Local suppliers fuelled to meet higher standards

How do you evaluate the disadvantage that domestic manufacturers have in developing supporting industries?

Ngo Huu Tiep, group chairman of Haast Industry Vietnam

In Vietnam, the number of supporting companies having a competitive capacity and large scale remains limited. Investing in the supporting industry is less attractive compared to investment in other sectors, such as the property sector, because of low profitability but required large investment capital.

For example, at Haast Industry, we invested VND1 trillion ($43.47 million) in the 3-hectare factory and in order to take this factory into operation smoothly, we have to be concerned about many things. Meanwhile, if we invest this capital in the real estate sector, the profitability is high.

Domestic enterprises have to ensure the input material, the products’ standard, and logistics cost, among other things in order to optimise the finished products’ selling prices.

In addition, local manufacturers often lack experience in design and operation, pushing the manufacturing procedures to higher than imported products or foreign vendors’ products.

Domestic suppliers have to compete with foreign-invested vendors, which enjoy massive incentives, including imported taxes on materials. In general, being satellite enterprises for large-scale groups, the foreign-invested vendors have an available output for their products. Besides that, they are proactive in materials and receive massive support from parent companies.

Foreign-invested suppliers enjoy the lending rate at an average of 2 per cent a year, while local manufacturers have to suffer a rate of over 10 per cent a year. Thus, they face woes in arranging capital for the mid and long-term.

In general, in Vietnam, domestic suppliers determine that it takes at least one year to operate with either lost or zero profit to establish a stable consumption market and look for output for their products. Moreover, they have to save procedures as much as possible to make a profit.

What is the role of Samsung’s smart factory programme in supporting local suppliers to increase their competitive capacity and participate in the supply chain?

The project aims to train 100 Vietnamese experts and provide consultation to help 50 businesses set up smart factories in 2022 and 2023.

In 2022, the project will support 14 enterprises, including seven in Bac Ninh province, two in Vinh Phuc province, three in Hanoi, and one in Hung Yen and Ha Nam provinces. Haast Industry is one of the candidates joining the first training course. Participating in the programme, the consultants will be trained by experts from Samsung Korea in the field of smart factories for 12 weeks to improve their knowledge and skills to set up smart factories.

Samsung’s experts spent one week auditing our factory’s capacity to have the most precise evaluation. They divided the capacity into levels, and supported and consulted with us about the management of input materials, establishment of machinery, management of productivity, packaging standards, and delivery. During the training course, we were made aware that our company’s operation still has a lot of weaknesses.

Before joining the training course, the company’s capacity was at the C2 level, but after two months, all indicators were improved and climbed to the B2 level. Our engineers will also be trained in South Korea. We hope to reach the A level and become a second-tier vendor of Samsung once the course finishes.

What are the opportunities for local suppliers once their capacity is standardised?

For the long term, Haast Industry targets to be the first-tier vendor of Samsung, which is a favourable condition for the company to extend their customer files. In general, if the local suppliers can improve the competition capacity, the opportunity to join the global supply chain is opened.

I know that the foreign-invested groups really have a demand for increasing the localisation ratio. They encourage Vietnam to foster the development of the supporting industry and open more factories.

The barrier remains available, but once local manufacturers overcome challenges, the opportunity is widened. You can look back at China’s supporting industries 20 years ago. At the time, their supporting industry’s starting point was similar to Vietnam’s current situation. However, to date, China has global-scale supporting vendors such as Foxconn and Pegatron. I believe that local manufacturers will establish the room for themselves if they dare to be pioneers and pave the path.

In order to foster the development of domestic supporting industries, it would need support from the government, such as incentives relating to policy and capital.