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Improvements needed at suppliers of MNCs

Released at: 07:13, 12/08/2018

Improvements needed at suppliers of MNCs

Photo: Viet Tuan

Meeting product quality standards is not the only barrier to Vietnamese enterprises becoming suppliers to MNCs.

by Nghi Do

Located at the Quang Minh Industrial Park in Hanoi’s Me Linh district, the Export Mechanical Tool JSC (EMC)’s factory has produced and supplied auto parts and components for multinational companies (MNCs) such as SYM, Honda Vietnam, Yamaha, Suzuki, Ford, General Electric (GE), and Toyota over the past 20 years. Chairman Mr. Ho Viet Tam said revenue from supplying parts and components to these MNCs rose from 10 per cent of its total to 75 per cent in the 1996-2017 period and it has focused on investing in high-end technology and equipment and improving capacity every year. “Starting out as a small enterprise, we have always invested when needed to meet the requirements of MNCs,” Mr. Tam said.

Capacity improvements

After SYM became EMC’s first partner, in 1996, growth in the supplier’s revenue began to notably increase and stood at VND600 billion ($26.2 million) in 2017. Recording similar revenue last year, the Nhat Quang Steel Limited Company has supplied MNCs for eight years. When GE invested in the Nomura-Haiphong Industrial Park in northern Hai Phong city in 2011, Nhat Quang Steel’s scale was small but it then grew as a supplier to GE, Canon, Toyota and other foreign enterprises. 

Estimated monthly production stood at $1 million from 1,500 tons of steel pipes and steel products. “To join supply chains of MNCs, a willingness to change in terms of capacity improvement has been a decisive factor for the company.” Mr. Nguyen Trung Thanh, Deputy CEO of Nhat Quang Steel, told VET. The company is now the only fully Vietnamese-owned supplier to GE in Vietnam.

The 2017 Provincial Competitiveness Index prepared by the Vietnam Chamber of Commerce and Industry (VCCI) shows that only 14 per cent of private domestic enterprises are suppliers to foreign-invested enterprises (FIEs). Only 27 per cent of total inputs and materials supplied to FIEs were bought from Vietnamese companies, with the remainder being bought from other FIEs. The involvement of Vietnamese companies, in particular small and medium-sized enterprises (SMEs), remains limited, Ms. Bui Thu Thuy, Deputy Director General of the Enterprise Development Agency at the Ministry of Planning and Investment (MPI), told a May conference in Hanoi.

The agency has held programs to connect local SMEs and MNCs three times but only two SMEs were able to meet the standards required. Ms. Thuy estimates that only 0.4 per cent of Vietnam’s 600,000 enterprises can meet the necessary requirements for being a supplier to MNCs. Capacity is weak, she explained, and standards and output quality are low.

Support from MNCs

The obstacle for Vietnamese suppliers like EMC and Nhat Quang Steel is not that they can’t produce the quality products sought by MNCs. “Vietnamese enterprises can actually produce products that meet MNCs’ requirements,” Mr. Thanh said. “The problem is a lack of management in the production system.” GE, Canon, and Toyota have the same requirements of their suppliers, which need to able to produce products in the millions at the same quality, Mr. Thanh added. They don’t allow any mistakes in products, meaning that Vietnamese suppliers need good management systems. But there is some leeway early on. “Any mistakes are identified and not allowed to happen again,” he said. “The MNC reviews and assesses the progress of the Vietnamese supplier for a certain time.” 

The attitude of many Vietnamese enterprises can differ greatly from foreign enterprises, which is an issue in global supply chains, Mr. Tam said. “Vietnamese producers pay more attention to what to produce while foreign enterprises focus on the production processes and stability,” he said. Mr. Thanh said that foreign partners look at the workplace environment at Vietnamese suppliers, the stability or otherwise of their business activities and finances, and the use of their workers, management mechanisms, and management systems, etc. “We have learned a great deal as a supplier from MNCs like GE and Canon,” he said. 

Meanwhile, EMC received technical and operational support from the Japan External Trade Organization (JETRO) Hanoi and some MNCs and then approached other MNCs. The Manh Quang Mechanics Co., which specializes in all types of sprockets, gears, shafts, and spindles and mechanical parts for vehicles, forklifts, agricultural machinery, and other industries, has also been supported by MNCs in the past. Recognizing the strict requirements of MNCs, CEO Mr. Nguyen Manh Quang told VET, has helped it be more professional in terms of mindset and operational systems. 

With no support coming from MNCs, Nhat Quang Steel’s leaders had to change their operations and management systems to improve capacity and meet the requirements of its foreign partners. The MNCs it has worked with engaged with the company and spelt out their requirements but offered no support or contracts. Only when they met their requirements were orders placed. 

Nhat Quang Steel and EMC along with 43 Vietnamese enterprises have received support since May 24 under the two-year Vietnam Supplier Development Program (SDP) held by the International Finance Corporation (IFC) and the Ministry of Industry and Trade (MoIT). Working with eight leading MNCs - Bosch, Canon, Datalogic, Denso, Ford, GE, Panasonic and Toyota - the program aims to help domestic suppliers, through the value chain in targeted sectors, meet the requirements of MNCs on quality, price and delivery, among other matters. They can then be linked to MNCs for future supply opportunities. Subsequent programs in the future will potentially cover other sectors and MNCs, giving more Vietnamese companies the chance to participate, according to the IFC. 

More seeking suppliers

The number of MNCs pursuing Vietnamese suppliers through the Vietnam Association for Supporting Industries (VASI) has increased since its establishment early last year and they are primarily in the automotive, electronics, and household appliance sectors, according to Ms. Truong Chi Binh, Vice Chairwoman and Secretary General of VASI. “Few Vietnamese enterprises, however, meet their requirements,” she added. The association hopes to help more Vietnamese enterprises cooperate with foreign enterprises through annual domestic and international fairs and conferences. 

Vietnam possesses advantages in motorbike manufacturing, with a total of 300 local support industry producers. The government has offered more incentives to facilitate support industries in general and those in the automotive sector in particular than previously, Ms. Binh said. As the quality of Vietnamese products is actually superior to Chinese equivalents, MNCs wish to engage Vietnamese suppliers for their supply chains. Manufacturing costs in Vietnam, though, are now higher than in regional countries like Thailand, making it difficult for domestic enterprises to compete.

The prospects for the development of the automotive industry will improve in the time to come, VASI believes. Ms. Binh suggested Vietnamese enterprises in support industries regularly upgrade their manufacturing to international standards and cut costs to improve their competitive capacity. “They should also devise long-term strategies, enhance connectivity, and actively join global supply chains to seize more opportunities in the future,” she said. 

Besides support from foreign organizations, Manh Quang, EMC, and Nhat Quang plan to actively upgrade their equipment and production lines every year to keep pace with global trends. “We continue to seek more overseas customers through sales and marketing promotions,” Mr. Thanh from Nhat Quang Steel said. “We will also pay attention to greater investment in our operational systems.” The company targets revenue growth of 25 per cent this year and continued double digit growth in the future, as MNCs arrive in Vietnam and elsewhere. 
EMC, meanwhile, plans to expand its new export manufacturing facility this year and anticipates 5 per cent revenue growth for the year. “We decided that 5 per cent of annual revenue will be spent on upgrading technology and equipment to meet the requirements of MNCs and give us access to more customers in the future,” Mr. Tam said.

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