Vietnam News Network

Japanese companies typically rely on a group of smaller companies to produce the parts they build into high-tech products, but they’re still finding it hard to find Vietnamese firms to fill that role.  As a result, there’s little local content in many exports.

Japanese manufacturers and experts are saying that Vietnam needs to learn to produce more of the parts and components that go into the goods assembled here.  It’s not a new theme, in fact more like a song that plays over and over, every time there’s a workshop on the nation’s industrial development.

Japanese participants in a Japan-Vietnam roundtable last week said they’ve seen little change in the industrial infrastructure over the past ten years.  It’s still the case that seventy to eighty percent of the components needed for manufacturing finished products are supplied by imports. “Local content” remains negligible in many sectors.

Mitsuo Sakaba said he learned about the weakness of Vietnam’s supporting industries when he was preparing to take up his duties as Japan’s ambassador in Hanoi in early 2008.  He was “shocked,” he said, to realize that the lack of capable parts suppliers was the principal reason that Japanese businesses hesitated to make investment in the country to which he was going to be the ambassador.

“Japanese companies told me the percentage of components supplied by Vietnamese manufacturers to Japanese companies was too low and that most of components must be imported. There are many things that need to be done to develop Vietnam’s supporting industries,” the ambassador said.

Dr. Nguyen Dac Hung of the State Bank of Vietnam said that the so-called ‘supporting industries’ in Vietnam mainly just make the packaging for products and very simple components.  He illustrated this point by describing a Japanese wine producer in Vietnam that was discouraged when it realized that it could not use anything made in Vietnam for its wine products, except. . . cardboard cartons.  The producer has to import even the wine bottles from other countries, because the bottles provided by domestic producers cannot meet his requirements on quality and colour.

Vietnam has been well known in the world for an abundant, low-cost labour force.  However, it is lacking the labour force with high quality, Hung said.  He repeated a familiar story of the difficulties encountered by Intel, the US IT firm, in recruiting staff for its new Vietnam factory.  Out of thousands of candidates screened, only 40 met Intel’s criteria for technical and language ability, reportedly the lowest percentage the US group has seen so far in the Southeast Asian countries where it manufactures.

Japan’s Canon Corporation is another big investor in Vietnam.  Sachio Kageyama, the director of Canon’s Vietnam operations, related that his company started operations in 2001 with seven Vietnamese partners.  The number has now expanded to 100 but, Kageyama stressed, “it’s because we found them.  Canon had to scour the business directories to establish relationships.  From 2001 until now, not a single Vietnamese company has taken the initiative to establish a business relationship with us.”

Clear directions and longer-term loans are key

The Secretary General of the Vietnam Electronics Manufacturers’ Association, Tran Quang Hung, said that most of Vietnamese electronics manufacturers are small companies.  They find it very difficult to meet with big foreign companies.  But if they are successful, and get an order from a Japanese firm, the latter asks for all sorts of products and the companies are ‘embarrassed.’  “If the Japanese firms would give technical help, being very clear as to the amount and nature of the orders, both sides can get on well and benefit a lot,” said Hung.

Other experts believe that the key problem behind the slow development of supporting industries is a lack of capital.

Hung from the central bank said that in order to develop supporting industries, businesses need medium and long term capital, while banks only have short term capital to lend.

Analyzing matters from a financial perspective, Hung said that the dong has weakened by nine percent against the dollar since late 2008.  Because Vietnamese companies cannot pledge property when they seek loans, but must borrow money short-term to import materials, the exchange rate fluctuations are a real problem.

Keinichi Ono of the Japan National Policy Research Institute sounded a gloomy note.  Now that Vietnam has joined the ASEAN Free Trade Area and the WTO, inflows of products from other ASEAN countries threaten the nation’s industrial foundation.  “If Vietnam’s supporting industries remain weak,” Ono said, “you risk losing your manufacturing base, and being left only with sales agents.”