CAPITAL MANAGEMENT IN VIETNAM’S SHIPBUILDING INDUSTRY, APPLYING ACCOUNTING POLICY, SUPPLYING RELEVANT INFORMATION FOR FINANCIAL MANAGERS: A CASE STUDY ON VINASHIN (VIETNAM SHIPBUILDING INDUSTRY GROUP) BY NGO VIET ANH E0700271 Graduation Project Submitted to the Department of Business Studies, HELP University College, in Partial Fulfillment of the Requirements for the Degree of Bachelor of Business (Accounting) Hons OCTOBER 2011 DECLARATION OF ORGINALITY AND WORD COUNT I hereby declare that the graduation project is based on my original work except quotations and citations, which has been duly acknowledged I also declare that it has not been previously or concurrently submitted for any other course/degree at Help University or other institutions The word count is 13,564 words NGO VIET ANH 17 October 2011 ii ACKNOWLEDGEMENT First of all, I would like to express my sincere appreciation to my supervisor, Dr Le Van Lien who has guided me throughout this thesis His constant guidance, insightful suggestions, and constructive ideas are the essential inputs and encouragement for me in order to complete this thesis Next, In addition, I would like to send my gratitude to the International School and HELP University College for giving me an opportunity to conduct my study in my favorite area Furthermore, I also address my appreciation to Mr Chu Van Hung (Financial Professor) who supported my thesis with information related to my thesis My thankfulness is also addressed to others who have helped me since the beginning of my study until I can finish my thesis Lastly, I would also like to extend my heartfelt gratitude to my family and my friends for their continuous support, encouragement and contribution, which have been crucial during the presentation of this report My thesis cannot be finished without your supports iii CAPITAL MANAGEMENT IN VIETNAM’S SHIPBUILDING INDUSTRY, APPLYING ACCOUNTING POLICY, SUPPLYING RELEVANT INFORMATION FOR FINANCIAL MANAGERS: A CASE STUDY ON VINASHIN (VIETNAM SHIPBUILDING INDUSTRY GROUP) BY NGO VIET ANH OCTOBER 2010 Supervisor: Dr LE VAN LIEN ABSTRACT The purpose of this paper is to analysis the capital management, especially management of efficiency use of capital of which concept of capital, efficiency use of capital, roles of capital, and making decision on capital management are mainly concentration If a company has a well managed capital, the company will run effectively and create profits Nevertheless, when there is failure in managing capital effectively, it can cause losses for the business and lead them to dissolution or bankruptcy It is mostly occurred in SOEs because of their management tend to have weaknesses, shortcomings and wrongdoings VINASHIN is specific case of failure in managing capital effectively In this thesis, I would like to discuss the failure in capital management of VINASHIN, and then suggest some solutions and recommendations for the organization iv TABLE OF CONTENT Page Declaration of Originality and Word Count ii Acknowledgment iii Abstract iv Table of content v List of figure ix List of tables x List of Abbreviations xi CHAPTER INTRODUCTION 1.1 Background of the thesis 1.2 Aims of the project 1.3 Problem statement 1.4 Structure of the thesis 1.4 Limitation CHAPTER LITERATURE REVIEW 2.1 Background of capital and the necessary to manage capital efficiency v 2.1.1 Capital and important of capital in SOEs 2.1.1.1 Definition of capital 2.1.1.2 Definition of efficiency of capital 2.1.2 Classification of capital and sources of capital 10 2.1.2.1 Capital classification method based on rotation 10 2.1.2.2 Classification by source of capital formation 13 2.1.2.3 Classification by time to acquisition 15 2.1.3 Roles of capital 15 2.1.4 Factors affected the efficiency of capital 17 2.1.4.1 Objective factors 17 2.1.4.2 Subjective factors 19 2.2 Capital management decision making in Vietnam’s SOEs 21 2.2.1 Factors affected financial decision 21 2.2.2 Roles of Vietnam’s SOEs in market economy 23 2.2.3 The decision making in Vietnam’s SOEs 26 2.3 Measurement of efficiency use of capital 28 2.3.1 The need to improve the efficiency use of capital 28 2.3.2 Criteria to evaluate effectiveness of capital 29 2.3.2.1 Based on efficiency ratios 29 2.3.2.2 Criteria to evaluate firm’s ability to pay short-term debts 31 2.3.2.3 Criteria to evaluate firm’s ability to pay long-term debts 32 2.3.2.4 Criteria to evaluate effectiveness of management 33 vi CHAPTER RESEARCH METHODOLOGY 3.1 Research objectives 35 3.2 Data sources 36 3.3 Research methodology 37 3.3.1 Primary data 37 3.3.2 Secondary data 37 3.4 Data Collection 38 3.5 Research tool 39 3.5 Limitation of Research 39 CHAPTER CASE STUDY ANALYSIS 4.1 Background of VINASHIN 41 4.1.1 Short history 42 4.1.2 Group’s businesses 43 4.1.3 Business strategy and function 43 4.1.4 Development 44 4.1.5 Organizational structure 46 4.1.6 Accounting policy adopted 48 4.2 Assessment of capital management in VINASHIN 4.2.1 Overview of funding situation 48 48 vii 4.2.2 From of funding in VINASHIN 51 4.2.3 Analysis of efficiency of capital 53 4.3 The failure of VINASHIN in capital management 55 4.3.1 The downfall of VINASHIN 55 4.3.2 Causes of the downfall 56 4.3.2.1 Subjective causes 57 4.3.2.2 Objective causes 62 4.4 Solutions to VINASHIN CHAPTER 63 CONCLUSION 5.1 Conclusion 66 5.2 Recommendation 67 BIBILIOGRAPHY 69 APPENDICES 72 viii LIST OF FIGURES Figure 1: VINASHIN’s organizational structure Figure 2: Broad of management ix LIST OF TABLES Table 1: Balance sheet of VINASHIN from 2008 – 2009 Table 2: Asset volatility Table 3: Capital volatility Table 4: Ratio analysis for efficiency of capital x large corporation, especially the top leader is limited in capacity, have expression irresponsible, arbitrary, self-interest, dishonest reporting, intentional violation of law in the observance of the provisions of the State, the decision of the Prime Minister to guide the investment projects, business capital for production, and use of capital and allocate staffs Group leader, first of all Board of Management and the top leader with a direct function of representing the owner has many shortcomings and mistakes in organization, management and administration, especially in the determination manufacturing sector, business, organization and management of subsidiaries, associated companies, conducting construction activities, capital management, finance, loans and paying debt In a short time, VINASHIN’s leaders has rapidly expanding group size, especially open many subsidiaries, associated companies and open to a number of fields which are not specialized for their primary task The Group has delayed construction and operation of charter provisions and other financial management, including financial management regulations, regulations on management of construction investment, and economic and technical norms, etc The Government Inspector assumes that the downfall of VINASHIN was a part responsibility of Government Agencies such as the Ministry of Transportation and Ministry of Finance, several local agencies because of weaknesses and wrongdoings when represent as the state ownership of the Group, monitoring and checking are weak, and slow to make effective solutions to handle the problems of the group Parent company - VINASHIN Group from 2006 - 2009 has 11 times auditing, inspection, but inspectors still not fully discover correct conclusion and weaknesses, serious shortcomings of the group, has not given the corrective measures, prevent and solve timely and effective, although the media agencies has been early warning 61 and many times public the expression of the difficulties and shortcomings of VINASHIN 4.3.2.2 Objective causes Group model is still in pilot phase, there is no preliminary review and evaluate effectiveness; institutional mechanisms are lacking or are not synchronized The Minister indicated that the Broad of Management of the VINASHIN’s holding company run by new group model but kept the same rules, the old financial regulations, and keep the position of Chairman and CEO for many years, etc Nowadays, the financial crisis and economic recession over the world in general as well as the sudden drop in the needs of the global shipbuilding and shipping industries in particular has recently affected the development of shipbuilding industry, maritime transport, including VINASHIN (Ngo Khac Le, Vinashin: Lessons learned, 24 August 2010, www.bairdmaritime.com ) It caused reduction of 38 percent in new shipbuilding orders, 57 percent in orders of containerships, and 66% in bulk carries orders compare to the year 2007 In this difficult times, many shipyards will bankruptcy if they not have ability to manage its capital effectively 62 4.4 SOLUTIONS TO VINASHIN Today, the cooperation among the Government, Government Offices, and VINASHIN will help VINASHIN solve their problems In the future, VINASHIN must pay all their debts and liabilities However, in recent times, company can only play a part of their debt by the help of the government and other organizations Now, VINASHIN should accelerate the restructuring process as Government’s advice in order to effectively overcome VINASHIN’s weaknesses and violations On August 12, the Prime Minister established a committee to restructure VINASHIN The committee’s task is to study the situation and propose policies and other remedies for VINASHIN, as well as to organize the implementation of these policies and measures to enable it to stabilize and develop its business (Ngo Khac Le, Vinashin: Lessons learned, 24 August 2010, www.bairdmaritime.com) Restructure of VINASHIN aims to reducing their debts, restoring capital, and minimum losses To prevent the negative effect from VINASHIN to the national economy and foreign investment, the Government will ensure sufficient capital to VINASHIN to pay off mature foreign debts And VINASHIN will restructure loans and debts when complete projects under the supervision of the Government Re-define VINASHIN’s development strategy and narrowing its scope are the primary task when restructure the Group Major strategy of VINASHIN in recent years is continue to promote the results achieved over many years of the enterprise, reaffirm the mechanical engineering industry is a key sector in the strategy of industrialization and modernization of the country, shipbuilding industry and ship repair industry is economic key to develop maritime industry and implementation of Vietnam’s maritime strategy up to 2020 and subsequent years When restructure, 63 VINASHIN continue develop based on those strategy The “new” VINASHIN will focus on three main sectors consist of shipbuilding and ship repair with suitable scale, supporting industries for the shipbuilding and ship repair, and training and skill enhancement for staff and workers of shipping industry After restructure, the “new” organizational structure of VINASHIN will continue remain 43 enterprises and reduce 216 enterprises; total labor of 26,660; total assets of 68,234 billion dong; and total liabilities of 53,054 billion dong In addition, during VINASHIN’s restructure, the organization will focus on several projects and restructure some incomplete projects According to restructure plan, up the year ended 2010; VINASHIN will complete 57 ships with the amount of 573 billion dong and expected to supply over 75 vessels with the amount of 15,600 billion dong in 2011 Under the restructure plan, VINASHIN is trying to reduce the unemployment workers as much as possible Therefore, “new” VINASHIN focus on remain staffs to enhance their level of professional skills into company’s major shipyards, and coordinate with the Federation of Labor, Department of Labor, and Invalids and Social Affairs to allocate suitable jobs for their employees - Vietnam Business New Another task of VINASHIN when implementing restructure plan is pay their debts and liabilities as much as possible Transfer or privatize the group’s affiliates, and reschedule local and foreign credits is one way to deal with VINASHIN’s debts and cover its capital For example, according to Vietnam Financial Review a number of its ship- building yards, shipbuilding industrial zones, and maritime transportation companies will be handed over to the Vietnam National Oil & Gas Group (PetroVietnam) and the Vietnam Shipping Lines Industry Corporation (Vinalines), who will have responsible to pay debts for VINASHIN In addition, in order to arrange full capital payment, VINASHIN is trying to negotiate with creditors to have 64 more time for their payment deadlines Moreover, the Group also continues negotiate with vessel owners to lengthen the completion deadlines in order to complete its projects and have money to pay the debts Furthermore, VINASHIN is trying to attract investors through several potential units, which easy to sell As results, there are several investors accept to purchase company’s units Besides, when becoming Limited Organization as restructuring plan, VINASHIN will receive additional charter capitals from the Fund's charter business support arrangements as well as arrangements by the Government promised to continue issuing bonds to restructure VINASHIN’s debts and implementation several work-in-progress projects Pumping more money into VINASHIN for the purpose of improving the debt-capital ratio is too high, an indication of poor business performance As results, the capital management is not effective In short, it is clearly needed to restructure VINASHIN under the creditor’s perspective However, other State-owned economic groups in Vietnam expanded their investment activities outside of their core business so it can lead to the similar situation as VINASHIN if they are lack of concentration from the Government as well as mistakes from companies’ management It would be the government's burden when implementing Restructuring VINASHIN because other groups will expected have the same assistance Therefore, the Government must careful consider all situations can occur when Restructuring VINASHIN The best ways is implementing the restructuring step by step with review and revise the results of restructuring to whether continue next step 65 CHAPTER 5: CONCLUSION AND RECOMMENDATION This chapter concentrates on discussion of the results collected in the previous chapter As far as concern, recommendation for capital management of VINASHIN and draw experiences with other State-owned Enterprises 4.5 CONCLUSION The organization, management, and capital efficiency is a matter of time urgency, are vital to businesses existence especially in the absence of capital for economic development like Vietnam Management and use of capital efficiency will contribute to improving production and business efficiency, increase profitability, increase accumulation ability, helping expand business’s reproduction, perform duties with the State, and enhance living standard of employees In recent years, when Vietnam’s market has become a market-oriented socialist, the improvement of efficiency use of capital is the key of existence and development of any organization, especially State-owned Enterprises (SOEs) With a certain amount of capital, to improve the efficiency use of capital enterprises must be combined harmoniously between the efficiency of the capital with the conditions of the business 66 Nowadays, SOEs plays important role in economic sectors of Vietnam’s economy Nevertheless, actually SOEs have not been implemented well its roles and responsibilities One of proofs for the absence of SOEs’ roles and responsibilities is low business efficiency with the loss of various SOEs In addition, SOEs has not been done well their duty to preserve and develop the capital From the study of basic theories of capital and capital management, the factors affect company’s capital management, and problems of capital management; the thesis deeply research the status of capital management in VINASHIN From the research, the capital management of VINASHIN is very poor It means that there is inefficiency use of capital in VINASHIN that leads to the downfall of VINASHIN in recent years because of their huge debts which are unable to pay without help from the Government Ministers, Government Offices, and other organizations 4.6 RECOMMENDATION With the knowledge and insight gained from the study, several recommendations can be suggested in relation with Vietnam Shipbuilding Industry Group (VINASHIN) First, promote the processing of violations at VINASHIN because of management weaknesses and wrongdoings For example, the management structure of VINASHIN must review their mistakes The Prime Minister can reposition of Broad of Management of VINASHIN, especially the Chairman – Mr Pham Thanh Binh, who have most serious responsibility for the downfall of the Group 67 Second, it is needed to recovery of debts from VINASHIN It is the most difficult job However, with the help of the State, Government Offices, and other organization; the Group is in the progress to full payment its debts For example, the Government continues give loans to VINASHIN with preferential interest rate to compete projects Besides, the Government supports a non-refundable fund to pay VINASHIN’s foreign debts Third, restructuring VINASHIN is the best way to deal with current situation of the company Under the restructuring plan, the Group will focus on their three main core business consists of shipbuilding industry, ship repair industry, and supporting industry for shipbuilding In addition, VINASHIN will reduce their number of subsidiaries as much as possible during the restructuring plan That means VINASHIN will focus on seven units included: Corporations (Pha Rung, Nam Trieu, and Bach Dang) and Limited Companies (Ha Long, Cam Ranh, Saigon Shipbuilding Industry Limited Company, and Saigon Shipbuilding and Marine Industry Limited Company) Last but not least, from the case of VINASHIN, other enterprises especially SOEs have drawn their experiences They should focus only on their core business, prevent to scattered investments In addition, SOEs should consider on their management policy as well as the activities of leaders to prevent problems from management weaknesses and wrongdoings 68 BIOGRAPHY David F Hawkins, Corporate Financial Reporting and Analysis, 4th edition, FRWIN/ McGraw-Hill Keown, A.J., Martin, J.D., et al (2005) 10th edn; Financial Management Pearson J.William Petty, A.J., J.D., Martin, et al Financial Management, 4th edn, Pearson Country Report: Vietnam, August 2008, Economist Intelligence Unit, United Kingdom Website: www.eiu.com Matt H Evans, CPA, CMA, CFM; Course 6: The Management of Capital Maritime Vietnam Vietnam’s Industry Outlook, 2009 http://maritimeshows.com/vietnam/index.php Business capital, http://www.businessfinance.com/business-capital.htm Jean Murray, Capital, http://biztaxlaw.about.com/od/glossaryc/g/capital.htm Secondary data, http://en.wikipedia.org/wiki/Secondary_data 10 Ngo Khac Le, Vinashin: Lessons learned, 24 August 2010, www.bairdmaritime.com 11 www.vinashin.com.vn 69 12 JAMES HOOKWAY, The Wall Street Journal Vietnamese Premier Faces Fallout on Vinashin, www.wsi.com 13 Big debtor named Vinashin unveiled, Apr, 2010 http://www.intellasia.net/news/articles/business/111290834_printer.shtml 14 Vinashin collapse gives State a lesson, http://vietnambusiness.dztimes.net/2011/02/vinashin-collapse-gives-statelesson.html 15 Vinashin In Financial Strife: A Bad Example? 14 August 2010, http://www.vfr.vn/index.php?option=com_content&task=view&id=1109&Ite mid=26 16 Restructuring Vinashin: Pros and Cons, http://vietnambusiness.asia/restructuring-vinashin-pros-and-cons/ 17 http://www.bsc.com.vn/News/2010/8/7/105909.aspx 18 http://vef.vn/2010-10-30-vinashin-nhung-khoan-no-khong-dia-chi 19 http://www.mandieselturbo.com 20 http://www.mbaprograms.org 21 http://business.ezineseeker.com 22 http://mats.hotbox.ru 23 http://www.bcsschool.kiev.ua 24 http://www.saidin.com 25 http://www.vnbiz.com.vn 70 26 http://www.vneconomy.com.vn 27 http://www.essaychief.com 28 http://www.kosmix.com 29 http://www.bfi.org.uk 30 http://fc.bethany.edu 31 http://www.nhandan.org.vn 32 "Vietnam: Gov't plans to restructure Vinashin.", Thai Press Reports, August 2010 Issue 33 http://www.nzica.com 34 http://smartcmns.com 35 http://www.aaps.k12.mi.us 36 http://coursgratuits.net 37 http://www.dcs.shef.ac.uk 38 http://textbooksonline.tn.nic.in 39 http://www.andreabiancalani.it 40 http://www.asb.co.za 41 http://metaprocess.ru 42 http://www.manbw.com 71 72 APPENDICES Calculation of Asset Volatility B  (%) =C4-C3 =C5-C4 77322 93238 102536 D  Total Assets 2007 2008 2009 C =D4/C3 =D5/C4 Calculation of Capital Volatility B D 2007 C 2008 E F G 2009 A Liabilities 70700 88521 =(D3-C3)/C3 96635 =(F3-D3)/D3 I term 43940 =(D4-C4)/C4 48290 =(F4-D4)/D4 44572 =(D5-C5)/C5 48345 =(F5-D5)/D5 3552 =(D6-C6)/C6 4.698 =(F6-D6)/D6 Short27000 II Longterm 43700 B Owner’s Equity 6613 73 Calculation of Ratio Analysis A B C D 2007 2008 2009 Net Profit 696900 1028600 -560000 Revenue 21078 28853 22461 Total Capital 7022 4762 5900 Owner’s Equity 6613 3552 4698 Total Assets 77322 93238 102536 Current Assets 18993 44991 50200 22200 22900 27562 10 Account Receivables Total Liabilities 70700 88512 96635 11 Current Liabilities 27000 43940 48920 2008 2009 =(D3*2)/(C5+D5) =(D3*2)/(C7+D7) =(D3*2)/(C6+D6) =D8/D11 =(D4*2)/(C9+D9) =(D9/D4)*365 =(E3*2)/(D4+E4) =(E3*2)/(D7+E7) =(E3*2)/(D6+E6) =E8/E11 =(E4*2)/(D9+E9) =(E9/E4)*365 ROTC ROA ROE Current Ratio Debtor's Turnover (times) (days) 74 75 ... iii CAPITAL MANAGEMENT IN VIETNAM’S SHIPBUILDING INDUSTRY, APPLYING ACCOUNTING POLICY, SUPPLYING RELEVANT INFORMATION FOR FINANCIAL MANAGERS: A CASE STUDY ON VINASHIN (VIETNAM SHIPBUILDING INDUSTRY. .. which concept of capital, efficiency use of capital, roles of capital, and making decision on capital management are mainly concentration If a company has a well managed capital, the company will... 2009, and financial ratio analysis Financial ratios are the principle tools for interpreting financial statements However, because of incomplete company’s financial statement so the financial ratio