It's entirely possible to develop support industries in Vietnam but proposals and policies are needed to take advantage of the opportunities.
Samsung Electronics received approval in early July to build a $1 billion factory in Bac Ninh province, to supply small displays for Samsung smart phones and tablets starting sometime next year. The presence of Samsung proves that Vietnam continues to be successful in attracting foreign direct investment. However, company’s leaders told local officials in mid-September that it must import materials worth $19.8 billion each year to export about $24 billion worth of products. The growing visibility of Samsung in Vietnam and others like it represents an opportunity for the country to encourage the development of support industries, which are expected to account for one-third of the manufacturing industry by 2020.
Still to develop
Samsung is not the only case of foreign investors wanting to purchase raw materials from Vietnamese suppliers but being unable to do so. According to Mr Takanori Yamashita, General Director of Fujitsu Vietnam, the company has been searching for local suppliers that can satisfy its requirements since it opened a factory in southern Dong Nai province 16 years ago. “No local supplier has been able to meet our requirements, as local support industries for electronics manufacturing remain underdeveloped,” Mr Yamashita told a recent seminar on support industries.
Mr Yasuzumi Hirotaka, Managing Director of the Ho Chi Minh City Office of the Japan External Trade Organization (JETRO), told VET that Japanese investment into Vietnam is increasing, including small and medium-sized enterprises SMEs in support industries, investing primarily in the south. But these enterprises cannot procure what they need from domestic suppliers. “Regardless of how many Japanese companies in support industries invest in Vietnam, if they cannot procure materials and parts from the domestic market then they must import from Japan, rendering their investments meaningless,” Mr Hirotaka said. He also believes that support industries remain underdeveloped in Vietnam because the government isn’t interest enough.
According to the results of a JETRO survey released in late 2013, the local procurement ratio of Japanese companies in Thailand is 21.4 per cent and 21.2 per cent in Indonesia, while in Vietnam it stands at just 13.2 per cent. The gap between these ratios is mainly the result of differences in foreign investment history and market scale. “If we look at the quality of the Vietnamese workforce and the potential of the market, I think we can see that in Vietnam, and especially in the south, the market economy is developing and companies are energetic,” said Mr Hirotaka.
The local procurement ratio in the south of the country is 14.8 per cent, against 11.8 per cent in the north. The survey results are in line with JETRO’s established view. “We organise support industry exhibitions and seminars every year and see that the development of support industries in the south over recent years has been significant,” Mr Hirotaka said. With about 560 support industry enterprises, Dong Nai is the country’s leading locality in this regard. Most, though, only supply basic products, while components, spare parts and advanced materials must still be imported.
Opportunities at hand
There can be no doubt that Vietnam is perfectly able to develop support industries. It has the workforce, the potential that comes with a market of 90 million people, and is geographically favourable being at the centre of ASEAN with good ports in Ho Chi Minh City and nearby Ba Ria Vung Tau province. Many Japanese support industry companies have chosen the south because of these advantages.
Mr Duangdej Yuaikwarmdee, Deputy Managing Director, General Manager Vietnam, of Reed Tradex Company Limited, which has been serving manufacturers in support industries for almost a decade, also sees that Vietnam’s support industries have an abundance of opportunities knocking at their doors. “There is a plentiful supply of active, enthusiastic human resources who are always eager to experience new technologies, new knowledge, and new inspirations and ideas,” he said. “With such tremendous opportunities and the government’s support and exhibition platforms that provide them with the necessary technologies, know-how, and business networks, it is entirely up to them whether or not they are able to take full advantage of the opportunities.”
The Ministry of Industry and Trade has submitted a draft decree to the government on developing support industries, with centres to be set up in key economic regions to provide parts makers with support in designing, testing, and controlling product quality, so that their products meet the requirements of global companies. The ministry has suggested a pilot scheme applicable to 2020, whereby personal income tax rates are halved for a maximum period of one year for individuals working as specialists or trainers in technology transfer at support industries. It also proposed corporate income tax breaks for a maximum of four years and a 50 per cent tax reduction for nine subsequent years for organisations, starting from the first profitable year.
Industry insiders spoke highly of the draft decree. “I think it is a wonderful initiative,” said Mr Yuaikwarmdee. “Vietnam’s support industries have so much potential. Once the industry acquires the technologies, the skill sets, the support, and the business networks they need, they could grow exponentially, because a huge amount of demand is just waiting for them to meet the standards set by foreign investors.”
Mr Hirotaka said that compared to previous development policies, apart from preferred company income tax rates there is also a wide range of support for investment in green companies, the development of human resources, assistance in attending international and domestic exhibitions, import tax exemptions and support for certain sectors. “From a broad perspective we appreciate all of these,” he said. “However, I think, there are many points that remain unclear. We expect much from the draft and we will discuss it with ‘Vietnam - Japan Support Industry Forum’ members and will present our opinions to the ministry.”
Mr Yuaikwarmdee sees strengths in the electronics and motorbike sectors. “Vietnam is now a regional hub for electronics manufacturing and is among the largest manufacturing hubs for motorbikes,” he said. “These are possible partly because their support industries are getting stronger every day. And it goes both ways. Investments by global manufacturers also drive the development of support industries. So, in these two sectors and many others, I believe support industries have a bright and exciting future ahead.”
Meanwhile, Mr Hirotaka believes that developing just one special sector is not enough; the government should develop all sectors. “Sectors that are easy to invest in, such as moulds or formation processing, are already developing,” he said. “Sectors such as plating or heat treatment, which cause environmental issues, may appear to be unimportant but in fact are crucial in determining product quality. The government should also treat these as preferred sectors.”
Back to Samsung. The company has agreed to cooperate with the Vietnamese Government to bolster local support industries in the technology sector. According to Mr Nguyen Van Dao, Deputy General Director of Samsung Vina, Samsung’s production of hundreds of millions of products a year in the northern provinces of Bac Ninh and Thai Nguyen has attracted foreign suppliers to Vietnam but local businesses would be able to replace them. “In the long term, Vietnam will form support industries for mobile phones and other electronics,” he said.
“I believe that the glory days for Vietnam’s support industries will be in the very near future, especially in electronics. I believe that we will see Vietnam rising as the largest electronics production hub in ASEAN and one of the largest in the world in just a few years from now.”
Mr Duangdej Yuaikwarmdee, Deputy Managing Director, General Manager Vietnam, Reed Tradex Company Limited
“I think the south of Vietnam will become an important and low-cost provider of parts. This will lead to the further development of its support industries.”
Mr Yasuzumi Hirotaka, Managing Director, Ho Chi Minh Office of JETRO