15April2006 VDF-Tokyo Workshop

Today’s Menu

I. What is supporting industries?

Development of Supporting Industries II. Why is the development of supporting
for Vietnam’s Industrialization industries necessary for FDI-driven
economic growth?
III. What impede the development of
supporting industries in Vietnam?
Junichi Mori IV. How can Vietnam overcome those
National Graduate Institute for Policy Studies (GRIPS) obstacles?
Vietnam Development Forum (VDF)
Date: April 15 2006 14:00 – 17:00
Venue: GRIPS Lecture Room G (5th floor)
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I . What is Supporting Industry? I . What is Supporting Industry? (Cont.)

1. In economic theory, supporting industries are defined

as a group of industries to supply “manufactured”
inputs, which are mostly intermediate goods.
2. In framework of business, supporting industries
manufacture production parts as well as tooling to “Supporting industries produce
produce those production parts.
something which looks easy, but
needs high-quality engineering
skills.”
Final Assembly

Sub-Assembly

Production Parts
Supporting
Tooling Industries

Machinery

Material & Raw Material 3 4

I . What is Supporting Industry? (Cont.) Why are Supporting Industries Important?

Home PC ‹ Supporting industries are the primary sources

3. Who are supporting
Motorbike
Appliance
AV
Peripheral
Automobile
of industrial competitiveness.
industries? ¾ Japan’s manufacturing sector is still competitive,
¾ Local supplier because of high-level supporting industries.
¾ FDI Supplier ¾ Korea have large market share in LCD Panel, but
most of core parts are imported from Japan.
4. Characteristics
¾ Capital-intensive Market Share of LCD Panel (2005)
industry Common Supporting Industries Procurement Ratio

¾ Cover broad rage of

Samsung
Electronics,

industries Others,
19%
Local,

¾ e.g. Plastic parts, metal 36% 40%

parts LG Philips, Import

Parts 15% , 60%

Rubber Plastic Metal Screw/nut Spring Electric

Process CMO Sharp, 12%

(Taiwan), AUO
Pressing Casting Forging Molding Machining Plating Heat Treatment 7% (Taiwan),
5 11% 6

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Supporting Industries Enhance Cost Competitiveness TOYOTA’s Value Innovation (VI) Project

• Growth of supporting industries will allow 1. Targeting 15% cost reduction of parts and
assemblers to reduce production costs. material
¾ Parts costs account for 70% of product cost, while ¾ Parts costs account for 60% of the whole product cost. So, this
labor costs account for only 10%. project aim to reduce 9% of the product cost.
¾ It is almost impossible to achieve 9% cost reduction through
cutting labor cost.

Logistics Cost
Around 2%
2. The CCC21 project as “modular” cost reduction
Manufacturing Around 18%
¾ It reduced 30% of parts costs in one car.
Value Chain
Cost ¾ However, “by-parts” cost reduction reached the limit.
3. VI project as “integral” cost reduction
Labor Cost
Around 10%

¾ Move the revaluation of product cost from designing stage to

planning stage.
Raw Material
Supply Chain
and Parts Cost
Around 70%
¾ “System-by-system” cost reduction
¾ Cost reduction is examined in a group of engine parts.
¾ Find optimal combination of parts, cutting unnecessary parts.
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II. What is the Role of Supporting Industries II. What is the Role of Supporting Industries in FDI-Driven
Economic Growth? (Cont.)
in FDI-Driven Economic Growth?
1. Many developing countries have tried to attract
FDI, for the economic growth.
2. Source of productivity growth by FDI
¾ 103 countries offered tax concessions to foreign companies ¾ Productivity growth within FDI firms
that set up production or administrative facilities. ¾ MNCs tend to have higher productivity than
¾ In particular, ASEAN countries succeeded to attract massive local firms.
volume of FDI since the middle of 1980s.
¾ Externalities (or Spillover effects) on local
8,000
firms
6,000
¾ Assemblers and suppliers
4,000
US$ million

☆ What is the net effect on the

2,000

productivity growth?
1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

-2,000

-4,000

-6,000

Vietnam Malaysia Thailand Indonesia Philippines 9 10

FDI’s Impacts on the Productivity Growth II. What is the Role of Supporting Industries in FDI-Driven
Economic Growth? (Cont.)

3. Net externality effects of FDI are ambiguous!

Local Negative FDI a. FDI’s positive vertical externalities
Assemblers Competition Assemblers ¾ Domestic supporting industries would increase
Positive output and productivity through the business
Spillover with MNC assemblers (backward linkage).
Positive
Technology Refer to an empirical study by Alfaro and
Loose Transfer Attract FDI Rodriquez-Clare (2003) on firms in Latin America.
Relation b. FDI’s negative horizontal externalities
Supporting Industries ¾ Domestic assemblers may decrease output and
productivity, after MNC assemblers enter the
Competition market (in short-run).
FDI
Local Suppliers Technology Transfer Suppliers c. Net externality effects of FDI are ambiguous
¾ Depend on the size of the above two
Positive
externalities.
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II. What is the Role of Supporting Industries in FDI-Driven 5 Steps for Developing Supporting Industries
Economic Growth? (Cont.)
Japan

4. Development of supporting industries

Korea, Taiwan
5
will make the net effects positive. Malaysia, Thailand R&D,
a. Positive externalities consists of productivity growth Design-in
in domestic supporting industries. 4

b. If domestic supporting industries are sufficiently Specialize in

competitive to expand business with MNCs and Vietnam 3 high-value
absorb their technology, the net impact of FDI will components
Agglomerate
become positive. FDI
c. On the other hand, if MNC assemblers import 100% 2 suppliers
of production parts, the vertical externalities may Produce Develop Intra-Industry
highly- local
be zero or negative. demanded
Trade
1 suppliers
(Note: However, it should be also ineffective to components - ICs in S’pore
Complete
force MNC to source 100% of parts locally. ) Knock
Bulky and heavy - CRTs in
Malaysia
parts (e.g. plastic
Down parts , metal Agglomerate - Compressors in
parts) FDI assemblers Thailand
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Key Factors to Achieve Agglomeration and III. Obstacles to Development of Supporting

Competitiveness in Parts Industries Industries in Vietnam
Stable policy
Industrial human environment Tariff & tax
resources policies
Three Elements of
Competitiveness
1. Limited demand size
FDI inflow, Cost ¾ Focus on consumer-electronics sector
cost reduction
FDI
Suppliers
2. Shortage of high-level industrial human
Demand
size Delivery
resources
Local
Domestic demand
(to assemblers)
Suppliers
3. High import duty on parts and raw material
Parts export Quality 4. Information and perception gaps
5. Unstable policy environment
Overcoming
information &
perception gaps
© Prof. K. Ohno
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Limited Demand for Production Parts Limited Demand for Production Parts (Cont.)

1. The domestic market for consumer electronics 2. However, the total output is much smaller
goods is growing in Vietnam than other ASEAN countries
¾ The output value grew at the rate of 18% from 2002 to 2003.
¾ Vietnam has the third largest domestic market of home Output Values of Consumer-Electronics Industries in ASEAN Countries (2003)
appliance products, next to Indonesia and Thailand.
Domestic Sales of Main Consumer-Electronics Goods (2003) Malaysia 23.0
2,500 2,370
Thailand 14.0
Number of Set (Thousand)

2,000
1,550 Indonesia 5.9
1,500
1,000 1,100 1,140
1,000 Philippines 5.4
520 494
368
500 244 Vietnam 2.4
0
TV Washing Machines Refrigerator 0.0 5.0 10.0 15.0 20.0 25.0
Commodity
US$ Billion
Vietnam Thailand Indonesia
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Limited Demand for Production Parts (Cont.) Limited Demand for Production Parts (Cont.)

3. This is mainly due to Vietnam’s small size export.

¾ 83% of total output in the consumer-electronics
4. The smaller the demand size is, the fewer
sector was sold in the domestic market. parts supplier can enter the market.
TV P roduc t ion (2004) Refr iger ator Pr oduc tion ( 2000)

12,000
– Especially for FDI Unit
9,900 2,500
2,200 suppliers cost
10,000
2,000 – Generally, supporting
8,000
industries are more
Thousand Set

6,500 Capital-intensive
Thousand Set

5,600 1,500
6,000
880
capital-intensive than
4,000
2,200
1,000
final assembly
2,000
500 185 110 – Large investment in Labor-intensive

0 0 equipment (indivisibility)
Thailand Indonesia Vietnam Malaysia
Malaysia Thailand Indonesia Vietnam
– Unit cost declines
inversely with production Production
Domestic Market Domestic Market volume volume
– less than 1 million? – about 1 million? © Prof. K. Ohno
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Limited Demand for Production Parts (Cont.) IV. The Ways to Overcome Limited Demand
5. FDI assemblers want to increase local 1. Assembler-side solution
procurement, but they cannot achieve that.
¾ Demands for local procurement are there. For example, 72.9% ¾ Promote the healthy growth of domestic
of Japanese manufacturers intend to increase local procurement. market
Japanese Manufacturers’ local procurement ratios in ASEAN Countries
(The average of all industries)
¾ Attract more export-oriented FDI assemblers
– “indirect” parts export
2. Supplier-side solution
Thailand 47.9

Malaysia 45.0

Indonesia 38.3
¾ Increase “direct” parts export
Philippines 28.3
¾ Supply parts across more than one sector
Vietnam 22.6 ¾ Expand the covering processes
0.0 10.0 20.0 30.0 40.0 50.0 60.0
%
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Supplying Parts More than One Sector Supplying Parts More than One Sector (Cont.)

1. “Horizontal” business expansion 2. One plastic injection molding machine can be

¾ This means increasing the variety of commodities used for producing both electronics parts and
across sectors. motorbike parts.
¾ For example, plastic parts are used for both ¾ Showpla (Motorbike, TV, Daily Commodity)
motorbike and TV. ¾ Daiwa Thang Long (Motorbike, Printer)
¾ Cat Thai (Washing Machine, Daily Commodity)
Range of Plastic Injection Machines by Product
Motorbike TV Product Parts 0-500t 501-1,000t 1,001-1,500t

Motorbike Exterior Parts 80-850t

TV Cabinet 850 -1,300t

Plastic Parts Plastic Parts
(Body (Cabinet) Washing Cover, Water 550-1,300t
component) Machines Tank

Refrigerator Interior Parts 150-550t

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Expanding the Covering Processes High-quality Industrial Human Resources are Needed!!
2. “Vertical Business Expansion” 1. Technology should be upgraded
¾ This means enlarging specialized processes. Parts suppliers will ¾ Electronics parts require better appearance and higher accuracy
increase value-added activities. than motorbike parts.
¾ One way is to add production or designing of molding tools to
the parts manufacturing operation (Downward expansion). Hi-Fi,
Printer

Business Volume
¾ Another way is to step into sub-assembly process, which is a Home
labor-intensive process (Upward expansion). Appliance, Chassis
¾ E.g. Assembling speaker to TV cabinet, painting, and printing. TV Mechanical Parts
Motorbike (gear, etc.)
Simple Life Cabinet
Products Mechanical
Body parts Parts
Final Assembly
•Muto Vietnam (Plastic Fork, plate, cup,
parts and molding tool plastic case,
+ Sub-assembly)
Sub-Assembly Function, Endurance for Friction,
Less Accuracy, High-quality material
More
Production Parts
Supporting •Showpla Vietnam
Tooling Industries (Plastic parts + Sub-
assembly)
2. “Meisters”, high-level engineers, are needed
“Highly-skilled workers are required, rather than new machines.
If we have high quality engineers, even second-hand machines
Machinery

Material & Raw Material are acceptable”

25 – a local plastic parts supplier. 26

Who are “Meisters”? Case of Molding Tool Manufacturing

1. Meisters purse “100%” (perfection) Design Process Production Process

“Product quality should be always guaranteed 100%. Electric
99% is not enough. This one percent explains the 3-D Computer- Layout discharge
difference between FDI suppliers and local suppliers” aided Designing design machine
(3-DCAD)
– a Japanese expert.
2. “Modular-type” Meisters Wire-cutting
¾ Specialized in a certain skill machine
¾ Very skilled machine operator who can repair, adjust,
2-D CAD
improve, and teach Assemble
CNC Lathe
&
3. “Integral-type” Meisters Polishing
machine

¾ Specialized in a certain process

¾ Coordinator who can manage & improve the whole
process, not just one skill.
Integral Modular
27 Meister Meister 28

Canon’s “Meister”System in Japan Promote Collaborative Training Program

1. Both MNCs and domestic firms participate
“A” Rank ¾ In contrast, conventional vocational training programs in
Meister License developing countries tend to focus on educating domestic firms
issued by the National only.
Applicants “B” Rank or Local Government
2. Promote technology transfer
“C” Rank ¾ MNCs’ employees are participants or instructors.
¾ Provide opportunities to access various resources for domestic
firms, which are not capable of obtaining business contracts with
MNCs.
Awards
Internal
3. Reduce information and perception gaps
(JPY500,000)
Meister ¾ MNC assemblers and domestic suppliers will meet each other.
Assignment to
Educate License ¾ Domestic assemblers will have chance to understand MNCs’ cost,
Successors quality and delivery requirement in classes or through
information exchange.
There are 4. Concerns
• Meister Systems at central or local government levels ¾ MNCs’ employees will also benefits from the training.
• Meister Systems within individual companies
¾ It may be difficult to use ODA for this kind of project.
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Case of Collaborative Training Program Positive Signs for Collaborative Training in Vietnam

„ Penang Skill Development Center (PSDC) in 1. Rising demand for labor

Malaysia ¾ Many MNCs are expanding the investment in Vietnam.
¾ PSDC was established and managed under MNCs’ active ¾ Job hopping is becoming a serious problem in some places.
leadership as a vocational training program. ¾ Middle-class managers or engineers tend to be “pinched off.”
¾ The Global Suppliers Program promotes information exchange ¾ Some MNCs expressed their interest in cooperating with
between MNCs and domestic suppliers. vocational training schools.
2. Increasing demand for local procurement
— Conditions of PSDC’s Closed- Integral Open-Modular
¾ MNCs hope to increase the business with domestic supplier for
success High
Preference to
further cost reduction.
¾ Great agglomeration of Collaborative ¾ One motorbike assembler said, “if the government can provide
semiconductor industry, which
Training the basic training such as 5S, we can support them to be our
raised the demand for skilled
(Intel, AMD, Motorola,
parts suppliers.”
Agglomeration

Fairchild)

labor. (Sony) 3. Potential demand for subcontracting

¾ Semiconductor is an open- ¾ Some foreign molding tool manufacturers want their factories
modular type product Preference to
(Seagate)
in Vietnam to be a manufacturing base as well as design center.
¾ which means that the
Independent Training
¾ Some of them are also interested in increasing sub-contracting
a part of process, in order to reduce their fixed costs.
Low

interfaces of production
processes are standardized.
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Thanks for listening

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