Firms resetting raw material sources

Businesses are being forced to think outside the box in establishing new links in global value chains Photo: Le Toan

Closed-off ports and border gates, and delayed shipments from China are not only affecting Chinese companies but also global groups that depend on supplies to keep business running, including operating enterprises in Vietnam. Businesses large and small are struggling to circumvent the epidemic so as to ensure production materials in the next few weeks.

A representative of Intel Group’s $1 billion chip plant in Ho Chi Minh City admitted the company had a plan to proactively respond to such situations, so the group has not yet been affected by the outbreak in terms of raw material supply disruption. However, it admitted their production lines could face not running a full operation if the situation does not improve in quick fashion.

Intel is not the only one facing a hard time. A range of foreign-invested enterprises have raised their voices regarding the same issue, including LG, Samsung, Formosa, and Foxconn, explaining that they may cut some production lines in the meantime.

US tech giant Apple was expected to increase exports in Vietnam by 30 per cent this year, but its output depends on outsourcing companies such as Samsung, Foxconn, and LG, so the lessened output of these groups will affect Apple’s export volume in Vietnam.

The aforementioned businesses contribute much to Vietnam’s total export growth. According to the General Statistics Office, the country’s total export-import value with China accounted for a very large ratio of total exports in 2019, of which exports to China accounted for 15.75 per cent while imports were 29.7 per cent. On that basis, the COVID-19 outbreak could affect the production of key export products that heavily depend on imported materials such as cellphones and their electronic components, computers, textiles, and footwear.

Preparing for disruption

For a short-term plan to ensure exports in time, enterprises must find a replacement market for raw materials such as from South Korea, Thailand, or India although it is certainly not an easy task, adding cost and time.

Nguyen Chi Trung, chairman of leading leather firm Gia Dinh Group JSC, said that to respond to the worst case scenario, his company is considering importing raw materials from other countries such as the Republic of Korea, Japan, and Bangladesh to compensate for the shortage for production.

Elsewhere, Nguyen Quoc Anh, chairman of the Rubber Plastic Manufacturers Association, said that enterprises that produce rubber and plastic components, as well as parts for foreign auto assembly lines and machinery production lines, were facing difficulties due to delayed shipments from China.

“If the situation does not improve by the end of February, our members may have to import raw materials from the Republic of Korea or Europe. That will bite into the profits of our enterprises,” said Anh.

Responding to the effects and solutions that enterprises are preparing, a representative of Canon said, “This might also affect our plans to launch new products in the market in 2020. As an immediate solution, we can only increase the volume of goods from secondary suppliers for production.”

In addition to this, the representative added, as goods transported by shipping are delayed, Canon will use planes instead, so that products can flow more easily. “However, these are only temporary measures, and we still have yet to find any long-term solutions since the epidemic situation remains complicated and unpredictable,” he said.

The Ministry of Industry and Trade suggested that companies should use the crisis to seek new markets and suppliers to manage future risks if the virus situation cannot be solved within a month. Business leaders could also conduct a scenario-planning exercise and develop action plans, making now the time to discover or develop alternative sources and persify value chains.

Developing local supporting industries

The supporting industry plays a role as an essential foundation to improve competitiveness of industrial products.

According to Reed Tradex, the largest organiser for supporting industry exhibitions in the ASEAN region, apart from challenges caused by world economic instability such as flexible exchange rate policies and strict regulation and monitoring in financial systems, the trend of production relocation from China to Vietnam is also bringing a host of opportunities to businesses that keep informed with the latest developments. However, one of the most important things is that Vietnam needs to quicken its construction of supporting industries.

Do Thi Thuy Huong from the Vietnam Electronic Industries Association said that to join the global value chain, businesses should be interested in establishing links, and connecting with domestic enterprises as well as global enterprises.

“If Vietnam’s electronics industry and supporting industries can build a supply network and create products that meet international standards, it will sharply improve competitiveness and the ability to join in with the entire supply chain,” Huong said.

For instance, to reap the benefits posed by the free trade agreements, the leather and footwear sector needs to develop a supporting industry to reduce reliance on the import of raw materials, enhance competitiveness, and boost high-value exports.

This is because new-generation agreements set strict requirements on product origin, a big challenge for Vietnamese enterprises in textiles, garments, and footwear as they are heavily dependent on material sources imported from China.

Vietnamese exporters have been advised to continue promoting the supporting industry, and ensure the origin of raw materials for production.