One out of three computers in any office anywhere in the world is assembled with a CPU made in Vietnam.
This is the fruit of a billion-dollar project that started with Intel, producer of the world’s first CPU, deciding to invest in Vietnam 17 years ago.
The American chipmaker makes 70% of the world’s computer CPUs while a factory in HCMC’s Saigon Hi-tech Park (SHTP), built to house technology enterprises, accounts for half of all Intel’s chip production.
"Getting Intel to invest was an important milestone in the journey to attract FDI," Pham Chanh Truc, former deputy secretary of the HCMC Party Committee and the first president of the SHTP management, says.
In Intel’s wake, several international technology giants like Samsung and LG, also set up billion-dollar manufacturing plants in Vietnam.
The "made in Vietnam" tag, which appeared only on clothing and footwear in the beginning, is now on countless smartphones, smartwatches and semiconductors across the globe.
Electrical and electronic equipment exports have risen to US$155 billion, or nearly half of Vietnam’s total exports.
Vietnam has even made it into the world’s top 10 suppliers of electrical and electronic equipment.
All the investments by large corporations might have given Vietnam a new global image, but they could not propel its economy up the value chain.
In the 2019 Vietnam Industry White Paper, a report analyzing the country’s industrial competitiveness, the Ministry of Industry and Trade itself concluded that "Viet Nam’s electronics industry only specializes in the simple assembly of parts and processing, and the specialized parts and equipment industry has not yet achieved any progress."
This was not what the visionaries who strived to attract international technology investors to Vietnam had hoped for.
Truc says: "Hi-tech park and investors were just our first steps. The end goal was to spread the technology outside the specialized zones to develop every industry in our country."
Welcoming the big boys
After doi moi HCMC built the country’s first export processing zone (EPZ), Tan Thuan, in its south in 1991.
The EPZ model was adopted from Taiwan, and tax and customs incentives were used to persuade foreign businesses to set up factories in the zone.
Most of the first businesses to come to Tan Thuan EPZ were textile and footwear manufacturers, the two industries that represented Vietnam’s early stage of industrialization.
But city and state leaders knew that, as a late entrant to the global economy, the country needed to quickly move past traditional industries.
"We must upgrade EPZs to adopt the world’s advanced technologies," Truc recalls himself as saying at a meeting between HCMC authorities and Dau Ngoc Xuan, then chairman of the State Planning Committee.
That statement sparked the idea for a hi-tech zone, and by 1992 Truc was in charge of the research team to realize that idea.
After 10 years the SHTP was launched in 2002 as the country’s first high-technology zone.
At the time Truc was 62 and about to retire as the deputy head of the Central Economic Commission.
But when the HCMC Party Committee proposed that he should lead the SHTP’s management board, he jumped at it.
"This position is equivalent to a department head, but I did not care and accepted because I wanted to see the project completed."
In a discussion with Xuan, Truc said that getting a Fortune 500 company to invest in Vietnam would create a big push for HCMC and the country itself.
The first name brought up was HP because the person in charge of expanding the firm’s production in the U.S. was ethnic Vietnamese.
Unfortunately, the person suddenly passed away, causing the plan to bring HP to Vietnam to be abandoned.
After touching base with some other companies, the city set its sight on Intel, which was looking for a location in Asia to set up a new assembly and testing plant.
During a visit to the U.S. in 2003 former Deputy Prime Minister Vu Khoan and his delegation made a stop at the Intel headquarters to discuss the possibility of investing in Vietnam, especially in the Hoa Lac Hi-tech Park in Hanoi and the SHTP.
Over the next two years Intel sent many teams to HCMC to assess its infrastructure, logistics, traffic, workforce, and incentive policies.
"The city had never encountered such a demanding investor with so many detailed requirements like Intel," Truc recalls, noting that meetings with the company usually ended at around midnight as they involved considering numerous "unprecedented requests" and discussing them with Intel’s directors visiting from the U.S.
During one of these meetings, the SHTP chief even had to directly call then Deputy Prime Minister Nguyen Tan Dung to discuss electricity price discounts.
"If we did not make exceptions, we would have to send requests to [monopoly power supplier] EVN and other agencies and then wait for the government to process and decide.
"Who knew when I would be able to respond to [Intel]? The city could not immediately meet every request they made, but a guarantee was enough for them to view us [Vietnam] as reliable."
During a visit to the U.S. in 2005 then Prime Minister Phan Van Khai and Truc visited the Intel headquarters in California to meet with the firm’s executives, only to be informed they were in Washington, D.C.
"Hearing that we immediately flew to the capital of the U.S. and invited the CEO to visit the Vietnam embassy," Truc says.
It was at this meeting that the Intel chief confirmed that the company was going to build a US$600-million factory in HCMC, a figure that rose to $1 billion a year later when the firm applied for a license.
Three years after construction of the factory began Intel produced its first batch of "made in Vietnam" chips in 2010.
At the time no other business in Vietnam had the technology to become its partner.
Now Intel Products Vietnam has over 100 Vietnamese suppliers, according to Kim Huat Ooi, its vice president of manufacturing, supply chain and operations and general manager.
However, this marks an increase only in quantity and not quality.
After 13 years Vietnamese firms still cannot provide any production equipment or materials directly used in chip assembly and packaging like chip substrate, solder and adhesives.
They companies can only supply Intel with conveyor belts, chairs, tables, fixtures, and services like transportation, human resource management and security.
Despite being the source of more than half of Intel’s products, Vietnam cannot supply anything substantial used in chip production.
Samsung is another example of Vietnam’s place in the global value chain.
Over half of the Korean brand’s smartphones are produced in factories in Bac Ninh and Thai Nguyen.
Last year Samsung published its list of main suppliers who accounted for 80% of its production volumes and 26 of those suppliers were in Vietnam.
But of the 26 firms, 22 were Korean, two were Japanese and two were Chinese; there were no Vietnamese companies.
In the global value chain, the forward linkage ratio reflects a country’s ability to provide inputs for foreign companies to manufacture end products.
Vietnam’s forward linkage ratio is lower than that of many other Southeast Asian countries and on the decline.
On the other hand, the backward linkage ratio indicates a country’s dependence on foreign sources for raw materials, components and parts for industrial production.
This ratio is on the rise for Vietnam, reflecting a growing dependence on imported inputs for production.
"Foreign firms do not drop roots in Vietnam and their links with the country is negligible," Nguyen Dinh Nam, chairman and CEO of investment consultant agency IPAVIETNAM, says.
For them, Vietnam is just a supplier of cheap labor, he says.
Dr Phan Huu Thang, former director general of the Foreign Investment Agency, which helps the Ministry of Planning and Investment handle matters related to investment from and in foreign countries, says that though the government has always emphasized the importance of approaching and learning technologies from developed countries, technology transfers have not been efficient in the last three decades. The main reason for this is the lack of links between foreign and domestic businesses, he adds.
Matsumoto Nobuyuki, chief representative of the office of the trade promotion agency Japan External Trade Promotion Organization (JETRO) in HCMC, says foreign investors do want to produce locally to lower costs, but very few companies in the country can meet their standards.
Several large Japanese corporations frequently ask him to introduce them to Vietnamese firms for local supply, he says.
But 97% of Vietnamese companies are small or medium-sized and have limited resources, while international corporations have sky-high standards for their suppliers.
A study of Intel’s investment in Vietnam published in 2016 by a group of experts at the Fulbright School of Public Policy and Management said: "These limitations prevent Vietnamese firms from entering high-technology corporations’ supply chains."
Large businesses investing in Vietnam always bring along their well-established ecosystem before looking for or incorporating local firms into it.
Earlier this year a German medical equipment firm and client of IPAVIETNAM told it that it preferred to build a factory in Indonesia instead of Vietnam.
Nam says the German firm looked all over Vietnam but could not find any chip supplier, and so gave up despite preferring Vietnam’s policies to Indonesia’s.
When Intel agreed to invest in Vietnam 17 years ago a few officials hatched the idea of persuading the chipmaker to establish a research and development center as well, but Truc dismissed the idea.
"Nobody would just simply hand out their core technologies to avoid copycats," he says.
Of all the foreign firms in the tech sector, only Samsung and LG have large R&D centers in Vietnam.
The value chain for a technology product begins with R&D and moves through parts procurement, assembly, distribution, brand building, sales, and after-sales.
This chain is usually depicted as a parabola from left to right.
The parabola, named the "smiling curve," was introduced by Stan Shih, founder of laptop maker Acer, in 1992 to describe the value chain.
On this curve, assembly sits at the bottom, meaning it adds the least value to the product.
The majority of factories owned by Vietnamese technology firms are for assembly.
In a Samsung smartphone for example, the assembly and testing done in Vietnam only account for 5% of its cost, according to a study by Canadian research firm TechInsights.
"Most countries want to participate in high-value stages, but multinational corporations distribute their operations to match each country’s capability," Do Thien Anh Tuan, co-author of the 2016 Fulbright report on Intel’s investment in Vietnam, says.
In the case of chips, after their design is made, production is done in two types of factories: a fab plant makes the integrated circuits and an ATM (assembly and testing manufacturing) plant which assembles, tests and packages them.
Intel has five fab sites in the U.S., Ireland and Israel and four ATM plants in Costa Rica, China, Malaysia, and Vietnam.
According to Ooi, Intel plans for the HCMC facility to focus on assembly and testing since its output is the highest among the company’s ATM plants.
Despite viewing Vietnam as an important part of the production process, Intel chose Malaysia as the first country outside of the U.S. to launch its state-of-the-art 3D chip packaging technology.
Unlike Vietnam, Malaysia has a complete semiconductors supply chain with many local firms capable of all the stages of chip production, from designing to making, assembling and testing.
Singapore also has two fab factories.
These two countries along with Thailand and the Philippines rank above Vietnam in Economic Complexity Index (ECI), an index indicating a country’s ability to produce complex products, according to Harvard University in the U.S.
Though Vietnam has been one of the fastest-growing economies in the last 20 years, it only ranks 61 out of 133 in ECI, above only Indonesia, Laos and Cambodia in Southeast Asia.
Recently some Japanese firms wanting to diversify their supply chain and reduce dependence on China have been looking at Vietnam as an ideal partner, but again only for assembly.
"If Vietnam wants to step up the ladder, it needs to forget low productivity jobs and focus on activities with higher value," Nobuyuki says.
Moving up the value chain is an even more urgent task right now since Vietnam, which has the fastest aging population in Southeast Asia, is slowly losing its cheap labor advantage.
The country’s working age population is expected to begin declining after 15 years, according to the United Nations Population Fund.
Tuan says the Vietnamese workforce’s productivity is falling behind other ASEAN countries, while wages keep rising, meaning Vietnam’s actual unit labor cost is no longer cheap.
"Investing in people and science to move up the value chain is the number one priority."
It has been 30 years since Truc outlined his idea for a high-technology zone, but an advanced production line is still nowhere to be found.
The visionary asks with a sigh: "We have high-technology companies but they are few in number and mostly do assembly. If we progress at this pace, how can we ever achieve the goal of becoming a rich country?"
Story by Viet Duc
Graphics by Hoang Khanh, Thanh Ha