Nov 2007

SME and FDI Policies
in East Asia

Malaysian Industrial
Development Agency

China Town, Kuala Lumpur

Malaysia’s Ministry of International Tradeand Industry

Kenichi Ohno
Vietnam Development Forum (VDF), Hanoi
National Graduate Institute for Policy Studies (GRIPS), TokyoTopics
QCD of Japanese enterprises
 Supporting industries Success factors in industrial parks
 Country evaluations by Japanese FDI
 Malaysia’s Manufacturing++ and clusterbased approach SME policies of Malaysia, Thailand Policy Proposals for Vietnam
1

Nov 2007

Quality, Cost, Delivery (QCD)
Japanese manufacturers pursue QCD forcompetitiveness.
 They also demand QCD from suppliers.
 Q means zero defects (all problems solved
within factory, never shipped to customers).
 C means cutting cost (subject to Q) D means on-time delivery and no (excess)inventory. It was spearheaded by Toyota’s
just-in-time system. Logistics is also key forquick delivery.
The Pledge of Monozukuri(Manufacturing)

A panel inside a Japanese FDI
factory in Hanoi, Vietnam

1. Keep Delivery Date--It is our responsibility
1. Guarantee Quality--It is our pride
1. Cut Cost--It is our duty2

Nov 2007

Supporting Industries (SI)
“Supporting industries” refers to partsindustries for mechanical assembly such as
electronics, cars, motorbikes.
 Development of SI is key to competitiveness,since 80-90% of production cost is parts cost.
 The term “Supporting Industries” has beenused by Japanese government since mid 80s.
 Similar terms: parts & components, suppliers,vendors, subcontractors, ancillary industries.
The core parts of SI:
Metal, plastic, rubber, electrical,screws, nuts & bolts, springs, etc.

The core processes of SI:
Mold & die, pressing, casting, forging,welding, plating, heat treatment,machining

Source: Nguyen Thi Xuan Thuy (2007)

3Nov 2007

Japanese Motorbike Assemblers in Vietnam(Honda, Yamaha, Suzuki)
Sources of Motorbike Engine Parts, March 2007
Section No.

EnginePart

1 Head cylinder
2 Cover cylinder head
3 Gasket
4 Body cylinder
5 Crank shaft
6 Connecting rod
7 Pin crank
8 Piston
9 Piston ring
10 Pin piston
11 Valve
12 Valve spring
13 Rocker arm
14 Cam shaft assy
15 Guide stopper
16 Cam chain
17 Cam chain tensioner
18 Oil pump assy
19 Joint carburetor
20 Air cleaner assy
21 Carburetor
22 Crank case23 Cover crank case24 Mission gear set
25 Kick cranck assy
26 Starter clutch
27 Clutch assy
28 Shift cam assy
29 Fork shift
30 Shift shaft assy
31 Shift pedal

In-house

Local purchase
Japanese Taiwanese
VN

Other

Japan

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Imports
Thailand Indonesia Malaysia
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Taiwan

Other

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Factors for Supporting Industry
Development
Most crucial factor is DEMAND SIZE.
Additionally, the following conditions arealso needed.
High-quality industrial human resources Proper tax and tariff policy Overcoming information and perceptiongaps Stable policy environment
4Nov 2007

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

UnitcostCapital-intensive

Labor-intensive“Supporting industries will develop
naturally, even without
promotion policy, if demand size
is sufficiently large.”– an auto parts supplier.

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

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

2000

20-40%

TV

7000

1740

5-10% Automobile
6500

1200

1290

1000
500
0Vietnam

Data for 2003 (Mishima)

Thailand

4000
3000
2000

1000

1000

5000

Thousand Unit

1500

Thoudand Unit

Thousand Unit

6000

1600800600400

100020000Vietnam

Thailand

35Vietnam

ThailandData for 2002 (GSO, New Net Asia) Data for 2005 (VDF-MOI hearing)5Nov 2007

How to Achieve Agglomeration and Competitivenessin Parts Industries (Policy Proposal for Vietnam)
Industrial humanresources

FDI inflow,
cost reduction

Stable policy
environment

Tariff & tax
policies

Cost
FDI
Suppliers

Demandsize
Domestic demand(to assemblers)Three Elements ofCompetitiveness

Delivery
Local
Suppliers

Parts export

Quality

Overcoming
information &perception gaps

Ingredients for Successful
Industrial Estates
Mr. Hajime Yamaguchi (Sumitomo Corp.), creator of two
successful industrial parks in Indonesia and Vietnam:

Success ingredients are:
1. Good location (access to urban center, port, airport)
2. Good infrastructure service (power, water, wastetreatment, etc)
3. Good management of industrial estate (pre- andpost-investment support)

6

Nov 2007

FDI Policy:
Centralized vs. Decentralized
Thailand (BOI) and Malaysia (MIDA) havecentralized FDI policy, marketing andapproval systems (2-3 zones within country,
but no local incentives) Vietnam has decentralized FDI approval andmarketing (provincial level).
 China: built-in local incentive to attract FDIand over-invest; less attention to quality orenvironment.
JBIC Survey of Japanese FDIJapan Bank for International Cooperation (JBIC) conducts
annual survey on Japanese multinational firms. In 2005, 590
firms were surveyed.

Where do you plan to expand business in the next three years?
(Multiple answers)

1

China

82%

8

Indonesia

9%

2

India

3

Thailand36%

9Brazil

7%

31%

10

Taiwan7%

4

Vietnam27%

11Malaysia

5%5United States

20%

12Mexico3%6Russia

13%

13

Germany

3%

7

Korea

11%

14

Philippines

3%

7

Nov 2007

China (perception of Japanese FDI, 2005)
MERITS
Large domestic
demandCheap labor
Large parts supply
Export base (toworld)
Industrialagglomeration
Export base (toJapan)
Cheap materials

68.8%
58.1%
31.2%
28.0%
21.5%
21.5%
20.4%

DEMERITS
Unpredictable laws
Violation of
intellectual property
Severe competition
among rivals
Wage increase
Exchange control
Social unrest
Unpredictable taxes
Unrecoverable
payments

60.7%
49.4%
44.9%
42.7%
41.6%
39.3%
34.8%
32.6%

Vietnam (perception of Japanese FDI, 2005)
MERITS
Cheap labor
Human resources“China plus 1” (*)
Future potential ofdomestic market
Export base (toJapan)
FDI incentives
Export base (toworld)
Political stability

79.5%
38.6%
31.8%
29.5%
20.5%
20.5%
15.9%
11.4%

DEMERITS
Poor infrastructure
Undeveloped laws
Unpredictable laws
Poor logistics andtransport
Poor supportingindustries
Lack of information
Unpredictable taxes
Lack of middle
managers

55.9%
38.2%
38.2%
35.3%
29.4%
26.5%
17.6%
17.6%

(*) Diversification of investment risk by investing in countries other than China.

8

Nov 2007

Excerpts from the slides on
Industrial Master Plan 2 (1996-2005)
by Malaysia’s Economic Planning Unit (EPU)
Presented to VDF delegation, January 2006

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Nov 2007

Two Purposes of SME Policy
SMEs for generating jobs &income

Small shops,
restaurants,familybusinesses

Local suppliers withcompetitiveness(QCD)

SMEs for international
competitivenessForeign SME
suppliers with
globalcompetitiveness

Malaysia’s SME policy targets only the middle group (competitive local SMEs). It
supports only those firms that introduce new technology, management, IT, etc.

13Nov 2007

Common Policy Measures
Local content regulations (no longer
allowed under WTO) Attraction of FDI suppliers FDI-local linkage promotion
 Incentives (targeted, conditional oneffort/action)
 Assist participation in global production
networks

Vendor Development Program(Malaysia, 1988-97)
Large FDI firms (“anchors”) were asked tonurture local vendors (first-tier suppliers &Bumiputra firms).
 Interest-free loans were provided toparticipating local firms.
Not very successful due to low capability oflocal firms, unwillingness of FDI firms.
 Later, replaced by Industrial Linkage Program(ILP, 1997-). Candidates were expanded tosecond-tier suppliers and non-Bumiputrafirms also.
14Nov 2007

Small and Medium Industries
Development Corporation (SMIDEC)(Malaysia, 1996-)
Eligibility—local capital >60%, annual sales<RM25m, employees <150; manufacturing,manuf. services, agro business Grants for business planning, product &process improvement, marketing, certification,
improved packaging, design, labeling, etc.
 Soft loans for factory relocation, ICT, etc.
 Quick disbursement with monitoring; must
return money if plans are not implemented.
 Match-making database of 18,000 firms
 FDI-local matching, 250 cases per year

BOI Unit for Industrial Linkage
Development (BUILD) Program(Thailand, 1992-1997)
Targets: electronics, cars, machinery Database for company matching Training local suppliers & seminars
 Trade fairs
Not successful due to lack of recognition, needs
study, coordination among organizations
 Subsequently, JICA was asked to draft masterplan on development of supporting industries.
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Nov 2007

Proposed SI Measures byMotorbike Joint Working Group(Vietnam, May 2007)
M1—Incentives for investment and training
Tax & tariff exemptions and training subsidies
for pressing, casting, forging, welding anddie-and-molds
M2—Mechanism for receiving foreign experts
Needs matching, assist life & work of foreignexperts; invite retired engineers from Japan
M3—Strategic FDI marketing
Shift from general to targeted marketing;attractive industrial parks and rental factories

Vietnam (cont.)
M4—Database
Start with small size and expand later;
database and company matching must be
integrated
M5—Technical education and training
Establish/support a few pilot schools anddisseminate nationwide
M6—Testing centers for motorbike parts
Create new centers and strengthen existingones; TA and equipment should be provided

16