1 March 2017
Addressing Vietnam’s Supply Chain Shortfall
Vietnam's status as one of the fastest-growing Asian economies has largely been driven by the expansion of its manufacturing industries and, more specifically, by its burgeoning electronics sector. According to 2015 figures from the General Statistics Office of Vietnam, 30 per cent of Vietnam's total exports – some US$162 billion – were electronic items. In 2010, they accounted for just five per cent.
The country’s electronics exports have expanded by 78 per cent per annum over recent years – US$6.9 billion in 2011, US$29.5 billion in 2012, US$32.1 billion in 2013 and US$35 billion in 2014. By the end of 2017, the Vietnamese government forecasts that the country's electronics exports will be worth US$40 billion. In spite of this – and even factoring in the country's other export sectors – the country has only comparatively recently moved out of a trade deficit situation, recording surpluses in 2012, 2013 and 2014.
Lack of Ancillary Industries
One problem is Vietnam’s high import levels, a consequence of the country's vast shortfall in ancillary industries. There are currently fewer than 700 enterprises producing spare parts in Vietnam, compared to about 58,000 businesses operating in the manufacturing industry.
This has forced several major electronics manufacturers, including Samsung, Foxconn, Intel and Panasonic, to rely on imports for the vast majority of the electronic components they require. As a result, electronics manufacturers operating in the country tend to focus solely on product assembly, allowing them to taking advantage of the comparatively low labour costs.
According to a 2015 report by the Vietnam Trade Promotion Agency, Samsung has 90 component suppliers servicing its Vietnamese operation, but only 10 per cent of these suppliers are actually in Vietnam, where they largely provide more basic services, such as packaging and printing. With Vietnamese suppliers still largely contributing at the low end of the value chain, this has led to a number of international players entering the market offering higher value-added processes, including product design and software development.
Most local suppliers conceded that at the moment they cannot meet Samsung's requirements, according to a 2014 report by Vietnam Investment Review.
"Samsung's requirements are a major challenge for local companies,” said local businessman Tran Anh Vuong, a Director of Bac Viet, a steel products manufacturer and one of the few local firms supplying Samsung. “They have many stipulations, including environmental protection and conducting specified R&D activities, as well as delivery and working conditions that most Vietnamese companies simply cannot comply with."
Access to Technology
Several factors appear to be holding back the development of the local supply chain. Speaking at the National Assembly recently, Vu Huy Hoang, Vietnam's Minister of Industry and Trade, cited a lack of policies supporting the ancillary industries as part of the problem. Ling Sing Kok, Assistant Director of Panasonic's Sales and Service Division, however, has a different take, saying: "Suppliers require access to high levels of technology, as well as substantial investment, neither of which are available in the Vietnamese market at present."
This continuing shortfall, while problematic for domestic companies, may be good news for Hong Kong electronic-components manufacturers, as well as in other ASEAN nations, thanks to pending trade agreements, including with the ASEAN Economic Community – of which Vietnam is a member – subsidies, lower tariffs and the creation of policies designed to stimulate foreign investors. According to BDG Vietnam, a Ho Chi Minh City-based business consultancy, Vietnam has already lowered its electronics tariffs from 15 to 20 per cent to 0 to five per cent following the establishment of the ASEAN Free Trade Area.
Focus on Consumer Electronics
Not all product ranges present the same opportunities, however. Highlighting the country's current requirements Mr Ling said: "Vietnam has a primary focus on the production of mobile phones and certain local electronic and audio-visual products.
"There is still a considerable number of more sophisticated electronic products, such as tablets, notebooks and industrial LCD panels, that are not yet produced here. We also see a potential 10 per cent growth in surface-mount technology machines."
In anticipation of this potential growth, a significant number of overseas electronic-component producers have invested millions of dollars in establishing Vietnamese plants. At the same time, the government has also been trying to remedy the situation through initiatives designed to encourage growth of the local supply sector.
All of this, however, will take several years to come to fruition. In the meantime, the Hong Kong electronics sector – eager to find new markets following falling demand on the Chinese mainland – may well find substantial opportunities in Vietnam in both the short and medium term.
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