Conclusions on Strengths and Weaknesses of Rang Dong Plastic Company

with the expeditious development of scientific and technical areas such electronic, communication, biotechnology advance in the world, the plastics have also had outstanding technological progress

DEVELOPMENT STRATEGY FOR VIETNAM PLASTIC

INDUSTRY: A CASE STUDY OF RANGDONG PLASTIC COMPANY

by

Ly Thi Minh Chau

A research study submitted in partial fulfillment of the requirements for the degree of Master of Business Administration

Examination Committee: Dr Fredric William Swierczek (Chairman)

Dr Truong Quang

Dr Clemens Bechter

Previous Degree: Bachelor of Economics

HCMC University of Economics, Vietnam Bachelor of English

HCMC University of Education, Vietnam

Scholarship Donor: The Government of Switzerland

Asian Institute of Technology School of Management Bangkok, Thailand April 1999

I would like to express my deepest gratitude to my research advisor, Dr Fredric WilliamSwierczek for his intensive support, valuable suggestions, guidance and encouragementduring the course of my study

My sincere thanks are also due to Dr Truong Quang and Dr Clemens Bechter for theirvaluable time as the members of the examination committee Their constructivesuggestions were of great help in my completing this study

I would like to express my sincere gratitude to all of my teachers at SOM-AIT for theirteaching and guidance during my course

I sincerely thank Mr Uong Tien Thinh and Mr Le Dinh Tuc for providing me theopportunity to carry out the study and such valuable information I appreciate theassistance of managers and staff of Rang Dong Plastic Company who were helpful in thecollection of data

I would like to specially express my thanks to all of my friends for their support andencouragement

Finally, I heartily dedicate this study to my beloved parents and my husband, NguyenThanh Long who have always sacrificed to encourage and support me during my study atAIT

Rang Dong Plastic company is one of the most successful companies in terms of highmarket share It has produced plastic products of various kinds in which PVC films is thecore product of the company The PVC films product accounts for 70% of the marketshare However, in the competitive environment, Rang Dong Plastic company has facedvarious difficulties especially the lack of the vision in the long term The objective of thestudy will therefore design a development strategy for the company in the long term.Based on the examination and analysis of the external and internal environment, the studywill determine strengths, weaknesses, opportunities and threats (SWOT) Derived from theSWOT and based on the general process of strategy formulation, the study will develop themost appropriate development strategy for the company Finally some recommendationsare suggested for the company to be able to implement the proposed strategy

2.4 Structural Analysis of the Competitive Environment: 8

3.7 Summary of Opportunities and Threats for Rang Dong Plastic Company

32

4.7 Finance 494.8 Conclusions on Strengths and Weaknesses of Rang Dong Plastic

5.1 Foundations of Rang Dong Plastic Company’s Strategy 515.2 Strategic Options for Rang Dong Plastic Company 52

List of Figures

Figure 2.5 - The Porter Model Applied for the Vietnam Plastic Industry 12

Figure 3.2 - GDP Growth Rate in the Period of 1990-1998 18Figure 3.4 - Asean Thermoplastics Consumption by Type 21Figure 3.5 - The Competitors in the Field of Producing PVC Films 32Figure 4.1 - Rang Dong Plastic Company’s Organizational Chart 36

Figure 4.4 - Process of Producing Sheets for Roofing and PVC, PE Boards 41

Figure 4.6 - Current Product Structure of Rang Dong Plastic Company 44

Figure 4.10 - Distribution System of Rang Dong Plastic Company 48Figure 5.1 - Development Strategy Designed for Rang Dong Plastic Company 54

List of Tables

Table 2.2 – Product / Market / Distinctive Competence - Choice and Generic

Table 3.2 – 1997 Asean Per Capita Thermoplastics Consumption 21Table 3.3 – Plastic Product Structure Compared with Thailand and Malaysia 23Table 4.1 – Labor Force of Rang Dong Plastic Company 38Table 4.2 – Price List of PVC Films Products According to Methods of Payment 47Table 4.3 – Rate between Sales Revenues and Advertising Costs 48

Table 5.1 – Direction for Rang Dong Plastic Company’s Strategy Development 54

CHAPTER 1

1 INTRODUCTION

1.1 Background

In the past 20 years and in the following years, together with the expeditious development

of scientific and technical areas such electronic, communication, biotechnology advance inthe world, the plastics have also had outstanding technological progress As plasticproducts in these days are serving not only for family life activities but in all economicsectors, through the experience of developing countries it is proven that if the growthration of the national economy is 1%, the plastic industry will develop accordingly from2% to 3% In the next 10 years, according to a forecast of economic experts, our country'seconomy can grow stable at a rate of 7%-8% or more Therefore, the annual growth rate ofthe plastic industry will also be in the range of 20%-25% consequently The center of thedevelopment of the plastic industry as well as the center of the plastic industry is nowconcentrated in Ho Chi Minh City with productivity of over 70% output of the countrywith plastic products of various kind This situation leads to the benefits for consumers andthe profit reduction for producers In addition, the plastic products serve mainly forconsuming household utensils at the rate of about 65% of the total output Plastic productsfor other economic areas are not much, remarkably are the packaging products covering20% of the total output, plastic product or electric and electric industry and for otherproduction industries are very little The plastic industry of Vietnam is on the threshold of

a new and highly promising but also of the challenging era of development VietnamPlastics industry has gained such a high development However, due to the low start, theper capita of 2.8 kg is still not comparable with that of 100-200 kg per annum in otherdeveloped countries Not only the per capita is too low but product structure accounts forthe low level of Vietnam Plastic industry in comparison with other countries Moreover,most of the manufacturers are of small and medium size and the number of big-sizedmanufacturers are very few This situation results from the lack of the management at themacro level It is clear that the Vietnam Plastic Industry needs a development strategy inthe long run This problem will be illustrated more clearly through the case of Rang DongPlastic Company

Rang Dong Plastic Company has faced with various difficulties especially the lack of thevision and the limitation of information about foreign market and competitors for strategicmanagement in the long term

1.2 Problem statement

Based on the examination and analysis the external and internal environment, the studywill formulate the development strategy for the Rang Dong Plastic Company in the longterm

of strategy formulation.

To identify strengths and weaknesses as well as opportunities and threats that the RangDong Plastic Company has been faced with

To assess the current situation of the company to develop its competitive profile

To formulate the development strategy for the Rang Dong Plastic Company in the longterm

1.4 Scope and limitations of the study

The study is about the Rang Dong Plastic Company It aims at the formulation of thedevelopment strategy for the company in the long term

The depth of the study depends partly on the availability of the data of Vietnam's economicsituation and plastic industry in general, especially of Rang Dong Company It depends onthe cooperation from the company and the Vietnam Plastic Association (VINAPLAST) aswell

1.5 Methodology and framework of the study

The study begins with the literature review which concerns the strategic managementprocess, particularly the process of strategy formulation It refers to the concepts andprinciples of the Porter Model to analyze the competitive environment of the industry Datafor the study are collected from 2 main sources:

Primary data: Interviews with by persons of VINAPLAST and the Rang Dong PlasticCompany as well as other plastic companies

Secondary data: Annual reports and other relevant data about the Rang Dong PlasticCompany Relevant data about the plastic industry and the Vietnam economy will becollected from Ministry of Industry, VINAPLAST, the National Statistics Office, Ho ChiMinh City Statistics Office, Ho Chi Minh Department of Industry and Commerce, fromnewspapers, magazines and from Internet and media as well

The framework of the study can be illustrated by Figure 1.1

Figure 1.1 - Framework of the Study

PROBLEM

LITERATURE REVIEWSTRATEGY PROCESS

Scanninginternalenvironment

Evaluating currentperformanceresults

 Opportunities

 Threats

 Strengths

 Weaknesses

GENERATION, EVALUATION, AND SELECTION OF THE BEST STRATEGY

CONCLUSIONS AND RECOMMENDATIONS

1.6 Organization of the study

Chapter 1 presents an introduction including the rationale of the study, and statement, theobjectives, the scope and limitations as well as the methodology and framework of thestudy

Chapter 2 summarizes the literature review and contains the fundamental ideas on strategy,strategic management, strategy formulation process as well as the Porter Model foranalyzing industry

Chapter 3 provides and analysis of external factors to identify the company's strategicposition as well as strategic orientations and investment opportunities for the Vietnamplastic industry in the coming years Based on the Porter model for examining the plasticindustry environment, the opportunities and threats for the Rang Dong plastic company isfound out

Chapter 4 includes the current analysis of the Rang Dong Plastic Company in terms oforganizational structure, production, sales, marketing and finance The goal is to identifystrengths and weaknesses of the company to depict its current competitive situation

Chapter 5 presents the design of development strategy for the Rang Dong plastic company.Finally, Chapter 6 includes recommendations on the implementation of the proposedstrategy

CHAPTER 2

2 LITERATURE REVIEW

2.1 Strategic management perspective

The central objective of strategic management is to assess why some organizations succeedwhy others fail Three broad factors determine a company’s success: the industry where it

is based, the country (or countries) where it is located, and its own resources, capabilitiesand strategic It is illustrated in Figure 2.1:

Figure 2.2 - The Determinants of Company Performance

Source: Hill / Jones 1995

Before mentioning the strategic management process in greater detail, we need to define:

“What is strategy?”

2.2 Definition of strategy

Reflecting the military roots of strategy, The American Heritage Dictionary definesstrategy as “the science and art of military command as applied to the overall planning andconduct of large - scale combat operations” (Boston: Houghton – Mifflin, 1992) Theplanning theme remains an important component of most management definitions ofstrategy Chandler defined strategy as “the determination of the basic long-term goals andobjectives of an enterprise, and the adoption of courses of action and the allocation ofresources necessary for carrying out these goals” (Cambridge, Mass.: MIT Press, 1962).The main idea in Chandler’s definition is that strategy involves a rational planning process.The organization is depicted as choosing its goals, identifying the courses of action (orstrategies) that best enable it to fulfill its goals, and allocating resources accordingly.Quinn of has defined strategy as “the pattern or plan that integrates an organization’s majorgoals, policies, and action sequences into a cohesive whole (Hill / Jones 1995)

However, planning-based definitions of strategy have been strongly criticized A newapproach based on Henry Mintzberg’s definition of strategy as “a pattern in a stream ofdecisions or actions” the pattern being a product of whatever intended planned strategiesare actually realized and of any emergent (unplanned) strategies (Management Science, 24-1978)

Company resources, capabilities & strategies

National contextIndustry context

Company performance

2.3 The process of strategic management

The strategic management process can be broken down into five different components Thefive components are (1) selection of the corporate mission and major corporate goals; (2)analysis of the organization’s external competitive environment to identify opportunitiesand threats; (3) analysis of the organization’s internal operating environment to identify theorganization’s strengths and weaknesses; (4) the selection of strategies that build on theorganization’s strengths and correct its weaknesses in order to take advantage of externalopportunities and counter external threats; and (5) strategy implementation The task ofanalyzing the organization’s external and internal environment and then selecting anappropriate strategy is normally referred to as strategy formulation In contrast, strategyimplementation typically involves designing appropriate organizational structures andcontrol systems to put the organization’s chosen strategy into action

Based on the context of this study, the focus will be on the strategy formulation process.The first six steps commonly found in strategy formulation are a series of interrelatedactivities:

(1) Evaluation of:

 the corporation’s current performance results in terms of return on investment,profitability, etc, and

 the corporation’s current mission, objectives, strategies, and policies

(2) Evaluation and evaluation of the corporation’s strategic managers – board of directorsand top management

(3) Scanning of the external environment to locate strategic opportunities and threats.(4) Scanning of the internal corporate environment to determine strategic strengths andweaknesses

(5) Analysis of the strategic factors from step (3) and (4) to pinpoint problem areas, andreview and revise the corporate mission and objectives as necessary

(6) Generation, evaluation, and selection of the best alternative strategy appropriate to theanalysis (Source: Wheelen / Hunger, 1988)

The above strategy formulation process can be divided into sub-stages, as illustrated infigure 2.2:

The first is the situation analysis Beginning with an evaluation of current performance andending with the review and possible revision of mission and objectives

The second is the process of generation, evaluation, and selection of the best alternativestrategy

In order to build up an appropriate competitive strategy, it is necessary for the competitiveenvironment analysis - an industry structure analysis

Figure 2.2 - Strategy Formulation Process

(Source: Wheelen / Hunger, 1988)

Evaluate strategic managers

Analyze the competitive environmentEntry

BuyersSuppliersSubstitutesCompetitors

Analyze strategic factors

in light of current situation

Develop:

MissionObjectives

Scan internal environment

StrengthsWeaknesses

Scan external environment

OpportunitiesThreats

SITUATTION ANALYSIS

GENERATION, EVALUATION, AND SELECTION OF THE BEST STRATEGY

2.4 Structural analysis of the competitive environment:

To succeed a company must either fit its strategy to the industry environment in which itoperates, or be able to reshape the industry environment to its advantage through its chosenstrategy Companies typically fail when their strategy no longer fits the environment in whichthey operate, as illustrated in Figure 2.3

Figure 2.3 - Requirements for Competitive Success

A formal strategic industry analysis can be used to identify environmental opportunities andthreats Opportunities arise when environmental trends create the potential for a company toachieve a competitive advantage Threats arise when environmental trends endanger theintegrity and profitability of a company’s business

Porter’s framework, known as the five forces model helps managers in this analysis Thismodel focuses on five forces that shape competition within an industry: (1) the risk of newentry by potential competitors, (2) the degree of rivalry among established companies within

an industry, (3) the bargaining power of buyers, (4) the bargaining power of suppliers, and (5)the closeness of substitutes to an industry’s products, as shown in Figure 2.4 The task facingstrategic managers is to determine which of these forces are of greatest importance to theorganization and which can be influenced by the strategic decisions of management and torecognize opportunities and threats as they arise and to formulate appropriate strategicresponses as well

Porter argues that “competition in an industry is rooted in its underlying economics, andcompetitive forces exist that go well beyond the established combatants in a particularindustry” (Porter, 1980) He further suggests that to compete effectively a company shouldstrive to find a position where it is best able to defend itself against these competitive forces orcan influence them its favor The task of the strategist is therefore to determine which of theseforces are of greatest importance to the organization and which can be influenced by the

Competitive

success

requires

Reshape environment

by choice of strategy

Creates a new envonment where there is a fit between strategy and environment

Fit with environment

strategic decisions of management Each of these forces is now considered in greater detail.

Figure 2.4 - The five Forces Model Potential competitors

The strength of competitive force of potential rivals is largely a function of the height ofbarriers to entry The concept of barriers to entry implies that there are significant costs tojoining an industry The greater the costs that potential competitors must bear, the greater arethe barriers to entry High entry barriers keep potential competitors out of an industry evenwhen industry returns are high

Clearly, it is in the interests of existing firms to have as high entry barriers as possible Porterlists major barriers to entry which are:

Rivalry among Established Firms

Threat of substitute productsBargaining power

production All present, the Vietnam plastic industry is still characterized with low technologyand obsolete equipment and the majority of plastic products produced in Vietnam is householdplastic wares Breaking into the field of producing plastic products does not require muchcapital Entry barriers for the Vietnam plastic industry are low.

Rivalry among Established Companies

 The degree of rivalry is likely to be based on the following:

There are many producers in the Vietnam plastic industry at present Also there is theoversupply of many plastic products such as household plastic wares, PP bags, PET bottles,etc Consequently the competition between competitors in the plastic industry becomes moreand more aggressive

The Bargaining Power of Buyers

Buyers can be viewed as a competitive threat when they force down prices or when theydemand higher quality and better services (which increase operating costs) Whether buyersare able to make demands on a company depends on their power relative to that of thecompany According to Porter, buyers are most powerful in the following circumstances:Buyers are few in number and large and the supply industry is composed of many smallcompanies

Buyers purchase in large quantities

The supply industry depends on the buyers for a large percentage of its total orders

The buyers can switch orders between supply companies at a low cost, thereby playing offcompanies against each other to force down prices

It is economically feasible for the buyers to purchase the input from several companies atonce

Buyers have the potential for backward integration

Buyers have full information

As mentioned before, there are many small producers in the Vietnam plastic industry atpresent They compete strongly against each other In addition, the main product of theVietnam plastic industry is household plastic wares As a result, there is a variety of plasticproducts in the market and the customers have many options in choosing plastic products Thebuyers are therefore quite powerful

The Bargaining Power of Suppliers

Suppliers can be viewed as a threat when they are able to force up the price that a companymust pay for input or reduce the quality of goods supplied, thereby depressing the company’sprofitability As with buyers, the ability of suppliers to make demands on a company depends

on their power relative to that of the company According Porter, suppliers are most powerful

in the following circumstances:

The product that suppliers sell has few substitutes and is important to the company

The industry supplied is not an important customer

The suppliers’ product is an important component to the buyer’s business

The suppliers’ product is differentiated

Suppliers can integrate forward

At present, the Vietnam plastic industry depends completely on source of raw materials fromabroad It is therefore the supplier power is so strong

The Threat of Substitute Products

The existence of close substitute presents a strong competitive threat, limiting the price acompany can charge and thus its profitability

The plastic products now can be seen everywhere and used in various field It is clear to saythat the threat of substitutes is very low

In summary, the current structure of the Vietnam plastic industry can be depicted throughPorter model as in Figure 2.5

Figure 2.5 - The Porter model applied for the Vietnam plastic industry 2.5 Selecting development strategies

Companies have to select a strategy that is most appropriate for development Options aboutdevelopment strategies involve decisions about three elements that are shown in Figure 2.7

The generic strategy to be pursued, i.e the basis on which the organization will compete or

sustain excellence

The alternative directions in which the organization may choose to develop.

The alternative methods by which any direction of development might be achieved.

Whereas decisions on generic strategy, direction, and method are not independent of eachother, they do benefit from separate discussion For example, an organization pursuing costleadership may choose to achieve this whilst pursuing a strategy of market development.However, this still leaves a further choice as to whether entry to new markets is best achieved

by acquisition of companies already operating in those markets, through the company’s ownefforts or jointly with other organizations

2.5.1 Generic strategies

According to Porter, the competitive strategies will be designed based on the choice from the

POTENTIAL ENTRANTS

COMPETITIVE RIVALRYAGRESSIVE

SUBSTITUES

Threat of SubstitutesLow

Low

Threat of Entrants

three basic competitive approaches: cost leadership, differentiation, and focus (Porter, 1985).These strategies are shown in Table 2.1.

A cost leadership strategy, where “a firm sets out to become the low-cost producer in itsindustry… a low-cost producer must find and exploit all sources of cost advantage Low-costproducers typically sell a standard product and place considerable emphasis on reaping scale

or absolute cost advantage from all sources… If a firm can achieve and sustain overall costleadership, then it will be an above-average performer in its industry provided it can commandprices at or near the industry average” (Porter, 1985)

Figure 2.6: Development strategies

(Source: Johnson / Scholes, 1993)

A differentiation strategy, which Porter defines as seeking “to be unique in its industry alongsome dimensions that are widely valued by buyers… It is rewarded for its uniqueness with apremium price… A firm that can achieve and sustain differentiation will be an above –average performance in its industry if its price premium exceeds the extra costs incurred inbeing unique… The logic of the differentiation strategy requires that a firm choose attributes

in which to differentiate itself that are different from its rivals” (Porter, 1985)

These two generic ways can be combined with the market scope in which the firm tries toachieve competitive advantage This leads to the focus strategy, according to Porter, which isbased on “the choice of a narrow competitive scope within an industry The focuser selects asegment or group of segments in the industry and tailors its strategy to serving them to the

DEVELOPMENT STRATEGIES

ALTERNATIVE DIRECTION

WithdrawalConsolidationMarket pennetrationProduct developmentMarket developmentDiversification

ALTERNATIVE METHODS

Internal development Acquisition

Joint development / alliances

exclusion of others” (Porter, 1985) There are two variants here, “in cost focus a firm seeks acost advantage in its target segment, while in differentiation focus a firm seeks differentiation

in its target segment” (Porter, 1985)

Table 2.1 - Generic strategies

COMPETITIVE ADVANTAGE

Broad target Cost leadership Differentiation

Narrow target Cost focus Differentiation focus

(Source: Porter, 1985)

Each of the above generic strategies results from the company is making consistent choices onproduct, market, and distinctive competences – choices that reinforce each other Table 2.2summarizes the choice appropriate for each generic strategy

Table 2.2 - Product / Market / Distinctive competence - Choice and generic

High(principally byuniqueness)

Low to High(price or uniqueness)

Market segmentation Low

(mass market)

High(many marketingsegments)

Low(one or few segment)

Distinctive

competence

Manufacturing andmaterials management

DevelopmentSales and marketing

Any kind ofdistinctive

competence

(Source: Hill / Jones, 1995)

COMPETITIVE

SCOPE

2.5.2 Strategic development directions

Based on sets of “product/market” choice, there are different directions for companies’strategy development These directions are shown in Table 2.3

Table 2.3 - Alternative directions for development

Present

WithdrawalConsolidationMarket penetration

Product development

(Source: Ansoff, 1987)

MARKET

CHAPTER 3

3 EXTERNAL ENVIRONMENT ANALYSIS

This chapter presents an analysis about the macro environment in which Rang Dong Companyoperates as well as the industry environment to identify opportunities and threats for RangDong company

3.1 Macro-environment analysis

3.1.1 Political and legal factors

Political and legal factors have a major effect on the level of opportunities and threats in theenvironment (Hill/Jones 1995) After decades of war and political upheaval, the governmentand people of Vietnam have settled down to the important task of promoting

economic growth in the country To this end, the once diplomatically isolated socialist countryhas embarked on an ambitious “doi moi “ (economic renovation) policy Recognizing thatrapid economic development required foreign capital and technology, the Vietnamesegovernment opened its doors to overseas investors in 1987 Implementing the “ renovation andopen door policy”, Vietnam has expanded and consolidated its political and economicrelations with many countries in the world Along with this, the lifting up of US embargo in

1994 and Vietnam - a member of ASEAN in 1995 have improved the restoration anddevelopment the Vietnamese economy to be more favorable This also facilitates theVietnam’s international trade, encourages foreign and domestic investors as well as createschances and challenges for domestic businesses

The liberalization of Vietnam’s economy has provided numerous business opportunities forentrepreneurs and multinationals to expand their operations and seek new markets To supportthe economic liberalization and encourage the private sector, the Vietnamese government haspromulgated a series of economic laws such as Law on Foreign Investment, Company Law,Law on Private Business, etc Foreign and domestic investors must be aware that new lawsand decrees ear issued frequently by the Vietnamese government as part of comprehensiveprogram to introduce laws and regulations in a number of areas Existing laws and regulationsare also subject to amendment or review This has formed a quite favorable environment fordoing business

Investment in the plastic industry has been attractive to foreign and local businessmen due tothe following reasons: the market for various plastic products in Vietnam is booming rapidly,the profit margin in this industry is high, the break-even time is short, and designs of productare easily adapted In addition, the legal system is now much refined, procedures aresimplified and a development strategy for the Vietnam Plastic Industry to the year of 2005 hasbeen approved by the Ministry of Industry in the middle of 1995

It is readily seen that Vietnamese production and trading businesses have made considerablecontribution to the fast changes of the local plastic industry However, one can see a basic

shortcoming of this industry, namely the development without a master plan This situationhas led to ample investment in the production of plastic home appliances, and consequentlythe production capacity to this regard has outplaced the demand Facing such a situation, manycompanies has had to play tricky games toward the consumers by producing lower qualityproducts to cut down the production costs and to raise their competition Rang Dong Plasticcompany has also been faced with the similar situation Therefore, on the legal aspect, one ofthe problems for the Vietnam Plastic Industry now is issuing documents for standardizing andcontrolling the quality of plastic products As Mr Pham Gia Duoc, General Director ofVietnam Plastics Corporation and president of Vietnam Plastic Manufactures Association, said

at the Press Conference on Vietnam Plastics Industry Update & Vietnam Plastic Fair’96 “Standardization of the local plastic production is a major problem that we will have toovercome in order to increase our output and improve our products The Vietnam PlasticManufacturers Association will have to issue rules banning all production of plastic that do notmeet international standard’’

Despite rapid development, the local plastic industry is still weak in R & D field Severalcompanies are heavily dependent on the designs of other companies’ products, includingforeign ones In the meanwhile, the protection of industries’ patents has not been takenseriously on the part of the concerned state agency Preparations, therefore, must be madenow, if it is not to lag behind

3.1.2 Economic growth

The rate of growth in the economy also has a direct affect on the level of opportunities andthreats that companies face After 10 years of renovation, Vietnam has got out of itssocioeconomic crisis Vietnam’s economy has continually, rapidly and steadily grown Withthe annual growth rate of 8%-8.5%, as presented in Figure 3.1, GDP has increased from USD12.8 billion in 1990 to USD 24.6 billion in 1998 Especially, in 1996 despite great lossescaused by storms and floods, Vietnam’s GDP increased 9.34 over 1995 (see Figure 3.2) In

1998, GDP growth rate was only 6% compared to 9.5% in 1997 The slowing down of theeconomic growth may be resulted from some of the main reasons:

FDI in 1998 was only about USD 1,700 million lower than FDI in 1997 (USD 2.7 billion).Export remained unchanged In 1998 export was about USD 9.3 billion The competitiveness

of the goods was weak due to the quality of the goods and the devaluation of the currency.Import also decreased (37% increase in 1996, 1.1% in 1997, and unchange in 1998)

There was more unemployment There was over 8.5 million people unemployed (about 1.2million in the city and 7.3 million in the urban areas)

(Source: Ministry of Planning and Investment- Development Strategic Institute)

In spite of Asian crisis, GDP is expected to grow 5-6% up to the year of 2000 From the figure3.1, these figures prove that Vietnam’s economy is still on a pretty stable development.According to economic experts at the 7th Asia Plastics Forum in New Delhi (India) on 7thMarch, 1997, the Vietnamese economy is still expected to grow in the year ahead It is

believed that this expected high economic growth rate actually creates opportunities forindustries to develop, especially for the plastic industry.

Figure 3.1 GDP during the period of 1990-1998

( Source : Vietnamese Statistic Office )

Figure 3.2 GDP growth rate in the period of 1990-1998

( Source : Vietnamese Statistics Office )

GDP during the period of 1990-1998

1991 1992 1993 1994 1995 1996 1997 1998

Year

3.1.3 Inflation rate

Inflation can destabilize the economy, producing slower economic growth higher interest ratesand volatile currency movements ( Hill / Jones 1995) Inflation has gone down from high rate

of 68 % in the early 1990’s to 50% in 1996, a significant decline from 12.5% in 1995 and 4%

in 1998 This inflation is the lowest level since the introduction of the economic reform adecade ago In Vietnam, inflation which was lowered from 17.5% in 1992 to 5.2% in 1993 isstill at high degree It was 12% in 1994 and has increased a little in 1995, around 12.5% andthen decreased to 4% in 1998 This showed that though gaining high growth rate, actually theVietnamese economy has not been stable For fear of declining living standard for the vastmajority of the rural population leading to social instability, the government has made apriority to keep inflation under 10% annually, though this was achieved in an economy whichwas growing as fast as 9.5% a year and where the instruments to maintain inflation are limited.The key characteristic of inflation is that it makes the future less predictable In an inflationaryenvironment, it may be impossible to predict with any accuracy the real value of returns thatcan be earned from business Such uncertainty makes companies less willing to invest ( Hill /Jones, 1995) High inflation therefore is a threat to business in general, to Rang Dong plasticcompany in a particular, in their plans of investment Aiming to integrate into the developmenttrend of world and Vietnamese plastic industries, Rang Dong Plastic company has alreadybuilt up its investment plan of 15-20 million USD worth As a result, it needs significantcapital In the high inflationary environment, it will be difficult for the company to invest

3.1.4 Interest rates

The level of interest rates can determine the level of demand for a company’s products.Interest rates are important whenever consumers routinely borrow money to finance theirpurchase of these products (Hill / Jones, 1995) In addition, currency exchange rates define thevalue of different national currencies against each other Movement in currency exchangerates has a direct impact on the competitiveness of a company’s products in the globalmarketplace (Hill / Jones, 1995) In recent years interest rates are relatively stable In the early

of 1996, the Vietnamese Central Bank had issued the decision of decreasing interest rates Thecurrent rates are 1.2% per month for short-term loans, 0.95 per month for long-term loans and5.5-6.5%per year for loans in USD The decreased interest rates aim to bring more favorableenvironment for companies, especially companies operating in the plastic industry which oftenhave large loans from banks to run their businesses that often require large capital

3.2 Current situation and trend of investment of Plastic Industries in Asian nations.

The economic growth rates for the various ASEAN countries compared with the global,industrialized countries, Germany and Japan are displayed in Table 3.1

Forecasted economic growth for 1996 is most probably overstated, however the ASEAN rates

of growth are 2-5 times the rate of growth compared to the global average The cyclic nature

of economic growth is illustrated by the German bind Japanese data Most probably the 1996forecasts for ASEAN countries are overstated as there has been a slowdown reflecting thedownturn In the electronics industry worldwide Nevertheless, the growth in ASEAN isexpected to be maintained until the end of the millennium and beyond ASEAN is one of the

main engines of growth globally together with China.

Table 3.3 – The Economic Growth Rates (%)

7.59.24.410.18.78.82.62.72.20.5

7.69.34.88.98.692.12.62.10.5

7.88.55.588.39.342.42.41.92.5

7.785.77.589.52.62.62.52.5

Source: The Singaporean Country Report on the 7 th Asian Plastic Forum, 1997

Thermoplastics consumption in ASEAN by country is shown in Figure 3.3 Thailand is thelargest consumer followed, in rank order, by Indonesia (1.3MT), Malaysia (900KT),Philippines (365KT) and Singapore (350KT) Vietnam consumes-the least amount of plastics

in ASEAN Consumption of plastics by type is shown in Figure 3.4 As with the world pattern

Asean T hermoplastics Consumption by Country

Vietnam

20%

Indonesia 28%

Singapore 7%

Thailand 33%

The Philippines 8%

Figure 3.3: Asean Thermoplastics Consumption by Country

Source: The Singaporean Country Report on the 7 th Asian Plastic Forum, 1997

polyolefins dominate (61%) with PVC (19%) and styrenics (15%) in second and third placerespectively The amount of styrenic plastics used is slightly larger than the world average.

ASEAN Thermoplastics Consumption by Type

PE 35%

EPS 2%

PS 9%

PP 25%

PVC 19%

ABS/SAN

3%

Figure 3.4: Asean Thermoplastics Consumption by Type

Source: The Singaporean Country Report on the 7 th Asian Plastic Forum, 1997

There have been considerable investments in world-scale crackers and polyolefin plants inthe region In 1995 new facilities were completed in Indonesia and Malaysia which hasbrought the region into a net export to a surplus position of plastic resins During 1996 thesupply has exceeded demand making the region a net exporter for the first time

Table 3.2 gives the plastics consumption per capita for the ASEAN countries The dataindicates that there is still much growth potential for thermoplastics consumption in mostASEAN countries except for Singapore The latter is a mature market with per capitaconsumption comparable to the fully industrialized nations

Table 3.4 – 1997 Asean Per Capita Thermoplastics Consumption

Source: Country Report-Singapore (1997)-7 th Asia Plastics Forum

According to the country report, the Singapore Plastics industry, which for this dissertation is

defined as resins manufacturing, compounding and fabricating sectors, continued to expandduring 1997 Plans for the future of the resins manufacturing sector, which are currently beingimplemented, will ensure growth into the next century The compounding sector has alsoexpanded rapidly and this growth is also expected to continue.

In the country report on the Malaysian Plastics industry, after experiencing a strong growthaveraging 15-25% a year over the last 6 years, the plastics industry maintained a moderategrowth of about 10% in 1997 The moderation in the growth of the plastic industry is mainlyattributed to a slump in the electronics industry which has affected the demand for plastic partsand components Growth in the export sector has also slowed down due to keener competitionfrom other low cost emerging countries Plastic products especially household items andstationaries are flooding into the Malaysian market from the other lower cost Asean countriesnamely Indonesia, Thailand and Vietnam

The Malaysian plastics industry is expected to continue its sustainable growth in the next fewyears due to the rapid growth of the Malaysian economy, a pick-up in the electrical andelectronics sector, stronger US economy and higher demand from the custom injectionmoulding and automotive sub-sectors within the country The industry is expected totransform from a consumer-based and export oriented industry, characterized by high usage ofengineering thermoplastics, use of high technology and sophisticated machines and highskilled manpower

Growth rate (compounded average annual) until the end of millennium for the plasticsindustry globally are expected to be in the range 4-6% per annum whilst in ASEAN thegrowth rates are expected to be 12-15% per annum

3.3 Current situation of Vietnam plastic industry

Vietnam plastics industry has not yet had the capability to manufacture plastics materials,equipment and machinery as this is still a processing industry thus all are mainly imported Inorder to encourage the fast development of the plastics industry the Government applied afavorable tax incentive for the import of plastics materials, equipment and machinery

The year of 1959 was a milestone for Vietnam plastics industry with the founding of the firstplastics plant, the THIEU NIEN TIEN PHONG plastics company and was continuouslydeveloped up till 1975 The output then reached about 50,000 tonnes per annum with a percapita of 0.4 kg

Following was a lasting recession, the plastics industry started to develop again in 1988.However, till the end of 1989, the capacity reached the same level as of 1975 and then it began

to be a booming sector in line with the highly developed plastics industry in many countries.Since 1990, with the "Doi Moi" policy, Vietnam plastics industry has developed strongly with

an annual growth of 25% -30% In 1994, the capacity reached 200,000 tonnes with a percapita of 2.8 kg In 1995, based on the uncompleted statistic, Vietnam plastics industryachieved around 250,000 tonnes (3.3kg per capita)

Although Vietnam plastics industry has gained such a high development, however, due to our

low start, the per capita of 2.8 kg is still not comparable with that of 100 -200 kg per annum inother developed countries such as US, Japan, German, and in developing countries likeTaiwan - 70kg, South Korea - 36 kg, Malaysia - 28 kg, Thailand - 16 kg and Indonesia - 8 kg.Not only the per capita is too low but product structure speaks of the low level of Vietnamplastics industry in comparison with other countries The major quantity of plastics products isthe household and consumer product (about 65%), the high technology plastics productsserving other industries such as electrical , electronics and vehicular industries are not many.Append is the comparison with Thailand and Malaysia:

Table 3.3 – Plastic product structure compared with Thailand and Malaysia

Source: Vietnam country’s report at the 7 th Asia Plastics Forum in New Delhi (India) on 7 th

March, 1997

At present, the distribution of plastics production in Vietnam is not equally located with 80%

in Ho Chi Minh City, 15% in the northern provinces and 5% in the central region Most ofthese manufacturers are of small and medium size and the number of big-sized manufacturersare very few

In summary, the features of Vietnam’s plastic industry can be listed as follows :

1 Vietnam has not been able to manufacture plastics materials, equipment and machinery for plastic industry.

Up to now, Vietnam still have to rely 100% on the import of materials, chemicals, plasticprocessing machinery and equipment which are tax exempted For plastic products which are

on sub contract and manufactured for export are granted tax exemption

2 Vietnam’s plastic industry is nearly concentrated in one geographical area.

The center of the development of the plastic industry as well as the center of the plasticindustry is now concentrated in Ho Chi Minh City with productivity of 80% output of thecountry with plastic products with various kinds and the appliance of new technology, whilstthe North 15% and the Central 5% It is necessary to adjust this ratio by policies of orientationand investment incentive so that by 2005, the South will obtain 60% of the total output, theNorth 30% and the Central 10%

3 Vietnam’s plastic processing machinery is obsolete.

Vietnam has now only concentrated on processing goods with 20-year-old to 30-year-oldtechnological processes like extension, injection and calendering Consequently, it is difficultfor Vietnamese plastic products to be exported and compete with foreign products

4 Most of plastics manufacturers are of small and medium size.

Vietnam’s plastic industry is characterized by small and medium-scale production Thereforethe capacity to invest and develop in large scale to high quality products is very limited Theplastics products serve mainly for consuming household utensils at the rate of 65% of the totaloutput Plastics products for other economic areas are not much, remarkably are the packagingproducts covering 20% of the total output, building materials about 8% , plastic products forelectric and electronic industry and for other production industries are very little

From the analysis above, the strengths and weaknesses of the Vietnam plastic industry can befound as follows:

of the country, thereby creating opportunities and challenges to plastics industry to caterthe energy and communication sectors

 The investment environment for the plastic industry is now more favorable and attractive

to both domestic and foreign investors Legal system is now much refined, procedures aresimplified, the level of knowledge of the management organizations and officers in charge

of investment are now improved

 Vietnam plastic industry has developed at high growth rate It promises a bright prospect

in the future

 Vietnam has potential of labor and market for the development of its plastic industry

 Equipment and machinery of Vietnam plastic industry are still outdated

 Mould technology has not been invested considerably

 The industry of producing raw materials for the plastic industry is still at its beginningstage Up to now Vietnam has to rely 100% on the import of raw materials, chemicals,plastic processing machinery

Through the above, it could be seen that Vietnam with a population of more than 70 million, is

a new emerging and potential market However, we can not develop this potentiality unless weorientated its development and with proper investments

3.4 Development of Vietnam plastics industry of 2005

In the next 10 years, according to the predication of economic specialists, Vietnam economycan grow stably at a rate of 7 - 8% per annum or more The plastics industry will developaccordingly at 20 - 25% per annum If the growth rate is at 25% per annum by the year 2005,the plastics output of our country will reach 1.5 million tonnes or 6 folds from it's current ratewith a per capita output of 16kg (equivalent to that of Thailand in 1993)

This annual growth is quite modest in comparison with that of South East Asian region, Inorder to cope with this growth rate from now up to the year 2005, the industry have toencounter plenty of challenges due to the near saturation of household plastics productssupply, higher quality products demand and with very competitive market competition

In order to sustain its development, the plastics industry have to improve with investment inmanufacturing plastic products for construction, packaging and other industries In addition, atthis stage, besides investment in increasing quantity of plastic products, we must developmanufacturing plastics materials, semi-finished products, moulds and dies, plastics equipment

At the Vietnam Plastic Fair’96 in Ho Chi Minh city (Vietnam) as Mr Huynh Phuc Anh– VicePresident of Vietnam Plastic Manufacturers Association-to enhance the development ofplastics industry, Vietnam Plastics Manufacturers Association together with Vinaplast andother organizations have a strategic plan worked out to sprout Vietnam plastics industry to theyear 2005, which has been approved by the former Ministry of Light Industry, now known asMinistry of Industry The orientations of strategy is:

 To increase the ratio of high quality and hi-tech plastics products to replace importedproducts thus to fulfill the function of being a satellite industry to strongly support otherindustries such as packaging of variety and high quality, meeting the developing demand

of other industries like diverse and high quality packaging, high quality plasticsconstruction materials, plastics technical components for assembly of electronic andelectric products, automobiles, motorcycles, high-tech equipment, etc which will give rise

to structural change in product lines

The structure of plastic products for the year 2005 is expected as follows:

in manufacturing products with higher technology content requires primarily much moreinvestment capital than what the industry can afford at present as well In addition, in thecurrent phase, not only the Vietnam plastic industry has to make further investment to increasethe output of plastic products, but it should invest in developing the production of plasticmaterials, plastic semi-products as well as in making mould and equipment for the industry inorder to meet the general target.

Apart from this, the center of the development of the plastic industry as well as the plasticindustry is now concentrated in Ho Chi Minh city with the productivity of over 70% output ofthe country with plastic products of various kind and the appliance with new technology Inaddition, one of the features of Vietnam Plastic industry can be concentrating in onegeographical area As a result, the structure of plastic output of the whole country after theyear of 2000 is projected as above due to the important position of Ho Chi Minh city in thecountry’s economy It can be said that Vietnam’s plastic output is processed almost entirely in

Ho Chi Minh city Most plastic establishment of the central government as well as privateconcern are based in Ho Chi Minh city The producers in Ho Chi Minh city has easy to access

to raw materials, skill labor and moulds as well as new technology from abroad Ho Chi Minhcity is also potential market for plastic products

 To improve the quality of plastics products to meet the demand of high quality consumerproducts of the country, then to increase the quantity and expand varieties of exportplastics products in order to absorb the abundant supply of local labor and to earn moreforeign currency for reinvestment In this matter, we should learn the experiences ofASEAN countries Our target is that by the year of 2005, earnings from the export of