Though having high demands for high-quality input materials and spare parts for their production bases in Vietnam, foreign manufacturers are finding it hard to seek for local qualified suppliers, experts said.
At the fifth Supplier Day 2018 held recently in Ho Chi Minh City, nearly 70 foreign direct investment (FDI) enterprises and 90 local suppliers joined the event in a move to seek for cooperation opportunities. According to the organizers, many other manufacturers wanted to join the exhibition, but the venue could not accommodate all of them.
The number of foreign participants surged by fourfold against last year’s event, meaning that many foreign investors want to seek local qualified suppliers to enable them more active in material sources.
In fact, the involvement of Vietnam’s supporting industries in the supply chain of FDI enterprises is currently assessed limited. Data from the Japan External Trade Organization showed that the localization for materials, components and spare parts of Vietnam is solely at 34 percent, while the rates for Thailand and China are 57 percent and 68 percent, respectively.
According to the Vietnam Chamber of Commerce and Industry (VCCI), only 1,400 of 151,000 Vietnamese companies are engaged in the supporting industries, of which 20 percent meet the criteria to engage in the global supply chain and 36 percent can join the export-oriented production.
The shortcoming has forced the country to import a large volume of spare parts and components for local production. In the garment and textile industry, for example, the country has to import 80-90 percent of fabric to meet local demand due to a lack of domestic cotton suppliers.
The same trend was also seen in the electronics sector, whose import value of spare parts and components accounts for up to 77 percent of the industry’s total revenue.
Brian Mtonya, a senior economic expert from the World Bank, said that in Vietnam, there is a severe shortage of suppliers that are able to compete with their foreign rivals in providing high-quality input materials and components at reasonable volumes and prices.
The Vietnamese government has so far issued a number of policies to support local producers in churning out outputs that meet the demand of domestic production and exports besides creating a gateway for Vietnamese enterprises to step into the global value chains.
Under the country’s plan to develop the supporting industries over the 2016-2025 period, investment projects involved in the supporting industry will be exempted from land rent for seven years. Investment projects in craft villages and projects on technical infrastructure located in the supporting industry zone will receive an exemption for 11 years.
The projects will also enjoy a corporate income tax (CIT) exemption for the first four years, a 50 percent reduction on payable CIT for the next nine years, and a CIT of 10 percent for the subsequent 15 years.
They are also subject to an exemption on import tax for imported machines and equipment to create fixed assets.
With the measures, the government expects that outputs of local production will meet 45 percent and 65 percent of the input demand of domestic manufacturing by 2020 and 2025, respectively.
Besides the government’s supports, experts suggested that domestic enterprises should study the requirements of foreign manufacturers in terms of product quality and volume to become qualified suppliers for FDI firms.
Frank Weiand, co-chairman of the American Chamber of Commerce in Vietnam’s Manufacturing Committee, said that local suppliers need to be aware of many things to become part of global supply chains, of which the greatest problems facing local small and medium enterprises are related to their understanding of their customers’ and partners’ needs.