Vietnam to shake up supporting industries to seize TPP opportunities

By June 18, 2016 | 01:44 am PT

Vietnam’s manufacturing is currently determined by low-wage, low-tech and low-added value production. And the country is finding its way to move up the global value chain so that it can maximize the potential benefits from a variety of new generation free trade agreements including the pending Trans-Pacific Partnership (TPP).

The supporting industries of Vietnam remain weak, said Pham Tuan Anh, deputy head of Heavy Industries Department under the Ministry of Industry and Trade (MoIT) on Friday at a workshop on how to boost the development of supporting industries in Vietnam as reported by the Vietnam News Agency.

Vietnam now has to import nearly 90 percent of raw materials, spare parts and components, Anh added.

Official statistics show the rate of locally sourced components of the motorcycle and electronics industries have improved noticeably over the past five years, ranging from 40 percent to 70 percent.

However, the localization rate in other industries such as automobile and textiles and garments is just about five to 10 percent.

About 85 percent of Vietnamese enterprises in the textile industry are focused on labor-intensive cutting and sewing, making the country an outsourcing hub for foreign fashion companies, said Le Tien Truong, chief executive of the country’s largest textile company Vinatex.

vietnam-to-shake-up-supporting-industries-to-seize-tpp-opportunities

Get ready for more "Made in Vietnam" labels as new generation free trade agreements will make it easier and cheaper for global fashion companies to source in the country. Photo by Reuters/Nguyen Huy Kham

Local companies have to import more than 65 percent of raw materials, including fabrics and other accessories from overseas, especially from neighboring China which owns the bulk of the worlds’ polyester production and is one of the top producers of cotton, said Le Quoc, a senior advisor to the Vietnam Textile and Garment Association.

In 2014, Vietnam only produced enough fabric to meet a fifth of the industry’s requirements, meaning some $10 billion in fabric was sourced overseas, with nearly a half of this coming from China, according to official customs data.

Moreover, local companies have little information about supporting industries which are mainly controlled by foreign companies. For instance, about 80 percent of parts suppliers in Vietnam, including electronics and other metal parts, are foreign-invested companies.

Evidently, Vietnam's supporting industries are weak, putting the country’s manufacturing sector at risk of missing out on the benefits of free trade agreements.

The TPP, for example, will scrap tariffs in many areas. In the garment industry, the trade deal, with a mechanism called the “rules of origin”, will only benefit companies either importing materials from within the TPP community or sourcing at home.

Vietnam’s domestic automobile industry is also faced with many challenges in the era of new generation free trade agreements. Following the ASEAN Trade in Goods Agreement, Vietnam will cut car import tariffs incrementally over the next four years for imported cars from ASEAN countries. The current tariff of 50 percent will be cut to zero by 2018.

The Vietnamese government has worked on a plan to spur the development of supporting industries.

The goal is that in the next four years local supporting industries can meet 45 percent of the demand and Vietnam will have 1,000 suppliers for domestic manufacturing sector and for foreign-invested companies in the country.

By 2030, Vietnam’s supporting industries will grow rapidly enough to meet 70 percent of the demand of local manufacturing. And the number of suppliers will double to 2,000.

The Vietnamese government has confirmed on June 15 that the national legislature intends to ratify the Trans-Pacific Partnership trade deal at its first plenary session from July 20 to August 9.

The TPP will create a free-trade zone among 12 nations around the Pacific region that accounts for 40 percent of the world’s economic output.

However, the pact can take effect only if it is agreed on by half of the participating countries representing 85 percent of the trade zone’s gross domestic product, which means without the approval of the U.S. Congress, the trade accord won’t come into effect even it is ratified by all the other countries.

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