Enhancing Supply Chain Diversity in the Global Market

9:43:34 AM | 7/10/2024

With aspirations to ascend the value chain, Vietnam finds itself at an important juncture to leverage its position in global value chains. The government's objective is to cultivate networks comprising primary (direct) suppliers and secondary/tertiary suppliers (indirect suppliers to manufacturers), thereby integrating them into assembly stages, aiming to catalyze a transition toward manufacturing more sophisticated products and broadening the spectrum of export commodities.

Overview of the business forum "Diversifying supply chains, expanding markets, and enhancing business adaptability"

Strategic beacon of immense potential

According to Hoang Quang Phong, Vice President of Vietnam Chamber of Commerce and Industry (VCCI), the Vietnamese economy and business community are positioned at a convergence of many developmental trends, prominently featuring the evolution of supply chains and global value networks. Many leading corporations and enterprises are actively realigning their supply chain architectures and revolutionizing production and business practices to align with the latest advancements in digital technology.

These transformations are pivotal in fostering sustainable supply chain development, enhancing resilience against global and regional economic fluctuations. "Amidst this profound shift, Vietnam has been singled out by many countries, corporations and major enterprises worldwide as a strategic and promising investment destination," noted Mr. Phong. This moment presents a golden opportunity for the Vietnamese economy and businesses to attract significant investments and advanced technologies, positioning themselves as integral nodes in global supply chains.

The economy's performance in the first half of 2024 improved positively, with export activities witnessing a strong recovery, achieving an estimated turnover nearing US$189 billion, a 13.8% surge from the same period in 2023. Notably, certain key products have not only met rising market demands but have also seen a redirection of orders to Vietnam from other countries.

However, according to the VCCI report, out of approximately 800,000 active domestic private enterprises, large enterprises constitute less than 2%, with the majority being small and micro enterprises. Small and medium-sized enterprises (SMEs) face significant challenges including inadequate management skills, limited technological innovation, and constrained access to finance. Moreover, domestic and foreign investor linkages remain underdeveloped, hindering potential synergies. The technology and productivity spillover from foreign direct investment (FDI) enterprises to domestic counterparts remains minimal, despite some successful integrations in sectors such as automobiles, motorcycles and electronics, though these instances remain limited.

Mr. Nguyen Quoc Viet, Deputy Director of the Institute for Economic and Policy Research (VEPR), highlighted ongoing risks amid Vietnam's resurgence in global trade participation in 2024. Geopolitical tensions continue to threaten supply chains, potentially escalating tariffs and trade barriers that could dampen global business and investment sentiment. Additionally, disruptions in major shipping routes - like those in the Red Sea, Black Sea, Panama Canal and Suez Canal - have escalated logistics costs, thereby increasing input costs for Vietnamese products and affecting their competitiveness in global value chains.

VEPR's latest annual report emphasized further risks for Vietnamese businesses involved in global supply chains, including global inflationary pressures and rising interest rates that may impact domestic monetary policies and increase capital costs. The trend toward fragmentation poses additional challenges for international trade and investment activities, limiting opportunities for collaboration and technology exchange among countries and enterprises.

Business support policies needed

The current landscape reveals both the potential and challenges inherent in deeper integration within global supply chains for Vietnamese enterprises. Thus, Mr. Viet emphasized the requirement of timely and strong support policies aimed at enabling these businesses to engage more profoundly.

Mr. Viet advocated for reinforcement of policies that bolster technological innovation investments, particularly in green technologies, energy efficiency, and the transition to renewable energy. Furthermore, he underlined the importance of aligning corporate and product branding with global trade and production dynamics.

Highlighting the requirement of affirming brand integrity and clearly distinguishing "Made in Vietnam" products amidst a complex global environment, Mr. Viet stressed the need for enhanced support in integrating Environmental, Social and Governance (ESG) principles into corporate governance. This involves forging stronger ties between domestic enterprises and FDI entities to meet evolving international standards and surmount emerging trade barriers.

Moreover, Mr. Viet recommended intensified scientific and technological collaboration between businesses, research institutions, policy units and universities. He pointed out the necessity of nurturing supply chain partnerships focused on research and development. Facilitating the development and transfer of cutting-edge technologies is important in fostering sustainable business growth, enhancing competitiveness, and effectively tapping into new export markets under new generation free trade agreements.

VCCI Vice President Hoang Quang Phong urged for support policies that are intricately aligned with the specific needs of businesses. He proposed a paradigm where businesses delineate their requirements first, thereby empowering the government to tailor support programs that stimulate growth, elevate competitiveness and fortify the capabilities of domestic enterprises in important industries with substantial potential.

Developing an ethnic business development strategy in alignment with the evolving trend of supply chain transformation is imperative

Dr. Nguyen Bich Lam. Former Director General of the General Statistics Office

The conventional supply chain typically includes five key partner groups: raw material suppliers, manufacturers, distributors and logistics providers, retailers, and end-customers. Regrettably, Vietnamese enterprises have predominantly concentrated on manufacturing, neglecting engagement with other partners.

Furthermore, there has been a notable lack of proactive adherence to commitments outlined in Free Trade Agreements (FTAs), particularly in capitalizing on emerging regulatory advantages.

In response to these challenges, Vietnam urgently requires a cohesive National Enterprise Development Strategy aligned with the evolving global supply chain landscape, with the government assuming a facilitative role. It should foster conducive conditions for foreign investors to collaborate and co-produce with domestic enterprises, thereby enhancing FDI attractiveness while instituting robust mechanisms to assess foreign investment quality and direction, thereby mitigating associated risks.

It is essential to fully implement Vietnam's obligations under FTAs to secure sustainable, long-term benefits and optimize the interconnected economy's potential. A proactive strategy is important for Vietnam to assertively engage in global services and capitalize on emerging opportunities effectively.

Biggest challenge is human resources

Dr. Nguyen Tu Anh, Director of the Center for Economic Information, Analysis and Forecasting (Central Economic Commission)

Significant opportunities present themselves alongside challenges, foremost among them being the management of human resources. Vietnam faces a shortage not only of labor but of both skilled and unskilled workers, amid a fast-growing economy that attracts substantial capital influx and requires great amount of energy. The integration of domestic enterprises with foreign direct investment is driven by the imperative for stability and uncompromising quality demanded by global business standards. Yet, local businesses aspiring to integrate into these supply chains must commit to substantial investments in both human capital and technology while remaining watchful against inherent investment risks. Amid the global shift toward greener supply chains, Vietnam is poised to align itself with international norms, emphasizing carbon footprint reduction in manufacturing processes. This requires a understanding of production protocols to ensure adherence to stringent standards set by developed markets. Vietnam has taken strides toward establishing a carbon credit market and is actively conducting greenhouse gas inventories across nearly 2,000 enterprises. The government's supportive measures notwithstanding, businesses must proactively anticipate and navigate potential risks and challenges to effectively capitalize on emerging opportunities.

Designing policies to bolster businesses' participation in the global supply chain remains a critical task

Dr. Nguyen Van Hoi, Director of Vietnam Institute of Strategy and Policy for Industry and Trade (Ministry of Industry and Trade)

Challenges persist in the implementation process, stemming from issues such as the awareness, mindset and strategic vision of policymakers. Transparency and equity remain elusive, stability is inconsistent, and bureaucratic overlaps. Moreover, efforts to transform the growth model are hampered by ineffective policy execution, particularly in the absence of mechanisms to foster export logistics development.

Deficiencies in policies supporting export resource allocation persist, including the disjointed coordination of raw material production, design and distribution. Compliance issues in the production and export chain further compound challenges under existing legal frameworks. Businesses, constrained by limited awareness and capacity, struggle to effectively leverage export promotion policies.

Consequently, there is a requirement to refine and tailor policies that support businesses in deepening and enhancing their integration into the global supply chain. Initiatives such as organizing exhibitions, bolstering trade promotion, expanding investment avenues, cultivating markets, and diversifying product introduction mechanisms are paramount. Fostering brand development and enhancing business understanding of labor and environmental considerations within Free Trade Agreements (FTAs) are important.

Furthermore, erecting technical barriers such as implementing import standards, navigating anti-dumping measures, and introducing environmental levies is essential to safeguard domestic production interests.

Complying with codes of conduct, regulations and standards

Dr. Le Duy Binh, Managing Director of Economica Vietnam

In the journey toward integrating into the global supply chain, embracing ESG (Environmental, Social, and Governance) standards, CSR (Corporate Social Responsibility), circular economic models, and the green economy isn't merely an option but an inevitable imperative for domestic enterprises.

For instance, participation in international supply chains requires adherence not only to host country regulations but also to international norms such as the EU's cross-border carbon adjustment mechanism and Anti-Deforestation Regulations.

Consequently, it is important for Vietnamese businesses aspiring to be global value chain suppliers to receive comprehensive training, support, and capacity building to comply with international codes of conduct, regulations and standards. Moreover, developing digital tools to enhance traceability and data collection across the global supply chain is equally important.

To effectively guide enterprises in aligning with green standards throughout their production and business processes, it is essential to formulate regulatory frameworks. Targeted support programs must be implemented to enable businesses to elevate their capabilities, enhance digitalization, and strengthen information technology infrastructure. This approach is important for meeting the stringent ESG standards demanded by discerning markets such as the EU, Japan, US, Canada and others.

Quickly seizing opportunities

Ms. Bui Thi Viet Lam, Country Representative in Vietnam, US-ASEAN Business Council (USABC)

Over the past year, we have witnessed dynamic shifts in investment strategies in Malaysia, Indonesia and Singapore, each competing to attract investment inflows. Despite Vietnam's significant appeal to investors, many ultimately choose alternative markets. This shift in investment preferences not only directs capital away from Vietnam but also fosters the creation of strong ecosystems elsewhere, accelerating economic opportunities that can quickly slip away if not seized promptly.

Navigating this situation requires united efforts, understanding that smaller businesses have limits compared to big companies. Vietnam urgently needs comprehensive and forward-thinking policies to make significant advances, especially when neighboring countries have proactive policies. For example, launching sandbox initiatives could attract more interest while Vietnam works on boosting its digital technology and semiconductor industries.

For businesses, being agile is crucial. They need to get ready for changes like green financing and the digital economy. Embracing these trends helps companies seize new opportunities, stay competitive globally, and grow sustainably with higher exports.

By Anh Mai, Vietnam Business Forum