Culture Clash
P&G joint venture takes a bath in Vietnam
I magine mould in your shampoo. Or a feather. These mishaps--known as "quality incidents" in
corporatespeak--are a nightmare for consumer-products companies. If an entire batch
of shampoo becomes contaminated by bacteria, it could mean disaster for a brand name and the
waste of millions of dollars spent to develop it.
No wonder, then, that American multinational Procter & Gamble tore down the new warehouses that its Vietnamese partner, Phuong Dong Soap & Detergent, contributed to their soap-products venture when it was formed in 1994. "They weren't the right size and not properly sealed; dirt and birds would get in," says Alan Hed, managing director of Procter & Gamble Vietnam. "You don't want feathers in your shampoo."
Writing off the buildings and erecting new,airtight ones with epoxy floors to guard against
bacteria meant unexpected costs for the joint venture. But the demolition wasn't the only
thing that may have unsettled the Vietnamese partner, a local soap company with links to the
Ministry of Industry's Vietnam National Chemical Corp., or Vinachem. Spending on advertising, promotions and expatriate employees exceeded the estimates of a feasibility study, and the venture, which sells mostly to the Vietnamese market, failed to make money within the three years the partners had predicted.
Now, with the joint venture $28 million in the hole, P&G wants to increase capital by nearly
two-thirds, to $96 million, to dig itself out and wait for more sales to materialize. But for that to happen, Vinachem would have to come up with $18 million to maintain its existing 30% share, and it is uncertain whether the state firm wants to--or even if it could. P&G previously helped Phuong Dong raise financing, but Hed says it won't do so again. Neither Vinachem nor its subsidiary agreed to interviews.
The dilemma appears to be shaping up into a classic joint-venture clash: The foreign partner
has the deep pockets to spend its way through years of start-up losses, but the local side
wants to see a return sooner. It's a common tale in Vietnam, where many multinationals plunged
into joint ventures in recent years, encouraged by enticing predictions of booming demand. When the expected sales didn't materialize, problems with local partners ensued.
Now, many multinationals are questioning the whole joint-venture model of doing business.
Although foreign investment is slowing, the number of fully foreign-owned ventures in the
country is on the rise as multinationals learn they can navigate the system on their own, says
Nguyen Bich Dat, head of the foreign-investment department at the Ministry of Planning and
Investment. The authorities may also be loosening up on approvals. Dat says Vietnam now
has 581 ventures that are 100% foreign-owned,with investment totalling $4.7 billion. That's
28% of the total number of foreign projects and 16% of the pledged U.S.-dollar amount of foreign direct investment.
P&G has proposed that if Phuong Dong can't provide more capital, it should allow P&G to buy
out its 30% stake--or, conversely, should let P&G get out. Vinachem, however, has said publicly that it doesn't want the venture to become 100% foreign-owned. Hed told the Ministry
of Planning and Investment by letter that the venture may be forced to file for bankruptcy if
the sides can't agree on the capital increase. P&G's deadline is July, after which it claims it
will liquidate the venture.
Some industry observers suspect it is trying to dump its partner so it won't have to share the
revenues if and when profits begin to roll in. Hed denies it. "There's nothing wrong with the
JV," he says. "The issue is capital. We need to bring in more money and we need a fair and
equitable structure that allows us to do that."
At issue, basically, is how to run a start-up business. P&G, with more than 100 years of
experience, operations in 70 countries and $3.4 billion in net income in the year to June 30,
believes it knows best. But Vietnamese authorities and business people repeatedly explain to foreigners that Vietnam is different--that models that work elsewhere may not be appropriate here.
The project's Vietnamese partners question why spending has gone far beyond what was estimated in P&G's feasibility study. The American firm replies that a feasibility study is just that--a best guess--and that business circumstances often will cause a firm to stray from its plans.
The problem is that Vietnamese law is ambiguous as to whether a company must strictly honour the terms of such a study, according to lawyers uninvolved in the project. "Traditionally,
companies are not held to specifics," says a foreign attorney in Ho Chi Minh City. "But major
items, like capital amounts and staffing, shouldn't vary significantly without informing the Ministry of Planning and Investment."
In the case of the soap venture, there were numerous areas in which reality diverged far
from expectations. P&G originally said it intended to have five expatriates on staff, but as the project progressed, it ended up employing 5-20. One executive outside the company estimates the cost for each person at about $250,000, including benefits like education and home leave. Multiply that by 15 people over three years and that comes out to more than $11 million, or 39% of the venture's losses. (Hed declined to comment on expat salaries.)
The joint venture had also spent more than $7 million on advertising by September this year,
research group Nielsen SRG Vietnam estimates. The early study called for it to spend 5% of its
sales on ads, but the amount is actually 31% due to lower-than-expected sales. Neither side will
comment on how far sales have fallen below projections.
Local press reports have accused the venture of spending lavishly on consulting work ($1
million) and conferences and travel ($1.2 million). And Hed describes other areas where
understanding is lacking: Machines with a book value of $50,000, he says, have actually ended
up costing $200,000 because of the training and maintenance required to keep them running.
But perhaps the biggest question surrounding P&G's Vietnam venture is how a company with so much experience in emerging markets could have been so wrong about the prospects. P&G based its original sales estimates on the assumption that Vietnam's per-capita consumption of shampoo and soap products would be similar to that in the rest of the region. It's not. Vietnamese consumption of laundry detergent, for example,is just 20% of that in the Philippines.
Hed says P&G should have taken more time to understand the Vietnamese market and its
potential size, but it was blocked by the difficulty of obtaining solid information on the country when it set up the venture in 1994. "We probably would've had a more realistic feasibility study from the beginning, which would make our jobs a lot easier now," he says.
Of course, P&G clearly isn't the only company to have misread Vietnam. Says a market researcher: "People looked at all the motorcycles and thought if it happens so fast, people must have the money for a premium product."
By Faith Keenan in Ho Chi Minh City (Far Eastern Economic Review)
December 18, 1997
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