Weak technology and limited financial capacity have hindered local enterprises from participating in the production chain of big foreign investors like Samsung, Toyota or Intel, leaving the manufacturing of components to foreign suppliers.
Samsung's recent expansion in Vietnam ushered the opening of 100 component providers for its factories.
Only 7 of those firms are Vietnamese companies; the rest are foreign firms, mainly from South Korea or other Southeast Asian countries.
Meanwhile, Intel has only 18 Vietnamese partners among the hundreds which provide materials and components for its operations. The situation is the same for Toyota--only two of its twelve suppliers in Vietnam are local firms.
Some 500 foreign companies have invested in supporting industries in Vietnam, producing mainly electronic components, and items for metal and rubber manufacturing, according to the Ministry of Planning and Investment.
The director of a manufacturing component producer in Ho Chi Minh City said most foreign-backed enterprises often select suppliers from their home countries or traditional ones which have participated in their global production chains.
“Local enterprises often participate in the chains as sub-contractors for the foreign-invested suppliers,” he said.
Local fledgling firms have found it hard to find customers and require government help. State agencies could meet with representatives from foreign-invested enterprises or send them lists of components that local firms can provide, he said.
Without the introduction, foreign firms will select traditional partners in their global production chains or those from their home countries, he noted.
However, he admitted that Vietnamese firms are too weak in terms of technology and capital to meet the criteria set by foreign producers.
At a recent meeting with Vietnamese enterprises, representatives from Samsung Vietnam have encouraged local firms to produce manufacturing components for their factories.
Hundreds of enterprises participated in the meeting, but most of them could not meet the criteria for even simple components like screws, chargers, and keyboards.
To become a Samsung supplier, local enterprises must have patented technology, facilities for research and development, and ISO certification for their products’ quality. They must also be able to ensure on-time delivery even when Samsung asks them to speed up production.
They must also follow Samsung's financial, labor, and waste treatment protocols.
Shim Won Hwan, general director of Samsung Complex based in the northern Bac Ninh province, said local supporting industries are under-developed and can only fill simple orders like packaging and printing for the company's factories.
Representatives from some local enterprises say it's difficult for them to become suppliers for foreign producers due to uncompetitive prices.
Former vice minister of Planning and Investment Nguyen Mai said input costs for local enterprises are much higher than for foreign ones, as the former have to pay interest rates of some 10 percent, while the latter can access loans in their home countries for only 2-3 percent.
Without state support, local enterprises can't compete with existing foreign suppliers, he said.
In addition to high lending rates, outdated technology is also an obstacle to local firms in developing supporting industries. However, they will have to seek ways to improve their technology by themselves, and can't expect any support from foreign producers.
Answering a question from Do Nhat Hoang, director of the Foreign Investment Agency under the Ministry of Planning and Investment about whether Samsung will offer technological support to Vietnamese enterprises which participate into its production chain or not, Jang Hoyoung, purchasing manager for Samsung Electronics Vietnam, said his firm produces the primary components for its products, and the technology they use is secret.
To have advanced technology, local enterprises need to rely on long-term research and investment. Samsung has also refused some Vietnamese offers to sign framework agreements so that they can feel secure about investing in production to supply foreign factories, or introduce their partners to the local enterprises to cooperate in a joint-venture.
Jang Hoyoung said his firm can't work in the area as it doesn't know the capacity of local enterprises, or interfere with its partners.
At a recent meeting of the Ministry of Industry and Trade, a representative from the auto parts manufacturer 19-8 said the government should issue specific regulations that force auto makers to purchase spare parts from local firms. Without the regulations, local small and medium-sized enterprises won't be able to compete.
Deputy Minister of Industry and Trade Le Duong Quang said car and part manufacturers should by all means cooperate, but Vietnam can't force auto-makers to buy components from local small and medium-sized enterprises.
The cooperation should be implemented on a voluntary basis, he said.
More focus required
Mai, the former vice minister, said supporting industries, despite being a major concern for foreign investors, have not improved in recent years.
He said supporting industries in other countries fully develop within 5-10 years, but Vietnam's has been stuck in a minor role for more than thirty years.
He said the government should offer specific policies to support the development of supporting industries and facilitate the establishment of major manufacturers in specific fields, he said, citing the way Thailand built up its automobile sector, and Malaysia built up its electronic supply chain.
Amid falling import tariffs from free trade agreements, the primitive state of Vietnam's supporting industry is a reason for foreign firms to shift their focus away from production to trading imported products, he said.
“There is a trend of tax reduction around the world, so Vietnam doesn’t have much time to develop its supporting industry. The most essential thing now is to define a concrete action plan - where, when, and what to do - and implement it well,” Mai said.
He urged local enterprises to cooperate with foreign suppliers in the field. By working with foreign providers, Vietnamese businesses could learn from their management experience and technological capacity to grow from bottom-level providers to potentially vital partners, he said.