'Eagles' staying at the guesthouse

In any office worldwide, for every three computers in operation, at least one has a "brain"—the CPU—that was manufactured in Ho Chi Minh City. This is the result of over 17 years of investment by Intel, the world's first high-tech corporation to choose Vietnam for a multi-billion dollar project. The American chip manufacturer accounts for approximately 70% of the global computer CPU market share. Meanwhile, the factory in the Ho Chi Minh City High-Tech Park (SHTP) is assembling, testing, and packaging more than half of Intel's total chips. "Attracting Intel was a significant milestone in the process of attracting FDI," observed Mr. Pham Chanh Truc, former Deputy Secretary of the Ho Chi Minh City Party Committee and the first Head of the SHTP Management Board. Mr. Truc played a key role in the more than two-year negotiation process that brought the American semiconductor giant to Vietnam. Following Intel, many global technology brands such as Samsung and LG have also established multi-billion dollar factories in Vietnam, along with a number of assembly units for Dell and Apple. From clothing and footwear, the phrase "made in Vietnam" has begun appearing on TVs, smartphones, smartwatches, and semiconductor chips consumed globally. Electrical and electronic equipment has become the most important commodity, accounting for nearly half of Vietnam's total export value, reaching $155 billion, a fivefold increase in 10 years. Vietnam is now among the top 10 largest suppliers of electrical and electronic equipment to the world. However, billions of dollars in investment from these corporations have only given Vietnam a new image on the trade map; they haven't yet been able to elevate the economy to a higher value-added level.

"Vietnam still specializes in assembling parts and simple processing, while there has been no progress in specialized components and equipment" is the conclusion regarding the electronics industry in the first and only industrial white paper to date, published by the Ministry of Industry and Trade in 2019.

That's not the outcome that those who laid the foundation to attract tech investors like Mr. Truc were aiming for.

"The high-tech zone or any investor is just the initial nucleus. The ultimate goal must be a spillover effect so that our own industries can develop," he said.

Preparing the nest to welcome the "eagle"

Following the Doi Moi (Renovation) period , Ho Chi Minh City established the country's first export processing zone – Tan Thuan, located south of Saigon in 1991. The model, inspired by Taiwan, leveraged tax and customs incentives to attract foreign businesses to set up processing and export factories. The first investors in Tan Thuan were mostly involved in the textile and footwear industries – sectors representative of the early stages of industrialization.

However, both city and central government leaders recognized that having integrated into the global economy late, they needed to find a way to develop quickly and could not remain stagnant in traditional industries.

"We must upgrade the export processing zones to access advanced technologies from around the world ," recalled Mr. Pham Chanh Truc (then Vice Chairman of the Ho Chi Minh City People's Committee, in charge of foreign economic relations) at a meeting between Ho Chi Minh City leaders and the Chairman of the State Committee for Cooperation and Investment, Dau Ngoc Xuan.

That was the premise for SHTP. Mr. Truc was also the person in charge of the research team that realized this idea in 1992. It took 10 years for SHTP to be officially established, becoming the first high-tech park in the country in 2002.

At that time, Mr. Truc was 62 years old, serving as Deputy Head of the Central Economic Committee and preparing for retirement. However, when the City Party Committee leadership proposed that he become Head of the SHTP Management Board, he immediately agreed, temporarily putting aside his retirement plans.

"This position is only equivalent to a department director, but I didn't haggle over the title and accepted it immediately because I wanted to complete the unfinished project," he recounted.

Mr. Truc discussed with Mr. Xuan that if SHTP could attract an investor from the Fortune 500 list of the largest companies in the US, it would be a major boost for Ho Chi Minh City and the whole country.

The first name considered was HP, because the person in charge of expanding the American computer company's production at the time was a Vietnamese expatriate – an advantage for the city. However, this person passed away suddenly, leaving the plan to bring HP to invest in SHTP unfinished.

After contacting several other companies, the city decided to attract Intel when it learned that the largest chip manufacturer in the US was looking for a location to build a new assembly and testing plant in Asia. Vietnam was on the list of potential locations.

In 2003, Deputy Prime Minister Vu Khoan led a Vietnamese delegation to Intel's headquarters in the US, carrying a letter from Prime Minister Phan Van Khai inviting the corporation to invest and introducing two locations: Hoa Lac High-Tech Park (Hanoi) and SHTP.

Mr. Pham Chanh Truc (center) and Prime Minister Nguyen Tan Dung at the Intel project launch ceremony in 2006 at the Ho Chi Minh City High-Tech Park. Photo: AFP

Over the next two years, Intel sent several delegations to Ho Chi Minh City to investigate infrastructure, logistics, transportation, human resources, and incentive policies. "The city had never encountered an investor who set so many detailed and stringent conditions as Intel," Mr. Truc said. The negotiations therefore "had to address many unprecedented demands," and with company leaders speaking from the US, some meetings didn't conclude until late at night. During one discussion about electricity prices, Mr. Truc directly called the government through Deputy Prime Minister Nguyen Tan Dung – who was in charge of directing the negotiations at the time – to seek their opinion. Having received the "green light," he immediately agreed to the preferential terms with Intel.

"If I didn't break the rules and send a document to EVN, the ministries would seek opinions, and then I would have to wait for the Government's conclusion according to the procedure. I don't know when I would have been able to respond to them. Not every request can be fulfilled immediately by the city, but our commitment makes them feel confident," said the former Head of the SHTP Management Board.

During Prime Minister Phan Van Khai's visit to the US in 2005, the negotiating team also visited Intel's headquarters in California to discuss matters directly with the company's leaders. However, upon arrival, Mr. Truc learned that the Intel chairman was in Washington D.C. "Seeing this, we immediately flew to the US capital and invited the chairman to the Vietnamese embassy for discussions," Mr. Truc said.

It was at this meeting that Intel's top executives confirmed they would build a $600 million factory in Ho Chi Minh City, and then increase the investment to one billion dollars once they received the license a year later.

Fragile link

Three years after the factory's groundbreaking, Intel shipped its first "made in Vietnam" chips in 2010. At that time, no domestic company was capable of partnering with the American corporation.

Today, the factory has more than 100 Vietnamese businesses in its supplier network, according to Kim Huat Ooi, Vice President of Manufacturing, Supply Chain and Operations and General Manager of Intel Products Vietnam.

However, the aforementioned progress in "quantity" has not been accompanied by "quality". After 13 years, no Vietnamese enterprise has yet been able to supply the raw materials directly for the chip assembly and packaging process, such as substrates, capacitors, current-generating materials, soldering resins, or adhesives. The equipment and machinery for Intel's production line are also unavailable.

Domestic companies' playing field remains outside the direct production line of semiconductor corporations. This includes indirect inputs such as conveyor belts, tables, chairs, jigs, and services like transportation, personnel, and security.

In other words, although Vietnam is the source of more than half of Intel's products, the domestic manufacturing industry has yet to supply any essential inputs for chips. Domestic businesses are still unable to soar alongside the "eagles".

Inside Intel's chip manufacturing plant in Ho Chi Minh City's High-Tech Park (Thu Duc City). Photo: Intel Vietnam.

Samsung is another example of Vietnam's position in the global value chain. More than half of the brand's smartphones sold are manufactured in factories in Bac Ninh and Thai Nguyen provinces.

Each year, the South Korean conglomerate publicly discloses its key suppliers, accounting for 80% of its procurement value. According to last year's list, 26 of Samsung's key suppliers are operating in Vietnam. Of these, 22 are South Korean companies, 2 are Japanese, 2 are Chinese, and 0 are Vietnamese businesses.

In the global value chain, forward linkage reflects a country's ability to supply input components to businesses in other countries to produce final products. Conversely, backward linkage indicates a country's dependence on imported raw materials and components for production.

Vietnam currently has a much lower forward linkage rate than many other Southeast Asian countries, and this rate is continuing to decline. Meanwhile, backward linkage is gradually increasing, indicating a growing reliance on imports for product assembly.

"Foreign direct investment (FDI) corporations find it almost impossible to take root in Vietnam because the link with the domestic economy is very weak," assessed Nguyen Dinh Nam, Chairman and CEO of Vietnam Investment Promotion and Cooperation Joint Stock Company. Vietnam's role for foreign businesses remains primarily to provide labor and capital, often positioned as a low-cost option.

Sharing the same view, Dr. Phan Huu Thang, former Director of the Foreign Investment Department, Ministry of Planning and Investment, believes that FDI attraction policies have long aimed at accessing and learning core technologies from leading industrialized countries. However, after more than three decades, the goal of technology transfer has not been achieved effectively, and the main reason is the lack of linkage between foreign and domestic enterprises.

Meanwhile, investors themselves want to increase the localization rate to reduce costs compared to importing, according to Matsumoto Nobuyuki, Chief Representative of the Japan External Trade Organization (JETRO) in Ho Chi Minh City.

Mr. Nobuyuki is frequently asked by many Japanese corporations to "matchmake" with Vietnamese businesses to find more domestic suppliers, especially for critical components. "But very few companies meet the standards of Japanese businesses," he said.

Approximately 97% of domestic businesses are small and medium-sized enterprises, with most having limited capital and management capabilities. Meanwhile, becoming a supplier partner for world-class manufacturers requires significant investment in technology.

"These barriers mean that most Vietnamese businesses remain outside the supply chains of high-tech corporations," a group of experts from the Fulbright School of Public Policy and Management pointed out in their 2016 report summarizing Intel's investment in Vietnam.

Large corporations investing in Vietnam therefore bring along their existing overseas supplier networks, and only then seek out and support the training of domestic businesses to participate in the supply chain. However, not all companies have the necessary resources.

Earlier this year, a client of CEO Nguyen Dinh Nam – a German company manufacturing medical equipment – ​​announced that it would choose Indonesia instead of Vietnam as originally planned to build its factory.

"They traveled from North to South but couldn't find a supplier of chips and microchips for their devices, so they had to give up, even though they appreciated Vietnam's preferential policies," Mr. Nam said.

Intel has invested billions of dollars in a factory in Vietnam for assembly, testing, and packaging. Chip manufacturing and design are carried out in other countries. Photo: Intel Vietnam

Bottom of the curve

When Intel agreed to invest 17 years ago, some senior leaders raised the issue of persuading the American corporation to expand its research and development (R&D) activities in Vietnam. But Mr. Pham Chanh Truc knew that was almost impossible. "No one easily takes their core technology abroad for fear of it being copied," he said.

In fact, to date, only Samsung and LG are the two high-tech FDI corporations that have opened large-scale R&D centers in Vietnam.

The lifecycle of a technology product begins with R&D, followed by procurement of components, complete assembly, distribution, branding, sales, and after-sales service. These activities follow a parabolic curve, progressing from left to right according to their respective added values.

This is known as the "smile curve"—a concept first introduced in 1992 by Acer computer founder Stan Shih to describe the value chain. In this curve, assembly is at the bottom—meaning the lowest added value, and it's the stage most technology companies' factories in Vietnam are currently performing.

This describes the smile curve in the value chain based on research by Fernandez-Stark and Gereffi of Duke University (USA), 2016.

For example, with a high-end Samsung smartphone, assembly and testing in Vietnam account for only 5% of the production cost, according to a 2020 analysis by TechInsights, a Canadian-based technology research company.

"Every country wants to handle high-value segments, but multinational corporations will allocate activities according to each country's capabilities," observed Do Thien Anh Tuan, co-author of a Fulbright study on Intel's operations in Vietnam.

In the chip industry, after design, the manufacturing process takes place in two types of factories: fabrication (Fab) and assembly, testing, and packaging (ATM). Intel has five fabrication plants in the US, Ireland, and Israel, and four packaging plants in Costa Rica, China, Malaysia, and Vietnam.

Kim Huat Ooi stated that the group's plan is to continue focusing on assembly and testing at its Ho Chi Minh City facility. Vietnam, which accounts for the largest share of ATM's production, plays a crucial role in the company's manufacturing process.

However, Malaysia was the first place outside the US where Intel chose to deploy its most advanced 3D chip packaging technology. Unlike Vietnam, Malaysia has a complete semiconductor manufacturing ecosystem with domestic businesses capable of handling all stages from design and fabrication to assembly and chip testing.

Besides Malaysia, Singapore also has chip manufacturing plants. These two countries, along with Thailand and the Philippines, rank above Vietnam in the ECI – an index reflecting the ability to manufacture complex products, calculated by Harvard University. Despite being one of the fastest-progressing countries in the past 20 years, Vietnam ranks only 61st out of 133 countries worldwide in this index, higher than Indonesia, Laos, and Cambodia in Southeast Asia.

Although Vietnam is the most attractive destination for Japanese businesses looking to implement a "China + 1" strategy to diversify their manufacturing bases outside the world's most populous country, it still only attracts assembly operations.

"If Vietnam wants to move up the ladder, it should forget about low-productivity jobs and focus on value-added," said Mr. Nobyuki.

This recommendation is not new, but it is increasingly urgent as the labor advantage – the main attraction for assembly and processing activities – is declining along with the fastest aging population in the region. The peak of the demographic dividend has passed, and Vietnam's workforce will begin to decline in the next 15 years, according to forecasting models from the United Nations Population Fund.

According to Mr. Do Thien Anh Tuan, Vietnamese labor productivity is still improving slowly, lagging behind other ASEAN countries, while wages continue to rise, making the actual labor costs associated with productivity far from cheap. "Investing in human resources and science and technology to move up the value chain must therefore be the number one priority," he said.

More than 30 years after sketching out the initial ideas for a high-tech zone, Mr. Pham Chanh Truc has yet to see the advanced manufacturing sector he envisioned.

"We have a few high-tech businesses and products, but there are still too few; the majority are still involved in processing and assembly. If we continue at the current pace, how can we achieve the goal of becoming a wealthy nation?" Mr. Truc wondered.

Content : Viet Duc. Graphics: Hoang Khanh - Thanh Ha

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