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Foreign invested enterprises could join forces with the government to cultivate Vietnam’s support industries.

The word “impulse” is often heard from Vietnamese authorities and policymakers when they talk about Vietnam’s support industries. It’s true that there has been an impulse in their development. Unfortunately, though, it has been “ideologically” encouraged, proven by countless workshops held to review the issue, the results of which have left a bit to be desired.

Due to there being an “ideological impulse” rather than any compulsory development, support industries in Vietnam have failed to become competitive and are virtually dormant compared to regional countries. According to Mr Hiroyuki Moribe, Chief Representative of the Japan External Trade Organisation (JETRO) Hanoi, in some ASEAN countries there have been groups formed that specialise in developing support industries, such as Thailand and Indonesia with automobile components and Malaysia with electronic components. “Vietnam should also define clearly the strategic support industries to focus on in the next ten or twenty years,” he told VET.

Existing obstacles

Take Toyota Vietnam, for example. Since its establishment in Vietnam in 1995, the country’s largest automobile joint venture has faced many difficulties in finding local component suppliers. It has only engaged ten or so companies to perform the task. The problem is even greater at the smaller foreign-invested enterprises (FIEs) in Vietnam. According to Mr Kobayashi Yuichi, General Director of Pentax Vietnam, who produce camera lenses, most of their suppliers are Japanese joint ventures. “The current localisation rate at Pentax Vietnam is less than 30 per cent,” he said. “Ideally, we want our suppliers to be all be from Vietnam, as it will maximise our returns.”

Japanese investors, with their careful nature, tend to thoroughly consider opportunities and challenges before making any business decision. Mr Yuichi said that Japanese companies, especially assemblers and manufacturers, often pay much attention to localisation rates before they come to Vietnam. “If companies have to import all of the components, the cost will be very high and the quality of products will also not be ensured,” he said. “In the assemble phase, our company needs producers that can supply some simple parts from plastic and metal, but there aren’t any Vietnamese companies that can do this.”

Another major matter of concern for many FIEs, according to Mr Shakashita Kiyoshi, Deputy General Director of the Nissin Company, an automobile brake manufacturer in Vietnam since 1995, is product quality among local suppliers. The localisation rate at Nissin is only 40 per cent, as there are just four Vietnamese suppliers that supply parts and equipment to the company. “Few Vietnamese parts suppliers have products that meet our quality demands,” he said. Moreover, the lack of professional competency among local parts suppliers is also clear, which put cooperation between such companies and FIEs at a low level. “Delivery time is in the contracts we sign with Vietnamese partners, but many times it is not met,” he said.

Mutual benefit

Apart from the question of support industries, foreign investors have found Vietnam to be one of the best investment locations in ASEAN, with a range of advantages, which explains why their investments in the country are increasing. If support industries receive due regard from both local authorities and from FIEs, they should gradually start to turn around. Mr Moribe is of the opinion that more foreign companies coming to Vietnam will enable improve technology and enhance professional skills among support industries. “I wholly agree that calling for more investment is essential in order to develop support industries,” he said. “And the creation of a favourable investment environment is important.”

However, most FIEs complain about the lack of measures and policies from the government in developing support industries, together with the shortcomings of their local partners. “Whoever Japanese investors work with, even if they are Japanese, we always put product quality in first place,” said Mr Yuichi from Pentax Vietnam. “We know that more time is needed for Vietnamese suppliers to improve the current quality of their products, but it’s one of our biggest concerns when placing orders.” But according to Mr Ngyen Xuan Chinh, Head of the Management Board of the Hanoi Industrial and Export Processing Zone, Vietnamese parts suppliers have their own concerns. “Local parts suppliers may want long term orders from FIEs, but a number of large orders were cancelled last year when the global crisis was raging,” he told VET’s online newspaper, VnEconomy. “Many are worried they will not find buyers for their products.”

So there is still some divergence between FIEs and local suppliers that limit the development of support industries. Without question, Vietnam must work hard to compile an overall development strategy for these industries, but it remains necessary for FIEs to join forces with local authorities for the benefit of both parties. In this regard, both should be more committed to the development of the country’s support industries rather than just waiting for the other to do something. Two years ago Vietnam suggested Toyota build an industrial park for developing automobile support industries, but the proposal was apparently turned down. The most appropriate approach would be for Vietnam to make the first move and pave the way for FIEs to follow and contribute to the process.

Mr Moribe from JETRO Hanoi suggested Vietnam implement policies based on the experience of Japan and other ASEAN countries in developing support industries. In terms of human resources, Mr Yuichi said that many workers at FIEs, after acquiring the necessary skills, then left. This also happens frequently in Hong Kong and Taiwan, but in those countries the workers go on to open small factories of their own to supply components to the FIEs. “Vietnam should therefore introduce incentive policies to encourage experienced workers, who have left FIEs for other jobs, to set up their own factories,” he recommended. 

In the search for investment destinations, Vietnam is quite clearly on the radars of foreign investors thanks to its political stability and continual economic growth. In the long run, developing the economy and creating more favourable conditions that lead to more investment continue to be crucial for the country. But whatever happens, support industries should not be neglected, as they not only play a key role in modernisation but also provide the foundation for attracting new foreign investors and spurring on economic development. “There is not much time left for Vietnam to develop support industries, so the most urgent thing to do right now is to determine a specific plan of action and carry it out,” Mr Moribe concluded. 
 

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