Localization: The game-changer of Vietnam’s manufacturing industry

14:08 | 16/07/2017 Industry

(VEN) - Vietnam Economic News’ Nguyen Huong talked with Project Manager of Reed Tradex Co., Ltd. Kasinee Phantteeranurak about the Vietnamese manufacturing industry on the occasion of the Nepcon Vietnam 2017 international exhibition, which will be opened in Hanoi from September 13-15, 2017.  

Project Manager of Reed Tradex Co., Ltd. Kasinee Phantteeranurak

Could you tell about the results of exhibitions Reed Tradex has organized in Vietnam?

Currently, Reed Tradex is holding three international exhibitions in Vietnam which are Metalex Vietnam, Nepcon Vietnam and Vietnam Manufacturing Expo. More than 10,000 industry members have joined our each exhibition to explore the technologies and to hold informational and educational conversations throughout the forum and seminar during the show. The number of visitors to our exhibitions, increasing by an average of 11-15 percent a year, reflects the concern of Vietnamese industrialists about the importance of connectivity and markets updating.

What is your outlook about the market-oriented and investment environment in Vietnam?

In 2016, Vietnam attracted a total FDI inflow of US$24.4 billion, of which the largest sector was manufacturing and processing, accounting for some 60 percent of total inward FDI. The Republic of Korea was Vietnam’s largest FDI investor (US$7 billion), followed by Japan and Singapore. This partly reflects the potential of Vietnam, as well as the opportunity to connect with strong Asian investors, to create a new and prosperous manufacturing area.

The investment has not been limited to low-end labor-intensive manufacturing. Increasingly, high-tech electronics producers are establishing a presence in the country. This trend is likely to persist reflects from the continued investment expansion of the global tech giants likes Samsung, Intel, LG, Panasonic and Microsoft.

It cannot be denied that Vietnam is benefiting enormously from FDI inflows; however, a long-term plan is essential to consider, in order to keep Vietnam moving forward sustainably.

What opportunities Vietnam needs to grasp, and also challenges which should be viewed objectively to have good preparation to integrate into the global economy?

In the past, a growing number of foreign companies investing in the manufacturing sector were attracted by low-wage workers and favorable tax incentives. Afterward, the entry of Samsung of the Republic of Korea into Vietnam was a game-changer for its electronics exports. The Korean giant started employing thousands of workers and bringing in its wake several hundred foreign component makers. Another high-technology giant, Intel placed its world biggest testing and assembly facility in Vietnam, involving US$1 billion of FDI which contributed to moving up the production value chain. This is despite the fact that there were inadequate local suppliers. Intel is engaged in training and entrepreneurship development for domestic companies to increase localization.

Over the years, Vietnam also put in place an attractive tax regime for corporates. Corporate income taxes were progressively brought down from 25 percent to 22 percent in 2014 and 20 percent in 2016. Special packages are available for specific identified sectors to be promoted, including high technology. High-technology zones and some industrial areas have also received tax benefits.

Nonetheless, the longer-term sustainability of the industry will depend on whether Vietnam can raise productivity and move up the value chain. The country will also need to develop its own talent pool to sustain the trend. Otherwise, once wages start to rise, not only electronics but also other industrial manufacturers will migrate to cheaper locations such as Indonesia, Cambodia, Laos, and Myanmar all representing competitive alternatives for global manufacturers.

The future of manufacturing is no longer simply about attracting FDI investment, but retaining and developing sustainably in the long term. What is your point of view on local capacities? What should manufacturers consider to enhance local capacities?

I do believe that existing incentives have motivated large FDI investors to be willing to undertake high investments even in the lack of local supply-chain capabilities. The localization rate in Vietnam is only about 10 to 30 percent, which does not reach the required 45-percent rate to enjoy preferential rules of origin in most FTAs. For long-term development, giant investors like Samsung, Intel and Microsoft appear ready to invest and engage in building local capacities by training workers and supporting related businesses. So, why do not local manufacturers take advantage of these effects to develop their productive capacity?

Each production unit needs to clearly identify its goal of upgrading the technology of the production line to serve the global standard, and accordingly develop resources to drive new systems. Indeed, technological and production capability building at local firms is basically driven by human capital development. The core of it is knowledge-intensive activity and technical training. Learn from the global standard, and apply it locally to push the production.

Localization and in-country value creation are a part of the solution. Nevertheless, it takes many years to educate a highly-skilled worker. A strategy is needed for attracting experts to return to local industries after they have worked overseas. The preferential regime for local manufacturers to borrow capital in order to invest in technology will be a good solution for synchronizing the production line and catching up international standards in the fastest way.

However, the sustainability of these initiatives to foster broad-based economic development is most fully realized when industry and government work together to support local skills development, foster investment in technology and R&D, and create the foundation for industry clusters that can generate innovations, capture supply-chain synergies and leverage economies of scale.

What are Reed Tradex’s directions and visions for the Vietnamese market?

In the face of the urgent need for localization in Vietnam, we are associated with local and international professional associations and organizations to promote thematic workshops, business meetings and industry experiences right at the exhibition. We believe that manufacturing has historically relied on developing skills, which in turn has promoted its capabilities. Individuals in the sector’s workforce possess skills, which are critical assets to add value to the manufacturing process.

We are continuing to invest in e-based marketing products and services with the forces to make exhibitors, visitors and all exhibition participants to conveniently access and connect from every point in the world. In the beginning of 2016, we launched a recommendation system through the website, making it convenient for all attendees to find the partner that best suits their needs.

However, to serve the unexpected rising tiger – the electronic industry in Vietnam, we are in the process to organize Nepcon Vietnam 2017 which is a special exhibition on SMT and testing technologies, equipment and supporting industries for electronics manufacturing. Nepcon Vietnam 2017 will celebrate its 10th edition and will be held at the Hanoi International Center for Exhibition (I.C.E) from September13-15, 2017.