Vietnam Needs to Improve Supporting Industries for New FDI Wave

9:16:07 AM | 7/9/2021

Supporting industry enterprises are seeing great opportunities as Vietnam has joined many free trade agreements (FTAs) and investors are tending to move production bases to Vietnam. However, given the current complicated pandemic development, many challenges still cast a long shadow on supporting industries.

Vendor race

The stronger wave of foreign direct investment (FDI) inflows to Vietnam has resulted in a more robust demand for supporting industries. According to data from the Foreign Investment Agency under the Ministry of Planning and Investment, as of June 20, foreign investors registered to invest US$15.27 billion in Vietnam, equal to 97.4% of the value in the same period of 2020.

The prolonged COVID-19 pandemic caused some companies to change their strategic approaches from restricting business operations to prevent the pandemic contagion to “living with it”, stabilizing operations and making reinvestments. Every year, Vietnamese companies have to spend a lot of money to import components, causing domestic production costs to be 10-20% higher than in the region, manufacturing to be passive and localization rate to be low. Therefore, many businesses tend to look for strong suppliers to actively source components and increase domestic production according to governmental policies.

Supporting industry companies are struggling to improve their capabilities in the race to become suppliers for large corporations and seize opportunities from the global redirection of investment capital flows. Many companies have filled major product supply contracts for multinational corporations and FDI firms in Vietnam such as Foxconn, Canon, Samsung, Toyota and Honda and exported their products to partners around the world.

Mr. Vu Ba Phu, Director of the Vietnam Trade Promotion Agency (Vietrade) under the Ministry of Industry and Trade, said that Vietnam's supporting industry enterprises have developed both in number and quality over the years, improved production capacity and become increasingly involved in global production chains. Supporting industry companies account for nearly 4.5% of total processing and manufacturing companies, and employ more than 600,000 workers, equal to 8% of the total labor force in the processing and manufacturing industry. Their combined revenue reached more than VND900 trillion, accounting for nearly 11% of the total revenue of the processing and manufacturing industry.

Some Vietnamese parts manufacturers are successfully making molds, bicycle and motorcycle parts, standard mechanical parts, electric cables and wires, plastic components, technical rubber, and tires. These products have met domestic demand and are exported to countries around the world, including Japan.

For example, Thaco Auto Company is currently successfully bucking headwinds as it exports cars, while many others have shifted to imports. A lot of its products and accessories have been exported to South Korea, Japan, Malaysia, Italy, Russia, Cambodia, Turkey and Kazakhstan. Thaco has built a supporting industry development strategy, invested in Vietnam’s largest automotive parts manufacturing facility in Quang Nam province to meet domestic and export needs, and attracted vendors to invest in manufacturing auto parts and other products.

Innovation and localization

The low localization rate has increased pressures on supporting industries. For example, textile - garment and leather - footwear industries import up to 70% of inputs from foreign countries. When the COVID-19 pandemic broke out, many companies fell into difficulty as they could not control input supplies. Similar lessons are also seen in other key industries such as electronics, manufacturing, and automobile assembling.

Mr. Takeo Nakajima, Chief Representative of the Japan External Trade Organization (JETRO) in Hanoi, said that, according to a survey conducted by JETRO, nearly 50% of Japanese companies in Vietnam planned their business expansion in the next 1-2 years. However, the biggest difficulty is the low localization of inputs and components in Vietnam, about 37%. Japanese companies want to further improve the localization rate.

Ms. Do Thi Thuy Huong, Vice President of the Vietnam Association of Supporting Industries (VASI), Member of the Executive Committee of the Vietnam Electronic Industries Association (VEIA), electronic parts manufacturers are currently facing the risk of falling further behind due to the rapid evolution of Industry 4.0, forcing them to grow innovation and creativity.

She also pointed out difficulties faced by supporting industries such as insufficient skilled workers; insufficient financial capacity and technological capacity to adopt advanced technology from FDI inflows; risk of low and medium technologies transferred into Vietnam; and temporary shortages of inputs and parts.

Currently, cheap labor and available natural resources are no longer advantages for FDI flows in Vietnam. Ms. Huong recommended the Government focus on investing in leading companies to push small and medium enterprises, develop and form supply chains for Vietnamese enterprises. Vietnam must prioritize investment in mid-range and high-end technology and avoid obsolete technologies and machines in the manufacturing sector.

Policy support

Mr. Nguyen Dinh Phong, Director of Tax Consulting Services, Deloitte Vietnam Company, said, the Government currently advocates investment attraction and sustainable development goals to encourage the further development of supporting industries. Typical incentives include full support for consulting costs, land rent within 70 years and 20-year land rent exemption.

Previously, in August 2020, the Government issued Resolution 115/NQ-CP on solutions to accelerate development of supporting industries. Specifically, by 2025, Vietnamese enterprises will capably manufacture highly competitive supporting industrial products to meet 45% of domestic demand. Supporting industries will account for about 11% of the total industrial value. About 1,000 companies are capable of supplying parts to assembling firms and multinational corporations in Vietnam, of which Vietnamese-owned companies account for about 30%.

Resolution 115 sets a target: By 2030, supporting industrial products will meet 70% of the domestic demand for production and consumption, and accounting for 14% of industrial value, and about 2,000 companies will capably supply components to assembling enterprises and multinational corporations in Vietnam.

Mr. Nguyen Dinh Phong added that, according to feedback from businesses, the current support policy on development of supporting industries is better than previous incentives and beneficiaries will be entitled to new business incentives. In particular, Decree 57/2021 on corporate income tax incentives for projects that make industrial components (promulgated on June 4, 2021) features many more favorable incentives than previous regulations. Therefore, supporting industry enterprises will have better investment and development opportunities and reduce financial pressures, thereby boldly investing and developing on a larger and more modern scale.

By Huong Ly, Vietnam Business Forum