Vietnam’s Industrial Policy Formulation:
To Become a Reliable Partner in Integral Manufacturing
Kenichi Ohno
Vietnam Development Forum andNational Graduate Institute for Policy Studies
June 2006
The Vietnam Development Forum (VDF) is a joint research project of the National Graduate Institutefor Policy Studies (GRIPS) in Tokyo and the National Economics University (NEU) in Hanoi. It is partof the 21st Century Center of Excellence (COE) Program of GRIPS funded by Japan’s Ministry of
Education, Culture, Sports, Science and Technology (MEXT). One of the most important objectives of
VDF since its establishment in early 2004 has been to support industrial policy innovation by
Vietnam’s MOI. For this purpose, VDF has organized a large number of workshops and researchweeks, published books and research papers 1 , and staged VDF-MOI joint missions to Thailand,
Malaysia and Japan. VDF has also directly assisted the drafting of motorbike and supporting industry
master plans, and commented on the overall, electronics, and automobile master plans, of theVietnamese government. This paper presents a broad conclusion drawn from our policy research. It
was originally addressed to Vietnamese policy makers. By re-presenting it to researchers indevelopment and aid studies, we hope to receive their comments and suggestions as well.

1. The need for new industrial policy
Vietnam is deeply committed to global and regional integration, and no one doubts theseriousness of this commitment. Vietnam has already taken many steps to realize this goal,
including the completion of the AFTA process, the conclusion of the bilateral trade agreementwith the United States, intense negotiation for WTO accession, and preparation for other free
trade areas (FTAs). Work is also progressing in the legal area, as the government doubles its
effort to create or amend a large number of laws for consistency with international practices. All
this is highly commendable.
However, diplomatic and legal preparations are not enough. In order for Vietnam to truly enjoy
the fruits of international integration, its real sector must also be prepared. Vietnamese firms
need to be competitive enough to survive and even prosper in the new open environment whereimport protection and special favors are, in principle, no longer allowed. And this is the area inwhich Vietnam’s preparation is the weakest.
Free-market advocates may argue that, once the economy is open and free, the market
mechanism will activate the ingenuity of the Vietnamese people and the national economy willgrow and become more efficient. This argument is too naïve, and the majority of Vietnamesepolicy makers already know it. The fact is that the balance of power between large advanced
economies and latecomer developing countries is lopsided. Vietnamese firms cannot at present
compete squarely with Toyota, Panasonic, LG or Intel in the global market. Instead, they must
work with these multinational corporations (MNCs) to improve their abilities and become crucial

1

See particularly Ohno and Thuong (2005) and VDF (2006b).

1

suppliers in their global value chain. A good policy is needed to encourage and support thiseffort.
But what kind of policy, more concretely? The days of planning are over. Vietnam can no longer
use rigid control to maintain international isolation. The strategy of infant industry promotion,
adopted by Japan and Korea in the early postwar period, is also out of question. Under thisstrategy, domestic industries were protected and nurtured until they became sufficiently
competitive. But Vietnam cannot introduce such protection because of its commitments to WTO
and various FTAs.
Even the strategy of FDI-led growth, exercised by ASEAN4 in the 1970s-90s, is no longer
applicable to latecomers like Vietnam. Although Malaysia, Thailand, Indonesia and thePhilippines vigorously absorbed FDI, they were slow to remove their tariffs, import restrictions
and localization requirements. In these countries, FDI promotion and industrial protection
coexisted for at least a few decades. External barriers were lifted only after they achieved
significant industrial agglomeration. But Vietnam is asked to remove barriers now, before suchagglomeration occurs.
For this reason, Vietnam’s industrial policy in the 21st century must be new and different fromthose of other countries in the past. It must reflect the fact that even newcomers must open up
very fast. Globalization is inevitable, and Vietnam must position itself to become a meaningfulplayer in the global arena, making sure that its contribution to East Asia and the world will riseover time. What kind of policy can that be? That is the key question for the Ministry of Industry(MOI) in particular and the Vietnamese government in general to consider. That is also thequestion we wanted to address in this paper.
2. Weaknesses in Vietnam’s policy formulation
To design and implement industrial policy in the age of strong globalization pressure, Vietnam
must overcome two methodological problems. At present, master plans are designed and draftedby a small group of officials assigned for the task. They work very hard but cannot produce
desired results, because crucial information and cooperation are lacking. More concretely, theweaknesses of Vietnam’s industrial policy mostly stem from the following two missing links.
(i) The lack of cooperation with stakeholders (i.e., concerned groups) in the entire
drafting and implementation process. In the case of industrial master plans, the mostimportant stakeholder is the business community.
(ii) The lack of inter-ministerial coordination within the government in deciding concrete
action plans.
These problems are unique to Vietnam as they are not observed in other high-performing East
Asian countries. In our missions to Thailand, Malaysia and Japan, no serious problems werereported in either government-business cooperation or inter-ministerial coordination in
formulating industrial policy.

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The main problem caused by the lack of cooperation with stakeholders is that policy is notsupported by the business community and therefore not implementable. This problem isparticularly acute in sectors where private and FDI firms--which are not under MOI’s directsupervision--dominate, such as motorbikes, automobiles, and electronics. Even in areas wherestate-owned enterprises (SOEs) used to play key roles, such as steel and cement, the share ofprivate and FDI production is rising. The drafting process must involve all key players,
especially private and FDI firms. Without solid channels to absorb their information andconcerns, policy remains ineffective.
Another problem caused by the lack of stakeholder involvement is that information and analysis
are neither to-the-point nor up-to-date. Even if MOI drafters are intelligent and hard working, it
is difficult for a small team to gather all relevant information. This is particularly true withexternal information such as global industrial trends or the latest strategies of MNCs. Suchinformation should be obtained through close and continuous contact with the business
community. A good policy cannot be built on outdated information.
On the other hand, the main result of the lack of inter-ministerial coordination is that supporting
measures are simply mentioned without details. Measures outside the authority of MOI, such as
tariffs and tax incentives or a reform of technical schools and universities, are especially hard toprescribe in detail, since there is no mechanism to discuss and agree on policy measures among
related ministries in close consultation. At present, ministries interact only superficially throughcommenting on mutual drafts and exchanging basic information. This is another reason whytimely and effective policy implementation is so difficult in Vietnam.
3. Good policy, modest results
Thailand, Malaysia and Japan have all constructed effective channels for stakeholder
involvement and inter-ministerial coordination in industrial policy making. Thailand has set up
industry-specific institutes and official committees to link the government, businesses, andexperts. Malaysia has a three-layer structure consisting of the Industrial Planning Committee, theSteering Committee, and technical resource groups, which together mobilize several hundred
people to draft an industrial master plan. In Japan, deliberation councils and industry associations
have long been the key instruments for sharing information among all stakeholders at any time.
The functions of these institutions are explained in detail in VDF (2006b).
The experiences of these countries make it clear that Vietnam is far behind them in industrial
policy formulation and that it has much to learn from them. It must be admitted that Vietnam’s
policy making method is in the early stage of development. It is still primitive and defective, andinherits many characteristics of the planning days which are no longer valid. Another crucial fact
is that the way to achieve good involvement and coordination is not one, and that Vietnam
should design a mechanism which is most suitable for its situation and needs. This means that
Vietnam must selectively import the good practices of neighboring countries, with necessary
revisions and additions, to suit its circumstances. Since institutional evolution is difficult toforecast or plan with any precision, the adaptive process will inevitably be a long one with many
trials and errors.

3However, there is also a negative lesson from Thailand and Malaysia that is worth attention.
While industry-led growth of Thailand and Malaysia has been remarkable by the standards ofdeveloping countries in general, it falls short of East Asia’s high performance criteria. These twocountries are still unable to break through the “glass ceiling” after several decades ofindustrialization. The glass ceiling here refers to the difficulty in moving from the second to thethird stage in the path of industrialization that I have described on another occasion2.
Figure 1. Breaking the Glass Ceiling

Source: see footnote 2.

A developing country in the catch-up process typically starts with simple assembly to fulfill
foreign orders (stage 1), builds industrial agglomeration and supporting industries (stage 2),
graduates from foreign guidance to master technology and management (stage 3), and finallyachieves innovative, original design capacity (stage 4). I argue that none of the ASEAN countries
has graduated from foreign dependency despite their quantitative achievement. They still rely
heavily on foreign managers and engineers to run their factories and maintain quality. Since corecompetence and value creation are not internalized, there is always a risk that industries will shift
to China or elsewhere when situations change.
The governments of Thailand and Malaysia are acutely aware of this problem and trying to
remedy the situation as a matter of top national priority. Specifically, this requires strengthening
SMEs and creating linkages among them, developing industrial skills, promoting supporting
industries, stimulating R&D, and other efforts in human resource development. Nevertheless,local capability of Thailand and Malaysia still falls short of the high requirements of Japanesemanufacturing FDI. This is a problem that has been recognized for a long time--at least for two
decades--but remains unresolved.

2

Kenichi Ohno, “Renovating Industrial Policy,” chap.2, Ohno and Thuong (2005), pp.24-26.

4At the risk of over-simplification, we may even say that Thailand and Malaysia are the countries
whose governments have succeeded in offering good policy frameworks but whose domestic
businesses remain less dynamic than expected. The gap between good policy and modest results
is especially striking when we look at the performance of Taiwan and Korea. From the situationof war devastation and dire poverty, they emerged as leading manufacturers of high-quality
products in a few decades. They received foreign technical assistance at first, but the time theyspent for learning was relatively short. As soon as they mastered technology, they sent foreign
advisors home. R&D, product design, enterprise management, and factory operation are now
carried out entirely by locals. They invest vigorously abroad to expand production networks, andhave become Japan’s formidable competitors. And all this was achieved in no more than the timeit took for Thailand and Malaysia to reach their current levels.
Why did Taiwan and Korea move up so fast, while Thailand and Malaysia learned more slowly?
The reason may be the difference in national character or the difference in policy quality. If
Taiwanese and Korean people are genetically more suitable for high-quality manufacturing thanThai and Malaysian people, there is not much the government can do to change people’s DNA.
But if industrial policies adopted by Taiwan and Korea have been superior in matching national
aspiration with needed actions, we are compelled to study much deeper into policy design andimplementation to improve the industrial policy framework and content of Vietnam3.
Vietnam at present is a country of weak policy formulation. However, Vietnamese people are
frequently praised as skillful, diligent and persistent in comparison with other peoples in theregion. This points to a possibility of greatly upgrading the industrial capability of Vietnam once
policy weaknesses are removed.
4. Coping with China
How to cope with China, with its enormous size and rapidly expanding manufacturing capacity,
has become one of the most urgent issues all over the world. China has large numbers ofmanagers, scientists, engineers and unskilled workers, ample industrial materials, a relatively
high level of technology backed by a long history of industrialization drive, and a thick networkof overseas Chinese businesses. The China challenge looms large in the industrial policy debatesof Thailand, Malaysia and Japan. It must also be a top issue in formulating Vietnam’s new
industrial policy.
It is clearly unwise to directly compete with Chinese products in the global market. To avoid this,a country must differentiate its products from Chinese, and position itself as a producer
complementary to China rather than competing with it. If this is done successfully, the country
can form a production partnership with China and use Chinese low-cost inputs to its advantage.
The crucial question is how to do this concretely. The proper positioning requires a clear
understanding of the fields in which China excels and the fields in which it does not.

3

Two facts complicate such a study. First, the policies adopted by Taiwan and Korea were very different in that theformer promoted dynamism of SMEs while the latter featured large business groups (chaebols) supported by largebanks. Second, state-led industrialization strategy adopted by Korea, in particular, is no longer available tolatecomer countries of today under the globalization pressure.

5

Since China is a big country, it is not easy to find industrial categories that are not produced by it.
One needs to go into the level of individual products and even different grades of the same
products, to find a niche. Even then, there is no guarantee that China will not produce that
product next year. Many countries want to promote “high-tech” industries to upgrade its skills
and compete with China. However, the popularity of this strategy must be evaluated against thefollowing precautions: (i) there is a significant gap between national aspiration and actual
capability; (ii) no differentiation will occur if all countries adopt this strategy; and (iii) China isalso targeting such areas.
Thus, finding a niche in terms of specific products, including “high-tech” products, has certain
limits. The better way to distinguish oneself is to analyze China’s strengths and weaknesses fromthe viewpoint of business architecture, as explained below.
5. Integral manufacturing
We would like to propose one concrete industrial strategy for Vietnam in order to overcome thedifficulties addressed in earlier sections. The strategy is targeted at building domestic capability
in assembly-type manufacturing, such as electronics and electricals, motorbikes, and automobiles,
and the production of parts and components of these industries 4 . Although assembly-type
manufacturing industries differ from one another in some aspects, they are common in the sensethat (i) they extensively use metal, plastic and rubber parts; (ii) product quality heavily depends
on the quality of these parts; (iii) they also require labor-intensive assembly with precision; and(iv) innovation and model changes are quick and frequent. For this reason, assembly-type
manufacturing industries can to a large extent share the same supporting industries and humanresources. That is why they should be grouped together in strategic planning.
Vietnam’s workforce is particularly suited to labor-intensive assembly with precision mentioned
above, and that is why such FDI inflows are accelerating in recent years. However, Vietnam
must also learn and internalize the other aspects, (i) (ii) and (iv) above, to fully take advantage ofthe strength of assembly-type manufacturing. If this is done successfully, assembly-type
manufacturing will surely become the main pillar of Vietnam’s industrialization, providing jobs,
improving skills, and raising national income.
Even without any further policy reform, FDI will probably continue to come to Vietnam and,given sufficient time, the country will reach the income and industrial levels of Thailand andMalaysia today. However, as argued above, these ASEAN neighbors remain heavily dependent
on foreign technology and management. Despite many decades of supporting industry and SME
promotion, their human resources and local parts makers remain too weak to break through the“glass ceiling” and reach the level of Taiwan or Korea. If Vietnam does not have a good policy,
it is also likely to stop at the level of Thailand and Malaysia today.

4

Assembly-type manufacturing has been the driving force of economic transformation of Japan, Taiwan, Korea,
ASEAN4 and China, and it is also expected to play the same role in Vietnam. For other industries, such as garment,
footwear, food processing, software, energy, industrial materials, construction, logistics, trade, telecom, finance,
tourism, etc, other strategies must be sought since the argument in this section is not applicable to them.

6Another important consideration noted earlier is that Vietnam is required to integrate much fasterthan ASEAN4. Thailand and Malaysia absorbed a large amount of FDI, but they were not“open” in the sense that they kept high tariffs, localization requirement, import restrictions, etc.
for a long time. They used these measures for at least a few decades to develop and protect theirindustrial base. But Vietnam must open up now, before building such an industrial base, and face
global competition. Vietnam’s industrial strategy must therefore be different from and bolder
than those of Thailand and Malaysia.
Let us now propose a new manufacturing strategy for Vietnam based on the above considerations.
(1) Vietnam should liberalize its trade and investment regimes unconditionally and moredecisively than ASEAN4 did in the past, create the most free and low-cost businessenvironment in East Asia, and attract a large amount of FDI without selectivity5. Thisdecisive openness should be the strongest selling point in FDI marketing.
(2) Linkage between domestic firms and foreign multinationals should be promoted as amatter of highest priority. Vietnamese firms should double efforts to become suppliers of
FDI manufacturers and foreign buyers, and improve their capabilities. The government
should support their effort.
(3) Vietnam should learn the monozukuri6 spirit of Japan’s integral manufacturing, as
explained below, as quickly as possible. Vietnam should aim to become a reliable
developing country partner in high-quality manufacturing with Japan and other developed
countries producing integral products.
Prof. Takahiro Fujimoto of Tokyo University and his research team have come up with thebusiness architecture theory to explain the differences among the manufacturing industries ofmajor economies such as Japan, China, the United States, Korea, Taiwan, and ASEAN countries.
This theory has a significant implication for Vietnam’s industrial strategy. According to Prof.
Fujimoto, there are two basic architectural types in manufacturing--modular architecture andintegral architecture. In modular architecture, the modality of interaction among components isstandardized for easy connection. For example, desktop computers are a typical modular productin which globally common components from various companies are freely combined. By
contrast, in integral architecture, the complexity of interaction is happily accepted, andimprovements are achieved through numerous trials and errors. For example, automobiles must
be manufactured with integral architecture if multiple objectives such as performance, comfort,
fuel efficiency, safety, etc. are to be attained simultaneously. Generally speaking, modular
architecture is suitable for obtaining quick results at low cost while integral architecture isappropriate for the pursuit of ever-higher quality in the long run.

5

The only permissible reasons for rejecting FDI are environment, cultural indecency, and national security. This
rule should be applied sparingly under transparent criteria.
6
Monozukuri literally means “making things” or “manufacturing.”

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Figure 2. Modular versus Integral Manufacturing

Correspondence between products and business architecture is not fixed; it evolves dynamicallywith the business strategy of each firm or country, technical progress, and consumer tastes. In
addition, business architecture often has structural layers in which, for example, modularization
may proceed in final assembly while integration may deepen in components.
Japan is a country of integral architecture, intensely interested in efficient factory operation andproduct integrity. By contrast, the United States excels in modularization and is good at slicing
the supply chain of a product into appropriate elements, standardizing them and making profitsby the novelty of combination. China is also a country of modular architecture, but its
comparative advantage lies in labor-intensive modular products rather than knowledge-intensive
modular products as in the case of the United States. Prof. Fujimoto considers China to be acountry of quasi-modularity since its manufacturing features mass production of products withcopied design and technology rather than original innovation.
Since the United States and China are both modular countries with different development levels,
they are complementary production partners. The former can supply technology and capitalwhile the latter can offer cheap labor to produce modular products. Meanwhile, Japan is acountry of integral manufacturing with high technology, high wages and aged population looking
for a developing country partner. Using cheap unskilled labor in China and ASEAN is notenough to fully exploit the potentiality of integral manufacturing. If ASEAN, the traditional
destination of Japanese FDI, learns to become a manufacturing partner with long-term vision andstrong aspiration for high quality, Japan and ASEAN can form a strategic alliance inmanufacturing integral products which are differentiated from Chinese products. However, thisalliance remains a possibility since no ASEAN country has acquired necessary skills and attitude8

for Japanese-style manufacturing. As noted above, Thailand and Malaysia are currently
struggling to become full-fledged manufacturing countries. They still need Japanese managers
and engineers to stay, and depend heavily on FDI parts producers.
Figure 3. Production Alliances Based on Business Architecture

Source: Prof. Takahiro Fujimoto’s explanation to the joint VDF-MOI mission inTokyo, June 2005.

To become a partner in integral manufacturing requires ability to design and operate factories
efficiently; maintain, adjust and repair machines; design parts; produce precision molds and dies;
educate highly skilled industrial Meisters, and so on. These requirements are not new. But the
point is that they must be accomplished well with purpose and tenacity. This will enable ASEAN
to graduate from simple assembly by foreign orders to participation as an indispensable player inthe global manufacturing network. This will also upgrade the Japan-ASEAN economic
relationship to a higher level.
Among ASEAN countries, Vietnam and Thailand are top candidates for this feat. Vietnam
should set a clear goal with appropriate action plans, and the Japanese government and business
community should actively provide technical assistance and business cooperation for thispurpose.
This perspective explains why supporting industries (especially high-quality plastic and metal
processing industries) and human resource development (especially high-level production
managers and engineers) are so crucial for Vietnam. They are needed to significantly raise
domestic manufacturing capability, and to differentiate Vietnam from China and other ASEAN
countries. It also means that copying China’s manufacturing style or receiving Chinese technicalassistance is not desirable for Vietnam since it only leads to low-price, low-quality competition
yielding little profit, as well as a direct clash with Chinese products.

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6. Anticipated skill shortages in Japan
Japan desperately needs a developing country partner in integral manufacturing but has foundnone so far. It needs such a partner since its wages are too high and its population is aging,making it very difficult to find young engineers and production managers in sufficient number
and quality inside Japan. The postwar baby boomers, born in 1947-49, with high skills arereaching the retirement age soon. The 1947 babies will become 60 years old in 2007 and begin toleave factories (the “2007 problem”). Their skills must be transferred to the next generation but
Japan lacks a sufficient number of successors.
According to the White Paper on Monozukuri7, the number of monozukuri workers in Japanesemanufacturing was 1.93 million in 2005. When asked if the “2007 problem” (retirement ofskilled workers) was a serious concern, 30.5% of the manufacturing firms responded yes. Amongthem, main reasons for their concern included long time required for skill transfer (68.5%), lackof younger engineers with enthusiasm (64.5%), and difficulty in communication between teacher
and student due to a large age or skill gap (41.9%).
Figure 4 shows the worker shortages for the ten largest basic industrial skills in Japan. As of2005, worker shortages are not yet severe, with only 25.6% of the respondent firms reporting
skill shortages in quantity or quality (or both), 47.9% reporting adequacy, and 1.7% reporting
surpluses (these numbers are averages for the ten skills). However, as time progresses, skill
shortages are likely to worsen. Many firms are expected to retain skilled workers beyond theretirement age, which will delay the impact of the 2007 problem for several years. But in thelong run, Japan will inevitably face skill shortages unless fundamental solutions are found.
I have highlighted Japan as a principal monozukuri partner for Vietnam, since Japan is the only
country in East Asia that has achieved a high level of integral manufacturing. In addition, Japanis already the most important manufacturing investor in Vietnam. Moreover, if Vietnam masters
integral manufacturing, it can also cooperate more effectively with, for example, German
automobile producers or Italian machinery companies. That is why I sincerely hope that highaspiration for assembly-type integral manufacturing be incorporated as one of the strategic pillars
of Vietnam’s overall industrial master plan.

7

Ministry of Economy, Trade and Industry; Ministry of Health, Labor and Welfare; and Ministry of Education,
Culture, Sports, Science and Technology, White Paper on Monozukuri, 2005. Data in the text were obtained fromthe survey by the Ministry of Health, Labor and Welfare on enterprises with five or more regular employees.

10Figure 4. Shortages and Surpluses of Monozukuri Workers in Japan
0%

20%

40%

60%

80%

100%

Designing
Plastic and other injection
Pressing
Boring (cutting)
Grinding and polishing
Textile industry skills
Welding
Painting
Production process management
Repairing and adjusting equipment
Shorta g e 1

Shorta g e 3

A dequa te

Surpl usN o a ns wer

Shorta g e 2

Source: see footnote 6.
Note: These are the survey results on the ten basic industrial skills with largest numbers ofworkers in 2005. Shortage 1, 2 and 3 are shortage in quantity, shortage in quality, and shortagein both quantity and quality, respectively.

References
Fujimoto, Takahiro, Japan’s Monozukuri Philosophy, Nihon Keizai Shimbunsha, Tokyo,
2004, in Japanese.
Fujimoto, Takahiro, and Junjiro Shintaku, Architecture-based Analysis of Chinese
Manufacturing Industries, Toyo Keizai Shimposha, Tokyo, 2005, in Japanese.
Ohno, Kenichi, and Nguyen Van Thuong, eds, Improving Industrial Policy Formulation,
Publishing House of Political Theory, Hanoi, 2005, in English and Vietnamese.
Vietnam Development Forum, “Supporting Industries in Vietnam from the Perspective ofJapanese Manufacturing Firms,” VDF Policy Note no.2, forthcoming in June 2006, inEnglish, Vietnamese and Japanese.
Vietnam Development Forum, Industrial Policy Formulation in Thailand, Malaysia andJapan: Lessons for Vietnamese Policy Makers, Vietnam Development Forum, forthcomingin July 2006, in English and Vietnamese.

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