Early Industrializers andLatecomers in ASEAN

Introducing VDF(Vietnam Development Forum)

Coping with Japanese and Chinese Manufacturing

Established in 2004 by the grant of Japan’s Ministryof Educationz Joint research project between National Graduate
Institute for Policy Studies (GRIPS), Tokyo, andNational Economics University (NEU), Hanoiz Objectives: (1) Research innovation(2) Policy impact & networking(3) Mobilizing young talented Vietnamesez Conducting and supporting research in many areas
related to Vietnam’s development
zFeb. 2007
Kenichi Ohno
Vietnam Development Forum (VDF), Hanoi
National Graduate Institute for Policy Studies (GRIPS), Tokyo

Industrial Policy Supportby VDF

HERE（4th floor)

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—official coordinator among
MOI, businesses and experts; implementing a newdrafting methodz Study on Hanoi’s developmentzVietnam Development Forum (Hanoi)
Workshop

VDF Office in GRIPS, Tokyo

Work area

VDF Publications on Industry,2005-2006
zImproving Industrial Policy Formulation (Eng & Vn,March 2005).

z

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

Supporting Industries in Vietnam from the Perspectiveof Japanese Manufacturing Firms (Pamphlet in Eng, Vn &Jpn, June 2006).

Industrial Policy Formulation in Thailand, Malaysiaand Japan (Eng & Vn, Sep.2006).
z Industrialization of Developing Countries: Analysesof Japanese Economists (Eng & Jpn, Nov.2006).
z Business Environment and Policies of Hanoi (Eng &zIssues to Consider
East Asian Dynamism—each country must levelup constantly, or stagnate.
z Early comers in ASEAN promoted SIs and SMEs
for many decades with only modest results—why?
z Now, latecomers must open up before FDI
accumulates. What should they do?
z FDI-led growth or forced capability-building—which is the winning strategy in the long run?
z Japan and China: two manufacturing centers inEast Asia—how to position yourself against them?
zVN, Dec.2006)

1

Manufactured Exports(% of total exports)

Flying Geese 1100%

Leading group
Graph: manufactured exports

Japan
TaiwanKorea

80%Singapore

Second group
60%

Malaysia
ThailandPhilippines

40%

VietnamThird groupIndonesia
China

20%

Vietnam
MyanmarPhoto by Saizou Uchida (location: Sakai-gun, Fukui Prefecture, Japan)
S

Motorbike Industry in Three Countries
Duration of import bans, localization requirement and high tariffs varies
VietnamThailandIndonesia

1998
1999
2000

1997

1995
1996

1992
1993
1994

1991

1989
1990

1986
1987
1988

1985

1983
1984

1980
1981
1982

1979

1976
1977
1978

1975

0%

Source: ADB, Key Indicators of Developing Asian and Pacific Countries , 2001/1993; IMF, International Financial Statistics Yearbook 1990 . For
Japan, Japan Statistical Yearbook 2002/1999 , Statistics Bureau/Statistical Research and Training Institute, Ministry of Public Management,
Home Affairs, Posts and Telecommunications, Japan.
ADB K I di t
fD l i A i
d P ifi C t i 2001/1993 IMF I t ti l Fii l St ti ti Y b k 1990 F J
JStages ofCatching-up Industrialization

1960
1964 Vietnam War1970
1975

1964 Yamaha
1965 Honda
1967 Suzuki
1971 Local content restriction(over 50%); ban on construction 1971 Hondaof new asembly plants
1974 Yamaha Suzuki
1977 Local content restriction
1977 Local content restriction(more than 70%); lifting of ban onwith penalty
new assembly plants of 1971

Technologyabsorption
FDI
Agglomeration

1978 Ban on importing CBU
Increasing tariff for parts
1980
1986 Doi Moi

STAGE ONE

1990
1993 Local content restriction
with incentive
1996 Suzuki
1997 Honda, ban on importing
CBU
1999 Yamaha

1996 Import Liberalization of1997 Abosolution of local
content restriction
1999 Import liberalization ofCBU

2000
2003 Import Liberalization ofCBU

Source:Kohei Mishima in
VDF, Improving
Industrial Policy
Formulation (2005)

Simplemanufacturing
under foreign
guidance

STAGE TWO
Have supporting
industries, but still
under foreign
guidance

Creativity
STAGE THREE
Technology &management
mastered, canproduce highquality goods

STAGE FOUR
Full capability ininnovation andproduct design as
global leader

Japan, US, EU

Korea, Taiwan

Thailand, Malaysia

VietnamGlass ceiling for
ASEAN countries

Lessons from Malaysia &Thailand
Supporting Industries in ASEAN4
Japan’s MITI, White Paper on Economic
Cooperation 1985—first official use of“supporting industries” to highlight thelack of such industries in ASEAN4.
z Policies and institutions to promote SIs
already exist, with some positive resultsz(Thai automobiles, Malaysian electronics).
z

But local firms produce “easy” parts andgenerally lack skills and creativity forglobal competition.

Part procurement ofThai automobiles

Imported(30%)(for Vietnam)（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 home
Value and capability are not internalizedz Risk of wage pressure and shifting FDI to China or Vietnamz Is this due to policy inadequacy or something else?
zFDIsuppliers(45%)

Thaisuppliers
(25%)

z

Malaysia and Thailand recognize these weaknesses and try tosupport SMEs, FDI-local linkage, value-chain upgrading,creation of high-value industries, etc.

Source: Nomura ResearchInstitute, Aug.2004

2Manufacturing ++and High Value Industries
Malaysia’s Industrial Master
Plan 2 (1996-2005)

Thai Industrial Strategy
under Thaksin (2001-2006)• Top-down quick decision• Committed to integrationand open market• “Nationality of firms does
not matter”• Gov’t supports SMEs, SIs
and human resources• Target industries withhigh domestic values

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 withz

Chinese products)zz

To do this, business architecture theory is useful.
To cope with China, go integral rather thanmodular
For business architecture theory by Prof. Fujimoto (Tokyo Univ.),
see VDF publications, Sep.2006 & Nov.2006.

Alternative Paths:

FDI-led or Do-it-yourself?
(1) FDI-led indirect competition
FDI agglomeration under open market + policy support for linking
local suppliers with FDI firms & foreign buyers
ex. Thai automobiles, Malaysian electronics
Risk: local capability may grow too slowly, and foreign dominancecontinues(2) Forced leveling-up and localization
Create national companies and internalize skills quickly withpreferred policies
ex. Korean steel & cars, Malaysia’s Proton
Risk: local ability grows, but if not enough to compete globally, effort
may eventually fail under integration(Besides, the world no longer accepts such policies)

Vietnam’s Broad Policy Direction?
z Planned economy is no longer possiblez Laissez-faire is out of questionz Infant industry protection is not acceptable(cf. Japan/Korea in old days)z FDI-led growth of Thailand/Malaysia cannot

be copied
They used tariffs, import bans, entry restriction, forced localization inparallel with FDI attraction for a few decades until industry
accumulated; this is no longer permissible

Business Architecture Typology

The Way Forward for Vietnamzz

Modular manufacturing

Integral manufacturing

Partsinterface

Parts are common and canbe used for any model

Each product has uniqueparts, specifically designed

Step-by-step liberalization is not effective; create freest businessenvironment in East Asia, and use it to market Vietnam

MeritsQuick results and flexibility

Endless pursuit of quality

Promote FDI-local linkage vigorously

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

Open up trade and FDI boldly

Analyze why other ASEAN countries are slow to link up with FDI andforeign buyerszLearn integral manufacturing
This strategy is needed to avoid direct clash with China and toovercome the “glass ceiling”

zPerformance

Strategic Thinking and Targeting
General marketing and promotion do not workÎFollow the first path (FDI-led indirect competition) vigorously,
but also learn from ASEAN4’s shortcomings
TimeTime3

Partnership Possibilities

Japan: Ageing Problem

Business architecture viewpoint
From the viewpoint ofbusiness architecture
matching, Japan=ASEAN
and USA=China can form
effective partnershipJapan has high technology, high wages, and ageingpopulationz 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 developingcountries
z Japan needs a young developing country as areliable partner in integral manufacturing
zSource: compiled from Prof.
Takahiro Fujimoto’s explanation
to the Joint VDF-MOI mission,
June 2005.

Monozukuri Workers in Japan

Population Pyramids

Monozukuri means manufacturing with skill, pride and dedication

MaleJapan2005

FemaleMaleVietnam2005

0%

Unit: million

20%

40%

60%

80%

100%

Designing
FemalePlastic and other injection
Pressing
Boring (cutting)
Grinding and polishing
Textile industry skills
Welding
Painting
Production process management
Repairing and adjusting equipment
Shorta g e
i n qua n ti ty Shorta g e
i n q ua l i ty

Source: US Census Bureau, International Database.

Overcoming Two Problems
To cope with glass ceiling problem and China challenge,
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

Don’t target high-tech (biotech, nanotech, new materials, etc) as key
industry; pure research is fine, but commercialization of latest
technology is beyond latecomers’ ability.

Shorta g ei n bothA dequ a teSurpl us

N o a ns w er

Source: White Paper on Monozukuri, 2005.

Old Problem, New Effort
IHR and SIs have been recognized as importantand promoted in ASEAN for many decades. Butresults are mixed.
z The key to success is doing basic things patiently
and consistently:z--Set a clear goal of becoming an integral manufacturing country--Work with and learn from teacher countries (don’t do it alone)--Concentrated implementation until goal is attained.

The End4