KINH DO AND THE AFTA, BTA, AND WTO ACCESSION

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1 AWARENESS AND REACTION IN SERVICE, INVESTMENT, INTELLECTUAL PROPERTY, AND COMPETITIVENESS OF PRIVATE COMPANIES KINH DO: THE PROCESS OF FORMULATION AND DEVELOPMENT! 1993: Kinh Do company was established from a small confectionery plant with 70 workers, mainly producing snacks.! 1996: Kinh Do invested in the first production facility in Thu Duc, on an area of 13,000 square meters, with 500 workers. At the same time, Kinh Do made the first hit in investing in the cookies production line with modern technology imported from Denmark, with the capacity of 10 tons per day. Jam-centered cookies became Kinh Do's cutting edge in the domestic market and some export market.! 1997: Kinh Do company imported the production line to make industrial bread and croissance with the capacity of 25 tons per day. From this year, Kinh Do products were distributed widely throughout 64 provinces in the country, even to the remote area, through its 110 distributors and agents covering the whole country.! 1998: Kinh Do Company imported the production line to produce chocolate. In this year, for the first time, Saigon Marketing newspaper organized a consumer survey to select the "High quality Vietnamese goods voted by consumers". Kinh Do brand name was selected by consumers for many consecutive years. In 2003, Kinh Do Company was honored to be listed in the "Top-ten" of High quality Vietnamese Goods".! 1999: Chartered capital of Kinh Do Company was increased to VND 40 billion and the company started entering the market for Moon cake, setting up the Savico- Kinh Do Trade Center in District 1, Ho Chi Minh City, and launched the first Kinh Do Bakery, followed by a chain of Kinh Do Bakery from the North to the South later on.! 2000: To develop the production, Kinh Do expanded the Southern facility to 60,000 square meters and built the Northern factory on an area of 28,000 square meters. At the same time, Kinh Do pioneered the investment ina an advanced production line for savory crackers, imported from Europe (for the first time in Vietnam) with the capacity of 20 tons per day. Crackers under the brand name of AFC made by Kinh Do became the favored products of consumers at home and abroad. In the same year, BVQI made evaluation and certified that the quality control system of the company achieved ISO standard.! 2001: Kinh Do Company increased investment in equipment and technology to promote export. In April 2001, the company imported a production line for hard candy and soft candy with the capacity of 2 tons per hour. In June 2001, the company imported the second production line for cracker, thus increasing the total capacity for cracker to 51 tons per day.! 2002: To continue the momentum, Kinh Do Company further invested in the automated production line for high quality chocolate. In 2002 Kinh Do made a breakthrough in export, increasing its export value by 124.5% over Currently, the company has 30 large customers; its products are present in more than 20 countries around the world; the United States is the biggest market, with 80% of total export by the company. 1

2 ! 2003: To complete the investment for industrialization and modernization of candy and cookies production, Kinh Do Company imported another production line for cracker and one for cookies. Given the current export level ( containers per month), the company belies it would reach the targeted US$ 10 million of export value in At the same time, this year Kinh Do Company negotiated to take over the Wall icecream factory from Unilever, and expand the company's range of products. Especially, over the last 5 months, Kinh Do's products were selected by the People's Committee of Ho Chi Minh City to be in the list of key products of the City. To make such achievement, Kinh Do Company took bold steps to invest in new technology and equipment, to diversify design to increase the competitiveness versus other local companies and companies in the region as well. And to further develop and catch up with the economic development of the country, Kinh Do Company has been applying advanced management method, the quality control system with ISO standard, worked with experienced exports and well-known consulting firms like PricewaterhouseCooper to develop a resource management system, using Solomon software, and trained human resource in order to improve the business performance. Beside the growth and development objective, Kinh Do Company also cared about its contribution to the state budget, stable job creation for workers. Not only that, Kinh Do also actively funded sport activities, social activities, and charity. The most significant contribution was to the establishment of the Fund for Poor Patients by Kinh Do, with the value of VND 1.16 billion in Given the regional integration and the certain associated difficulties, Kinh Do Company needs to make more efforts. With the support of the Party, the government, People's Committee of Ho Chi Minh City, we believe that Kinh Do would further develop sustainably to create more jobs for workers and contribute more to the society. KINH DO AND THE AFTA, BTA, AND WTO ACCESSION Since 1996, when discussion was about Vietnam's joining AFTA, the time for signature of the BTA, Kinh Do Company initiated a strategy for renewing its equipment and technology, to diversify design and sought possibility for export, especially to the US market, while occupying the domestic market. However, it took 5 years after a period of product research, offer, sample show, challenged by the very stringent phytosanitary quarantine barrier by the US customs, and time to conquer the candy distribution network in the US, Kinh Do Company eventually received modest orders with the few hundred thousand dollars in value. The targeted US$ 10 million of export value in 2003 is set, of which 80% is export to the US. Given our limited export, related to the WTO accession, we hope the viewpoints presented below will contribute to the topic of this forum. 2

3 OPPORTUNITIES AND CHALLENGES OF WTO ACCESSION Obviously, there are concerns that trade liberalization in international economic integration will be associated with big challenges that we should be aware of. However, with the commitment to "seek profit out of risk", "without prejudice", we believe that the positive side and opportunities of globalization should taken into consideration and analyzed to tap on their potential Opportunities 1. Comparative advantages of countries: Since we opened up the economy, for the last decade many people talked about Vietnam's comparative advantages in abundant and cheap labor, favorable geographical location, diverse natural resources, etc. However, no one has ever tried to quantify these advantages for pairs of nations. And now, given the trend toward international economic integration, enterprises cannot wait for somebody to tell them which product is of Vietnam's advantage versus other countries. Therefore, Kinh Do Company has to find its own way in this daunting process. The comparative advantage is already there and now opens up new opportunities while we go global. The reward for productivity growth will go to those enterprises that soon find its target market. 2. Market for the product is not limited to 80 million people in Vietnam. Export market is opened up, and we no longer have to rely on a few "traditional" market. The trend toward international integration emerged in recent years; before that Vietnam used to trade with many other countries. When the economy was reformed, foreign trade has helped many Vietnamese enterprises to find new partners. At the national level, the foreign trade policy helped Vietnam overcome the difficulties under the trade embargo imposed by the United States. When we joined AFTA, APEC, BTA, and soon WTO, the opportunities for Vietnamese enterprises its to bypass the intermediary market and directly go to the end user market. Of course, there are hurdles to be passed on this new road, but anyway it gives us more opportunities to select and compare. In fact, Kinh Do company has 30 customers around 20 countries, and we believe that these numbers will increase together with Vietnam's WTO accession. 3. More diverse demand of consumers motivates production growth. As we all know, our wish is unlimited, while our money is limited. Confectionery is a long time product in each nation; but the flavor of confectionery varies from one country to the next, and can be introduced to make it more enriched. Kinh Do even tries to meet exactly the taste for confectionery in those countries, and to meet consumers' taste, with high quality and competitive price. International economic integration opens up opportunities for Kinh Do to join this process. There are products that few people may think of. For example, folded hammocks. Some private enterprises have successfully exported this product with growing volume to Europe and America, where we would not think there is a demand for it. 4. Increased access to foreign investment, modern technology, and investment in science and technology. We usually think that technology is the cutting edge of MNCs in seeking profit, to compete and gain market share. However, the reality shows that trade liberalization and economic globalization create new flows of science and technology, and many countries are motivated to develop science and technology. Therefore, the gap in science and technology between countries has been shortened after each decade. This is why over the last 10 years of its development, Kinh Do Company always invested in changing equipment and in modern technology, to diversify product design, the improve its competitiveness, not just versus domestic enterprises, but also those in the region. On the other hand, the case of Vietnamese catfish in the US makes us think that maybe Vietnamese catfish compete on cheap labor and low cost only. The farmers who grow catfish know how to breed, to care in an appropriate way in the natural environment. Maybe that is a kind of folk technology that is still not fully studied as a comparative advantage? 3

4 5. More opportunities to invest at home and abroad, to export on the spot and cross-border. Following this thought, Kinh Do Company considered its direct investment in the US market, with a confectionery plant. At the same time, Kinh Do Company also pay attention to Vietnam's tourism industry that brings million of visitors each year, and Kinh Do then has a chance to export ice-cream and confectionery on the spot. We do not have ambition to compete with the MNCs in this industry. But given the trend toward international economic integration, we cannot help but find our own way to survive and develop among the giants. 6. Opportunities to select among many better inputs (technology, raw material, labor) at lower cost, and training professional staff. International economic integration allows enterprises to select the inputs that bring higher efficiency to them. The supply sources of these inputs, either domestic or imported, have to compete against each others. The style of arm length production on the autarkist basis has now turned to cooperation, division, and more sophisticated specialization or professionalism. In this regard, Kinh Do Company had experience in buying technology from Taiwan instead of waiting for Vietnamese engineers to study and invent at much high cost. However, we are now selling to Russia a number of technologies that we have upgraded from the ones we bought before. 7. More motivation for reform, growth, and development. The six opportunities mentioned above are also 6 pressures on Kinh Do Company to make more efforts to tap these opportunities. Challenges : 1. Integration brings more benefit to developed countries than to developing countries We see this not from political point of view. From the entrepreneurial point of view, the reality of economic globalization of the past years indicated that the developed countries, by various means and under various covers, always tried to maintain protectionism and discrimination against the commodities from developing countries. Although the door for trade liberalization in the developed countries is open, the invisible barriers, both direct and indirect, are errected and go against the principle of trade liberalization under the WTO. Maybe confectionery exported by Kinh Do Company in particular and by Vietnamese enterprises in general is not significant enough to threaten the confectionery industry of the host country. But the evidence from the Vietnamese catfish case shows that the door of trade liberalization is open, but it is not easy to enter. Maybe more Vietnamese catfish would enter the US market, but not by direct export from Vietnamese companies, instead through American corporations? WTO supports competition, restrict the unfair competition practices such as export subsidies and dumping to gain market share. This is not forbidden by regulations, but trade retaliation is allowed and the affected member countries have the right to be compensated. Then legal disputes occur, and SMEs in the developing countries are always the losers, since the cost of "justice" is too high compared to their financial resources. 2. MNCs and their products share the international market, and there is little room left for SMEs. In recent years, together with trade liberalization and economic globalization, mergers also take place between MNCs, especially in high-tech industries. The sale network of these MNCs have been divided, their pricing is agreed, with budget allocated to the "bombing" marketing campaign, and modern corporate governance. All of these sweep away SMEs, not just in the developed countries, but also in the developing countries. However, the expanded international market is not for big companies only. A survey conducted by the UN on SMEs around the world indicated 4 areas that SMEs can have comparative advantage versus 4

5 the MNCs: i) taking advantage of the business opportunities left by big companies; ii) using the technology disposed by big companies, but still have market; iii) adapt the technology to be appropriate to the market size, combing between labor intensity and value added investment and intellectual intensity; iv) the biggest advantage of SMEs is low cost thanks to simple and flexible organization and management, which are highly adaptive. This is true, but not all SMEs can easily seize this opportunity and take advantage. Based on Kinh Do Company's experience, it is not as easy as suggested by the UN study to tap these advantage. Unfortunately, the findings from the US survey do not tell the proportion of SMEs that are successful in tapping these advantages; but it cannot be majority. Kinh Do Company hopes to belong to the minority that success in the process of the international economic integration. 3. Growing competition pressure in prices, design, quality, and delivery, forcing enterprises to have technology, innovation, with better products, and the leadership to have broader knowledge and strategic vision, better understanding of the rule of the game in economic globalization. These competitive pressures are falling on SMEs even in the domestic market. For confectionery, under AFTA, from 2003, tariff on confectionery imported from ASEAN countries will fall from 50% to 20%, and from 2006 to 5%. This creates great competitive pressure from ASEAN originated confectionery in the Vietnamese market. In the export market, competitive pressure will also be fierce. For example, Vietnamese products exported to the US have to compete not only with the American products, but also those from third countries that export to the US. Conclusion Given the trend toward economic globalization, competition takes place in the domestic market and becomes more internationalized. No matter they want it or not, enterprises have to face with many challenges ahead. Only by enhancing the capacity and competitiveness, can domestic enterprises maintain their foothold in both domestic and foreign markets. In this course of integration, there are both opportunities and challenges, both benefit and costs, and there is the negative side of international economic integration. However, we believe that both opportunities and challenges are not equally shared by all enterprises or nations. The level of opportunities or challenges to each enterprise or nation depends on the level of development and competitiveness thereof. The following diagram shows this relation: % OPPORTUNITIES CHALLENGES Fir m Fir m Firm J Fir m A B COUNTRY X Z COUNTRY Y Developme nt level and competitiv eness 5

6 Assuming that the opportunities/challenges ratio is 50/50, enterprises in any country with higher development level and competitiveness will have higher capacity to take the opportunities and easier to overcome challenges, while enterprises in a country with lower development level and lower competitiveness will suffer difficulties in seizing the opportunities and more difficult to overcome challenges. We can imagine the picture where Vietnamese enterprises like the slender boats going to the BTA - AFTA sea and in the coming time to the WTO ocean. Off- shore fishing is promising with the opportunities to find big fish markets, but at the same time it is confronting with many challenges of strong storms and waves. How do the Vietnamese boats- enterprises prepare for overcoming competition and pressures suffered when going to this WTO ocean? COMPETITION AND PRESSURES OPPORTUNITIE DEVELOPMEN T 1987: MARKET MECHANISM BT A AFT A WT O Local competitio n Competitio n for export Regionally wide competition Global competitio n HOW TO PREPARE FOR INTEGRATION? ROLE OF THE GOVERNMENT IN SUPPORTING THE WTO ACCESSION OF ENTERPRISES. In the process of global economic integration, enterprises cannot compete on their own. The government should play an important role, particularly in the stage of negotiating and signing international agreements, formulating policy commitments to follow the "game rules" of the global market mechanisms. After this stage, enterprises must confront with the challenges themselves, seeking and catching business opportunities by themselves. The businesses' expectations from the government are following: 1. Sharing the information on trade policies and status of all trade partners. The wide information sharing will help enterprises to understand better what they have to do under the international legal framework? What are the potential actions of their competitors in the international business environment? 6

7 2. Formulation of special and discriminated principles, which are relevant to the development levels of individual export and import groups and clear road- maps. The government needs a strategy to support enterprise restructuring in consistency with the restructure directions of the whole economy. We have to identify the road map showing that the government support will be applied for a limitted time. To the end of the road the regulation will be enforced with stopping the government's protection. This road map is with adjustment. Therefore, what reforms need to be done by different sectors as directed by the strategy to support enterprises? 3. Updating international and national regulation relating to competition. Enterprises have to improve the competiveness, but how they can compete within the international and national regulation to prevent from chaos in the domestic markets? It is a big challenge to the Government in running state management functions in the context of global economic integration. 4. Improving favourable social, political and legal environment for business investment. During the integration, there are many problems to be solved in synergy by the government, not only economic problems, but also other problems, e.g. human resources development problems. The competitiveness of a nation or an enterprise depends largely on the capacity, skills and spirit of individual persons. Enterprises can invest in R&D and skills training only if they have trained personnel of high qualification. Company culture is also established based on the social culture of a nation, not of multinational companies. 5. Helping enterprises to overcome the shortage of "know-how", technology and information. These are the weaknesses of majority of SMEs in developing countries making them vulnerable entities in the severe conditions of market mechanism during the economic globalization. 6. Protecting property right The State plays the role in facilitating the information exchanges between researchers to prevent overlapping in researches, giving incentives to innovative researches, improving the knowledge of the society, creating favorable environment for investment, for mobilization of foreign and domestic investment into the industries which need property right protection, and at the same time preventing the "brain drain" to the countries where their property rights can be protected. Only when the property right protection is regulated effectively, enterprises will be encouraged invest in commercialization of patents and inventions, scientific research products, invest R&D transfer, to help enterprises to build up trade marks, licensing their trade marks, prepare the budgets for advertisements, improvement of their competitiveness in the international and domestic markets. At the same time, enterprises will be supported with the fighting against counterfeit goods and it is the way to protect the consumers' interests. At present, there are resistance and barriers to property right protection, such as the purchases of stolen goods (no property right) at low price are considered the way to "support" the poor and low income people, or support SMEs. There are some wrong views that only developed countries, big business groups and multinational companies can benefit from property right protection. Would developing countries and SMEs know how to get their property rights protected? In addition, the habits of doing business without any strategy, using tricks of trade, copying the designs and ideas of other enteprises without innovation are the barriers to some SMEs themselves. However, high business registration costs and high costs for appeals for property rights with complicated paper works and low protection enforcement can easily disappoint investors. The government must build a good image of the nation, respected by the international community, not the nation protecting the property right thieves. 7

8 DEVELOPMENT DIRECTION OF THE FOOD INDUSTRY IN ACCESSING WTO. 1. Take the advantages of agriculture for food processing industry development and diversification. The export of raw and fresh agricultural products will be not stable and inefficient because of the lack of the products with distinction and large number of competitors. Therefore, during the WTO accession, we have to develop the advantages of a diversified agriculture for a mix and diversified food processing industry development with so what distinct products of high service, "know-how" and modern technology values. 2. Take the business opportunities which have not been taken yet by multinational companies, explore the market niche. In addition to the traditional items of "top ten" exporters in the international markets, we have to explore the niche of the international markets. The market niche is small, but sufficient for Vietnamese enterprises, mostly SMEs- to make profits for investment accumulation. 3. Encourage trade promotion. Develop national and business trade marks. Joining the international market, Vietnamese products need "brand names". The government need to spend the budget for building national trade mark as the shared wealth of many enterprises in a region. At present, the government has spent hundreds of billion dong for some businesses for trade promotion, for advertising their own trade marks, causing the inequity in competition between enterprises. 4. Establish joinvetures or associations to be strong business groups. Global market operates like any domestic market: "big fish eats smaller ones", competition for survival- but at the same time, "doing business in cooperation". Global economic integration includes internal narrow cooperation and wide external cooperation. The competitiveness of enterprises shows not only the internal capacity of enterprises, but also the capacity to take advantage of business groups' as well as the whole regional economic bloc. 5. Absorb modern technologies with due attention paid to R&D - training for management capacity improvement. Economic globalization is the process of continuous confrontation with many newer, more complicated dangers and risks, more sophisticated default and sabotage tricks. Therefore, managers have to be equipped with broader knowledge, strategic visions because they will suffer more work loads, they need to be more dynamic, innovative and more adaptive. Despite that, we cannot wait for having the managers trained with comprehensive capacity and the strength of businesses cannot depend only on an excellent individual. The development of businesses should build on two types of technologies: advanced production technology and modern governance technology. In addition, for sustainable development enterprises should pay special attention to R&D, which is the weakness of Vietnamese enterprises. PROPOSED SOLUTIONS 1. The government shall develop the comparative advantages of a nation to help enterprises in improving business competitive advantages. As mentioned above, the competitive advantages of a nation and an enterprise are in mutual interaction. Therefore, the economic restructure should base on the quantitative estimates of the business opportunities of enterprises by putting investment into the Vietnamese products of comparative advantages. 2. SMEs shall be supported to improve their competitive advantages against multinational companies through integration policies and schedule. Here we don't recommend the protection policy in various modalities, but the government needs to introduce the policies helping enterprises to be grown up by themselves. For example, instead of allowing enterprises to use 10%, not 7% of cost as before for advertisement and trade marks promotion, the government needs to encourage enterprises to prepare a marketing and trademark promotion strategies as a long-term investment project and allowing 8

9 enterprises to depreciate the investment. According to the current financing policies, only investment in tangible, not intangible assets, is allowed to be depreciated, while the investment in intangible assets can bring incremental value of higher rate. 3. Improve the legal framework to be transparent to foreign investors. Foreign investors want a clear legal framework and stable policies. Therefore, the advantages of Vietnam mentioned is political stability, but it is difficult to attract foreign investment into Vietnam without stable policy environment. 4. Disseminate information on rights, obligations and adequate enforcement of the property right protection. The laws which are in consistent with TRIPS shall be quickly issued and enforced strictly participating international conventions, establishing the easily accessible channels to the international property right protection offices (WIPO) - disseminating information on the rights, obligations and enforcement in consistency with the Law on property right protection - training good policemen, marine officers, lawyers, judges who are able to process cases equally, transparently and quickly - encouraging the establishment of associations, mass organizations as the representative of the persons who need registration for the property right protection- Developing the legal services at low fees affordable to SMEs... 9