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Supporting industries: Renovation is the indispensable path ( 13:56 | 18/11/2014 )

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NDO - In the second of a two-part series on supporting industries in Vietnam, Nhan Dan looks at a number of suggestions to help Vietnamese businesses become suppliers of spare parts and components for multinational manufacturers.

At present there is a very big gap between the capabilities of domestic enterprises and quality requirements of big corporations. If Vietnamese enterprises do not reinvent themselves, they are destined to fail.

The Samsung magnet

In 2013, Samsung’s mobile phone exports were US$23.9 billion, accounting for 18% of Vietnam’s total export revenue. For the first time, Vietnam became a manufacturing centre of high-tech products as 120 million out of 400 million Samsung phones sold worldwide were made in Vietnam. Professor Nguyen Mai, Chairman of the Vietnam Association of Foreign-Invested Enterprises said this was a big opportunity for Vietnamese enterprises to renovate themselves. Samsung has been and will be a strong magnet for domestic enterprises manufacturing spare parts and components. Let’s do a simple calculation: each year Samsung needs around 400 million units, each of which has a profit of US$0.5, so 400 million units will bring in profits of US$200 million for Vietnamese enterprises. More than that, this is an opportunity for them to enhance their technology and join the global supply chain, added Professor Mai.

General Director Shim Won Hwan of the Samsung Vietnam Complex said the company always welcomed opportunities to co-operate with Vietnamese enterprises that can meet requirements of quality, price and delivery time. He hopes to increase the number of Vietnamese suppliers in its supply chain to bring benefits to both Samsung and Vietnamese enterprises.
Vietnamese enterprises will have opportunities to grow, increase their revenue, and enhance their product quality while Samsung will benefit from a smaller workforce, lower transport fees and taxes. However, an enterprise has to meet three criteria - quality, price and delivery time - to qualify as a Samsung supplier. Therefore when Samsung was looking for Vietnamese component suppliers, only a few among hundreds could meet its requirements.

For a long time, enterprises were used to taking charge of all phases of the production process while ignoring collaboration with other companies on design, manufacturing, assembly and distribution. This has reduced the competitiveness of Vietnamese enterprises and their products have become virtually extinct on the market.

Dr Tran Dinh Thien, Director of the Vietnam Institute of Economics emphasised that the only way for Vietnamese enterprises to become “satellites” of major companies is to change their mindset, strategy and focus on specialisation and pursue their goals relentlessly. The sting of humiliation from their inability to properly manufacture screws and battery chargers will also drive home a healthy motivation for enterprises to renovate themselves and change the current situation.

Targeted support

The Government does not currently have a national strategy to develop supporting industries. Incentives are usually incorporated in many different programmes so investment for supporting industries is very modest. According to Dr Thien, experience from advanced economies shows that the Government should only focus on a number of advantaged sectors and capable enterprises. For example, if Vietnam wants to develop supporting industries for the automotive sector, there should be targeted support for leading enterprises − in this case, Truong Hai Auto Corporation. The largest automotive company in Vietnam, headquartered in the Chu Lai Economic Zone in Quang Nam province, Truong Hai boasts dozens of modern factories for spare part and component manufacturing as well as assembly lines. Truong Hai is looking to join the global supply chain with high quality products and competitive prices. With this target in mind, Truong Hai has proved to be a competent automotive manufacturer with a domestic content ratio of 50-60%. Truong Hai has become an equal partner of Hyundai Motor with agreements to receive the transfer of engine manufacturing technology, marking the first time the technology has been transferred to a domestic company, an important milestone for Vietnam’s automotive industry.

After 14 years of attempting to develop supporting industries unsuccessfully, the Government has decided to change their policies and start prioritising manufacturing components and materials using advanced technology. Deputy Head of the Department of Heavy Industry Truong Thanh Hoai said Vietnam and the Republic of Korea recently signed a co-operative agreement on supporting industries, under which the ROK will share its expertise to help Vietnam make a leap forward in supporting industries. The Government has also asked for the formulation of a decree on developing supporting industries, replacing previous documents with new incentives that are attractive, transparent and easy to implement. The Ministry of Finance is also proposing a four-year, 50% income tax reduction for enterprises in supporting industries.

As large multinationals relocate their manufacturing facilities to Vietnam, the demand for components and materials will enable the development of supporting industries. In order for breakthroughs to come, the Government should make adequate investment in supporting industries directly rather than through other programmes. As capabilities remains weak, there is a strong need for the establishment of an investment fund dedicated to this sector so that enterprises can borrow from it easily. At the same time, the Government should create concentrated areas of enterprises in supporting industries to ensure the highest degree of specialisation can be achieved. In the initial phase, the Government should encourage the establishment of clusters of supporting industries in three main areas: metal components; plastic and rubber components; and electric and electronic components.

Supporting industries require advanced technology and highly qualified personnel; starting a new business much more difficult than in services and trade sectors. Products must also have their designs changed regularly to adapt to the market while the majority of small and medium enterprises do not have resources for research and development. In order to meet the needs of supporting industries, there should be strong Government support through a system of supporting industries development centres. These centres should provide enterprises with services and information, and assist them in technology development and corporate administration as well as in receiving transferred technology.

In a recent survey of supporting industries enterprises, Dr Park Dong Ho from the Korea Institute of Industrial Technology said that Vietnamese engineers are very smart, and proficient in using design software, making it convenient for them to learn new technology in the future. Enterprises have started to determine their path and development strategies. Developing supporting industries not only requires equipment and machinery but also concrete and effective policies from the Government.

Park believes that the current actions of the Vietnamese Government and enterprises are a positive sign of future success for Vietnam’s supporting industries. Both enterprises and regulators should relentlessly pursue their long-term goals in order to overcome initial challenges and move forward to the successful realisation of their goals.

 NhanDan news paper