Seminar on Action Plan for theDevelopment of Vietnam Supporting
Insudtry, at VCCI, Hanoi

Vietnamese Supporting Industries
From Master Plan to Action Plan throughVietnam-Japan Monozukuri Partnership

Kenichi Ohno (VDF)
September 2008

Topics

Vietnam must produce internal value(VDF symposium, March 2008)

A proposal for Vietnam-Japan strategic
partnership for promoting supportingindustries
 Action plan contents – preliminary ideas byJapanese experts1

Seminar on Action Plan for theDevelopment of Vietnam Supporting
Insudtry, at VCCI, Hanoi

Vietnam’s New Era
Opening up and receiving FDI can attain
middle income ($1,000+), but higher income($10,000+) requires good policy and privatedynamism.
 Without these capabilities, a country may be
stuck at middle income without reaching highincome (“middle income trap”).
 Vietnam needs to create internal value
instead of just offering cheap labor andfactory land.
Different Speed of Catching Up
Per capita real income relative to US(Measured by the 1990 international Geary-Khamis dollars)
100%

Japan
80%

TaiwanS. Korea

60%

Malaysia
Thailand40%

Indonesia
20%

Philippines
Vietnam2005

2000

1995

1990

1985

1980

1975

1970

1965

1960

1955

1950

0%

Sources: Angus Maddison, The World Economy: A Millennium Perspective, OECD Development Centre, 2001;
the Central Bank of the Republic of China; and IMF International Financial Statistics (for updating 1998-2006).

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Seminar on Action Plan for theDevelopment of Vietnam Supporting
Insudtry, at VCCI, Hanoi

Catching Up Process
Internalizing
parts andcomponents

Initial FDI
absorption

Internalizing
skills andtechnology

Internalizing
innovation

Creativity

Technology
absorption
STAGE THREE
Agglomeration
STAGE TWO
Have supporting
industries, but still
under foreign
guidance

STAGE ONE
Simplemanufacturing
under foreign
guidance

Technology &management
mastered, canproduce highquality goods

STAGE FOUR
Full capability ininnovation andproduct design as
global leader

Japan, US, EU

Korea, Taiwan

Thailand, Malaysia
Glass ceiling for
ASEAN countries(Middle income trap)

VietnamLessons from Thailand and Malaysia（Success）） Impressive FDI-led growth andindustrialization under reasonable policy（Failure）） Domestic private sector capability
is still weak after many decades
Foreign dependency—inability to send
foreign managers home Value and capability are not internalized Risk of wage pressure and FDI shift toChina, India or Vietnam
3

Seminar on Action Plan for theDevelopment of Vietnam Supporting
Insudtry, at VCCI, Hanoi

Vietnam’s Challenge
AFTA, WTO, FTAs - danger of large importsof ASEAN products (esp. Japanese brands)
that may destroy VN’s industrial base.
 The risk of losing manufacturing andkeeping only sales agents (“hollowing-out”).
 Vietnam’s wage becoming too high forlabor-intensive industries, but technology
too low for knowledge-intensive industries.
 Vietnam needs a strategic partner to greatly
increase internal value in manufacturing.
Vietnam’s
Changing Sources of Growth
Doimoi to mid 1990s—liberalization effect Mid 1990s to now—externally driven growth withlarge inflows of investment, capital and aid From now—creation of internal value!


7
6
5
4
3
2
1
0
-1
-2

ICOR

2006

2005

2004

2003

2002

2001

2000

1999

1998

1997

1996

1995

1994

1993

1992

1991

1990

TFP change (%)

4

Seminar on Action Plan for theDevelopment of Vietnam Supporting
Insudtry, at VCCI, Hanoi

Malaysia’s Manufacturing++
Malaysia’s 2nd Industrial Master Plan (IMP2, 1996-2005)aimed at raising and broadening the value chain
Leveling up of eachindustrial cluster-Core production-Supporting industries-Supporting services-Human resources-Logistics-R&D

Proposed Strategy for 2020(presented at VDF Conference, March 2008)

Reform of industrial
policy formulation

Concrete targets
and action plans

Learning integral
manufacturing

Building 3 pillars of industrial strength-Supporting industries-Industrial human resource-Efficient logistics

Effective use ofcapital inflows & ODA

Solvingsocial issues

Proper macro
management

Preconditions for industrialization

5Seminar on Action Plan for theDevelopment of Vietnam Supporting
Insudtry, at VCCI, Hanoi

Japanese Cooperation with Vietnam(1990s-Now)
Japan has contributed to VN’s industrialization
through trade, FDI, ODA and policy dialogue.
 Japanese ODA covered many areas:
Infrastructure (esp. transport & power)
Human resources
Institutional reforms
Urban & regional planning
Removing negative impacts of growth
Poverty reduction


Action-oriented bilateral policy dialogue:
Ishikawa Project (1995-2001)
New Miyazawa Plan (1999)
Vietnam-Japan Joint Initiative Phase 1, 2, 3 (2003-09)

Future Direction ofJapanese Cooperation with Vietnam
Vietnam is no longer a low-income transition
country. Bilateral cooperation should be equal andstrategic, not one-way.
 Cooperation should gradually shift from removing
negatives and providing basic conditions toproactive creation of the new source ofcompetitiveness.
 We propose VN-JP monozukuri partnershipas the first step in this direction.

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Seminar on Action Plan for theDevelopment of Vietnam Supporting
Insudtry, at VCCI, Hanoi

Vietnam-Japan Monozukuri
Partnership: A Proposal
Purpose – Implement Supporting Industry MasterPlan (approved July 2007) through concrete actionplan.
 Method – Japan to transfer skills and technology
for monozukuri; Vietnam to absorb them withdetermination.
 Reciprocity – Two countries to share the burden
and benefits as equal partners (not one-way aid).
 Time scope – Short-term (2009), medium-term(2013) and long-term (2020); intensive efforts
should be made to produce initial tangible results.
The Concept of Monozukuri
Japanese Style Skill-based ManufacturingMonozukuri literally means “making things.”

Pursuit of high quality and customer satisfaction as
the primary goal, with pride and dedication.
 Many of Japan’s excellent companies were foundedby engineers full of monozukuri spirit.
Sakichi Toyota
1867-1930

Konosuke Matsushita
1894-1989

Soichiro Honda
1906-1991

Akio Morita(Sony’s co-founder)
1921-1999

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Seminar on Action Plan for theDevelopment of Vietnam Supporting
Insudtry, at VCCI, Hanoi

Monozukuri – cont.
Long-term relationship and skill & knowledge
building within individual companies and amongproduction partners (e.g. assemblers-suppliers).
 Strong demand for 5S, QCD (quality-cost-delivery),kaizen, just-in-time system, quality control circle,and other efforts for constant improvement.
Two Types of Business Architecture
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, excessentry, low profit, lack of R&D

It takes much energy andtime to achieve results

Institutional
requirements

Openness, quick decision
making, flexible outsourcing

Long-term relations, building
internal skills & knowledge

PerformanceTimeTime8Seminar on Action Plan for theDevelopment of Vietnam Supporting
Insudtry, at VCCI, Hanoi

Partnership Possibilities
From the Viewpoint of Business Architecture
Effective partnership:
USA=China (modular)
Japan=ASEAN (integral)

Source: compiled from Prof.
Takahiro Fujimoto’s explanation
to the Joint VDF-MOI mission,
June 2005.

Importance of Supporting Industries
Supporting industry promotion is the first important
step to realize the vision of monozukuri partnership.
 In assembly-type manufacturing, part cost is large(80-90%) while labor cost is small (5-10%).
 Without quick access to suppliers with QCD,
assemblers cannot become competitive (addedtransport cost + long lead time).
 ASEAN4 have been promoting supporting industries
for a long time, but with limited success in creating
non-FDI suppliers.
9Seminar on Action Plan for theDevelopment of Vietnam Supporting
Insudtry, at VCCI, Hanoi

The Concept of Supporting Industries

Japan’s Challenge
Japan has high technology, but faces highwages and ageing population.
 The 2007 Problem - Postwar baby boomers(born 1947-49) with high skills began to retirein 2007. Young workers to absorb their skills
are in shortage.
 Japan needs a young developing country as areliable partner in integral manufacturing.
10Seminar on Action Plan for theDevelopment of Vietnam Supporting
Insudtry, at VCCI, Hanoi

Additional Features of VN-JP
Monozukuri Partnership
Resetting the mindset – Vietnamese managers
and workers must be more aggressive in learning andmarketing Commitment to international standards –quality, safety, environment, intellectual property
 Positioning in the global value chain – jointly
specializing high skilled processes and outsourcing
other inputs Reforming policy methodology
 Non-exclusivity (win-win-win) – other countries
can also enjoy the benefits of this partnershipInitial Ideas forSupporting Industry Action PlanAction menu: Capacity building (for specific firms)
 Human resource (general or institutional) Finance Incentives
 FDI-local linkage
 FDI marketing Policy framework

11Seminar on Action Plan for theDevelopment of Vietnam Supporting
Insudtry, at VCCI, Hanoi

About This Action Menu
This contains initial ideas of Japanese experts.
It is only a starting point for discussion.
 Following information was referenced:
- Japan’s New Aid Plan for ASEAN (late 1980s-early 90s)
- Recent ASEAN4 experiences (incl. Mizutani Report forThailand 1999 and Urata Report for Indonesia 2000);- Supporting Industry M/P 2007
- Motorbike M/P 2007
Since all measures cannot be adopted atonce, selectivity and proper sequencing
should be considered.

Local suppliers

FDI suppliers

Clear strategy & strong campaign
to mainstream monozukuri & SI
Policy framework
ManagementTechnology
LinkageEnterpriseevaluator
systemFinance

Incentives

Industrialclusterstrategy

Matching, trade fairs,database

FDImarketing

SME policy

Logistics

Infrastructure

Human resource
Technical and vocational
education & training (TVET)
Note: Measures are classified by main impacts even if they benefit both local and FDI suppliers.

12Seminar on Action Plan for theDevelopment of Vietnam Supporting
Insudtry, at VCCI, Hanoi

Action Area 1 – Capacity Building(For Specific Firms)(Benefiting mainly Vietnamese firms)
 Survey of concrete capabilities required oflocal suppliers in next 3-5 years (ongoing).
 Training of Shindanshi (Enterprise Evaluators)
and establishment of Shindanshi System.
 Large-scale mobilization of Japaneseengineers (current and retired).
 Over time, accelerate technology transferfrom Japan to Vietnam.

Action Area 2 – Human Resource(General or Institutional)(Benefiting both Vietnamese and FDI firms)
 Review and improve programs at engineering
universities as well as training centers.
 Select a small number of training institutions
for intensive supporting industry promotion.
 Establish collaborative schemes between FDI
firms and universities/training centers.
 Link up with FDI-local linkage programs.

13Seminar on Action Plan for theDevelopment of Vietnam Supporting
Insudtry, at VCCI, Hanoi

Action Area 3 – Finance(Benefiting mainly Vietnamese firms)
 SI firm support should be added to existing
SME finance programs.
 Strengthen banks’ capacity to evaluate andprovide loans to SI firms.
 Develop credit guarantee fund, subsidized
policy loans, non-property collaterals, etc.

Action Area 4 – Incentives(Benefiting both Vietnamese and FDI firms)
 Define eligible “supporting industries.”
 Tax holiday, import duty exemption forequipment, subsidies for training, workpermit waiver for foreign engineers, etc.
 Incentives should be sufficiently competitivevis-à-vis neighboring countries (not too muchor too little).
 Active PR of incentives to attract FDIsuppliers.

14Seminar on Action Plan for theDevelopment of Vietnam Supporting
Insudtry, at VCCI, Hanoi

Action Area 5 – FDI-local Linkage(For matching Vietnamese and FDI firms)
 Create a list of potential local suppliers, to beupgraded to a full database.
 Establish a linkage program after studying
international experiences (Thai BUILD &NSDP, Malaysia’s VDP & ILP, etc).
 Award-giving and PR of excellent Vietnamesesuppliers.
 Expand matching activities (exhibitions,reverse trade fairs, business missions, etc)

Action Area 6 – FDI Marketing(For attracting FDI suppliers)
 Proper roles of Vietnamese and FDI suppliers
should be identified for each sector.
 Draft industrial cluster strategy.
 Create supporting industry industrial parks
with small lots, rental factories, andadministrative support.
 Improvement in infrastructure and logistics
should enhance industrial clusters.

15

Seminar on Action Plan for theDevelopment of Vietnam Supporting
Insudtry, at VCCI, Hanoi

Action Area 7 – Policy Framework(Benefiting both Vietnamese and FDI firms)
 National campaign to raise awareness andprestige in skilled manufacturing.
 Improve inter-ministerial cooperation,
private-public partnership, and industryuniversity partnership.
 Draft the Basic Law of SMEs and the Law on
the Promotion of SMEs.
 Establish a new official body that specializes
in SME and SI promotion in the future.

THE END

Hanoi Industrial College,
now upgraded to University16