Scope and Limitations of the Study

Vietnam has always been primarily an agricultural country, with most of its population residing in rural areas and living off rice planting, fishing and rubber.

Chapter 1 Introduction

1.1 Introduction

Vietnam has always been primarily an agricultural country, with most of its populationresiding in rural areas and living off rice planting, fishing and rubber Yet from 1954, bothSouth and North Vietnam keyed on economic development through manufacturing Despitewar and turmoil, by 1976, within a space of 20 years, manufacturing provided over one-quarter of gross national product But for the following decade, until “doimoi” liberalization,there were problems for industry

By 1986, most industry was under State control of various types and, having lost itswar-based direction and suffering under general instability as the reunited countries adapted

to each other, industry was negatively affected Still, by the late 1980s, there were positiveindications that the country’s manufacturing sectors were progressing, having won back theirbenchmark share of gross domestic product

With the winds of change, business environment in Vietnam has been changing fast

As long as opening the economy to the world, international relationship has been improved.Government policies and regulations are amended to facilitate domestic businessmen andencourage foreign investment

The arrival of a free market economy created not only opportunities but also threats fordomestic companies State enterprises were given much more freedom to choose theirmarket directions, but with less Government support Also, selective privatization of Stateindustry was promulgated under the term “equitation” for example, by forming a companyand selling shares

Foreign companies entered the market and occupied a significant market shares insome industries Machinery industry is one of them Representing roughly 10 per cent ofgross national product, automobile and machinery manufacturing is poised in a delicatebalance Vietnam is facing with the choice of either refurbishing and refining existingproduction facilities through joint-venture participation, or leaving such machinerymanufacture to other countries, remaining a net importer of vehicles and machines tosupport its other industries

For the developing countries like Vietnam, machinery industry remains to be a highlyimportant industry The Government put great significance to the industry but a few yearsago it still was very poor A lot of factories were closed, thousands of employees lost theirjobs and production could not meet domestic demand for industrial machinery while a fewmachine tool which demanded for large capital investment was over capacity in the short-run The reasons might come from bureaucracy lasting year by year, lack of competenceand experienced managers that led to inability to compete successfully with foreignproducts

Recent years, the situation is changing Vietnam Machinery Industry is refurbishingmore and more The high end machine tool market in the world (1994) is worth more thanabout US $ 250 billions, ASIA has about 35% of the world machine tool market and ispredicted to increase to 50% before the year 2010 Besides Singapore and Thailand,Vietnam would be the third country in ASEAN producing CNC machines commercially This

is an excellent opportunity and a highly profitable one if it materialized

Hanoi Mechanical Company is a very particular representative for the growth ofVietnam Machinery Industry The company is considered as one of the most successfulcompanies in the Machinery Industry nowadays What is the strategy that the company used

to overcome the poverty in the past and compete successfully in domestic market? Whatshould they do to keep up the growing and develop strongly in the future?

1.3 Objectives of The Research

 To analyze the business environment (external and internal) and how it impacts oncompany’s operation

 To identify the industry structure through Porter’s five forces model

 To identify the strengths and weaknesses as well as opportunities and threats thatHAMECO has been facing with

 To find out the strategy used by company to compete successfully in domestic market

 To strategic recommend to the company, what it should do in the following years tomaintain the leading position in Vietnam Machinery Industry and its contribution in theworld’s machinery market

1.4 Research Methodology

Literature review:

The study comprehensively reviewed the available literature to build the rationale ofthe strategic management in Vietnam Machinery Industry in general and the HanoiMechanical Company in particular In order to assess the company’s strengths and

market, Porter’s framework, known as the five forces model, has been used Materials weregathered from the textbooks, journals and other publications which are related to strategicmanagement.

 Secondary information: Relevant information as well as data about Vietnam economy ingeneral, about Machinery industry, and about Hanoi Mechanical Company werecollected from newspapers, journals, media etc Moreover, the information was also beobtained from sources such as Statistical Department of Vietnam, Department ofStatistics and Planning of the Ministry of Industry The annual reports, profile report alsowere collected during this process

Following framework could give the tentative flows of the research methodology:

PROBLEM ANALYSIS

LITERATUREREVIEW

SECONDARY &

PRIM ARYINFORM ATION

Figure 1.1: Framework of the study

The study analyzed in general the present competitive situation in Vietnam MachineryIndustry The case taken of Hanoi Mechanical Company was able to explain the up-downs

in the industry and strategy the company had used to become successful The studybasically depended on the in-depth level of information that was supplied by the companyand targeted groups Moreover, the study mainly considered that portion of overall effort, forstrategy development, in which the author remained in touch with the investigated company.The unresponded portion was not be discussed in detail

The major products are machine tools and industrial machines and equipment using inalmost industries, especially in Chemical and Foodstuff Industry

The limitation of the study is that it depends partly on how supportive the companywas and its related departments The data concerning to industrial financial ratios andindices is not available in Vietnam Thus, it is difficult to make the exact and clearcomparison with other companies within machinery industry

Chapter 2 Literature Review

2.1 Strategy: An Introduction

2.1.1 The Definition of Strategy

What is strategy? There is no single, universally accepted definition Different authorsand managers use the term differently; for example, some include goals and objectives aspart of strategy while others make firm distinction between them

Reflecting the military roots of strategy, the American Heritage Dictionary definesstrategy as “the science and art of military command as applied to the prevail planning andconduct of large-scale combat operations” The planning theme remains an importantcomponent of most management definitions of strategy Strategy is “the determination of thebasic long-term goals and objectives of an enterprises, and the adoption of courses of action

and the allocation of resources necessary for carrying out these goals” (Chandler,1989).

There is also the another definition of strategy as “the pattern or plan that integrates an

organization’s major goals, policies, and action sequences into a cohesive whole.” (Quinn,

1988) Along the same lines, Glueck defined strategy as “a unified, comprehensive, and

integrated plan designed to ensure that the basic objectives of the enterprise are achieved”

as “a pattern in a stream of decisions or actions”, the pattern being a product of whateverintended strategies

Marketing has its 4P’s (product, price, place and promotion) So why can’t strategy dolikewise, even go one better? But these 4P’s pertain not to components of the field so much

as to its most central concept, that of the nature of strategy itself Mintzberg defines strategy

as an plan, ploy, pattern, position and perspective (Quin et al, 1988)

2.1.2 The Nature of Corporate Strategy

Definition

Corporate strategy is the pattern of decisions in a company that determines andreveals its objectives, purposes, or goals, produces the principal policies and plans forachieving those goals, and defines the range of business the company is to pursue, the kind

of economic and human organization it is or intends to be, and the nature of the economicand non-economic contribution it intends to make to its shareholders, employees, customersand communities

Corporate Competitive Strategy

Companies compete in three ways One is building core competencies that imbueproducts and services with unique functionality Secondly, they compete to build a worldwidedistribution and brand infrastructure, i.e an ability to access and serve global market Animportant part of this competition for global market access is the race to build globalcorporate brands and thereby capture economies of scope in creating the share of mindnecessary to ensure that customers have a pre-disposition to buy and that competitors arepreempted a pre-disposition to buy and that competitors are preempted in the quest forglobal market share Thirdly, they compete to create product integrity disciplines-quality,time to market and customer service, all the things that allow a company to do things faster,more cheaply and more consistently

Nowadays, every company of any size that is to have a chance of surviving in anindustry must have a global market-servicing capability So more and more, competition isshifting towards functionality-based competencies Functionality competencies are aboutgiving the customers something unique, some unique benefit

The thinking of corporate strategy has been focus on competition for competence, torecognize that competence has these three different dimension, functionality, market accessand product integrity, and to understand that a core competence can be contained in anyone of these dimensions, though, distribution may become less ‘core’ in some industries

(European Management Journal, Vol 11 No 2 June 1993)

Levels of strategy

Strategies will exist at a number of levels in an organization An individual may say hehas a strategy-to do with his career, for example This may be relevant when consideringinfluences on strategies adopted by organizations but it is not what is meant by corporatestrategy There is the corporate level: here the strategy is concerned with what types ofbusiness the company, as a whole, should be in and is therefore concerned with decisions

of scope

The second level can be thought of more in terms of competitive or business strategy.Here strategy is about how to compete in a particular market So, whereas corporatestrategy involves decisions about the organization as a whole, competitive strategy is morelikely to be related to a unit within a whole

The third level of strategy is at the operating end of the organization Here there areoperational strategies which are concerned with how the different functions of the enterprise

- marketing, finance, manufacturing and so on - contribute to the other levels of strategy.Such contributions will certainly be important in terms of how an organization seeks to becompetitive Competitive strategy may depend to a large extent on, for example, decisionsabout market entry, price, product offer, financing, manpower and investment in plant Inthemselves these are decisions of strategic importance but are male, or at least strongly

influenced, at operational levels (Johnson/Scholes, 1988)

Formulation of strategy

The principal subactivities of strategy formulation as a logical activity includeidentifying opportunities and threats in the company’s environment and attaching someestimate or risk to the discernible alternative Before a choice can be made, the company’sstrengths and weaknesses should be appraised together with the resources on hand andavailable Its actual or potential capacity to take advantage of perceived market needs or tocope with attendant risks should be estimated as objectively as possible The strategicalternative which results from matching opportunity and corporate capability at an

acceptable level of risk is what we may call an economic strategy.

The determination of strategy also requires consideration of what alternatives arepreferred by chief executive and perhaps by is or her immediate associate as well, quiteapart from economic considerations Personal values, aspirations, and ideals do, and in ourjudgment quite properly should, influence the final choice of purposes Thus what theexecutives of a company want to do must be brought into the strategic decision

(Quinn/Mintzberg/James, 1988)

The implementation of strategy

Since effective implementation can make a sound strategic decision ineffective or adebatable choice successful, it is as an important to examine the processes ofimplementation as to weigh the advantages of available strategic alternatives Theimplementation of strategy is comprised of a series if subactivities which are primarilyadministrative If purpose is determined, ten the resources of a company can be mobilized toaccomplish it An organizational structure appropriate for the efficient performance of therequired tasks must be made effective by information systems and relationships permittingcoordination of subdivided activities The organizational processes of performancemeasurement, compensation, management development - all of them enmeshed in systems

of incentives and controls - must be directed toward the kind of behavior required byorganizational purpose The role of personal leadership is important and sometimes decisive

in the accomplishment of strategy (Quinn et al, 1988)

Implementation problems

Difficult as it may be to make good plans, the effort of making them is nothingcompared to what is necessary to actually implement them, implementation requirespatience, tact, perseverance and determination The lack of people that can make planscome true cannot be the only explanation for the fact that a large number of plans stayexactly what they are; merely plans One has to realize that some plans are just of no useanymore after some time The environment in which a company operates may havechanged drastically since the plan necessary It needs no further argument that in suchcases it is wise not to implement the original plan Not implementing a designed strategymay also have its roots in badly executed design phase Normally, strategies tend to beworded in more or less abstract terms Sometime they have not been formulated at all Inthe case of turbulent and dynamic environment the management of a company will have to

be very careful when trying to make the company’s strategic explicit Management will have

to see to it that a large enough degree of freedom remains Thus, making it possible tochange the company’s course in case the changes in the environment so demand Puttingthe strategy into writing and communicating it to the employees may be a risky undertaking

that, therefore, the strategy has to be revised (once more) (European Management Journal,

Pattern of purposes and policies defining the company and its business

1 Organisation structure and relationships

Division of labor Coordination of divided responsibility

Information systems

2 Organisational process and behavior

Standards and measurement Motivation and incentive systems Control systems Recruitment and development of managers

3 Top leqadership

Strategic Organisational Personal

Figure 2.1: Analysis of Strategy as A Pattern of Interrelated Decisions

(Source: Quinn/Mintzberg/James, 1988)

2.1.3 Strategic Management Process

The easy answer is the management of the process of strategic decision making.Strategic management is concerned with deciding on strategy and planning how thatstrategy is to be put into effect There is strategic analysis in which the strategist seeks tounderstand the strategic position of the organization There is strategic choice which is to dowith the formulation of possible courses of action, their evaluation and the choice betweenthem Finally there is strategy implementation which is concerned with planning how thechoice of strategy can be put into effect This three-part approach is summarized in figure2.2

Strategic analysis

Strategic choice implementation Strategy

Expectation objectives

Resource planning

Organisation structure

2.2.1 Identifying The Industry's Dominant Economic Characteristics

As a working definition, we use the word industry to mean a group of firms whoseproducts have so many of the same attributes that they compete for the same buyers The

 Market size.

 Scope of competitive rivalry (local, regional, or global)

 Market growth rate and where the industry is in the growth cycle (early development,rapid growth and takeoff, early maturity, late maturity and saturation, stagnant and aging,decline and decay)

 Number of rivals and their relative sizes-is the industry fragmented with many smallcompanies or concentrated and dominated by a few large companies?

 The number of buyers and their relative sizes

 The prevalence of backward and forward integration

 Ease of entry and exit

 The pace of technological change in both production processes and new productintroductions

 Whether the product(s)/service(s) of rival firms are highly differentiated, weaklydifferentiated, or essentially identical

 Whether there are economies of scale in manufacturing, transportation, or massmarketing

 Whether high rates of capacity utilization are crucial to achieving low cost productionefficiency

 Whether the industry has strong learning and experience curve such that average unitcost declines as cumulative output (and thus the experience of "learning by doing")builds up

 Capital requirements

 Whether industry profitability is above/below par

(Source: Thompson/Strickland, 1992)

2.2.2 The Concept of Driving Forces: Why Industry Change?

Industry conditions change because important forces are driving industry participants(competitors, customers, suppliers) to alter their actions; the driving forces in an industry arethe major underlying causes of changing industry and competitive conditions

Most common driving forces:

 Changes in the long-term Industry Growth rate: Shifts in industry growth up or down areforce for industry change because they affect the balance between industry supplier andbuyer demand, entry and exit, and how hard it will be for a firm to capture additionalsales

 Changes in Who buys the Product and How They Use It: Shifts in buyer demographicsand the emergencies of new ways to use the product can force adjustments in customerservice offerings (credit, technical assistance, maintenance and repair), open the way tomarket the industry's product through a different mix of dealers and retail outlets, promptproducers to broaden/narrow their product lines, increase/decrease capital requirements,and change sales and promotion approaches

 Product Innovation: Product innovation can broaden an industry's customer base,rejuvenate industry growth, and widen the degree of product differentiation among rivalsellers Successful new product introductions strengthen a company's position, usually atthe expense of companies who stick with their old products or are slow to follow withtheir own versions of the new product.

 Technological Change: Advances in technology can dramatically alter an industry’slandscape, making it possible to produce new and/or better products at lower cost andopening up whole new industry frontiers Technological change can also change incapital requirements, minimum efficient plant sizes, and desirability of vertical integration,and learning or experience curve effects

 Marketing Innovation: When firms are successful in introducing new ways to market theirproducts, they can spark a burst of buyer interest, widen industry demand, increaseproduct differentiation, and/or lower unit costs-any or all of which can alter thecompetitive positions of rival firms and force strategy revisions

 Entry or Exit of Major Firms: The entry of one or more foreign companies into a marketonce dominated by domestic firms nearly always produces a big shakeup in industryconditions Likewise, when an established domestic firm in another industry attemptsentry either by acquisition or by launching its own start up venture, it usually intends toapply its skills and resources, in some innovative fashion Entry by a major firm oftenproduces a “new ballgame” not only with new key players but also with new rules forcompeting

 Diffusion of Technical know-how: Diffusion of technical know-how occurs throughscientific journals, trade publications, on-site plant tours, word-of-mouth among suppliersand customers, and the hiring away of knowledgeable employees It can also occurwhen the processors of technological know-how license others to use it for a fee or team

up with a company interested in turning the technology into a new business venture

 Increasing Globalization of the Industry: Global competition usually changes patterns ofcompetitive advantage among key players Globalization is most likely to be a drivingforce in industries (a) based on natural resources, (b) where low-cost production is acritical consideration (making it imperative to locate plant facilities in countries where thelowest costs can be achieved), and (c) where one or more growth-oriented, market-seeking companies are pushing hard to gain a significant competitive position in asmany attractive country market as they can

 Changes in Costs and Efficiency: In industries where significant economies of scale areemerging or strong learning curve effects are allowing firms with the most productionexperience to undercut rivals’ prices, large market share becomes such a distinctadvantage that all firms are pressured to adopt volume-building strategies Likewise,sharply rising costs for a key input (either raw materials or labor) can cause a scramble

to either (a) line up reliable suppliers at affordable prices or (b) search out lower-costsubstitutes Any time important changes in cost or efficiency take place, firms’ positionscan change radically concerning who has how big a cost advantage

 Emerging Buyer Preferences for a Differentiated instead of a Commodity Product (or for

a more standardized product instead of strongly differentiated products): Sometimesgrowing numbers of buyers decide that a standard product at a bargain price meets theirneeds as effectively as premium priced brands offering ore features and options These

wings in buyer demand can drive industry change by shifting patronage to sellers ofcheaper commodity products and creating a price-competitive market environment.

 Regulatory Influences and Government Policy Changes: Regulatory and governmentalactions can often force significant changes in industry practices and strategicapproaches In international markets, newly-enacted regulations of host governments toopen up their domestic markets to foreign participation or to close off foreignparticipation to protect domestic companies are major factor in shaping whether thecompetitive struggle between foreign and domestic companies occurs on a level playingfield or whether it is one-sided (owing to government favoritism)

 Changing Societal Concerns, Attitudes, and Lifestyles: Emerging social issues andchanging attitudes and lifestyles can be powerful instigators of industry change

 Reductions in Uncertainty and Business Risk: Overtime, however, if pioneering firmssucceed and uncertainty about the industry’s viability fades, more conservative firms areusually enticed to enter the industry

(Source: Thompson/Strickland, 1992)

2.2.3 Competition Analysis

Competitive strategy is the part of business strategy that deals with management’splan for competing successfully - how to build sustainable competitive advantage, how tooutmaneuver rivals, how to defend against competitive pressures, and how to strengthenthe firm’s market position

As a rule, competition in an industry is a composite of five competitive forces:

The Rivalry among Competing Sellers:

The most powerful of the five competitive forces is usually the competitive battleamong rival firms How vigorously sellers use the competitive weapons at their disposal tojockey for a stronger market position and win a competitive edge over rivals shows thestrength of this competitive force The big complication is that the success of any one firm’sstrategy hinges on what strategies its rivals employ and the resources rivals are willing andable to put behind their strategies Competitive battles among rival sellers can assume manyforms and degrees of intensity The weapons used for competing include price, quality,features, services, warranties and guarantees, advertising, better networks of wholesaledistributors and retail dealers, innovation, and so on There are several factors that industryafter industry, influence the strength of rivalry among competing sellers:

a Rivalry tends to intensify as the number of competitors increases and as they becomemore equal in size and capability

b Rivalry is usually stronger when demand for the product is growing slowly

c Rivalry is more intense when industry conditions tempt competitors to use price cuts ofother competitive weapons to boost unit volume

d Rivalry is stronger when the costs incurred by customers to switch their purchases fromone brand to another are low

e Rivalry is stronger when one or more competitors is dissatisfied with its market positionand launches moves to bolster its standing at the expense of rivals.

f Rivalry increases in proportion to the size of the payoff from a successful strategic move

g Rivalry tends to be more vigorous when it costs more to get out of a business than tostay in and compete

h Rivalry becomes more volatile and unpredictable the more diverse competition are interms of their strategies, personalities, corporate priorities, resources, and countries oforigin

i Rivalry increases when strong companies outside the industry acquire weak firms in theindustry and launch aggressive, wee-funded moves to transform their newly-acquiredfirms into market contenders

(Source: Thompson/Strickland, 1992)

Regarding to Vietnam’s Machinery Industry, the competition among domesticmanufacturers is not fierce Most of domestic mechanical companies possess the very poorproduction system with obsolete technology and equipment Thus, in general, domesticproducts could not attract customers while foreign products overwhelm the domestic market

The Competitive Force of Potential Entry:

How serious the threat of entry is in a particular market depends on two factors:barriers to entry and the expected reaction of incumbent firms to new entry A barrier toentry exists whenever it is hard for a newcomer to break into a market and/or economicfactors put a potential entrant at a disadvantage relative to its competitors There are severaltypes of entry barriers:

 Economies of scale

 Inability to gain access technology and specialized know-how

 Learning and experience curve effects

 Brand preferences and customer loyalty

 Capital requirements

 Cost disadvantages independent of size

 Access to distribution channels

The Competitive Force of Substitute Products:

The competitive threat posed by substitute products is strong when prices ofsubstitutes are attractive, buyers’ switching costs are low, and buyers believe substituteshave equal or better features

As a rule, then, the lower the price of substitutes, the higher the quality and theperformance, and the lower the user’s switching costs, the more intense are the competitivepressures posed by substitute products

For Vietnam’s machinery industry, foreign products became a rather important threat

of substitute products thanks to their much higher quality products Foreign productsovercame the domestic ones long back and is continuing to increase their reputation inVietnam’s market if the domestic production can not catch the pace of technologicaldevelopment and modernization in the world

The power of suppliers:

Whether the suppliers to an industry are a weak or strong competitive force depends

on market conditions in the supplier industry and the significance of the item they supply.The competitive fore of suppliers is greatly diminished whenever the item they provide is astandard commodity available on the open market from a large number of suppliers withample ability to fill orders

On the other hand, powerful suppliers can put an industry in a profit squeeze with priceincreases that can not be fully passed on to the industry’s own customers Suppliersbecome a strong competitive force when their product makes up a sizable fraction of thecosts of an industry’s product, it is crucial to the industry’s production process, and/orsignificantly affects the quality of the industry’s product

Suppliers are also more powerful when they can supply a component cheaper than

industry members can make it themselves (Thompson/Strickland, 1992).

In the past, most of raw material is imported in a very strict and complicated importprocedure At that time, suppliers was quite strong and there are a lot of difficulties fordomestic companies to buy raw materials from abroad Since the economic reform, thesituation is changing Import and export procedures are not so strict and it is much easier fordomestic companies to buy material from abroad The supplier power is not so strong atpresent

The power of Buyers:

Buyers become a stronger competitive force the more they are able to exercisebargaining leverage over price, quality, service, or other terms of conditions of sale

Just as with suppliers, the competitive strength of buyers can range from strong toweak Buyers have substantial bargaining leverage in a number of situations The mostobvious is when buyers are large and purchase a sizable percentage of the industry’soutput The bigger buyers are and the larger the quantities they purchase, the more cloutthey have in negotiating with the sellers

One last point: all buyers don’t have equal bargaining power with sellers; some may be

less sensitive than others to price, quality, or service (Thompson/ Strickland, 1992)

Due to the fierce competition with foreign products, customers are divided into differentclasses Strong customers are often companies with strong financial position and thesecompanies are in favor for foreign products Domestic production serve mainly value-oriented customers, who are not so strong and favor good quality products at reasonableprice For this kind of customers, domestic companies often create their reputation and mayget customers loyalty Therefore, the power of buyers is not strong as well

2.2.4 Competitive Position of Major Companies/ Strategic Groups

A strategic group consists of those rival firms with similar competitive approaches andpositions in the market

Some strategic groups are usually more favorably positioned than others becausedriving forces and competitive pressures do not affect each group evenly and profitprospects vary among groups based on the relative attractiveness of their market positions.Strategic group analysis helps deepen understanding of competitive rivalry First,driving forces and competitive pressures often favor some strategic groups and hurt others.second, the profit potential of different strategic groups may vary due to the strengths andweaknesses in each group’s mark position General speaking, the closer strategic groupsare on the map, the stronger competitive rivalry among member firms tens to be

anticipate what moves they will make next (Thompson/Strickland, 1992)

2.3 Pinpointing the Key Factors for Competitive Success

Key Success Factors (KSFs) are the major determinants of financial and competitive

success in a particular industry Key success factors highlight the specific outcomes crucial

to success in the marketplace and the competencies and capabilities with the most bearing

on profitability At most, KSFs can serve as the cornerstones for building a company’sstrategy Companies frequently win competitive advantage by concentrating on beingdistinctively better than rivals in one or more of the industry’s key success factors

Key success factors vary from industry to industry, and even over time in the sameindustry, as driving forces and competitive conditions change

To summarize, key success factors spell the difference between profit and loss andultimately, between competitive success and failure A Key Success Factor can be a skill or

technology, manufacturing, distribution, marketing, or organizational resources.(Thompson’Strickland, 1992).

Chapter 3 External Environment Analysis

This chapter focus on the issue of indefinite opportunities and threats for HanoiMechanical Company (HAMECO) in the near future It begins with the analysis about themacro - environment in which HAMECO operates This section concentrates on analysis ofthe current situation in Vietnam as well as showing strategic orientations and investmentopportunities for the Vietnam’s Machinery Industry in the coming years Porter’s five forcesmodel is applied to analyze the industry concentrating in machine tools industry in order tohave a general view about competitive competencies of HAMECO at present and in thefuture

3.1 Macro - Environment Analysis

3.1.1 Overview of Vietnam Economy

Political and legal factor:

Political and legal factors have a important impact on the level of opportunities andthreats in the environment

Although the Communist Party has provided Vietnam with stable government, it has by

no means reached consensus on the way to go about solving the country’s massiveproblems, neither has it created the detailed organizational methodologies that will need to

be employed Such progress as has been made has been achieved by wrenching policyzigzags The Vietnamese economy has reached a crucial stage in its development.Economic progress could stall unless there is real political will to carry out the changesneeded for the economy to emerge on a strong footing Some of the Government’s recentmoves haven’t been very encouraging “We are convinced that the Government should like

to open up the economy, but instead of going in a straight line, it is zigzagging” says Luu Le,

Vietnam Country Manager of Bank of America (Vietnam: Politics Delay Tough Choices,

Asian Business, 10/1995).

To support the economic liberalization and encourage the private sector, theVietnamese Government has promulgated a series of economic laws such as Law ofForeign Investment, Company Laws, Law of Private Business, etc It seemed to create afavorable environment for foreigners doing business in Vietnam Actually, it is not completelyfavorable as it was supposed to be For example, in February 1995, a Government edictplaced fixed annual rentals on the right to use the land - all land in Vietnam is state - ownedwhich would be set by the Finance Ministry and People’s Committees (the local authorities) The new regulation perturbed the foreign banks that have set up in Vietnam, because

it makes it harder for business and Jvs to use land - lease documents as collateral The

which limits companies to using just one bank It seems to be a means to force companies

to use Vietnamese banks

Vietnam’s acceptance into ASEAN in July 1995 was seen as a catalyst for the forces

of change It is a positive step It will help Vietnam accelerate economic reforms, improve thecompetitiveness of its products and broaden economic relations It will offer a bitter, buthealthy remedy It remains to be seen to what extent the patient will take his medicine, interms of lowering import tariffs on ASEAN goods in keeping with the AFTA agreement.With regards to the machinery industry, the investment environment is likely to bemore favorable and attractive to both domestic and foreign investors a little bit At presentthe legal system is much refined, procedures are simplified and there are crucialadministrative reforms in Government The Government aimed to make the civil servicemore professional, and they structured Ministries into more logical groups by, for examplecombining the ministries of Light and Heavy industry, and the Ministries of Forestry andAgriculture They are also aim to turn the ministries into administrators of their assets, ratherthan active players in the economy Without these administrative reforms, further efforts toprivatize Vietnam’s state - owned enterprises are futile

One more important thing is the import problems The Government has not providedthe policy for domestic production protection especially for machinery industry More thanthat, due to the bad export and import management, some mechanical industrial productionaspects have been deadlocked Thus, the Government intentionally let foreign mechanicalproducts penetrate deeply and gradually occupy the domestic market Domestic mechanicalproduction is lacking jobs whereas it is confirmed that the market for mechanical products isreally big and is increasing more and more The problem is that there is a need to have areasonable import policy to encourage and make it easier for domestic mechanicalmanufacturers to survive and develop

Economic growth:

After three years of bumper growth and the resumption of international developmentfinancing and aid flows, Vietnam’s economy is poised to enter a phase of what might betermed consolidated growth in 1995 The original policy changes (doimoi) that kick - startedthe country’s shift to a market economy in the second half of the 1980s are being refinedand expanded today, creating a more workable economic environment, particularly from thepoint of view of foreign business

Industrial growth remains vigorous across the board, and there is evidence that thecountry’s chronic infrastructure problems, which have hither to limited growth projections, arestarting to be tackled, thanks to new loans from such lenders as the International MonetaryFund (IMF), the World Bank, and the Asian Development Bank (ADB) Also having animpact are much - increased levels of overseas development assistance, especially fromJapan, France and Australia and various innovative private sector schemes linkinginfrastructure development with business spin - off, as evidenced in recent major projectsinvolving Taiwanese and Korean companies

Vietnam has 6,289 registered state enterprises, a 48% decrease from 12.084 at thebeginning of 1990 Although the numbers have dropped, state enterprises are still the main

the fixed assets in industry, 100% of large mines and employing 90% of skilled workers.According to the Government’s General Statistics office, the state sector’s contribution toGDP (GDP is estimated to growth by 10% this year - 1997) grew from 29.4 % in 1990 to40.4% in 1994 Production from JVs - nearly all of them with state enterprises - is included,rather oddly, in figures for public sector output Taxes from state enterprises last year

accounted for almost 49% of all receipts (Business in Vietnam, 1995)

Figure 3.1: GDP Growth Rate

(Source: Statistic Department of Vietnam)

Economic structure

(GDP by real price - %)

28.9 33

30.1 42.4

Figure 3.2: Economic structure between 1986 and 1995

(Source: Vietnam Economic Times, No 5/1997)

From a economy without any improvement before 1986, Vietnamese economy isgradually recovering and getting stable, growth rate of next periods is higher than previousones and reached rather high level in last five years

Based on the performance of the past two years, GDP is expected to grow by 10% in

1997 As observed in Figure 3.1, in 1995 and 1996, GDP growth is fixed with 9.5% incomparison with 8.8% in 1994 This is not a mere ‘blip’ in as much as Vietnam’s effort inbuilding new relationship with a wide swath of countries worldwide is beginning to bear fruit

in terms of eliminating financial and technology access bottlenecks - to say nothing ofmarkets - for Vietnamese goods This can be readily seen in a variety of sectors:

1. Agriculture production has grown 6.5 % in 1994 and 5.6% in 1995 Growth rate of foodgrains in 10 years of reform reached 4%, higher than population growth rate Therefore,food grains per capita increased from 300 kg/year in 1986 to 371 kg/year in 1995 From

a country lacking of rice in 1988, Vietnam became the third largest rice exporter in theworld after United State and Thailand Agricultural products increased 4.8% in 1996compared to 1995 (See figure 3.3)

2 Industry as a whole did even better The value of general industrial products in 1995 is26.463 billion VND, more than 4 times in comparison with 1975’s data, reached averagegrowth rate 7.2% per year in 4 years Especially in the period 1991 - 1995, GIPincreased over 10%.

3 Services are expected to grow as well, more or less in lock step with industry, especiallyfinancial services and tourism

4 Science - Technology became an important factor of production power, encouraged thestable development of the economy with high speed It is a new point of Vietnameseeconomy in the reform period Rate of investment in scientific research increased from0.1% GDP previously to 0.4% GDP currently

Economic situation generally is in favor for HAMECO to improve itself in the comingyears GDP increased led to the increase in demand for other consumer goods industriesand other economic sectors This will result in increasing demand for mechanical productsand it is hoped that HAMECO would be expand its production in the coming years

However, certain warning signs will have to be heeded Inflationary factors remain verymuch in the equation and, with the sharp increase in exports crucial to maintaining thecountry’s growth trajectory, commensurate pressures are reflected in growing budget andexternal deficits

In an inflationary environment, it may be possible to predict with any accuracy the realvalue of returns that can be earned from business Such uncertainty makes companies lesswilling to invest High inflation rate is a threat to businesses in general and particularly forHAMECO Inflation devalues the money and investment will bring much less benefits than itshould be as normal Thus, the company should pay much attention in the movement ofinflation rate to have reasonable investment plan

3 2.1

1.95 1.75

1.95

1.03

29 27.5

26.19 25.5

24.21 21.98

Export Output

Figure 3.3: Output and export of food grains (million of tons)

(Source: Vietnam’s Statistic Department)

14

3.1 6.2

Figure 3.4: Industrial growth rate (% per year)

(Source: Vietnam’s Statistic Department)

Inflation ratio

12.7 14.4

5.2 17.5

67

Figure 3.5: Inflation Ratios

(Source: Vietnam’s Business Times, Feb 1997)

Interest Rate Policy:

Interest rates also determine the cost of capital for a company This cost can be amajor factor in deciding whether a given strategy is feasible

In 1993, State Bank of Vietnam abandoned stipulating sector - specific lending ratesand instead, differentiated them according to the purpose of loans - fixed and workingcapital Its current interest rate policy sets maximum rate on bank deposits and lending, withthe exception of “purpose - linked” funds (also called deposit substitutes) which can bemobilized and on - lent at higher rates Interest rates have been positive in real terms since

1989, except during 1990 - 1991 While the thrust of interest rate policy is in the rightdirection, there are some shortcomings First, the number of maximum lending rates anddeposit rates is too high Second, there is no convincing rationale for prescribing lower rates

on deposit for economic entities than households Third, purpose - linked lending should betreated no differently from normal bank lending, since exempting banks from the maximumlending rate runs the risk of adverse selection and may have negative impact on bank’sfinancial soundness Fourth, although the interest rate on medium - and long - term loanswas raised in August, 1994, it remains lower than that on short - term loans This invertedrate structure does not reflect maturity or credit risk premiums and discourages term lending.All these aspects of interest rate policy create financial distortions and aggravate financialmarket segmentation at a time when it is urgent to unify the formal financial system andforge links with the informal credit market The current rates are 1.75% per month for short-term loans, 1.7% per month for long-term loans (the former rate was 2.1% and 2.2%) and9% per year for foreign currency The decrease in interest rate is much in favor of businessenvironment For HAMECO, it is really good for gaining ability to cover the bank’s loanbecause the decrease in interest rate reduces remarkable amount of money that HAMECO

will have to pay off as interest (Source: Report No 9223 - Vietnam, World Bank, 4/1991)

International Trade:

Vietnam has been increasingly engaged in foreign trade since 1986 Major tradepartners are Japan, Germany, Australia, Hong Kong, South Korea, Malaysia and Thailand.Because of a lack of technology in processing, principal exports are mostly primaryproducts The important ones are crude oil and rice, which make up about 50 per cent of thetotal export value Eighty percent of crude oil is exported to Japan Other export productsconsist of fishery products, rubber, textiles and coffee.

In terms of imports, the major item is refined oil Although Vietnam has abundant crudeoil, the fact that there are no local refineries causes the country to export nearly all of itscrude oil and then import in the form of refined oil form Russia, Singapore, and Indonesia.Additionally, there are also imports of consumer goods, motorcycles, fertilizers, chemicalproducts and machinery, all of which are expected to increase in line with the growth ofdomestic investment

In 1994, Vietnam’s exports were expected to reach US $ 3.6 billion, compared to theprevious year’s US $ 2.85 billion, or up to 26% Imports were anticipated at US $ 4.2-4.5billion, compared to US $ 3.3 billion in 1993, or up to 30% This caused a trade deficit ofabout US $ 600 - 900 million Foreign reserves are low, about US $ 300 million, which is

equivalent to less than 1 month of imports (Bangkok Bank Monthly Review, April-June

1995)

Machinery industry in Vietnam in general and HAMECO in particular is looking for theexports’ markets abroad ASEAN countries can be considered as potential markets forexport The expansion of international trade created more and more relations betweenVietnam and other countries HAMECO has by built itself relationships with some foreigncountries such as Japan, France, Thailand and is eager to look for new relations with others

to create new market for exporting its products This opened a bright future for Vietnammachinery industry to become a key industry in modernization and industrialization

Import & Export

(million US$)

2200 2541

3924 4500

6778 7000 5000

3600 2985

2581 2087

11000

Export Import

Figure 3.6: Import and export

(Source: Statistical Department of Vietnam)

Foreign Direct Investment:

Foreign direct investment plays an important role in Vietnam’s industrial development

Up to January 19, 1995, there have been 1,017 licensed projects with an investment capital

of US$ 11.1 billion The top five on the list are projects from Taiwan, Hongkong, Singapore,South Korea, and Japan Thailand ranked twelfth, with 46 projects worth US$ 284 million.Taiwan and Hongkong top the list because of the close relationship between Chinese whoimmigrated to Taiwan and Hongkong As for the US, its role became more evident after theembargo on Vietnam had been lifted by the US President on February 4, 1994 The US,ranking thirteenth, has 28 projects including oil and gas exploration

Even though foreign investment in Vietnam has been expanding noticeably, thenumber of projects that are in operations is very low According to the Secretary General ofSCCI, actual investment accounted for only 37% of the approved investment due toinadequate infrastructure Moreover, the government’s efforts to have various industriesdispersed throughout the country have not proved to be very fruitful

Nevertheless, foreign investment is expected to grow rapidly in infrastructure projectssuch as in telecommunications and transportation, real estate development, agriculturalprocessing and consumer goods production, to meet with increasing domestic demand.Moreover, the fact that the US embargo on Vietnam was lifted enabled Vietnam to receivemore assistance from foreign countries and international organizations, and encouragedmore investment

Foreign investment situation created many opportunities for machinery industry toimprove itself through the help of foreign investment Now, it is easier for foreigners toinvest in Vietnam and it is an effective way to develop Vietnamese industries, especially it isvery necessary for machinery industry There have been many Joint-Ventures in machineryindustry, mayjor in automobile industry In machine tools as well as in industrial equipmentfield, it is likely that there is not any JVs yet Actually, some strong foreign companies kept

an eye on this field of machinery indutsry Let's hope that there will be JVs in coming years

Manufacturing:

A common key in the rapid transformation of traditionally agrarian Asian societies intothe so-called economic miracles today has been their capacity to develop productive, cost-effective-and highly profitable-manufacturing industry

The State still play a vital role in the industrial sector, with 70 per cent of the totaloutput coming from state enterprises tend to decline as a result of the liberalization policyand a reduction in subsidies The number of state enterprises went down from 12,000 in

1991 to half the number at present Meanwhile, the private sector’s role has increased since

1986 when private companies were allowed to carry out their businesses with, or as join ventures with foreign companies Then in 1991, the Private Company Law was enacted.Rapid growth of private business and other joint - venture has accelerated constructionbusiness, especially the construction of houses, offices and infrastructures Major industries

-in the North are mostly

Foreign investment

6616 4041

2777 1938

1288 596

539 366

Figure 3.7: Foreign direct investment

(Source: Statistical Department of Vietnam)

heavy industries such as machinery, chemical products and construction materials Those inthe South, however, consist of such light industries as rice mills, agricultural productsprocessing, electronics, textiles and garments The total output from these industries isapproximately 70 per cent of the country’s overall industrial output

Vietnam’s industries have a comparative advantage over those of other countries due

to its abundant natural resources and labor Minimum monthly wage is US$35, but theaverage wage falls in the range of US$50-120 a month Industry with a great potential isfood processing, which yields 35% of the total industrial output and has a work force of700.000 The most important ones in this industry are rice mills, numbering over 3700 Alsoincluded are sugar mills, vegetable oil factories, seafood processing, tea and coffee.Another industry with a potential expansion is textiles and garments, which accounts for12% of the country’s total industrial output and has an approximate work force of 200.000

(Source: Business in Vietnam, Chamber Publications, 1995)

In addition, there is oil and gas exploration in South China Sea New oil and gasresources have been located at White Tiger (Bach Ho), Dragon (Rong), Big Bear (DaiHung), and Blue Dragon (Thanh Long)

Representing roughly 10 per cent of gross national product, automobile and machinerymanufacturing is poised in a delicate balance Vietnam is faced with the choice of eitherrefurbishing and refining existing production facilities through join-venture participation, orleaving such machinery manufacture to other countries, remaining a net importer of vehiclesand machines to support its other industries

What is known is that, despite having been hamstrung by a moribund economy fordecades, the roots of manufacturing in Vietnam are deep - set

3.1.2 An Overview of Industrialization and Machinery Industry’s Development

in Developing Countries.

Depending on level of industrialization and modernization in each country, the demandfor machinery industry development is different from country to country but it is possible toconfirm that machinery industry plays a very important role in the development of otherindustries In developed industrial countries, mechanical production occupied about 15 to 20per cent of GDP

In order to have a developed industry, many countries in the world like Switzerland,Japan, South Korea, etc based on machinery industry’s development Depends onparticular situation every country has different strategy for machinery industry development

In generalization, there are two trends for machinery industry to develop:

 Industrialization strategy instead of import through mechanicalization replacing for import

 Industrialization strategy forwarded export through mechanicalization for export

North America, Western Europe, Japan developed industrialization towards export withthe purpose of manufacturing mainly machine tools In 1993, general export value ofmachine tools in the world accounted for US$ 14.5 billion Among this Japan, GermanySwitzerland, United State and Italy occupied for 74 per cent South Korea, France, Englandand Canada have also turnover annually over US$ 500 million per country for machine toolsexporting

Development strategy for machinery industry in some developing Asian countries is asfollowing:

Strategy and industrialization process in developing countries are much different anddepend on:

 Country’s social and economic development level

 Natural Resources Capability

 Labour forces

 Infrastructure development: energy, transportation, telecommunication, etc

 Cumulative and investment capability

 Scientific and Technological trend

 The formation and relationship between classes in the society

The countries in Latin America such as Brazil, Mexico, Argentina, Chile, Venezuela,Colombia, Peru, Equado, the countries in Central America and in Caribbean focused onimplementing strategy of industrialization and mechanicalization instead of import

The countries with high population rate, potential natural resources in Asia such asIndia, Indonesia, Myanmar, etc in a rather long period after the second world war areconsidered as the author of the Industrialization strategy replacing for import in Asian region.But after that, it is up to Indonesia becoming a representative for industrialization strategytowards export.

For developing countries with agricultural labor occupied for 2/3 total labour force such

as India, Myanmar, Indonesia, etc it is very necessary to implement industrializationstrategy instead of import in the beginning because this put agricultural product processingindustry in a priority and reduced the expenses of foreign exchange

Developing countries in Southeast Asia and Eastern Asia, otherwise, are considered

as the representatives of industrialization toward export, such as Hongkong, Taiwan, SouthKorea:

 Hongkong: small area (1013 km2) with small islands, population is about 4 to 5 million,domestic market is small as well Therefore, in this decade, industrial production greatlyenhanced the export Hongkong export value in some years is as following:

 In 1960: Hongkong Dollar 3.94 billion

 In 1970: Hongkong Dollar 15.24 billion

years), annual GDP growth rate is about 6.7 to 8 percent (Source: Development

Strategy for Vietnam's machinery industry, Ministry of Industry)

Among the Southeast Asian countries, Singapore was the first one to become a “newindustrial country” in the beginning of 1980s together with other countries in Southeast Asialike Hongkong, Taiwan, South Korea After the separation from Malaysia Union on 8thAugust 1965, Singapore’s economy developed typically following the industrialization towardexport started with second five years plan (1960 - 1970) till the end of the industrializationprocess In this period, GDP growth rate per capita annually attained for 8 to 9 per cent.Other countries in ASEAN such as Malaysia, Thailand, Philippines, Indonesia, Bruneiexperienced the period of industrialization instead of import as well and by the middle of1960s had shifted to implementation of industrialization toward export

Percentage of exporting main industrial products (natural oil, natural gas, coal,automobile, ships, machine tools, steel, cement, fertilizer, wood, silk, etc.) of some

Table3.1: Percentage of exporting main industrial products

(Source: Static Department of Ministry of Heavy Industry)

3.1.3 The Conclusion about General Conditions for Implementing the Industrialization Toward Export

 For developing countries, after the liberalization, the shift from industrialization strategyinstead of import to industrialization strategy toward export has been implemented indifferent period of time depends on each country’s social-economic developmentcharacteristics

 For the countries having special geographical and economic - social attributes such asHongkong, Singapore, Brunei, etc., being the international trade - financial centers, theimplementation of industrialization toward export happened to be a certain objectiveneed

 Industrialization strategy toward export encouraged the industrialization process

 In fact, a suitable industrialization strategy toward export for economic - socialdevelopment gained successes in some developing countries

Following table is GDP in 1982 and average GDP growth rate (%) in the period 1973

-1982 of some Southeast Asian and East Asian countries in comparison with developedcountries This is a strong evidence to prove above conclusion:

Table 3.2: GDP growth rate (%) some Southeast Asian and East Asian countries

1982 (%)

AVERAGE GDP GROWTH RATE 1973-1982 (%)

“New industrialized countries”

(Source: Statistic Department of Ministry of Heavy Industry)

The development strategy for Mechanical industry always had organic relationship witheconomic - social development strategy as well as industrialization strategy It is clear in thecases of developing countries

Mechanic is one of 6 major fields of manufacturing industry The development ofmachinery industry can not be separated from development policy of manufacturing industry

in developing countries Untill now, among document saying about developing countries,there is none about development strategy for machinery industry in particular andseparately Besides the terms of “Industrialization strategy”, there are other terminology such

as “Investment strategy”, “Export strategy”, “Import strategy”, “Industrial strategy”, etc

However, together with industrialization process, it might be generalized twodevelopment strategies for machinery industry in developing countries as following:

Figure 3.8: Development strategy for machinery industry

(Source: Development strategy for Vietnam's Machinery Industry)

Matching with two strategies, there are two models for machinery industry development:

1/ Model of completely and totally developing machinery industry replacing import: India is a

typical case for implementing this model

Started from a country with technological development far lower than developedindustrial countries, after the industrialization process, India was numbered 13 amongcountries leading the world in general industrial products and now has become theleader among the developing countries in formation of major industries and machineryindustry in particular

In order to get this result, the Indian Government invested a rather big amount of capitalfor Machinery Industry For example, in the two years plan (1976 - 1977), IndianMechanical Industry had 10,681 enterprises with 955,000 employees, invested US$ 3.88billion (average US$ 4062 per labour) and resulted in general products value of US$5.58 billion (average US$ 5843 per labour) Thus, percentage of the whole MachineryIndustry out of all other industries:

 Number of enterprises: 13.1%

 Labour forces: 14.4%

 Investment: 15.2%

 General Products Value: 16.4%

Growth rate of Machinery Industry’s products in India:

Output Growth Rate of Indian Mechanical Industry

Figure 3.9: Output Growth Rate of Indian Machinery Industry

(Source: Statistic Department ofMinistry of Heavy Industry)

The success of this model based on two principles:

 Mechanization needs to penetrate deeply into economic sectors

 Balance between production and consumption

 Focus mainly on domestic market

In fact, India had developed every field in Machinery Industry: classical mechanicalindustry (automobile, ships, aircraft, tractors, etc., manufacturing) as well as modernmechanical industry (airline, space mechanic, nuclear industry’s equipmentmanufacturing)

In the industrialization process, Indian mechanical industry was able to produce almostevery machine and equipment used mainly in industry, agriculture and other economicsectors There are some products with very fast growth rate

2/ The selected model for the development of Machinery Industry toward export: (applied inalmost ASEAN countries and Southeast Asian countries)

Actually, Machinery Industry in some Southeast Asian countries and especially someASEAN countries developed rather late in the industrialization process However, insome “new industrial countries”, there has been a remarkable development

The selection of the model indicated in:

 Production structure for Machinery Industry

 Main field in Machinery Industry

 Strategic product of Machinery industry

 Export structure of Machinery Industry

About production structure, development process of Machinery Industry indicated aspecialized production in details (parts of equipment, machinery) The assemblingfactories are centers combining with other supporting factories which specialized inseparated parts production serving for assembling of final products This reflectedmanufacturing way of United State, Japan, etc., and some ASEAN countries as well.The fact improved that this alternative is much more efficient, especially for developingcountries and is also the way to improve the strength of crowded labour forces,especially for fields requesting a lot of workers in assembling lines such as automobile,motorcycle, electronic assembling lines

ASEAN countries entered industrialization process with very poor infrastructure formachinery industry but due to the impact of the second science and technologyrevolution with major purpose being strong development of atomization since thesecond world war, they chose the major field in Machinery industry as electronic andtransportation mechanic

Singapore, Taiwan, South Korea chose ships as a strategic products Other countriessuch as Indonesia, Philippine, Thailand, Malaysia although do not consider ships as astrategic product but ships manufacturing was formed and developed strongly as well

3.2 Current Situation of Vietnam’s Machinery Industry

Vietnam’s Machinery Industry has been formed for more than 30 years - mainly inVietnam - America war Because of selfsponsor policy, many enterprises production isclosed from embryo production to machining and assembly in order to produce necessaryproducts used in the war as well as develop the poor economy in one certain period.Therefore, most of industries and local enterprises had mechanical production

After implementing economic reform, there were 463 State-owned enterprises inMachinery Industry focused mainly on machines and equipment manufacturing and metalproducts production Among them, there are 30 enterprises belonging to the army

Main power in Machinery Industry is in hydra - electric equipment, electric equipment,transportation vehicle, machines parts for industries, etc., production and concentrates in theMinistry of Heavy Industry, Ministry of Transportation, Energy, Construction, Agriculture andFood processing Industry with total current and fixed assets accounted for over 80 per cent

of total capital of State - owned Mechanical enterprises but for just only 7 per cent of totalassets value of the whole industry

Three big cities: Hanoi, Haiphong, and Ho Chi Minh city have rather well-equippedmechanical capability Each city has 5 to 7 enterprises producing processing equipment,machine tools and common electric equipment

Almost all provinces have 1 or 2 mechanical factories specialized in small processingequipment production, small water pumps and labour tools which served local demands.Non-State owned mechanical enterprises consist of 929 mechanical cooperatives, 43private enterprises and 28,464 small scale mechanical family companies.

Total fixed assets of machinery industry accounted for more than VND 3000 billionwith nearly 50,000 machine tools (among them about 10,000 broken down seriously) Most

of machines and equipment have been used for 25 to 30 years In Northern mechanicalenterprises, almost all machines and equipment were subsidized by other Social republiccountries since 1960s

Total number of labour force is about 200,000 employees, among them 104,000working in State owned mechanical enterprises and more than 93,000 working in privatemechanical enterprises It is a remarkable attention that there are over 10,000 technicalstaffs who graduated from universities with rather high educational level and 12 researchinstitutes specialized in mechanical design research

With present mechanical capability, Vietnam is able to produce by itself moulds ofmachine parts of 3 to 4 tons, machine parts with the length of 12m by drills, diameter 6,3m inuniversal lathes, etc

Technological capability: most of mechanical factories were formed from 1960s Thus,technology is obsolete and of low accuracy There are still many machines and equipmentthat have been used since French colonial period, after many hard working years in a verybad working environment (lack of functional parts and maintenance) causing earlybreakdown Most of factories lack high quality equipment to ensure the product quality aswell as technological process required high accuracy, lack of machines which are able toproduce big parts in completed systems of equipment Equipment for total quality controllingalso are in a very urgent need because they are not enough in even quantities

Together with obsolete machines and equipment adding with inefficient managementstyle is leading to low quality products In addition, products’ appearance is not good enough

to attract customers as well as to compete with foreign products Currently, the industry isbeginning to export some kinds of products to some countries in the region such as Taiwan,Indonesia, etc

Technological know-how is not much different from factory to factory Therefore manyfactories produced the same products which are easier to produce That led to the situation

of supply over demand-products surplus Vietnam’s Machinery Industry generally did nothave modern technological know-how that would make it possible to be specialized andcooperated - the very important demand on mechanical production

Inspite of poor capability and low level of technological know-how in mechanicalproduction, in the current situation of Vietnam’s Machinery Industry, the existinginfrastructure and human resources are very important strength making it able to developthe whole industry in the near future

The fact proved that, in 1993 Vietnam’s Machinery Industry produced more than 500

complete assembly lines for some other industries such as for food processing industry,sugarcane refinery industry, cement industries, etc.

Army controlled mechanical enterprises have produced products not only for army andsocial security but also for daily life

Since 1992 till now, there are 4 joint-ventures specialized in automobile assemblingfrom SKD-CKD Among them 2 joint-ventures sold their products in the domestic market aswell as exported

Private mechanical enterprises produced many mechanical products such as toolsused in agricultural production, small processing machine, consumer goods servingnecessary demand of customers

With current human resource development, product’s quality produced is sufficient withexisting know-how capability, quality and efficiency is still low The main reason is obsoletetechnology, old equipment and lack of some necessary policy to develop completely theindustry’s capability However, through many difficulties in beginning years of “reform”, manyenterprises found out the way to go which suits gradually with new policy, know how to enterthe market and had a good grasp of market demand to organize business

3.3 Vietnam’s Machine Tools Industry

Apart from the automotive and machinery sector, the rapidly - advancing machine toolsindustry has become solidly grounded in Vietnam Since 1991, there have been manydelegations from machine tool and general manufacturers, as well as one major machinetool exhibition In addition, there have been equipment demonstrations and presentations,

as well as donations of machinery equipment for education and training

SKF, the leading Swedish producer of bearings, has been supplying Vietnam withbearings and components since 1990 Servicing a diverse range of industries - from cement,paper and rubber to mining, railways and textiles - the company now has its focus onrecruiting and training local engineers as well as increasing its market share Apparently with

no immediate plans to commence local production, SKF’s competition comes from Japanand Germany, with America now able to join the competition

Machine tools such as lathes, shapers, drills, air-compressors are traditional importantproducts of this industry However, enterprises (factories) producing these products met a lot

of difficulties after changing from the planed centered economy to the market economy Onone side, these enterprises lost the aid from the Government when Government paid muchmore attention in consumer goods production, domestic demand for Machine toolsdecreased and this industry did not have technical capability to compete with industrializedcountries as well

Machine tools is very important products among many types of machines It is called

“major machine” meaning that it is the machine producing other machines

There are still very few in number of machine tools produces in ASEAN, so Vietnamcan export machine tools products to other countries in the region if the products isimproved to have powerful competitiveness One serious disadvantage of Vietnamesemachine tools is a lack of numerical control technology (NC) While nearly 80 per cent ofmachine tools in the world market is equipped with NC, Vietnam still does not produce it

In fact, it is really difficult to produce NC in the Vietnamese market but there are plenty

of NC types being available in the world market Japanese machine tools manufacturerspurchase NC parts from manufacturers who specialized in NC production abroad instead ofproducing by themselves This production way can be a very good experience forVietnamese machine tools manufacturers to follow And there is one more point ofadvantage for Vietnamese machine tools production: it is totally easy to combine NC partswith existing machine tools in Vietnam

3.4 Major Limitations in Vietnam’s Machinery Industry

1) Low productivity:

Basically, Machinery Industry is a industry bringing high profit because it producesmachines and equipment from raw material However, Machinery Industry in Hanoiproduced output that accounted for only VND 9 million per capita, and for 1/200 ofindustrial rate in industrialized countries

2) Operation’s speed of machines equipment:

The clear reason of low profitability is low efficiency of equipment (adjusted lower than

20 per cent) It is because of the lack of jobs as well as equipment and production beingnot suitable

3) Unused machines and raw materials:

There are a lot of abundant machines and raw materials in every factories This led tothe changes in existing harmony of the factories And it is difficult for factories’ leaders

to decide leaving these abundant things because they belong to the Government.4) Poor working condition:

Factories are very dark, not bright enough for workers to perform their jobs properly.The absence of air-conditioning systems make the environment stuffy

5) Foreign exchange:

As shown in the chart below, dollars seemed to be devalued in comparison with theincrease in retailing price made it difficult to import but to easier export

Comparison between the increase in retail price and

US$

0 100 200 300 400

1985 1986 1987 1988 1989 1990 1991 1992 1993

YEAR INDEX

Retail Price Exchange Rate

Figure 3.10: Comparison between the increase in retail price and exchange rate

6) In Vietnam, export depends on agriculture and fishery products, import depends onindustrial products In this field, machine manufacturing industry has impact of foreignexchange rate in 1989

7) Government’s intervention:

Most of the factories in Machinery Industry belong to the Ministry of Heavy Industry Butthere are still many others belonging to other Ministries such as the Ministry ofTransportation, Forestry Ministry, Ministry of Water Resources, etc., and is not under thecontrol of the Ministry of Heavy Industry With this situation, it seems very difficult to have

a unified national development policy for Machinery Industry

3.5 Success Factors (for companies within industry in general)

Experiences gained by survival and developed enterprises (Source: Planning

Department, Ministry of Industry)

1 It is necessary to have a leader who is dynamic, eager to learn the new things and suitquickly with the “reform”, know the way to mobilize enterprises’ capability of technology,assets, human resources, etc., in order to renew the existing technology, to improveproduct’s quality, reduce production cost, design new products matching with theincreasing and difficult demands of customers and being able to compete successfully inthe market This leader needs to know many production alternatives in order to be active(or to take the initiative) in some difficult situations He needs to have right decision inchoosing investment policy which matches the enterprises capital capability

2 It is necessary to have large scale and complicated products that make it possible formany other enterprises to attend in the production as much as each one capability

3 In recent years, as Vietnam economy developed increasingly, demand for machines andequipment for some industries increases Some joint-venture companies brought into

parts being able to be produced by Vietnam’s Machinery Industry In order to do that,Vietnam’s mechanical enterprises need to be reorganized according to the trend ofspecialization, cooperation, making full use of enterprises’ capability, increaseproductivity, reducing production cost, ensuring product’s quality following a certainstandardized system.

4 Since the middle of 1993 to now, many large firms in the world started to pay attention

to mechanical manufacturing Till the end of 1994, there have been 57 jot-ventureprojects and investment of 100 per cent foreign partners’ capital in mechanical field.These projects, however, are small scale ones but if there is also right implementation itwill contribute in making the machinery industry have stronger capability of capital,equipment and production technology, especially in automobile manufacturing and there

is one jot-venture producing heavy mechanical products between Vietnam and SouthKorea being formed

5 The biggest problem of Machinery Industry in Vietnam for many years is that “closedproduction” with machines and equipment’s aided from socialist countries did not make itsynchronous Because of self-sufficing policy, mechanical production in Vietnam is justfew in number with obsolete equipment’s and technology, low technical know-how led tonon-synchronous and understandardized products, high production costs and faced therejection of the market All of these attributes are different from conditions for thedevelopment of Machinery Industry which urged highly specialization and largecooperation

6 In many developed industrial countries, production of every product type needed tocombine with hundreds of different production functions depended on the differentcomplicated levels of products It is very necessary for Vietnam Machinery Industry toreorganize itself based on the trend of the developed countries to form technologicalcenters in order to invest suitably in current situation

It is also because of self-sufficing policy lasting for too many years, every localindustries had their owned mechanical production with the same production technologyleading to the abundant products Some enterprises depressed seriously, some even came

to the bankruptcy Some other even gave up mechanical production and shifted to beer,beverage production, etc.,

In fact, the Government did not have a suitable policy in favor for the development ofMachinery Industry-the very important industry in the modernization and industrialization ofthe country It is urgent for the Government to keep an eye on Machinery Industry, to issuespecial policy or first priority for Machinery Industry

3.6 Future Trend for The Development of Vietnamese Machinery Industry up to The Year 2005-2010

3.6.1 Strategic View

According to political report of 8th Communist Party Congress major goals of thewhole country in coming years is: Encouraging the economic shifting followed the trend ofindustrialization and modernization.

Machinery Industry plays a extremely important role in reequipping State-Ownedeconomic sectors Therefore, if we want to industrialize and modernize the country, to push

up the economic growth, it is necessary to improve Machinery Industry, make it become adriving force, possible to equip most of machines and equipment for all other industries Thedevelopment of Machinery Industry contributes a lot in defense the country as well

There are basic strategy needed to be used in development process of MachineryIndustry, which pressed on: the deep investment in this field, thoroughly exploit productionand technological capability, focus on attributes decided competitiveness of the product,combining traditional technology with modern technology based on particular conditions.Machinery Industry with low profitability, slow speed of return on capital needed toinvest in first priority by exploited capital resources, should cooperate with foreign partners torenew production technology, build new decisive factories in production being able toproduce high quality product and to compete successfully in domestic market as well asinternational market

3.6.2 Goals And Production Alternatives in The Period 2000-2005 and 2010

(focused on products concerning to HAMECO products)

 Equipment’s for cement industry: trying to meet the goal of producing 20-21 million tons

in the year 2000 and 40-45 million tons in the year 2010

 Machine parts: plan is about 67,000 tons in 1996-2000 and in the year 2010 is 39,000tons Among this, 80 per cent is produced domestically

 Comparing with current production ability, in the period 1996-2000, cements’ output will

be 14.8 million tons increased Thus, there is the need of 120,000 tons of equipment’sfor cement kilns production (domestic production accounted for 20 to 40 per cent, nearly36,200 tons) and 8,000 tons equipment for shaft cement kilns production (domesticproduction accounted for 50 to 60 per cent, nearly 4,800 tons)

 Equipment for brick manufacturing: the year 2000 planed to produced 10 to 11 billionbricks Thus, in the period of 1996-2000 needed 115 equipment lines accounted for23,000 tons

 Equipment for construction: 4000 to 5000 tons

 Sugarcane refinery industry:Ensuring to provide equipment for processing line produced100-500 tons of sugarcane per day to 1500 tons/day combination of some exportequipment, producing about 20-40 per cent of equipment for production lines of2000,4000,6000 tons of sugarcane per day