Optimizing manufacturing supply chain development in Vietnam

Mr Thang, who is the director of the Centre of Analysis and Forecast at the Vietnam Academy of Social Sciences, readily acknowledges that Samsung has generated substantial employment in the country.

This employment has come both in the form of direct employment in the smartphone manufacturing segment and indirectly in parts of the economy only tangently related to the production of phones.

He points out that the employment generated by Samsung has largely been confined to the northern provinces of Bac Ninh and Thai Nguyen, where the company has erected its manufacturing facilities, and is not as some might assume, widespread throughout the country.

Recently, there have been many conferences and workshops where speakers have expressed reservations about the concessions the government gave up in striking its partnership with Samsung in the form of preferential tax treatment on the earnings it generates, among other preferences.

Many so-called experts criticize the agreement struck saying that it unduly gives Samsung an advantage over local manufacturers, says Mr Thang, in a recently published article.

The agreement between the government and Samsung has also come under fire because there are many other experts who are dissatisfied with the localization rate of domestic manufacturers in the supply chain.

However, Mr Thang, cautions that the expectations of these experts are not realistic and the theory that there is somehow an automatic connection between foreign direct investment from Samsung (or any foreign multinational) and local development of the supply chain is erroneous.

Currently, local companies’ participation in the supply chain of Samsung has been limited to ancillary activities such as wrapping and packaging of products. The transition to becoming a supplier of materials or intermediate goods is a process that realistically could take decades.

Thang advises local governments to be mindful that the commonly referred to benefits of technology transfer is not an overnight process but one that will take many years to be fully realized.

However, there are things that can be done in negotiations with foreign multinationals that can help speed up the process and bring more immediate benefits to the local economy.

First, he says, the approval of foreign manufacturers locating in high tech parks throughout the country should be made provisional upon a guaranteed gradual increase in investment in worker training.

Consideration should also be given to mandating targeted increases in localization rates.

Second, he says that governments should be mindful of the need for local companies to actively strive to produce a higher quality product than they have customarily made in the past.

Companies such as Samsung are successful because of their dedication to provide the highest quality of service to their customers.

Neither local governments nor companies should expect Samsung to lower its standards just to accommodate a higher localization rate. If companies want to participate in the supply chain they should be held accountable to the highest of standards.

Third, he suggests that governments at all levels should effectively work with the domestic private sector to find ways to incentivize innovation and to create more favourable conditions for start-ups to emerge.

Clearly, Samsung (as well as other foreign multinationals) have intellectual property rights that local companies have no legal authority to access, steal and use to compete against the company in the same or virtually the same industry.

But there are spill over technologies, as Mr Thang describes, where knowledge obtained can be used in alternative economic segments that do not violate intellectual property rights and this type of use should be encouraged by the governments at all levels.

Some experts and other commentators put forth the argument that domestic companies in the smartphone segment have not benefited sufficiently from the agreement struck with Samsung.

However, Mr Thang, argues this proposition is blatantly false.

Those parties who criticize the agreement have unrealistic expectations and are not sufficiently cognizant of the fact that technology transfer does not take place at a couple of meeting over a week-long period.

The benefits brought about by technology transfer take a long time for the structural economic transformation to be realized— it is a gradual process that takes years if not decades to unfold.

To build momentum, says Mr Thang, much more can be done to facilitate the process such as revamping the education system to teach relevant managerial and technical skills and improving collaboration between universities and other post-secondary educational institutions.

Most importantly, Mr Thang concludes, the government, business community and academia must begin laying the foundation for an innovative and thriving start-up culture that extend its reach far beyond the assembly line.