International Positioning Strategyfor Hanoi’s Manufacturing Sector

Hanoi
Dec. 2006Kenichi Ohno
Co-leader, VDFTopics(1) Introducing VDF(2) Policy orientation for Vietnam and Hanoi(3) Policy formulation method(4) Glass ceiling, China challenge andintegral manufacturing(5) Strategic thinking and targeting

(1) Introducing Vietnam
Development Forum (VDF)
Established in 2004 by Japan’s research grantz Joint research project between National Graduate
Institute for Policy Studies (GRIPS) in Tokyo, andNational Economics University (NEU) in Hanoiz Objectives: (1) Research innovation(2) Policy impact & networking(3) Mobilizing young talented Vietnamese
zWorkshopOfficeIndustrial Policy Supportby VDF
Research and surveys on electronics, motorbike,automobile, steel, power, supporting industries,infrastructure, business architecture, database, etc.
z Joint missions with Ministry of Industry (MOI) toThailand, Malaysia, Japan comparing policy drafting
method, master plans, business involvementz Supporting Industry Master Plan—working with MOI
to conduct surveys and related researchz Motorbike Master Plan—VDF is a coordinator among
MOI, businesses and experts; new drafting methodz Hanoi’s development (this conference)zVDF Publications on Industry,
2005-2007
zImproving Industrial Policy Formulation (Eng & Vn,March 2005).

Industrial Policy Formulation in Thailand, Malaysiaand Japan (Eng & Vn, Sep.2006).
z “Supporting Industries in Vietnam from the Perspective ofJapanese Manufacturing Firms” (Eng, Vn & Jpn, June 2006).
z Industrialization of Developing Countries: Analysesof Japanese Economists (Eng & Jpn, Nov.2006).
z Business Environment and Policies of Hanoi (Eng &zVN, Dec.2006)

VDF Publications (cont.)z

Economic Development of Japan (Ohno/GRIPS, Japanese
2005, Eng & Chinese 2006)z

Building Supporting Industries in Vietnam (Eng & Vn,forthcoming in early 2007).

(2) Policy Orientation forVietnam
z Open up trade and FDI boldly
Step-by-step liberalization is not effective; create freest businessenvironment in East Asia, and use it to market Vietnamz Promote FDI-local linkage vigorously
Analyze why other ASEAN countries are slow to link up with FDI andforeign buyers
z Learn integral manufacturing
This strategy is needed to avoid direct clash with China and toovercome the “glass ceiling”
z Strategic Thinking and TargetingGeneral marketing and promotion do not workHanoi’s Issues
z Become a better business host

Improve policy method, business involvement, businessfriendly attitude< VCCI’s Provincial Competitive Index >-Hanoi no.14 among 42 (2005)-Hanoi no.40 among 64 (2006)
z Strategic issues in industrial planning--Possibility of China-Northern Vietnam production linkage?
--Agglomeration of printer/copier and motorbike production?
--Targeted marketing: invite specific high-skill FDI firms

Hanoi’s Issues (cont.)z Geography of industry activity

Industrial zone expansion from Hanoi to neighboring
provinces; Greater Hanoi being formedz Transportation and logistics--Faster and reliable access to Haiphong and Cailan--Reducing urban congestion--More speed and capacity for Noibai Airport--Inviting foreign logistic/forwarding companies to comez Adopting international standards--Hanoi should lead the nation in environment, trafficmanagement, intellectual property rights, etc

(3) Policy Formulation Method<Two Problems in Vietnam’s Industrial Policy>z Lack of business involvement--Unrealistic analysis & targets not supported by firmsz Lack of coordination within government(ministries, departments)--Listing policies without concrete action plans
These problems are unique to Vietnam; they do not exist
in Japan, Thailand or Malaysia
Within Vietnam, North is said to be worse than South; but
some provinces are becoming more business-friendly

Thailand (under Thaksin, 2001-2006)
Tripartite coordination under industry-specific institutes and committees

Prime Minister

Policy direction
to be concretized

Order

Relevant
Ministry

Industry-specificCommittees

DirectinputsPrivateSector--Master plan--Implementation--Monitoring--Adjustment

Industry-specificInstituteExperts

Malaysia:Industrial Master Plan 3 (IMP3), 2006-2020
338 members + support staff; actual drafting time—about two years

Malaysia:
Drafting Process of IMP3
IPC: Industrial Planning Committee (headed by MITI Minister)
SC: Steering Committee (headed by MITI high official)
TRGs: Technical Resource Groups (headed by various experts)

Business opinions reflected through TRGs and brainstormingVietnam: Traditional M/P Drafting Process
PrimeMinister
Review for
approval

Order

SubmitInterministerial
review

Drafting
TeamMinister

MPI & other
Ministries

Submit

Data

Internal
review

MPI & other
Ministries

GovernmentAppeal letter toPrime Minister whenproblems arise

ContactMinistry whennecessary

Interviews,symposiums(sometimes)

Technicalassistance(sometimes)

Internationalexperts

Business Community
No permanent channel for continuous policy dialogue(case-by-case, temporary, ad hoc)

Does Hanoi Interact Effectively
with Stakeholders? (chapter 1 of book)No agency specializes in comprehensive businesssupport like HCMC’s Investment & Trade
Promotion Center (ITPC). Hanoi’s DPI is too busy
and short-staffed. SME Support Center (2005)?
z Motorbike registration ban lacked support ofbusinesses and consumers, and was ineffectivez Hanoi received $1.6 billion of FDI in 2005; butmaybe due to locational advantage, not because ofexcellent policyzInteract with Stakeholders? (cont.)
Socio-economic development plan, 2001-2005 &2006-2010 (HAPI) -- drafting process generally
lacked business involvementz Hanoi Integrated Development and Environmental
Program (HAIDEP) by Hanoi PC & JICA -- publicexhibition (Aug. 2006)zÎ Improving, but not yet nation’s leader

VDF’s Support for MOI’sMotorbike Master Plan
In Spring 2006, Joint Working Group (JWG) wasorganized to draft Motorbike Master Planz 17 members from IPSI/MOI, motorbike assemblers,experts, and VDF
z Improving business involvement and interministerial coordinationz Final draft by end May 2007zwww.vdf.org.vn/jwg.htm

Drafting
Organization

Ministry of Industry
Master Plan for approval

Motorbike Joint Working GroupIPSI/MOI

Relevant
ministries
andagencies

VDF

Coordinator

Experts

Assemblers

Opinions
Assemblers

Partsuppliers

Information& analysis
Experts

(4) Glass Ceiling, China Challenge,
and Integral Manufacturing
Technologyabsorption
Agglomeration

STAGE ONE
Simplemanufacturing
under foreign
guidance

VietnamSTAGE TWO
Have supporting
industries, but still
under foreign
guidance

Creativity
STAGE THREE
Technology &management
mastered, canproduce highquality goods

Korea, Taiwan

Thailand, Malaysia
Glass ceiling for
ASEAN countries

STAGE FOUR
Full capability ininnovation andproduct design as
global leader

Japan, US, EU

Lessons fromThailand & Malaysia（Success）Impressive growth and industrialization
led by FDI and reasonable policy（Failure）Domestic private-sector capability is still
weak after many decades of industrialization
Foreign dependency--inability to send foreigners homez Value and capability are not internalizedz Risk of wage pressure and shifting FDI to China/Vietnamz Is this due to policy inadequacy or people’scharacteristics?
zThailand and Malaysia recognize these weaknesses and try tosupport SMEs, FDI-local linkage, value-chain upgrading, creation ofhigher-value industries, etc.

Coping with China
It is foolish to directly compete with China, in thesame product, market and technology.
z Vietnam should take a complementary position visà-vis China (use Chinese inputs but do not compete withzChinese products)

To do this, business architecture theory is useful.
z To cope with China, go integral rather thanmodularz

For business architecture theory by Prof. Fujimoto (Tokyo Univ.),
see VDF publications, Sep.2006 & Nov.2006.

Modular manufacturing

Integral manufacturing

Partsinterface

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

Partnership Possibilities
Business architecture viewpoint
From the viewpoint ofbusiness architecture
matching, Japan=ASEAN,
USA=China can form
effective partnership

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

Japan: Ageing Problem
Japan has high technology, high wages, and ageing
populationz “The 2007 Problem”—Postwar baby boomers (born1947-49) with high skills will retire soonz Merit of integral manufacturing cannot be fully
exploited by using unskilled labor in developing
countries
z Japan needs a young developing country as areliable partner in integral manufacturingzPopulation Pyramids

MaleJapan
2005

FemaleMale

Source: US Census Bureau, International Database.

Vietnam2005

Unit: million
FemaleMonozukuri Workers in Japan
Monozukuri means manufacturing with skill, pride and dedication
0%

20%

40%

60%

80%

100%

Designing
Plastic and other injection
Pressing
Boring (cutting)
Grinding and polishing
Textile industry skills
Welding
Painting
Production process management
Repairing and adjusting equipment
Shorta g ei n qua nti ty Shorta g e
i n qua l i tyShorta g e
i n bothA dequa teSurpl us

N o a ns w er

Source: White Paper on Monozukuri, 2005.

Overcoming Two Problems
To cope with glass ceiling problem and Chinachallenge, what must be done is clear:z Promote industrial human resources
Training centers, Meister system, curriculum reform at industrial univs.
& colleges, overseas educ. & training, incentive for brain return, using
AOTS & JODC schemes, etc.

z Promote supporting industries
SME promotion (HRD, technology, finance), inviting FDI parts makers,
industrial standards, quality standards and testing, factory doctors,
local-FDI matching service, promoting SME networking, trade fairs &reverse trade fairs, database, using JETRO services

Old Problem, New Effort
SIs & IHR are old problems in ASEAN4. They havebeen promoted for many years, and Japansupported such effort (cf. MITI White Paper 1985).
z Despite long effort, results are mixed in ASEAN4.
z Key to success is doing basic things competently,
not jumping to high-tech, bio-tech, nano-tech, newmaterials, etc.
z Vietnam should target integral manufacturing at an
early stage, and Japan should support Vietnam
through private and official channels.
z(5) Strategic Thinking andTargeting
VN’s policy has been general, passive and reactive. It must
be result-oriented with concrete goals, actions & schedule.
<FDI Marketing>
Policy problems

General marketing

Strategic targeting-Unclear law & policy-Unpredictable cost
-Bureaucracy & delays-Trade fairs & missions-Listen to customers-Preferred project list

-Target particular firms-Special offers, supportby top leaders

FDI firms do not come by waiting. Vietnam should have concretetargets in terms of sectors, countries and companies. It should
vigorously and individually approach targeted firms, and offer
attractive conditions.

Promoting Local and FDI
Supporting Industry Firms
Initial Research

General marketing

Strategic targeting-What is SI?
-Why is SI important?
-Survey of SI needs-SI master plan
-Incentive measures-Website, database-Target particular SMEs
-Special offers & support-Link with ODA, JETRO<Malaysia>--Under Japan-Malaysia FTA, Toyota & Honda jointly send engineers tolocal SMEs and teach die & mold skills. JBIC provides loans (2006).
<Indonesia>--Japan-Indonesia High-level Government-Business Investment Forumsets up the Die & Mold Industrial Association (2005). Bilateral effort toimprove skills and certificate system. Many other measures proposed.

<Thailand>--Ota Techno Park created in Bangkok
suburbs (June 2006): rental factory
space with good support for SMEs from
Ota Ward, Tokyo--Automobile Support Project: JETRO(coordinator), Denso (teach kaizen),
Toyota (teach kanban system), Honda(teach die & mold skills), Nissan (buildcertificate system)Ota Techno Park in Amata Nakorn
Industrial Estate, Thailand (less than1 hour from Bangkok)<VDF interview with Ota Ward enterprise support leader>(Tokyo, Sep.2006)“SMEs in Ota Ward are second-tier suppliers. We cannot go toVN unless VN has more first-tier suppliers. From what wehear, VN’s business environment is risky and lacks trust. We
need more experience in Thailand before going to Vietnam.”THE END