Increasing numbers of local small and medium-sized enterprises are aiming to join the global supply chains of multinational corporations.
On a winter’s day earlier this year, Mr. Hoang Gia Hung, Chairman of the Viet Hung Packaging Company, welcomed an important guest at his factory. The man was Mr. Han Myoung Sup, Executive Vice President and President of Global Strategy & Operations Vietnam at Samsung, who is in charge of all of its business operations in the country.
There was no tea or coffee and no formal welcome in a reception room. As soon as he arrived Mr. Han went directly to the factory and warehouse where Viet Hung’s employees were hard at work. He took a look around the factory and examined production lines while listening to Mr. Hung explaining the production steps and management methods applied by the company.
It was a very important day for Mr. Hung, who was trying to persuade Mr. Han that his company remained qualified to be a first vendor of Samsung Electronics Vietnam, and the purpose of Mr. Han’s visit was to decide whether Samsung would continue its contract with Viet Hung in the future.
“We didn’t want to lose our business ties with Samsung because they are our biggest client,” said Mr. Hung.
He revealed that revenue from Samsung contracts accounted for half of his company’s total revenue in 2014, at around $45 million, which clearly illustrates just how important Samsung is to Viet Hung. Now, with its first factory in Hung Yen province, it is supplying packaging products to two Samsung manufacturing complexes in Bac Ninh and Hung Yen. The second factory will be built shortly in Ho Chi Minh City to serve Samsung’s under-construction complex in the city.
On the same day, not far from Viet Hung, Mr. Han also visited the An Phu Viet Plastic Company, which manufactures plastic smartphone covers and other plastic components. Unlike Viet Hung, An Phu Viet has not been a vendor of Samsung but is making preparations to join Samsung’s global supply chain. An Phu Viet won praise from Mr. Han that day for its preparations.
Mr. Nguyen Van Hung, General Director of An Phu Viet, is confident that his company will become a second vendor of Samsung soon. He has even dreamed that his company will do business directly with Samsung in just one or two years.
For Mr. Han, what Viet Hung, An Phu Viet, and other local small and medium-sized enterprises are doing implies a change of mindset. The change is that “they want to join the global supply chains of multinational corporations like Samsung.”
Indeed, for many years Vietnamese companies only focused on selling products in the local market. Some even believed that they must focus on competing with foreign companies rather than joining global supply chains.
Now, though, things are changing slowly. Samsung Electronics Vietnam reported that it is receiving more and more applications from local enterprises seeking to be vendors and more than 40 Vietnamese enterprises now supply equipment and components to Samsung in Vietnam. “To join a global supply chain it is not important whether your company is big or small,” said Mr. Hung from An Phu Viet. “The important thing is that you must meet all the requirements in quality, price, delivery time, management skills, and environmental protection.” For years, he went on, local companies have only focused on product quality and price while ignoring the other criteria of corporate management and environmental protection. This was a mistake of local companies, he said, and one his company had also made.
Such mistakes are the reason multinational companies have had difficulty in finding local suppliers to reduce their reliance on imports.
The localization rate of Made-in-Vietnam Samsung products is only around 36 per cent. Mr. Han said that Samsung wants to increase the rate to reduce spending on imports. In 2014 Samsung Vietnam spent over $26 billion importing components and the figure is estimated at around $30 billion for 2015. Import costs will keep rising in the future when Samsung completes the construction of its $2 billion manufacturing complex in Ho Chi Minh City.
Fortunately, Mr. Han said that Samsung has begun to feel confident about the ability of the Vietnamese enterprises that are or will become vendors of the electronics giant in the near future. Of course, with Samsung’s rapid expansion in Vietnam, the chance of local enterprises joining the supply chain is huge.
In 2014 and 2015 Samsung held two conferences in Hanoi to guide local enterprises on how to become vendors. Its efforts didn’t stop there, as the globe’s largest smartphone maker also provided assistance to specific companies to push up the localization rate.
There is one thing that local enterprises will find hard in joining Samsung’s global supply chains without assistance from the South Korean group: to find more local vendors Samsung has had to send engineers and experts to the country to provide technical assistance.
Viet Hung and An Phu Viet are among the lucky companies receiving assistance from Samsung within just two months. “They came and introduced us to the 5S and 3R management standards,” said Mr. Hung from An Phu Viet. “We had never heard of those standards before.”
These standards describe how to organize a workspace for efficiency and effectiveness by identifying and storing items used, maintaining the area and items, and sustaining new orders. The decision making process usually comes from a dialogue on standardization, which builds understanding among employees on how they should do their job. Mr. Hung said that most local companies have not paid attention to these standards but this is one of the most important things that multinational corporations want to see. “We can buy advanced technology, but changing corporate management requires a change of mindset,” he noted. “It is not easy to do.”
Just a few months ago An Phu Viet constantly had trouble in its quality and production management processes. For example, its warehouse was in complete disarray, which impacted on delivery times. Because of low awareness among its workers, Mr. Hung said, he found many products with errors. But everything changed after the new management standards were introduced by Samsung experts. Mr. Hung said his company is now much more effective, as inventory durations have fallen from one month to half a month and the number of workers on each production line was reduced from three to two.
The same efficiency has been seen at Viet Hung. The company’s Mr. Hung said that it used to fail to reach its production plans, while inventories and product errors were always high. But thanks to the assistance from Samsung, Viet Hung increased the efficient use of machinery from 65 per cent to 78 per cent. Customer complaints fell from 53 a month to 21 on average. “When we followed the new management methods it was not just to satisfy Samsung but also to satisfy our other clients such as Canon and Heineken,” Mr. Hung said.
Companies receiving assistance from Samsung are in the minority, however. As Vietnam implements a number of new free trade agreements and especially the TPP the country is expected to benefit from an influx of foreign direct investment (FDI) projects. But the weaknesses in support industries remain a bottleneck for economic development. Mr. Vu Tien Loc, Chairman of the Vietnam Chamber of Commerce and Industry, has long complained that local enterprises remained out of global supply chains during international integration.
According to the Japan External Trade Organization (JETRO), the low localization rate counts among the barriers for Japanese investors in Vietnam. Local content in products made in Vietnam by Japanese enterprises accounts for only 33 per cent, much lower than the 43 per cent in Indonesia and 55 per cent in Thailand.
“Vietnam has been extremely successful in attracting FDI and benefiting from significant export growth from FDI factories, but Vietnamese enterprises have had limited results in participating directly in that success,” said Ms. Sherry Boger, Chairman of the American Chamber of Commerce in Vietnam.
Right now, more than two-thirds of Vietnam’s exports are from foreign-invested factories. Ms. Boger said that Vietnam’s main contribution to supply chains is low-skilled labor. “The cost of imported materials and components is estimated to equal 90 per cent of the value of Vietnam’s exports of manufactured goods,” she added.
Of course, when local companies fail to supply components and equipment to foreign-invested factories, investors will continue to delay their investment expansion. An annual study by JETRO showed that Japanese firms are increasingly investing in Thailand and Indonesia, where they can find a local supplier quite easily.
Mr. Nguyen Van, Deputy Chairman of the Hanoi Support Industry Business Association, said this was a challenging time for local companies to change and join global supply chains or stand still and watch opportunities slip through their fingers.