Coca-Cola weighs global status against profit

Finan:

Irial Finan

We employ up to 2,000 people in our own business in Viet Nam. The multiplier effect and the number of indirect jobs typically range from between 6 and 10 jobs for 1 direct job. So if you take 500 distributors and each has 5 or 6 employees, you're already at 2,500 or 3,000 people as indirect/direct employees, because of our business.

With an additional investment of US$300 million, how many more jobs do you expect to create here?

Tuggle:

In the medium term, we would say about 500. But then we would be very disappointed if we haven't doubled our employees in the next 10 years, hopefully sooner.

Market statistics show that you have a strong footing here and should be making a profit, but that is not the case and you have been reporting losses. Why do you continue to invest here when you're making a loss?

Finan:

We believe in building long-term sustainability. We believe in investing first in our people, and in having world-class production, distribution and sales facilities. We believe in investing in our brands so we build a love for them that will sustain us in the future. Once we do that, we believe profits will follow.

I look at high tech companies, particularly software firms, that have been around for 10-15 years but have never made a penny. These companies are still sold for billions of dollar on the assumption that the product will eventually become successful. And you see that going on around the world every day. I think that the beauty of a business like ours is that in markets like Europe and the United States, we've been in business for up to 100 years, so we are firmly established and profitable. That profit allows us to invest in a market like Viet Nam and not have to turn a profit for a number of years.

Do you think $300 million is enough for you to become profitable in the next few years?

Finan:

I would say yes. But at the end of it, it's not so much about 200, 300 or 350, it's about doing the right thing. It's about building the right buildings. It's about ensuring our brands are properly invested so that we can build long-term sustainable buildings.

It is your responsibility to make a profit when you come to any market. When will it happen?

Finan:

Sure. I would say, as a manager, I have to make a profit yesterday. But I'm equally conscious of the fact that as we build more facilities and as our business grows, we will make a profit in the next few years for sure. It's not an exact science. You may become profitable in a year, it may take ten years. That's the way business goes. But we feel very confident that in the next 2, 3, or 4 years, we will be a successful business.

You highlighted earlier the importance of being a good corporate citizen. This means job creation and generating a revenue through taxes and turnover for any country that you operate in. What is Coca-Cola's stance on this?

Tuggle:

Clyde C. Tuggle

One of the things which we are very proud of is that every country we operate in, we adhere to the rules of that country. And the first rule of being a good corporate citizen is by abiding by the rules of that country. That means being transparent about our operations and paying taxes. So on the profits that we make in different markets around the world, we're very proud that we pay taxes on those profits.

It's been suggested that your financial operations in Viet Nam are not transparent enough and that you are trying to avoid paying taxes. What is your response?

Finan:

Basically there are 4 streams of tax that we will be paying: federal tax, VAT, import tax and corporate tax. We do pay a lot of tax in Viet Nam and we have paid more than $33 million from 2008 to May 2013. Last year alone, Coca-cola Vietnam paid $8.6 million . It's just that we don't pay corporate tax because we do not make sufficient profits. What's important to understand is for a global company like Coca-Cola, it's all about branding. We're very proud of our reputation, about insurance and maintaining high standings in every country we operate in. We're happy to pay tax, where necessary.

The conservations we have had over the past two days reinforce the fact that we're transparent and open to any necessary government agency scrutiny.

We don't understand why the issue of transfer pricing came up. We haven't done anything differently than we have anywhere else in the world. We read stories in newspapers about transfer pricing, but transfer pricing can mean different things in different markets.

Tuggle:

To be very clear, we don't engage in transfer pricing to evade tax-full stop. The advice we have taken from our discussions today is that we need to do a better job explaining our business model, how we operate our business, and how we create value and build the business in the long-term.

Finan:

The Coca-Cola brand is valued by Interbrand – a global measure of branding - at 80+ billion dollars – the most valuable brand in the world. It's taken us 127 years to build the brand to that value. Why would you take risk destroying it in 5 seconds? That could happen if we didn't apply very stringent government standards around what we do and how we do it. You must apply the law of the land in every country around the world.

Viet Nam is an emerging market. In emerging young markets, the cost of labour tends to be lower than other markets. When you first came to Viet Nam, you received a lot of business incentives to give you a competitive advantage, so why have your costs been so high?

Finan:

Firstly, about the cost. In emerging markets, labour costs are typically lower than in other markets, but other things aren't. For example, the trucks here are much smaller than in developed markets, and transport infrastructure is lacking. This means it takes more trucks more time to do the same job as in a developed market.

The bottling line, computer equipment and electricity: all these things are priced differently here.

For example – we spend US$100 million to build a factory in Viet Nam, but that same factory in the US would cost maybe $110 million. In markets such as Germany or Japan, the prices are always the same. If you build a plant here it may only produce a million cases, but its capacity is 70 million cases. There are lots of variables. Yes, it's the scale.

Finan:

We're happy to be an investor in Viet Nam because we actually believe it is an exciting market.

In 2010, our CEO Muhtar Kent announced an ambitious global goal: double our system revenue by the year 2020. In the process of breaking that down and working out how we were going to do that, it was very clear that markets like Viet Nam are essential. — VNS