Economic Sector

Last updated: Thursday, February 21, 2019


Vietnamese Enterprises Struggling to Join Supply Chain

Posted: Monday, August 06, 2018

A great majority of domestic companies have not been able to meet the requirements of quality and price of products to join the supply chain. Therefore, when investing in Vietnam, FDI enterprises usually bring along their suppliers, making it difficult for domestic firms to enter the supply chain.

In the trend of the increase in export, the low percentage of contribution of domestic enterprises is extremely regrettable. Although progress in localisation has been made, the ratio is still very slow.

At the online conference on seeking general solutions to promote exports held in April 2018, according to the Minister of Industry and Trade, the localisation rate in export products is gradually improved.

For example, by the end of 2017, the localisation rate of textile industry reached over 50 per cent. Or, according to the statistics of Vietnam Leather, Footwear and Handbag Association (LEFASO), the localisation rate of the industry was about 45 per cent.

Domestic enterprises can supply almost all kinds of shoe soles, shoe laces, about 50 per cent of raw materials for medium-grade shoes and 20 per cent for high-grade shoes. With the current investment trend, by 2030, Vietnam will have been able to supply up to 60 per cent of materials for leather shoes and handbags manufacturing industry.

However, in addition to the two sectors which have been considered to have a favourable rate of localisation, those of other sectors are very modest. For example, despite the fact that the electronics and mechanical industries have good domestic and international market prospects, almost all the Vietnamese enterprises have not yet entered the market. Export value is still occupied by FDI enterprises, which is equivalent to more than 70 per cent.

At a meeting between the People's Committee and departments of Ho Chi Minh City with more than 30 enterprises working in mechanical industry in mid July 2018, Mr Do Phuoc Tong, Chairman of Ho Chi Minh City Mechanical and Electrical Enterprise Association said there had been many factors hindering the development of the mechanical industry for many years.

For example, enterprises importing machinery in complete units are entitled to a tax rate of 0 per cent, meanwhile domestic manufacturers importing components are subject to a tax rate of 10 per cent. This results in the difference between the cost of a domestic product and an imported one, suppressing the creative production capacity of enterprises and reduce the attractiveness of domestic products.

In addition, there remains one problem, which is that although one of the objectives of attracting FDI is to enable local firms to improve capacity through supply chain engagement, domestic enterprises still find it hard to participate in the chain.

FDI enterprises give priority to the products of the suppliers with whom they have a history of partnership. For example, Samsung is currently in preparations to bring 200 companies to Vietnam instead of using domestic products for manufacturing in Vietnam. Therefore, it is extremely difficult for Vietnamese enterprises to access end-of-the-mill FDI enterprises.

Meanwhile, many industries are strong in export growth, particularly the electronics industry. Specifically, in the first 6 months of 2018, the group of electronics, computers and components has reached an export turnover of US$19.7 billion, an increase of 14.3 per cent. In 2017, this group achieved export value of US$25.94 billion, up 36.8 per cent compared to that of 2016. Next, the export value of the group of telephone products and components also reached US$45.27 billion, up 31.9 per cent over the previous year.

Sadly, the localisation rate in these industries is very low. Most of the domestic enterprises are only involved in the processing of components, other equipment is still imported, while from 2015 to now, Vietnam has always been the world's 12th largest electronics exporter and the third largest in ASEAN.

According to data of the General Department of Customs, in the first 6 months of 2018, two groups of machinery, equipment and spare parts and computers, electronic products and components reached the import turnover of US$35.7 billion, accounting for 32.2 per cent of the total import value of the country.

The textile and garment industry has not yet resolved the problem of raising the rate of domestic production. In the first 6 months of 2018, the import of fabrics for the industry also increased by 14.2 per cent over the same period of last year, to US$6.27 billion. The import of raw materials for leather and footwear has also increased by 3.4 per cent with the turnover of US$2.8 billion.

At the workshop on supporting Vietnamese exporters organised by Vietnam Chamber of Commerce e and Industry (VCCI) in Ho Chi Minh City on July 20, Dr Tran Dinh Thien, President of the Vietnam Institute of Economics, said that the position of the private sector has been gradually confirmed.

The decisive role of the private and the business sector is crucial to the breakthrough of the economy. Therefore, the Government has made great efforts in reforming to support the business development, however, the business community still encounters numerous difficulties.

According to the analysis of enterprises, their limited production capacity is due to their weak internal forces, the outside factors have not enough to create momentum. It is not only the lack of capital, high production costs, but also the policy has made pressure on businesses. Therefore, businesses need to quickly remove the barriers for a more favourable business environment.


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