Chapter 15
Hardware production in Vietnam

In October 1993 all of the Vietnamese companies engaged in television manufacture were building products on a franchise manufacturing basis (see Figure 8 for a description). This sourcing arrangement between Vietnamese companies and their foreign partners means that products are built according to specific brand name designs.

The technology used for circuit board assembly in Vietnam is hand PTH (see Chapter 14 above for explanations of circuit board assembly tech- nology). Franchise manufacturing does not encourage the localization of services 'up-stream' from manufacturing, such as manufacturing design, (circuit board layout, etc.) and component purchasing (for the stages of production associated with franchise manufacturing see Chapter 14, Figure 7). For these and related reasons, little learning is accomplished and little technology is transferred to the Vietnamese partner.

As we emphasized already in the beginning of this report, IT policies should enable all actors in Vietnam to capture new knowledge as it becomes available in the country. The local manufacturing of foreign products is an activity that may have excellent potential for technology and know-how transfer. Unfortunately, in the emerging Vietnamese IT industry, very little technology and related know-how seems to be transferred.

In addition, the competitiveness of products in franchise manufacturing suffers because of the high cost of the inputs to production. Because local manufacturers are locked into buying components from the 'brand name' companies (or a related trading company), the Vietnamese partner company cannot always use its advantageous location in the Asia-Pacific region to search for lower cost components. This situation may decrease Vietnamese profits and increase overall production costs.

As a result, products that are more expensive than others available in the region will encourage "non-official trade". Although few television sets were being smuggled into Vietnam as of October 1993, the local production of radio-cassettes had already been sharply curtailed because of high levels of "non-official trade" in these products. This problem could easily arise iri the television market as well, putting Vietnamese manufacturers out of business.

Because of a lack of assembly technology for CKD (circuit board) assembly, and because there are no imports duties levied against computers (see Figure 9), virtually all computers currently sold in Vietnam are made outside the country and imported. Systems integrators and computer re-sellers (such as in 3C and Computer Company No. 2 in HCM City and FPT in Hanoi) do, however, assemble many PCs at the SKD level (product assembly level) in order to configure the systems for particular applications. S KD product assembly requires few skills and little more than a screwdriver to perform.

It is important for policy makers to bear in mind that import duties are limited tools to encourage domestic manufacturing. SMT assembly is required for circuit board (CKD) level manufacturing of nearly all computers, VCRs, and telecommunications equipment requires (as it is for most newer consumer electronics, automotive electronics, and computer peripherals).

Besides the lack of SMT assembly capacity in Vietnam as well as the current lack of import duties, the reason that no computers are being manufactured in Vietnam at the circuit board (CKD) level is because tax laws favor imports over domestic production. As of 1993, there was no import duty for fully or partially assembled computers, while the national trade tax on computers assembled at the circuit board level was 8 per cent. This tax

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