There is still room for growth in ports, warehousing, and transportation despite the decline in global demand, according to Andy Ho, Chief Investment Officer of VinaCapital.
VinaCapital and A.P Moller Capital have announced a strategic partnership to establish a joint platform to grow and scale investments in logistics and transportation in Vietnam.
Andy Ho shares the insights behind this deal, and the development potential of the Vietnamese logistics market.
Why did VinaCapital choose A.P Moller Capital to develop a transportation and logistics infrastructure platform in Vietnam?
Logistics is a critical part of Vietnam’s economic growth story. The opportunities to invest, develop and consolidate transportation and logistics businesses in Vietnam are significant. A.P. Moller Capital, which is part of the A.P. Moller Group, brings exceptional operational expertise and deep pools of capital and investment experience in both developed and emerging markets, and this is coupled with VinaCapital’s extensive network and successful track record in Vietnam where we have been successful in delivering consistent returns to our investors over the past 20 years.
Can you tell more about the platform?
The platform created by A.P. Moller Capital and VinaCapital is one where we will source deals together, invest alongside each other and help grow the businesses we invest in by utilizing the extensive network of operational expertise and local knowledge that each partner brings to the table.
What are the advantages and challenges related to infrastructure and shipping in Vietnam?
While significant investments have been made over the years in developing Vietnam’s infrastructure and shipping industry, there is further scope for development and growth. As such, there are tremendous opportunities in ports, warehousing, and transportation which are some of the sectors we are targeting.
Furthermore, logistics is an industry that is highly fragmented and has many inefficiencies, and, coupled with poor infrastructure, can add to significant friction costs in the transport of goods. However, we view these challenges as opportunities and want to help address them.
Vietnam has several unique advantages that have contributed to its rapid growth. These include a long, continuous coastline, increasing levels of foreign direct investment, a strong manufacturing base, and growing domestic demand (with rising incomes, growing middle class, increasing urbanization).
Are there any barriers for A.P. Moller Capital and VinaCapital to investing in this field?
There are regulatory and ownership limits in certain sectors, and as foreign investors, we will operate within the guidelines that are relevant to various sectors as we do with our other investments.
Through this partnership, we will invest in local companies where we can make real, tangible contributions to their growth while doing good for the communities we invest in.
Can you tell us about the investment strategy of VinaCapital and A.P. Moller Capital?
Our strategy is to deploy meaningful levels of capital into the businesses we invest in. We seek to deliver returns to our investors and help grow the businesses we invest in by creating value through applying A.P. Moller Capital’s deep operational expertise. We seek investment opportunities where value can be created through market growth, consolidation and performance improvements.
The focus will be on businesses with real assets and potential for high growth. It is important that we identify strong management teams, scalable businesses and areas of high growth where we can integrate technology and best practices in terms of operations, governance and sustainability.
In the context of declining global demand, how do you assess the outlook for the logistics and transport infrastructure sector?
The decline in global demand is a near-term concern and reflects weakness in the current business cycle. However, we do not believe this to be structural, meaning the long-term growth outlook for Vietnam and therefore the logistics and transportation industry remains robust. It is well-reported, this phenomenon of inventory clearing that is happening in developed markets. We believe that this should conclude by the end of the year, and Vietnam is well-placed to take advantage of the recovery or normalization of trade volumes. As such we believe that now is an important time to invest in the transportation and logistics sector.
Furthermore, the government appears willing to introduce supportive measures for the sector, as evidenced by the proposal to increase handling fees for port operators, which we expect to occur in 2024, and should provide an uplift to the sector’s profitability.
Logistics development depends a lot on infrastructure, especially roads. Is the current public spending a driving force for the Vietnamese logistics industry to catch up with the rest of the world?
Yes, the program of public investment in infrastructure is crucial in driving the attractiveness of Vietnam as a destination for FDI over the long term.
The government’s infrastructure budget was increased by 50% year-on-year for 2023 to approximately US$30 billion. Though the actual expenditure may only reach 65-70% of a given year’s budget, infrastructure spending should [still] equate to 4.8% of GDP (assuming that US$20 billion is spent on infrastructure and GDP is US$420 billion).
Improved infrastructure enhances the appeal of the logistics industry in terms of efficiency and profitability. For any developing economy, infrastructure is the panacea prescribed for growth. That said, infrastructure spending so far has only been 15% of the total earmarked for this year (or 3.0% of GDP), suggesting an acceleration in public spending will occur in the second half of 2023.
What are your recommendations for businesses in the industry, especially investment funds?
As mentioned, the sub-scale and fragmented nature of the logistics and transportation industry presents an opportunity for our partnership.
As investors, the challenge is to find viable targets for investment in terms of size and scale, and profitability of operations. Furthermore, it is important we identify opportunities where we can leverage the operational, financial and institutional know-how that A.P. Moller Capital and VinaCapital bring to the companies we invest in.
It would be encouraging to see the government’s program of infrastructure development continue, as it will help enhance the efficiency and profitability of the industry as well as the broader economy.
Furthermore, allowing higher foreign ownership in certain businesses in the transport and logistics sector will add to their attractiveness for investors and help create domestic business champions that can compete and succeed in regional and global markets.