Building Outsourcing Base for Japan’s Production Chain

Japan has invested over US$21 billion in nearly 1,500 FDI projects in Vietnam, of which nearly US$12 billion has been disbursed. This amount is small in relation to the Japanese economy and is just equal to investments by much smaller economies like Singapore, Taiwan and South Korea. The project scale is also very small, averaging some US$7 million per project. Building supporting industries in Vietnam for Japan’s production chain has been mentioned and implemented for a long time, but this process is still facing many obstacles.

 

Dr Tran Tuan Anh, Deputy Minister of Industry and Trade, said: The Governments of Vietnam and Japan agreed to build Vietnam into an offshore base for Japan’s production chain. This policy was initiated in the 1990’s when Vietnam was preparing for the industrialisation strategy of 2000 - 2010. Besides, during this time, the Vietnamese Government focused on supporting small and medium-sized enterprises (SMEs) to develop and establish domestic manufacturing networks in an effort to replace imported parts. With this policy, in the past 10 years, many Japanese corporations have channelled their investments into Vietnam and built assembly facilities there to supply regional and global markets. Thus far, Vietnam has established downstream industrial parks like Thang Long 1 and Thang Long 2 in Hanoi, Nomura in Hai Phong, and in Ho Chi Minh City. Although these facilities are operating relatively effective, they mainly house Japanese assemblers.

 

Developing supporting industries is an important content in the Vietnam - Japan Joint Initiative from the first phase to third phase and it will be continued in the fourth phase. The Vietnamese Government built the master plan for supporting industry development, which was legislated by Decision 34,2007,QD-BCN, approving supporting industry development through 2010, with vision to 2020, and Decision 12,2011,QD-TTCP dated February 24, 2011 of the Prime Minister on policies for development of supporting industries. According to the master plan, the Ministry of Industry and Trade will play a leading role. To better develop supporting industries, the Government created favourable conditions for private businesses, especially SMEs, to invest in supporting industries, particularly manufacturing parts and accessories to acquire know-how and international quality standards. Gradually, they will be able to engage in heavy industries.

 

Japan has sent policy advisors on SMEs; organised training courses at the Vietnam - Japan Human Resources Cooperation Centre; dispatched senior volunteers working in foreign countries to Vietnamese companies; supplied credits to Vietnamese companies and enterprises operating in supporting industries; hosted trade fairs and dialogues concerning parts supply since 2005, continued providing skill-training support for Hanoi Industrial University, assigned consultants to the General Department of Vocational Training to help build professional examining mechanisms, consultants to the Foreign Investment Agency to advise on the completion of investment environment; and operated the SME Supporting Centre to help attract foreign investors into supporting industries.

 

However, according to Mr Tuan Anh, Vietnam is presently facing weaknesses in attracting capital into assembly fields, that is, outsourcing and assembling are causing the trade deficit to balloon, added value of domestic production is low, and human resource training and technology transfer remain limited. Outsourcing and assembling factories typically use a large simple-training workforce and this starts causing worker shortage in many industrial parks. In the meantime, Vietnam lacks policies to speed up the development of SMEs, leading to the absence of qualified supporting industry enterprises, notwithstanding the establishment of a domestic assembling network. As a result, Japanese companies still have to import.

 

According to Deputy Minister Tran Tuan Anh, it is the right time for both Vietnam and Japan to attract Japanese companies to invest in manufacturing industries in addition to supporting industries. Vietnam can now meet initial conditions at a suitable scale. In Japan, a shrinking market and a stronger yen, which is weakening the competitiveness of production, are forcing Japanese companies to boost foreign investment. Also, the earthquake and tsunami in northeast Japan in early March are pushing Japanese corporations to restructure production, equipment supply, material, and manpower systems. Vietnam is expected to receive the third wave of Japanese investment soon if it prepares domestic conditions well.

 

To attract Japanese companies to develop supporting and manufacturing industries, Vietnam is required to have high quality human resources, have appropriate infrastructure, and develop high quality vocational training schools, according to Deputy Minister Tran Tuan Anh. Japanese language training should be fostered.

 

According to economic experts, besides developing downstream manufacturing industrial zones, Vietnam and Japan must have close cooperation at State and business levels; and Vietnam must supply good production sites and infrastructure at low cost to encourage Japanese investors to do long-term business.