Chapter 6.

Industrial and Trade Policies
of Vietnam
underInternational Integration
MINUTES OF MEETINGThe National Economic University (NEU), Hanoi, and the Japan International
Cooperation Agency (JICA) held a joint symposium on Vietnam’s trade andindustrial policy in Hanoi on March 29 and 30, 2002. This was part ofintellectual ODA provided by the Government of Japan to Vietnam. The
research project is headed by Le Du Phong, Vice Rector of NEU, on the
Vietnamese side, and Kenichi Ohno, Professor at the National Graduate
Institute for Policy Studies, on the Japanese side. Additionally, seven Japaneseand twenty Vietnamese experts (including those from the Ministry of Planningand Investment, Ministry of Trade, Ministry of Industry, and Vietnam SteelCorporation) participate in the project.

60

Opening remarks by His Excellency Mr. Ryuichiro Yamazaki, Japanese
Ambassador to Vietnam, and Professor Dr. Vu Ngoc Nhung, Vice Ministerof Education and Training

SESSION 1 : OVERVIEW AND MAJOR RECOMMENDATIONS(March 29, 2002, morning)

Presentation by Prof. Kenichi Ohno, National Graduate Institute for Policy Studies (GRIPS)
This research project between National Economic University (NEU) and Japan International
Cooperation Agency (JICA) was organized to produce concrete policy advice for Vietnam’s
industrialization under integration. We conduct in-depth studies respecting the individuality of eachindustry. Twenty-nine researchers from Vietnam and Japan participate in this project. We
disseminate output through various channels including a web site and seminars like this. My role isto summarize our current views and recommendations.
The market must be the main engine of growth. But where the private sector is weak, thegovernment has important roles in fostering markets and managing integration. We reject both fullcontrol and full liberalization. Liberalization must be strong enough to provide incentives for reform,
but it should not be too drastic to cause social problems. This delicate role of government in adeveloping country is what we want to convey. There is much room for improvement in Vietnamesepolicies.
Integration for a latecomer country is a process of great self-transformation under foreignpressure. This tends to create dual structure according to the degree of foreign penetration.
Vietnam’s manufacturing sector is also split into two parts: the protected domestic sector and theopen export sector. They operate independently now, and Vietnam’s challenge is to link them byimproving domestic capability.
The key to Vietnam’s industrialization is foreign direct investment (FDI) policy. FDI dynamics isa very complex one in which two forces of agglomeration and fragmentation interact. Vietnam
should first accumulate a critical mass of assembly-type FDI. This will open up the possibility ofcreation of supporting industries and, later, technology transfer. Do not try to jump to the last stage
without sufficient FDI accumulation. To attract FDI, the government must actively build goodenvironment and reduce the cost of doing business. The policy of free trade and investment is notenough.
By contrast, industries producing for domestic markets are now protected. Foreign and
Vietnamese firms in these industries must be given clear timetables for the removal of protection.
For industries with realistic restructuring plans, the government may temporarily support them inexchange for such efforts.
We also have specific advice for individual industries. In textile and garment as well as in steel,for example, the Japanese advice is different from the current government policies. The details will
be presented in later sessions, today and tomorrow.

Mr. Tran Dinh Thien, Institute of Economic Studies
We appreciate very much the presentation of Prof. Ohno. May I ask some questions? First, does
the essence of your proposal contradict with Vietnam’s commitment to free trade? Is there not a61dilemma between industrialization under protection on the one hand and globalization on the other?
I wonder if your project is also considering the issues of institutional reforms and incentive policies
as well. Second, Prof. Ohno mentioned the sequencing from assembly to parts production, andfinally to technology absorption. But we need clear criteria for moving from one stage to the next.
We have to specify the timing from the viewpoint of technology.

Prof. Ohno
In theory, there seems to exist a dilemma between globalization and protection. But in practice,there is no such dichotomy; the two policies must always be combined properly. We can say that acountry with good preparation should be able to go far in globalization. The problem is that, formany countries, globalization proceeds too quickly without preparation. The preparation includes
not just new laws and institutions but also industrial competitiveness. How to combine globalizationand protection in each individual case is more important than trying to choose between 100%
globalization and 100% protection. When we study specific industries and products, we will see thatboth are needed but with different proportions. On the second point, I agree completely. That isexactly what we are studying. At present we do not have concrete proposal for timing (except steel,
below). But in the rest of this year, we will continue to prepare such schedules for key industries. To
present concrete timetables for integration, we need to study hard to understand deeply the local
industries as well as global market trends.

Mr. Nguyen Quy Son, General Secretary of Vietnam Electronic Industries Association (VEIA)
Vietnam’s electronics industry is assembly-concentrated and foreign-dominated. Foreign firms
produce hardware, but the government emphasizes software. However, we have only a few small
and medium enterprises (SMEs) and state owned enterprises (SOEs) in the software industry. Prof.
Ohno suggested that Vietnam should identify its proper position in the global electronics industry todesign appropriate policies. According to Japan’s experience, what is the current position ofVietnam’s electronics industry in the world?

Mr. Nguyen Xuan Hoa, Vice General Secretary of the Vietnam Association of Textile and Garment
Prof. Ohno suggested that the textile and garment production in Vietnam should focus on
downstream processing. What is the basis of this recommendation? In deciding the development
path of the textile and garment industry, we need to consider many factors. And the most importantamong them is the internalization of production and the increase of domestic content.

Prof. Yumiko Okamoto, Nagoya University
For electronics, there will be a detailed presentation this afternoon. It is true that the major
driving force of Vietnam’s electronics industry at present is multinational companies. Vietnameseexperts may be worried that the industry is dominated by foreigners. But we need to look at theexperiences of other Association of Southeast Asian Nations (ASEAN) members. At first, they
invited as many multinational corporations (MNCs) as possible.
Secondly, they tried to establish linkage between local SMEs and large MNCs. What Vietnam
should do is first to attract foreign firms and next to improve domestic capability. We cannot do62everything at once, and the sequence is very important. For this, Vietnam needs to have a gooddevelopment strategy for the electronics industry.

Prof. Ohno
I would like to add that all our recommendations for electronics, textile and garment, and otherindustries are based on international experience and the analysis of global and regional forces, notjust domestic factors.
Let me give you an example. For textiles, we do not support “internalization,” or investing
upstream, for the following reasons: Vietnam is rich in human resources and poor in capital, but
upstream investment requires a lot of capital. There are already many countries that produce good
textile, and it is very hard to compete with them in price and quality. Moreover, if you sink yourmoney into big capital equipment and if the global condition changes, you cannot switch to anotherstrategy. Before investing so much, Vietnam can do many things to improve competitiveness ingarment manufacture. The productivity of Vietnamese garment workers is low compared with
China. To improve this, better production management is needed, not large capital investment. At
present, Vietnam depends entirely on foreign partners for marketing and input procurement. Why
not start to learn these from them, step by step, which will raise domestic content, reduce foreign
partners’ operation cost and attract more FDI? The Vietnamese side can also take up designing,accessories, dyeing, and factory management in proper speed and sequence.
In the age of globalization, raising value-added does not necessarily mean investing upstream.
You should not try to internalize the whole industry. Even for one product, there are many stages of
production with different labor and capital requirements. Concentrate on the process you canperform well, and do it even better. If Vietnam focuses on the processes requiring a lot of highskilled labor, it should do very well in the future.

SESSION 2 : WTO, AFTA AND FDI(March 29, 2002, morning)

Presentation by Prof. Mai Ngoc Cuong, National Economic University
Integration is an urgent requirement for Vietnam. Despite the recent efforts of both government
and enterprises, their preparation still cannot meet the challenges of integration adequately.
Therefore, the preparation for economic integration should be accelerated. This requires continued
endeavors by both government and enterprises.
For the government, appropriate strategies for economic restructuring under ASEAN Free Trade
Area (AFTA) and World Trade Organization (WTO) should include: (1) building a long-term
comprehensive plan for regional integration; (2) regulating the direction of investment for systemictransition and development of potential advantages of the economy; (3) upgrading businessenvironment including credit access by non-state enterprises and tax rate adjustment; and (4) traderelated measures such as removal of Non-Tariff Barriers (NTBs), shift from positive to negative
lists, transparency in trade laws, etc.

63For enterprises, appropriate strategies should be: (1) enhancing enterprises’ quality andeffectiveness; (2) designing business strategies for most effective targeting in the long run; (3)renovation and modernization of technology and achievement of low cost; and (4) enhancing
quality and management of labor resources at enterprises.

Presentation by Prof. Okamoto (on behalf of Kimura)
Let me present the paper on FDI strategy by Prof. Fukunari Kimura, who is absent. My own
presentation on the electronics industry is scheduled this afternoon, but the first half of mypresentation is related to Kimura’s ideas. The difference between the ASEAN model on the one
hand and the Japanese or Korean ones on the other is that the latter separated export and domestic
markets in industrialization strategy. To promote exports, instead of waiting for local firms to growup and penetrate the world market, the ASEAN countries established export processing zones(EPZs) to attract FDI and let foreign firms produce for the world market. Then they tried tostrengthen the linkage between the domestic and international sectors. Vietnam should follow theASEAN model for industrialization.
The question is what type of industrial policies Vietnam should adopt today. The most important
recommendation by Prof. Kimura is to design new industrial promotion policies centered on FDI
accumulation. Vietnam is facing new challenges which were not experienced by the other East
Asian countries in the past. The forces driving FDI are changing: there is more competition for FDI
attraction among developing countries; unskilled labor alone is no longer enough to attract FDI. To
attract export-oriented FDI, Vietnam must become the best (or second best) location in the world.
For this, the key is to provide good infrastructure services and good policy environment.
Additionally, supplying more skilled and educated workers as well as development of intermediate
inputs will attract more FDI into Vietnam.

Mr. Peter Sturm, Ph.D, German Development Service and Central Institute of Economic
Management
Let me raise two questions. First, Prof. Ohno advises that Vietnam should concentrate on
assembly now and not parts. Does this mean that Vietnam should refuse investment projects inparts? It is for private firms, not government bureaucrats, to decide what investment they will make.
There should be no selectivity in attracting FDI. Second, if you permit protection in importsubstitution industries, this tends to attract uncompetitive projects, leading to a waste of capital.

Prof. Okamoto
There should be a clarification of terms. Vietnam has both assembly of final products andassembly of parts. The distinction between assembly and parts, therefore, is not really correct. What
I am saying is that the Vietnamese government should try to attract as many FDI projects as
possible. Of course the business sector is in the best position to decide the type of FDI. But the
government has also to play the role by preparing good environment and infrastructure.

Ms. Karolyn L. Gates, PhD, Multilateral Trade Policy Assistance Program (MUTRAP), EU
Prof. Kimura’s paper says that Vietnam should be the No.1 or No.2 location for FDI. But
locational advantages shift dynamically and specific measures required may differ from one

64industry to another. Telecom may be the key for one industry, but a good road system may be more
important for another. I feel that policy to target particular industries in this way is difficult torealize.

Prof. Okamoto
Perhaps the way I presented Prof. Kimura’s ideas was somewhat misleading. In the newcompetition for FDI, how you attract FDI depends very much on the type on industries and, even
within an industry, on the particular production process. I am not saying that Vietnam’s government
should prepare everything.

Dr. Nguyen Duc Kien, Economic Research Agency of the Vietnam Communist Party
I would like to raise a point of clarification. It is proposed to let the private sector decide whatkind of investment they should make. But I want to refer to a situation in Vietnam and ask for youradvice. The very first group to oppose the tariff reduction under AFTA framework was FDI firms in
Vietnam. They asked the government to raise import tariffs to protect their production. Chemicals
and motorbikes were examples of these. In the current transition process, where is the boundary
between government and private decisions, and to what extent should the government intervene in
the market?

Prof. Ohno
We are not asking the Vietnamese government to screen FDI. On the contrary, we arecomplaining that the government is screening too much, especially in imposing local contents. Our
main argument is that Vietnam should first establish an FDI attraction policy without selectivity.
Under import protection, as noted by Dr. Kien, some FDI firms come to enjoy high protection, andthey often lobby against trade liberalization. This type of protected FDI should be clearly
distinguished with export-oriented FDI which operate under open and competitive environment. Forprotected FDI, a clear timetable for reducing protection including both tariffs and NTBs should beannounced. The government should respect international commitments.

Mr. ThienProf. Kimura’s paper suggests that Vietnam should follow the ASEAN model for attracting FDI
and achieving industrialization. But this may not be the right model for Vietnam. The Asianfinancial crisis revealed the risk of adopting the model which may have succeeded in other countries.
First, in the earlier period, the East Asian countries industrialized under high tariffs. But now,
Vietnam has to reduce protection within a short time, so the same model cannot be used. Second,
capital mobility has increased dramatically. Third, this is the age of the knowledge economy, but
Vietnam lags far behind in this area. To catch up, Vietnam needs a medium-term strategy formoving from simple assembly to high-tech. As the world changes, the model for attracting FDI inparticular, and the development strategy in general, must also change. Therefore, with respect to the
Kimura paper, I would like to ask: can Vietnam really apply the ASEAN model? If not, what model
should developing countries adopt in the age of globalization and knowledge economy?

Vietnamese participant65I agree fully with Mr. Thien. We have relied too much on past experiences, but what Vietnam
needs is new creativity for its development. FDI attraction must be balanced with the government’s
own vision about Vietnam’s development. Even under WTO, the government should give directions
so that our path will be knowledge- and technology-based and inputs and upstream processes areinternalized.

Prof. Ohno
The two previous speakers hope to maintain Vietnam’s autonomy in the process ofindustrialization. I can understand that, but policy independence must be realized in a way
consistent with FDI dynamics. The oriental saying teaches that, to control the flow of water, weneed to work with the nature of water, not against. Vietnam’s autonomy must be realized by guiding
FDI, not dictating it.

Prof. Okamoto
Let me stress three things in clarification of the ASEAN model. First, the other ASEAN countries
did not lift protection immediately. Second, strategies for export-oriented industries and importsubstitution industries must be clearly distinguished. Third, Vietnam has much less time to
implement free trade than the other ASEAN countries.

SESSION 3 : ELECTRONICS INDUSTRY(March 29, 2002, afternoon)

Presentation by Dr. Nguyen Ngoc Huyen, National Economic University
The electronics industry has grown strongly since 1990, in terms of both production capacity andnumber of enterprises. To date, there are approximately 200 enterprises, of which state enterprises
account for a half. Most enterprises are small-scale assemblers. Enterprises in the South account for
75% of total electronics output. Foreign-invested enterprises dominate, while state enterprises anddomestic private enterprises account for a small proportion of output.
In terms of technology, it remains a labor-intensive industry in which complete knock down
(CKD) assembly accounts for 80% of total. Simple labor is Vietnam’s largest input. While thegovernment desires to promote the industry, the strategy is formed at national or ministerial levelwith very general directions. The government has revised its policy orientation from importsubstitution to export promotion.
Despite the advantages of cheap labor and the government’s promotion, Vietnam’s electronics
industry faces many challenges: (1) market imbalance; (2) inherent disadvantages of a late starter;(3) unskilled labor with little discipline; (4) poor infrastructure; (5) weak macroeconomic
management; and (6) the weakness of state electronics enterprises.
From the current situation, taking into account the potential and the targets of the industry, we
would like to propose some measures. The government needs to stimulate FDI in original parts
production, promote technology transfer, build necessary infrastructure, and support trade in theelectronics industry. Additionally, domestic investment should be promoted. For copyright66

protection, the legal environment must be improved by strengthening the legal protection
institutions and the fight against smugglings and counterfeits. Finally, the development of humanresources must be accelerated.

Presentation by Prof. Okamoto
Global electronics production is entering a new stage with (1) globalization of production; (2)new factors dictating the location of MNCs; and (3) emergence of China as an industrial power. The
driving forces of this industry are MNCs. In Vietnam, the share of MNCs in total manufacturing
rose from 1.3% in 1996 to 4.4% at present. Even so, Vietnam’s share in East Asian electronics
production is very small. Although electronics appears to be one of the leading industries inVietnam, its size is minuscule by the Asian standard. New opportunities generated by bothinternational and regional changes have not been fully captured by Vietnam. Development of theelectronics industry in Vietnam is constrained by (1) high cost of doing business; (2) lack ofpromotion; (3) underdeveloped infrastructure; (4) strict local contents requirement; and (5)bureaucracy.
In Vietnam, office rents are about the average of ASEAN but higher than in ASEAN4. Phone
charges are the second highest in the region. Electricity is also expensive. Local transportation costs
more than transoceanic shipping. All these offset the advantage of cheap and skilled labor.
My suggestions for Vietnam’s electronics industry are as follows: up to 2006, Vietnam should
attract as much electronics FDI as possible. This should be done by cutting the cost of doing
business, improving the quality of government services and removing various disincentives in
production. In the medium to long term, Vietnam should gradually introduce selectivity and support
the development of SMEs.
Mr. Sadanori Watanabe, JICA expert and VCCILet me say a few words from the private sector’s viewpoint. Vietnam’s electronics production is
only in assembly. Further development requires parts industries. To build such industries, thegovernment must clarify its policy and offer good incentives. But not much time is left for Vietnam
to do this. It is very important to distinguish electronics for exports and electronics for domestic
sales.

Prof. Nguyen Ke Tuan, National Economic University
Let me ask some questions. First, I understand that the electronics industry is characterized by
rapid change and short product cycles. How do you assess the competitiveness of Vietnam’s
electronics in the globalization age, in the domestic as well as foreign markets? Vietnam currently
does only assembling, which is old technology. Second, Dr. Huyen’s presentation seems toemphasize the closed circuit of production from A to Z. In the mean time, Prof. Okamoto suggeststhat Vietnam must become one link in the international division of labor. Third, Dr. Huyen’s
forecast is too optimistic, especially the export demand of USD 2 billion by 2005. Fourth, researchand development (R&D) should be included in the development strategy since this is very important.
How do you assess its possibility in the Vietnamese context?

Mr. Tran Dinh Thien67

I agree that the electronics industry must be given priority. Concerning Dr. Huyen’s presentation,
the strategy should be more specific. For instance, what are the conditions for successful
implementation of the measures proposed, what is the technology needed for the proposeddevelopment, and this question leads to the market selection. Given that Thailand, Korea, Taiwan
and others have attained high levels of electronics development, at which market should Vietnam
aim? The electronics industry is also highly volatile, as seen by the recent IT recession. So ourstrategy must also be flexible. Could the Japanese experts suggest international experiences usefulfor Vietnam, especially the Malaysian experience?

Prof. Hoang Duc Than, National Economic University
Prof. Okamoto mentioned the problem of Vietnam’s high costs. I do not think it is a major
problem. Currently, the government is promoting decentralization so provinces can offer rent
exemption, like the case of the Nomura Industrial Zone. According to the government’s plans, theelectricity tariff will come down and the telecom cost will be equivalent to the regional level by
2006. Second, the most important issue for the electronics industry is to increase the domestic
content, to produce parts locally. The lesson from the motorbike industry is highly suggestive. The
increase in local contents from 18% to 33% led to a large fall in the price. The IMF/World Bank
study of Vietnamese production finds that the cost of imported inputs accounts for 42-60% while
the labor cost is only 7-9%. Domestic production of inputs is very important. So can you tell us
whether Vietnam should invest upstream for stable development or continue to do only assembling?

Mr. Nguyen Quy Son, Vietnam Electronic Industries Association (VEIA)The government has no strategy for the electronics industry at present. We have clear targets fortelecommunication and a plan has been submitted for software. But we have no strategy forelectronics hardware. With the cooperation of the Vietnamese government and Japanese experts, I
sincerely hope that a formal strategy will be drafted for hardware. As to the localization of parts,
reality is moving faster than the government can think. To promote localization, tax incentives will
be necessary. When AFTA tariffs begin to come down from 50% to 30% in 2003, there will be asevere problem of survival among TV producers. Technology must come from abroad, but we must
upgrade infrastructure.

Prof. Okamoto
Thank you for your comments. I have visited many foreign electronics companies in Vietnam andthey have a lot to say about high domestic contents requirement and high tariffs on imported
components. In order to make them more competitive, they must procure cheaper inputs. There are
two ways to do this. One is to import the best and cheapest parts from neighboring countries. The
other is to attract FDI in parts. However, with the current production volume in Vietnam, it is very
difficult to attract FDI in components that require large scale for efficiency.
In conclusion, I would like to make three remarks. First, Vietnam has a big potential inelectronics, and whether that will be realized depends on policy. Second, as to the question ofremaining in assembly or going upstream, let me say that the current global business model isconcentrating on core competence and outsourcing the rest. And third, let me repeat that the
government must have a good strategy for electronics to guide investors. At present, there is none.

68

SESSION 4 : TEXTILE AND GARMENT INDUSTRY(March 29, 2002, afternoon)

Presentation by Prof. Nguyen Ke Tuan, National Economic University
With the comparative advantages of Vietnam, the textile and garment industry is very importantin the national industrial structure. The cut-make-trim (CMT) mode is currently most suitable with
Vietnam’s textile and garment industry because of abundant labor, lack of capital and complicatedtechnology, geographical location, etc. In the last few years, Vietnam’s textile and garment
production expanded considerably but the country still remains in a backward position. Exports alsorose rapidly, reaching USD 2.15 billion in 2001, of which 70% was export processing. The CMTmode not only dominates, but also it is the main reason for foreign companies to choose Vietnam.
The industry faces many constraints, including the limited access to foreign markets, weakcompetitiveness, and mismatches in institutional environment.
Despite these challenges, the industry’s opportunities for development are great. The
development strategy for the industry up to 2010 has been approved by the government, in which
exports are targeted to USD 4 billion by 2005 and USD 7 billion by 2010. The bilateral trade
agreement (BTA) with the United States has been ratified, giving the industry a chance to enter theAmerican market in the future. We offer the following recommendations for textile and garment
companies exporting through CMT.
(1) Manage well the quality of material and accessories provided by foreign partners as well as thequality of each stage of production, improve the professionals and labor, and build and apply
advanced quality management systems.
(2) CMT partners should be diversified over different markets.
(3) Promote investment for technological innovation.
(4) Renovate production organization and management.
(5) Follow the strategic direction of gradually shifting from CMT to FOB.1
On the government side, the main tasks are two: promoting investment in material development for
the garment sector, and improving the legal environment.

Presentation by Mr. Kenta Goto and Prof. Yasuhiro Ota, Kyoto University and Tokuyama
University
The Textile and garment industry plays important roles in Vietnam. However, Vietnam iscompetitive only in the exports of a narrow range of garments and contributes to very limited stagesof production and distribution. The main mode of garment production for export is CMT. This issuitable for Vietnamese garment manufacturers as it provides small risk and stable margins. Somefactories export in the FOB mode, but even this is the simplest FOB (type I), not more advanced
FOB (types II and III).
1

The FOB, or free-on-board, mode refers to a production contract where the Vietnamese garment factory, not the foreign
partner, procures inputs. It has no relation with FOB in international trade business.

69

Our survey of factories and outlets in the North and South shows the lack of a modern
merchandise distribution system. The Vietnamese textile markets are very primitive and cannot
handle inter-firm business risks. If FOB is forced under such circumstances, each factory will haveto bear all business risks and may end up losing money compared with CMT. This problem is more
serious than the lack of modern production equipment.
The Vietnamese government has approved a “speed up” strategy for 2000-2010 aiming at (i)building a backward linkage through investment in the upstream sector (textiles); and (ii) early
realization of garment export under “type III FOB.” However, we suggest that Vietnam should
concentrate on the CMT mode for the moment, improving its quality and quantity and achieving its
full potential.
After that, the next step will be the development of the upstream sector. But this should be
supported indirectly, not by hasty investment but as a natural evolution of expanded garment
production in the downstream. The upstream sector is highly capital intensive and requires highlevel management and production skills. Its development takes time and money, and FDI shouldplay an important role in it.
The following measures are additionally recommended: (1) clarify the causes of poor quality andlow productivity and take appropriate measures; (2) expand the domestic market of ready-madeclothes and materials; (3) encourage independent SMEs to link textile producers and garment
makers (such SMEs already exist in Ho Chi Minh City (HCMC)). The government should introduce
measures to develop core competence and increase the availability of education, training andtechnical services.

Presentation by Prof. Yoshiaki Ueda, University of Marketing and Distribution Sciences (UMDS)
The leather and footwear industry has contributed to Vietnam’s economic growth. In 2001, it was
the fourth largest export industry. The industry has a good prospect of future development,
including the US market under the newly ratified US BTA. It has also benefited from the policy ofprivate sector development as well as low cost and high quality labor. However, Vietnam has toovercome a few obstacles: keen competition from other countries (especially China), highdependence on imported raw materials, etc. To strengthen the competitive edge, the government
should integrate its industrial policies with the activities of enterprises in both global and domestic
areas.
Seven policy actions are proposed: (1) set up “hybrid” vocational schools; (2) establish researchand development centers for design; (3) receive foreign experts for technology transfer; (4) promote
supply of low cost raw materials; (5) convert weak companies into other industries; (6) promote
SMEs; and (7) promote exports for the entire industry.

Mr. Tran Manh Thu, Ministry of Industry
I was very interested in all the presentations. I have some comments. First, Prof. Tuan did not
mention the quota issue for garment exports, but that is an important factor. Second, Mr. Goto
advises indirect development of the upstream sector. Here I want more explanation. You are trying
to demonstrate that the CMT mode has the comparative advantage in Vietnam today, and maybe
you are correct. But the real question is how to get from here to more value-added: by promoting
CMT or investing upstream? Can you, instead of describing advantages of CMT, prove that70

upstream investment is more costly for Vietnam than CMT in achieving this goal? China has athree-year strategy to upgrade textiles under WTO. Thailand is renewing technology. Technology
changes fast, and we must find a short cut for development. I do not see why Vietnam should
promote only CMT.

Mr. Truong Huynh Cam, Vietnam Textile and Garment Corporation (VINATEX)
We appreciate all of your presentations and agree with many of your points. Your assessment of
CMT has been comprehensive. Of course we should aim at FOB as a long-term goal. VINATEX is
also trying and some enterprises have reached high FOB ratios. To increase domestic content, thegovernment has approved the 2000-2010 strategy. CMT has low risk but its productivity is low. It is
prone to the same crises as FOB. Another important consideration is that the US market only
accepts FOB exports. So CMT will not do.
As for the risk-sharing distribution mechanism mentioned by Prof. Ota, I think the Japanesemodel is not directly applicable to Vietnam. Regarding the quotas mentioned by Mr. Thu, garment
exports depend on quotas only in EU and Canadian markets. To date, these quotas have been
distributed to only garment manufacturers, not trading firms. So the Japanese experience may apply
in future, but not today.
Vietnam has other difficulties, especially competition with Chinese exports. China has morematerial supplies than we do. Regarding FDI attraction, the current accumulation of FDI in thegarment sector is relatively large, but the efficiency of these JVs is still low. I wonder why. So
attraction of FDI is good, but it may not be the highest priority.
Vietnamese participant
I agree with Prof. Tuan’s recommendations, especially government actions to support educationand management, provide stable legal environment, etc. I also concur with Prof. Ueda that the rolesof government and enterprises should be more clearly separated. The government’s role is tonegotiate integration and draft a road map for guidance. This is extremely important in the current
globalization trends. But all recommendations should be made more concrete.
Second, we should let the market decide how to go from CMT to FOB. We cannot deny FOB
entirely since it is important and some markets require FOB. We should concentrate more on
marketing and trade promotion.
Third, the suggestion to develop relations between producers and trading firms will encounter aproblem in Vietnam. Currently, foreign sales are dominated by foreign companies which are profitoriented. We need to diversify partnership.

Mr. Goto
We have discussed whether and how fast Vietnam should go upstream. This question is similar tothat in electronics. As a current strategy, I believe Vietnam should focus on CMT, namely
downstream, not upstream investment. I do not think “short cut” solutions are possible, and buying
modern machines will not guarantee success. Vietnam can hardly afford the luxury of spending somuch money on capital equipment.
However, this does not mean that Vietnam will forever remain at this level. Doing CMT well not
only generates more value-added, but you will realize technology transfer through foreign partners
and can move to the next stage.

71

Vietnamese participant
The government’s roadmap for the textile and garment industry already exists. But it is certainly
true that realizing full potential will take much time.

72

SESSION 5 : STEEL INDUSTRY(March 30, 2002, morning)

Presentation by Prof. Nozomu Kawabata, Tohoku University
Our study discusses the policy options for the Vietnamese steel industry. The iron and steel
industry includes many production processes. In Vietnam, the production structure is not only
limited in scope but is also imbalanced. There are many rolling mills for long products, while there
is too little steel-making capacity and no rolling mill for flat products.
The feasibility of constructing a large-scale integrated steel works (ISW) has been hotly debatedamong Vietnam’s policy makers. In my opinion, however, the ISW is not an urgent problem. It is
too large in capital requirement and cannot be built in a short time. Instead, the government should
focus on the two immediate challenges that will determine the future of Vietnam’s steel industry: (i)coping with the overcapacity in long product rolling; and (ii) successful operation of the nation’s
first flat steel mills.
First, with long products, steel-making capacity is lacking while rolling capacity is excessive.
This resulted from mutually inconsistent trade and competition policies. The Vietnam SteelCorporation (VSC) should avoid over-investment in rolling mills.
While Vietnam should liberalize its steel trade, its timing is important. I present two tariff
reduction scenarios in concrete numbers and three policy options for your consideration. The first
option gives top priority to liberalization. The second option makes partial modification to AFTA
commitments for temporary protection of long products. The third option tries to strike a balance
between temporal protection and the commitment of liberalization. In the first option, rolling mills
will face difficulty because product margin for rolling mill will diminish rapidly. In the second
option, relatively thick margin is predicted. In the third option, which combines strict AFTA
implementation with slower liberalization with non-AFTA countries, the margin for rolling mill will
be somewhere between the first two options.
Second, with flat products, the first cold rolling mill (CRM) will be built by 2003-04 to produce
sheets. For viability of this mill, market research and development is crucial. The main target for the
new flat products should be customers in the middle-range market. There is also an issue of speed of
capacity expansion. If it expands too vigorously, it will create overcapacity in that market segment.
As in the case of long products, I have two tariff reduction scenarios and three policy options. If
Vietnam adopts the first option (fastest liberalization), building a hot strip mill (HSM) in the future
will become virtually impossible because the margin is too thin. On the other hand, CRM and HSM
can secure thick margins in the start-up periods in the second option (late liberalization). In the third
option, the margin will be somewhere between the two options.
Overall, I recommend the step-by-step approach for developing the steel industry in Vietnam.

Pham Chi Cuong, Vice President, Vietnam Steel Corporation (VSC)As for the past developments and current issues, Prof. Kawabata’s observations are similar tomine. With respect to the overall speed of steel industry development, JICA cautions us since an
ISW will require huge capital to build ($5-7 billion) and face fierce competition. But some want an
ISW as soon as possible. I agree with JICA experts that the step-by-step approach is superior.
VSC’s view is that Vietnam should not build an ISW early.

73

In building flat steel mills, we do not want to raise protection against Russia’s cheap but lowquality sheets. These cheap products are needed in Vietnam. We will target other market segments
to avoid direct competition with Russia.
As for boosting billet production, the pre-feasibility study (F/S) of an electric arc furnace (EAF)with a capacity of 500,000 tons was approved two days ago.
As for domestic raw materials, the pre F/S of Thach khe ore is being conducted by the Russianteam. After we receive its results, we will decide whether to proceed with the full F/S.
Regarding Thai Nguyen Steel Corporation, JICA advises us not to expand any further (second
phase), but there are different views in Vietnam. My personal view is that Thai Nguyen should not
be expanded any more; it is not competitive and cannot survive under AFTA due to importrequirements and inappropriate location. Because of needed land transportation, its steel is $10
higher per ton than other mills. Under AFTA, many mills must be closed or consolidated, and only
those with good technology will survive.

Presentation by Prof. Hoang Duc Than, National Economic University
The steel industry has an important role in Vietnam’s industrialization. Since 1986, it has been
performing well in terms of capacity and product diversification. However, the industry also facessome drawbacks: the monotonous and simple product structure (only low and medium quality longproducts); the low capacity of billet production; out-of-date technology; and inconsistency between
targets and capacity. Competitiveness is weak with respect to production cost, human resources andinfrastructure. The regional and international integration process has posed many challenges for the
steel industry, and the survival of enterprises operating in Vietnam is being threatened. We have thefollowing suggestions to reform the industry in the integration process.
Regarding the government policy, various resources should be mobilized including budget,
official development assistance (ODA) and FDI to train staff, build infrastructure and promote R&D.
These indirect measures are better than directly subsidizing steel enterprises. The protection policy
should be reasonable with proper selection of products based on the situation of the domestic
market and AFTA commitments.
Regarding enterprise efforts, competitiveness comes from cost advantage as well as
differentiation. Production cost can be reduced by organization, technology and the efficiency in
input use. We propose the scheme for cutting cost in the medium and long run as described in thetable in our paper. Product differentiation requires enterprises to reform distribution to create morevalue for customers. We have concrete data for the profitability of state-owned steel distributors in
the paper. VSC should reorganize its structure and activities, and the steel association should play
more roles.

Dr. Do Huu Hao, Director General, Institute of Industrial Policy and Strategy
All presentations have described the steel industry well and given good recommendations for ourpolicy design. I have the following comments. Our steel industry is imbalanced. Although there isovercapacity in rolling, more manufacturers are entering into this market. The VSC and the Ministryof Planning and Investment (MPI) must curb investment in steel rolling.

74

There are two opposing views on the development of the steel industry: go upstream fast, or stepby-step. The government takes the second position. As to Thai Nguyen, we are only talking about
expansion to the maximum capacity of 0.5 million tons of billet, and not more. Quy xa ore isinefficient. The new investments should be on the coastal area, near Ha Tinh ores. We will use gas
for billet production.
We are facing many challenges, especially the difficulty in capital mobilization. Soft loans with
3% interest rate are available but amounts are limited. ODA loans are no longer usable for steel.
Please also note that domestic steel demand is rising strongly. CRM and HSM must be built soon.

Mrs. Nguyen Thi Bich, Deputy Director, International Relations, Ministry of Finance
We highly appreciate all presentations; they have provided valuable information and mentioned
issues of our interests. Regarding policy options offered by Prof. Kawabata, I have some questions.
First, you have proposed scenarios for tariff reduction in the steel sector. In my opinion, AFTA
commitments are fixed and should not be changed. If we want to renegotiate the AFTA
commitments, we have to offer new concessions in other products. Is such a strategy profitable forthe whole economy? And if we choose to renegotiate, what should be the proper length ofprotection for the steel industry? Second, in your tables you start the projections from the 20%
tariffs, but the current AFTA tariffs for steel are already less than 20% [Note: there is however a
dispute as to whether that has really been implemented]. Third, Prof. Kawabata mentioned Russia
and Ukraine as big competitors, but what about neighboring countries like Thailand and China? I
fear they will be even bigger competitors for Vietnam.
Prof. Ohno
Concerning the renegotiation of AFTA commitments, I think that the message conveyed by Prof.
Kawabata is that it should not be renegotiated. His third policy option, which is most reasonable,
combines full AFTA implementation with temporary higher tariffs against non-AFTA countries.
This avoids the political mess associated with AFTA renegotiation.
The grave problem with Vietnam’s industrial policy is that it is not integrated with trade policy.
In the opinion of the ministries responsible for international integration, free trade commitments
should be surely honored. But from the viewpoint of building industrial strength, part of theVietnamese government still considers deviation from AFTA as a serious option. And investors,
both domestic and international, are perplexed as to which policy will be followed in each industry.
Another problem with AFTA is that it is not certain whether other members like Indonesia andMalaysia will fully implement AFTA. Particularly in steel, with globally depressed prices and US
anti-dumping disputes, it is very unlikely that AFTA will proceed as scheduled. If so, we cannot
expect Vietnam to stick to AFTA when most other members are not implementing it, at least in steel.

Prof. KawabataThank you for your questions and comments. My second policy of postponing AFTA
commitments is only one option among many, for the Vietnamese government to consider andchoose from. Personally, I do not recommend it to you. But the reality of the steel industry is suchthat, as Prof. Ohno noted, not only Vietnam but other ASEAN countries face difficulty in keeping
the AFTA deadlines. Thailand imposed a 25% surcharge on flat steel this January, on top of the
10% tariff. Malaysia is doing the same. My prediction is that ASEAN as a whole will be forced torenegotiate tariff reduction in steel products.

75But apart from this, if Vietnam decides to respect the AFTA commitments, I believe the third
option is most realistic. Differential tariffs between ASEAN and non-ASEAN does not violate thenon- discrimination principle of WTO, since AFTA is considered to be regional integration.

On the question of Asian rivals, I have checked their potentiality already. My overall conclusion
is that neighboring countries are not the largest threat to Vietnam’s steel makers. In long products,
ASEAN producers are not competitive at all. In flat products, producers in Thailand are competitive,
especially Japanese affiliated cold rolling mills. They tried to export during the Asian crisis, butthey supply domestically under more normal circumstances. Russian and Ukrainian producers areserious rivals, so relatively high tariffs should be imposed on their exports. China is a big steel
producer but does not export much. But by 2010, this situation may change.

SESSION 6 : SOFTWARE INDUSTRY(March 30, 2002, morning)

Presentation by Dr. Truong Dinh Chien, National Economic University
The Vietnamese software industry is new, with about 200 enterprises operating in the market.
The domestic market is also new with low demand. The product structure is simple and monotonous.
On the export side, Vietnam’s access to international market is limited; only a few companies
export to a limited number of countries. Total export value is USD 5 million, or 5% of the industry's
total revenue. The industry’s competitiveness is weak and the production scale is small.
Despite these points, the industry has a good potential in terms of human resources, low laborcosts and government support. Considering all the strengths, weaknesses, opportunities and threats,
we would like to propose the following development strategy. By the year 2005, the software
industry should attain the domestic sales of USD 80-90 million and the export revenue of USD 200
million. The attraction of FDI and enhancement of the reputation of Vietnam’s software industry arealso important targets. To achieve these goals, we need to carry out a set of comprehensive
measures. These include implementing a mixed marketing strategy, improving supporting policies
like training of human resources, developing domestic and international markets, building good IT
infrastructure and improving the legal environment.
Mr. Nguyen Quy Son, Vietnam Electronic Industries Association (VEIA)Your presentation has covered almost all issues in Vietnam’s software industry. We greatly
appreciate recommendations in your presentation and will use some of them in developing the
program for the software industry in the period 2001-2005. However, it would be better if you
concentrate on fewer issues and provide deeper analysis. In my opinion, the software industry in
Vietnam has a good potential to develop. However, to find suitable promotion steps, an appropriate
strategy is needed. The Vietnam’s software products are facing many obstacles, including the lackof English capability and low commercial value. The NEU study has suggested many measures, andwe hope JICA will assist us to concretize major ones.

Mr. Nguyen Huu Thang, Vietnam Electronic Industries Association (VEIA)76

This is a complete study with appropriate approaches. The study has provided many valuablefindings that even industry insiders could not recognize. The first part of the study has provided us
with a comprehensive assessment of the industry’s current status. Regarding the domestic market ofsoftware, I think it is growing strongly, with rising demand for internet and telecommunication, thee-government program worth VND 1000 billion, the Edunet program worth USD 450 million, etc.
In my opinion, we also need to analyze the software industry in close relation with the hardware
industry.
However, I wonder if your forecast of exports of USD 200 million is based on sound ground.
The study mentions many good strategies. I want to add that we need to focus on a few crucial
products to design appropriate exporting policies. The idea of software parks remains unclear. The
current policies are good in general terms, but we need concrete measures to implement thesepolicies.

Mr. Long, Information Technology Center, Vietnam Bank for Agriculture and Rural Development
Let me say a few things as a user of software. I find the NEU study reasonable with highpracticability. But we need to set clear goals and orientations, including targeted markets. Concretemeasures should include good training for software writers. At our center, it takes two years to train
new staff for our own programs, and five years to work efficiently in the banking sector. The
software industry lacks consultants, managers and other well-trained professionals. The clientprovider relationship, which is less than ideal, must be improved. Public awareness campaign is alsoneeded, as some top managers do not have enough knowledge about computer software.

Mr. Huynh Duc Thang, Ministry of Planning and Investment
The study is comprehensive and logically presented. I have some comments. First, in assessing
the strengths and weaknesses of the sector, you are relying on the general perception like theVietnamese are intelligent, but more training is necessary, etc. This is not concrete enough. As totraining, for example, the question is where we should start. Software writers need a few more yearsof training, it is said, but who will teach them? And where are the curriculums? We need deeper
studies on these two issues of teachers and methodology. Second, regarding the telecom sector, I do
not think slow speed is a problem. The reason why the Quang Trung IT Park does not function wellis not related to the problem of infrastructure. Its failure is due to high service cost and inherent
localism of the Vietnamese people. Each ministry and province wants to have its own IT department
and programs, causing dispersion of limited resources. This issue should be taken up in the policy
formulation process.

Prof. Ohno
I would like to question if the NEU’s export target is really realistic. Vietnam’s software is a baby
industry with very limited capabilities. The paper presenter proposed two development directions:domestic sales and international marketing. But I think Vietnam should concentrate on the domestic
market, which is growing fast and also protected by the language barrier. The international market
is very hard to penetrate for such an infant industry with low English proficiency. Separately, I was
surprised to hear that local fights over IT industries are so fierce in Vietnam. Do Hanoi and HCMC
fight to have their own IT parks and projects?

77Mr. Alain Chevalier, Senior Technical Advisor, VIETRADE, Ministry of Trade
I agree with Prof. Ohno that in Vietnam, we need to focus on the domestic market. I note that thepresent export value of the industry is only USD 3 million, and as targeted, it should reach USD 200
million by 2005. This is impossible. However, the potential for Vietnam’s software industry is good,
especially with respect to speed of growth. The computer literacy of the young Vietnamese ispicking up quickly. Internet is still slow, but it takes time to improve the infrastructure. Many talkabout e-commerce, but Vietnam should do other things first, including upgrading of the contents ofweb sites.
I would like to emphasize the importance of marketing. Production must follow the market, notvice versa. This is true for both domestic and foreign markets. Government should help those who
help themselves. Let government follow and support them. Instead of big targets for the wholeindustry, there should be an accumulation of concrete strategies, each not too ambitious, to improve“how to” capabilities. To improve the image of Vietnamese software, what is needed is action.
Regarding human resources, exporting programmers is not a good idea because they will not comeback! At any rate, there are very few Vietnamese software companies abroad. My final point is that
we should look at ASEAN experience and draw lessons for Vietnam.

Mr. Pham Hong Chuong, National Economic University
Let me comment on and review the arguments of the last two days. First, whether upstream or
downstream, we should focus on the stages of production where Vietnam has efficiency andcomparative advantage. We are in the globalization age, and risk is acceptable and necessary inorder to become part of the international production network. However, not everything is acceptable.
Second, we should shift from the production-oriented planning method with quantitative targets tothe market-driven approach where production is for the sake of the satisfaction of users.
Regarding software, Vietnam need not have a complete software industry. Let us focus on
applications if that is our comparative advantage. If that succeeds, we can move to network softwarewith greater labor skills and capital later. If we want to export, we must find a market niche.
Dr. Do Huu Hao, Director General, Institute of Industrial Policy and Strategy
There are four points we should consider seriously for the Vietnamese software industry. First,
we need to pay more attention to the copyright issue. Second, the salary of software engineers is too
low which is causing brain drain. The industry is too small and weak to offer high salaries to attract
good people. Third, there is a supply imbalance: we have a lot of application and accounting
software but very few industrial applications. And finally, we need to have a training strategy. We
should establish special schools for IT skills. Education of young Vietnamese is needed withassistance of foreign experts. India provides a good example for Vietnam.

Mr. Vu Huy Thong, National Economic University
Thank you for all of your comments and suggestions, especially the opinions about IT education.
This issue draws much attention from the government as well as the industry. Regarding thetelecom environment in Vietnam, I think the slow speed of internet access is a problem for thesoftware companies. Also, I agree with Dr. Hao on the issue of the copyright. It is the responsibility78

of the government to solve this problem. If this project continues into the third stage, we should
focus on the IT education issue.

CLOSING SESSION

Prof. Ohno
After two days of lively discussion, I want to say three things in summary.
First, the common thread of our debate across many industries was how to increase the valueadded of the Vietnamese industry. Right now, Vietnam performs only a small link in the production
process, and the rest is done by foreigners. The two conflicting considerations always come up: (i)in the age of globalization Vietnam must accept free trade and take advantage of FDI dynamics asmuch as possible; and (ii) Vietnam should take a strong initiative in national industrialization, notjust passively receiving foreign influences. These two ideas must be combined wisely andrealistically.
Second, from now on, all studies must go into much greater detail, proposing policies that areconcrete and operational. This is also what we wish to do in the third stage.
Third, to discuss each industry more deeply, we should have smaller and more targeted seminars
with relevant government officials and enterprise managers.

Closing remark by Professor Nguyen Dinh Phan, Vice rector, National Economic University

79