The State of Vietnam’s Support Industries in the Automotive and Mechanical Sectors
Vietnam’s Ministry of Industry and Trade (MoIT) reveals that the country is home to approximately 5,000 companies supplying components for the automotive and mechanical sectors. Of these, 70% cater to domestic manufacturers, while 8% focus on exports, and 17% serve both markets. Notably, around 30% of Vietnamese support industry firms are actively engaged in global supply chains, showcasing the growing integration of local businesses into international markets.
Limited Supply Capacity
Despite the promising numbers, it’s essential to recognize that companies in Vietnam’s support industries represent only about 4.5% of the total enterprises in the manufacturing and processing sector. Localization rates have seen improvement across various industries, particularly in textiles and footwear, where they reach 45-50%. In mechanical engineering, these rates exceed 30%. However, the journey toward enhanced localization and self-sufficiency remains challenging.
Domestic companies are demonstrating improved production capabilities. The productivity and efficiency of local firms have risen, allowing many to become direct suppliers to manufacturers, assemblers, and multinational corporations. Their growing participation in regional and global production networks signals progress, yet significant hurdles persist.
Challenges in Development
The landscape of support industries is still fraught with challenges. One major hurdle is the size of local companies, many of which are small or medium-sized entities. This limits their financial and human resources, making it difficult to scale operations and compete effectively. Additionally, the absence of leading players in the industry adds to the challenge. Research and development (R&D) initiatives and new product development are often neglected, hindering the capacity of these firms to meet the more demanding requirements of global value chains.
The relationship between Vietnamese businesses and foreign-invested enterprises (FIEs) remains weak. Mr. Pham Tuan Anh, Deputy Director of the Vietnam Industry Agency, notes that Vietnam’s industrial sector has developed two or three generations later than its neighboring countries. This lag has resulted in a smaller market size that does not support the production scale necessary for competitive pricing. Moreover, policy constraints arising from international commitments further complicate the situation.
Business practices among global companies also tend to favor suppliers with whom they have previously established relationships or those from the same country. This further marginalizes Vietnamese firms looking to enter the supply chain.
Current Standing in Global Supply Chains
While Vietnam’s manufacturing sector has made significant headway, it still occupies a low position in the “smiling curve” of global supply chains, particularly in the electronics industry. The focus remains largely on production, lacking engagement in higher value-added processes like procurement logistics and distribution logistics. This limits the potential profitability and bargaining power of local firms.
Connectivity with major global brands is weak, leaving Vietnamese companies in a passive stance regarding orders and pricing. Furthermore, many government policies intended to support businesses have not been widely implemented. Despite attracting foreign direct investment (FDI) and forming supply chains, numerous challenges related to the legal framework and the electronics industry’s policies continue to persist.
Moreover, some of Vietnam’s advantages have become challenges, such as the workforce becoming less abundant and the increasingly stringent regulations imposed by key export markets like the US and the EU. The global emphasis on production that is both green and clean presents opportunities but also challenges for local small and medium-sized enterprises lacking sufficient resources.
Legal Framework Enhancements
To bolster Vietnam’s integration into global supply chains, Mr. Tuan Anh emphasizes the necessity of enhancing connectivity and resilience within key manufacturing sectors, such as textiles, footwear, and electronics. There is a need for refining institutional systems, policies, and legal frameworks that can serve as a robust foundation for industrial development.
Key initiatives focus on establishing a market environment conducive to support industries. Promoting the development of downstream industries—particularly in manufacturing and assembly—is crucial. Attracting multinational corporations to invest in large-scale projects in Vietnam can open up international markets and enhance the benefits derived from existing Free Trade Agreements (FTAs). Policies encouraging the utilization of domestic support industry products are also essential, especially in sectors like automotive, agricultural machinery, and railways.
Addressing Human Resource Needs
The critical need for state support in training high-quality human resources cannot be overlooked. Ms. Do Thi Thuy Huong, Vice President of the Vietnam Association for Supporting Industries (VASI), advocates for continued selective FDI policies, ensuring that Vietnamese enterprises can break into higher-tech segments of the supply chain. It is vital for these enterprises to leverage state support, industry associations, and international projects to elevate their operational capacities.
To align with global green standards, the Department of Industry and Trade in Bac Ninh province has recommended development strategies centered on smart factories and sustainable practices. Here, energy efficiency, emissions reduction, and eco-friendly practices are no longer just trends; they are becoming critical priorities for businesses aiming for long-term growth.
The Path Towards Green Production
The shift towards sustainability emerges as a significant trend in the development agendas of major corporations and nations. This green transition promises long-term benefits for businesses while also delivering sustainable cultural, social, and environmental advantages. For firms looking to enter the production value chain, developing green enterprises and eco-friendly factories is rapidly becoming a competitive edge.
In its efforts to drive industrial development, the MoIT is researching and proposing a Key Industrial Law aimed at establishing a cohesive legal framework around processing, manufacturing, and support industries. Additionally, comprehensive initiatives are in place to develop the Supporting Industry Development Program through 2026, with a vision extending to 2035. This program targets sectors such as smart electronics, automotive, and high-tech industries, promoting partnerships between FIEs and domestic firms to foster localized supply chains and technology transfer.
Resources and Financial Support
Strategically allocating national resources from central to local levels aims to enhance the effectiveness of investment support and incentive policies under the legal framework for industrial development. Proposals to adjust FDI attraction policies focus on increasing domestic value-added ratios, while new credit and financial incentives are intended to facilitate access to resources. This funding is crucial for innovation, product quality enhancement, and driving scientific and technological advancements in Vietnam’s support industries.
The dialogue on enhancing the competitiveness of Vietnam’s support industries is ongoing, with stakeholders considering various strategies to ensure that local enterprises can fully capitalize on the global marketplace. As these strategies evolve, the future of Vietnam’s automotive and mechanical support sectors holds the potential for significant growth and transformation.