©Vietnam Development Forum, 2007

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The authors would like to thank Professor Donna Amoroso and Ms. Patricia
Decker of the Academic Writing Center of GRIPS for their excellent and timely
work on English editing for the book, and all assistants of the GRIPS Development Forum (GDF) for their tireless supports and encouragements in the preparation of the manuscript, as well as in several related administrative work.

CONTENTS

Introduction and Summary

Chapter 1⋯⋯⋯⋯⋯⋯⋯⋯⋯⋯⋯⋯⋯⋯⋯⋯⋯⋯iVietnam Development Forum

Supporting Industries in Vietnam from thePerspective of Japanese Manufacturing Firms ⋯⋯⋯⋯⋯1
Vietnam Development Forum

Chapter 2

Supporting Industries: A Review of Conceptsand Development

Chapter 3⋯⋯⋯⋯⋯⋯⋯⋯⋯⋯⋯⋯⋯⋯⋯⋯27
Nguyen Thi Xuan Thuy

Quantitative Analysis of the Procurement Structureof Supporting Industries in ASEAN 4, Republic of Korea,and Japan

Chapter 4⋯⋯⋯⋯⋯⋯⋯⋯⋯⋯⋯⋯⋯⋯⋯⋯⋯⋯⋯51
Toshiyuki Baba

Designing and Managing Supporting Industry
Databases⋯⋯⋯⋯⋯⋯⋯⋯⋯⋯⋯⋯⋯⋯⋯⋯⋯⋯⋯65
Junichi MoriIntroduction and Summary

Vietnam is one of the best performing developing countries in theworld. Economic growth has been recorded at about 8 percent during the past
decade, during which the industrial sector has played an increasing role in both
value and employment creation. Swift changes in economic structure haveattracted an increasing flow of foreign investments, particularly in the manufacturing sector, which in turn has helped Vietnam to promote higher economicgrowth. Moreover, under globalization with fiercer competition, both foreign
and local enterprises in Vietnam need to improve their international competitiveness through good business connections. Given this need, supporting industries are becoming extremely important to the business strategies of the foreign
manufacturing enterprises, especially assemblers, in Vietnam. The demand of
the foreign enterprises in Vietnam for good local suppliers has necessitatedmore comprehensive industrial policies in developing these industries.
However, supporting industries in Vietnam have not been fully developed; they are just at the early stages of development. This limits business
opportunities for the foreign-invested enterprises, specifically assemblers,
because it is costly and time-consuming for them to find good local suppliers.
In this context, conducting studies and proposing policy actions for the development of the supporting industries in Vietnam is an urgent task. This book is
published for these purposes. It contains four papers, each addressing a different topic on the current situation of Vietnam’s supporting industries and international experiences in developing these industries. These papers were presented and commented on in a number of workshops and conferences held insideand outside Vietnam. It is the hope of the editor that the contents of this bookwill extend beyond those directly involved in the related field of research, andthat the book will provide crucial information about the current situation andpolicy directions for the development of Vietnam’s supporting industries. The
following are summaries of the papers in this book.
The first paper, written by the Vietnam Development Forum (VDF)
research team, provides an overview on the supporting industries in Vietnam
from the perspective of Japanese manufacturing firms, and then proposes a seti

of policy directions to develop these industries. The analyses are based mainly
on a series of hearings between the Ministry of Industry, Vietnam (MOI) andJapanese manufacturing firms operating in Vietnam, which were held by VDF
from late February to early April 2006. There are 38 firms in the sample,
including 15 electrical and electronic firms, 14 motorbike firms, and 9 automobile firms. The existing situation of local procurement shows that the supporting
industries in Vietnam are relatively underdeveloped in comparison with othercountries in the region, such as Malaysia and Thailand. Although progress in
the local procurement ratio has been recorded, it differs significantly across thestudied sectors.
Before making detailed analyses on enhancing the growth of supporting industries in Vietnam, the paper argues that competitiveness and demand
size are two determinants for the development of these industries. Regarding
competitiveness, the paper indicates that under the standards of Japanese manufacturing, quality, cost, and delivery (QCD) are extremely important. The parts
cost in the studied sectors usually occupies 70–90 percent compared with labor
cost of less than 10 percent, so the Japanese manufacturing firms need to reducethe cost related to parts procurement, which in turn helps them to attain costcompetitiveness. To achieve this, most parts must be made in Vietnam because
importing parts from other countries will incur additional costs in transportation, storage, and handling. In addition, Japanese assemblers in Vietnam wantparts suppliers to be located close by to enable high-frequency, on-time deliveryof parts in order to minimize inventory and production lead time. To this end,
Vietnamese parts suppliers first need to improve quality and delivery of parts.
About the demand size, the paper argues that large demand size is crucial for
supporting industries because they require relatively large minimum orders toenter the market, and they are generally more capital-intensive than the final
assembly. More importantly, some supporting industries, such as molding andmetal pressing, require expensive machines, which are indivisible, and therefore
they can reduce the unit capital cost by increasing the volume of production.
Such increase needs to be guaranteed by a large demand.
Once the two factors mentioned above are attained, four additional
areas must be promoted to accelerate the growth of supporting industries inVietnam: high-quality industrial human resources, attractive tax and tariff poli-ii

cies, stable policy environment, and overcoming the information and perception
gaps between foreign direct investment (FDI) assemblers and Vietnamese suppliers. For instance, the majority view among Japanese firms is that high-quality industrial human resources are much more important than high-techmachines because second-hand machines operated by high-skilled workers may
be superior to brand-new machines operated by low-skilled workers. To
improve the human resources for industrial development, the paper proposes anumber of policy directions to enhance the existing training programs and promote new programs with both public and private efforts.
Along with these issues, the paper discusses other two issues, which
are also crucial for the development of supporting industries in Vietnam: industrial and safety standards, and unavailability of raw materials. Dealing withthese issues is important for meeting international standards and ensuring efficient operation.
In order to make a concrete development strategy for the supporting
industries in Vietnam, Nguyen Thi Xuan Thuy, in the second paper in the book,argues that the term “supporting industries” needs to be defined properly to suit
the socio-economic conditions of the country and the targets of industrial strategy. Therefore, her paper mainly focuses on reviewing different concepts of“supporting industries” and their development, and then proposes a definition
for Vietnam.
According to the author, although the term “supporting industries” iswidely used in many countries, it is still ambiguous and without consensus indefinition. This term is used differently in different countries, depending on theeconomic conditions and policy purposes. For instance, Thailand defines supporting industries as the enterprises that produce parts and components that areused in the final assembly processes of the automobile, machinery and electronic manufacturing industries, while the US Department of Energy defines supporting industries as those that supply materials and processes necessary toform and fabricate products before they are marketed to end-use industries.
Moreover, the term has also been changed to adapt to changes in economic conditions and policy directions of the country. For example, in the White Paper on
Economic Cooperation 1985 by Japan’s Ministry of International Trade andIndustry (MITI, now called the Ministry of Economy, Trade, and Industry—iii

METI), the term “supporting industries” was used to refer to small and medium
enterprises (SMEs) that contribute to strengthening industrial structure in Asiancountries for medium and long terms, or the SMEs that produce parts and components. However, in the New Asian Industrial Development Plan to promoteindustrial cooperation between Japan and four countries in the Association ofSoutheast Asian Nations (ASEAN 4: Indonesia, Malaysia, the Philippines, andThailand), MITI defined “supporting industries” as industries that supply thenecessary things such as raw materials, parts and capital goods for assemblytype industries.
In addition to these concepts, the paper also provides a number ofrelated concepts in order to see the different development stages of supportingindustries. Subcontracting, ancillary industries, parts and components industries, and vendors are some of these concepts.
Going further with the case of Vietnam, where the term “supportingindustries” has been used only since 2003, the paper suggests that without aclear definition of supporting industries, it is more difficult for Vietnam to haveconcrete industrial policies and strategies, and to mobilize all necessary
resources for the development of supporting industries. Based on the current
development context, the author then proposes a definition of these industries inVietnam. Furthermore, reviewing international experiences in developing supporting industries with such important policies as local content regulations, promotion of FDI into supporting industries, linkage promotion, and participationin the global production networks, the paper indicates some lessons that Vietnam can learn to foster these industries.
Using a broad definition of “supporting industries,” which refers to agroup of industries that supply the diverse parts and materials used in the production of industrial products, the third paper of the book, by Toshiyuki Baba,
aims at describing quantitatively the procurement structure of supporting industries for key manufacturing categories in Asia. The paper uses the Asian International Input-Output Tables to reveal the industrial structures that are composed of the industries in each country in the region. Three tables corresponding to 1975, 1990, and 1995 are used to analyze the industrial relations
between ASEAN 4, the Republic of Korea, and Japan with particular focus on
automotive/motorcycle and electrical/electronic industries.

iv

Providing formulas for estimating domestic direct procurement rate(DDPR) and domestic indirect procurement rate (DIPR), the author shows thatindirect linkage effects are greater than direct linkage effects in these studied
sectors in Japan, while ASEAN 4 and the Republic of Korea have lower domestic linkage effects in comparison with Japan. According to the author, this finding can be elucidated by a possibility that lower domestic linkage effects are
due to low levels of domestic procurement.
Regarding automotive/motorcycle industries, the paper shows that in
ASEAN 4 both direct and indirect procurement rates from their own countries
were stagnantly low during 1975–1990, while they developed during
1990–1995, and dependency on Japan was greater than that on domestic
sources. This can be explained by the fact that these countries experienced
major economic expansion in the latter period. The situation for the Republic ofKorea was contrasted with that of ASEAN 4, in which both direct and indirect
procurement rates from domestic sources increased over time, while those froma major external source (Japan) declined steadily. For Japan, there was almost
no change during this 20-year period because both direct and indirect procurements were approximately 100 percent from domestic sources.
The same analysis is also used for the electrical and electronic industries. The findings imply that the foreign dependency was significant in
ASEAN 4 in the studied period. Meanwhile, domestic direct and indirect procurements in the Republic of Korea expanded in the 1975–1990 period anddeclined during the 1990s. This situation went along with an increase in foreignprocurements. For Japan, domestic sources were still significantly important,and foreign sources, particularly the US, increased steadily.
To provide a more thorough analysis on these changes of domesticbased and foreign-based procurements in the studied countries, the paper showssome possible causes, including differences in the characteristics of parts, in thequality required by the market, and in policies of each government. These differences are useful information for the policy makers in proposing their industrial development policies.
It is emphasized in the first three papers of this book that local procurement of parts and components benefits both FDI assemblers and local parts
suppliers because FDI assemblers are able to reduce additional costs, such asv

transportation and inventory, associated with imports, while local suppliers canincrease business volume and absorb updated technology through business relations with FDI assemblers. Therefore, it is commonly agreed that promoting
local procurement is a key to FDI-led industrial growth in developing countries.
Yet, most FDI assemblers in Vietnam do not have sufficient information on
where good Vietnamese parts suppliers are located in order to attain cost competitiveness through fruitful business connections with these local suppliers. To
investigate this research question, Junichi Mori presents an analysis of designing and managing databases for supporting industries in the last paper of thebook.
The author explains the importance of such databases in Vietnam.
According to various sources of information such as Japan External TradeOrganization (JETRO) (2004) and VDF (2006), FDI assemblers in Vietnam
face serious difficulties in promoting parts localization because local parts procurement in all manufacturing sectors in Vietnam was much lower than in other
ASEAN countries. More seriously, it is also costly and time-consuming for FDI
assemblers in Vietnam to find appropriate and good parts suppliers in Vietnam.
Creating databases of supporting industries is therefore urgently necessary.
To go further with designing databases for supporting industries inVietnam, the paper describes desirable characteristics of such databases. It isshown that the current yellow-page-type business directories in Vietnam cannot
provide sufficient information for FDI assemblers to find their appropriate local
partners. It is also emphasized that the main difference between databases forsupporting industries and business directories is the depth of firm-level data. To
obtain the required information, the paper then illustrates the mutual relation
between criteria of supplier selection and the required items in databases forsupporting industries.
For creating appropriate databases that can meet the demand of FDI
assemblers, the author provides useful information about databases of supporting industries in Japan. Among many others, Okaya City database andMonozukuri-net are excellent examples. To create such databases, various related issues need to be considered thoroughly. For instance, motivating SMEs toparticipate in the databases requires such important activities as good publicprivate partnerships, intensive company visits, and business matching services.

vi

We hope that this book will help the readers understand more thoroughly the current status of the supporting industries in Vietnam. If VDF cancontribute its mite to promote development of Vietnam’s supporting industries,
we will be more than happy.

Tokyo, March 2007
Vietnam Development Forumvii