Ngo Khac Le charts the rise and fall of Vietnamese state shipbuilding group Vinashin.
A short history of Vinashin
The Vietnam Shipbuilding Industry Group (Vinashin), formally known as the Vietnam Shipbuilding Union, was set up in 1972 to consolidate the country's shipbuilding industry. It is the largest shipbuilder in Vietnam by capacity, accounting for approximately 70 to 80 percent of total domestic capacity and is one of the largest state-owned enterprises in Vietnam.
Vinashin's businesses include shipbuilding, ship repair, shipping, heavy industries and other related services in Vietnam and abroad, and it is a holding company with over 160 subsidiaries. This includes 39 shipyards (30 operating shipyards and nine shipyards under construction) with the capability to build modern ships up to 150,000DWT, oil tankers of 105,000DWT and other equipment.
Vinashin's shipyards and industrial complexes are located throughout the country, in 34 out of Vietnam's 64 coastal provinces. Total staff number 70,000, 12,500 of which are university graduates and post-graduates, and 55,000 technicians.
Vinashin received its first international order in the year 2000. Other notable events included the US$322.5 million contract from the UK's Graig Investment for the construction of 15 DNV-classed, 53,000DWT bulk carriers in 2004, delivery of its first 53,000DWT vessel in 2007, the launch of the 'FSO-05', an offshore storage unit with a 150,000DWT loading capacity for PetroVietnam in 2010, and the first 4,900-vehicle car carrier for Ray Car Carriers, also delivered in 2010.
Development
Vinashin has signed contracts to build ships worth US$12 billion (as of March 2009) and delivered over 279 vessels, worth US$1.8 billion, to customers. Vinashin's success in the last five years has seen Vietnam climb up the rankings to become the fifth largest shipbuilding nation in the world.
The group grew at an annual average growth rate of 35 to 40 percent between 1996 and 2006, and recorded profits year after year. In 2008 alone, Vinashin grossed revenues of nearly 29 trillion VND(US$1.51 billion). By the end of 2009 however, it contributed only 3.3 trillion VND (US$0.17 billion) to the state budget.
The downfall of Vinashin
As of June 2010, Vinashin faced debts totalling VND86 trillion (about US$4.5 billion) while its total assets were worth VND104 trillion (about US$5.4 billion). As a result, from nearly 200 invested projects, Vinashin has by 2010 focused on only 13 shipbuilding projects.
The group is on the verge of bankruptcy, and nearly 17,000 workers have resigned and 5,000 others have lost their jobs.
Last month, twelve subsidiaries and five projects of Vinashin were handed over to the Vietnam Oil and Gas Group (PetroVietnam) and the Vietnam Shipping Lines Corporation (Vinalines).
Causes of the downfall
There are subjective and objective causes of the failure. The subjective cause is the main one, being Vinashin leadership's management weaknesses and wrongdoings. The group's leadership made numerous decisions contrary to Vietnamese law, inaccurately reported the use of capital for investment, the establishment of new companies, business lines and production performance, and even made foolish mistakes relating to the use of investment capital.
The group's reckless expansion, and scattered investments and financial problems brought it to the brink of bankruptcy, resulting in a standstill of much of its business and its investment projects. Internal troubles also caused nearly 17,000 of its workforce to leave the group.
The group's board and its leadership,including the chairman of the board, in this case must hold direct responsibility. Corporate governance and the forecasting capacity of the group were very weak.
According to the government, in 2006, the Vietnamese Prime Minister already ordered the examination and monitoring of Vinashin's capital mobilisation and use, and requested the group to cut many invested projects and focus on those involving modernising and upgrading new shipbuilding facilities.
Inefficient use of capital is Vinashin's major problem. Its investment and financial management was loose and ineffective. Facing a cash flow crisis, Vinashin took out new loans to pay old debts and borrowed short-term to pay long-term debts. It even used working capital as investment capital. Its losses in 2009 were heavy. By June 2010, though its total assets were estimated at VND104trillion (about US$5.4 billion) its liabilities had risen to VND86 trillion(about US$4.5 billion).
The GFC
The objective cause is the worldwide recession in general and the sudden drop in the needs of the global shipbuilding and shipping industries in particular. World shipbuilding developed rapidly between 1999 and 2007, with newbuildings accounting for 51 percent of world fleet tonnage. A sharp downfall in 2008 resulted in a newbuilding order reduction of 38 percent compared with 2007 and at half the price. New orders for containerships declined by 57 percent, bulk carriers 66 percent, NPG and LPG carriers 80 percent. Many shipyards were on the verge of bankruptcy.
The global financial crisis delivered a heavy blow to Vinashin, especially in terms of market and capital. Nevertheless, serious mistakes made by Vinashin officials were the direct cause of the crisis. They falsified reports of its situation, and though it incurred losses in 2009 and the first quarter of 2010, it still claimed to be making a profit. Reeling under the impact of the global financial crisis, buyers cancelled Vinashin contracts worth US$8 billion in 2008. Another US$700 million in contracts is at risk of being cancelled this year.
Other problems
In a short time, the group had established many subsidiaries whose operations were beyond the group's core business, and they were too slow to build a company charter and to introduce financial and infrastructure investment management regulations and technical and economic standards.
The management of state-owned companies in general and the Vinashin group in particular has been ineffective. The supervision, inspection and financial management of these companies is still weak.
Although inspections were carried out, the problems at Vinashin were not detected in a timely way. This showed weakness in state management; the mechanism failed. There is a lack of responsibility among a number of concerned state management agencies at the central and grassroots levels.
The government steps in
On August 12, the Prime Minister established a steering committee to restructure Vinashin. Permanent Deputy Prime Minister Nguyen Sinh Hung will be in charge of the committee while another Deputy Prime Minister, Hoang Trung Hai, was named as vice chair, demonstrating the seriousness of the situation. The 14 other members are representatives from relevant ministries, branches and sectors.
The committee's task is to study the situation and propose policies and other remedies for Vinashin, as well as to organise the implementation of these policies and measures to enable it to stabilise and develop its business. The committee also gives instructions to the mass media in disseminating information on Vinashin's situation and the government's plans.
The committee is composed of two working groups and a coordinating section. Working Group No. 1 is in charge of organisational restructuring, development strategy, and the direction of investment, production and business lines for Vinashin. Working Group No. 2 is responsible for reshaping Vinashin's financial structure to ensure that it is able to cover debts, production, business and investment activities.
The government's policy is to restructure Vinashin with the objective of reducing its debt, restoring capital and cutting losses to a minimum. In particular, the government aims to prevent the Vinashin case from negatively affecting macro-economic stability and the investment environment in Vietnam. The state will ensure sufficient capital to Vinashin to pay off mature foreign debts. Vinashin's mission will be to restructure production loans and debts to suppliers while completing projects.
"Preliminary calculations by the Vinashin management board indicate that the group will require capital infusions up to 2012," said a government statement.
"It will begin earning a net profit in 2013 and will develop stably as of 2015."
Meanwhile…
Work has resumed at the projects handed over to PetroVietnam. Around 1,000 out of 6,000 workers at the Dung Quat Shipyard have returned to work. Recently, Vinashin sold four ships worth nearly US$100 million. The group will also launch a 104,000DWT oil tanker this October. This is important to prevent it from going bankrupt and collapsing, as this would have adverse effects on the shipbuilding industry's development and its customers' confidence.
How to save Vinashin
To restructure Vinashin, the first task is to re-define its development strategy, narrowing the scope. The "new" Vinashin will concentrate on building and repairing ships, developing only supporting industries for shipbuilding and ship design. It will no longer engage in maritime transport.
Vinashin will concentrate investment on 13 projects, and several dozen incomplete projects will be restructured. Vietnam still aims to confirm the mechanical engineering industry's place as the major part of the national strategy of industrialisation and modernisation, with the shipbuilding and repair industries being the spearhead sector for the development of a robust maritime economy and the country's sea strategy through 2020 and the following years.
At a press briefing on August 4, 2010, Deputy Prime Minister Hung spoke of measures to deal with Vinashin's outstanding debts, saying that the government will transfer or equitise the group's affiliates to recover their capital to cover debts, and reschedule local and foreign credits. On Saturday, August 15, he reiterated the government's desire to restructure Vinashin and to make shipbuilding a core of the national marine strategy, at a working session of the Vinashin Group Restructuring Steering Committee.
He affirmed that the new Vinashin would continue to receive loans that serve its production capabilities and to retain workers of the former group, striving to halt its losses by 2012 and develop in a stable manner by 2015.
"A new Vinashin should focus on shipbuilding and maintenance, developing supporting industries and training a skilled workforce in shipbuilding in order to meet market demands at home and abroad," said Hung on August 16.
On August 18, Prime Minister Nguyen Tan Dung ordered the Vietnamese Transport Ministry to begin assessing Vinashin's businesses, with final recommendations due before the end of the year.
Lessons drawn
Too much authority was given to the group chairman Pham Thanh Binh. He should have been restricted to making investment decisions within an approved investment plan.
The trial period for the establishment of state-owned groups meant there was no foundation for working out guidelines for their operation in time.
Authorities and agencies failed to discover the group's serious shortcomings and faults from 2006 to 2009, despite many warnings from the public and mass media,
Other state-run economic groups and corporations must be examined, inspected and evaluated accurately, and their financial situation and production and business performance should be disclosed publicly and transparently.
The government should be urged to promptly keep a close watch on these groups and corporations when they expand their investment into fields outside of their main business, and harmonise the interests of all parties involved.
Finally, the government must urgently re-evaluate the performance of Vinashin's parent company, its affiliates,integrated companies and invested projects in an accurate, objective, and honest manner to take specific and appropriate action.
Status of the group's "master" and other individuals
The Party Central Committee's Commission for Inspection has decided to refer the investigation of wrongdoings committed by Chairman Pham Thanh Binh to an investigation agency to consider criminal proceedings. The Prime Minister stated that individuals who committed wrongdoings against the state would be punished severely in line with the laws and rules of the ruling party.
The Vinashin chairman was sacked just prior to his arrest on August 4, 2010 to face criminal investigation.
Documented on a notice dated July 12, 2010,the commission concluded that Mr Binh committed serious wrongdoings and should be subject to a criminal investigation. Mr Binh has been accused of irresponsibly mobilising, managing and using state capital, leading to great losses that pushed Vinashin to the verge of bankruptcy, and also seriously violating state bidding regulations while developing big projects invested in by Vinashin and its affiliates
He established many of Vinashin's subsidiaries and joint stock companies that failed to meet financial viability requirements, and also unlawfully appointed his son and his younger brother as the holders of the state's stake at Vinashin and to other positions therein. The commission concluded that such wrongdoings stemmed from both irresponsible neglect and intentional lawbreaking motivated by self-interest, which caused serious economical, political and social consequences. In the past several years, he is also accused of submitting false reports to the government about the group's financial condition.
Mr. Binh's misconduct, as well as that of other Vinashin officials, likely violates the Penal Code, so a criminal investigation is necessary, the commission said.
Ngo Khac Le
