A new approach to developing supporting industries
Communist Review- Despite the fact that Viet Nam has been one of the most open economies for the past three decades, its export turnover (mostly end products) has heavily relied on imported raw materials, accessories and man-made materials. In the long run, it requires a new approach in this sector for long-term and sustainable development goals.
Current situations of supporting industries in Viet Nam
In the current import structure of Viet Nam, raw materials and supporting industry products account for a high proportion and have undergone little change over the past period. The heavy dependence on imported components and accessories has made domestic value added in processing and manufacturing industries lower than other regional nations. Viet Nam’s processing and manufacturing industries only make up approximately 16% of GDP compared to 26% of Thailand’s and 36% of China’s. Accordingly, developing supporting industries plays a pivotal role in the deeper participation in the global value chain, restructuring and increasing the contribution density of processing and manufacturing industries in GDP, improving the domestic value added and their competitiveness.
The supporting industry is not specifically classified in the economic sector system. Hence, its scope is differently defined, based on its concept and intended use of policy makers. The more evidently the scope is determined, the easier policy planning will become. As a result, those policies will be more manifest and feasible.
The concept and scope of supporting industries are differently understood in different countries. While Thailand and Japan define the scope of supporting industries as enterprises manufacturing components and accessories for automobile, motorcycle and electronic (1) industries, it was specifically determined for the first time in Viet Nam pursuant to Decision No.12/2011 QD-TTg, dated February 24, 2011 of the Prime Minister “On policies of development of supporting industries - the ones producing materials, accessories, components, semi-finished products to supply the manufacturing and assembling industries with finished produce which serve as means of production or consumer goods. Decree No.111/2015/ND-CP, dated November 3, 2015 of the government on “Developing supporting industries” defined them as “industries manufacturing raw materials, man-made materials, accessories and components to supply finished goods”. Supporting industries by this definition in the overall industry from upstream to downstream are specified as upstream and midstream industries, providing inputs for the production of final goods in the downstream region. Correspondingly, supporting industries play an important part in the supply and value chains. Any nation whose domestic supporting industries dramatically develop is likely to deeply engage in the global value chain and shift its economy towards industrialization, increasing the contribution density of processing and manufacturing industries in GDP.
However, if considering supporting industry goods prioritised for development under Decree No. 111/2015/ND-CP alone, supporting industries comprise raw materials, man-made materials, components and accessories - serve as the inputs for downstream products in the textile, footwear, electronics, automotive, mechanical and high-tech industries. This is regarded as the basis for determining the economic sector codes corresponding to the scope of supporting industries in Viet Nam’s economic sector system promulgated by the Prime Minister pursuant to Decision No 17/2018/QD-TTg, dated July 6, 2018.
In such a way that supporting industries are defined, the survey data from the General Statistic Office (2018) showed that there were approximately 5,000 enterprises nationwide operating in supporting industries, supplying raw materials, materials, components, accessories to the businesses manufacturing end products in the automotive, electronics, mechanical, textile and footwear industries. Regarding geographical location, enterprises converge on the Red River Delta and the Southeast. With regard to operation, the mechanical, textile and footwear industries possess a larger number of supporting industrial enterprises than others. In terms of scale, 88% of supporting industrial enterprises are small and medium (less than 300 employees). The number of supporting industrial enterprises are categorised according to industry, region, economic sector and labour scale.
Most supporting industrial enterprises have not applied the international standards or common production management tools, according to a survey by the General Statistic Office. There are relatively 20% of enterprises with ISO 9000 certification (quality management), 9% of businesses with ISO 14000 certification (environmental management) and over 20% of firms with on-the-spot 5S implementation. Meantime, roughly 1% - 2% of enterprises apply tools such as Lean, 6 sigma or TQM, TPM. In relation to the level of technology, approximately over 30% of businesses reveal that they have been utilizing manual control devices, more than 50% have been using semi-automatic equipment and only over 10% have been employing automation equipment and less than 10% with the use of robots in the production line. This proves that the capacity of Vietnamese supporting industrial enterprises remains limited both in production management and level of technology.
Most supporting industrial enterprises are small and medium (88%) which are short of market information and opportunities to connect customers. As for the value chain, the proportion of enterprises in segments with high value added is pretty small; only around 19% of textile, footwear firms and 33% of electronics businesses do design stage during production. The percentage of supporting industrial enterprises with access to preferential treatment and assistance from the State’s programs is relatively low (17%), which proves that the coverage of the domestic supporting industrial development policies and programs remains limited. There are various reasons, some of which may be due to preferential and supportive programs and policies for supporting industrial enterprises that have been carried out over the past few years; the poor dissemination of the policies and programs has made them unknown to numerous businesses.
What is noteworthy from the survey is that supporting industrial enterprises admitted not to having the advantage of the ability to cope with environmental change, research and develop products and strategic vision for production and enterprise management system, etc. They also identified such challenges for development as customer connection, market information and human resources, etc. However, when enquired about the desire for supporting solutions, most enterprises wish to gain support for taxes, administrative procedures and capital which were not the solutions to surmount hurdles and weaknesses identified beforehand. This serves as a considerable challenge in the process of formulating and implementing industrial development policies due to aforementioned discrepancy.
Viet Nam’s supply chain, value chain and industrial structure
Concept of supply chain and value chain
Supply chain and value chain are interchangeably used, but in reality these two concepts are not equivalent. While the supply chain only comprises input and output links for production activities forming the chain of products, the value chain determines a greater scope including value added activities in the supply chain and additional services such as research and development, design, marketing, logistics and customer support, etc.
The discrepancy between the value chain and supply chain in reality is that the former concentrates on physical transformation and transportation of raw materials to the final products; meanwhile, the latter focuses on economic value added activities for products in each phase, which is not necessarily associated with manufacturing or logistics.
Comparing the definition and scope of supporting industries mentioned above with the concept of the supply chain and value chain, it is obvious that the former is being limited to the concept of supply chain; therefore, preferential and supportive measures are restricted to production activities on the supply chain. In the meantime, so as to increase domestic value added, apart from activities in the supply chain, it is possible to expand into other activities in the value chain such as design, research and development. Yet, these activities do not currently belong to the scope of supportive programs and preferential policies for supporting industries.
Engaging in the supply chain and value chain
Supporting industry products are components, accessories, raw materials and man-made materials - the intermediate commodity as well as the inputs for the production of finished products. Therefore, any product is assembled into a final one; any supporting enterprise has to participate in the supply chain and value chain of one or several businesses manufacturing and assembling end products by means of different forms, being likely to become the supplier to domestic manufacturing and assembly enterprises or export to overseas markets.
Becoming the supplier to any enterprise (domestic, foreign direct investment - FDI or export) relies on the capacity of supporting industrial enterprises. 75% of enterprises entirely supply for domestic markets (of which FDI accounts for 5%) and 8% of businesses completely provide for the export markets, the remaining 17% of enterprises both furnish the domestic markets and export. Thus, it is possible to tell that roughly 30% of supporting industrial enterprises have taken part in the global supply and value chains.
In the textile and footwear industries, 64% of supporting industrial enterprises supply for the domestic markets (of which FDI makes up 3%), 9% export and 27% provide for both markets. In the rubber, plastic and chemical industries, the number of businesses furnishing the domestic markets make up 52% and ones that export account for 4% and the remaining 44% furnish the two markets; in electronics industry, there are 44% of enterprises supplying to the domestic markets (of which 22% completely provide for FDI), 16% supply to the export markets and 40% of its supporting industrial enterprises both furnish the domestic markets and export. In mechanical and automatic sectors, 83% businesses completely provide for the domestic markets and there are only 3% enterprises with revenue totally from export and around 14% of businesses with turnover from both markets.
The markets that attract numerous enterprises engaging in exporting supporting industrial products include: South Korea (25%), Japan (18,5%), China (14,5%) and Taiwan (China) (8,9%). As for textile and footwear industries, the export markets include enterprises from South Korea, China, Taiwan (China) and Japan; in terms of rubber, plastic and chemical industries, the number of export enterprises accounts for a tiny proportion (less than 50%) and the major export markets are South Korea and Japan; with regard to electronics industry, South Korea and Japan serve as two main markets in which there are 141 and 53 enterprises exporting products to respectively; the main export markets of businesses in mechanical and automobile industries are also aforementioned traditional ones, namely Japan, South Korea, Taiwan (China) and China.
In order to calculate the value of a country engaging in the global value chain, the Organization for Economic Cooperation and Development (OECD) and the World Trade Organization (WTO) have devised a method to measure the value added in trade specifying the degree of backward linkages (measured by the value added in exports) and forward linkages (measured by the value added in domestic exports) in the global value chain of an industry in a country. Updated data in 2016 showed that though the domestic value added (forward linkages) increased in absolute value, it was declining in proportion; meanwhile, the foreign value added (backward linkages) was rising. That is to say, Viet Nam’s export commodity with import volume from abroad is on the rise each year and Viet Nam’s exports has been increasingly dependent on overseas input imports. In other words, the proportion of Viet Nam’s value added contributing to the global value chain has tended downwards over recent years (2).
Only when domestic supporting industries develop can Viet Nam’s enterprises increase the proportion of purchasing domestic components, accessories and raw materials; hence, it can improve the value of contribution and enhance its position in the global value chain.
Transforming Viet Nam’s industrial structure
Statistics during the past period show that processing and manufacturing industries play an increasingly pivotal role in the economy with their contribution to GDP rising from 12,9% in 2010 to 16,7% in 2020. They are also experiencing a structural shift towards increasing the proportion of high-tech industries regarding both value added and export turnover. During 2010, the value added in the processing and manufacturing industries were mainly constituted from resource-intensive and labor-intensive industries such as food processing, oil and gas, textile and footwear. However, in 2017 the electronics rose to the top with a 25% contribution to the value added in the processing and manufacturing industries.
Viet Nam’s export structure has shown significant improvement with the contribution of processed and manufactured products in total export turnovers rising from less than 80% in 2010 to 87% in 2020, of which the processing and manufacturing industries have witnessed a strong growth of the electronics industry with the proportion increasing from 12% in 2010 to 43% in 2020. This achievement is closely linked to an investment boom in the electronics after Viet Nam’s participation in the WTO as well as negotiations and signing free trade agreements.
The influence of Viet Nam’s industries on the global markets also indicates its position in the value chain and industry structure in terms of the global markets as a whole. According to statistics on import and export, Viet Nam occupies a fairly high position in the global value chain regarding footwear with an enormous increase in market share from 4,1% in 2010 to 10,4% in 2020. For its important position, Viet Nam’s footwear enterprises had to shut down temporarily when the pandemic broke out, which had considerable influence on the global value chain. Besides, Viet Nam has positioned itself in the global value chain of the furniture, clothing and electronics industries with its global market share in these sectors increasingly improving.
Developing supporting industries to foster participation in the supply and value chains and restructure industries
The aforementioned analysis reveals the importance of developing supporting industries to deeply participate in the supply chain as well as the global value chain, boosting the industrial restructuring towards industrialization, modernization and suggesting some drastic measures to deal with the current inadequacies.
Firstly, it is essential to take a new approach to supporting industries in accordance with the value chain, expanding the scope of supporting industries including activities that place high value added in the global value chain instead of the current approach in conformity with the supply chain, which leads to the State’s preferential and supportive programs not stimulating the activities that put the high value added for enterprises.
Secondly, it is necessary to strengthen communications so that enterprises are well informed and get easier access to the government’s preferential and supportive programs, thereby step by step changing their awareness and striving for the national common goals. In addition, simplifying administrative procedures and intensifying the application of information technology so as to improve the efficiency of public services serve as one of essential solutions meeting the requirements of supporting industrial enterprises.
Thirdly, in order to increase the capacity of supporting industrial enterprises towards industrialization, modernization and sustainable development, it is critical to perfect the legal system and institutionalize supportive measures to develop industrial enterprises, particularly supporting industrial ones. Besides, keep effectively implementing key measures referring to business connectivity, market information, support for the application of management systems, market and human resource development.
These measures need implementing synchronously with communications, shifting and enhancing the awareness of relevant parties and supporting industrial business community towards long-term and sustainable development goals, thereby enabling supporting industrial enterprises to truly transform and improve their competitiveness for growth and global integration.
(1) Kenichi Ohno (Compiler): Building supporting industries in Viet Nam, Viet Nam Development Forum, Hanoi, 2007
(2) Specifically, Viet Nam’s proportion of domestic value added declined from 58,2% in 2005 to 52,5% in 2016; meantime, Thailand’s rose from 55,7% to 61,3% in the same phase
This article was published in the Communist Review No. 989 (May 2022)