More than 70 per cent of Japanese firms operating in Vietnam are seeking to increase their use of domestically-made parts in an effort to lower production costs. However, the sad state of the country’s support industry has made it difficult for foreign firms to compete abroad.

Four or five years ago, neither state management agencies nor local enterprises were aware of the concept of a ‘support industry’. The idea was gradually introduced with the establishment of a number of major Japanese assemblers in the past decade, including Honda, Toyota and Canon. These firms soon began asking for locally-made parts and components in order to lower their production expenses.

Kenjiro Ishiwata, chief representative from the Japan External Trade Organisation (Jetro) in Vietnam, said most Japanese investors found Vietnam to be an attractive and lucrative destination with a stable political situation, strong economic growth and an abundant work force.

“Those are the factors that have encouraged Japanese investors to enter the market and they will continue to come in the future,” he said.

However, Ishiwata stressed that Japanese firms were facing three major challenges, including poor infrastructure, electricity and water supply; a shortage of well-trained managers, engineers and skilled workers; and an insufficient support industry that could provide low cost parts and components.

“Most Japanese assemblers had hoped to find high quality suppliers of components and spare parts in Vietnam, instead of having to import those products from Thailand or Malaysia,” Ishiwata explained.

In mechanised assembly manufacturing, the cost of parts looms large in the total production expense. Parts generally occupy 70-90 per cent of manufacturing costs, while labour usually comprises less than 10 per cent.

Japanese investors have often complained that by importing Malaysian or Thai parts, they incur additional costs in transportation, storage and handling, hampering their ability to compete effectively against Malaysian or Thai assemblers who can access these parts without additional costs.

The state of play so far

A survey carried out last year by the Vietnam Development Forum (VDF), a joint research project between the National Graduate Institute for Policy Studies (GRIPS) in Tokyo and the National Economics University (NEU) in Hanoi, showed that local procurement of Japanese firms in Vietnam was 22.6 per cent, while those of Malaysia and Thailand were 45 per cent or higher.

The progress of local procurement differs significantly across the three major sectors that Japanese firms have invested in, among them motorbike production, electronics and automobile assembly.

The rate of domestically-made parts in the motorbike sector is much higher than in the other two sectors, with the average local procurement ratio at 75 per cent. The figure includes internal parts production by assemblers and sourcing from local and foreign suppliers in Vietnam.

Local procurement in the electronics sector is rising, mostly at foreign firms. According to the VDF, most consumer electronics assemblers were unable to domestically source even relatively simple plastic and metal parts in 2002.

Local procurement for TVs now ranges from 20 per cent to 40 per cent, depending on the producer.

“However, the current localisation level is still far below what Japanese firms are looking for,” according to VDF researchers. “Even for manufacturers who have increased the local procurement of plastic parts significantly in recent years, finding electronic parts, moulds, and metal processes like pressing, forging and plating remains very difficult.”

Progress for the automobile sector has been slowest with local procurement ratios of 5-10 per cent. While some bulky or labour-intensive parts such as seats and wire harnesses have been localised, most parts continue to be imported. Trucks and buses have higher local procurement ratios than passengers cars as the upper-structure of buses and trucks can be built locally by Vietnamese companies.

“State agencies and local enterprises have increasingly been recognising the importance of building a strong domestic support industry to help call in more foreign investors as well as to support local sectors whose growth depends on exports,” explained Do Thang Hai, head of the Vietnam Trade Promotion Agency (Vietrade) under the Ministry of Industry and Trade.

“However, it will take time [for state agencies and local enterprises] to build policies and implement a real support industry in Vietnam that can meet investor demand,” he added.

Bridging the information gap

The lack of an adequate system to help Japanese assemblers and local spare parts suppliers make connections, as well as the poor capability of domestic enterprises to ensure international standard quality are the biggest challenges that now need to be resolved.

By Japanese manufacturing standards, competitiveness depends on quality, cost and delivery. According to the VDF’s study, there exists a significant gap between Japanese assemblers and Vietnamese suppliers regarding acceptable standards in quality and delivery.

When Japanese companies reject local parts they say are below their quality standards, Vietnamese firms complain that Japanese assemblers are too fussy about little things.

“One explanation is that local firms have had little exposure to global market competition, while Japanese firms are already fiercely competing with American, European, Korean and Chinese firms,” said the study.

“Another factor is that the integral manufacturing of Japanese firms, which requires long-term cooperation and the endless pursuit of perfection, is at odds with the modular manufacturing of copied products practiced by most Vietnamese firms.”
Lacking the patience or knowledge on how to approach Japanese firms was also another shortcoming among Vietnamese enterprises.

Jetro’s deputy chief representative, Takano Koichi, admitted that Japanese firms did have strict demands on quality, cost and delivery, higher even than those of other foreign investors.

“However, once Vietnamese firms are able to meet Japanese investors’ demands, they will also be able to meet the requirements of other foreign investors. That is why Vietnamese firms should be patient in pursuing Japanese clients,” Koichi explained.

He added that even though it was a costly and frustrating process, once trust was built, Japanese firms would work with local suppliers on technical issues.

In terms of the gap in information, a Japanese electronics producer complained that he had to visit 100 firms in Vietnam just to find one good supplier. “This is too costly and time-consuming for private firms,” he said.

A large number of Japanese firms criticised local suppliers for not actively approaching them. However, in most cases Vietnamese suppliers simply did not to know how to build business relations and lacked the confidence needed to do business with Japanese firms.

“Vietnamese enterprises must be more aggressive in approaching Japanese firms and advertising their products and manufacturing capability. They must not continue to wait passively for clients to come see them,” Koichi stressed.
“They should understand the basic principle in business that sellers must act while buyers can wait,” he added.

In order to help Japanese firms and Vietnamese suppliers make business connections, Jetro and Vietrade will co-organise the country’s second exhibition on Vietnam’s support industry in Hanoi on November 13-14, with the participation of 128 firms from Japan, Vietnam, China, Singapore and Thailand. The first exhibition was held in 2005.Organisers have called it a ‘reverse exhibition’, as more than 80 Japanese firms, including those operating in or considering Vietnam, will exhibit the products they wish to be able to purchase domestically.

“Vietnamese suppliers must take the opportunity to actively come out and meet with Japanese firms and convince them of their production and business capabilities,” said Koichi.

Source: VIR.