The growth of the manufacturing and processing sector

Although, in general, Vietnam’s industry experienced unstable growth between 2011 and 2016, its manufacturing and processing industry benefited from much higher growth rates, which showed a tendency of steady increase from 2012 to date (Table 1).

Table 1: The Growth of the Manufacturing and Processing Sector over the 2011-2016 Period [3]

Target/year 2011 2012 2013 2014 2015 2016

Growth rate of Vietnam’s industry (%) 6.8 5.8 5.9 7.6 9.7 7.57 Growth rate of the manufacturing and

processing industry (%) 9.5 4.5 7.6 8.7 10.5 11.9

Contributions of the manufacturing and processing industry to growth of

Vietnam’s industry (%)

6.7 3.2 5.3 6.2 7.5 7.9

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Last year, the manufacturing and processing sector enjoyed the highest growth rate over the 2011-2016 period.

However, such growth is mainly involved with outsourced production and assembly activities. At the moment, the industry is positioned at the lowest value-added stage of the value chain of the global economy.

Contributions of the sector to the overall growth of Vietnam’s industry were

increased from 6.7% to 7.9% in 2016.

However, the growth solely stemmed from outsourced production and assembly activities. In contrast, the growth of the production and processing of goods using domestic raw materials remained fairly low.

A typical characteristic of this situation is that the growth rate of gross output (GO) was much higher than the GDP growth rate of the economy (Figure 1).

Figure 1: The Growth Rates of GO and GDP over the 2011-2016 Period [3]

Figure 1 reveals that, although GO showed a tendency to decrease at a steady pace (from 11.75% to 9.45% during the 2010-2016 period), the GO growth rate was still approx. 3 percentage points higher than the GDP growth rate in 2016, which confirms that (i) the sector failed to achieve high efficiency in growth due to low value-added manufacturing; and (ii) growth in Vietnam’s manufacturing and processing sector has not been accompanied by an

intense and effective structural shift towards high value-added sectors.

A remarkable trend of development in the processing and manufacturing sector is that the growth of some products processed from domestic raw materials was rather low, while the fast growth rates were mostly recorded for processed products under outsourced production and assembly activities. Compared with the overall growth rate of the processing and

manufacturing sector (11.9%), industries using domestic raw materials saw very disappointing growth rates. Many products struggled to reach a 1-3% growth rate. This implies that Vietnam has yet to truly develop a well-functioning processing and manufacturing industry as per its meaning.

The processing and manufacturing sector of Vietnam had not been able to fulfil its pioneering role in generating high added values for the country’s industrial production. At the same time, industries engaged in outsourced production and assembly enjoyed much higher growth rates than the average level, e.g. electronics and computers/mobile phones, with a growth rate of 12.8%, automobiles with a growth rate of 16.4% and metal products with a growth rate of 17.9%.

Secondly, the growth of the processing and manufacturing sector is still dominated by outsourced FDI enterprises through the practice of temporary import for re-export.

According to the GSO, in 2016, the growth rate of the exports of processed and manufactured products was 8.6%, of which domestic enterprises only reached 4.8%

while the FDI ones with 100% foreign capital attained 11.8%. Those of textiles was 23%, of telephones and electronics was 14.4%, of computers and spare parts was 18.4%, of automobiles and machinery was 28.4%. Similar to the case of exports, the outstanding growth in imports belonged to FDI enterprises. Imported goods, which are mainly spare parts, components and accessories to serve the operation of outsourced manufacturing, in the sense of being sub-contracted, and assembly, for export purposes, saw a growth rate of 20.1%. The growth rate of

imports was only 4.6%. This means that Vietnam’s industry still mirrors the image of “a hub of foreign outsourcing and assembly providers” located in the country. Thus, the added value for Vietnam’s economy is actually very small, inefficient and unsustainable.

The situation has been triggered by three main causes: (i) the weakness of production capacity of domestic enterprises, especially those in the private sector; (ii) the lack of linkages and technology transfer between domestic and FDI enterprises; and (iii) the lack of strategic objectives for the overall development of Vietnam’s industry in general and the manufacturing and processing sector in particular.

The weakness of the production capacity of domestic enterprises is the most worrying factor. The reason for the weakness is that most mechanical enterprises used old and outdated machinery and equipment, with over 50%

of the machines having been in use for 30-50 years and fully depreciated; some equipment originated from the former Soviet Union and Eastern Europe; and two-thirds of the equipment imported from China [1]. It can be said that, over a long period of time, investments in the mechanical engineering industry of our country had always been fragmented.

Enterprises often chose to invest in additional equipment for important stages that determine the product quality, and simply repaired refurbished and upgraded old machines for continued use. Such a trend of asynchronous investments stemmed from the fact that they had been distressed by signs of market failure and

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the difficulties in raising capital, not to mention the lack of assistance from the government, including a long-term vision and sound policies to encourage the adoption of modern technology over the past years.

The lack of linkages between domestic and FDI enterprises was clearly shown in the processing and manufacturing sector.

While the growth of the sector was robust thanks to the strength of FDI enterprises, the connection between them and domestic firms was found relatively weak.

Domestic enterprises mainly focused on serving the domestic market, while over 90% of the output of FDI enterprises was for exports. The connection between these two market segments was very modest.

Thus, the FDI sector remained a separate entity, rather than acting as a catalyst for growth, possibly with spillover effects to positively affect domestic firms, raising demands for inputs and creating further opportunities to access new technologies and modern management practices, and actively generating the effects of demonstration and the benefits provided by clustering.

In addition, while pursuing the goal of building an industrialised country towards modernity, Vietnam still lacked a set of clearly-defined and straightforward criteria to guide the overall economy.

Furthermore, it still considered the development of the processing and manufacturing sector and that of the industry to be one. The country has not linked the policy on industrial development in general and that on the development of the processing industry in

particular with each other in a comprehensive strategy. Hence, the processing and manufacturing industry still relied on labour-intensive practices which only create low added value. There was also a lack of policies of investment and in priorities for the development of supporting industries that provide materials, such as cotton, synthetic fabrics, dyes, chemicals, plastics and steel, which currently import more than 70% of materials and ingredients from abroad [5].

Vietnam had not introduced sufficient preferential policies that would provide incentives for investment targeting specifically at high value-added industries so as to lay the foundations for the development of an industrialised country towards modernity. One more issue is the lack of adequate investment in human capital and effective development strategies to meet the requirements for the development of these industries.