23 Dec 2016
Vietnam's Electronic Exports Soar Despite Supply Chain Shortfall
On-going lack of domestic component manufacturing provides significant opportunity for Hong Kong companies.
Vietnam's status as one of the fastest-growing economies in Asia has largely been driven by the expansion of its manufacturing industries and, more specifically, by its burgeoning electronics sector. According to 2015 figures from the General Statistics Office of Vietnam (GSOV), 30% of Vietnam's total exports – some US$162 billion – were electronics items. In 2010, they accounted for just 5%.
Overall, electronics exports have expanded by 78% per annum over recent years – $6.9 billion in 2011, $29.5 billion in 2012, $32.1 billion in 2013 and $35 billion in 2014. By the end of next year, the Vietnamese government is forecasting that the country's electronics exports will be worth $40 billion. In spite of this – and even factoring in the country's other export sectors – the country has only comparatively recently moved out of a trade deficit situation, recording surpluses in 2012, 2013 and 2014.
One problem for Vietnam is its high import levels, a consequence of the country's vast shortfall in terms of ancillary industries. There are currently fewer than 700 enterprises producing spare parts in Vietnam, compared to about 58,000 businesses operating in the manufacturing industry.
This has forced a number of major electronics manufacturers, including Samsung, Foxconn, Intel and Panasonic, to rely on imports for the vast majority of the electronics components they require. As a direct consequence of this, those electronics manufacturers operating in the country tend to focus solely on product assembly, allowing them to taking advantage of the comparatively low labour costs.
According to a 2015 report by the Vietnam Trade Promotion Agency, Samsung has 90 component suppliers servicing its Vietnamese operation, but only 10% of these are actually in Vietnam – those that are largely providing the more basic services, such as packaging and printing. With Vietnamese suppliers still largely contributing at the low end of the value chain, this has led to a number of international players entering the market offering higher value-added processes, including product design and software development.
According to a 2014 report by Vietnam Investment Review, most local suppliers conceded that they could not currently meet Samsung's requirements. One local businessman interviewed for the report was Tran Anh Vuong, a Director of Bac Viet, a steel products manufacturer and one of the few local firms supplying Samsung.
He said: "Samsung's requirements are a major challenge for local companies. They have many stipulations, including protecting the environment and conducting specified R&D activities, as well as delivery and working conditions that most Vietnamese companies simply can't comply with."
Overall, a number of factors are seen as holding back the development of the local supply chain. Speaking at the National Assembly recently, Vu Huy Hoang, Vietnam's Minister of Industry and Trade, cited a lack of policies supporting the ancillary industries as part of the problem. Ling Sing Kok, Assistant Director of Panasonic's Sales and Service Division, however, has a different take on the issue, saying: "Suppliers require access to high levels of technology, as well as substantial investment, neither of which are available in the Vietnamese market at present."
This continuing shortfall, while problematic for domestic companies, has been seen as good news for Hong Kong electronic-components manufacturers, as well as those in other ASEAN nations. With trade agreements in the offing through the Trans-Pacific Partnership and ASEAN Economic Community – of which Vietnam is a member – subsidies, lower tariffs and the creation of policies designed to stimulate foreign investors are all likely to be forthcoming. According to BDG Vietnam, a Ho Chi Minh City-based business consultancy, Vietnam has already lowered its electronics tariffs from 15-20% to 0-5% following the establishment of the ASEAN Free Trade Area.
Not all product ranges present the same opportunities, of course. Highlighting the country's current requirements Ling said: "Vietnam has a primary focus on the production of mobile phones and certain local electronic and audio-visual products.
"There is still a considerable number of more sophisticated electronic products, such as tablets, notebooks and industrial LCD panels, that are not yet produced here. We also see a potential 10% growth in surface-mount technology machines."
In anticipation of this potential growth, a significant number of overseas electronic-component producers have invested millions of dollars in establishing Vietnamese plants. At the same time, the government has also been trying to remedy the situation through a number of initiatives designed to encourage the growth of the local supply sector.
All of this, however, will take a number of years to come to fruition. In the meantime, it is likely that the Hong Kong electronics sector – eager to find new markets following falling demand on the mainland – may well find substantial opportunities in Vietnam in both the short and medium term.
Geoff de Freitas, Special Correspondent, Ho Chi Minh City