operated. What lead to this reform was the the poor economic performance with inflation reaching to 700%. The problems included also almost no foreign direct investment, value of exports were just a fraction of the imports', and the
Vietnam's resources were depleted due to the war with the U.S., which ended in 1975.
Moreover, the technological gap was increasing in comparison with its neighbours.
What greately concerned the government was the poor standard of living of their citizens caused by the planned economy, which needed to be changed (Mallon, 1999).
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In 1988, Doi Moi opened the economy to new opportunities, by liberalizing production, distribution, and prices. The new policies eased up the conditions for new entrants into the economy, but mainly were aimed at the export business, which helped the
Vietnamese economy to grow in the next decade. Export taxes, as well as non-tarrif barriers were removed, and minimum tarrifs were reduced from 200% to 120%. State- own enterprises were reformed, now encouraging the private ownership of businesses.
Another reform was passed called Law on Foreign Investment, which came up with a framework that helped the economy with receiving of the FDI. During the next few years, the government removed obstacles that would cause difficulties for the FDI enterprises to operate in Vietnam and made the conditions generally more attractive for foreign investors. One of the things were more relaxed requirements for those foreign companies, such as having more relaxed currency balance regulations, allowing investors more freedom to change the investment form, or allowing just 100% foreign owned companies to carry forward losses. From that point beginning with 1990, the inflow of FDI grew, which created the first wave of Vietnamese FDI (Mallon, 1999).
FDI inflow into Vietnam surged in 1996, with the East Asian crisis, reducing the amount of FDI inflow to half, as most of the investments were done by these countries affected by the crisis. However, it is also speculated that the FDI slowdown was caused because of the decline of optimism in the Vietnamese economy, as investors saw little progress in issuing any reforms since the 1980s.
Second wave of FDI inflow began with 2004, which resulted from Vietnam's growth potential. Vietnam's growth in GDP surpassed growth of its neighbours and with the support of government, it was able to attract many investors. One of the reasons was a
18 revision of the corporate tax in 2004, which created more favorable conditions for foreign investors. Moreover, in 2006, domestic laws were transformed based on the international laws, adopting the Enterprise Law and Common Investment Law, which gave investors a solid legal framework to work with. In 2005 Vietnam accomplished to become a WTO member, which also raised confidence in investors and gave Vietnam more creditworthiness ("Shifting FDI trends in Vietnam").
Source: “Shifting FDI Trends in Vietnam”
Vietnam's biggest FDI investors have always been from the Asian region. As already mentioned, this has been also a factor, which influenced the development of the FDI.
On contrary with other countries in this region, the U.S. investments have not been the biggest item in the FDI pie in Vietnam. In comparison with Japan, Taiwan or South
Korea, their economies gained from the U.S. investments, as well as the development aid in terms of guidance and recommendations for governmental policies ("Shifting FDI trends in Vietnam").
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In 2008 the biggest inflow in terms of volume into Vietnam was made by Korean investors, who made in total 2,153 projects between 1988 and 2008. Followed by
Taiwan, with 2,135 approved projects, and Japan with 1,102 projects. The U.S. was on the seventh place, with total of 493 investment projects worth 5 billion dollars. Even though South Korea was on the first place in terms of volume of projects from 1988 to
2008, the projects were in total worth 16.7 billion, which made them the fifth largest investor. On the first place ranked Taiwan with projects amounting 21 billion U.S. dollars in total. However, in 2014, South Korea has been reported as the biggest FDI investor in Vietnam, planning even more projects in the upcoming years (“South Korea continues to be the biggest FDI investor”).
IV B. VIETNAMESE FDI DETERMINANTS
Investment climate is certainly one of the factors that attracts the FDI. Development in
Vietnam and its friendly regulations for FDI investors were one of the reasons why
Vietnam has quickly become a popular destination for investments. A key for sound investment decisions, however, are not only strong institutions, but favorable regulations are important as well. It is also important to analyze the environment of the targeted country, as there can be many risks that would endanger the feasibility of their investments.
After the Doi Moi reform was passed, Vietnam achieved gradual increase in trade, and in 2015 it was reported that exports rose 9.6% from year earlier to $120.7 billion, with
71% coming from foreign companies. However, Vietnam still maintains average tariffs of 5.7%. Those tariffs shield the economy that the government wants to be protected
20 from outside competitors. Despite the tariffs, Vietnam has been having a favorable attitude towards FDI and trade, as foreign companies play a major role in Vietnamese economy. Vietnam is part of ASEAN, together with other ten Southeast Asian countries, such as Indonesia, Malaysia, Singapore or Laos. By the end of 2015, Vietnam is planning to fully integrate into the ASEAN system, which would encourage the FDI mainly from ASEAN countries ("2014 Investment Climate").
Even though Vietnam still has not fully integrated into the ASEAN, distance factor explains the three biggest investors in Vietnam. In total, South Korea, Japan, and
Singapore are consistently top three FDI contributors. In separate years South Korea is still a leading FDI contributor.
Vietnam has been growing in recent years at growth rate of around 6%. This figure has been lower than its neighbors’ such as, Laos, which has been growing at a pace of 8.5%.
However, what is more important is the GDP per capita, which has been on a rapid increase since the reforms in 1980s. In 2013, GDP per capita in Vietnam was $1,910.51, in comparison with its neighbor Laos with $1,660.71 per annum. However, ASEAN
21 countries together still fall behind China in the amount of GDP per capita with $3,852.
The main reason is that ASEAN is consisted of still developing countries, which joined later in 1990s, and are therefore lowering the overall GDP average. However, the growth of Vietnam's GDP in the third quarter of 2015 has been the strongest among its peers. The growth rate reached 6.8%, which was caused by a raise in private consumption, higher exports, as well as the increase in FDI (Nguyen, 2015).
According to Juan Du (2011), both the market size and the market growth show significant implications on the FDI inflow to Vietnam. His research has shown that 1% increase in each of the determinants will lead to inflow of FDI by 1.23% and 0.77%. He further argues that this indicates the strong motivation for investors to seek new emerging markets in Vietnam, with a big potential for consumer spending.
Vietnam is a developing economy with a very dense population. Average wage for a
Vietnamese worker is VND 4.1 million (“Vietnam Wage Policy”), with the purchasing power parity of $5,370 per year. Due to the increasing amount of FDI inflow into the country, Vietnam is becoming a middle class economy, which is expected to further develop and strengthen. The disposable income, which was $127 billion in 2013, is also forecasted to increase in the future. The rise in income will increase gradually the purchasing power over the years. According to Breu, Salsberg, and Tu, the rapidly growing economy, increasing literacy of the citizens, and expanding middle class contribute to the attractiveness and to the potential of the Vietnamese market for foreign businesses. However, despite the fact that the market is expected to grow in the future, the retail market purchasing power is one of the lowest in Asia with $450 per capita.
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This is a problem for foreign retailers offering premium products, as the majority of the population, meaning the more traditional and older generation, still prefers to shop at markets, which are more flexible with prices. Vietnamese citizens are price sensitive, especially after the economic slowdown, and prefer to save rather than spend. There has been a trend in buying ecological and healthier products before the economic slowdown. However, in the recent years, the citizens are more likely to give up on premium products, entertainment, and branded products. Moreover, in order to save more money, cutting down on the frequency of shopping is also one of possible the means of reducing spending (deloitte). However, the emerging middle class and the good prospects of the Vietnamese economy in the future may desire an option of having good quality premium products.
However, only recently the Vietnamese citizens again showed the interest in consumer market. Since 2009, after Vietnam has become a member of WTO, it lifted its barriers of FDI to a retail market. Even though government examines each project to protect their retail domestic companies, retail chain market registered entrance from all around the world. Even though Vietnamese companies own the most of the retail chains,
French retail chain Big C has fairly established its position on the Vietnamese market with four big supermarkets in Hanoi and six supermarkets in Ho Chi Minh City
("Shifting FDI trends in Vietnam").
Traditionally, the motivation for foreign investors to invest in Vietnam was to have a manufacturing base. With this strategy, companies could take advantage of the price differences in Vietnam and in their domestic country. Because of the new governmental policies that were passed in the 1980s, foreign investors were attracted to Vietnam,
23 mainly because of the cheap costs and low wages. Wages were extremely low, compared to other countries in this region. Vietnamese labor wages were 70% of
Indonesia, 50% of Philippenes, or 40% of Chinese. Despite China being the main destination for manufacturing bases, investors started to invest in Vietnam not only because of the low costs, but also to disperse the risks of their plants. However, cost of labor is varying from sector to sector. The minimum wage is varying from VND 2.7 million ($129) to VND 1.9 million ($90) a month. However the minimum wage is mainly earned in the rural areas, as bigger cities, such as Hanoi or Ho Chi Minh City, have higher labor expenses.
Human capital is one of the biggest determinants of FDI inflow into Vietnam. The labor force in Vietnam has also very good characteristics, with a large pool of people capable of working which amounts to 53.6 million. This pool is also from 94% literate. (state gov). On the contrary with Europe, Vietnam's labor force is also very young with 66% being people younger than 40 years of age.
Despite the fact that more than 90% of the adult population is literate and the high school enrollment rate is also around 93%, only 15% of adults actually attend university in 2014 (nationamaster). This may cause potential problems for companies looking for knowledgeable domestic experts focused in a particular field of interest. However, the low expertise is compensated by the wide labor force of people, which are hired for manual intensive work. This also keeps the costs of the labor force low, as the pool of potential candidates is high. However, this may change in the future, as the generation
X and Y is encouraged more to continue their studies. On the other hand, taking into consideration the low financial income of some families, the offspring may not have a
24 chance to study, as they would need to take care of the family right after the compulsory education. Moreover, Vietnamese culture is very dependent on relationships and therefore applying for a job is also very influenced by the people that the family is in contact with. Moreover, while applying, senior employees responsible for recruitment expect to be given a "gift". This fact further discourages mainly the low-income families to pursue higher education, as it is perceived as unnecessary and redundant.
However, despite the abundant and relatively skilled workforce, Vietnam bureaucratic procedures associated with obtaining employees is still very high, and many companies can perceive it as a barrier to entry. All companies have to undergo a process of registering the employees, and while recruiting and hiring they need to address the state-run employment and recruitment bureau. In 2013 Vietnam government issued policies, which encourage the use of domestic labor over the foreign employees. The
Decree 102 specifies the employment of foreign experts, and companies are obliged to file in an annual foreign labor demand report to the government. This report is supposed to indicate, why the company decided to employ a foreign worker and should state what competencies and requirements are met by the foreign worker and not by the domestic one. The employer is also obliged to state the plans on the development of training for
Vietnamese employees to be able to fill in those positions later in the future (“Retail in
Vietnam”). This means that for foreign investors, who want to have their management in the country, this would again mean higher costs while maintaining their business in
Vietnam. Even though there are no fees for preferring foreign employees to domestic ones, there would be still higher administrative costs, especially during the first years of the business. Those administrative costs would be paid mainly for translations and services offering bureaucratic help.
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Unstable and unclear social policies are also causing troubles for employers. An example of this can be a strike that occurred in March 2015, which affected big shoe manufacturer for companies, such as Adidas, Nike, Reebok, or Converse. The strike was mainly because of the change in a social policy, which restrained the employees to withdraw a lump sum payment during their resignation. The new law proposes that the money can be only withdrawn, when the employees retire, which means after 60 years of age. Main reasons why the strike happened is that citizens do not understand the good intentions of the state that the insurance money should be a safety pillow for the employees, when they retire. Rather, employees believe that they were given up the right to choose of when they can withdraw the money, and think that the government is doing some unfavorable practices with the money. The five-day strike was reported not to have any impacts on the manufacturing processes, as the business was temporarily transferred to other factories in Vietnam. However, these types of situations may have an impact in other business, such as in services, which may have higher switching costs
(“Vietnam Factory workers in rare strike”).
As already mentioned, Vietnamese culture is very traditional and typical for Asian countries, with its cultural importance stressed on relationships. This, therefore, is also reflected on the Political stability and the corruption level of the country. Despite the recent reforms, the Vietnamese business environment still experiences common acts of bribery, political interference and facilitation payments (business-anti-corruption.com).
The government criminalizes the corruption acts and attempts in the public sector, but not in the private one. These acts may include extortion, fraud, or abuse of power.
Facilitation payments and gifts are also illegal, with an exception of low-value and
26 occasional gifts. Despite the illegality, both of those practices are very common in the business environment. This is a serious issue for foreign companies, especially western ones, which are not used to this method of doing business at all. In some situations, the company needs to engage itself in the facilitation payments and bribes primarily to government officials. This may cause several potential problems for the company.
Depending on the strictness of the foreign company's country laws, the company may be prosecuted of doing illegal activity abroad by their home authorities. Corruption and cultural practices again increases the uncertainty and the cost of doing business in the country.
One of the most problematic issues in doing business in Vietnam is the government interference in land ownership and administration. As the communist regime does not support the private ownership of the land, the foreign companies may need to obtain leases for the use of the land trough embassies. However, a case of extortion of a land by the state may occur even when the land is in use by the company for several months or years, which is then compensated with an undervalued price of the asset.
Vietnam has overall very insufficient energy supply, with remote areas having very underdeveloped system of water and energy. The government has been in the recent years expanding its government spending on improving the infrastructure, with building high ways, seaports, railways, and airports. The main national highway is No. 1A, which connects the borders of China with Ho Chi Minh City. Another construction was recently completed, which connected the South of Vietnam with the capital of
Cambodia Phnom Penh. Moreover, regional highways have been improved and repaired due to the unsatisfying condition of the roads ("2014 FDI Report"). However, the
27 situation with the energy sector is still far behind from its South East neighbors and even the capital city experiences brownouts on a daily basis. Analysts are expecting that this energy supply limitations will be occurring more often in the future, if the government does not attract foreign investors who would be able to construct new power plants. Even though the communist party tried to enforce a law, which would provide the citizens with enough energy without any blackouts, they strive to raise money to actually take this plan into action. Moreover, The Economist reported that in
2013 that few investors see a potential in the energy market in Vietnam, which leaves the country to rely on solely on its own resources, which are fairly easily exploitable. It is predicted that by 2015 Vietnam will become a net importer of energy ("A heavy load"). However, Đầu Tư (Investment) magazine reported that there have been talks in
2015 about new renewable energy supply and distribution, using the solar energy, which is easily utilized in this region ("US firms eye deeper investment").
Vietnam's infrastructure of canalization system is also underdeveloped, with Hanoi having no effective draining system, which is especially inconvenient in the raining season, which results often in Hanoi being flooded by rain. This may have a very costly implication on the businesses, as the floods often prevent even taxi cars to conduct their own business.
IV C. IMPACT OF FDI ON POVERTY IN VIETNAM
In the 1990s Vietnam was further integrating with the world economy and FDI inflows were on increase. Poverty was decreasing and the number of poor people fell down
28 from 59% of the population in 1992 to 37% in 1997 (“World Bank”). Since the, the national poverty rate is on a downward trend, while the GDP per capita is increasing.
The biggest inequality in Vietnam is between the rural areas and urban areas, which can be explained by the difference in earning opportunity. Agricultural areas hold more people in poverty, as agriculture generates lower incomes in comparison with urban cities. Therefore, the pace of reducing poverty in urban areas is much faster than in rural areas (Trong).
In Vietnam, areas with the biggest concentration of poor people can be found in North
West and North Central and Central Highlands of Vietnam. However, in 1998 50% of people in these areas still live under the poverty line, not only because of the unfertilized lands, but also because of the lack of infrastructure and transportation to these remote places (Trong).
During the last 20 years, Vietnam has made a remarkable progress in poverty reduction, when it was able to reduce the poverty rate from almost 60% to 20% in 2013 ("Poverty
Reduction"). However, it was estimated that in 2012 there are still 11.3% of population living under the poverty line ("Population Below the Poverty Line "). Inequality became even larger due to the macroeconomic instability, as the growth of the economy slowed down. Another reason is also that the minorities living in the rural areas are harder to reach, and are not able to generate as much revenue as other parts of Vietnam. In the upcoming years the poverty reduction will be certainly more challenging and it will require more efforts from the government to be able to raise the quality of living of the poorest ("Poverty Reduction").
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V. VIETNAMESE - KOREAN INVESTMENT RELATIONSHIP
By recognizing the importance of being in WTO, Vietnam has opened its doors to many foreign investors, including South Korea. The business relationship between South
Korea and Vietnam started after the implementing the Doi Moi reform, and since then the cooperation has gone even deeper. In 1992 the official business relationship was signed and created, and since then, both of the countries are trying to more closely cooperate in political and economic fields, social and cultural issues, as well as enhancing the quality of lives, mainly in Vietnam (“Vietnam-Korea Relationship boosted”).
One of the most important agreements between the two countries was signed recently in
2015, which is called the Vietnam and Korea Free trade agreement (“VKFTA”), which was firstly proposed in 2010. The main aim of this agreement is to increase the bilateral trade to $70 billion by 2020 (“Korea Investment Profile”). The agreement deepens the relations, as it covers and specifies the trade conditions on trade in goods and services, investments, intellectual property, competition, e-commerce, and addresses the institutional, legislative and horizontal issues. However, most importantly it reduces and eliminates the tariffs on products, which are most commonly exported by Vietnam, such as agricultural products, fish, tropical fruits, mechanical instruments or garment.
Imports should be therefore more efficient in the future, with Korea eliminating 95.43% of the tariff line, and Vietnam 89.75%. The agreement has brought higher bilateral trade, which increased by 27% in 2015 in comparison with the precedent year.
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According to Bui Huy Son, the Director General of Vietnam Trade Promotion Agency under the Ministry of Industry and Trade, Vietnam will benefit from the agreements mainly because its exports will increase in the future, but also from other social and technological benefits that result indirectly from the cooperation. Vietnam has also become the first trade partner, which gained market access for export of key products for Vietnamese economy, such as ginger, garlic, shrimps, and etc. These products were subject to very high tariffs, which were up to 420%. By eliminating those tariffs,
Vietnam has a competitive advantage over its exporting rivals, such as China, Thailand,
Malaysia, or Indonesia (“VKFTA: Opportunities for investment attraction”).
Investments from South Korea have been increasing more rapidly since the 2009, where
AKFTA entered into force. Since then, Korean investors have invested and developed the textile and shoes industries, as well as energy and engineering. In the future,
Vietnam is likely to have higher level of technology, due to the spillover effect. The
VKFTA is predicted to attract more investment from South Korea, mainly in hi-tech and support industries. Many Korean investors have put their capital into big projects in
Vietnam, which enables Vietnam to participate more deeply into global and regional production, while enhancing the supply chain, which in turn will attract more Korean businesses and suppliers (“VKFTA: Opportunities for investment attraction”).
The South Korean government is also a supporter of deepening the business relations between the two countries, and has been helping Vietnam build solid infrastructure through ODA loan and grant aid programs. For example, in 2013, Korea has granted $2 million to support the development and implementation of Green Growth Strategy
31 project. Moreover, it provided a loan of $200 million for construction of a highway from Lo Te to Rach Soi (“Korea Investment Profile”).
However, the Korean - Vietnam relations are boosted also by several organizations, which provides support for Korean investors in Vietnam. They serve as an intermediary for Korean investors to help them settle in the Vietnamese business environment, as well as they serve as a communication channel between the Vietnamese government and the investors, if they have ever any complaints and concerns. One of the organizations is the Korean International Trade Association, which promotes the
Korean economy through trade and is the largest business organization with more than
71,000 member companies. It operates with 12 domestic offices and 9 branches overseas, among which is the Ho Chi Minh office in Vietnam (“Korea Investment
Profile”). The Vietnam branch's goal is to support the bilateral trade relationship between the two countries, as well as to provide information on recent market trends, investment environment and economic conditions. Through their events, forums and seminars these organizations play an immensely important role for investors, as they reduce the uncertainty about doing business in the country.
V A. INFLUENCE OF KOREAN MEDIA INDUSTRY
The Korean media and entertainment has had a big influence across the world. As mainly Korean Pop (K-Pop) and Korean TV series, known as TV dramas are becoming more popular mainly in Asia, including Vietnam, investors have been taking advantage of this influence to penetrate the Vietnamese market. The influence started roughly since the 2000s, when the Korean media industry started to focus their marketing on
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Vietnamese customers, especially teenagers. The Vietnamese market has been enjoying the media mainly through Internet and televisions, as well through talent shows, which aim to make Vietnamese artists become Korean-like stars. The domestic organizers say that they have learned a lot from their foreign counterparts, as they are very punctual, disciplinary, and they use a very up-to-date technology (“Korean influence pervasive”).
The spillover effect is especially important, as it improves the overall quality of the output, which consequently increases income and widens customer base.
The Korean investors have also used the influence of Korean TV dramas to enter the retail market in Vietnam. In the recent years, there have been emerging a lot of retail chains, including European style Korean coffee shops, which have been appearing a lot in the media. Due to the higher prices, the retailers are targeting mainly teenagers from wealthier families, but also tourists, who are not used to the market style and on the street dining.
VI. COMPETITOR ANALYSIS OF LOTTE
VI A. HISTORY OF LOTTE GROUP
Lotte Group conglomerate is an eighth biggest company in South Korea established in
1967. The current Korean CEO Shin Kyuk-ho established the company firstly in Tokyo, and then later expanded its activities in his home country. He was able to develop his business in South Korea after the normalization of Korean-Japanese relationships, after the end of Korean occupation by Japan.
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After the current CEO established the diplomatic relations, the Lotte Company was able to grow in its home country. Lotte started firstly as a Lotte Confectionary, which has still been until this day one of their main revenue generators. Since then, Lotte has expanded its portfolio of products, and is now engaged in hospitality, chemical products, cinema, as well as hypermarkets. Despite their diverse portfolio, Lotte has been seeking more industries of interest, and has been seeking more industries to add in its portfolio, with the recent interest in IT electronics or car rental (“About Lotte”).
Lotte has been also growing organically and inorganically overseas, mainly opening retail chains, and engaging in hospitality business. Lotte has been mainly active through its subsidiaries of Lotte Shopping, which contributes greatly to the revenues of the overall group, but it also enables the company to penetrate the market in other industries as well.
VI B. FINANCIAL RESULTS OF LOTTE SHOPPING AND LOTTE
SUBSIDIARIES IN VIETNAM
Lotte Shopping has shown a decline in its profits in the recent years, with the profit in
2015 being ₩ 688 bil, which was a 30% decline in comparison with the previous year.
It operating margin was reported to fell from 3.7% to 2.5% in 2015. This loss was reported to be due to the decrease in consumption and weaker operating results on the domestic, as well as the foreign market. The Moody’s has announced that this decrease in profits would not immediately affect the company’s rating Baa2, as the earnings are offset by the deleveraging of the company. However, the company’s earnings are also reduced by the costs of investments that were used to establish new retailing units. Due
34 to this new operating units, Lotte Shopping’s overall results are expected to increase in the next few years (“Lotte Shopping's ratings unaffected”).
However, Lotte’s subsidiaries were reported to be constantly at loss in the past 5 years.
The Vietnam’s affiliates have not been profitable, and the Lotte Vietnam Shopping’s losses increased from 2013 to 2014 by 78% to 6 bil. (“Annual report 2014”).
VI C. LOTTE GROUP SWOT ANALYSIS
Strengths
Lotte has established a good and stable market position through mergers and acquisitions at home, as well as on the foreign market. In 2013, Lotte merged with a
Korean based department store operator, Midopa Co., which enabled Lotte to strongly position itself on the domestic market, and thus positively impacting their cash flows. It also recently merged with a leading retailer in electronic goods, which strengthens its position in this industry. Moreover, Lotte was able to penetrate the foreign markets, by engaging in the retail market. It was able to open fast food chains - Lotteria, supermarkets - Lotte Mart, and cinemas - Lotte Cinema in China, Vietnam, and
Indonesia (“About Lotte”).
Lotte has entered the Vietnamese market in 2008, and since then it has opened 6 shopping centers, including the $45 million shopping mall in Phan Thiet City. In the future Lotte is planning to open another grand shopping mall in Vung Tau, which is
35 estimated to cost around $34 million. Throughout Vietnam, Lotte has opened 4 Lotte
Marts, 5 Lotte Cinemas, and 13 Lotteria fast food restaurants (“About Lotte”).
In 2013, Lotte's overall market share was 45.8%, and Lotte Cinema also increased its market share by 1.4% to 29.9%. In 2014, the company acquired Daewoo International and POSCO Construction, and has now the rights to operate the biggest department store, the Diamond Plaza, in Ho Chi Minh. The successful mergers and acquisitions not only strengthen Lotte's market position, but it also enables Lotte to expand to other markets more easily and effectively.
Lotte's another strength is also the diverse channels that they use to retail their products.
The channels include department stores, premium outlet malls, cinemas, consumer finance, and home shopping channels (“Lotte report”). This diverse distribution enables the Lotte Shopping to effectively respond to the opportunities and challenges on the market.
Weaknesses
Lotte Conglomerate is very concentrated geographically in its home country, South
Korea. This means that it creates a dependence on its domestic markets, as the Group's sales are generated mainly in South Korean market. Therefore, Lotte's revenues are also easily influenced by the economic changes, but also by country-specific risks.
Lotte also uses four distribution centers in South Korea, which are essential for the supplying the merchandise to the stores. These centers are key facilities for Lotte, as
36 they store the goods for retail. Any disruption, such as accidents, system failures or employee strikes, may harm the course of the business, and may result in unsatisfied customers and thus lost future revenues.
Opportunities
In March 2016, it was reported that Lotte is planning to place a bid to buy retail units of one of its biggest competitors on the market, the Thai Casino's Big C supermarket chain. This shows that Lotte has high hopes in the Vietnamese retail market, and wants to establish a strong market position within Vietnam. Lotte is also planning to open new stores in different sectors, such as hotels, cinemas, and cafeterias.
Moreover, the emerging middle class in Vietnam is broadening the consumer base, which is very favorable for Lotte, as it is perceived to be one of the more expensive brands. Vietnamese consumers will keep their interest to raise the quality of their lives, and this trend is expected to continue in the future. It is forecasted that the middle class will grow from 8 million in 2012, to 44 million in 2020 (“Grocery report”). The consumers will therefore seek products, which are classified as affordable premium, which fits into Lotte's brand perception.
Tourism has been on an increase in Vietnam, and is supported greatly by the
Vietnamese government. Due to the efforts, Vietnam has been enjoying an increase in tourism, which almost doubled from 2005 to 2013 to 7.5 million tourists. The government sees the importance and impact of tourism on the retail market, and has indicated that it is one of the key drivers of Vietnam’s economy. Tourism together with
37 the growing middle class is making the targeted audience for Lotte bigger, and therefore there is a lot of potential for expansion to other segments, such as hospitality or amusement parks.
Threats
The high competition domestically, as well as overseas, is one of the biggest concerns surrounding Lotte. Domestically Lotte has to face not only other big companies engaged in retailing, but also online shops, which sell directly to the customers. The online retailers are therefore able to lower the costs of their products, as they have less fixed costs to pay.
VI D. PORTER'S FIVE FORCES LOTTE MART IN VIETNAM
Rivalry among competitors: HIGH
Lotte Mart is expected to be expanding through new branches of supermarkets, offering a wide variety of products, including dry food, fresh food, drugstore products, clothing, as well as electronic products. It is reported that Lotte's strategy is to gain market share by opening 60 new supermarkets by 2020. However, Lotte's future is very uncertain, as there is high level of competition among retailers in provinces throughout Vietnam.
Retail industry is one of the most competitive ones and the Vietnamese market consists of 750 supermarkets, 130 trade centers, and over 9000 traditional markets. Lotte faces foreign, as well as domestic competitors with very similar assortment. The biggest competitors are: Thai Big C, Japanese AEON, and Vietnamese Co.Opmart and
Fivimart.
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In comparison with the biggest competitor Big C managed by Group Casino, Lotte is disadvantageous mainly in terms of the market share that the conglomerate possesses.
Big C is one of the biggest retailers, with 31 stores in Vietnam. Moreover, Big C has a competitive advantage over Lotte, as it manages resources from its home country -
Thailand, which is much closer than South Korea. Even though both of the retailers carry products from the domestic suppliers, Lotte Mart imports its confectionary products from South Korea, where the products are manufactured. This increases the costs of their assortment. However, some of the most favorite confectionaries are also sold by other competitors, which contributes to the Lotte's revenue by earning a margin on their products.
Co.Opmart is a leading domestic retail brand, mostly operating in the South of Vietnam, in Ho Chi Minh City. Co.Opmart established its dominant position in the South, when the Vietnamese economy started developing and liberalizing, which resulted in need for modern shopping centers. Co.Opmart now owns 60 stores located throughout Vietnam, and has placed in top 500 retailers in Asia-Pacific (“Retail in Vietnam”). Co.Opmart's biggest strength is that it has a long tradition in its home country, and is, therefore, able to understand the consumers' needs more than other foreign companies. However, in comparison with its foreign rivals, it may seem to have stagnated in terms of innovation, regarding its assortment, as well as marketing.
However, in comparison with the industry peers, Lotte has a competitive advantage in terms of marketing of their products. Even though the brand itself is perceived as premium brand, it still mainly targets the middle class. As the other competitors, Lotte
39 has been using a slogan implying good quality products for cheap price. Moreover,
Lotte has been using the influence of the Korean media industry to raise the sales of their retail chains. For example, for its cookie confectionary product, Lotte invested into a huge marketing campaign involving one of the most famous celebrities in Asia Lee
Min Ho. He became very popular after starring in one of the most popular TV dramas, which was also broadcasted overseas. The commercial spot with Lee from 2010, stresses the good quality product originated from Korea. This again evokes the feeling of the Lotte Pie being a premium product, in comparison with the Vietnamese Orion
Choco Pie, which is much more common and cheaper on the Vietnamese market.
Lotte group is able to pay for the most popular endorsement celebrities, mostly because of the good reputation of the brand. Celebrities are also attracted to take the offer, as
Lotte is well perceived by the public. By having this exposure through an endorsement, the celebrities also gain more popularity and are more likely to get more sponsorships and offers from other brands as well.
Supplier Bargaining Power: LOW
As the Vietnamese market is very price sensitive, manufacturers are reluctant to introduce new products onto the market, sticking with value priced goods (grocery report). However, as other supermarkets in the world, Lotte carries a wide variety of assortment, which do not come only from one supplier. Suppliers are also interested in having the products sold in the supermarkets, and therefore their bargaining power is low. Even though suppliers can choose which brand of supermarkets they will supply,
40 there is no brand of goods in Vietnam that would be more prominent than other, and therefore is easily replaceable by customers.
Consumer Bargaining Power: LOW
The fierce competition in Vietnam in the retail market pushes the prices of goods down, but they are still higher than in the traditional markets. However, the retail industry is on the rise, as customers accept the higher prices for the certainty of good quality products. Therefore bargaining power of customers in supermarkets is very limited, and there is low pressure on Lotte on this matter.
Barriers to Entry: MODERATE
As Vietnamese market is now very opened to FDI, the barriers to entry are low for investors wanting to engage in the retail industry. However, for the new entrants it will be very difficult to find a good location for a new supermarket unit, as there have been many supermarkets established by other competitors. Moreover, the government also regulates the opening of subsequent operating units. Even though investors are encouraged to open the first retail store, the opening of another retail chain has to be approved by the ministry of industry and trade. The Ministry assesses the conditions and decides, whether it will grant a license for the additional outlets. However, the assessment is based on a set of considerations under the ENT framework, which analyzes the compatibility of the products and the economic environment on the market
(“Korea Investment Profile”). However, this assessment is unclear and is being
41 interpreted differently across various localities. This may create delays in the process, which may result in higher costs incurred.
Threat of Substitutes Products: HIGH
Since there are many retail stores on the Vietnamese market, customers can choose in which store they shop. The assortment also does not differentiate by a big margin, when comparing the supermarkets and hypermarkets, and therefore customers shop in a store, which is the most convenient for them. The decision is dependent on the size of the retail store, as well as on the distance factor. However, customers' decision may be influenced by the various customer benefits programs, which are mainly targeted to lower the costs of shopping for the consumers. Most of the big supermarkets carry a benefit program, which enables the customers to collect points from their purchase, which are electronically recorded on a card. The customer then can choose, when is he/she going to use the points to discount his/her purchase.
For Lotte Mart, their advantage in those benefit programs is that it is clearly stated, how much the customer will benefit from the program. In comparison with its biggest competitors, Lotte clearly defines, that for every 100 VND, the customer gets 1 point, which equals to 1 VND discount on their purchase in the future. While researching for this data, it was much more easier to find it at Lotte's websites than at other competitors.
For example, Big C's benefit program was quite difficult to find on the websites and the program is less beneficial than Lotte's. Big C offers for every purchased 200 VND 1 point, which means that the customer has to collect twice as much points to get the
42 same discount than at Lotte Mart. This is advantageous for Lotte, but for most of the citizens, it is not a main decision factor, but rather a pleasant advantage.
VI E. BUSINESS STRATEGY RECOMMENDATION
Lotte needs to innovate and improve its operating activities in order to sustain its business and to gain a higher market share. As the competition is quite high in the
Vietnamese retail market, Lotte needs to distinguish themselves from other companies, but still keep their products competitive in terms of customer value.
The rising middle class in Vietnam, and fairly young population should be a target audience for retail companies now. The majority of the population is the age group of
15-24, which makes about 18 million of the total population. This potential of the country will be having its own needs, and retail companies should mainly focus on raising the quality of their lives.
Nowadays, citizens are very interested in the newly emerging health and nutrition sector. It is expected that the consumer expenditure will further focus to this trend, as citizens are becoming more aware of what they consume. It is mostly because there have been many disturbing news about harmful effects of some products sold at the markets. Therefore, citizens are now more willing to pay for what they perceive as good quality products. According to the Nielsen Company, 47% of consumers want to have fresh and natural food. 41% also say that they consider the meal's nutritional values, while buying the groceries. The products that are most frequently bought are fruit juices, soymilk, beans and peanuts, cholesterol reduced cooking oil, milk, and yoghurt.
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Lotte with its good reputation of being a Korean premium product should thus target the audience by promoting its products, as the best on the market, with scientifically proven results. Vietnamese people are also likely to be convinced, if the packaging states the results of the consumption, such as the products being able to enhance health, reduce cholesterol, or having positive impact on their lives. Moreover, the packaging should contain also information about the products, such as the nutritional ingredients, vitamins, and other health related components. This seems to be very important for the
Vietnamese, as 64% of the consumers read the product labels always or most of the times, and 68% are reported to believe it (“Grocery report”).
However, Vietnamese are still very price sensitive, and thus one of the main decision factors is the cost of the product. The citizens want to purchase a good value product for the money they put in. Therefore, in order to have a stable consumer base, Lotte needs to make their products affordable in order not to lose the customers in the future. In case
Lotte makes their products premium, and puts a high margin on it, the consumers will buy it occasionally or to test it out, but will return to a cheaper alternatives, if the products will not show completely different, and better, results.
Lotte should also focus on producing items that offers more customer value in one product. That means that the company should market products that are multifunctional.
This merchandise can be found across food, drink or beauty products. Examples of those products are for example beverages with vitamins or nutritional beverages. Asian female population is very aware about their skin and is willing to invest into skincare products. Therefore products, such as yoghurt with collagen, or makeup with integrated
44 moisturizers are likely to attract female consumers, as the products promises to deliver more than simply the core product itself.
Lotte is in advantage in comparison with its industry peers, as they have a competitive advantage in terms of marketing practices over its competitors. Lotte is a giant in Korea, and therefore it has a big influence in media. As already mentioned, Lotte employs the biggest celebrities, and should continue with this strategy of having "endorsement stars". What Lotte needs to do is to have stronger product placements for its products in
TV dramas, as this kind of entertainment is very popular in Vietnam, and TV is reported to be the most effective communication channel of influencing consumers' decision.
Nielsen Grocery Report claims that 68% of TV viewers's preference is influenced by the commercials they see. The most watched TV channels are VTV3, HTV7, and
VTV1.
Even though TV commercials have been shown as the most effective advertising tool, online shopping has recently shown to have potential as a new channel. According to a survey conducted by the Nielsen Company, with population of 506 people, the results show that 72% of online users have conducted their research about the product online that means that consumers compare the prices, as well as read other customers' review.
Therefore, Lotte should take this opportunity to diversify its business in Vietnam and should try to establish this emerging distribution channel, in order to gain competitive advantage and customer base. However, what may be an obstacle is the infrastructure of the distribution channel that is yet not very reliable. In terms of Internet, Lotte would need to invest into developing the energy sector, which experiences occasional
45 malfunctions, as this issue would have a negative impact on the operation activities of the online retail. These issues undermines the concepts of more convenient and easy shopping, but as the Vietnamese economy is turning into a more developed one, it will be certainly a mean of future retail.
Even though the focus now is on the young middle class, Lotte should also think ahead and focus on the aging population that will be on a rise in the future. As Vietnam is becoming a developed country, the birth rate will also slow down. Therefore, the
Company should think about carrying products that are needed by the senior people, such as adult diapers, adult milk, or health supplements. Again, Lotte has a better market position, as Korean products regarding health and beauty are widely regarded to be the best on the market.
However, to sustain the retail supermarket business, the company should think about restructuring the supermarket to make it more convenient. Nowadays, Vietnamese supermarkets are very crowded with a lot of aisles and assortment, making it very chaotic and disorganized. What Lotte should do in the future is to track the items that sell the most, which will result in having lower costs in terms of having fewer inventories to store in the company’s warehouses. Moreover, the capital that is invested into the goods can be more efficiently used to improve the customers' shopping experience.
As Lotte is also active in department store business, the capital that they spare can be used to improve the shopping mall facilities. Elderly are now more used to go shopping at the local markets, as it is usually near and cheap. However, in the future, the aging
46 population, that is young now, will be used to the higher living standards, and will be used to getting their groceries at shopping malls. Therefore, Lotte should make it easier for older people to move around the shopping mall, for example by slowing down the escalators. The company should also take into consideration the weight of the baskets, and should make it more light or put wheels on it, as it can be seen in the Western countries. With the elderly shopping at the supermarkets, the aisles should also be designed to be easily reachable, which means that products that are more likely to be bought by elderly should be put lower in the shelves.
As Vietnamese are one the most price conscious customers in the world, labels should be also customized to make it easily visible for the aging population. Lotte should also provide sufficient light for reading important information and the company can also offer magnifying glass for the elderly to be able to read the small letters on the packaging.
As Vietnamese culture is very traditional and emphasizes the importance of having respect for the elderly, Lotte should provide this age category special customer care.
Lotte can make it more convenient for the older population by dedicating them special payment lines that would be easier and quicker to pay at. Moreover, the Company should also think about the weight of the purchase, and therefore might want to employ some cheap labor force, such as students, to help the senior people with the bags of purchase.
However, Lotte's short-term business strategy should be mainly oriented to target the women population, as females are often those, who are the main customers and
47 shoppers in the housholds. One of the things that is becoming very popular in Asia is the feeling of being pampered in the comfort of own home. As Vietnamese are likely to cut on outside entertainment, when the financial situation is not optimal, this alternative of being able to relax at home is tempting for a lot of Vietnamese women. Therefore, the products that are sold by Lotte should be focused to encourage women's beauty and spa-like experience that can be provided at home.
VII. CONCLUSION
The subject of the thesis is to analyze the FDI environment in Vietnam, the development, and the impacts on the economy and poverty reduction. It covered also the main determinants that are important for decision making for FDI investors.
Vietnam in comparison with other FDI targeted countries is very successful in attracting the investments into Vietnam, also mainly because a lot of proactive investment attracting laws were enforced during the 1990s, which resulted in a peak of FDI in
Vietnam’s history. However, this trend has been on a decrease, as the laws that were easy to implement already took place, and now it is much more difficult to find new law that would give Vietnam competitive advantage over different countries. Despite the slow down of the FDI inflow into the country, Vietnam has been experiencing a lot of
FDI investments from the Asian region, mainly from the South Korea, which Vietnam has been maintaining very good relations over the course of few years.
The assessment of Lotte Company and the retail market has shown that there is a potential to grow in the market and gain market share. However, Lotte is advised to differentiate its products from other retail companies, as there is a very high and strong
48 competition in this market. It is important to keep analyzing the market, and with the recent studies it was shown that the Vietnamese market is still very price sensitive and is inclined to reduce the expenditures on outside entertainment. However, Vietnamese consumers are still very willing to pay for good quality products, and the attention is turning towards health and nutritious products. Therefore, Lotte is highly advised to focus on products that offer high consumer value for consumers’ money.
Despite Lotte having negative results from its subsidiaries in Vietnam, it still seeks to expand its business. This, as well as the analysis of the retail sector, show that there is a big potential in this industry and growing its business may bring Lotte competitive advantage as well as higher revenues in the future. Therefore, despite the loss in the initial years, Lotte is likely to turn its business into profitable one. It may achieve this by focusing on consumers’ needs or it by acquiring other competitors, and therefore eliminating other industry rivals. However, this is a very long-term plan, as Vietnamese population is still shifting to the middle class consumer spending, and premium products, which Lotte is perceived as selling, may not be as pursued at the moment.
However, Lotte is in a very good position and to break into the minds of consumers’ and to establish a stable consumer base.
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POLICY: THE LINKS IN DEVELOPING COUNTRIES. FDI and Social
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Miyamoto, K. 2003. “Human Capıtal Formatıon and Foreıgn Dırect Investment in
Developıng Countrıes.” Oecd Development Centre Working Paper No. 211.
Nunnenkamp, P. (2001). Foreign direct investment in developing countries: What
policymakers should not do and what economists don't know. Regional
Integration, Economic Development and Global Governance.
Nguyen, D. (2015). Vietnam's Economic Growth Accelerates as Exports Beat Peers.
Retrieved December 22, 2015, from
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quarter-economic-growth-accelerates-to-6-81-
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five-forces/
Qiu, L. D., & Wang, S. (2011). FDI Policy, Greenfield Investment and Cross-border
Mergers. Review of International Economics, 19(5), 836-851.
doi:10.1111/j.1467-9396.2011.00984.x
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http://www2.deloitte.com/content/dam/Deloitte/jp/Documents/consumer-
business/dis/jp-dis-vietnam-retail-en.pdf
57
Shifting FDI trends in Vietnam. (2010). Economic Review, 5(4).
South Korea continues to be biggest foreign investor in Vietnam. (n.d.). Retrieved April
15, 2016, from http://tuoitrenews.vn/business/31615/south-korea-continues-to-
be-biggest-foreign-investor-in-vietnam
Sun, X. (2002). How to Promote FDI? The Regulatory and Institutional Environment
for Attracting FDI. Foreign Investment Advisory Service. Retrieved from
http://unpan1.un.org/intradoc/groups/public/documents/un/unpan0063
49.pdf
SWOT Analysis: Strengths, Weaknesses, Opportunities, and Threats. (n.d.). Retrieved
April 15, 2016, from http://ctb.ku.edu/en/table-of-
contents/assessment/assessing-community-needs-and-resources/swot-
analysis/main
Trong Hung, T. (n.d.). Impacts of Foreign Direct Investment on Poverty Reduction in
Vietnam. Retrieved November 27, 2015, from
http://www.grips.ac.jp/vietnam/VDFTokyo/Doc/18TTHungPaper.pdf
US firms eye deeper investment in Vietnam clean energy: Consulate officer. (n.d.).
Retrieved February 15, 2016, from
http://tuoitrenews.vn/business/28074/us-firms-eye-deeper-investment-
in-vietnam-clean-energy-consulate-officer
VIETNAM-KOREA ECONOMIC RELATIONSHIP BOOSTED. (2008). Retrieved
April 15, 2016, from http://www.vietnamembassy-
denmark.vn/en/vnemb.kr/nr070521165843/nr070724011651/ns080123100337
58
Vietnam Factory Workers in Rare Strike to Protest New Insurance Law. (n.d.).
Retrieved April 15, 2016, from http://www.rfa.org/english/news/vietnam/strike-
03312015162305.html
VKFTA: Opportunities for investment attracttion. (2015, June 25). Retrieved from
http://www.vietrade.gov.vn/en/index.php?option=com_content&view=article&i
d=2321:vkfta-opportunities-for-investment-
attracttion&catid=20:news&Itemid=287
World Bank. "World Development Report 2000/2001: Attacking Poverty,"
Washington, D.C: World Bank, 2000.
Yu, J., & Walsh, J. P. (2010). Determinants of Foreign Direct Investment: A Sectoral
and Institutional Approach. IMF Working Papers, 10(187), 1.
doi:10.5089/9781455202218.001
59