Economy - December 3, 2023 | 03:00 pm PT

Firms begin tentative steps into global supply chains amid challenges

Machinery parts manufacturer Huynh Duc LLC is one of the few Vietnamese companies to supply products to major international semiconductor manufacturers, but its CEO has even bigger ambitions.

Huynh Duc’s 5,000-square-meter factory is in a small street in Dong Nai Province’s Bien Hoa City.

Behind its old and outdated façade, around 180 workers and engineers are hard at work producing precise mechanical parts for multibillion-dollar multinational companies.

It became one of the first Vietnamese manufacturers to become a supplier for an American semiconductor company’s plant in HCMC.

Pham Ngoc Duy, its 35-year-old CEO, began his career at the R&D department of sewing machine manufacturer Juki, the first Japanese firm to set up shop in HCMC’s Tan Thuan Export Processing Zone (EPZ).

After three years of alternating between Juki’s Vietnamese and Japanese offices, he quit and went to work for local company Huynh Duc.

Garnering experience at a multinational company and then joining a domestic firm that supplies goods to foreign-invested companies is a common career path for many business executives and managers.

His experience at a foreign firm helped Huynh Duc, which started out as a family business in 1995, to professionalize its operations and cement its role as a reliable partner to foreign investors in the last 10 years.

Following the ‘giants’

If a supply chain can be likened to a pyramid, multinationals with thousands of employees are at the top, churning out final products for the market, while manufacturers of components and parts for making their products are the base.

Huynh Duc is determined to be an irreplaceable base in this supply chain.

A decade ago the company had to negotiate for a year and undergo a six-month review to become a partner for American semiconductor business.

Duy says: "Almost no Vietnamese business has the technical and managerial capacity to fulfill every demand made by big foreign firms. The important thing is the commitment to willingly change and address problems."

Workers are seen at Huynh Duc factory in Dong Nai Province, southern Vietnam. Photo by VnExpress/Quynh Tran

At that time Huynh Duc was rated 5-6 on 10 by its foreign partners and knew it had to make long-term investments in human resources and technology.

Until five years ago it was only importing old machinery deemed "barely enough" for its operation.

But since then it has switched to brand new machines.

"They are very pricey, but the goods produced are much better and our competitiveness is also a lot higher," Duy says.

The firm’s customer base reflects this progress.

Japanese factories used to make up 80% of Huynh Duc’s clients, but gradually American and European firms slowly started buying from it.

Now 10% of its revenues come from direct exports.

Duy says: "The most valuable asset is not cash; it is the opportunity to worh with and learn from large international corporations’ management and operating systems to learn and improve our business."

Local and foreign firms forging symbiotic partnerships is commonly seen in many of Asia’s industrialized countries like China and Malaysia.

The foreign firms get incentives from the country’s government while the local businesses get to learn from the giants and slowly catch up with them.

But in reality, very few Vietnamese firms get to partner with foreign-invested companies.

For instance, Japanese factories in Vietnam usually rank bottom in terms of the ratio of local to foreign suppliers, though the figure has risen by 80% in the past decade, according to an annual survey by the Japan External Trade Promotion Organization.

But even this improvement is only in terms of number and not importance.

Despite having partnered with high-technology firms for 10 years, Huynh Duc only supplies minor components and parts, molds and fixtures.

Vietnamese companies still do not supply any core machinery or equipment to their customers.

Though the foreign companies have helped them develop rapidly, there is still a huge gap between the top of the supply chain and Vietnam’s supporting industries.

Unable to provide high-value devices and components, Vietnam’s electronics and other traditional industries like textile and footwear only make a profit of 5-10% on their sales, a 2020 study by Assoc. Prof. Dr. Tran Thi Bich Ngoc of the Hanoi University of Science and Technology’s School of Economics and Management found.

So despite its large export volumes, Vietnam gains little economically from joining the global electronics supply chain.

Twain shall never meet

Embarking on a similar career path as Duy, Nguyen Van Hung launched industrial plastics company An Phu Viet in 2011 after working for 15 years for a Japanese corporation.

It mainly served Japanese firms in Vietnam until 2015 when Samsung, the largest foreign investor in the country, collaborated with the Ministry of Industry and Trade to look for local suppliers.

After half a year of review An Phu Viet became a tier 2 supplier for the behemoth, meaning it would supply another Korean firm in tier 1, which would produce materials directly used to make Samsung’s final products.

Since then An Phu Viet has sought to regularly upgrade its technologies in the hope of keeping up with the Korean smartphone brand, but Hung realized that it is better for Vietnamese firms to collaborate among themselves to produce more complex components, like a complete module, instead of upgrading their production line to single-handedly produce complex components.

He explains: "If we focus solely on manufacturing specific parts, it would be hard to make a breakthrough. If we supply a complete module, we could make more profits while also proving our capability to foreign firms."

Outside its own subsidiaries, Samsung has 23 partners in Vietnam who provide complete modules used for its phone cameras, chargers, speakers, circuits, and headphones.

On average they have been in the business for 32 years. Some 80% of them are listed on the Korean stock market with the market capitalization of each exceeding US$100 million.

These are the competitors An Phu Viet and other Vietnamese firms, their inferior in experience and resources, have to face to achieve their ambition of becoming tier 1 suppliers.

An Phu Viet has no chance to compete on price as many of its materials, like engineering plastic, are imported at high prices.

Hung says: "Given the same quality, clients may choose to support a Vietnamese supplier if its prices are a few percent higher than foreign suppliers’. But if the difference is in double digits, clients will choose the foreign suppliers."

Realizing his ambition of becoming a tier 1 supplier will require the development of several industries in the country, like supporting, mechanical and electrical–electronic.

Thus, decades later, Hung’s ambition remains a distant dream, and Vietnamese firms in general have not achieved their goal of becoming an important link in the global value chain.

Merely attracting FDI is not going to help Vietnam reach a higher position in the global market, Dr. Nguyen Dinh Cung, former president of the Central Institute for Economic Management, which is run by the Ministry of Planning and Investment, says.

"Drawing in foreign investors and fostering domestic businesses are two tasks that must be coordinated to help the economy take off."

For the past 35 years Vietnam has successfully performed the former task, but the latter remains work in progress.

"There is a risk of the domestic sector slowly shrinking as foreign firms keep growing," Pham Chanh Truc, former head of the Saigon Hi-tech Park, which houses technology enterprises, warns.

Investors will always aim to maximize profits, and so if there are cheaper suppliers from China or Korea, they will not use a Vietnamese supplier, he points out.

Vietnam’s rate of indigenous parts in mechanical and electrical–electronic products made for export is gradually falling behind that of neighboring countries like Malaysia, Thailand and Indonesia, according to the Organization for Economic Co-operation and Development, the so-called rich nations’ club.

This means Vietnam is growing more dependent on imports to assemble final products.

According to Dr. Nguyen Quoc Viet, vice president of the Vietnam Institute for Economic and Policy Research, a research unit at the University of Economics and Business, Vietnam National University, 98% of Vietnamese firms are small or medium-sized and with little connection with each other.

If the government does not push these domestic businesses into foreign supply chains, they will never work with large global corporations.

"If we do not find a way to get into more complex stages of production, Vietnam cannot develop no matter how many investors it attracts," Viet says.

Vietnamese firms are trapped in a vicious cycle: They need better technologies to be able to work with foreign firms, but they need to work with foreign firms to acquire better technologies since they are usually very expensive.

This leaves them unable to meet foreign companies’ requirements while the latter struggle to find local suppliers.

Juki, one of the first major foreign firms to come to HCMC 35 years ago, first invested in parts manufacturing before expanding to assembly, precision casting and even research and development with a focus on automation.

It now has four factories in the Tan Thuan EPZ.

Sugihara Yoji, Juki’s CEO for Vietnam and regional head for Asia, says the company is slowly shifting its Chinese factories to Vietnam with plans to make the latter a long-term production site.

But to realize the plan, better infrastructure is required and Vietnamese businesses should be able to produce important parts like motors and circuits, he says.

"The government does not have incentives for foreign firms to buy locally."

It is evident that without the government’s intervention, foreign and domestic firms will remain two "parallel lines."

Breaking the cycle

Truc believes the government holds the key to breaking this cycle and connecting the two.

"The government has to create a market by ordering goods from domestic businesses. After some time, after establishing their products’ quality, domestic firms can persuade foreign corporations to partner with them."

Domestic supporting industries cannot provide raw materials for every part and component that foreign firms need, and so the government must identify and focus on the most competitive products, Truc suggests.

For instance, Vietnam is a major producer of rubber and so it makes sense to develop industries that use rubber, he says.

Do Thien Anh Tuan, a senior professor at the Fulbright School of Public Policy and Management, recommends adjusting incentives offered to foreign investors to create a market for domestic firms.

"Foreign investors will never transfer their technology to us unless there are specific promotion policies."

In the past five years there have only been 400 technology transfer contracts involving foreign firms, and every single one was between a parent company and its subsidiary, according to data from the Ministry of Sciences and Technology.

Tuan suggests that instead of just handing out tax breaks to foreign investors, there should be a tiered promotion policy in which investors get better incentives corresponding to the rate of local suppliers used and Vietnamese employees in management positions, and the number of training hours and technology transfer contracts with Vietnamese enterprises.

Reforming the incentive programs is especially urgent as the global minimum tax will take effect in 2024, which will subject all large multinationals to a minimum tax rate of 15%, putting an end to Vietnam’s strategy of attracting foreign investment with tax breaks, he points out.

The government is drafting a policy to provide incentives in the form of direct grants to foreign tech firms providing training and doing R&D in Vietnam.

Workers examine products at An Phu Viet factory in Hung Yen Province. Photo courtesy of An Phu Viet

With its relations with the U.S. upgraded to a Comprehensive Strategic Partnership, Vietnam has a greater opportunity to enter global high-technology supply chains, especially in the semiconductor industry.

In preparation for the fourth big wave of FDI, Prime Minister Pham Minh Chinh has chaired two conferences with foreign investors in the last 10 months alone.

He urged them to increase the use of local content in manufacturing and collaboration with Vietnamese businesses for developing supply chains.

In 2022 the government amended a 2019 plan for foreign technology transfer to include new objectives like 400 technology transfers involving domestic firms in 2025, a 10% annual increase from that until 2030 and 15% afterwards.

This would mean a golden opportunity for domestic firms like Huynh Duc and An Phu Viet.

In the next five years Huynh Duc hopes to be able to provide equipment used directly in its customers’ production lines, but admits nevertheless this is next to impossible to achieve.

Its CEO says to improve machining accuracy and precision by a thousandth of a millimeter, manufacturers have to invest hundreds of thousands of dollars, while high-tech industries like semiconductors require precision in nanometers, or a millionth of a millimeter.

The company has set up a group of six engineers to do research to find new technologies.

But making the product is just the first step.

Even if Vietnamese products meet all quality standards, their prices cannot compete with that of foreign manufacturers with their decades of experience.

To catch up with the international competitors, Vietnamese firms need a steady stream of orders from major foreign companies, something that can only happen with the help of the government.

"Investing does not guarantee success, but if we never sow the seeds, we will never harvest the fruits," Duy concludes.

Story by Viet Duc, Le Tuyet

Graphics by Hoang Khanh