New opportunities for Vietnam's coffee industry

Vietnam's coffee industry, particularly in the Central Highlands, has a great competitive advantage amongst global competitors

The Vietnamese coffee industry has a great competitive advantage and holds high potential for industry development and investment. BIDV Training and Research Institute evaluates investment opportunities in this high-potential industry.

growing area in Vietnam during this period also increased from 470,000 hectares in 2000 to nearly 550,000 hectares in 2010. Since 2010 when the world coffee price decreased, the coffee growing area in Vietnam, although there was a period of slowdown, saw continued expansion overall. By the end of 2018, Vietnam’s coffee cultivation area was at 688 hectares, of which the harvest area was 650 thousand hectares.

position

In the past 20 years, both the cultivated land area and the production of coffee grown in Vietnam have developed strongly, especially in the period 2000 - 2010 when the world price of coffee was in a cycle of price increases. During this period, world coffee prices increased about six times from US D0.45/pound in 2001 to US D3/pound in 2010. The coffee On the world coffee map, Vietnam currently ranks sixth by cultivation area and second by coffee production (behind Brazil) and ranks first by Robusta coffee production. In the 2017/2018 season, Vietnam's coffee accounted for 18.6 percent of production output and 19.8 percent of global export volume. It can be said that Vietnam has become a leading country in growing and producing coffee beans. Bestowed with favourable climate conditions for growing coffee plants and low-cost labour and production, Vietnam's coffee industry, particularly in the Central Highlands, has a great competitive advantage amongst global competitors. Vietnam is currently a leading country among the main producing countries, reaching about 2.55 tons per hectare.

The industry’s impressive results are attributed to many factors including the favourable natural conditions, the industry benefits from the experience of growers and producers and technical improvements in plant varieties, cultivation and the care process by coffee growers.

Challenges

Though successful in affirming the leading position in production and export, the country’s coffee industry is still facing many difficulties and challenges.

Currently, the proportion of coffee trees aged 15-20 years in the Central Highlands region is quite high. The productivity of these aging trees will gradually reduce and they will need to be replanted. To address this issue, in 2014 the Ministry of Agriculture and Rural Development issued a scheme to replant coffee trees in the Central Highlands, setting a goal toward 2020 to replant about 120,000 hectares. The replanting area is relatively high and is expected to achieve the set target.

However, in many regions replanting results are not as expected due to ineffective processes being in place that have resulted in pests and diseases in the new trees. In addition,

the intensive cultivation of coffee on a large and centralised scale has led to a decline in soil quality and nutrient imbalance, causing crop diseases such as root rot, yellow leaves, dry branches, and fruit drop. This is likely to affect coffee productivity in the coming time. Meanwhile, growing coffee trees is not of high economic efficiency due to the impact of prolonged price reduction cycle in the world coffee market. In some places, farmers are not interested in maintaining coffee gardens, instead replacing the trees with others with higher economic efficiency.

Another factor that affects the overall efficiency of the coffee industry is the limited ability to process highvalue products. Currently, Vietnamese coffee is mainly processed and then exported in the form of coffee beans. The rate of deeply processed products of commercial value is limited and although there have been improvements in recent years, the rate of deeply processed coffee products is still low, accounting for only about 0.1 percent of total export turnover.

for Vietnamese

Although facing many challenges, the development potential of the coffee industry is very open. However, as a country leading in coffee production, Vietnam is still lacking and weak in the processing stage in terms of creating branded products.

According to the Vietnam Coffee Cocoa Association (VICOFA), there are more than 150 coffee export enterprises and about 3,000 coffee agencies, of which about one-third of the enterprises have export coffee processing plants. However, there are only 19 instant coffee processing plants with a total design capacity of nearly 180,000 tons per year. Although the number of enterprises in Vietnam’s coffee business sector is very large, there are only a few big names and brands such as Trung Nguyen Group, Nestle Vietnam Co., Ltd., and Vietnam Ngon Coffee Co., Ltd. Therefore, there is great opportunity for new businesses to invest in Vietnam's coffee industry.

Trading coffee in the domestic market also draws attraction from many businesses both at home and abroad. According to data from the International Coffee Organisation (ICO), the market for coffee consumption in Vietnam has experienced a rapid growth rate (tripling in the last 10 years). This is the highest growth among coffee exporting countries. Domestic coffee consumption is expected to continue to increase as Vietnam is a developing

country, with per capita income and population increasing rapidly. New trends and diversifying customer tastes, especially among young people, present the possibility of developing new coffee products.

In recent years, the market has witnessed the strong development of traditional coffee store chains, existing Vietnamese coffee brands such as Trung Nguyen and Highlands Coffee, along with the market entry of international coffee brands such as Coffee Bean and Starbucks. The boom of these coffee chains reflects the potential of the domestic market.

With the industry’s current position and potential, Vietnam's coffee industry is forecast to have further development and reach new heights, contributing to promoting the country's image in the international market.

M&A market: 10 year review

After a decade of strong growth, Vietnam’s mergers and acquisitions (M&A) market grew dramatically and is predicted to enter a new era with various opportunities. However, currently many challenges remain.

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In the last ten years, M&A activities across the country have grown greatly both in quantity and deal value, becoming an important source of funds for local companies and diversifying capital inflows into the economy. M&A is also pushing the restructuring process of Vietnam’s growing economy, which includes the equitisation of state-owned enterprises and boosting standards of corporate governance and the competitiveness of Vietnamese companies.

According to Mr. Vu Dai Thang, Deputy Minister of Planning and Investment of Vietnam, in 2009, total M&A value reached US D1.1 billion. However, in 2018, it soared to US D10.2 billion, pulling the total value in the last ten years to US D55 billion.

The number of deals also increased rapidly across all businesses, from private to foreign and state-owned enterprises. The deals attracted the participation of not only domestic and foreign professional financial investors but also production and technology enterprises.

The most bustling sectors in the period 2018-2019 include consumer goods manufacturing, real estate,

logistics, e-commerce and retail, all of which are taking advantage of the country's huge market of more than 96 million people.

Vietnam’s M&A market has seen a great deal of socio-political developments, including the revised laws on investment and enterprises, as well as

the Securities Law and other legal documents such as a strategy to attract new-generation foreign investment inflows, as well as new free trade agreements such as the CPTPP, EVFTA , and EVIPA. It is hoped that these developments will usher in new opportunities to help Vietnam attract more foreign investment capital, including through the M&A channel.

Trends

Total M&A value in Vietnam in the first seven months of this year reached nearly US D5.43 billion. Experts posit that the value could reach US D7.6 billion by the year-end, while leaving open the possibility of a higher value if big deals like KEB Hana Bank appear. BIDV-KEB Hana Bank deal is the highlight of the M&A market in general and financial market in particular. Specifically, BIDV will issue over 603 million stocks as private placement to South Korean partner KEB Hana Bank. The total value of the deal is more than VND20 trillion. With the stock purchase, KEB Hana Bank will hold a 15-percent stake in BIDV.

Besides finance and banking, consumer goods and retail are expected to be targets for financiers thanks to the growth potential and rising local demand. In particular, the food and beverage sector will remain attractive for M&A deals. According to Dang Xuan Minh, general director of AVM Vietnam, with much room for potential transactions, famous brands such as Habeco, Vinamilk, and others will be on the radar of international groups from the United States, European Union, and neighbours such as Thailand.

However, challenges remain. The process of equitisation and divestment of state-owned enterprises in 2018 and in the first seven months of 2019 showed certain efforts and positive results although signs of slowing down. In addition, valuation, brand management, and post-M&A management are notable issues of M&A activities in 2018 and early 2019.

The challenges also come from both outside and inside Vietnam. For example, major economies are changing their policies on international trade, and from within Vietnam, some regulatory roadblocks have yet to be resolved, while the quality of many domestic businesses remains low. Moreover, there are pending issues related to the equitisation and divestment of state-owned enterprises.