Vietnam’s supporting industry and the story of the screw

On October 28, 2014

supply chain strategy 1

A few weeks ago, SamSung Vietnam made a controversial statement when they announce the list of over 100 supporting equipments that are essential for their Vietnamese assembly lines. Unfortunately, no local suppliers were able to meet Samsung’s requirements for this coveted contract. The public was in tumult by the disappointment that after 30 years of industrialisation, the country remains not technologically competent enough to produce proper screws?

Following this revelation, Vu Huy Hoang, the Minister of Trade, in his interview with the national television, said that Vietnam is fully capable of producing screws, however the production costs and efficiency do not meet SamSung’s requirements.

The public was again, baffled by the statement and hence, criticizing Minister Hoang on the Vietnamese supporting industry’s questionable incapability and how they have hardly advanced technologically despite all the sizable state investments into it.

During a business trip, I had the chance to meet with the executives of Vietnamese precision engineering companies. I teased “Is it true that Vietnam is unable to produce proper screws?” The CEO with an engineering background calmly replied with an amiable look on his face: ‘Producing screw is within our reach. The technology was created a long time ago; all that are needed to for screw production are machinery, materials and adequate training for workers. We can even produce the highest quality screws. However, who will buy those screws? MNCs have their own global supply chain strategy. For example, such countries as Singapore and Malaysia will produce and supply materials and technologically complex parts, whilst countries like Vietnam, Cambodia and Bangladesh are assigned with (low-skilled) labour intensive assembly work.  Research and development usually remain in developed countries and even countries like Malaysia, who are competent, will not receive those jobs’.

This supplying strategy is no stranger to organizations around the world. In the textile, leather, electronic industry or FMCG, the buyer will force Vietnamese suppliers to get materials from designated provisions. That demand must be satisfied in order to have the contract signed. This separation of supply chain can significantly reduce risks multinational organizations have to take while preventing them from becoming overly dependant on a group of certain nations. Thus, ensuring and empowering the buyers’ bargaining position. Moreover, protection of technology secrets is another reason.

The second factor that limits the development of supporting industry in countries like Vietnam is market. Why does the nation have to import fabric, buttons and zippers from China and India? Is that because we can not produce them ourselves? In reality, we are fully capable but the production costs would be staggering, approximately 6 times more than that of Chinese products. The reason why China can have such efficiency is because of the economy of scale. China supplies almost 90% of the amount of buttons and zippers to the world. Meanwhile, if Vietnam is to construct a similar factory, not only will it face problems regarding the colossal amount of capital needed (tens of million of dollars for one factory) but also the shortage of a sizable market that would consume its goods. If that factory only serves the purpose of supplying to the local market, it would be wasteful due to the meager Vietnamese market.

So then how did nations like Korea, Singapore and later Malaysia and China manage to rise from the global supply chain? That is due the considerable development of their workforce, the ability to do business in the global market by their entrepreneurs and supportive policies from the respective governments. The development of a supplying market will subsequently be accompanied by the proportional increase in workers’ wages. That is when the buyers will alter their supply chains again in order to maximize the new strengths of these markets and at the same time, shift the simple workloads like assembling to nations with lower labour costs.

Why does the supporting industry of Vietnam still leveling off throughout the past 30 years? That is because we are satisfied with the simple assembling tasks and hence, neglecting labour force upskilling, creating necessary encouraging policies for business (especially private owned business) and help them to surface in the global supply chain. Indeed, we were deluded by the rise in FDI volume in reports while not realizing that from those billions and billions of dollars, how much of a share would we receive and consequently, missing the precious chances and time to thrive and development, as well as wasting the nation’s labour force. In short, the problems lie within the way we develop the workforce as well as shortage of favourable conditions for the private sector to grow.  


Comments are closed.