[Vnbiz] the milk crisis in VN [SEC=UNCLASSIFIED]

[Tran Dinh Hoanh]

Dear CACC,

Another important point that I forgot to mention in my previous message is
that while privatization should be encouraged, privatization HAS the great
potential to entrench a monopoly.

Say, a state-owned monopoly has been making great profit due to its monopoly
status.  When it offers some stocks to the public, the stock price will be
soaring.  But the company now is no-longer purely state-owned.  By all
accounts, the state probably still owns a dominant share and everyone else
owns the rest, maybe in lots of small chunks.  Good way to raise some
capital for the company.  And the company now operates more like a
profit-oriented private enterprise.  This should be a very good thing for
free-market advocates (like me).

Except for one small thing:  We now have a profit-oriented monopoly, which
is a very bad thing for the economy.  In the old days, the state-owned
monopoly sometimes cares about things other than profit, like farmer's
decent living. Today, it cares only about profit, and maybe only short-term
profit.  Long-term investments that may reduce the current profit margin may
not be considered at all, since the board of directors and board of
management are more concerned about their current seat.

If several years ago, Vinamilk went ahead with its plan on promoting
domestic fresh milk, its profit margin might not have been so attractive to
have high stock price today. So obviously it stopped the fresh milk plan for
a reason.  Many private companies have a short vision like that when they
need to attract a lot of capital immediately.

The problem is: Now the monopoly is acting as a purely profit oriented
enterprise, with the monopoly power to get its ways.  This entrenched
monopoly is really harmful to the economy and to all
citizens (except, of course, its shareholders).

And this issue is present in every single sector of the economy where we
have a state-owned monopoly going public on the stock market.

So how do we solve this problem?

We avoid this type of entrenched monopoly by doing two
things simultaneously.  On one hand, we continue pushing for privatization,
on the other hand, we increase vigilance and sophistication in anti-trust
management.

And here is the real problem of Vietnam today:  Few people understand
antitrust (competition) issues, not mentioning enforcing competition.  And I
don't see the country is serious in building a competition regime, with good
law and regulation and, more importantly, good enforcers who understand very
well micro-economics and competition issues and who have the real power to
enforce competition law.

So we now have a serious problem in the structure of the national economy.
But as anyone who is experienced with Vietnam knows, most of the time you
can't tell people to do anything in advance.  They will know it only when it
happens to their face.  (I have talked about many things in advance in the
period of 15 years.  My experience shows that if I say something, I should
wait 10 years, then people will do it when things happen to their face).

So I am not overly anxious to see any solution to this "enhanced monopoly"
issue.  I will just wait till WTO forces things to change more drastically.
It won't be the best scenario for Vietnamese companies then, but that is the
nature of the game: Most people only can see as far as next week.

Have a great day :-)

Hoanh

On 10/12/06, Tran Dinh Hoanh <tdhoanh at gmail.com> wrote:

> Dear Dzung & CACC,
>
> Thanks for the note, Dzung.  We don't have conclude that the problem is
> with Vinamilk, but we have to be able to guess logically where the problem
> is in order to do an investigation.
>
> The fresh milk market is obviously not working properly.  Milk companies
> buy fresh milk at the price lower than any place in the world and selling it
> out at the price highest in the world.  Who would be able to do that in a
> market?  Only a monopolist can do that.  The guy who has all the purchasing
> and selling power.  I say "milk companies" but in deed it should be "milk
> company," the de facto monopolist in this market.  You don't have to be an
> economist to know.  Just walk around the street on any city, you will know
> who is the real player.  All other companies mean very little.  Vinamilk
> sets the tone of the market.  Other companies either follow its tone or
> collude with it outright.
>
> Any who are other companies anyway?  Vinacafe is not in the same market
> (although the tow markets may overlap here and there).  Dutch Lady is no
> where compared to Vinamilk.  That is two.  Who else?  Even two or three is
> still too few for a market.
>
> We have serious competition issue in this market.  Keep in mind that
> Vinamilk is state-owned with tremendous advantages over the years till now.
>
> Don't count on its soaring stock as a benefit for the country.
> Monopolies ALWAYS have soaring stock, because  they have the power to
> squeeze the market to death, to reap incredible profits.  When an oil
> monopoly has soaring stock, it means ALL drivers have to pay up their nose
> to finance the monopoly's stock profit.
>
> If I am the anti-trust chief, I would definitely ask my lawyers and
> economists to open an investigation into the fresh milk market with the
> potential theory of conspiracy (or unilateral monopolistic behavior)
> to keep domestic fresh milk out of the market.
>
> (Several years ago, there were talks that Vinamilk encouraged farmers to
> raise milk cows, and many farmers were doing that, but then Vinamlik backed
> out of its promise to buy, and a lots of farmers lost their shirt then.
> That was the beginning of a new strategy of ignoring domestic fresh milk).
>
> While I point out Vinamilk as the number-one target of investigation (if
> someone cares to open an investigation), the issue is much deeper.  It is
> the apparent distortion of the market that has given too much protection and
> power to its state-owned monopoly.  If you like to make profit on Vinamilk's
> stock, fine.  But if you care about the country, you want to ask:  Do we
> have great market distortions in this fresh-milk market?  Why?
>
> Anh here is another thing for the people who don't care about farmers and
> the country and only care about some quick bucks from Vinamilk stock: WTO
> may change the entire scene.  I am not sure that ice cream and dairy related
> products may be considered "agriculture products" which tend to give Vietnam
> some protection from international competition.  But if they are open for
> all out war, Vinamilk will be in serious trouble.  American and Australian
> ice cream, with much better taste than Vinamilk products because they are
> made with fresh milk, may be able to come in Vietnam at a price that will
> send Vinamilk to its sickbay.
>
> I realize that Vinamilk has its intensive network of distribution.
> By then, its strategy could be using its dominant leverage in its
> distribution network to distort the market, by telling retailers: "If you
> sell our products you cannot sell any product of any of our competitors."
> Then it could be another serious antitrust issue.  (If you are not
> monopolist you can require your retailer to sell only your products.  But
> when you have the monopoly power, saying that could be an unfair-competition
> violation).
>
> I am spelling out all the potential issues, potential culprits and
> potential market maneuvers for whoever cares to examine these major
> issues.  Or you guys can just sit there and will see them later,
> when everything unfolds a couple of years from now.
>
> Have a great day, Dzung and all.
>
> Hoanh
>
>
> --
> Tran Dinh Hoanh, LLB, JD
> Attorney of Law
> Washington DC
>
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