Research Report on Enhancement of
Vietnamese Supporting Industries
1. Introduction
Supporting industry is one of the most important industries for Vietnam. However Vietnamese supporting industry has been lag behind comparing to neighboring countries especially in terms of technical aspect. Now that Vietnamese supporting industry has faced harshly competitive international global market, it is an urgent task for Vietnamese supporting industry to raise technical competitiveness. The purpose of this research is to find a possible collaborative area in a supporting industry enhancement policy field between Vietnam and Japan
2. Overview of the Vietnamese economic development stages
2.1 Overview of economic development status in neighboring Asian countries
2.1.1. Overview of Economic Development Stages of Asian Countries
(1)Flying Geese Pattern of Economic Development
Asian countries, has achieved sequential economic development since the 1960s. Each country's economy, has been evolved on the basis of the interdependence of the Asian countries in the region. Its form is referred to as the flying geese pattern of economic development. Asian countries can be divided into a plurality of groups as shown in the following table.
Table 2.1 Outline of Grope Countries in Asian region
Group Category / OutlineJapan / Since the 1980s, Japan was allowed to full-scale direct investment in Asian countries. Japan kept its position as the head of the flying geese pattern economic development.
China / China has achieved rapid economic development, since the reform and open-door policy in the early 1990s. Since 2000, China has been the “World Factory" in such manufacturing sector as electric industry and automobile.
Asian NIEs (Korea, Taiwan, Hong Kong, Singapore) / NIEs, which is in response to Japan's direct investment in the 1980s, has been rapidly developing. Thereafter, NIEs has grown as a country to lead the Asian economy. NIEs are growing as a global center for high-tech industry.
ASEAN Forerunners (Thailand, Malaysia, Indonesia, Philippines) / Since the 1980s, ASEAN Forerunners developed rapidly in response to the direct investment from Japan and the Asian NIEs. In addition, ASEAN Forerunners have grown as major bases of Asia in the field of automotive, electrical/electronics, food processing and textiles/garment.
ASEAN Developing countries (Vietnam) / Vietnam has been becoming catching up the advanced ASEAN countries. However, Vietnam is now facing the challenge of supporting industries promotion.
ASEAN Developing countries(Myanmar, Cambodia, Lao PDR) / This group has a comparative advantage still in labor-intensive industries. This group is expected to have future capital accumulation.
Source: Author’s compilation based on variety of materials
Japanese industrialization of the 1950s became the starting point of the Asian economic development. Since 1980s of the Plaza Accord, direct investment from Japan made significant progress. Through it, technology is propagated to the Asian countries, and international industrial competitiveness has been promoted. Economic development path of the Asian countries, in general, takes the following steps. That is: 1) Closed Autarky Economy (agricultural industry), 2) Import substitution industrialization, 3) Export-oriented industrialization, and 4) Export substitution industrialization. In response to this, comparative advantage structure of each country has been developing from labor-intensive industries to capital-intensive industries, technology-intensive industry, and knowledge-intensive industries.
Figure 2.1 Typical Pattern of Economic Growth
Source: Author’s compilation based on variety of materials
Figure 2.2 Flying Geese Pattern of Economic Development
Source: Author’s compilation based on variety of materials
(2) Common industry challenges that Asian countries have been facing
Asian countries, which received a technology transfer from relatively advanced countries’ FDI in terms of economic development. As a result, Asian countries have been following the path of industrial upgrading. In the early stages, it was difficult for local companies to supply parts for the FDI companies. The reason is that relatively low-level technology and products quality. Major measures, which were taken by the FDI companies at that time, were the import of parts and intermediate goods. The final products produced by the FDI companies went out into the international market, and export was extended. On the other hand, along with the expansion of import of parts, trade deficit was also seriously increased. In addition, there was also concern that too much foreign capital dependence of economic development may lead to inhibited development of the national local capital. Through the transfer of technology from foreign capital, also upsurge of momentum to achieve the independence of the national capital of the local, was seen at the Asian countries.
As the background of the above, the local supporting industries development to enable the supply parts to the FDI companies was an issue of urgent in Asian countries. Asian countries have been formulated industrial policy at the national level. And the development of supporting industries, and SMEs development have become common industry challenges for the Asian countries. Also in the Vietnam, starting with the Doi Moi policy in 1987, the industrial policy towards the market economy have been taken. In Vietnam, SMEs development and supporting industries development has been underway since 2000.
2.1.2. Supporting Industry Development Policy in Asian Countries
(1)Terminology of Supporting Industry
Supporting Industry can be defined as follows
“Supporting industries can mainly refer to the machinery production industry and mechanical parts industry, which provides raw materials, parts and service for the final goods production industries.”
Supporting Industry can be categorized into the following 5 industries. And SMEs shoulders all categories except raw material production industry.
Ø Raw material production industry (Steel, non-ferrous metal, chemical products)
Ø Capital goods manufacturing industry (Industrial machinery, mold)
Ø Parts manufacturing industry（Home appliances, semiconductors, electronic parts, metal parts)
Ø Manufacturing process (Hot-rolled, cold surface treatment, assembling)
Ø Sub-materials (Packing material)
Looking at the perspective of the Japanese trading relationship, supporting industries companies are SMEs, and it is synonymous with the subcontractors. This relationship is referred to as a “KEIRETSU (trading series)". In the “KEIRETSU”, the parent company will pose a severe QCD request to the subcontractors. On the other hand, for Japan's SMEs, long-term trading relationship in the “KEIRETSU" relationship is guaranteed. Such a Japan-type supporting industries system has been called a "Japanese-style supplier system" in 1960s-1980s. Under this Japanese-style system, technical capabilities of supporting industries has been successfully accumulated.
Supporting industries under such Japan-type supplier system are SMEs group companies that perform only the parts supplier to a particular parent company. This is definitely closed corporate group. Therefore, linkage effect in the industry and intra-industry ripple effect of element technology is likely to be limited.
Supporting industries is, originally, to accumulate a variety of elemental technologies, and to support the key industries by supplying parts to them. Supporting industries should be a group of companies providing plural parts to plural assemblers. For instance, supporting industries which support the automotive industry should be the one that can support the electronic and electrical industry at the same time. Namely, supporting industries should be the industry group which are responsible for the intermediary function in building a mutual linkage among industries.
(2) Significance of supporting industries promotion
The significance of supporting industries promotion can be summarized as follows;
Ø To contribute to the improvement of the trade balance of the parts imported. Since the middle of 1980s, ASEAN intra-regional FDI from the appreciated yen aspects triggered by the Plaza Accord was rapidly increased. However, direct investment was a transfer from the comparative disadvantage industry in the transfer source country to the transfer destination country of which comparative advantage industry is a labor-intensive industry. Direct investment in technology level and capital accumulation of the transfer destination is immature. After all, dependent on import of parts and intermediate goods became significant. This gave birth to the huge trade deficit. That phenomena became prominent in all the Asian countries with the exception of South Korea and Taiwan. Hence supporting industries development can contribute to change of the import dependence of intermediate goods and parts.
Ø To contribute to strengthening the industrial base in a country as a whole. Development of supporting industries is to contribute to the ripple effect to a wide range of manufacturing stages. That is so-called as the “Forward Linkage Effect”. Mutual linkage among multiple manufacturing sector is strengthened by this process. Also economic growth is expected to ride on the track of Hirshman’s specific un-balanced economic growth. In addition, export processing zones and the Free Trade Zone, which were established in the early stages of export-oriented industrialization strategy in almost all the Asian countries, contributed to eliminating the adverse effects of foreign investment: “Enclave economy”. In this way, linkage between FDI and the domestic industry can be achieved. In addition, the route of technology transfer can be enlarged.
Ø To contribute to increasing business opportunities of local companies. Generally speaking, the manufacturing process of the supporting industries can be sub-divided. Therefore, the amount of the capital equipment required for companies which are responsible for supporting industries may be small. Therefore, it is easy to entry and withdrawal to/from the industry. In Taiwan, plenty of venture companies which freely entered in fragmented division of labor process has been inspiring the "Taiwan Dream". Such cases have been reported in the past.
Ø To contribute to participating in the ASEAN global production network. Supporting industry companies can access to the global production network conforming to international quality standards.
(3) Case of supporting industries promotion policies and measures
Some cases of supporting industry promotion policy in the Asian countries are examined. Here, the following cases are taken up.
Ø Case in Malaysia (Vendor Development Program: VDP,1988, The second industrialization master plan: MP2,1996 – 2005, Industry Linkage Program, 1998)
Ø Case in Thailand (Supporting industry development in auto mobile sector)
1) Overview of the Malaysia’s Efforts
a. VDP: Vendor Development Program, 1988 -
VDP was promoted by the PROTON domestic automobile company, which consists of Malaysia heavy industry enterprises, Mitsubishi motor vehicle Corporation and Mitsubishi Corporation. VDP began from the automotive industry. Then, in 1992, it was expanded in the following industries. That is, the electronic and electrical industry, wood processing, construction, service, communication, and so forth. PROTON was founded in May 1983. Proton has a mission for manufacturing domestic cars (Saga) . PROTON also had a mission for being responsible for the import substitution industrialization in the 1980s. In addition, PROTON was responsible for 1) developing automobile parts manufacturing industry, 2) the Malaysia participation promotion in the manufacturing sector.
VDP was initially under the jurisdiction the Ministry of International Trade and Industry (MITI) . Since 1995, the jurisdiction was transferred to the Ministry of Entrepreneur and cooperatives Development (MED) for the purpose of development of Bumiputera entrepreneurs. Predecessor of the VDP was the Proton Component Scheme (PCS) in 1988. In the beginning, PROTON has been heavily dependent on imports or local foreign supplier for the majority of the parts. PCS was put into practice for the purposes of improvement of this situation. PCS summary of are as follows:
Ø PROTON became an anchor company, and recruited vendors as training objectives.
Ø PROTON made a technical guidance in the form of cyclic visit to the vendors. At that time, QCD (Quality, Cost, Delivery) activity, 2S&3M exercise (organized, tidy, non-uniformity, unreasonable, waste), 4M activities (Manpower, Material, Machine, Method), and TCA (Target Cost Achievement) was thoroughly trained. Mitsubishi Motor Company staffs joined.
Ø For the purpose of the vendor's technical support, business matching with subcontractors of Mitsubishi Motors has been carried out.
Ø One vehicle parts of the Proton Saga are provided by the only one vendor, so-called as “Single-sourcing Approach”, was adopted.
Ø Proton Cooperative was established. Through this operation, raise the level of technical capabilities of the vendor, and the strengthening of the lateral connection of the vendor industry has been enhanced.
VDP was initially under the jurisdiction the Ministry of International Trade and Industry (MITI). Since 1995, the jurisdiction was transferred to the Ministry of Entrepreneur and cooperatives Development (MED). Target industries has also been expanded from the automobile industry to the electronic and electrical field and the like.
In the VDP, such 4 main players as 1) the anchor companies, 2) central government (MITI, MED), 3) financial institutions and 4) vendors were in cooperation with each other. However, vendors that were able to participate in the VDP has been limited to “Bumiputera” companies. Therefore, for the non-Bumiputera-based companies, including ethnic Chinese vendors, benefits did not reach.
b. The Second National Industrialization Master Plan (IMP2), 1996 - 2005
IMP2, which was announced in November 1996, was based on the upper level plan of the "Vision 2020". Among these, Prime Minister Mahathir Mohamad has emphasized the importance of the development of SMEs in the automobile industry and the electronic and electrical industry. Central ideas of the IMP2 are “Cluster Development“, and "Manufacturing ++". These two conceptual ideas are under the influence of "Competitive Advantage of Nations” by Michael E. Porter.
Cluster has the following elements. That is, a core industry and key suppliers surrounding it, and infrastructure and institutional support infrastructure to support these. Elements necessary for the economic base to bring the growth of the industry are the following five. That is, 1) human resources, 2) technology, 3) financial incentives, 4) support services, 5) a physical infrastructure and equipment. In Manufacturing ++, the importance of the shift to such high value-added fields are highlighted that research and development, design, distribution, and marketing field. This shift has been shown to be carried along the value chain.
c. Industrial Linkage Program (ILP), 1998 -
ILP was positioned as a center of supporting industrial development policy in the cluster development in IMP2. SMEs Development Corporation (SMIDEC) has jurisdiction over ILP. SMIDEC was established in 1996 as a one-stop agency for SMEs support. As a vendor that can participate, there were no constraints of Bumiputra. SMEs, which has the Malaysian capital of 60% or more, were able to participate. Even the ethnic Chinese companies could participate. The vendors who participated in the ILP, pioneer status as intermediate goods producer was given. This status, tax exemption of five years, or was 60% of the incentives for capital investment reduction and exemption. 128 vendors participated in the end of 2000, and 953 vendors in the end of 2002.