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Position in global supply chains growing

Released at: 14:33, 25/11/2018

Position in global supply chains growing

Photo: VET Archives

Mr. Fred Burke, Managing Partner at Baker & McKenzie Vietnam, tells VET's Khanh Chi about Vietnam's role and the opportunities for local firms in the global supply chain.

by Khanh Chi

Mr. Fred Burke, Managing Partner at Baker & McKenzie Vietnam

What is the role of Vietnam in the global supply chain?

Vietnam’s role has really changed over the last 20 years. It was really not involved in the global supply chain much at all when I first arrived here in 1991. I think its total two-way trade with the entire world was only about $3 or $4 billion in 1991, mostly with the former Soviet bloc. Today, there is $50 billion-plus trade with the EU and with the US. So, trade has really boomed over the years. People are referring to Vietnam as an economic miracle and it really has moved itself into a prominent position in the global supply chain.

What progress has been made with the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) and how will it impact on supply chains between Vietnam and other member countries?

First, we were very disappointed when the US pulled out of the TPP after working for eight years on an agreement, which really would have been comprehensive and progressive itself. So, we’re actually happy to see that CPTPP members have decided to go ahead. It’s still something worth doing for the other eleven members. I think looking forward, it looks like the CPTPP will be ratified and come into effect early next year. Japan, Mexico, Singapore, Australia, and New Zealand have already ratified it, and Vietnam is believed to be doing so in November.

When six out of the eleven countries ratify the CPTPP it will come into effect in 60 days, so we can get there easily by the end of the year. It’s exciting that other countries are expressing interest in joining the CPTPP. Obviously, we have some ASEAN economies that would love to get in. Taiwan can be a member even though it’s not recognized as a separate, sovereign state. It can still be a customs territory for these kinds of agreements. South Korea, Indonesia, and even Thailand have expressed an interest. Even farther afield, the UK has actually expressed an interest in it and the Department for International Trade has called for stakeholder consultation and comments from British industry to see whether they may like to join the CPTPP.

The CPTPP is going to happen in the near future and along with some other key trade agreements such as the EVFTA will help boost jobs and exports even further. For a lot of different reasons, including the trade war, there’s a lot of new manufacturing investment coming into Vietnam, which may be more than what it can absorb, just like when it acceded to the WTO in 2007. At that point, there was a huge influx of foreign investment that sparked inflation and job shortages and a lot of capacity issues rose to the surface.

I think Vietnam is much better positioned to take advantage of the rising interest now, but it’s already having some dislocations. Lower-end jobs are leaving and higher-end jobs are coming in. That’s great for the country, but it also requires some relocation and reeducation of the workforce. 
 
What factors hinder Vietnamese enterprises from participating in the global value chain?

I think one characteristic of the global value chain these days is that all of these FTAs have different country of origin rules, different compliance standards, different non-tariff barriers in different countries. It’s extremely important that participants in the supply chain meet international standards in terms of record keeping and compliance with tax and labor laws. That has been challenging for Vietnam’s small- and medium-sized enterprises (SMEs). They are trying to exist in a regulatory environment that is very difficult for them, and often they’re not fully paying taxes or trying not to pay workers their entire legal entitlement in order to gain a cost advantage. 

Sometimes local authorities put pressure on them for purposes of squeezing out an advantage from them and that makes them sort of contaminated for purposes of the supply chains that lead to the big markets in the US, Japan and the EU. Those supply chains require a very tight sort of quarantine right back up to the original sources of raw materials and components so that they know there was no labor standard violation, no compliance with law issues. All of those things are important. Health and safety come into play when talking about food exports, which are big for Vietnam. It’s really important that the government adopt policies that support SMEs and don’t prey on them. The local tax authorities sometimes come around and squeeze them too hard. That hurts the competitiveness of local enterprises in the supply chains. 

A lot of foreign supply chains would like to include more Vietnamese SMEs. We see programs, for example at AmCham, where they have an Annual Supplier Day. That’s really growing interest on both sides in terms of the buyers and the sellers. It’s a terrific program. Walmart has done things for women entrepreneurs where they have huge attendance and go through the Walmart code of conduct, which is extremely complicated, but nevertheless the suppliers have to know, they have to live in that world if they want to participate in the supply chain.

Those are the kind of things I think the government can help with in administrative procedure reform. The Prime Minister has really been a strong backer of that for many years. We’ve been working on it, too, to try to bring to the attention of the government areas where administrative procedures are overly cumbersome or duplicative of other requirements that already exist in law.

Some have said that large corporations in Vietnam have their own supply networks so the opportunities for local companies are limited. What is your opinion? 

I think global supply chains are always looking for a cost advantage. It’s a very competitive world. They are trying to drive down price. Every year they will bid out the supplier roles but they don’t lock them in forever. An incumbent that is already supplying them and is already complying with their standards has an advantage, but that’s not to say that things don’t change.

Actually, they do change, like the fact that they moved to Vietnam. For example, Samsung is making so much of their global supply of hand phones in Vietnam. In the beginning, there was a complaint that only 2 per cent of the value added is actually in Vietnam, but gradually authorities in Bac Ninh province and that area around the Samsung’s factory have become very welcoming of Samsung suppliers, so they can obtain licenses easily without a lot of monkey business, and it’s growing very well. That means a lot more of the value added is gradually being sourced in Vietnam.

What should Vietnamese enterprises do to increase their added value and develop sustainably in the future, especially in the context of the ongoing digital revolution?

This is something that was mentioned at the World Economic Forum on ASEAN held in Hanoi recently. Prime Minister Nguyen Xuan Phuc as well as other leaders all acknowledged the reality of the digital revolution, Industry 4.0, the importance of AI, digitization, robots, and all these kinds of things that are going to be very important in the production process. So, on that note, I think the idea is how to educate the workforce for the future. People won’t just be cadre and use sewing machines in the future. They will be programming computers that do the sewing, so you have to have a workforce that is ready for that, otherwise you miss the chance. Vietnam right now has a very good educational foundation for the engineering, mathematics, and science skills that are needed for that kind of thing. 

However, there are still gaps. I remember when Intel set up, they were very impressed with the capacity of local engineers but there was still a gap in the practical application of their knowledge, so they had to introduce the HEAP program. This program was devised in conjunction and cooperation with the Ministry of Education and Training and was really successful. They had to spend another $35 million on it and it gave them a cadre of trained engineers, people at various stages who could really help businesses succeed here.

What policies should the Vietnamese Government adopt in order to encourage local enterprises to participate more actively in the global value chain?

I think that what is of the utmost importance is the continuing efforts at reforming administrative procedures, which is critical. We’ve been involved in a project called the trade facilitation agreement project, funded by USAID. That’s also designed to help make customs processing faster. Non-tariff barriers concern businesses, too. As businesses like predictability, if their goods are stuck in customs behind the border, it makes their businesses riskier and hinders the investment decisions of foreign investors.

On the other hand, Vietnam is also very good at several things that will be important for its continuing success. One is being deliberate, strategic and aggressive about negotiating international trade agreements so it can gain access to international markets. Vietnam, I think, is second-to-none in really working that system, and they’ve gotten a lot of opportunities as a result. Of course, they’ve had to open up a lot of the domestic market to foreign participation, but that has helped it be more competitive on the international scene, too. It’s actually working, the strategy. Living standards are going up so quickly. We talked about the “Vietnam economic miracle”. So, that’s one thing, the aggressive integration in FTAs.

In terms of trade promotion, more could be done with trade missions. We had a very successful one between AmCham and the city of Los Angeles. They came here first, then we sent a group there, and that resulted in a lot of contracts and new contacts that will lead to contracts in the future. Trade missions are quite useful. I think the one thing we should probably do more of is get incoming trade missions to go look at the provinces and not just the big cities.

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