Communist-ruled Vietnam is flourishing as a manufacturing base for many well-known western companies, drawn by its diligent and inexpensive labour force. But while its economy booms on the back of expanded trade, many state- owned enterprises are struggling to adjust to international markets.
Vietnam's more than 55 state-owned textile and garment companies limped along for years churning out low-quality winter jackets and other items that state trading companies sold to markets in eastern Europe and central Asia, as well as captive domestic consumers.
Yet when Hanoi's 1990s economic liberalisation -- and its 2001 bilateral trade deal with the US -- drew international brands to Vietnam, the over-staffed and under-performing state garment companies were ill-equipped to profit from the surging western interest.
Managers, though nominally under the umbrella Of Vietnam's National Textile Garment Group (Vinatex), failed to co-ordinate new investments, resulting in massive over-capacity and cut-throat competition. Hanoi, meanwhile, offered a financial lifeline that gave managers little incentive to improve.
Le Quan An, chairman of Vinatex -- an amorphous Vietnamese entity known as a "general corporation" -- had little power over manufacturers. "Before, our state companies acted independently," he says. "If they made profit, they kept it." Even if they made no profits, but simply came close to breaking even, they faced no repercussions, he adds.
But Vinatex and its 55 affiliated companies have recently been shepherded through a restructuring effort led by PwC, and funded by the UK government's Department for International Development.
Its story highlights the challenges of transforming the structure and culture of former state enterprises with little experience of the profit motive -- and highly suspicious of outside advisers -- and turning them into attractive, reliable partners for international business.
The project sought to turn Vinatex from a toothless administrative entity into something closer to a profit-oriented holding company.
The manufacturing units themselves are also being turned into partially privatised share-based corporations, with equity held by the state - at levels between 25 and 82 per cent - as well as management, employees and outside investors.
A new "holding company" law allows Vinatex to collect the state's share of profits from its subsidiaries, then re-allocate that capital for investment to the best performers. "Now we act as a real owner," says Mr An. "In the past, we talked with the enterprises many times, and sometimes they followed us, but most of the time they didn't. Now we only talk very little. But the result is very important."
Vinatex subsidiaries are already exporting around $1.0bn in garments each year for such brands as Zara, The Limited, Nike, Liz Clairburne and Marks and Spencer. US-based Burlington also recently announced plans to create a $80m joint venture cotton manufacturing factory with a Vinatex subsidiary.
But industry players say the firms' financial weaknesses, and managers' slow decision-making and deeply engrained aversion to risk, still undermines their appeal as larger-scale suppliers.
Vinatex group earnings, a meagre $4.3m in 2003, did rise to $12m last year, as the pursuit of profit has preempted more traditional communist pre-occupations, such as job creation. "All management understands that profits are number one," says Vu Due Giang, Vinatex's acting general director.
The attempt to overhaul an entire state-owned sector has been a first for Vietnam. And Vinatex managers were initially sceptical in January 2003-when the British-funded foreign consultants began talking of sweeping changes to their structure and operations. "Initially, enterprise managers would say, 'these foreign consultants, they don't know Vietnam. They work overseas in developed countries, but things are different here,' " says PwC tax expert Dinh Thi Quynh Van, who served as project co-ordinator.
Sandy Ewart, PwC team leader and a veteran of SOE restructuring in the former Soviet Union, says Vinatex officials were initially "unsure of what we were doing, unsure of what they were doing, and naturally suspicious". Asked for detailed financial information, they often stalled.
"We would present concepts and information requirements then wait for them to have their own internal meeting to find out what we really meant, and whether they really should give it to us," says Mr Ewart. "We were asking them to look at the company and the business in a way they had never looked at [them] before."
Yet through patient explanation of modern business concepts, the consultants and Vinatex officials came to agree on a broad plan for restructuring. The key change was to put each of the manufacturers -- many of which would turn raw cotton into finished clothes -- into one of several divisions, each of which would focus on a core competency.
While initially a tough sell, says Mr Ewart, the proposals were ultimately "joint plans", embraced by the Vietnamese executives. "We were constantly presenting their own data back to them, presenting ideas, concepts, suggestions and how and why this would be beneficial to them," he adds.
But further tensions arose over implementation. Though the proposed overhaul had the prime minister's approval in principle, Vietnam had no law governing the relatively new concept of a holding company. Vinatex officials were reluctant to move until the legal framework was in place which took another year.
Moving physical assets between the state firms, which could have helped rationalise operations, also proved difficult, as some subsidiaries had been partially privatised, while others were eager to be privatised, as it enabled them to write off much of their debt.
The clash of interests among minority shareholders meant machines could not easily be transferred.
Throughout the process, garment industry managers were trained in modern management practices, such as human resources, environmental compliance and legal challenges. Yet some resisted the efforts to increase their responsibility.
"We received some objections from people who said that they would be more busy, more tired, and incapable of doing it," says Mr Giang. "But we told them if they are not capable they will be dismissed and replaced by others, otherwise they have to try to complete the task."
Vinatex's overhaul is far from complete. Around 13 enterprises have yet to be turned into stock companies, and the group has a long road ahead to improve management, productivity, product quality and profitability.
But Mr An, who wants to see a return on equity of at least 10 per cent, is upbeat about his group's prospects. "Our vision is that Vinatex will become a powerful company, and the most effective company in the field of textile and garment sector," he says. "I think we can do it."
arrangement with FE