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Bit part players

Released at: 20:36, 20/02/2018 30 YEARS OF FDI IN VIETNAM

Bit part players

Photo: Viet Tuan

More is required for Vietnamese enterprises to fully benefit from increasing levels of foreign investment.

by Quang Huy

Ever since the introduction of the “doi moi” economic reforms in 1986, Vietnam’s economy has headed ever upwards. Apart from a brief period of economic distress and financial volatility from 2009 to 2012, the country has been a development posterchild, with sustained GDP growth of around 6 per cent a year, and is now knocking on the door of the middle-income club of economies. Low labor costs and foreign investment-friendly policies were the secret sauce, and as wages rose other trading nations migrated up the value chain, from low-end exports of garments, footwear, and furniture to automotive parts and electronics. But despite riding an export-oriented manufacturing wave supported by Japanese and South Korean investment, Vietnam’s success growth story remains incomplete, as a lack of effort to increase local content is set to present long-term consequences for a country that has every chance to become the long-awaited fifth Asian tiger. 

No accident

With mobile phones and components making up the largest segment, at about one-fifth, Vietnam’s export boom shows no signs of losing steam, surging 21 per cent in 2017 to a record $214 billion and defying a gloomy outlook at the beginning of the year. The impressive performance in terms of output growth and exports is largely attributed to Samsung Electronics, which through tax incentives and preferential land access has almost single-handedly turned Vietnam into an electronics manufacturing hub, with over $17 billion in investment in the 23 years since it arrived. 

But apart from significant job creation, much of the growth in hardware exports has been hollow from a technological learning and industrial upgrading standpoint. Although Vietnam has emerged as an attractive destination for foreign investors, with disbursed foreign direct investment (FDI) reaching a record high of $36 billion in 2017, double the figure four years ago, the country is still reaping only limited benefits from the presence of multinationals on its soil. 

Domestic companies supplying foreign companies account for only some 20 per cent of the total, while the figures are in the 30-40 per cent range in Thailand and Malaysia, according to the Vietnam Chamber of Commerce and Industry (VCCI). In some cases, Vietnam has gone too high-end. While much has been made of Samsung’s plans to invest $3 billion in mobile phone production in the country, links to the domestic supply base remain weak or non-existent. The prominence of Vietnamese packaging companies in Samsung’s supply chain is no accident, because packaging is one of the lowest value-added inputs to any manufacturing operation.

Efforts to increase local content have largely failed, as relatively few Vietnamese suppliers can meet these companies’ high standards in quality. “Most Vietnamese suppliers shook their heads when Samsung asked them to deliver products every two hours,” Mr. Hoang Anh Tuan, Chairman of Viet Hung Plastics Co., a Samsung tier-one vendor supplying plastic and packaging, told VET. “With only limited inventories being allowed and each activity being monitored electronically, suppliers must provide exact products within an accurate timeframe, which most local businesses today don’t have the capacity to achieve.”

Even so, the Bac Viet Technology Co., a tier-two vendor supplying precision molding and electronic components to Samsung, said it getting into global value chains never necessarily meant the hard times were over. “Having invested VND120 billion ($5.3 million) in our factory in 2012 to boost manufacturing capacity, the company painfully operated at a loss for the next five years while running orders for global lead firms,” Deputy Director Mr. Tran Quang Huy told VET. “Prior to that, we spent nine months just cleaning machinery and equipment for every visit by a foreign company, in the hope they would pick us.” 

Locally made

Experts said the number of local vendors for major firms like Samsung, which ended 2017 with only 29 tier-one vendors and nearly 200 tier-two vendors in the country, is too small and due to about half a million local firms lacking competitiveness. “Almost all Vietnamese businesses today remain passive, as they want support from the government without actively finding solutions to develop by themselves.” Professor Kenichi Ohno from Japan’s National Graduate Institute for Policy Studies, said. “Thus, it is difficult for Vietnam to catch up with other countries due to its low productivity.”

Beside access to finance, which represents one of the most pressing issues for suppliers trying to invest in required technological capacity, skills and the adoption of international quality standards to upgrade their production to become more competitive domestically and overseas are other critical weaknesses of Vietnamese enterprises, CEO of the Minh Nguyen Industry Support Co., Mr. Chau Ba Long, told VET. “For multinational giants like Samsung, quality is always the most important criteria,” he went on. “While they are always willing to support those with a desire to learn, only the best will be selected. If you are inconsistent, which a lot of enterprises have been, you will be kicked out of the game.” 

This situation could change, however. With around 30 per cent of the group’s mobile phones being built at its two factory complexes in the northern provinces of Bac Ninh and Thai Nguyen, Samsung intends to roughly double its local suppliers of smartphone components in Vietnam, to around 50 by 2020. Having sourced 57 per cent of core components locally last year, compared to 35 per cent in 2014, the group plans to help make Vietnamese companies more competitive through technology tie-ups and other cooperation, so that its suppliers can produce components that meet the necessary standards.

“With hopes of long-term sustainable growth in Vietnam, Samsung cooperates with the government in developing local support industries to ensure global competitiveness through practical activities,” President of the Samsung Electronics Ho Chi Minh City Complex (SEHC), Mr. Lee Sangsu, told VET. “We hope to continue creating more opportunities for businesses joining Samsung’s supply chain, ultimately helping us raise our global competitiveness as well as contributing to our long-term development in Vietnam.”

Industry observers said there are positive factors driving multinational firms to strengthen their links with domestic enterprises. Cost savings, easier tax refunds, and more straightforward administrative procedures encourage foreign investors to buy components and spare parts manufactured locally rather than importing them from elsewhere, Vice Chairman of the Vietnam Association of Foreign Invested Enterprises, Mr. Nguyen Van Toan, told VET. “Samsung, for example, has regularly coordinated with the Ministry of Industry and Trade and the Ministry of Planning and Investment since 2015 to organize exhibitions where it can meet suppliers and set specific standards for businesses wishing to become suppliers,” he explained. 

At the crossroads

Thirty years after it opened its door to foreign investment, Vietnam now intends to foster competitive components and materials suppliers to capitalize on free trade opportunities. Launched in January 2016, the government plans to invest a total of VND1.72 trillion ($77 million) in a project over the next ten years assisting support industries to improve their technical capabilities. About 52 per cent of this, or VND890 billion ($39.4 million), will be used to subsidize research and development activities. Some money will also be used to fund capital investment and other costs, so that Vietnamese companies can meet global standards and join the supply chains of multinational manufacturers.

From an international perspective, one stumbling block could be a lack of cohesion among Vietnamese government agencies. The finance, industry and trade, and planning and investment ministries all have their own programs to court businesses and cultivate industries. Vietnam is getting serious because it is concerned about the effects of the ASEAN Economic Community (AEC), an economic bloc comprising the ten members of ASEAN, but authorities will need to be on the same page to succeed, a Japanese business consultant who has lived in the country for over two decades suggested. 

From the supplier side, incentive policies should be adjusted or developed towards the actual reality that businesses are facing. “Having been taxed on imported materials to supply components for foreign firms before they become exported goods, our imported inputs are not subject to tax refunds according to regulations on consumption tax rebates,” Mr. Huy said. In addition, the exemption and reduction of corporate income tax rates for support enterprises during their early years are not that meaningful when most have to bear huge losses. “It would be much more beneficial to have tax incentives during the following five years, when businesses are actually making profits and are mature enough to survive in the industry,” he believes. 

In the meantime, multinationals will keep coming. The list includes a number of leading US companies such as Intel, Microsoft, and Procter & Gamble. As a signatory to the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) as well as the AEC, Vietnam is expected to play an increasingly important role as a production hub. “Vietnam is at a crossroads. It can grow as an enclave export platform specializing in low value-added assembly functions, or it can leverage the current wave of growth to move into higher value-added functions in ICT global value chains,” Mr. Toan said.  

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