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Vietnam’s supporting industry: Chances and Challenges

Vietnam’s supporting industry: Chances and Challenges

Wednesday 12, 10 2022
The shifting supply chain is creating great chances for companies in the supporting industry in Vietnam. However, said companies will have to overcome many difficulties before being able to join the global value chain.

Vietnam’s supporting industry can flourish

Vietnam has become a destination for many foreign investors, those looking for business cooperation opportunities with Vietnamese enterprises, including supporting industry enterprises.

Especially, along with the supply chain shift of multinational corporations to Vietnam, many giants in the manufacturing and service industries are continuing to search for auxiliary equipment suppliers in Vietnam.

supporting industry

Big names in the field of high technology and electronics are choosing Vietnam as a destination. Asides from Samsung, which had planned on adding an investment of 3.3 billion USD more into Vietnam in 2022, Foxconn, Luxshare, Goertek, Intel, LG, etc., are also making their moves, accelerating their investments in Vietnam.

In a recent report to investors, JP Morgan emphasized that Vietnam is emerging as a center for manufacturing electronic components and manufacturing services. The same company forecasts that Vietnam will contribute 20% of the total output of iPads and Apple Watches, 5% of MacBooks, and 65% of AirPods by 2025.

The trend of top-tier enterprises in the technology field increasing their presence in Vietnam is positive, and Vietnam is benefitting from that. Christopher J Marriott, CEO of Savills Southeast Asia, said that one of the great advantages that Vietnam has at the moment is the production capacity of the high-tech industry. Vietnam is benefiting from an expansion of supply chains and production that is being driven by the China+1 policy.

More and more companies in the field of technology and electronics are investing in Vietnam. Data from the General Statistics Office shows that Vietnam's export turnover of computers, electronic products and components has grown continuously in the 2016-2020 period, with an average growth rate of 23.8%/year. In the first nine months of 2022, the estimated figure reached nearly 90 billion USD, accounting for more than 32% of Vietnam's total export turnover.

FDI enterprises have also made positive changes in terms of choosing suppliers. In recent years, FDI companies have been paying more attention to the supply from Vietnamese enterprises.

Vietnamcredit - Vietnam Chamber of Commerce and Industry

According to a survey by the Vietnam Chamber of Commerce and Industry, in 2020, the proportion of FDI enterprises that buy input materials from enterprises in the country of origin gradually decreased from 58.7% in 2016 to 41.4% in 2020. FDI enterprises are also gradually reducing their dependence on suppliers from third countries compared to 5 years ago. Only 26.8% of FDI enterprises reported using a third-party supplier in 2020, compared with 39% in 2016.

Challenges remain

Information from the Vietnam Industry Agency shows that there are currently 5,000 Vietnamese enterprises operating in the supporting industries, mainly in the mechanical, textile, and footwear industries. However, 88% are small and medium enterprises with less than 300 employees.

Domestic enterprises account for only 4.5% of the total number of manufacturing enterprises in Vietnam. That is a pretty small proportion. It shows that the domestic manufacturing sector has not been closely linked and involved in the value chain of multinational corporations, even though Vietnam has always been the leader in attracting FDI in the region.

VietnamCredit - attracting FDI

In addition to limitations in terms of size, market share, brand, etc., enterprises in the supporting industry of Vietnam have many inherent weaknesses, such as weak qualifications and capacity, low level of modernization of production lines, etc.

Meanwhile, COVID-19, with its heavy impact on the world economy and businesses, has changed industrial production methods. Corporations tend to shift investment and restructure the global supply chain. That raises the question of how Vietnam's supporting businesses will connect as these chains are changing daily.

According to Ms. Do Thi Thuy Huong - Vice President of the Vietnam Supporting Industries Association, ensuring supply chain stability is a top priority for Vietnam.

Ms. Huong said that the conditions for Vietnamese enterprises to participate in the supply chain of large corporations are not simple. For example, Samsung has 4 sets of indicators for quality assurance, safety and security, and transparent control, ensuring production index. Accordingly, to meet those conditions, great efforts of enterprises are required, not only in improving capacity, production processes, and people, but also financial capacity, etc.

Over the past time, many mechanisms and policies have been issued to strongly promote the development of supporting industries. However, in reality, the capacity of domestic enterprises is still limited, has not developed commensurate with its potential, has not met the requirements of multinational corporations, and faces many new difficulties and challenges.

The promotion of the development of industries, including foundation industries, supporting industries, and priority industries with a focus on supporting industries, is still the top task that companies need to work on together in the coming time.

 

Compiled by VietnamCredit

 

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