13

Vietnam Recycled Plastic

Trading Industry Analysis &

Recommendations Quoc Le

(MBA at Kennesaw State University)

Introduction:

There has been a trading opportunity for the Import and Export Company that I work at. The firm

previously exported electronic devices and industrial equipment to Southeast Asia and imported

agricultural products back to the U.S. The company just entered into trading recycled plastic materials

business for almost a year. Taking advantage of cheap and abundant plastic waste supply from the U.S,

the firm exports the materials to China, Malaysia and Vietnam where the demand for plastics grows

rapidly for the past ten years. However for the past 2 years, there have been stricter regulations from these

governments, especially China and Malaysia to limit and control the importation of recycled materials.

These regulations require worldwide exporters not only to have special licenses issued by the imported

countries to be able to export but also to inspect the materials before exporting. All of these barriers have

made Vietnam to be our main market for exporting recycled materials since its relatively easy regulation

still gives us some rooms for us to do business. This paper is going to present the Vietnam plastic waste

trading industry analysis by employing Five Forces Model, SWOT and Profit & Loss analyses. All

information will be used to help our company to make the decision regarding the acquisition to magnify

our sales potentials.

Under my observation, there has been a steady growth in sales in Vietnam. However, these sales do not

present the real potential. Our recycling plastic materials could have been sold more if we had our

presence in Vietnam. As a person who is mostly engaged in the foreign sales, I have a number of

opportunities to interact with Vietnamese clients. Under our companys policy, buyers have to pay us in

full before we export the materials to them. Our terms of payment are 30/70 which means a buyer has to

deposit 30% in advance, the remaining 70% will be paid before we load the materials on the sea vessel.

These terms have made so many potential buyers walk away from our business. The reason is very

simple. Our buyers are afraid that we will not ship the materials as promised after receiving the payment.

In global trading, both seller and buyer have very limited information about each other; this makes it

extremely difficult to do the business. Involving parties have to spend substantial amount of time of and

money to do the background check, however this minimizes but not terminate the possibility of fraud and

scam. Having said that, it is risky for our company to relax our payment terms for the clients, either use

letter of credit or 30/70 term. Letter of credit means that our clients bank is going to pay us after

receiving the materials at the destination. 30/70 term means that our client pays 30% in advance, the

balance 70% will be paid after receiving the materials at the major sea ports in Vietnam. As happened

several times in the past, after delivering the materials to the destination sea port, our clients refuted to

receive the materials and demanded to ship them back because they claimed that the materials did not

meet the requirement as specified in the contract. As a result, we had to ship materials back to the U.S and

paid for the shipping cost and 30% return fee to our seller. Or another instance, after receiving the

materials, our clients did not pay the remaining balance to our company. Therefore, acquiring a plastic

Vietnamese company is a strategic decision to help us overcome the geographical barrier and payment

terms, to gain trust from the local businesses and in turn reap off our sales potential.

Analysis:

Before investing in the acquisition, we have carried out our research about the Vietnam plastic waste

trading industry. Porters five forces model, SWOT and Profit & Loss analyses will be used to justify the

attractiveness of the acquisition.

Porters Five Forces Model:

Rivalry: Rivalry among existing competitors is relatively low. The plastic industry is one of the fastest

growing industries in Vietnam. For the past ten years, there has been a 20% average growing rate.

According to Vietnam Ministry of Industry and Commerce statistics in 2012, there were around 1,400

plastics firms in Vietnam and most of them are located in the South. The plastic products are going to be

used on both domestic and foreign purposes. Plastic products are exported to 151 countries all over the

world such as Japan, USA, UK and Germany and so on. These plastic companies desperately need

inexpensive and steady supply to keep their facility running; they can either use pure plastic resin or

recycled plastic resin as the materials for their production. Pure plastic resin price is totally depending

upon the price of oil and natural gas because these resins are extracted directly from oil and gas. During

the past few years, the price of resin has been rising significantly due the unstable conditions in Middle

East and Libya which caused the oil price to increase. Therefore, recycled plastic is the best alternative

for plastic firms to hedge to the rise in raw materials. Because of cheap labor, plastic company will be

able to recycle plastic waste and turn them into plastic resin at the cost of one haft of pure resin. Having

said that, plastic recycle materials suppliers are being chased by buyers. Each recycling plastic supplier

already has a number of buyers to sell the materials to. (Refer to Appendices from 1-6.)

Buyers: Power of buyers is low. Buyers comprise of plastic companies who purchase recycling plastic for

production and traders who purchase and resell for markup. As indicated in the rivalry section, there are a

number of buyers while there have been a limited number of recycling plastic suppliers. (Refer to

Appendix 2.)

Suppliers: Power of supplier is extremely high. Due to the rise in pure plastic resin price, plastic

companies turn to recycling plastic suppliers for raw materials. This has put suppliers into a very

advantageous position where suppliers have a stronger voice toward buyers. As estimated by the Ministry

of Industry and Commerce in 2012, there were approximately 150 recycling plastic suppliers which a

majority of them located in the South. Within 150 suppliers, a few of them are capable of providing a

steady supply year in and year out, the remaining are mostly seasonal and brokers. (Refer to Appendix 2.)

Entrance: Threat of new entrants is low. It is relatively easy to enter into plastic recycling trading;

however there are a few barriers that firms have to consider. First of all, language barrier makes it more

difficult to enter into the industry. English will be the official language to be used in international trade,

there are a few Vietnamese people that have efficient English to intensively engage in global trade where

they have to prospect suppliers and search for shipping lines for different parts of the world. Second,

payment terms are one of the most difficult issues. As presented above, both buyer and seller dont want

to risk their money; they will be reluctant to engage in the transaction if they find themselves unprotected.

Substitute: Substitute of recycled plastic resin is pure plastic resin. The relationship between recycling

plastic resin and pure plastic resin is somewhat overlapping. Plastic firm will preferably use pure plastic

resin to manufacture their products since it will yield better colored product. However, recycled plastic

resin is way less expensive, it costs is almost one haft as compared to pure plastic resin.

SWOT Analysis:

Strengths:

-As an Import and Export Company, we are intensively engaged in international trade. This has provided

us with intensive experience and certain reputation in dealing with both oversea suppliers and buyers.

-We are able to use both languages, including Vietnamese and English. This enables us to easily deal with

Vietnamese clients and at the same time comfortably deals with international suppliers.

-Our company has employees that came from Vietnam, this allows us to share the common background

and understand the culture of doing business with Vietnamese clients.

-Our network of professionals and Vietnamese government officers helps us to resolve problems that may

occur in the future.

-Possessing a number of plastic recycling suppliers allows us to confidently compete with Vietnam local

suppliers.

-A newly acquired local company will enable us to better serve our clients. Within 6 business day, from

Monday-Saturday 24 hour service will be provided. Due to 12 hour difference in time zone, once our

office in the U.S is closed, our oversea office will be opened. Our clients can either contact the Vietnam

office or contact our company at any time.

Weakness:

-Our company imports/exports various products, including electronic devices, industrial equipment and

agricultural products. Thus we do not have enough allotted fund to grow and compete with Vietnamese

local businesses whose products are specialized in recycling plastics.

-We do not fully understand the Vietnamese legal system. Vietnam is one of growing markets in

Southeast Asia; it is a promising market for foreign firms to participate in. However, the complex legal

system is the hurdle that scares so many foreign firms. Various regulation and agencies oversee a

particular business has unnecessarily created many barriers for companies to do business. And we

honestly just understand fifty percent of the legal system.

Opportunities:

-There has been a great demand for recycled plastic materials. The Vietnam plastic industry had a slow

start as compared to other countries in the same Southeast region, such as Thailand, Malaysia and

Singapore. After the war in 1975, Vietnam had closed its door for global trading. Until the economic

reforms of the mid-90s, the Vietnams economy was opened for international trade and foreign

investment. This allowed the plastic industry to grow rapidly which was about 20% for the past 10 years,

and this trend would be stay the same for the next 5-10 year according to a report by the Ministry of

Industry and Commerce.

-Acquiring a Vietnamese local business will allow us to have stronger presence in Vietnam. This presence

will eliminate the geographical barrier and payment terms, to gain trust from the local businesses and in

turn reap off our sales potential.

Threats:

-The difference in working culture between our company and the acquired company may present

problems in doing business in the future. There may be future issues that possibly cause disruption in our

strategic relationship and hence cause losses in the acquisition.

-Changing in regulations will have devastating impact on our business. As it happened in China where the

government enforced a new environmental law, called Green Fence, this law inspects waste materials and

limits the imported quantity.

-Fluctuation in the recycled plastic price can be a problem for us. As developing countries grow rapidly,

the demand for plastic will be increased for both domestic use and export, this trend is going push up the

plastic waste price. Our current suppliers may either increase the price on their supply or go to other

buyers who are willing to pay them higher in price.

-As involved in international trade, exchange rate will affect our profit. Vietnam is considered an

emerging market; this presents both potentials and risks. The economy is relatively sensitive to any

disruption; this in turn will negatively affect the exchange rate. When doing business in Vietnam, any

contract has to be paid by a local currency, Vietnam Dong. However, this currency has easily lost its

value since it is strongly dependent on the nations economy which has been relatively unstable within the

past several years. This affects our profit when converting the Vietnam Dong back to U.S dollar.

-The Vietnams economy has been struggling to grow, for the past 2 years the economy grew just above

5% as compared to 8% in 3 years earlier. Although the plastic industry has grown approximately 20% for

the past 10 years, the stagnant economy will have a certain impact on the plastic industry for sure.

-The global economy also has a significant impact on the Vietnam recycling plastic industry. Local plastic

companies export roughly 60% of their products; any disruption in the international market will in turn

affect both local plastic companies and plastic waste suppliers.

-The recycling plastic trading is regulated by multiple government agencies and laws which in turn make

it more difficult for us to do business. Red tape and corruption are other drawbacks that we have to

consider in our acquisition decision.

Profit and Loss Analysis

If we acquire a Vietnamese local firm, the followings are factors that we have to consider.

First of all, our existing clients will stay with our company here in the U.S. We will not transfer these

accounts to our acquired company. Just only Vietnamese clients, who have been previously walked away

from us due to the difference in payment terms and future Vietnamese clients will be taken care by the

acquired company in Vietnam.

Our initial investments for the acquisition will be less than $300,000. The first $200,000 will be used to

purchase the existing warehouse and necessary licenses. The remaining balance will be used to cover the

first six-month fixed expenses and 1st month purchase order paid to our suppliers. The investment will be

accordingly adjusted depending on the financial performance. The plastic waste trading does not require a

whole lot upfront investment. Our business is highly leveraged. As a rule of thumb, buyers have to make

at least a 50% deposit of the sale; the remaining balance will be funded by our money. However, the

selling price that we apply to our clients is already included our markup, so the actual remaining balance

paid to our suppliers will be around 20% of the sales.

Lastly, the expenses are highly depending on the sales which mean the higher sales the higher expenses,

these expenses are factored into the costs of goods sold which include but not limit to shipping cost,

importing tax, bank fees and etc. These expenses account for roughly 80% of sales. The fixed expenses

will be relatively small because labor cost, office rent and utility are not really expensive. As roughly

estimated, with 8 plastic containers sold we can make enough money to cover these fixed costs in a

month, a number that we can easily achieve. Under are the shorten version of projected P&L statements

for the next 3 years which we assume our annual sales and inflation rates will be increased by 20% and

5% respectively. (Refer to Appendix 7.)

Recommendations:

Based on the analyses of Porter Five Forces model, SWOT and P&L, it is a highly valuable opportunity

for our company to fully take advantage. Acquiring a local plastic company is going to help us overcome

the geographical barrier and payment terms, to gain trust from the local businesses and in turn reap off

our sales potential. It is quite intriguing to see an industry where buyers have to actively look for sellers

and compete with other buyers to secure their supply chain. The incremental sales associating with the

acquisition are highly considerable. The biggest risk will be the loss of our investment in the acquisition.

However, considering all the factors, the potential gains outweigh the losses. Acquiring a local plastic

business is highly encouraged.

If the acquisition is approved, under are the recommended actions:

-Periodically send people from the parent company to train the acquired companys workers, to assure the

success of know-how and professionalism transfer.

-Install a trusted person from our side into acquired company to ensure the accuracy of profits& expenses

and the soundness of the company.

-Discover other business opportunities and fully take advantage of the acquisition to increase our sales in

electronic devices and industrial equipment.

-Provide 24 hour service to help our clients as mentioned in the SWOTs strength. This allows us to

differentiate ourselves with other suppliers.

-Partner with shipping lines on global scale to ensure the consistency of our shipping service at reasonable

cost.

-Lock into contracts with both buyers and sellers to ensure our steady supply and demand, prevent

possible disruption in our supply chain and secure our interests.

-Allocate more fund into the plastic waste trading, this enable us to rapidly reap off the market

opportunity before it may get saturated.

Year 1 Year 2 Year 3

Sales $3,000,000 $3,600,000 $4,320,000

Cost of Goods Sold $2,400,000 $2,880,000 $3,456,000

Gross Profit $600,000 $720,000 $864,000

Total Expenses $67,800 $71,190 $74,750

Income Before Tax $532,200 $648,810 $789,250

Taxes $117,084 $142,738 $173,635

Net Income of the Acquired Company $415,116 $506,072 $615,615

Works Cited Anh-Analyst, N. T. (2011, 05 06). http://vninvestment.files.wordpress.com/2012/03/plastic6may11.pdf.

Retrieved April 26th, 2014, from http://vninvestment.files.wordpress.com/

Concetti. (2013, August).

http://www.ice.it/paesi/asia/vietnam/upload/198/Vietnam%20Plastic%20Industry%20-

%20Dec%202013.pdf. Retrieved April 26th, 2014, from http://www.ice.it/

Deloitte. (2014). http://www2.deloitte.com/content/dam/Deloitte/global/Documents/Tax/dttl-tax-

vietnamhighlights-2014.pdf. Retrieved April 28th, 2014, from http://www2.deloitte.com/

DNSGCT. (2013, July 11). http://english.vietnamnet.vn/fms/environment/78878/vietnam-spends-more-

money-on-waste-recycling.html. Retrieved April 24th, 2014, from http://english.vietnamnet.vn/

NamViet News. (2011, May 22). http://namvietnews.wordpress.com/2011/05/22/vietnam-plastics-

industrys-bottlenecks-block-its-growth/. Retrieved April 20th, 2014, from

http://namvietnews.wordpress.com/

Nguyen, T. (2014, March 20th). Vice President of Vietnam Sea Imexport LLC. (Q. Le, Interviewer)

Pham, D. (2014, March 15th). C.E.O of Vietnam PN CO. LLC. (Q. Le, Interviewer)

Vietnam News Agency. (2013, August 04). http://en.vietnamplus.vn/Home/Plastic-exports-continue-to-

rise/20138/37421.vnplus. Retrieved April 26th, 2014, from http://en.vietnamplus.vn/

Vietnam Trade Promotion Agency. (2012).

http://www.vietrade.gov.vn/en/index.php?option=com_content&view=article&id=966:strengths

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26th, 2014, from http://www.vietrade.gov.vn/

Appendices

Appendix 1

Appendix 2

Appendix 3

Appendix 4

Appendix 5

Appendix 6

Appendix 7

Year 1 Year 2 Year 3

Sales $3,000,000 $3,600,000 $4,320,000

Cost of Service Sold $2,400,000 $2,880,000 $3,456,000

Gross Profit $600,000 $720,000 $864,000

Expenses

Payroll $36,000 $37,800 $39,690

Lease $12,000 $12,600 $13,230

Advertising $6,000 $6,300 $6,615

Utilities $3,600 $3,780 $3,969

Telephone $2,400 $2,520 $2,646

Employees' Health

Insurance $3,600 $3,780 $3,969

Office Supplies $1,800 $1,890 $1,985

Miscellaneous Fees $2,400 $2,520 $2,646

Total Expenses $67,800 $71,190 $74,750

Net Income before Tax $532,200 $648,810 $789,251

Taxes $117,084 $142,738 $173,635

Net Income of the

Acquired Company $415,116 $506,072 $615,615