The 5,000 m2 factory of Huynh Duc Mechanical Company in Bien Hoa City (Dong Nai) is located on a small road with no sidewalks and houses crowded around. From the outside, this facility looks like an old, outdated processing workshop. But inside, nearly 180 workers and engineers are making precision mechanical products for multinational corporations with capitalizations of hundreds of billions of USD. This is one of the first Vietnamese enterprises chosen by the American semiconductor group as a supplier when opening a factory in Ho Chi Minh City. The director of this factory is engineer Pham Ngoc Duy (35 years old), who started his career at the research and development (R&D) department of sewing machine manufacturer Juki - the first Japanese foreign direct investment (FDI) enterprise in Tan Thuan Export Processing Zone, District 7, Ho Chi Minh City. After nearly 3 years working in both Vietnam and Japan, he left the group and moved to work for Huynh Duc - a 100% domestic enterprise. The career path that Mr. Duy has taken is also the choice of many bosses and managers: working at a multinational corporation to accumulate experience, then joining a domestic enterprise, returning to participate in the FDI supply chain. This director's experience at an FDI corporation has helped Huynh Duc - a family business - professionalize its work process, and maintain its position as a trusted partner of foreign investors for 10 consecutive years.
Follow the "eagle"
In a production chain, multinational corporations with thousands of employees like the first company Duy worked for are the top of the pyramid - the place that produces the final products for the market. The company he is running is considered the base - suppliers of components and input equipment. This enterprise aims to develop the company into an indispensable base of the FDI supply chain. 10 years ago, to become a partner of the American semiconductor corporation, Huynh Duc Company had to undergo a 6-month capacity assessment, not to mention the initial contact period that lasted more than a year. "Almost no Vietnamese enterprise has the technical and management qualifications to immediately meet all the requirements of large foreign corporations. The important thing is to commit to change to overcome weaknesses," said Director Duy. At that time, the company only scored 5-6 on a 10-point scale according to the partner's criteria. To accompany FDI corporations, businesses must be ready for long-term investments in both human resources and technology. Starting from a family mechanical workshop established in 1995, Huynh Duc Company has imported "just enough" used machinery for more than two decades. But in the past 5 years, the business has completely switched to investing in new machines. "It costs a lot more, but the products are better, and the competitiveness is of course higher," said the 8X Director. In return, FDI partners become a guarantee for the capacity of domestic enterprises like Huynh Duc. From 80% of initial customers being Japanese factories, then American and European corporations investing in Vietnam, the business began to have 10% revenue from directly exporting equipment abroad. "The most valuable thing is not money, but the opportunity to access the management and operation systems of the world's largest corporations to learn and improve your business," Mr. Duy said.
Domestic enterprises joining hands with FDI investors to "coexist" and develop together is a popular model in many newly industrialized countries in Asia such as China, Malaysia, etc. While FDI enterprises enjoy preferential policies from the host country, domestic companies have an environment to learn from the "giants" and grow. That's the theory. In reality, the number of Vietnamese enterprises joining hands with the FDI sector is still small. For example, Vietnam almost always ranks last in the rate of domestic suppliers chosen by Japanese factories, although the number has increased by 80% over the past 10 years, according to the annual survey results of the Japan External Trade Organization (JETRO).
That is only an improvement in quantity, not depth. Huynh Duc is among the few enterprises that have participated in the supply chain of high-tech FDI corporations in the past 35 years. But after 10 years, this enterprise is still in the role of providing indirect equipment such as components, molds, fixtures, etc. Most domestic companies have not been able to provide equipment in the core chain of customers. Flying with the FDI "eagle" has helped them go a long way, but the wall between the domestic supporting industry and the top of the production chain is still there. Unable to supply equipment and components with high added value, the electronics industry as well as Vietnam's traditional industrial sectors such as textiles, footwear only generate profits of 5-10%, according to a 2020 study by Associate Professor, Dr. Tran Thi Bich Ngoc (Institute of Management Economics - Hanoi University of Science and Technology). That is, despite the huge export volume, the economic benefits from Vietnam's participation in the global electronics supply chain are relatively small.
Two parallel lines
Following a similar path to Mr. Duy, General Director Nguyen Van Hung also moved to lead An Phu Viet Plastic Company after 15 years working for a Japanese corporation. In 2011, he quit and opened his own company to produce plastic components in Hung Yen. The first customers were Japanese FDI enterprises. The turning point came in 2015, when the largest FDI investor in Vietnam at that time, Samsung, combined with the Ministry of Industry and Trade to expand the search for domestic suppliers. After half a year of participating in the evaluation program, his company was selected by Samsung as a second-tier supplier, working through a first-tier partner, a Korean enterprise. An Phu Viet continuously upgraded to keep up with the pace of technological innovation of the world's number one smartphone manufacturer. But this CEO soon realized the isolation of Vietnamese enterprises in the supply chain. For many years, he has cherished the ambition of joining forces with other Vietnamese enterprises to provide a complete set of components to customers, instead of individual parts as at present. "If we keep processing individual parts, it will be very difficult to make a breakthrough. But if we can supply a whole cluster, we will both gain more profit and increase our position with FDI corporations," Mr. Hung said. Up to now, this is still a playground for foreign suppliers. For example, Samsung has 23 key partners opening factories in Vietnam, not counting companies in the same group. These businesses provide complete modules such as cameras, chargers, speakers, circuit boards, and headphones for the Korean phone company. The average "age" of these companies is 32 years. 80% of them are listed on the Korean stock exchange with capitalization of mostly over 100 million USD, according to statistics from VnExpress at the end of October.
That is the portrait of the competitors that domestic enterprises like An Phu Viet must compete with if they want to realize their ambitions. Weaker in terms of capital and experience, to win at home, Vietnamese suppliers must compete on par with long-term partners of FDI corporations on at least three fronts: quality, price, and delivery time. But right from input materials such as technical plastics, An Phu Viet has lost its competitive advantage in price when it has to import because it cannot find domestic sources. "With the same quality, customers can choose Vietnamese enterprises if the price is a few percent higher. But if the difference is double digits, they will definitely buy from abroad," said Mr. Hung. The ambition of An Phu Viet's CEO requires the synchronous development of an entire industry - from materials, mechanics, machine manufacturing to electricity - electronics. But after decades of following the "eagle", this is still just a dream. Domestic suppliers have not yet reached the final destination: becoming an important link in the value chain of world corporations.
FDI money is not the universal key to open the door for Vietnam to move up the value ladder, as has been the case over the past two decades, according to Dr. Nguyen Dinh Cung, former Director of the Central Institute for Economic Management. "Attracting foreign investment and nurturing domestic enterprises to develop are like two wings, which must work together smoothly for the economy to take off," Dr. Cung said. Over the past 35 years, Vietnam has done a good job of attracting foreign investment, but has not yet solved the problem of improving the internal strength of domestic enterprises. "This reality reveals an unreasonable risk: the more foreign investment, the more domestic industry shrinks," warned Mr. Pham Chanh Truc, former Head of the Management Board of Ho Chi Minh City High-Tech Park. According to him, the principle of investors is to pursue maximum profit. If there are already better and cheaper components and spare parts from China and Korea, of course they will not choose Vietnamese enterprises. In the machinery and electrical and electronic equipment industry, the proportion of domestic value added contributing to Vietnam's export turnover is increasingly falling behind that of neighboring countries such as Malaysia, Thailand, and Indonesia, according to the Organization for Economic Cooperation and Development (OECD). This means that Vietnam is increasingly dependent on imported equipment and components to assemble final products.
According to Dr. Nguyen Quoc Viet, Deputy Director of the Vietnam Institute for Economic and Policy Research (VEPR), 98% of domestic enterprises are small and medium-sized and lack connections. If the state does not have proactive policies for enterprises to participate in the FDI supply chain, but leaves it to investors, Vietnam will forever be outside the playing field of global corporations. "If we do not find a way to take on complex stages, Vietnam cannot have a sustainable advantage no matter how many investors we attract," Mr. Viet assessed. Domestic enterprises are gradually falling into a vicious circle of "chicken and egg". To have the opportunity to produce important inputs for FDI corporations, the necessary condition is to prove their capacity. But to do that, first of all, there must be opportunities. While Vietnamese enterprises lack the conditions to produce for FDI, foreign investors themselves are also confused and cannot find domestic enterprises that meet the requirements to become partners. Belonging to the first group of "eagles" to come to Vietnam 35 years ago, Juki Group started with a pilot factory producing components, then expanded to assembly, precision casting and now has 4 factories in Tan Thuan. Not only manufacturing and processing, Juki also established an R&D department in Ho Chi Minh City specializing in automation. General Director of Juki Vietnam Co., Ltd. and Director of the Asia business department Sugihara Yoji said that the group has just decided to gradually move factories in China to Vietnam with the vision of a long-term production base. But not only developing facilities, Juki needs more domestic enterprises with the capacity to supply important components such as electronics, motors, and circuit boards to implement the above strategy. That is the biggest bottleneck. "The government has not yet had a policy to encourage foreign companies to increase local orders," Mr. Sugihara stated his opinion. Lacking coordination from the state, FDI investors and domestic enterprises are like "two parallel lines".
Ladder Offer
To break the above deadlock, Mr. Pham Chanh Truc believes that the state plays a key role in navigating these "two straight lines" to meet. "The state must create a market by placing orders with businesses. Over time, when the actual quality of products has been proven, domestic companies will be able to convince foreign corporations," Mr. Truc suggested. Domestic supporting industries cannot supply all spare parts and production equipment for FDI corporations, so they must identify the right products with competitive potential for key investment. He gave an example, Vietnam has strengths in rubber plantation area, so it needs to focus on developing and investing in related materials and plastics industries. Mr. Do Thien Anh Tuan, senior lecturer at the Fulbright School of Public Policy and Management, said that to create a market for domestic industries, the state needs to change its preferential policies for FDI investors. "FDI investors will never be motivated to transfer technology to us without specific incentive policies," said Mr. Tuan. In the past 5 years, there have been 400 technology transfer contracts of FDI enterprises, but they are all internal activities between parent companies and subsidiaries, without the participation of the domestic sector, according to data from the Ministry of Science and Technology. According to him, instead of setting out easy benefits as it is now - investing is exempted from tax, the Government should design incentives according to a ladder. The higher the rate of using domestic suppliers, the more incentives investors will receive. This method can be applied similarly to the rate of Vietnamese management staff, the number of training hours, or the number of technology transfer contracts for domestic enterprises. This expert believes that redesigning incentive policies for FDI investors is more urgent than ever when the global minimum tax regulation will take effect from next year. At that time, all countries will have to apply a tax floor for large investors. That is, the era of attracting FDI investors with rock-bottom tax incentives will end. In preparation, the Government is drafting a resolution on piloting support for high-tech investors. Accordingly, FDI projects with production plans along with human resource training, research and development in Vietnam will receive incentives in the form of tax deductions or direct budget support.
The Vietnam-US comprehensive strategic partnership established in early September is an opportunity for Vietnam to participate more in the global high-tech supply chain, especially in the semiconductor industry. Welcoming this fourth wave of FDI, Prime Minister Pham Minh Chinh held two conferences with FDI investors in 10 months, proposing to increase the localization rate and develop a supply chain with the participation of Vietnamese enterprises.
Previously, in 2022, the Prime Minister adjusted the project to promote technology transfer, mastery and development from abroad to Vietnam issued three years ago , adding the target that by 2025, the number of FDI projects with technology transfer to domestic enterprises will increase by 10% per year, and by 2030, it will be 15%.
This is an opportunity for Vietnamese businesses like Huynh Duc. From the position of a supplier of mechanical equipment supporting (indirect) production for semiconductor corporations, the company hopes that after 5 years, the business will begin to supply equipment in the direct production lines of customers, although it admits that this is an extremely challenging goal.
Pointing to the two molds being processed, Mr. Duy explained the difference that cannot be distinguished by the naked eye. To reduce the error by a few thousandths of a mm, a business may have to invest hundreds of thousands of USD. Meanwhile, in high-tech industries such as chips, the required precision is in the nm unit - one millionth of a mm.
To achieve this goal, the company has established a team of 6 engineers in charge of R&D, researching new technologies. However, manufacturing products is only the beginning. With the same components, Vietnamese companies can currently meet the quality, but the price is certainly difficult to compete with foreign companies with decades of experience. To compete, Vietnamese companies need long-term orders from FDI "eagles" - something that requires coordination from the state.
"Not every investment will be successful, but if you don't sow the seeds, you will never reap the fruits," the young businessman concluded.
* Graphics in the article were drawn by Adobe Firefly's Generative AI application
Content: Viet Duc - Le Tuyet Graphics: Hoang Khanh
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