Practice flying with 'eagles'

The 5,000 m2 factory of Huynh Duc Mechanical Company in Bien Hoa City ( Dong Nai province) is located on a small road without sidewalks, surrounded by densely packed residential houses. Outwardly, the facility resembles an old, outdated processing workshop. But inside, nearly 180 workers and engineers are producing precision mechanical products for multinational corporations with market capitalizations reaching hundreds of billions of USD. This is one of the first Vietnamese businesses chosen by a US semiconductor corporation as a supplier partner when it opened a factory in Ho Chi Minh City. The factory director is engineer Pham Ngoc Duy (35 years old), who began his career in the research and development (R&D) department of Juki sewing machine manufacturer – the first Japanese foreign direct investment (FDI) enterprise in Tan Thuan Export Processing Zone, District 7, Ho Chi Minh City. After nearly three years working in both Vietnam and Japan, he left the corporation and joined Huynh Duc – a 100% domestically owned enterprise. The career path that Duy has taken is also the choice of many business owners and managers: working at a multinational corporation to accumulate experience, then joining a domestic enterprise, and finally returning to participate in the supply chain of an FDI company. This director's experience at the FDI corporation has helped Huynh Duc – a family-owned company – professionalize its work processes and maintain its position as a trusted partner of foreign investors for 10 consecutive years.

Following the "eagle"

In a production chain, multinational corporations with thousands of employees, like the first company Duy worked for, are the apex of the pyramid – where the final product is shipped to the market. His current company is considered the base – the suppliers of components and input equipment. This business aims to develop itself into an indispensable pillar of the FDI supply chain. Ten years ago, to become a partner of a US semiconductor corporation, Huynh Duc Company had to undergo a six-month capability assessment, not including the initial contact period which lasted over a year. "Almost no Vietnamese company has the technical and management skills to immediately meet all the requirements of large foreign corporations. The important thing is the commitment to readily change to overcome weaknesses," Director Duy said. At that time, the company only scored 5-6 out of 10 according to the partner's criteria. To partner with FDI corporations, businesses must be ready for long-term investment in both human resources and technology. Starting from a family-run mechanical workshop established in 1995, Huynh Duc Company imported used machinery for over two decades, just enough for their needs. However, in the last five years, the company has completely shifted to investing in new equipment. "It costs much more, but the products we make are better, and our competitiveness is naturally higher," said the 8X-generation director. In return, FDI partners have become a guarantee of the capabilities of domestic businesses like Huynh Duc. From initially having 80% of customers from Japanese factories, then from American and European corporations investing in Vietnam, the company began to generate 10% of its revenue from direct exports of equipment abroad. "The most valuable thing is not the money, but the opportunity to access the management and operational systems of the world's largest corporations to learn from and improve our own business," he said.   Duy said.

Workers at Huynh Duc Mechanical Company in Bien Hoa City (Dong Nai province) - a supplier partner for a US multinational corporation. Photo: Quynh Tran.

The model of domestic businesses partnering with FDI investors for "symbiotic" development is common in many newly industrialized countries in Asia such as China and Malaysia. While FDI businesses benefit from preferential policies from the host government, domestic companies have an environment to learn from these "giants" and grow. That's the theory. In reality, the number of Vietnamese businesses that successfully partner with FDI remains small. For example, Vietnam almost always ranks last in the percentage of domestic suppliers chosen by Japanese factories, even though the number has increased by 80% over the past 10 years, according to the annual survey results of the Japan External Trade Organization (JETRO).

That's just an improvement in quantity, not depth. Huynh Duc is among the few businesses that have been able to participate in the supply chains of high-tech FDI corporations over the past 35 years. But after 10 years, this company is still in the role of supplying indirect equipment such as spare parts, molds, jigs, etc. Most domestic companies are still unable to supply equipment in the core production lines of their customers. Flying with FDI "eagles" has helped them come a long way, but the barrier between the domestic supporting industry and the top of the production chain remains. Unable to supply high value-added equipment and components, the electronics industry, as well as traditional Vietnamese industries such as textiles and footwear, only generate profits of 5-10%, according to a 2020 study by Assoc. Prof. Dr. Tran Thi Bich Ngoc (Institute of Economics and Management - Hanoi University of Science and Technology). This means that, despite the large volume of exports, the economic benefits from Vietnam's participation in the global electronics supply chain are relatively small.

Two parallel lines

Following a similar path to Duy, CEO Nguyen Van Hung also transitioned to leading An Phu Viet Plastic Company after 15 years working for a Japanese corporation. In 2011, he resigned and opened his own company producing plastic components in Hung Yen. His first customers were Japanese FDI enterprises. The turning point came in 2015, when Samsung, then the largest FDI investor in Vietnam, collaborated with the Ministry of Industry and Trade to expand its search for domestic suppliers. After half a year participating in the evaluation program, his company was selected by Samsung as a Tier 2 supplier, working through a Tier 1 partner, a South Korean enterprise. An Phu Viet continuously upgraded to keep pace with the technological innovation of the world's number one smartphone manufacturer. But this CEO soon realized the isolation of Vietnamese businesses in the supply chain. For many years, he has harbored the ambition to collaborate with other Vietnamese businesses to supply complete component assemblies to customers, instead of individual parts as is currently the case. "If we continue to manufacture individual components separately, it will be very difficult to achieve breakthroughs. But if we can supply complete assemblies, we will both increase profits and enhance our position with FDI corporations," Mr. Hung said. To date, this remains a playing field dominated by foreign suppliers. For example, Samsung has 23 key partners opening factories in Vietnam, not including companies within the same group. These businesses supply complete modules such as cameras, chargers, speakers, circuit boards, and headphones to the South Korean phone manufacturer. The average age of these companies is 32 years. 80% of them are listed on the South Korean stock exchange with market capitalization mostly exceeding $100 million, according to VnExpress statistics from the end of October.

That's the portrait of the competitors that domestic businesses like An Phu Viet must contend with if they want to realize their ambitions. Weaker in both capital and experience, to win on home turf, Vietnamese suppliers must compete on equal footing with long-standing partners of FDI corporations on at least three fronts: quality, price, and delivery time. But even with raw materials like engineering plastics, An Phu Viet has lost its price advantage because it has to import them due to the inability to find domestic suppliers. "With the same quality, customers might choose a Vietnamese company if the price is a few percent higher. But if the difference is double digits, they will certainly buy from abroad," Mr. Hung said. The ambition of An Phu Viet's CEO requires the synchronized development of an entire industry – from materials, mechanics, machine manufacturing to electrical and electronics. But after decades of following in the footsteps of these "eagles," this remains just a dream. Domestic suppliers have not yet reached the ultimate goal: becoming a vital link in the value chain of global corporations.

Foreign direct investment (FDI) is not a magic key to unlocking Vietnam's path to a higher level on the value chain, as has been the case over the past two decades, according to Dr. Nguyen Dinh Cung, former Director of the Central Institute for Economic Management. "Attracting foreign investment and nurturing domestic businesses are like two wings; they must work together harmoniously for the economy to take off," Dr. Cung stated. Over the past 35 years, Vietnam has done well in attracting foreign investment, but has yet to solve the problem of strengthening the domestic industry. "This reality reveals an irrational risk: the more foreign investment there is, the more domestic industry shrinks," warned Mr. Pham Chanh Truc, former Head of the Management Board of the Ho Chi Minh City High-Tech Park. According to him, the principle of investors is to pursue maximum profit. If better and cheaper components and parts are readily available from China or South Korea, they will naturally not choose Vietnamese businesses. In the machinery and electrical/electronic equipment sector, the proportion of domestic value added contributing to Vietnam's export turnover is increasingly lagging behind neighboring countries such as Malaysia, Thailand, and Indonesia, according to the Organization for Economic Cooperation and Development (OECD). This means that Vietnam is increasingly becoming dependent on importing components and equipment for assembling final products.

According to Dr. Nguyen Quoc Viet, Deputy Director of the Vietnam Institute for Economic and Policy Research (VEPR), 98% of domestic businesses are small and medium-sized enterprises (SMEs) and lack linkages. If the government does not proactively implement policies to enable businesses to participate in FDI supply chains, but instead leaves it entirely to investors, Vietnam will forever remain outside the playing field of global corporations. "If we cannot find ways to handle complex stages of production, Vietnam cannot achieve a sustainable advantage, no matter how many investors we attract," Dr. Viet assessed. Domestic businesses are gradually falling into a vicious cycle of the "chicken and egg" dilemma. To have the opportunity to produce key inputs for FDI corporations, they must demonstrate their capabilities. But to achieve that, they first need the opportunity. While Vietnamese businesses lack the conditions to produce for FDI, foreign investors themselves are struggling to find domestic businesses that meet their requirements to partner with. Belonging to the first group of "big players" to arrive in Vietnam 35 years ago, Juki Corporation started with a pilot factory producing components, then expanded into assembly, precision casting, and now has four factories in Tan Thuan. Beyond manufacturing and processing, Juki has also established an R&D department in Ho Chi Minh City specializing in automation. Sugihara Yoji, General Director of Juki Vietnam Co., Ltd. and Director of the Asia regional business division, stated that the corporation has recently decided to gradually relocate its factories from China to Vietnam with the vision of establishing a long-term production base. However, beyond developing infrastructure, Juki needs more domestic businesses capable of supplying critical components such as electronics, motors, and circuit boards to implement this strategy. This is the biggest bottleneck. "The government has not yet implemented policies to encourage foreign companies to increase local orders," Mr. Sugihara stated. Without coordination from the state, FDI investors and domestic businesses are like "two parallel lines."

Tiered pricing

To break the aforementioned deadlock, Mr. Pham Chanh Truc believes that the state plays a crucial role in guiding these "two lines" to meet. "The state must create the market by placing orders with businesses. Over time, as the quality of their products is gradually improved and proven, domestic companies will be able to convince foreign corporations," Mr. Truc proposed. Domestic supporting industries cannot independently supply all the parts and equipment for FDI corporations, so it is necessary to identify the right products with competitive potential for targeted investment. He cited the example of Vietnam's existing strength in rubber plantations, suggesting that it should focus on developing and investing in related materials and plastics industries. Mr. Do Thien Anh Tuan, a senior lecturer at the Fulbright School of Public Policy and Management, argued that to create a market for domestic industries, the state needs to change its preferential policies for FDI investors. "FDI investors will never have the incentive to transfer technology to us without specific incentive policies," Mr. Tuan said. Over the past nearly five years, there have been 400 technology transfer contracts by FDI enterprises, but all were internal transactions between parent and subsidiary companies, without the participation of domestic entities, according to data from the Ministry of Science and Technology. He argued that instead of offering easy incentives as currently – simply investing entitles investors to tax exemptions and reductions – the government should design incentives based on a tiered system. Investors with a higher percentage of domestic suppliers should receive greater incentives. This method could be applied similarly to the percentage of Vietnamese management personnel, the number of training hours, or the number of technology transfer contracts with domestic businesses. This expert believes that redesigning incentive policies for FDI investors is more urgent than ever, especially with the global minimum tax regulations set to take effect next year. At that point, all countries will have to apply a tax floor for large investors. This means the era of attracting FDI through tax and fee incentives will end. To prepare for this, the government is drafting a resolution on piloting support for high-tech investors. Accordingly, FDI projects with plans for production, human resource training, research and development in Vietnam will receive incentives in the form of tax offsets or direct budget support.

Workers use a 2D measuring machine to inspect products at the An Phu Viet factory (Hung Yen). Photo:   An Phu Viet

The comprehensive strategic partnership between Vietnam and the US, established in early September, presents an opportunity for Vietnam to participate more actively in the global high-tech supply chain, especially in the semiconductor industry. To welcome this fourth wave of FDI, Prime Minister Pham Minh Chinh held two meetings with FDI investors within 10 months, urging them to increase the localization rate and develop supply chains with the participation of Vietnamese businesses.

Previously, in 2022, the Prime Minister revised the plan to promote the transfer, mastery, and development of technology from abroad into Vietnam, issued three years earlier , adding the goal that by 2025, the number of FDI projects transferring technology to domestic enterprises would increase by 10% annually, and by 2030 by 15%.

This presents an opportunity for Vietnamese businesses like Huynh Duc. From being a supplier of mechanical equipment supporting (indirect) production for semiconductor corporations, the company hopes that within five years, it will begin supplying equipment directly to its customers' production lines, although it acknowledges this is an extremely challenging goal.

Pointing to the two molds being processed, Duy explained the difference, which is indistinguishable to the naked eye. To reduce an error of a few thousandths of a millimeter, a business may have to invest hundreds of thousands of USD. Meanwhile, in high-tech industries like chip manufacturing, the required accuracy is in the nanometer range - one millionth of a millimeter.

To achieve this goal, the company established a team of six engineers in charge of R&D, researching new technologies. However, manufacturing the product is only the first step. With the same components, the Vietnamese company can currently meet the quality standards, but the cost will certainly struggle to compete with foreign businesses that have decades of experience. To compete, Vietnamese businesses need long-term orders from FDI giants – something that requires significant government coordination.

"Investing doesn't guarantee success, but if you don't sow the seeds, you'll never reap the harvest," the young entrepreneur concluded.

* The graphics in this article were created using Adobe Firefly's Generative AI application.

Content:   Viet Duc - Le Tuyet. Graphics: Hoang Khanh

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