Tightening the linkage between FDI and domestic enterprises

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Manufacturing activities at Samsung Electronics Vietnam Company Limited (Bac Ninh). Photo: T.Binh

Weak links

According to research by the United States Agency for International Development (USAID), the US-China trade war and the Covid-19 pandemic have boosted the demand of FDI to shift production. For example, Apple started moving production from China to Vietnam and increased the number of headphones produced in Vietnam with about 4 million headphones in the second quarter of 2020. Google and Microsoft are also moving some production lines from China to Vietnam, while the United States has identified Vietnam as a priority partner in the supply chain. Panasonic will also move its factory to Hanoi to become the largest manufacturing center for washing machines and air-conditioners in Southeast Asia. This is good news for Vietnam's economy in the context of the pandemic. However, the question is whether Vietnam, particularly Vietnamese enterprises, will be able to take advantage of these great opportunities.

Also according to USAID's research, the challenge to connect the FDI sector to Vietnamese enterprises is high processing costs, lack of transparency in cost calculation because of poor cost control; suppliers are not reliable enough, do not comply with commitments, delivery is slow, incorrect or insufficient compared to orders.

Vietnamese enterprises also have many problems in connection because Vietnam currently imports raw materials from China for production, of which, the garment industry imports 70-80% of raw materials from China, the electronics industry imports up to 77% of the total product value, pharmaceuticals import 85-90%, the plastic industry that imports input products account for 70-80% of production costs.

Data from the Enterprise Development Agency, the Ministry of Planning and Investment (MPI) also shows that Vietnam attracts a large number of FDI enterprises, but the import structure is quite large, for US$1 of export, up to US$0.4 is imported from abroad. Along with those limitations, the fact that only 5% of Vietnamese enterprises are medium and large enterprises are the reasons that make it difficult for domestic enterprises to step into the global supply chain of multinational corporations. Therefore, a tight handshake between the FDI sector and the domestic economy is still a question mark that takes time to answer.

Minister of MPI Nguyen Chi Dung:

"Vietnamese enterprises need to make full use of their creativity to seek new opportunities in a changing state, shifting supply chains as they are now, reaching overseas markets to acquire businesses with advanced technology. All levels and branches need to take quicker and stronger actions to support enterprises to seize the "once in a lifetime" opportunity, in order to restore and develop the value chain sustainably, create a breakthrough, and promote economic growth.”

According to the Minister of MPI Nguyen Chi Dung, Vietnam has achieved remarkable achievements in attracting FDI and developing domestic enterprises.But the fact is that the linkage of Vietnamese enterprises is still sporadic, and there are very few links between small enterprises and larger enterprises, between Vietnamese enterprises and FDI enterprises.The participation of Vietnamese enterprises in the global value chain is still very modest in both quantity and quality. The linkage between the business sectors is weak and fragmentary, not only affecting the sustainable development of enterprises, but also reducing the efficiency of FDI, which is a problem the Government is always concerned about.

“One of the main reasons is that due to its small size, most small and medium enterprises (SMEs) in Vietnam have low management skills and limited human resources in terms of both quantity and quality; they are barely able to accumulate and concentrate capital to invest, innovate technology, improve productivity and quality to meet the increasingly demanding requirements of large domestic and international customers. At the same time, Vietnamese enterprises are still hesitant, and dare not accept risks to invest in upgrading standards, so they cannot make breakthrough steps,” said Minister Nguyen Chi Dung.

Need to change thinking

Speaking about this issue, Ms. Hoang Thu Thuy, representative of Panasonic Vietnam Company, said that Panasonic Vietnam always offers opportunities for enterprises including domestic and foreign enterprises with clear terms and standards, so enterprises that meet the criteria will be able to join the Panasonic supply chain. However, FDI enterprises approach very positively, while domestic enterprises are still shy. When seeing many competitors, domestic enterprises are concerned about whether they can compete or not.

"I think that, before the buyer's request, enterprises need to be confident and prove to the buyers that their ability to meet them can participate in the value chain of FDI enterprises,"said Ms. Hoang Thu Thuy.

According to Ms. Dao Thi Thu Huyen, Senior Manager of Canon Vietnam, the number of component suppliers for Canon Vietnam is 340 global enterprises, including 147 Vietnamese enterprises, but pure Vietnamese enterprises are only about 20 enterprises and this number has barely increased in recent years. Currently, Canon has 59 category groups with 300-400 components to provide, but Vietnamese enterprises mainly provide easy-to-make components such as plastic and packaging. A Canon representative suggested, instead of providing components that are easy to make, businesses need investment to produce equipment with higher technology content.

Mr. Nguyen Anh Tuan, Head of Strategic Support, Samsung Vietnam Complex:

“Enterprises participating in the Samsung supply chain must ensure compliance with the laws of the host country on labor and salary. If the company is doing business with Samsung but has delayed payment of 3-6 months, then Samsung must find other solutions to reduce the risk, because unemployment and strikes will affect Samsung's supply chain. Besides, it is the guarantee of social responsibility for environmental issues, waste treatment.”

“Once in the supply chain, customer requirements are very high, because these are global products, providing customers with the most demanding quality and cost, because they always have to maintain the supply chain and compete with other businesses. Accordingly, domestic enterprises need determination and continuous improvement to participate in the supply chain. It is necessary to focus on investing in technology and technical development, developing less competitive components, and at the same time training a team of engineers to ensure the standard of joining the global supply chain,” Ms. Dao Thi Thu Huyen said.

According to some other enterprises, the difficulty of domestic enterprises is that they want but do not have enough determination and patience to pursue the goal of working with FDI enterprises, having to set foot in the global supply chain.In order to have products in the supply chain, businesses must invest in technology and production lines, while capital costs can reach several billion VND. However, when enterprises have made a big investment and don’t have an order, it is also very risky, but if they don’t invest, there are no orders.These difficulties create a vicious circle of domestic enterprises in the process of connecting with the FDI sector.

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According to Mr. Nguyen Anh Tuan, Head of Strategic Support Department, Samsung Vietnam Complex, Samsung Vietnam currently has 42 companies supplying level 1 components which are domestic enterprises, the goal of this company is that by the end of 2020, there will be 50 level 1 enterprises. But the ability of Vietnamese enterprises to respond is low. Changing technology and production lines for Vietnamese enterprises is also very difficult.