The frailties in Vietnam's logistics sector need to be addressed as demand will only grow as integration continues.
Vietnam’s logistics sector has largely failed to match the potential it’s considered to possess nor fully meet demand. Many enterprises are now looking for the opportunities to join the sector, with Panasonic Vietnam recently setting up a Global Procurement Division in charge of all purchasing activities to cut costs by purchasing large quantities and better utilizing transport modes.
“We have set up new function of buying and selling so that our division can directly import and export or act as a trading company instead of functioning as a representative office as previously,” General Manager of the Global Procurement Division at Panasonic Vietnam, Mr. TabuchiTeppei, said: “Our establishment contributes to further cost reductions at Panasonic factories.”
According to a recent report from the Vietnam Logistics Association (VLA), the sector is recording average growth of 20 to 24 per cent each year despite the outsourcing logistics market only accounting for 3 to 4 per cent of total GDP.
In 2014 and 2015, 80 per cent of enterprises in the sector reached or exceeded their annual plans. Seventy per cent of logistics enterprises recorded profits while only 1 per cent went bankrupt; much less than in other industries. A number of large firms, such as SNP, Gemadept, Vinafco, Transimex Saigon, Vinafreight, Viconship, Vietfracht, and Sotrans are viewed as operating in a very professional manner.
“Many enterprises in the processing industry have independent logistics departments or subsidiaries that work effectively and professionally,” according to Mr. Tran Du Lich, a member of the National Assembly Economic Committee.
In July, the Gemadept Corporation and the Minh Phu Hau Giang Port Company, an affiliate of the Minh Phu Seafood Corporation, agreed to build a VND670 billion ($30.8 million), 15 ha logistics center in the Mekong Delta province of Hau Giang. Gemadept will provide 51 per cent of the investment capital.
Mr. Pham Hong Hai, General Director of the Gemadept Logistics Company, a subsidiary of the Gemadept Corporation, said that the project will be connected with other logistics centers in Ho Chi Minh City, Hai Phong, Da Nang and elsewhere in Vietnam, together with other countries in the Asia-Pacific region.
“The project will help to cut logistics costs by up to 30 per cent for exporters in the Mekong Delta and by up to 20 per cent for companies producing consumer goods for distribution in the region,” Mr. Hai said.
Figures from VLA show that the average charter capital of logistics companies is about VND4-6 billion ($180,000- $270,000); three or four times higher than in 2007. The number of small and medium-sized enterprises account for 72 per cent, while the remainder are large enterprises with charter capital of more than VND20 billion ($890,000). The number of enterprises using integrated logistics services providers or a third-party logistics provider (3PL) has grown over recent years and now account for 15 to 20 per cent.
The sector has continued to embrace information technology, with 10 per cent of enterprises being equipped with Enterprise Resource Planning systems, 17 per cent using Electronic Data Interchange, and most using customs and accounting software. In transport, 19 per cent of enterprises use transportation management systems and 29 per cent use GPS. Meanwhile, in warehousing, nearly 17 per cent used bar code systems and warehouse management software.
“Overall, the operational capacity of logistics enterprises has developed and exhibits stability,” according to VLA Chairman Do Xuan Quang. “Many businesses have plans to develop transport, warehousing, and integrated logistics services providers, or 3PL.”
Mr. Quang also noted that Vietnam’s logistics industry has built trust with not only domestic but also international customers, leveraging local advantages and cooperating with foreign firms to integrate logistics activities.
Limitations to address
Despite the positives, the facts show that only a small number of domestic logistics enterprises have the capacity to join international logistic chains or supply foreign corporations. “Vietnamese enterprises account for about 11 per cent in quantity and 5 per cent of the value in the total supply system of Panasonic factories in Vietnam,” Mr. Teppei said. “Panasonic evaluates suppliers by certain criteria, such as quality assurance, appropriate scale, and technology.”
He added, however, that this could be regarded as a good sign for Vietnamese enterprises who wish to become a Panasonic supplier in the future because domestic supply is currently quite limited.
VLA is unhappy that of the 1,300 enterprises in Vietnam’s logistics sector, foreign-invested firms hold 75 per cent of the market share while representing only 4 to 5 per cent of players.
“Logistics and distribution power currently lies with foreign investors and enterprises while domestic firms only play a minor role,” said Vice President of Avina Logistic, Ms. Le Hoang Oanh. “Preferential investment policies, the appearance of 100 per cent foreign invested enterprises, and a lack of technology transfer makes it difficult for domestic companies to seize opportunities and secure resources.” Vietnam is losing its distribution power in the global supply chain as a result.
Shortages of skilled workers are also an obstacle for the local logistics sector. According to Mr. Quang, only 5 to 7 per cent of workers are well trained and educated while 85 per cent of enterprises must train their workers after they are employed. About 40 per cent of logistics companies said that their workers satisfy their requirements while 23 per cent complained about low skills.
According to Deputy Minister of Industry and Trade Tran Tuan Anh, in recent years the government has spent a large part of the State budget and ODA resources to invest in infrastructure to facilitate freight transport and the development of logistics services. Vietnam’s seaport network has also seen investment in large-scale constructions and modern equipment.
However, one of the major difficulties for logistics enterprises is the poor connection between infrastructure and commodity centers. Most cities and provinces lack forwarding centers and dedicated supply services.
“Transport infrastructure, connectivity between seaports, airports, traffic routes, production areas, and warehousing is inconsistent so vehicles need to travel further and carry less cargo,” Ms. Oanh explained. “This leads to high logistic costs.”
The legal and institutional framework for logistics is also quite complex and in need of closer coordination between relevant agencies. “Administrative procedures are slow and overlap between management agencies as well as legislation, which affect efficiency,” Mr. Quang said.
Efforts at developing technology are considered to have been ineffective. “Business operations are not effective because information technology is not sufficiently applied and productivity is low,” Ms. Oanh said. About 25 to 30 per cent of companies choose to outsource logistics services, which also affects efficiency and the development of logistics outsourcing in Vietnam.
The many free trade agreements (FTAs) Vietnam has signed and the establishment of ASEAN Economic Community (AEC) at the end of this year will lead to increases in both imports and exports and foreign investment is predicted to grow strongly. Many logistics enterprises in ASEAN countries are keen to expand their markets. Enterprises from these countries have a deeper understanding of the laws, customs and culture of Vietnam than those from other countries, making development and integration easier.
“Vietnam’s logistics sector opened up in 2014 under commitments made when the country joined the WTO, and competition has been fierce between domestic and foreign enterprises,” Mr. Hai said. “The opportunities are shared equally, so enterprises with careful preparations can leverage these opportunities to gain a competitive advantage.”
To face the foreign challenge, many local logistics enterprises agree that they need to work together to create a complete chain, because loose links are paving the way for foreign competitors to dominate the market.
The State should also have a policy for lending to local logistics enterprises. Moreover, to help cut costs, transport infrastructure and procedures must have a clearer strategy.
“Many domestic companies have potential and are enthusiastic to become partners of Panasonic but their poor management is a major challenge,” Mr. Teppei said. “In the future, when Vietnam’s market becomes more open, it will be critical for domestic companies to have an open mind and learn from successful foreign companies to improve.”
“I think that a change in mindset to adapt to the new era is very important. Previously, logistics enterprises mostly invested in property and infrastructure. In the new context, logistics services need to meet the demands of customers. Competition is now based on human resources, technology, and the effective exploitation of logistics infrastructure. We understand that one business cannot meet all requirements, so logistics enterprises need to cooperate with each other to improve overall competitiveness.”
Mr. Pham Hong Hai, General Director of the Gemadept Logistics Company
“At the moment, domestic logistics and supply chains are developing but not reaching their potential or the expectations of customers. However, I believe this situation will change in the future. Domestic enterprises must change and improve quickly, especially when the ASEAN Economic Community is established at the end of this year and more importantly when the TPP comes into effect.”
Mr. Tabuchi Teppei, General Manager of the Global Procurement Division at Panasonic Vietnam
“Vietnam has a good geopolitical location. If the State as well as local people can understand the value of logistics in the global chain, the country can become a logistics center for the region and the world.”
Ms. Le Hoang Oanh,Vice President of Avina Logistic
- logistics sector