Vietnam’s largest private company Vingroup earned no economic profits, but to beat the odds soon - Part 1
Vingroup, the realty and retail giant with the highest market capitalization in the Vietnamese stock market, was performing a “hockey stick” graph of its operating profits from 2012 to 2019, but its economic profits were constantly negative. Since 2016, the company has been broadening its business activities to beat the odds and aims to become a global tech-industry-services powerhouse in the next 10 years.
Vingroup, Vietnam’s largest private conglomerate, was first ranked at 1992nd in the 2018 Forbes Global 2000, an annual ranking of the top 2,000 public companies in the world by Forbes magazine. The company fortified its presence in the chart in the next two consecutive years with expanding profits and sales, placing at 1534th worldwide.

Despite performing a “hockey stick” in the operating profits, Vingroup has witnessed a constant negative economic profit over the years, demonstrated by the fact that the return on invested capital (ROIC) of the company was much lower than its weighted average cost of capital (WACC) calculated by ACBS Research Department in the 2016 VIC Update-HOLD report.

Economic profits in the “power curve”

According to the “Principles of Economics” by N. Gregory Mankiw, an economist measures a firm’s economic profit as the firm’s total revenue minus all the opportunity costs (explicit and implicit) of producing the goods and services sold. When a firm is making economic losses (that is, when economic profits are negative), the business owners are failing to earn enough revenue to cover all the costs of production. Unless conditions change, the firm owners will eventually close down the business and exit the industry.

In 2018, McKinsey & Company published a bestselling book named “Strategy beyond the hockey stick” with the introduction of “hockey stick” and “power curve” concepts to illustrate the real economic profits of companies.

The “power curve” was the ranking from the lowest to highest average economic profits of the 2,393 largest non-financial firms by revenue over the period 2000 to 2004 and 2010 to 2014. The “hockey stick”, on the other hand, is a popular visualization of the business growth plan that most companies are using to earn approval from potential investors and shareholders.

“Every CEO presents their business plans with the hope that they’re actually going to move up that power curve,” said Martin Hirt, McKinsey senior partner at the Taipei office and one of the three authors of the book.
 

The “hockey stick” and “power curb”. Graphics by McKinsey & Company.

Based on McKinsey’s calculation methodology (as Vingroup was not in the scope of the study in 2000), for example, in 2014, the economic profit of Vingroup was approximately -350 million dollars*. If placed on the power curve, Vingroup would probably be on the left-handed side of the line.

But why did so many competitive firms stay in business if they made zero or negative economic profits like Vingroup? Every economics book would tell that in perfect competition, the economic profit is always zero, but the accounting profit is still positive, which could help firms compensate for the cost of production and pay dividends to investors. The real-life market competition is not that perfect, but would probably operate towards this equilibrium.

“Sixty percent of all these companies work really hard to essentially just keep pace with the market and just stay around the zero line,” Hirt said, adding that 80% of the world’s new capital would rather inject into the top 10% companies. “Economic profit is very unevenly distributed.”

He added that only eight percent of all the “middle” companies in the power curve managed to move up over a 10-year period, receiving a large amount of capital, while more than two-thirds stayed where they were in the middle, and the rest sank to the bottom.

The question is whether or not Vingroup is trying to move up the curve and beat the odds of losing behind?
Tác giả: Bùi Thị Thanh Mai