Vietnamese electric vehicle maker Vinfast caused a stir when it announced it would jump straight into the US auto market and build a $4 billion manufacturing facility in North Carolina. The company, which is majority owned by Vietnamese conglomerate WingGroup, has begun preparations for an initial public offering in the United States in 2022.
From the outset the plan was ambitious. Much of Vietnam’s recent economic success has been because big global brands such as South Korea’s LG find it attractive to manufacture products in Vietnam and then export them to global markets. It is unusual for a country with export-oriented industrialization like Vietnam to have offshore manufacturing in the United States. And, as WinFast posts poor financial results and its US plant struggles to get off the ground, we begin to understand why.
The North Carolina factory was initially scheduled to begin production of cars in 2024, but the date of operation has been pushed forward to 2025. Until then, any cars Vinfast sells in the US will be imported from its Vietnamese production centers. Still, things haven’t been smooth there either, with the first batch of cars shipped to the US being recalled after a safety alert was issued by the National Highway Traffic Safety Administration.
WinFast executives are leaving the company, and the original Simple IPO plan has been shelved and replaced with something called a SPAC, a type of speculative financial vehicle that was popular when the stock market soared to wild heights in 2021. But what The Washington Post recently referred to as a kind of “foolishness”.
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Looking at the financials disclosed by VinFast as part of the proposed SPAC deal, the company currently has negative equity and is losing billions of dollars from its operations. Post-tax deficit in 2022 recorded at $2.1 billion. In the first three months of 2023, things haven’t improved, with the company reporting accumulated losses of $598 million and reporting cash on hand of just $159 million. Total accumulated losses have reached nearly $6 billion.
It’s true that as Winfast seeks a major expansion into tough overseas markets, you’d expect the company to spend money initially as it invests in its US operations, and then recoup this investment over time. . But US operations are already struggling, and even given the large initial capital outlay required, these financials aren’t telling a very convincing story. So what is going on here?
The United States is pursuing industrial policy to encourage investment in domestic manufacturing, especially in industries such as clean energy. On the supply side, big tax breaks and other sweeteners have become available for companies looking to build manufacturing facilities in the United States. On the demand side, financial incentives are being offered to encourage consumers to buy electric vehicles.
But many companies are finding that setting up shop in the United States is more difficult than they first thought. Costs are often high, including labor, construction, permitting and licensing, and the regulatory and political environment is different from what they are used to. This is not just a WinFast problem. Taiwanese chip maker TSMC is struggling to get its Arizona fab operational, and has also pushed back the operational date to 2025.
VinFast’s parent company, Vingroup, is profitable and will close 2022 with more than $1.1 billion in cash and $5.7 billion in shareholder equity. They may have the means to pursue this project, but it will be difficult. Investors are hardly clamoring for more SPACs these days, and the accumulated losses on WinFast’s balance sheet are already substantial. Furthermore, the EV market in the United States is becoming very competitive. If WinFast continues down this path, it likely won’t be for purely financial or market-based reasons.
I think these developments also throw interesting light on the complexity of industrial policy. The US government can indeed offer massive incentives to companies to encourage investment in priority sectors. But companies will enter the market for a variety of reasons, and their experiences will vary and be difficult to predict. WinFast’s bumpy road to the US market is a testament to this complexity in action.