Supporting Industriesin Vietnam
From the Perspective of Japanese Manufacturing Firms

Kenichi Ohno
(VDF & GRIPS)
April 2006
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Hearings
Opinions of Japanese firms on the draft
Supporting Industry Master Plan Hearings were conducted from late February
to early April 2006


Intensive hearings in North--March 6 to 11
 Intensive hearings in South--March 13 to 17
 Company names are confidentialWe heard from 32 Japanese firms
15 electronics and electrical firm, 14 motorbike
firms, and 9 automobile firms (6 overlaps) 19 in North, 13 in South Also, opinions of experts and Vietnamese firms
2

Today’s Menu
Current situation of local procurement
 Relationship among demand size, thegrowth of supporting industries, andcompetitiveness (Main) Key factors for developing
supporting industries

We present opinions of Japanese FDI firms (withquotes) as selected and interpreted by VDF
Preliminary – VDF report under preparation
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Overview of Current Localization
Motorbikes
The most advanced in local procurement.
 Local procurement reaches 75%.
Electrical and Electronics
Local supply is increasing in recent years.
For example, one TV assembler haslocalized almost all plastic parts.
 However, local procurement, which isabout 20% to 40%, is still far behind whatfirms desire.
4Automobiles
The slowest progress. Local procurement isfrom 5 to 10%.
 Only some labor-intensive parts such as
wire harness are localized.
 Serious short-term issues, such as secondhand car imports and special consumption
tax, prevent long-term strategic planning.
5Sources of Competitiveness
Competitiveness depends on QCD (quality,cost, delivery).
 Parts cost looms large in production cost.
“Parts cost accounts for 80% of production cost, while labor
cost is only 2%” – a consumer-electronics manufacturer.

Most crucial factor for SI development isdemand size.
 After demand size, the following are alsoneeded.





High-quality industrial human resources
Proper tax and tariff policy
Overcoming information and perception gaps
Stable policy environment

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How to Achieve Agglomeration and Competitivenessin Parts Industries
Industrial humanresources

FDI inflow,
cost reduction

Stable policy
environment

Tariff & taxpolicies

CostFDISuppliers

Demandsize
Domestic demand(to assemblers)Three Elements ofCompetitiveness

Delivery
LocalSuppliers

Parts exportQuality

Overcoming
information &perception gaps

Key Factors for SI Promotion
Demand size!!!
 High-level industrial human resources Tariff reduction for parts and materials
 Tax incentives for SI investment
 Overcoming information and perception
gaps (for linking local suppliers with FDI)
 General policy stability
 Other measures

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1. Why is Demand Size So Important?
Generally, supporting industries are more
capital-intensive than final assembly
Large investment inequipment (indivisibility)
 Unit cost declines inverselywith production volume“Supporting industries will develop
naturally, even without
promotion policy, if demand size
is sufficiently large.”– an auto parts supplier.

Unit
cost

Capital-intensive

Labor-intensive

Production
volume9Limited Demand Size in Vietnam
The larger the demand size, the higher the
local procurement ratio.
Motorbikes > E&E > Automobiles
Localization

75%<Production-size comparison: Vietnam vs. Thailand>20-40%

Motorbike

2000

6500

7000

1740

5-10% AutomobileTV

1200

1290

1000
500
0Vietnam

Data for 2003 (Mishima)

Thailand

5000
4000
3000
2000

10001000Thousand Unit

1500

Thoudand Unit

Thousand Unit

6000

1600

800
600
400

1000

20000Vietnam

Thailand

35Vietnam

ThailandData for 2002 (GSO, New Net Asia) Data for 2005 (VDF-MOI hearing)

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Possibility of Export?
Printer, audio-visuals
etc

Large Export Volume

Assembler

VietnameseParts Supplier
INDIRECT EXPORT

Small Local
DemandDIRECT PARTSEXPORT

FDI
Parts Supplier

Wire harness,etc
11Conditions for Direct Parts Export
International cost competitiveness is crucial--Labor-intensive (using VN’s diligent but cheap labor)--Input/material cost must be low--Import tariffs on inputs must be low--Quick and efficient logistic service must be available

Compact-size parts which do not require
daily/hourly delivery
 Note: export decision depends on the global
strategy of MNC headquarters, not thefactory in Vietnam
12

2. Industrial Human Resources“Meisters” are needed for competitive
supporting industries
Someone who can manage & improve the wholeprocess, not just one skill
 Very skilled machine operator who can repair,adjust, improve, teach Super assembler in cell production (assembling awhole product by one person)

Simple assembly or machine operation
is not enough (anyone, any country can do it)
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“Highly-skilled workers are required, rather thannew machines. If we have high quality engineers,
even second-hand machines are acceptable”– a local plastic parts supplier.
“Product quality should be always guaranteed 100%.
99% is not enough. This one percent explains thedifference between FDI suppliers and localsuppliers”– a Japanese expert.
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Why Skill Building is Crucial
Strategic alliance basedon business architecture
theoryIn order to--Cope with China challenge--Break through the ASEAN“glass ceiling”
Vietnam should become astrategic partner in Integral
Manufacturing(Don’t copy China’s modularmanufacturing)
Source: Prof. Fujimoto (Tokyo Univ.)

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Modularmanufacturing

Integral
manufacturingPartsinterface

Parts are common and canbe used for any model

Each product has uniqueparts, specifically designed

MeritsQuick results and flexibility

Endless pursuit of quality

Demerits

No differentiation, excess
entry, low profit, lack of R&D

It takes much energy andtime to achieve results

Institutional
requirement

Openness, quick decision
making, flexible outsourcing

Long-term relations, building
internal skills & knowledge

PerformanceTimeTime

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Measures for Industrial Human Resources
Subsidizing firms’ training cost

The master plan suggests subsidizing 50% of thecost.
“Does it include the cost for internal training too?”– an auto parts supplier.


Establishing the Meister System

To increase engineers who pursue “100%”(perfection) National, provincial, and firm-level systems
Promoting collaborative training programs

Example: Malaysia’s Penang Skills DevelopmentCenter When labor demand is rising, this kind of program
has a good chance of support and success17

Strengthen practical engineering education atschools“We sent our workers to Japan for training but the results
were less than expected, because Vietnamese engineers did
not have basic knowledge.”– a motorbike parts supplier.

Taking advantage of existing training andincentive programs such as AOTS, JODC, Skill
Olympics, etc.

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The “Meister” System in Japan“A” Rank

Meister License
Applicantsissued by the Nationalor Local Government“B” Rank“C” RankAwards(JPY500,000)
Assignment toEducate
Successors

Internal
MeisterLicenseThere are• Meister Systems at central or local government levels• Meister Systems within individual companies

Curbing Job Hopping
For integral manufacturing, good staff withlong-term vision must stay in one company
 Some FDI firms report increasing job hopping,but others enjoy low labor turnover (reasons:wage level, location, employee policy, company philosophy?)“At our company, job hopping by medium-level engineers has
increased significantly in the last 2-3 years.”-- an electronic parts exporter.
“Ideally, we don’t want to lose any workers we have trained. But
those who go to other companies will indirectly contribute toVietnam’s industrialization.”-- a computer device assembler.
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3. Import Duty Reduction for Partsand Raw Materials

Zero parts tariff (or at least less than 5%, both CEPT &MFN) will enhance cost competitiveness--We need to study its total impacts on FDI, growth, jobs,
fiscal revenue, etc.
--Thailand already has zero parts tariffs.

“Give-and-take” between government and FDI
firms (VDF suggestion)
Government should work on improving policies, and FDI
firms should work on achieving some targets in production,
export or localization, conditional on good policies. If they
cooperate productively, blaming each other will end.
(Note: some companies still fear numerical targets)21

Tariff reduction on raw materials“Because the import tariff on steel products rose from 0% to7%, we may need to increase the price of metal parts.”– a motorbike parts supplier.

Capacity building of customs officers
High-quality industrial materials (not available in VN)
and common materials (produced in VN) should be
distinguished22

4. Tax Incentives for SupportingIndustriesSpecial treatment for supporting industries--To provide incentives for both FDI and local suppliers.
--To develop supporting industries as a national priority goal as inThailand and Malaysia.

Common concerns of policy makers--Tax revenue“Government revenue may decrease at first, but will increasein the long run as FDI and industries grow.”– a Japanese expert--Fairness (every producer wants special treatment)“I understand the concern, but concentration of resources isnecessary and inevitable. You must support those industries
that are crucial” – a consumer electronics manufacturer.

--FDI parts will dominate, local suppliers may be wiped out“In the future, division of labor with local suppliers ispreferable.” – a molding-tool supplier.

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5. Information and Perception Gaps

Information gap--FDI assemblers do not know where potentially good local
suppliers are.
--It is time consuming for each company to check telephone
directories or ask friends“In order to find one capable supplier, we need tocheck 100 firms.” – an electronics manufacturer.

Perception gap--Local suppliers complain that no Japanesecompanies respond when they send a sample
or catalog.
--In fact, to become a partner of Japan’s integral
manufacturing, 2 or 3 years of intense learningand negotiations are necessary.
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“Sincere attitude toward business, accurate selfassessment of capacity, and the commitment toquality are important.”-- More than one Vietnamese suppliers doing business withJapanese companies.

“When we visit a Vietnamese supplier, we look at
the attitude of the general director. That is themost important thing.”-- A computer device assembler.

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Establishment of Supporting Industries
Database
Yellow-page-style database is not sufficient.
 Japanese firms think the following
information is crucial:
--Management policy ⇒ Top priority--Product quality--Cost--Flexibility of delivery--Production capacity26

6. Stable Policy Environment
General problems are lack of communication withbusinesses, ambiguity of purpose, and sudden
implementation
 Examples in early 2006:
Second-hand car import issue
Minimum wage increase and strikes in Dong Nai


FDI firms expect: “Probably other issues will arisein the future...”“We had a business plan when we came to Vietnam, but it
became useless now, due to a series of inconsistentpolicies.”– an automobile assembler.
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

Many Japanese suppliers are “risk-averse”“Many Japanese suppliers are SMEs with small capital. Unlike
big companies, they are extremely afraid of any businessfailure. The government should declare and ensure full
support, by drafting a good master plan.”– a material supplier.

“Ondosa” (temperature gap) between headquarters
and general director in Vietnam--GD in VN wants to expand his factory very much (very hot)--Tokyo HQ doesn’t care much about VN (cool or cold).
“I am doing everything to invite our group companies to VN,
but I can’t convince HQ if so many bad policies continue tobe issued”-- An electronics and electrical assembler
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7. Raw Materials
Some firms pointed out the lack of raw
materials in Vietnam, in comparison withThailand and Malaysia
 However, raw material industries arehighly capital intensive⇒ Need great industrial agglomeration before
building such facilities“China developed material industries for PCB, because it
has a few hundred PCB assemblers.” – an electronics
manufacturer.
Meanwhile, tariff reduction on highlydemanded raw materials is a more urgent
issue.
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8. Financing for Local SuppliersBanks should improve the loan mechanism
for small and medium enterprises“The big four commercial banks excessively focus on SOEs,
with less attention on SMEs.”– a Japanese expert.
“Both state-owned and private banks take too much time for
new loan examination. Foreign banks can approve it much
faster. I don’t apply loans to local banks any more.”– a Vietnamese supplier to FDI companies.

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9. Improvement of Industrial and Safety
Standards
Safety standard will reduce import of lowquality products and parts.
 Industrial standards are necessary to ensurehigh quality productionE.g. Japan Industrial Standard (JIS)The government should provide information
on environmental laws in developed
countries (Vietnam’s markets)
E.g. The Restriction on Hazardous Substance (ROHS) inEU.

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