Vietnam is expected to be more attractive to foreign investors thanks to the increase of localization rate for parts production in the country, especially in the manufacturing industry.

Vietnam surpassed Malaysia in localization rate for the first time last year

The country’s low localization rate for parts production is often a big concern for foreign investors as their production cost would increase because of the import of spare parts. However, the rate has been increasing significantly in recent years in the wake of the government’s bold measures to develop supporting industries.

According to a recent survey of the Japan External Trade Organization (JETRO), Vietnam’s localization rate has risen gradually since 2010, and in 2018 it rose to 36.3 percent from 33.2 per cent in the previous year.

Notably, the rate was the highest rise among the surveyed countries, which helped Vietnam for the first time surpass Malaysia (36.1 percent).

Data from the government also showed Vietnam’s supporting industries have been improved, helping to raise domestic content to 40-45 percent in the garment and footwear sector, 10-15 percent in the manufacturing of under-nine-seater cars, 15 percent in ICT products and 5 percent in high-tech electronics.

The improvement is expected to add attraction to Vietnam, where manufacturing is the most impressive sector, making up over 80 percent of the country’s total pledged capital amid stiffening competition in foreign investment attraction.

According to JETRO Hanoi, manufacturing retained the most attention of Japanese investors in Vietnam last year, accounting for 35 percent of total number of projects, and rising by 10 percent on-year. In terms of registered capital, this sector made up 77 percent of total Japanese-registered capital during the year.

Hironobu Kitagawa, JETRO Hanoi’s chief representative, said Japanese groups still have high interest in the Vietnamese manufacturing sector. Thus Vietnam should have policies to attract investment in manufacturing in its target areas.

Further improvements

Despite the rise, experts said the government still has to promote supporting industries as only 300 domestic enterprises are able to take part in the supply chains of multinational companies, compared with 1,800 enterprises producing parts and components and 75,000 in the manufacturing sector in Vietnam.

Minister of Industry and Trade Tran Tuan Anh said that it is now time for Vietnam to consider a special policy to boost supporting industries.

Since the majority of Vietnam’s industrial enterprises are medium and small, they need the government’s consistent and long-term support, in addition to their own efforts. The government has to stand by and accompany them in order help them enhance their capacity, Tuan Anh said.

Nguyen Van Hoa, director of engineering firm HTMP Vietnam, said capital and access to land will be the most substantive support to enterprises. Foreign-investors can secure cheap loans but Vietnamese enterprises have to borrow at interest rates several times higher, making it hard for them to rise and seize a part in the global value chain. The government should take action so that enterprises could access preferential long-term loans, at 6-7 percent, for example, so that they are motivated to enhance their production level and competitiveness.

Market development policies such as promoting the development of downstream and materials industries are also needed.

In addition to financial assistance, technological and human resources development, it is necessary to promote the linkages between Vietnamese businesses and foreign manufacturing companies.

However, experts said, for domestic spare parts suppliers themselves, they cannot rely solely on government support but must be proactive in technological innovations, enhancing their administration and production capacity in order to gradually gain a foothold in an increasingly competitive market.

Hanoitimes