Private funding powers local supply chain leap

The question of how to raise assorted investment sources in Vietnam for national economic development has dominated the agenda of many economic forums. Senior economist Nguyen Mai discusses the latest efforts made by local firms to shape up and strengthen local and global product supply chains, and what Vietnam must do to boost private firms’ engagement with supporting industry development, laying the bedrock for the next economic leap.

Supply chains with local alliances

Vingroup, a leading multi-field company, is teaming up with small- and medium-sized enterprises to establish local agricultural produce supply chains.

In the last few years, Vingroup has developed an extensive network of several hundred supermarkets and convenience stores throughout the country, and engages in high-tech agriculture in many locations.

The group has co-operated with various producers and traders and has applied numerous incentive policies, all based on a philosophy of “strengthening the link between local businesses in each particular product branch for higher competitiveness to counterbalance foreign competitors in the domestic market”.

Accordingly, Vingroup has lowered its discount rates to between 0 and 5 per cent on several locally-produced agricultural items on sale at Vingroup supermarket chains. Other retailers such as Thailand’s supermarket chain BigC have discounted Vietnamese products by 25 per cent, a level many local producers cannot afford to accept.

Vingroup has signed contracts with 250 local suppliers and hundreds of new-age agricultural co-operatives concerning the use of modern and environmentally friendly production technology. They have also guided farmers on how to cultivate and harvest effectively, striving to create a supply chain at lower costs while shortening delivery time from production to retail shelves. This process has benefitted producers, businesses engaged in the supply chain, consumers, and Vingroup itself.

The story of Vingroup forming mutually beneficial alliances with numerous producers and distributors sets a model for other local businesses to become self-reliant when developing their own network and supply chain. This would allow them to capitalise on prevailing opportunities in both the domestic and world markets.

Local firms, global supply

Local leading nutritional group Vinamilk, private milk producer TH true MILK, and telecom giant Viettel have effectively promoted their global supply chains.

Vinamilk, which has 18 years of experience in foreign markets, now sells products in more than 40 countries across the globe. Its foreign markets include the US, many European and African countries, New Zealand, Myanmar, and Thailand.

The company now owns 10 cow breeding farms and 13 milk factories nationwide, and two Vinamilk super-factories, each with the capacity to produce 800 million litres of milk per year. Vinamilk also has three overseas factories.

During 2011-2015, the company’s labour productivity rose 10.19 per cent on average, and added value jumped 14.5 per cent per year. This year, Vinamilk is poised to generate VND66 trillion ($3 billion) in revenue. With its internationally recognised brand, Vinamilk’s state divestment is very appealing to investors.

In the Vietnamese market, TH true MILK – a relative newcomer to the dairy industry – has found a new approach to attract consumers. Through an expansive media campaign that promotes ‘clean milk’, TH Group has positioned its brand in a way that differentiates it from other Vietnamese milk producers.

After just five years, TH Group has grown into Vietnam’s largest private milk producer. The group has made a foray into Russia with an ambitious cattle raising and milk processing project spanning over 100,000 hectares.

Compared to the leading state-owned telecom group  VNPT, military-run Viettel is a relative newcomer to the telecom market. By pursuing a well-conceived development strategy, the company has presently outperformed VNPT in many important markers – for example revenue, profit, and tax contribution.

GSMA Intelligence figures show that by mid-September 2016, Viettel captured a spot among the world’s top 30 telecom groups in terms of subscribers – with 26 million outbound subscribers, a steep increase compared with the 10 million they had in 2013.

These examples show that many Vietnamese business groups have the capacity to establish global supply chains, making local products competitive within regional and international markets.

The goal is to promote engagement between the supply chains of leading local players and local small- and medium-sized enterprises (SMEs).

To achieve this goal, these leading players must help SMEs promote their goods in each specific supply chain. Also, SMEs need to take the initiative to occupy a niche segment in the global supply chain. This is particularly important for the labour market, helping to bolster added value and gradually replace the current labour export model which is riddled with shortcomings.

The state’s support of supply

In recent years, the government has enacted many policies on supporting industry development to encourage local businesses to become more proactive in joining the global supply chain. The government also seeks to strengthen horizontal alliances in specific product branches, formulate business support funds in science and technology, guarantee credit and tax reductions, and organise SME support centres and technology incubators.

This has resulted in a sharp increase in new business startups and raised the private sector’s contribution to national, social, and economic development in recent years.

At this point in time, it is important to perfect policies, ensuring that they are feasible, enforceable, and actually beneficial for SMEs and other constituents.

Japan’s Mitsubishi Research Institute joined hands with the Ministry of Planning and Investment’s Central Institute for Economic Management in a project called “Enhancement of Vietnamese supporting industries”, which proposed the application of a successful Japanese model to encourage Vietnamese SMEs to actively take part in domestic and international product supply chains.

Currently, each province and municipality operates two business support centres: one on industrial promotion belonging to the Department of Industry and Trade, and one on SME support under the management of the Department of Planning and Investment.

Based on the project survey, these centres still do not perform as effectively as possible. The two main reasons for this are that they lack resources in finance, machinery and equipment, and consultants, and the low support levels these centres give to private firms – SMEs in particular.

The enhancement project then proposed merging these   two centres to establish local public technology centres (LPTCs). Such a new centre  would function as sources of research and development for industrialisation in each locality; as finance and technology support centres for SMEs; and as assistance providers for agricultural production, seafood, forestry, and mining.

These LPTCs would make use of leading experts in technology, finance, and corporate governance. They would be fitted with modern technology and equipment and financed by the local community – or they could raise capital from other domestic and external sources, allowing them to operate as financially independent entities.

Japan is currently home to 600 LPTCs, each with about 100 experts and other employees. This includes three big centres with personnel surpassing 300 people each.

This model is worth further consideration for application in Vietnam. In the current context, we can only apply this model in two major development hubs – Hanoi and Ho Chi Minh City – which are currently home to more than 60 per cent of local private businesses and have large potential for further development. After several years, if the model proved successful, it could be replicated in other localities.

With more than half a million private firms (97 per cent of which are SMEs), the government’s commitment to having one million private businesses by 2020, and many instances of established supply chain models, private investment into supporting industry development will surely be expanding in 2017-2020, laying the bedrock to propel economic development and shape Vietnam’s growing green economy.

by VIR