General

Current situation and Vietnamese Government policies in the supporting industry

Trường Lăng

April 16, 2022

General

Current situation and Vietnamese Government policies in the supporting industry

Trường Lăng

April 16, 2022

The current situation of supporting industry 

According to the Department of Industry of the Ministry of Industry and Trade (MIT), Vietnam currently has 2,000 enterprises in spare parts and components manufacturing and processing, in which only more than 300 Vietnamese SMEs are capable of supplying multinational corporations in Vietnam with location-allocation mainly in Hanoi and HCMC. This figure of Vietnamese enterprises in supporting industry is relatively humble. Plus, the linkages between foreign enterprises and domestic private firms, and between small and large enterprises, are still tenuous, indicating a shortage of domestic supply for the manufacturing and processing market. 

For another example, in Vietnam, 20 large automobile assembly enterprises are operating in the auto industry, but only 81 tier-1 suppliers and 145 tier-2 and 3 suppliers are providing input resources for the whole industry. Meanwhile, in Thailand, a modest number of 16 large car assemblers are in operation nationwide, yet the country owns 690 tier-1 suppliers and 1,700 tier-2 and 3 suppliers.

In addition, home-produced raw materials and accessories are mainly deployed by foreign-invested enterprises, while domestic firms have not yet taken advantage of the resources, thereby failing to meet the quality standards for export orders. Indeed, global corporations are seeking domestic suppliers, yet their ability to meet the requirements of home-grown businesses is humble. Global corporation Bosch has been in search of domestic supporting partners for 3 years, however, not a single Vietnamese company has qualified as a potential supplier. This can be attributed to the difficulty in accessing the capital resources of Vietnamese SMEs. The preliminary report on the three-year implementation of the Supporting Industry Development Plan in Ho Chi Minh City (period 2016-2020, with a vision to 2025) also confirmed that the majority of industrial enterprises in the area are small and medium-sized with limited capital and ability to access loans due to lack of collateral.

Solutions and policies from the Vietnamese Government

Aware of the shortcomings of the supporting industry, the Vietnamese Government has made a great attempt to improve and develop the industry through diverse policies and practical solutions, thus advancing manufacturing and processing. 

Under Resolution No.23/NQ-TW issued by The Political Bureau of the Central Committee of the Communist Party of Vietnam in 2018, the supporting industry is on the prioritized list for development. 

Supporting industries play a significant role in economic restructuring towards industrialization and modernization, improving labor productivity and competitiveness, creating added values, and increasing the contribution rate of the processing and manufacturing industry in the whole economy. Therefore, in the orientation of developing supporting industry in accordance with Resolution 115/NQ-CP dated August 6th, 2020, by 2025, Vietnamese enterprises are able to manufacture competitive supporting industrial products, meeting 45% of the necessary demand for domestic production and consumption, and accounting for 11% of industrial production value. Additionally, approximately 1,000 domestic firms have the ability to supply directly to assembly enterprises and multinational corporations in the territory of Vietnam. By 2030, supporting industrial products will meet 70% of the demand for domestic production and consumption, accounting for about 14% of industrial production value. There are about 2,000 enterprises capable of supplying directly to assembly enterprises and multinational corporations in the territory of Vietnam.

Additionally, Resolution 115/NQ-CP specifies several prioritized industries for development that may continue to receive incentivized investment policies from the Vietnamese Government. In detail, the priority includes spare parts, supporting industries for the textile-garment and footwear industry, and supporting industries for high-tech industries in which developing the manufacturing of materials, specialized supporting equipment, software, and services for high-tech industries, developing a system of domestic providers in the specialized supporting equipment, and supporting technology transfer in the high-tech industry. Under the Resolution, 7 key solutions to further develop and perfect Vietnam supporting industry are listed, including (1) Completing mechanisms and policies, (2) Ensuring and effectively mobilizing resources for the development of supporting industries, (3) Financial and credit solutions, (4) Developing domestic value chains, (5) Market development and protection, (6) Capacity building of supporting industry enterprises, and (7) Media information, statistics, and databases. In particular, developing the domestic value chain is of the most importance. The domestic value chain is fostered through effective investment attraction and linkages between Vietnamese and multinational enterprises, and domestic and foreign manufacturing and assembly companies. Furthermore, the Government encourages building concentrated supporting industrial parks, thereby increasing autonomy in input materials for manufacturing, reducing dependence on single imported sources, improving domestic added values, and enhancing the position of Vietnamese enterprises in the global value chain. Along with that, the state agencies support Vietnamese enterprises in the prioritized processing and manufacturing industries to grow into regional-sized corporations, creating spillover effects and leading supporting industry firms under the spirit of Resolution No. 23-NQ/TW.

At the same time, the Resolution also emphasizes the joint role of ministries and branches in promoting supporting industries, thus requiring tight collaboration among ministries and branches to deliver the best results. Notably, MIT has coordinated with the Ministry of Planning and Investment (MPL) to strengthen the investment attraction of major global FDI enterprises, encouraging them to invest in the manufacturing of finished products and the establishment of regional manufacturing plants in Vietnam. Therefore, domestic supporting industry enterprises are now able to participate in the global supply chains. This year, MIT will collaborate closely with multinational FDI enterprises namely Samsung, and Toyota, among others to strengthen the search and connection of domestic raw materials, components, and accessories manufacturers in the replacement of imported sources in the short term as well as in the long term.  In this way, Vietnam can enhance the localization rate of Vietnam-produced products and increase the influence of FDI enterprises in the domestic business community, aligning with the Government opinions on FDI attraction in Development Bridge Forum 2021. 

Besides, the authorities of major cities in Vietnam have created a legal framework for the development of supporting industry. Following Resolution 115/NQ-CP, Decision 504/QD-UBND 2015 was issued by Ho Chi Minh City Council, approving the Outline of the Supporting Industry Development Scheme for the period 2015 – 2020, with a vision to 2025. Hence, Resolution 16/2018/NQ-HDND stimulates investment demand in the supporting industry sector of Ho Chi Minh City for the period 2018-2020. Following suit, Hanoi People’s Committee issued Plan 94/KH-UBND on the Program of Supporting Industry Development in Hanoi in 2020. A year after, Plan 49/KH-UBND on the Program of Supporting Industry Development in Hanoi in 2021 was approved to enhance and enforce the implementation of the previous plan. 

Viettonkin believes that with the majority of enterprises being SMEs, Vietnam will move up its global value chain if the country has the right policies and strategies to promote and develop supporting industries. The current situation indicates that supporting industries remains several shortcomings, yet in the upcoming time, the preferential policies and timely action plans from the Government, ministries, branches, and localities will definitely boost the industry to thrive. Thus, this will be an ideal time for foreign investors to start a business in Vietnam. With an experience of more than 10 years in consulting, Viettonkin is one of the leading firms in the industry. Our professionals, who are insightful of the Vietnam market and legislation, can provide detailed advice on helping your companies navigate through the legal processes of setting up business in Vietnam. Let’s get down to work! 

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