Vietnam looks for ways to bolster supporting industries

Thursday, 2018-12-20 17:25:11
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Manufacturing motorbike parts at Cosmos Industrial Co.,Ltd in Vinh Phuc province (Photo: Thanh Lam)
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NDO - Despite certain progress in recent years, Vietnam’s supporting industries remain weak. In this situation Prime Minister Nguyen Xuan Phuc has asked ministries, localities and enterprises to make an effort to work out measures to develop supporting industries and soon transform Vietnam into a manufacturing hub of multinational companies.

Numerous weaknesses

Growing at an average annual pace of 15% over the past 20 years, garment production has emerged as one of Vietnam’s major economic sectors with revenues estimated at US$40 billion in 2018 and exports at US$35 billion. Although Vietnam is the world’s fifth largest garment exporter, its garment industry is relatively weak, unsustainable and vulnerable, which is partly due to the uneven development of supporting industries. Specifically, the spinning and sewing segments are growing quickly, while the fabric manufacturing segments are rather sluggish, creating a bottleneck in the entire sector’s progress.

The heavy reliance on imported fabric has deprived domestic garment producers of the initiative in their business plans, restricted their creativity and caused the sector to be unable to break-free from the fabrication segment, which is among the least profitable stages in the entire production process.
According to the Ministry of Industry and Trade (MOIT), although the domestic capacity to make components has improved in recent years, the ratio of domestic content remains rather low. It is 40-45% in clothing products and only 7-10% in under-9-seater cars, far behind the goal of 40% by 2005 and 60% by 2010. The electronic industry is also deeply dependent on foreign-invested enterprises, as the domestic content ratio is only 15% in common ICT products and 5% in more advanced devices. However, most domestically supplied parts come from FDI enterprises as Vietnamese companies can only provide printing and packaging items of very little value.

MOIT Minister Tran Tuan Anh frankly admitted that such a situation was due to limited investment and government support, which are incommensurate to their role. Policies to develop supporting industries are slow to be promulgated and lack consistency. Furthermore, many localities have not paid adequate attention to supporting industries, making the incentivised policies introduced by the central government fail to be implemented properly. As a result, enterprises are still facing many difficulties when approaching the government’s policies, leading to their limited size and capacity.

Currently only 300 domestic enterprises are able to take part in the supply chains of multinational companies, compared with 1,800 enterprises producing parts and components and 75,000 in the manufacturing sector in Vietnam. Furthermore, the production organising capacity and technological level of most domestic enterprises in supporting industries are relatively low. Local enterprises are currently able to meet just 10% of the demand for products in the supporting industries. The fact that the majority of parts and components have to be imported means that the added value of Vietnam’s manufacturing sector is very low in comparison with regional countries. Although accounting for nearly 90% of the economy’s production revenues in 2017, manufacturing contributed only 15% to the GDP, compared with 20% in most countries in ASEAN and East Asia.

Long-term, consistent policies needed

According to experts, supporting industries are considered the foundation for major industries through the supply of parts, components and technical processes. Supporting industries do not play the auxiliary but the main role in the national industry. In the age of global economic integration, the national industry cannot grow without flourishing supporting industries because this is the factor that determines the production costs, and enhances the added value and competitiveness of final products.

Aware of this, many countries in the world have allocated a great deal of resources to bolstering the supporting industries in order build internal strength and self-reliance. In 1949, Japan introduced a law to promote sub-contractor activities, or activities of supporting industries in other words. In the subsequent years, various laws were promulgated and a list of products prioritised for government assistance was made, all focusing on supporting industries. To date, Japan has millions of enterprise in industrial manufacturing, many of which are very small but have participated deeply in the global value chains, even in high-tech industries such as space and aeronautics.

Malaysia also began adopting preferential policies for pioneering industries in 1958. The Southeast Asian country also endeavoured to develop and strengthen the industrial connection between large enterprises and domestic part suppliers. Moreover, Malaysia’s enterprises in supporting industries were also given assistance through effective government programmes. Thanks to such policies, supporting industries in Malaysia have enjoyed strong development especially in the fabrication of mechanic and electronic parts.

From these examples above, the lesson for Vietnam is that it is necessary to assess the role of supporting in national economic development properly so that consistent, persistent and long-term policies can be introduced and adequate resources allocated to quickly enhance the capacity of supporting industries through specific programmes.

According to Vice Chairman of the Vietnam Association of Supporting Industries, Vietnam needs a dedicated law with special policies in order to bolster supporting industries. Minister Tran Tuan Anh stated that it is now time for Vietnam to considering a special policy to boost supporting industries.

Since the majority of Vietnam’s industrial enterprises are medium and small, or even ultra-small, they need the government’s consistent and long-term support, in addition to their own efforts. The government has to stand by and accompany them in order help them enhance their capacity.

HTMP Vietnam Director Nguyen Van Hoa said that capital and access to land will be the most substantive support to enterprises. Foreign-investors can secure very cheap loans but Vietnamese enterprises have to borrow at interest rates several times higher, making it very difficult for them to rise up and seize a part in the global value chain. The government should take action so that enterprises could access preferential long-term loans, at 6-7% for example, so that they are motivated to enhance their production level and competitiveness.

Amid deepening economic integration and growing international competition, the weaknesses of the Vietnamese economy are being exposed. The matter of restructuring the economy and selecting a new growth model is becoming more and more urgent if Vietnam wants to grow sustainably and narrow the gap with regional countries. In that restructuring process, the role of industrial production and supporting industries are identified as the most important pillars.

However, developing supporting industries needs a long time to accumulate management expertise and production skills and a leap cannot be made overnight without the strong support of the government. The government needs to deploy a consistent and long-term policy and allocate adequate resources to help manufacturing enterprises reach regional and international levels.

Market development policies such as promoting the development of downstream and materials industries are also needed. In addition to financial assistance, technological and human resources development, it is necessary to promote the linkages between Vietnamese businesses and foreign manufacturing companies.

For domestic enterprises themselves, they cannot rely solely on government support but must be proactive in technological innovations, enhancing their administration and production capacity in order to gradually gain a foothold in an increasingly competitive market. These are the fundamental measures to guarantee the stable development of supporting industries, which will lay the foundation for the national economy to grow in a more sustainable way in the long run.