FDI enterprises expand their supply chains in Vietnam

The risk of a new outbreak of Covid-19 in Europe and the US has been raising concerns that supply chains of raw materials for production will break again. Therefore, foreign direct investment (FDI) enterprises that manufacture end products in Vietnam have been accelerating their capacity to expand domestic supply chains.
Electronic component production at MTEX Company (Japan) in HCMC. (Photo: SGGP)
Electronic component production at MTEX Company (Japan) in HCMC. (Photo: SGGP)

From having only four suppliers of one supporting industry product in 2014, Samsung Electronics Vietnam Co., Ltd., now has had 42 suppliers. Besides, there are also 679 other suppliers of different tiers. Mr. Jang Yoon Ho - Director of Partner Support - Samsung Electronics Vietnam, said that increasing suppliers is a part of the group's strategy to expand its production scale in Vietnam. Especially, in the context that the global supply chains are interrupted by the pandemic, this network expansion has been accelerated faster.

Currently, Samsung has invested and put into operation six factories producing mobile phones, electrical and electronic products, televisions, and home appliances. Only for mobile phones, on average, Samsung Vietnam makes three million units per year, accounting for 25 percent of the market share of Vietnam's electrical and electronic product exports and 50 percent of Samsung Group's global mobile phone exports. The company plans to put into operation a product research and development center in Hanoi by the end of this year. This is also considered a strategic investment to pave the way for the expansion of the group's production scale in the coming time.

According to a report from the Japan External Trade Organization, the demand for using supporting industry products in Vietnam of FDI enterprises will increase in the coming time. Because many European countries will possibly have to re-establish a large-scale blockade to prevent the risk of a Covid-19 recurrence by the end of this year. This will cause global supply chains to break again in Europe. In the US, the situation of the pandemic still develops quite complicatedly, significantly affecting the supply chains here. As for Japanese enterprises, they are expected to invest heavily in Vietnam next year, as soon as applications for support of investment shift are approved by the Japanese Government. And accordingly, the local supply chains are also the target that many Japanese investors will increasingly seek.

A recent survey by the Vietnam Association for Supporting Industries shows that Vietnamese enterprises producing supporting industry products are small and medium-sized ones. However, the quality of products is not a major barrier but a competitive price. Enterprises are not determined enough to improve and maintain results after improving production capacity.

FDI enterprises expand their supply chains in Vietnam ảnh 1 A corner of Samsung's factory in Saigon Hi-Tech Park. (Photo: SGGP)
On the other hand, the loan interest rates for enterprises investing in this field are still quite high, at about 5-7 percent per annum, while Korean and Japanese enterprises can access loans with low-interest rates of 1-2 percent per annum. This reduces the internal competitiveness of domestic enterprises against foreign supporting industry products suppliers. In Ho Chi Minh City alone, traffic congestion increases transportation costs and time, negatively affecting the on-time delivery requirements of enterprises. In addition, many export processing zones and industrial parks in the vicinity of high-tech parks no longer have a land fund or have not reserved suitable land funds to support domestic enterprises to invest in developing production. Facing the above reality, Ms. Le Bich Loan, Deputy Head of the Management Board of the Saigon Hi-tech Park, said that the Southern key economic region attracted $173 billion out of $345 billion of total foreign investment capital in Vietnam. To reduce pressure on the shortage of the supply source of supporting industry products for FDI enterprises, the management board has signed a regional association agreement on developing the supply network of supporting industry products with Long An, Binh Duong, Dong Nai, and Ba Ria - Vung Tau provinces. Accordingly, provinces will provide information and products produced by domestic enterprises. The management board and the Department of Industry and Trade of HCMC will provide a list of components, equipment, and supply conditions that FDI enterprises need. This connection will shorten the distance between the involved parties, creating a supply network of supporting industry products. At the same time, it will create opportunities for domestic enterprises to accelerate the process of upgrading and improvement of production capacity. The Ho Chi Minh City Export Processing Zone and Industrial Park Authority is considering a requirement given by FDI enterprises that enterprises need to ensure the delivery time. In fact, with the current traffic infrastructure, traffic congestion is unavoidable. Therefore, the city has deployed to expand land banks in industrial zones near the Saigon Hi-tech Park, including Binh Chieu, Linh Trung industrial parks, and Tan Thuan Export Processing Zone. In these areas, more high-rise factories are being built to meet the requirements of increasing the land fund and matching the investment needs of supporting industry enterprises. It is expected that by the end of this year, Tan Thuan EPZ will put into operation a three-story factory with a total floor area of more than 18,000 square meters and a two-story factory with a total floor area of 5,094 square meters in Binh Chieu Industrial Park. Besides, after 2020, Binh Chieu Industrial Park will continue to build an eight-story factory with a total floor area of nearly 177,000 square meters.

According to many economic experts, this is the golden time for domestic enterprises to enter the global supply chains of FDI enterprises. This golden time can only last until mid-2021 when the pandemic is expected to be controlled. At present, due to the shortage of supply, many technical barriers to production scale will be loosened by FDI enterprises. Domestic enterprises need to take advantage of this opportunity to participate in the supply chains on the one hand, and on the other hand, build a roadmap to improve their production capacity. It is impossible to enter the global supply chains with high tiers but to start from a low level as tier 3 or 4 suppliers. In the long run, as capabilities gradually improve, the position of suppliers will also increase. More importantly, enterprises need to consider investing in the production of core products, the specific characteristics of end products. Thus, the added-value will be high, and the position of domestic enterprises in the global supply chains will be sustainable.