Vietnam losing out to other ASEAN members in the FDI stakes for want of a well-developed supporting industry
Workers on a mobile phone assembly line of a Samsung Vietnam factory in Bac Ninh Province
Automobile giants like Toyota, Ford and Honda plan to expand production in ASEAN countries like Indonesia and the Philippines, but not Vietnam due to the country’s weak support industries.
An official from the Vietnam Automobile Manufacturers Association (VAMA) said Vietnam would not be a choice for foreign investors interested in the ASEAN unless supporting industries developed more quickly slowly.
“Vietnam’s supporting industries are far less developed than other ASEAN countries like Thailand, Malaysia and Indonesia.”
Locally-made automobile components and spare parts accounts for only 25 percent of the total parts used to manufacture a car, compared to some 60 percent in Indonesia.
The rate is very low, which means investors have to import more components and spare parts from other countries, raising their production costs, he said.
“Products made in Vietnam are less competitive than those made in other countries with higher localization rates.”
Former Ford Vietnam General Director Laurent Charpentier said it is not easy for car producers to purchase enough batteries in Vietnam. Battery producers in the country are mainly small-sized with limited production capacity. Thus, supply has not met local demand, he explained.
He said the local automobile industry would develop only when Vietnam does more to boost its supporting industry, which now has some 210 businesses making auto parts. The number is just a fifth of that in Indonesia, and a fiftieth of that in Thailand.
Weak supporting industries are a barrier to foreign investors not only in the automobile sector, but also in other sectors like motorbikes, electronics and garments.
Executives at chip producer Intel also said the company had been unable to find enough qualified Vietnamese partners. Intel has only 18 Vietnamese partners among hundreds of companies providing materials and components for its production.
"We have worked with many Vietnamese companies in the supporting industry. They showed very good samples, but when it came to actual business, their deliveries were not consistent," he said.
Samsung Electronics Vietnam has only five Vietnamese partners in its 60-strong supply chain, and they do simple jobs like packaging and printing. The others are mainly companies from South Korea or other ASEAN countries, or joint ventures between Vietnamese firms and foreign partners.
A company source said production had evolved from cheap cell phones five years ago into smart phones and tablets, but the local supporting industry companies have failed to keep pace with the technology.
Nguyen Van Dao, vice general director of Samsung Vina, said almost none of the Vietnamese firms could meet the technical requirements set by Samsung. With low technology, local firms could provide foreign investors simple products only.
“Thus, it is difficult to reach the target that half of 170 providers of Samsung are Vietnamese firms by 2015.”
Hirotaka Yasuzumi, managing director of the Japan External Trade Organization (JETRO), said Japanese firms see the weak supporting industry as their biggest challenge. A recent JETRO study found that for Japanese firms, Vietnam is the second most difficult place to do business behind Myanmar.
The ratio of Japanese firms’ use of local parts in Vietnam is just 28 percent, or half the rates in China and Thailand, the study showed.
This raises concerns about high input costs among firms that have already complained about tax policies and the lack of skilled workers and information, according to the report.
Support for support
Some industry insiders said the government is actually treating foreign electronics investors better than the local supporting industry.
Nguyen Anh Tuan, chairman of the Ho Chi Minh City Semiconductor Industry Association, said by failing to back the local supporting industry while pampering foreign investors with low taxes and land fees, the government is just giving the latter a chance to make use of cheap resources.
Tuan said foreign giants like Sony, JVC, and Panasonic only use Vietnamese companies to assemble components, generating little value addition.
Amid reducing import tariffs under free trade agreements, the primitive state of the supporting industry is a reason for foreign firms to shift their focus away from production to trading imported products. Most other auto firms manufacturing in Vietnam, like Toyota, Ford, and Honda, have increasingly resorted to importing and selling products. Their ratio of imported cars now matches locally made ones.
Even a few years ago 75 percent of their cars had been produced locally. Others like Canon, Sharp, and LG have also started to depend on imports.
Nguyen Mai, former vice minister of the Planning and Investment, said supporting industries, despite being a major concern for foreign investors, have not been improved over the past many years.
He said supporting industries in other countries develop into production mode within five or 10 years, but Vietnam's has been stuck in assembling for more than 30 years.
He said the problem was that the government has not offered specific policies to support the development of supporting industries.
Economist Dinh The Hien said state-owned corporations involved in key sectors of the economy want to participate in all stages of their production chain, instead of ordering spare parts for their products from private small-and medium-sized enterprises components. “It is one of reasons hindering the development of the local supporting industries.”
While local enterprises could not participate in supporting industries due to weak technology and limited capital capacity, and shortage of support from the government, foreign ones are not interested in it because of the small market scale.
A representative of a foreign car assembler in Vietnam said Vietnam has a very high number of assemblers (18) compared to the industry size (less than 200,000 units). “With multiple models assembled in all factories the average production run is less than 3,000 units a year,” he said.
“At this volume it is almost impossible to localize beyond a very basic level. Most component manufacturers require annual production runs of at least 100,000 units a year, and this will require exports if they are to set up in Vietnam,” he said.
According to Mai, the government needs to define which supporting industries we will boost in the coming years, and build specific policies to develop them.
“There is a trend of tax reduction in 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.”
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