Holding Company - Success Comes from Apparatus but not Model

Ho Xuan Hung, deputy head of the Steering Board on Enterprise Renewal and Development, said that parent companies had to implement two tasks of doing business directly and invest in its affiliate companies. To invest in their affiliate companies, parents companies have to have capital. However, the difficulty of most enterprises is a capital shortage. Another difficulty is that corporations are not used to doing business directly. Therefore, it is hard for them to adapt themselves with such a practice. Furthermore, the business strategies of holding companies should be developed in a manner that would be able to avoid any overlapping and neutralisation of their strategies. At the same time, the organisation of corporations may mean a jobs cut. Hung stated that at a recent conference in Hanoi to review five years’ implementation of the holding company model. Hung said that the implementation of the model would be convenient when corporations were strong enough and had clear business strategies. Corporations, which face financial and business difficulties, will certainly suffer competition pressure from other economic sectors.

 

Talking about the holding company model, Nguyen Thi Truong Anh, general director of the Khanh Viet Corporation, said that the corporation had convenient conditions to be converted into the model as its affiliate companies had been invested by their parent company, the Khanh Viet General Business Company, before it started operation as a corporation. As a result, the parent company had adequate resources to support its affiliate companies.

 

Knowing that it would be difficult for corporations to be converted into holding companies, enterprises had to admit that the previous corporation model was ineffective, so a conversion was needed. This also became a selection for a change in management and financial mechanisms. A conversion into the holding company model is certainly good but how the model develops will depend much upon the perfection of parent companies and the legal environment for the model. Some corporations did not predict these difficulties when they were organised as holding companies, so they did not possess adequate financial resources and business strategies when their affiliate companies were set up.

 

Deputy Minister of Industry Nguyen Xuan Thuy said that those corporations and enterprises converted into holding companies gained a high growth rate in their production and business activities. This has proven that the model was suitable with the reorganisation and rearrangement of corporations and enterprises. However, with a dominant stake belonging to parent companies, affiliate companies did not have much autonomy to decide their own issues. Also, it would be convenient to choose a strong enterprise with its capital, technology and market strength, as a parent company which can play a dominant role, when corporations were converted into holding companies.

 

According to the guidelines of the Government, the renewal of State-owned enterprises will be implemented in a manner of reducing small-sized enterprises and the one-member limited companies. Ministries and corporations 90 and 91 will have to promote their reorganisation and rearrangement of enterprises, as well as the equitisation process, without which enterprises would not be able to be converted into holding companies.

 

Nguyen Quoc Hiep, general director of the Vietnam Construction Import and Export Company, said that due to the lack of a unique legal environment, there were obstacles in capital and asset settlement, investment and capital contribution rights, and profit division. Clearly, the holding company model created a multi-ownership of capital and enterprises, which required time to become familiar with. It is necessary to conduct further research on parent companies’ investment in their affiliate companies as it is necessary to ensure that capital would be managed effectively and parent companies would not interfere in the production and business activities of affiliate companies.

 

Tran Hong Tam, general director of the Ben Thanh Corporation, said that many people had said that responsibility of parent companies would be reduced. However, parent companies, in fact, still have to settle issues relating to their affiliate companies’ strategies, capital and project implementation. Therefore, the apparatus of parent companies should be strengthened to meet the requirements of their affiliate companies’ activities.

 

After five years’ piloting the holding company model, apart from initial achievements, the review report pointed out a real fact that despite being converted into the holding companies, many enterprises still maintained their administrative demand management mechanisms.

 

The Southern Food Corporation was established and converted into a holding company on a trial basis with many financial difficulties still to be settled. Analysing the corporation’s financial status before its conversion, the corporation had a total capital of VND 1,120 billion. However, its payable amount was put at VND 1,100 billion. The scale of its member enterprises was small with nine joint stock companies having capital valued at less than VND 20 billion. Some enterprises had capital standing at less than VND 5 billion. As a result, after the corporation’s conversion, these enterprises face many difficulties.

 

However, this is not a unique case. Many parent companies do not have adequate charter capital as stipulated. With poor financial ability, these companies are weak at helping their affiliate companies. In some cases when affiliate companies issued stocks to increase their capital, their parent companies were unable to buy shares, without financial strength, to maintain their dominant stake.

 

According to the Steering Board on Enterprises Renewal and Development, the formation of some holding companies was ‘administrative.’ Accordingly, the formation of parent companies was simply the mergence of corporations’ offices and some independent enterprises within corporations. As a result, any real change in their management and operation has not yet been seen. According to the chief executive of the Southern Food Corporation, in enterprises in which the State holds a control stake, and one member limited companies, the management mechanisms are similar to State-owned enterprises as most of leaders of the enterprises were transferred from State-owned enterprises.