Among them, theVietnam dairy products joint-stock company Vinamilk, as a key player, makesits strong presence known by holding a dominant share of 75% of the country’sdairy market.In an
B ACKGROUND TO THE STUDY
Competitiveness is a hotly-debated topic among policy-makers and businessmen throughout the world Yet it is of vital significance when assessing a firm’s performance in today’s increasingly competitive market.
Vietnam's dairy market has experienced significant growth in recent years, presenting substantial opportunities for dairy processors Currently, the market is highly competitive, with Vinamilk dominating 75% of the market share This remarkable expansion is particularly noteworthy given Vietnam's lack of a traditional dairy production culture and the challenges posed by multinational dairy corporations Understanding the factors behind Vinamilk's competitiveness is essential for industry stakeholders.
As Vietnam approaches its milestone of becoming the 150th member of the World Trade Organization, domestic enterprises face intensified competition from foreign rivals entering the market This situation underscores the urgent need to enhance the competitiveness of local businesses, particularly in emerging sectors like dairy The Vietnam Dairy Products Joint-Stock Company, previously state-owned, is among those identified for assessment to strengthen their capabilities This study aims to address the pressing needs outlined by both the government and the industry.
O BJECTIVES OF THE STUDY
The primary goals of this thesis are to:
(i) grasp the whole picture of Vietnam’s dairy market
Vinamilk holds a dominant position in Vietnam's dairy market, driven by its extensive product range and strong brand recognition Key factors contributing to the company's efficiency include its advanced production technology, robust distribution network, and strategic partnerships with local farmers However, Vinamilk faces challenges such as increasing competition and the need for sustainable practices, which must be addressed to maintain its market leadership.
(iii) propose appropriate measures to enhance Vinamilk’s competitiveness in the domestic market, then to improve performance of Vietnam’s dairy sector.
R ESEARCH QUESTIONS
Through the thesis, the following questions are to be answered and discussed:
(i) What does the term “competitiveness of a firm” really mean? What are factors determining competitiveness of a firm?
(ii) How does the overall picture of Vietnam’s dairy market look like? How strong is Vinamilk’s position in the market?
(iii) What factors indicate competitiveness of Vinamilk?
(iv) What are some of measures that should be taken to enhance competitiveness of Vinamilk in Vietnam’s dairy market?
M ETHODOLOGY
The thesis is based on pertinent documents and economic reports from the Vietnam Dairy Products Joint-Stock Company, as well as insights from various ministries including the Ministry of Industry, Ministry of Planning and Investment, and Ministry of Agriculture and Rural Development Additionally, data gathered from communication networks provides supplementary insights Key sources include the Vinamilk branch in Hanoi, the Foreign Trade University library, the National Library, the Vietnam Development Information Center (World Bank), and several other resources.
This thesis examines the factors that influence a firm's competitiveness within its domestic market The final recommendations are derived from a comprehensive analysis of the entire study, highlighting the roles of both government and corporate participation in enhancing competitiveness.
S COPE AND FOCUS OF THE THESIS
This thesis specifically examines strategies to improve Vinamilk's competitiveness within the domestic market, thereby limiting the scope of the study While the analysis emphasizes Vinamilk's current situation, it recognizes that competing in the global market involves a broader range of factors The research provides only a general overview of the entire dairy sector and includes references to other players in Vietnam's dairy market solely for comparative purposes.
The thesis strongly emphasizes introducing necessary measures to improve the current situation of Vinamilk, increase the company’s real power,then strengthen its position in Vietnam’s dairy market.
S TRUCTURE OF THE THESIS
The thesis is structured into three main chapters, excluding the Introduction and Conclusion The first chapter defines key concepts of firm-level competitiveness and its primary indicators The second chapter focuses on an analysis of Vinamilk's competitive position within Vietnam's dairy market Lastly, the third chapter suggests practical strategies to enhance Vinamilk's competitive capabilities in the face of a growing market rivalry in Vietnam.
LITERATURE REVIEW
C ONCEPTS OF COMPETITION AND COMPETITIVENESS
1.1.1 Competition and the role of competition
In the historical context of capitalism, competition was characterized as the intense rivalry among capitalists vying for advantageous conditions in production and consumption to maximize profits This perspective highlights the negative aspects of competition, which is deeply rooted in a system of private poverty, where the goal is often to undermine others in order to thrive.
In modern society, competition in business is defined as the independent efforts of multiple parties to attract a third party by providing the best terms This competitive dynamic serves as a crucial driving force for economic enhancement, fostering the development of new markets and the introduction of innovative technologies Moreover, the exit of less competitive firms, despite associated costs, is beneficial for society as it facilitates necessary adjustments and transformations at the national level.
Competition is fundamental to a firm's success or failure, as it influences the effectiveness of its activities Factors such as innovation, a strong organizational culture, and effective implementation are all shaped by the competitive landscape, ultimately impacting overall performance.
In a market economy, the balance between supply and demand is crucial; when supply surpasses demand, competition among sellers drives prices down Companies leveraging advanced technology can maintain reasonable prices, gaining a competitive edge Conversely, when demand outstrips supply, scarcity leads to rising prices, prompting producers to invest in new facilities and enhance production capacity to capitalize on the situation This dynamic fosters increased competition in the market.
1 Karl marx, 1863 is likely to encourage stronger efforts of managers to improve efficiency and induce higher innovative activity, leading to higher multi factor productivity
In a competitive landscape, some enterprises thrive while others struggle to survive This competition compels businesses to exert maximum effort to secure their market presence To achieve this, they must implement various strategies that reflect their capabilities, ultimately defining the firm's competitiveness.
Competitiveness, derived from the Latin term "competer," refers to the involvement in business rivalry for market share and lacks a universally accepted definition It can be analyzed at three levels: country, industry, and firm, with some concepts being relevant at one level but not another This thesis emphasizes competitiveness at the firm level, highlighting that it is defined as the ability to provide goods and services in the desired location, form, and time, while offering prices that are equal to or better than those of competing suppliers.
(ii) “Competitiveness is a measure of whether a technology or product will survive and flourish commercially.” 4
A competitive firm delivers high-quality products and services while maintaining lower costs compared to both domestic and international rivals This competitiveness is directly linked to the firm's long-term profitability, enabling it to offer better compensation to employees and generate superior returns for its owners.
Competitiveness is crucial for a firm's survival in a competitive market, serving as the foundation of an effective market system To be competitive means to thrive in an environment where businesses strive to maintain their position against rivals.
3,4 Richard Hawkins and Jan Douwe Meindertsma, ICRA learning resources (www.icra-edu.org)
4 ahead of each other by reducing prices, by increasing the quality of their current products and services, and by creating new ones.
In strategic management, a company's competitiveness is defined by its ability to generate profits that exceed the industry average When a firm achieves a higher economic profit rate compared to its market rivals, it establishes a competitive advantage This concept underscores that the essence of competitive advantage lies in the pursuit of superior profit targets.
Competitiveness in a business context refers to the capacity to deliver products and services more effectively and efficiently than rivals It reflects a company's strengths and advantages, particularly in meeting customer demands, which ultimately leads to greater benefits compared to other firms.
Competitiveness is essential for any business to thrive in an increasingly active market A thorough analysis of a firm's competitiveness is vital for developing effective strategies and enabling informed investment decisions However, evaluating a firm's competitiveness is complex and can be approached through various criteria This study will focus on key factors that influence a firm's ability to compete effectively with its rivals.
F ACTORS DETERMINING COMPETITIVENESS OF A FIRM
A firm's competitive advantage in the domestic market can stem from various factors, including low production costs, significant market share, high innovation rates, and the ability to produce high-quality, differentiated products Key elements that will be explored in detail include profitability, product competitiveness, market share, advanced technology, human resources, and effective management.
Profitability is the ability of a business to generate profit, which is essential for its long-term survival It is assessed by comparing income, derived from business activities like selling crops and livestock, against expenses, which represent the costs incurred in those activities Notably, income does not include funds obtained through borrowing, as this is simply a cash transaction for operational needs Similarly, loan repayments are not classified as expenses but rather as cash transfers between the business and the lender.
Profitability is assessed through an income statement, which details the income and expenses of a business over a specific period, typically one year This traditional income statement evaluates the profitability of the business for the previous accounting period In contrast, a pro forma income statement forecasts the expected profitability for the upcoming accounting period Additionally, budgets can be utilized to project profitability for specific projects or segments within a business.
Measuring profitability is crucial for assessing a business's success, whether evaluating past performance or forecasting future gains A business that fails to achieve profitability risks its survival, while a highly profitable enterprise can significantly reward its owners with substantial returns on their investments.
Enhancing profitability is a crucial responsibility for business managers, who continuously seek strategies to optimize their operations To evaluate the potential effects of minor adjustments on profitability, managers can utilize tools such as pro forma income statements or Partial Budgets Partial budgeting specifically allows for the analysis of the financial impact of incremental changes before they are put into action.
Profitability ratios serve as essential decision-making tools for evaluating a business's financial health, derived from the income statement and benchmarked against industry standards Additionally, monitoring income statement trends over several years can help identify potential emerging issues within the company.
Profitability serves as a key indicator of a firm's competitiveness, as an unprofitable firm is inherently uncompetitive In a perfectly competitive market, a firm becomes uncompetitive when its average costs surpass the market price of its products This situation indicates that the opportunity cost of the resources being utilized exceeds the value generated by the goods and services produced, leading to misallocation of resources and a reduction in overall wealth.
Economists agree that a firm's pursuit of profit maximization, within the limits of its production capabilities, significantly influences its sales volume and overall competitiveness When profitable opportunities arise, companies tend to boost their production and sales Therefore, the presence of profits indicates a firm or industry's growing competitiveness, while losses signify a decline in that competitiveness.
Profitability is a crucial aspect of competitiveness, as it balances revenues and costs, with productivity serving as a key underlying factor Enhancing profitability and productivity directly contributes to improved competitiveness.
Capacity is a crucial metric in production management, reflecting the resources utilized in the manufacturing process It can be analyzed through two main measures: capacity usage, which compares actual output to designed capacity, and efficiency, which assesses actual output against effective capacity The disparity between these measures arises from planned and anticipated unused capacity, often due to scheduled batch setups, known productivity issues, and planned shutdowns Understanding these factors is essential for optimizing production efficiency and resource allocation.
Production capacity refers to the maximum sustainable output rate achievable with existing product specifications, worker effort, and available plant and equipment A high production capacity leads to rapid output increases, resulting in substantial value creation within processing facilities.
Design production capacity, peak design capacity, and design capacity are key metrics that quantify the volume of products or materials a facility can produce These capacities are influenced by various factors, including daily operating hours dictated by local regulations, the efficiency of processing equipment, and the availability of raw materials Understanding these limits is essential for optimizing production and ensuring operational efficiency.
The competitiveness of a product or service in both domestic and international markets is determined by the unique benefits it offers to customers Key factors influencing this competitiveness include cost efficiency, quality, speed of delivery, and innovation.
Cost competitiveness is essential for profitability, as it ensures that product prices remain attractive to consumers Offering desirable products at lower prices increases sales potential Effective management of raw materials, equipment, capital, manufacturing, marketing, delivery, and labor is crucial for achieving this balance While a competitive cost structure alone does not guarantee a firm's success, lacking it almost certainly leads to failure, especially in today's consumer-driven market.
8 www.pera.net/Tools/Glossary/Enterprise_Integration/Glossary_P.html easily compare prices offered by thousands of competitors, cutting costs reveals ability of a firm to compete.
Quality refers to the excellence of a product, encompassing factors such as attractiveness, reliability, and long-term dependability In recent years, the significance of quality has surged, becoming a crucial element in market competition, as customers now expect high-quality products and will not settle for less Quality is assessed through various metrics, including performance, additional features, reliability, durability, serviceability, and aesthetics, making it essential for businesses to meet these standards to succeed.
F ACTORS LINKAGES – V ALUE CHAIN ANALYSIS
Competitive advantage is derived from how firms organize and execute specific activities within their industry These activities are categorized into primary and support activities Primary activities encompass the production, marketing, delivery, and servicing of products, while support activities involve providing necessary inputs, technology, human resources, and infrastructure to enhance primary operations Each activity relies on a mix of purchased inputs, human resources, technology, and firm infrastructure like management and finance The significance of these activities in contributing to competitive advantage can vary significantly across different industries.
All business activities enhance buyer value, allowing firms to create meaningful offerings for their customers The true measure of this value is reflected in the price buyers are willing to pay for a product or service A firm achieves profitability when the value generated surpasses the total costs of its operations To secure a competitive edge, a company must deliver similar buyer value while optimizing its performance and efficiency.
In Chapter 2 of "Confronting the Competitiveness Challenge," the concept of competitiveness is explored through two primary approaches: cost efficiency and differentiation A business can achieve competitiveness by either executing activities more efficiently than its rivals, thereby reducing costs, or by performing activities in a unique manner that enhances buyer value, allowing for premium pricing.
Figure 1: Activities performed when a firm competes in a particular industry
Firms achieve competitive advantage by innovating their activities through new procedures, technologies, or inputs, creating an interdependent value chain This value chain consists of linked activities, where the performance of one can influence the cost or effectiveness of others, leading to essential trade-offs that must align with the firm's strategy For instance, investing in higher-quality product design and components can lower after-sale service costs Effective coordination of these linked activities minimizes transaction costs, enhances information flow for better control, and allows for the substitution of expensive operations with more cost-effective alternatives Additionally, optimizing the coordination of activities is crucial for reducing execution time, further solidifying a firm's competitive edge Therefore, meticulous management of these linkages serves as a vital source of competitive advantage.
To achieve a competitive advantage, it is essential to manage the value chain as an integrated system rather than as isolated components Significant enhancements in competitive positioning often stem from strategically reconfiguring the value chain through the relocation, reordering, regrouping, or elimination of specific activities.
Normally, competitiveness analysis addresses three basic questions:
1 Where firms are currently competitive, what can be done (by entrepreneurs, businesses, governments) to sustain this?
2 Where systems are not competitive, what can be done to make them competitive?
3 How do we identify and evaluate possible developments that might change competitiveness?
Positive response to these questions is likely to add value to firm’s commodity systems and fuel its power.
A firm's competitiveness is determined by its ability to deliver products and services as effectively and efficiently as its competitors Key factors to assess include profitability, production capacity, product competitiveness, market share, technology, human resources, and management skills Successfully integrating these elements can provide a significant competitive advantage in the marketplace.
The following chapter conducts a comprehensive analysis of the application of fundamental theories to assess the competitiveness of the Vietnam Dairy Products Joint Stock Company (Vinamilk) within the Vietnamese dairy market.
VINAMILK’S POSITION AND ITS
O VERALL PICTURE OF V IETNAM ’ S DAIRY MARKET
Vietnam's dairy market has experienced rapid growth, with an annual increase of 18-20% in recent years, reaching 13 trillion Vietnamese dong (approximately 817.6 million U.S dollars) in 2005 Projections indicate a continued growth rate of 5-10% for 2006, driven by rising domestic demand for dairy products and favorable government policies supporting the local dairy industry According to Euromonitor International, the dairy sector is among the fastest-growing segments within Vietnam's packaged food industry.
Vietnam's dairy production has primarily been small-scale, with households averaging 5-7 cows as of 2005, though some modern farms with over 100 cows have emerged in the peri-urban areas of Ho Chi Minh City Dairy farming provides stable profits and significant income for families The growth of this sector has fostered inter-provincial and inter-sectoral linkages for input supplies, adding value to low-cost agricultural by-products like hay and brewery grains Over the past six years, milk yield per dairy animal has increased by 35%, while the total number of dairy animals surged by 360% Currently, over 60% of dairy cattle are located in the South region, including Ho Chi Minh City, whereas the Hanoi area hosts only about 3.5% of the dairy herd.
Vietnam has annually consumed some 200 million liters of fresh milk sold in nearly 50 trademarks in recent years, and the figure increases by over
Vietnam's powdered milk market has experienced significant growth, expanding by 15-20 percent annually Currently, the country is home to approximately 20 producers and traders, boasting nearly 250 different trademarks Collectively, these companies generate annual revenues of around 200 million dollars.
Despite the rapid growth of the Vietnamese dairy industry, the country faces a low per capita milk production of approximately 1 kg per year In comparison to neighboring countries, Vietnam's average per capita dairy consumption, which includes fluid milk, butter, and cheese, is significantly lower at 1.8 kg This figure pales against regional averages such as 4.5 kg in China and 9.8 kg in Thailand, and is drastically lower than the EU-15's 105 kg, Australia's 120 kg, and the US's 113 kg per capita consumption Experts attribute this disparity to Vietnam's relatively short history in milk production and consumption.
0 20 40 60 80 100 m ill io n to ns o f m ilk
India Pakistan Bangladesh Thailand Vietnam
Vietnam's contribution to global milk production is minimal, accounting for only 0.01 percent, despite having a national herd of cattle and buffaloes that is nearly 75 percent of New Zealand's total and over 50 percent of Germany's Among key dairy regions in Asia, which include India, Pakistan, Bangladesh, Thailand, and Vietnam, the country remains at a slow pace in dairy development.
In 2005, Vietnam's milk production was only 0.9 million tons, significantly lower than India (87 million tons), Pakistan (27 million tons), Bangladesh (2.14 million tons), and Thailand (1.2 million tons), indicating the dairy sector's limited capacity However, this challenging situation has seen considerable improvement in recent years.
Vietnam's dairy market, though relatively young, has experienced rapid growth and is becoming increasingly competitive It is now comprised of various players, including foreign, domestic, and joint-venture companies.
2.1.2 Key players in the market
The leading milk processing companies in Vietnam include Vinamilk, Dutch Lady, and Nestle, which source milk from local backyard farms Other notable processors are Lothamilk, Nutifood, Hanoimilk, Tribeco, Vixumilk, Bifo, Babio, Purina, Elovi, and Lasuco, along with various smaller local factories Most of these companies are based in Ho Chi Minh City, with a few exceptions like Hanoimilk, Purina, and Elovi in the North, and Lasuco in Central Vietnam Collectively, these companies are estimated to purchase around 365 metric tons of milk daily.
Table 1 : Milk purchased by companies (2005)
Source: HCM city Department of Trade
The dairy industry is experiencing heightened competition due to the proliferation of processing plants and retailers, driven by increasing foreign direct investment (FDI) in dairy processing and retail sectors Key players like Vinamilk and Dutch Lady compete directly in processing, while Co-opmart, a domestic chain, faces off against the German multinational Metro in the retail space.
The majority of fresh milk produced is distributed to 82 collection points for Vinamilk and 53 for Dutch Lady (Foremost), while only about 8% is processed by smaller factories or producers themselves This distribution is clearly illustrated in the accompanying pie chart.
Figure 3: Milk purchased by companies
Vinamilk Dutch Lady Nestle' Others
Source: HCM city department of trade
Local milk producers in Vietnam, such as Moc Chau, Hanoimilk, and Nutifood, are striving to maintain their presence in the competitive domestic market, where Vinamilk remains a dominant player These companies have established a strong foothold, as their products resonate well with Vietnamese consumers who often favor locally-produced fresh milk over imported options due to cost considerations In fact, imported fresh milk from countries like Australia, New Zealand, Thailand, and Malaysia is priced 5,000-8,000 VND (30-50 U.S cents) higher than similar Vietnamese offerings, making local products more appealing.
Vietnam's growing market potential has attracted numerous foreign milk companies, including XO from Korea, Mead Johnson Nutritionals and Abbott from the US, Dumex from Denmark, and Formosa Milk As a result, foreign milk products dominate the shelves in local shops, with brands like XO, Mead Johnson, and Abbott outperforming Vietnamese competitors such as Vinamilk and Hanoi Milk This situation presents significant challenges for domestic dairy producers, who struggle against well-established foreign firms that leverage advanced technology and extensive research and development Additionally, the relatively short history and limited financial resources of Vietnamese milk companies further disadvantage them in their own market.
This year has seen a notable rise in competition from newly-established companies, with five new milk enterprises beginning operations since January and an additional five expected to launch by the end of 2006.
US High Technology Dairy Joint-stock Company's 'Milky US' is a new entrant in the local dairy market, boasting a network of over 30 distributors across central and southern provinces The company is set to expand further with plans to construct a large dairy factory in Long An Province.
Milk processors are actively enhancing their competitive edge, with Nutifood Milk Company recently completing a VND135 billion (US$71 million) processing factory in Binh Duong Province, capable of producing 17 million liters annually Dutch Lady Vietnam has also invested in upgrading production lines for its Yomost and Calcimex products Major industry players like Nestle, Vinamilk, and Abbott are launching initiatives to increase production and market share Notably, Abbott Vietnam employs over 5,000 scientists and experts dedicated to developing new milk formulas, having invested over US$2.5 billion in research and development in 2005.
D IAGNOSTIC OF V INAMILK ’ S SITUATION
2.2.1 Overview of the company history and development
Founded in 1976 as the Southern Coffee-Dairy Company, a subsidiary of the General Food Directorate, Vinamilk initially operated four factories: Thong Nhat Dairy, Truong Tho Dairy, Dielac Dairy, and Bien Hoa Coffee In 1982, the company was transferred to the Ministry of Food Industry and rebranded as Alliance Enterprise of Dairy-Coffee-Confectionery I By 1989, it streamlined its operations to three main factories: Thong Nhat Dairy, Truong Tho Dairy, and Dielac Dairy.
In March 1992, the Alliance Enterprise of Dairy-Coffee-Confectionery was officially renamed Vietnam Dairy Company (Vinamilk), operating under the Ministry of Light Industry and focusing on dairy processing To enhance its market presence in the North, Vinamilk established a new factory in Ha Noi in 1994, increasing its total number of subsidiary factories to four, including Thong Nhat, Truong Tho, Dielac, and Ha Noi Dairy Factories The establishment of the Binh Dinh Dairy Joint Venture in Quy Nhon in 1996 further expanded Vinamilk's reach in Central Vietnam By 2000, the company continued its growth by launching two additional facilities: the Can Tho Dairy Factory and a Logistics and Warehouse Enterprise.
In December 2003, Vinamilk transitioned to a Joint Stock Company, officially becoming the Vietnam Dairy Products Joint Stock Company The merger with Sai Gon Milk Joint Stock Company (Saigonmilk) in April 2004 increased Vinamilk's charter capital to VND 1,590 billion.
In June 2005, the Company acquired its partner's stake in Binh Dinh Dairy Company, subsequently merging it into Vinamilk On June 30, 2005, the Company celebrated the inauguration of the Nghe An Dairy Factory.
During 30 years of operation and development, Vinamilk has become a leading company in dairy products processing industry The company has received many honours and rewards such as: Title of Hero of Labour; Labour medal of first class, second class and third class; First ranked of “Top ten Vietnamese High-quality Goods” in successive years from 1995 to 2004 (voted by the readers of Saigon Marketing Magazine)…
Most of Vinamilk products are sold in the domestic market (70%) and the other 30% is exported to Middle East, Iraq, America, Australia, Eastern Europe, China, South Asia, Cambodia and Laos…
Vinamilk's development strategy aligns with industry policies, government initiatives, and global trends, focusing on enhancing the dairy cow and processing sectors This approach aims to reduce reliance on imported materials by utilizing local resources, while also promoting increased per capita dairy consumption and expanding export opportunities in international markets.
2.2.2 Business activities of the company
With the current charter capital of VND 1,590,000,000,000 (One thousand five hundreds and ninety billion VND), Vinamilk is engaging in a wide range activities including:
(i) producing and trading canned milk, milk powder, cereal, pastries, fresh milk, soya milk, soft drinks and other dairy products (major items).
(ii) trading food processing equipment, parts and accessories, materials, chemicals and raw materials,
(iii) real estate trading, lease brokerage; trading in warehouses and yards; products delivering and transporting by trucks,products handling,
(iv) producing, buying and selling alcohols, beers, beverages, processed foods, teas, coffee (roasted, ground, filtered and instant),
(v) producing, trading packs/bags; pack printing,
(vi) producing, buying and selling plastic products,
Diversification is essential for companies to mitigate risks associated with sudden market changes, as losses in one sector can be balanced by gains in others In today's unpredictable business environment, having multiple revenue streams enhances a company's competitive edge Engaging in various business activities not only stabilizes income but also boosts overall market energy and resilience.
Vinamilk prioritizes brand building to strengthen its market position, emphasizing professionalism across all departments, including marketing and distribution To enhance effectiveness, the company collaborates with consulting and PR firms, and invests in training for brand management roles through courses offered by Vietnam Marcom and private experts from Sweden and Singapore Their slogan, “Chất lượng Quốc tế, Chất lượng Vinamilk” (“International quality, Vinamilk’s quality”), has gained increasing recognition among consumers nationwide.
Vinamilk actively enhances its brand image through strategic marketing initiatives, including television advertising, participation in the Vietnamese High-quality Goods Trade Fair, and various public events The company serves as the main sponsor for an annual teenage football cup and supports popular television entertainment programs like HUGO and Match for Children Consequently, Vinamilk has established a strong market presence and is recognized as the most favored brand among consumers.
2.2.3 Analysis of the company’s competitiveness
Vinamilk's robust financial health underpins its strong market position, evidenced by consistent revenue growth rates in the domestic market and a gross profit margin exceeding 12% and 10% annually Additionally, the company has achieved a notable 30.9% increase in earnings per share, further highlighting its successful performance.
In 2005, the Company experienced significant growth compared to 2004, with a share price increase of over VND 8,900 following its equitisation The return on owners' equity rose by 2.5%, reaching 29.54%, while the return on assets improved by 4.2%, achieving 22%.
In 2005, earnings per share rose over 30.9% to VND 38,002, driven by a substantial revenue increase Domestic revenue grew by 31.7%, while export revenue surged by an impressive 156% compared to 2004.
Since 2001, domestic revenue has experienced consistent growth, averaging over 12% annually, with notable increases of 35% in 2005, 30% in 2004, and 16% in 2003 The surge in domestic revenue post-2004 can be attributed to effective marketing strategies targeting the domestic market and enhanced customer service approaches As a result of these improvements, domestic revenue soared by 32% in 2005 compared to 2004, 65% compared to 2003, 100% compared to VND 2,154 billion in 2002, and an impressive 225% compared to VND 1,840 billion in 2001.
In 2005, the company's earnings before income tax surged over 30% from the previous year, reaching VND603 billion, primarily driven by significant revenue growth in milk-related products Notable increases included condensed milk at 21.7%, fresh milk at 46.8%, yogurt at 45.07%, powder milk at 20.65%, and Yomilk and YaO products at 16.95% These figures underscore the company's robust financial health, ensuring its continued dominance in the market as of December 31, 2005.
Table 2: Financial indicators of Vinamilk’s business
(for the year ended 31 December 2005)
- Non-current assets/Total assets (%)
- Net profit before tax/ Revenue (%)
- Net profit after tax/Revenue (%)
3.2 Return on total average assets
- Net profit before tax/ Total average
- Net profit after tax/Total average assets (%)
- Net profit after tax/ Average owner’s equity (%)
- Net profit after tax/charter capital(%)
Source: Vietnam dairy products joint stock company, Report of the board of directors and financial statements for the year ended 31 December 2005.
Vinamilk's shares are highly attractive to both domestic and international investors due to their impressive profitability Since their debut on February 17, 2005, Vinamilk has been a driving force at the HCM City Securities Trading Centre, which now features 48 listed stocks and one investment fund.
Table 3: Stocks listed on Ho Chi Minh City Securities Trading Center
VSHPC Gemadept Kinhdo REE Sacom CII Bmplasco Sudico NorthKinh do
Beverages Commer bank Electric utility Transpt- Services Confectionery Appliances Wire&Capale Pro
SSC 620CCC Savimex Hoaan TayaVietn am
Bidg ProdCement Home furnishings Mining Services Material
Source: HSBC, Global Research, Vietnam equities
MEASURES TO ENHANCE COMPETITIVENESS OF
C RITICAL ISSUES RELATING V IETNAM ’ S DAIRY SECTOR DEVELOPMENT 49 1 The sector’s drawbacks
In recent years, Vietnam's milk processing industry has gained significant government attention, becoming a rapidly growing sector Despite this growth, local milk production continues to lag behind the rising domestic demand, leading to approximately 90% of milk and dairy products, primarily milk powder for reconstitution, being imported annually This concerning situation highlights the need for a thorough evaluation of the country's dairy industry.
To tell the truth, Vietnam's dairy industry is beset by many production and processing constraints, inefficiencies and a lack of basic infrastructure.
Dairy cattle production in Vietnam faces significant challenges due to a lack of suitable tropical breeds and insufficient land for housing facilities Historically, cattle have been raised primarily for draft power and meat, resulting in limited knowledge among farmers regarding effective dairy cattle management.
The dairy industry in Vietnam faces significant challenges, including limited access to technical equipment and animal health services, particularly for reproductive diseases and disorders in dairy cows As a result, milk productivity in Vietnam lags behind other regional countries Investing in dairy farming is a costly endeavor, with dairy cow prices ranging from 20 to 30 million VND, making it difficult for resource-poor smallholder farmers to secure sufficient credit to cover infrastructure and input costs High interest rates further exacerbate the issue, with 87% of dairy farmers citing lack of credit opportunities as their primary constraint, highlighting the need for improved financial support and resources in the sector.
Vietnam's domestic milk industry faces a paradox where it charges the highest retail prices globally, averaging US$0.82 per kilo, yet purchases fresh milk from local dairy farmers at some of the lowest rates worldwide In comparison, the retail price of milk in regions such as North America, China, Israel, and the EU is around US$0.80 per kilo, while Eastern Europe and South America see prices as low as US$0.40 per kilo Additionally, fresh dairy milk is significantly cheaper in Japan and South Korea, priced between $0.54 and $0.71 per kilo, and even lower at $0.28 per kilo in Thailand.
In Vietnam, the price of fresh milk is significantly lower than in China, with local companies generating substantial revenue However, this has led to a decline in the dairy cow population, as farmers are discouraged by low prices From 2005 to now, milk output has decreased sharply due to fewer dairy cattle, resulting in a serious shortage of fresh milk Currently, domestic production meets only about 20% of demand, while the market is flooded with products that often contain 40 to 70% powdered milk, misleading consumers This situation highlights the urgent need for government regulation and collaborative efforts from all stakeholders to address the challenges facing the Vietnamese dairy industry.
Despite various challenges, the dairy sector plays a crucial role in driving economic growth, with promising prospects for future development This is largely due to strong local demand for milk and dairy products, particularly in urban and industrial regions, alongside significant export opportunities to neighboring countries Furthermore, increasing support from the Vietnamese government is paving the way for advancements in the sector.
3.1.2 Policies influencing the current shape and future prospect of the dairy sector in Vietnam
The government strongly encourages investments and involvement aimed at enhancing the dairy sector, focusing on improving services and input delivery for dairy production, milk production, and dairy processing.
Efficient cattle raising is essential for establishing a strong dairy industry On October 26, 2001, new policies for dairy cattle production were introduced, along with a nationwide program aimed at advancing dairy development.
Between 2001 and 2010, Vietnam aimed to significantly boost its dairy industry, as outlined in Decree 167/2001/QD-Ttg by Deputy Prime Minister Nguyen Cong Tan The plan included increasing the number of dairy cows to 200,000 and achieving a milk production target of 350,000 tons by 2010, which would meet 40% of the country's milk demand Post-2010, annual milk production was projected to exceed 1 million metric tons Additionally, Vietnam sought to develop a new cattle breed that would enhance milk productivity and be well-suited to local environmental conditions, ultimately transforming the livestock structure to improve economic viability and the living standards of rural household farmers.
The Decree outlines designated dairy cow raising zones across Vietnam, categorized into three regions: the Northern provinces (including Ha Tay, Bac Ninh, Vinh Phuc, Phu Tho, Bac Giang, Thai Nguyen, Ninh Binh, Thanh Hoa, Nghe An, and Son La), the Central region (comprising Binh Dinh, Quang Nam, Quang Ngai, Khanh Hoa, and Phu Yen), and the Southern provinces (such as Binh Duong, Binh Phuoc, Dong Nai, Tay Ninh, Long An, Can Tho, and Ho Chi Minh City) The Tay Nguyen highlands, including Dac Lac, Lam Dong, Gia Lai, and Kon Tum, are also identified as suitable for dairy production expansion The Ministry of Agriculture and Rural Development (MARD) aims to convert 5,000 hectares of low-income agricultural land to pasture over the next decade, supporting farmers in transitioning from coffee, rubber, and other crops to dairy farming Following the implementation of Decision 167, the Dairy Cattle Production development plan for 2002-2010 was initiated, with many provinces creating their own plans to increase the dairy cattle population, reflecting the Vietnamese government's ambitious goals for milk production.
Figure 6: Total dairy cattle herd population and its production in Vietnam in 2001, 2005 and projections for the year 2010
Source: Vietnam Ministry of Agriculture and Rural Development
Decision No 22/2005/QD-BCN, issued by the Ministry of Industry on April 26, 2005, outlines a master plan for the development of Vietnam's milk industry through 2020 The primary objective is to enhance local milk production to achieve per capita consumption targets of 8 kg in 2005, 10 kg by 2010, and 20 kg by 2020 The plan anticipates that the highest growth rate in indigenous milk output will be for liquid milk, followed by yoghurts, powdered milk, ice creams, and finally condensed milk.
Table 7: Effective and planned production, consumption and export of dairy products (expressed in liquid milk equivalent) according to the MoI
Average consumption Lt per capita 5.9 8 10
Source: Vietnam Ministry of Industry
The dairy development program is set to significantly impact society by reducing reliance on imported dairy products and boosting domestic milk production This initiative aims to enhance livestock diversity and increase income for rural livestock producers, while also addressing unemployment in the agricultural sector by enabling farmers to diversify their livestock offerings By utilizing available land and labor in highland and mountainous regions for dairy cattle farming, the program promises to optimize resources effectively Additionally, the government has proposed an ambitious plan to increase the average height of the population by 6.35 cm over 25 years, with milk as a key component A pilot scheme, pending Prime Minister approval, seeks to provide free milk to 10,000 children aged 6 to 18 for two years, allowing for a comparative study on growth against children who do not consume milk These reforms hold the potential to transform the dairy sector and improve public health outcomes in the country.
The implementation of the dairy development plan involves a systematic approach, starting with the Provincial Department of Agriculture and Rural Development creating a dairy cattle development program for each province, which is then submitted to MARD for evaluation and approval MARD assesses and sanctions these provincial projects based on local capabilities The Vietnamese Government actively promotes the establishment of various dairy cooperatives and associations to bolster dairy production, thereby enhancing investment in the dairy sector and improving technical services related to cattle raising, milk production, and dairy processing.
Vietnam's dairy sector, though relatively young compared to other agricultural industries, has shown remarkable growth in recent years The rising standard of living and heightened health awareness have significantly boosted the demand for nutritional products With strong government support, the future of Vietnam's dairy industry appears particularly promising, despite some existing challenges.
3.1.3 Impacts of WTO integration on Vietnam’s dairy sector
In 2006, Vietnam's economy, especially the agricultural sector, will experience significant changes due to two key events: Vietnam's anticipated accession to the World Trade Organization by November and the full implementation of the ASEAN Free Trade Area (AFTA).
M AJOR OBSTACLES TO V INAMILK ’ S DEVELOPMENT
Vinamilk, the leading milk processor in Vietnam, operates under the Ministry of Industry, which limits its collaboration with the Ministry of Agriculture and Rural Development (MARD), despite Decision No 167 promoting inter-ministerial cooperation This separation creates inefficiencies, leading to duplicated efforts and conflicting policies within the dairy sector While Vinamilk focuses more on reconstituted milk products, MARD is primarily dedicated to enhancing indigenous fresh milk production, highlighting a disparity in their objectives that hampers overall dairy development.
Vinamilk's monopoly on indigenous pricing is seen by the BTC as a significant barrier to effective and transparent milk collection, fostering a growing informal sector of milk traders and hawkers These traders, who collect and sell milk to retailers, often lack reliability, posing challenges in a market for perishable goods Furthermore, Vinamilk faces intense competition from major players like Dutch Lady and Nestlé, which will intensify with Vietnam's impending entry into the World Trade Organization.
Clearly, obstacles to the progress of Vinamilk are enormous, not to mention difficulties facing the whole sector.
To strengthen its competitiveness in the home market, it is vital that the company formulates a comprehensive strategy to run its business both efficiently and effectively.
V INAMILK ’ S GUIDELINE FOR ITS LONG - TERM GROWTH
Vinamilk aims to expand its production scale and diversify its product offerings to become a leading food corporation in Vietnam To achieve this, the company plans to invest in new production lines and factories, aligning with domestic market trends and its international expansion strategy For 2006, Vinamilk targets a 50% increase in domestic revenue compared to 2005, contributing to an overall projected revenue growth of 24% Additionally, the company will re-enter traditional export markets, focusing on understanding and evaluating business opportunities to support future growth plans.
In 2006, the Company aimed to diversify its investment activities by exploring new areas, including the manufacturing and distribution of beverage products such as beer and instant coffee, as well as operating a medical clinic These initiatives commenced and are anticipated to be operational by 2007 Vinamilk is confident in its promising future, as its products match the quality of foreign brands while maintaining competitive pricing.
S OLUTIONS TO THE IMPROVEMENT OF V INAMILK
Vinamilk's operations must align with comprehensive guidelines from the dairy sector and government, as well as the company's strategic vision for the future Effective coordination between the macro-level sector and government and the micro-level company is crucial for the growth of Vietnam Dairy Products Joint Stock Company The proposed solutions are derived from key insights and trends identified in the study, along with various interconnected strategies and ideas.
3.4.1 On the part of the government
The overlap in responsibilities between the Ministry of Industry and the Ministry of Agriculture and Rural Development (MARD) hinders effective information sharing and collaboration among MARD's institutions, such as NIAH, IAS, and DARDs, and Vinamilk To address this issue, it is recommended that the government take action to streamline operations and enhance cooperation.
(i) Establish a National Dairy management board consisting of all relevant major stakeholders of the sector (policy makers, researchers ,universities, various relevant processors and feed companies, farmers’ representatives, international projects coordinators )
Establish a "local dairy board" in each priority dairy zone, bringing together key stakeholders such as provincial, district, and commune authorities, processors, and selected farmers This initiative should mirror the proposed pilot "Dairy Agency" model in Hung Yen and Thai Binh provinces, which has yet to be implemented.
The official network of service and input providers in Vietnam is complex and complicated by decentralization, as each province can adapt the system, leading to variations across regions This complexity is further exacerbated by the involvement of both formal and informal private stakeholders In the Vietnamese dairy sector, it is crucial for stakeholders to improve the efficiency of service and input provision Additionally, intermediaries like people's committees and project steering committees at the commune level should be eliminated to create a more streamlined system.
Figure 7: Flow of services/information/inputs in the dairy industry in
The absence of precise and ongoing data regarding animal production, reproduction, health, and management on private farms poses a significant challenge to effective performance monitoring To address this issue, it is crucial to implement a reliable long-term data recording system and prioritize comprehensive data monitoring in dairy regions.
In Vietnam, dairy products are primarily derived from reconstituted milk made from imported milk powder, whether skimmed or whole To import dairy products, companies must obtain an import license and are theoretically required to process local fresh milk alongside the reconstitution process, as outlined in Decision No 167 by the ministry.
To enhance the development of the dairy sector, it is essential for trade to annually evaluate the internal demand for milk and dairy products, identifying the gap between local production and demand Improving this mechanism will ensure the collection and commercialization of the entire national production prior to imports Additionally, disclosing official figures on yearly dairy product imports and their milk equivalent is crucial for dairy processors, such as Vinamilk, to accurately assess market demand, which is fundamental for informed business decisions.
3.4.1.2 Broadening financial and technological support
Vinamilk, like other dairy processors, is struggling with a limited supply of fresh milk due to inefficiencies in dairy cattle raising Despite significant investments in developing its own supply regions, the company faces ongoing challenges in milk production at a sector level Contributing factors include farmers' lack of capital and technical expertise, along with their dissatisfaction over low prices for fresh milk.
Dairy farming requires significant capital investment and technical expertise, often influenced by the household's existing wealth To improve access to credit for farmers, the government should subsidize investments in breeding materials and techniques, and establish "cow bank" initiatives in key provinces Additionally, credit facilities should be provided through projects similar to the former BTC/CTB initiative in Southern Vietnam, which created a revolving solidarity fund Furthermore, to mitigate the impact of losing a dairy cow, comprehensive insurance schemes must be developed to support affected farmers.
To support rural households and enhance dairy cattle production, the government should implement a tax strategy that includes a 50-70% rental discount for farmers and provide free land for a minimum of three years throughout the project's operational period, particularly in designated investment regions.
Vinamilk requires government support to enhance technology in dairy cattle raising and milk processing This assistance could include financial investment for advanced technology and technical services, such as training staff in dairy management and breeding, educating farmers on dairy practices and disease prevention, improving milk quality testing methods, ensuring the availability of milking equipment, and maintaining standards for milk collection cold tanks Additionally, government aid in constructing modern, large-scale warehouses for material storage would be greatly beneficial to the production process.
3.4.1.3 Performing sound management and training task
For the dairy sector and its processors to thrive, it is essential that government support is delivered in a structured and effective manner Without proper management, even generous assistance will fail to yield the desired results, hindering growth in the industry.
The government's managerial role is crucial in formulating coherent and applicable policies and regulations for the dairy sector To enhance the capacity for value-added products, it is essential to implement policies that encourage research and development in dairy processing, focusing on innovative technologies suitable for Vietnam Additionally, accelerating the equitization of state-owned enterprises (SOEs) in this sector can address capital shortages and promote flexibility, enabling diversification of products and improving investment and production efficiency Furthermore, the government should explore policies that attract foreign investment in dairy processing beyond just infrastructure development Comprehensive dairy development plans should be established with a long-term perspective of around 30 years to ensure the complete setup and consolidation of the industry.
To enhance hygiene and safety standards in the dairy processing sector, government investment is crucial for expanding the capacity and operations of state authorities responsible for testing and certifying dairy product quality Implementing official policies to regulate all aspects of milk quality is essential Additionally, it is important to encourage processing enterprises to innovate in product design and packaging while developing their trademarks Clear labeling of origins and trademarks on packaging is necessary for consumer trust and product recognition.
The Vietnamese government effectively protects its domestic dairy industry through tariffs and duty quotas on imported dairy products, although these measures may face challenges with WTO regulations To strengthen local enterprises, the government must develop alternative strategies that enhance the capabilities of dairy businesses Additionally, the lack of a dairy tradition in Vietnam leads to inadequate care and management of dairy cattle, necessitating government collaboration with dairy processors to provide training and support for cattle raisers This complex task involves ensuring regular vaccinations for cattle, producing necessary vaccines, and regulating veterinary and antibiotic products Furthermore, attention must be given to dairy feed production and the intricacies of crossbred cattle raising techniques to successfully implement training programs.
(i) Technical staff with existing knowledge in dairy (veterinarians,extensionists) should be utilized as trainers in the areas identified as “priority dairy zones”.