Cheng Vang

Global Finance
Argosy University

Assignment M8A1

This research paper is focus on Goodyear Tire and Rubber Company (Goodyear). The objective of this research paper is to determine if Goodyear should expand to Vietnam as a Foreign Direct Investment (FDI) or not. The research will focus on these areas:

1) Goodyear Financial
2) History of Goodyear
3) Principal of Business
4) The Country Vietnam a. History b. Economy d. Trade and Balance of Payments g. Intellectual property rights h. Work forces i. Currency exchange rate
5) Conclusion

Goodyear is a US based company, which is traded on the New York Stock Exchange (symbol GT). They have more than 20,000 investors and employ about 72,000 people around the world. They are one of the world’s leading tire companies and second largest tire manufacturer in Europe behind Michelin. They have 55 plants in 22 countries and operate in most regions of the world. Goodyear Tire and Rubber Company was founded by Frank A. Seiberling in 1898. During the early stages of the company, rubber and cotton were the lifeblood of the organization. The wingfoot trademark of Goodyear was not known to the public until it was first advertised in 1901. In 1905, four years after Goodyear first advertised, they emerged into a tire manufacturer leader. In 1910, Goodyear became a multi-national company when it acquired foreign plant in Bowmanville, Ontario, Canada and opened sales office in Australia, Argentina and South Africa in 1915. In 1916, Goodyear became the world’s largest tire company. Today, Goodyear is more than just a tire manufacture company. Its business include automobile tires, truck tires, bus tires, aviation tires, earthmoving and mining equipments, industrial equipments, chemical, and various other applications.
Recently, Goodyear financially has had a net operating loss in the past three years due to the recession but in the first quarter of this year; Goodyear has a profitable sale. The sale was four times higher than what Wall Street estimate for its home market (North America). Globally, sales also are up about 22% which contribute to a $5.40 billion in net sale for the first quarter of this year. Goodyear has a good current ratio, quick ratio, receivable turnover, Inventory turnover, and asset turnover. The long-term debt to equity was high due to large debt accumulated by the new plant in Dalian, China. In addition, rising fuel price, natural rubber prices, supply, and significant increase in other key commodities are also potential concerns.
In 1959, Goodyear expanded to the Asian Market when the company built a new plant in Delhi, India. As a multi-national corporation, Goodyear divided the global market into five regions: North America, Europe, Middle East/Africa, Latin America, and Asia Pacific. The Asia Pacific market consists of China, India, Indonesia, Japan, Malaysia, Singapore, and Thailand. This research paper will focus on the Asia Pacific market and whether Vietnam would be a good market for Goodyear to expand into.
Historically, Vietnam is a tributary state of China and has been wrought by struggle for much of its history. In the 19th century, France colonized Vietnam. Vietnam was part of French Indochina until 1945 when Japan ousted the French administration and set up the Empire of Vietnam. The Empire of Vietnam is only lasted for a few months due to the Japanese surrendered to the Allies at the end of World War II. As the Empire of Vietnam diminishing, a group of Viet Minh rise to seize power and British try establishing control over Vietnam too, when they landed troops on October 1945. The French also try to re-establish in the following year but was unsuccessful. The Viet Minh grew in power with the aid of China, the French finally surrendered in 1954. After the French surrender, instead the country gain peace, it was split into North and South Vietnam. The country then entered the Vietnam War era which struggle for 21 years. The North was control by the Communist Party regime of Viet Minh and the South was established itself as the Republic of Vietnam. The North Communist regime was aid of the China and Soviet Union. The South was aid of the U.S government. The Vietnam War was finally end on April 1975 with Fall of Saigon to the North Communist Regime.
Vietnam is roughly about 127,243 square miles which equivalent to the size Ohio, Kentucky, and Tennessee combined. It also contains a rich landscape, with a long coastline that stretches from the Gulf of Tonkin in the north to the Gulf of Thailand in the southwest. Vietnam is border on the west by the countries Cambodia and Laos, north by China, east and south by the South China Sea. The population of Vietnam is about 90 million with the majority of the working class being unskilled laborer.
The capital of Vietnam is Hanoi which home to approximately 6.4 million people. The total population of Vietnam is approximately 90 million with annual growth rate of 1.077%. There are 54 ethnic groups in Vietnam. Vietnamese (Kinh) are the majorities which made up about 85.7% of the total population. In term of education, approximately 94% of the total population is literate and English is increasingly favored as a second language. Vietnamese (Kinh) is the official language of the country. (U.S. Department of State) According to the CIA site, Vietnam total population has an average age of 26 years old which would provide for a young and abundant supply of workers in the country.
In prospecting Vietnam, the risk includes high trade deficit, political stability, inflation, and the gross domestic product (GDP). The economy is also controlled by a single party constitutional republic (Communist Party) government. Politically, Vietnam has been a single party constitutional republic since the Vietnam War. However, recently the government has slowly opened its economic policies to foreign investors in order to boost its economy. On the other hand, with the government managing the money supply, this could have a negative impact on foreign investment decisions, decisions to extend credit, building manufacturing facilities, and engagement in export activities.
Vietnam has eight car manufacturers consisting of: Chevrolet Vietnam, BMW Vietnam, Kia Vietnam, Lexus Vietnam, Honda Vietnam, Ford Vietnam, Hyundai Vietnam, and Mitsubishi Vietnam. Each of these manufacturers is capable producing 14,000 units per year. With the rising cost of fuel and raw materials, this could be a good opportunity for Goodyear to invest in Vietnam. At the present time, there are no foreign tire manufacturers in the country however all the major tire manufacturers have sale offices in the county. All the tire manufacturers with presence in the country are a locally owned.
Vietnam’s main exports include: Crude oil, textiles and garment, rice, coffee, rubber, coal, seafood, and processed forest products. Agriculture is the main export item. However, crude oil is accountable for 11%, 7% seafood, 7% footwear, 5% electronic equipment, 5% jewelry, 5% rice, 4% wooden products, 4% machinery, 3% coffee, 2% anthracite, and 2% rubber. The major export businesses are petrochemical, construction industry; cement industry, power generation/electricity, food and beverage, paper and pulp, and plastic and rubber.
Vietnam’s main imports include: petroleum products, steel, fertilizer, electronics, and machineries and equipments. Currently, Vietnam’s major trading partners are countries such as the Soviet Union, Japan, Singapore, Hong Kong, Taiwan, Korea, US, and countries in the European Union.
After the Vietnam War in 1975, North and South Vietnam unified and started to rebuild and develop its economy. During the first ten years, economic growth was slow and many economic reforms were needed to sustain the growth. In 1985, the country went through a major economic reform by raising prices in the public sector to catch with the market price, by increasing wages and monetary value. After this reform, inflation rate was up about 775 percent and more change were needed it. In 1986, the country entered a period of reform call doi moi. During the doi moi periods, the country has a real Gross Domestic Product (GDP) average about 3.9%. In 1991-1995, the average GDP growth is about 8.2% and 9% into the late 90’s. In 1997, when the Asia Financial Crisis occurred, it had strongly harmed countries such as Thailand, South Korea, and Indonesia, but had no negative effects on Vietnam’s economic growth. At the time of Asia Financial Crisis, Vietnam had not gained international investor confidence and had very little Net Foreign Direct Investment so therefore the crisis had less impact on the country’s economy than on other country that had heavily Foreign Direct Investment (FDI). Although, the crisis did slow-down Vietnam’s economic growth, the economy still showed growth throughout the crisis.
With the drastic cuts of aid from the Soviet in the late 80’s, Vietnam liberalized trade and open their doors for several comprehensive international trade and FDI. They also devalued the currency to increase exports. As they open up international trade, Vietnam’s trade deficit rose and reaching $12.85 billion dollars in 2009 due to high imports and heavily FDI. Currently, FDI is remains steady which is estimated at $8.5 billion. The trade deficit for 2010 is to be about $13.5 on October 17, 2010 which is equivalent to 19.8 percent of total exports. The National Assembly Economic Committee showed concern of the increasingly high trade deficit. The prolong trade deficit over many years, decrease foreign exchange reserves, increased national debt will put pressure on the domestic currency. These are the symptoms to major obstacles for the economic growth. According to article “Six Vietnamese banks also downgraded on macro concerns” the unwillingness to tighten effectively monetary policy and allow the exchange rate to depreciate in value, and market pressures have weakened the balance of payment and this could trigger external payments crisis. (Ruwitch, J. 2010)
On February 11, 2011, Vietnam announced the biggest currency (dong) devalue to date, the move was to ensure the liquidity of the market and curb the huge trade deficit. The devaluation of the dong will temporarily reduce Vietnam’s imports which cause a huge trade deficit and declining financial reserves of Vietnam. This move was to stabilize the economy.
Vietnam is a member of World Intellectual property Organization (WIPO), member of the Patent Cooperation Treaty, and a member of the Bern Convention on Copyright Protection for Literacy and Artistic Works. Vietnam also has bilateral agreements on the protection of intellectual property with the EU, Switzerland and the US. Under the bilateral trade agreement with the US, Vietnam has committed to most obligations covered by the WTO TRIPS Agreement. The country also agrees that it will fully implement the TRIPS Agreement upon its accession into the organization. In recent years, Vietnam has passed and issued a number of laws, ordinances, decrees and directives to establish a legal framework and measures for the protection of intellectual property rights in the country.
According to the Ministry of Labour, Invalids and Social Affairs (MoLISA) and the International Labour Organization (ILO), Vietnam’s workforce in 2009 is about 48.3 million. The workforce between the ages 15-34 are accountable for almost half the workforce. The abundance of workers, large proportion of young people, weak domestic currency will attract foreign investment. However, many foreign investors investing in Vietnam have problem of recruiting a skilled workers for foreign companies. Although, the government are trying to improve its human resource quality by developing vocational training schools and its education system, but the results of these policies will take time.
Vietnam currency, the dong (VND) is Vietnam’s official currency. The dong is not a free float currency system. The paper notes come in denominations of 200, 500, 1000, 2000, 5000, 10,000, 20,000, 50,000, 100,000, and 500,000. The current exchange rate is $1dollar to 20,693 thousand dong. Vietnam like most of the other Southeast Asia country, US dollars can be use as a legal tender in the country but mostly in the big cities. Most Hotels, restaurants, and golf courses will honor dollar payments. However, with smaller operators like street vendors, food stands, taxis and cycle driver expect payments in dong.
In conclusion, Vietnam would be a good country to invest in for other manufacturers of products/goods. It is an emerging economy in the Southeast Asia Sector, which next China and close to Thailand. They have the characteristic like any other well developed country: abundance natural resources; long geographic coastline; and large pool of young workforce. The local currency is weak against the dollar and company like Goodyear can benefit the cheap labor with the abundance raw material (rubber) generate by the country. Vietnam also has a fast economy growth in the last decade; they average about 8 to 9 percent growth annually. With the fast economy growth, it came along with huge trade deficit. Early this year, Vietnam announced its biggest currency devalues, the move was ensuring the liquidity of the market, discourage of import luxury item, boots export, and curb the huge trade deficit. Although, this move might be temporally fix the huge trade deficit but it cannot fix the problem in the long run.
Therefore, while there are eight auto manufacturers in the Vietnam and it may look wise for a tire manufacture to invest in Vietnam because the high demand for tires. Investing into Vietnam, may not be the best of choice for Goodyear. The country’s high trade deficit and unstable value of its currency are just a couple of the risks associated with a bad investment into Vietnam for Goodyear. In addition, Goodyear just completed a new $700 million dollar plant in Dalian, China which is located directly north in South China which shares a border with Vietnam. Since tariff tax is low in Vietnam and this new plant in China can supply all the tire demand to meet the needs in Vietnam.

Reference:

(January 17, 2011). Property Rights Index - South Korea Compared to Continent.Global Property Guide. Retrieved May 24, 2011 from

http://www.globalpropertyguide.com/Asia/South-Korea/property-rights-index

(January 17, 2011). Weak Dong could hit Vietnam's real estate market. Retrieved June 24, 2011 from

http://www.globalpropertyguide.com/Asia/Vietnam

(June 3, 2011). Background note: Vietnam. Retrieved June 23, 2011 from http://www.state.gov/r/pa/ei/bgn/4130.htm#political Ruwitch, J. (December 15, 2010). Six Vietnamese banks also downgraded on macro concerns. Retrieved June13, 2011 from http://www.reuters.com/article/2010/12/15/vietnam-economy-moodys-idUSSGE6BE06O20101215 (June 23, 2011. Goodyear history. Retrieved June 20, 2011 from http://www.goodyear.com/corporate/history/ Shapiro, A. C. (2010). Multinational Financial Management (9th ed.). Hoboken, NJ, USA: John Wiley & Sons, Inc.
Besley, S. & Brigham, E. F. (2008). Essentials of Managerial Finance (14th ed.). Mason, OH, USA: South- Western