By: Steve Toloken
March 13, 2014
HO CHI MINH CITY, VIETNAM — There are many challenges to business in emerging markets like Vietnam, but one potential upside that’s getting a lot of attention these days is the growth of what’s broadly called the middle class.
Truong Thinh Plastics, Vietnam’s largest maker of plastic tubes for personal care and cosmetics, said the rising local incomes are fueling its growth.
Sales, for example, have grown more than 10 percent a year for at least a decade for TTP, and it’s doubled production in the last five years, to about 8 million plastic tubes a month.
Showing a visitor around the company’s extrusion and injection molding factory on the outskirts of Ho Chi Minh City, Executive Vice President Jay Tran said he expects that growth to continue. The biggest driver, he says, will be increases in Vietnamese purchasing power.
“What I’m counting on is the people who are workers and taxi drivers, the lowest income part of the country. I have a strong confidence that the purchasing power of this group will increase a lot in the upcoming 5-10 years,” he said.
“The better we clean up poverty, the more population in the middle class we will get,” he said. “This is the main force that makes the domestic consumption grow.”
Some outside analysts back that up. A December report from the Boston Consulting Group said the consumer class in Vietnam, which it defines as having a per capita income of at least $2,300, will triple to 33 million between 2012 and 2020. It said Vietnam and its 90 million people have the fastest-growing middle class in Southeast Asia.
Compared to some countries, that $2,300 per year is not a huge sum of money, of course. Even adjusted for purchasing power parity, which would put Vietnam’s $2,300 at closer to $3,500 of spending power, the local market remains very price sensitive.
But for companies like TTP, which was started in 1986 by Tran’s family, it still represents an opportunity, said Tran, who has a degree in business from George Mason University in the United States.
The company spent $2.5 million last year on a major equipment upgrade to higher-speed machines, including several machines from South Korea. Future plans include developing more capability at making caps and closures and “offering more options and variety instead of just increasing capacity,” he said.
Today it has seven production lines with extrusion and printing, 12 injection molding presses and assorted hot stamping and other machines.
By revenue, business is split equally between the domestic market and exports, although its export markets are more profitable, at least on a unit basis. Domestic clients include local operations for Korea’s LG Cosmetics and the consumer goods business of Bangalore, India-based Wipro Unza.
Tran said the company, which has about 40 percent of Vietnam’s domestic market for tubes, has no plans to shift to more of an export-oriented model.
“I have already accepted very long ago the price competition domestically,” he said. “I acknowledge that selling domestically I earn very little, the margins are very slim, [but] I accept it in order to keep supplying, keep my dominating position in the domestic market.”
Export opportunities are growing as well, in part because as manufacturing costs rise in China, global companies are coming looking for options, Tran said.
“I’ve been exporting to many regions around the world, including the United States, Europe, India, Japan, but recently the United States buyers have been increasing volume a lot,” he said. “They never share where they shift their purchases from, but I can judge from many factors that these were previously ordered from China.
“They are finding alternative suppliers, not only in Vietnam but in Thailand and other Asian countries,” Tran said. “So we are getting what China is losing.”
TTP, with 400 employees, remains relatively small on the world-scale of tube makers. And some of the challenges in Vietnam work against it getting larger, Tran said, like access to capital.
Inflation in Vietnam has roller-coastered up and down between 6-22 percent in recent years, and the country’s GDP growth slowed to 5 percent the last two years as it dealt with a host of macroeconomic challenges. Its prime minister made a very public apology in 2012 for mishandling the economy and for problems with the country’s large state-owned companies.
TTP said it’s had a focus on investment from the beginning. It installed the first extrusion line in Vietnam in 1996, although Tran said getting access to funding remains a challenge for his company, as it does for the country’s mostly small-scale manufacturers.
“In my mind I can see there’s a lot of areas where we can improve efficiently and bring in profits, very profitable improvements that we have not done solely because of the limitations in terms of capital,” he said.