Enhancing the logistics sector’s competitiveness

Thursday, 2017-02-23 09:04:08
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NDO - Logistics is considered as one of the arteries of an economy and the bridge for trade between domestic and global markets, but in Vietnam the sector’s growth is still not on par with its significant role.

Prime Minister Nguyen Xuan Phuc has recently approved a plan to enhance the sector’s competitiveness towards 2025, which is expected to create a strong boost to make logistics a sector with a high added value, acting to support and stimulate socio-economic development, thereby contributing to improving national competitiveness.

New resources for development

The logistics sector in Vietnam has experienced a long period of development. In recent years, as the country deepened its reforms and opened up further to the world while foreign trade became more robust, logistics has also seen positive developments. However, the sector’s development level is still rather low, with only 1,500 enterprises compared with a total of 700,000 enterprises throughout the country. The sector’s contribution to the economy is also not commensurate with its potential, at only 3% of GDP, while costs account for 20-25% of GDP compared with only 10-13% in developed countries and 15-25% in developing countries. Minimising the costs of logistics is crucial to enhancing national competitiveness, especially as Vietnam’s trade is growing, reaching nearly US$400 billion 2016.

Logistics expert Nguyen Tuong says unstable supply chains are the main factor driving up Vietnam’s logistics costs. Statistics show that the average speed of lorries on Vietnam’s highways is only 35 kilometres per hour, significantly lower than other countries while one third of lorries are left vacant on their route home after goods have been delivered. In addition, Vietnam’s customs procedures are also three days longer than the top performing country in Southeast Asia. Another research suggests that if supply chains are better organised, an enterprise can cut warehouse costs by up to VND100 million (US$4,400) each year.

In addition, the ratio of logistics outsourcing, a key performance indicator, is also low. The majority of manufacturers, exporters and importers usually conduct logistic services on their own with high costs and low efficiency, thereby reducing competitiveness. Moreover, during the process of opening-up, foreign enterprises have been increasingly penetrating Vietnam’s logistics market. Most of them are large multinationals with strong financial capacity and experience so they have quickly dominated the domestic market. Meanwhile domestic logistics service providers, with the relatively small remaining share being forced to become subcontractors for foreign enterprises, are employed in the simplest stages of the logistics supply chain.

The monopoly of foreign providers is also one of the reasons for increased export costs as Vietnamese enterprises must pay high costs, sometimes unreasonably high, to foreign shipping companies. There is no way to prevent foreign logistics companies from imposing high fees, something which is expected to continue happening in the time ahead. Experts say this situation will continue because Vietnamese enterprises are reluctant to use domestic services.

Some domestic logistics services companies have succeeded in securing the trust of export and import companies but that number is very small. It is a result of Vietnamese enterprises favouring foreign providers, the practice of granting the right to choose logistics services to foreign partners, and lack of attention to supply chains, making them unwilling to use outsourced services or only use separate services.

Strengthening connections

Domestic logistics companies have yet to take a proactive approach to collaborating with export-import companies and are weak in providing multimodal transport services or overall logistics solutions. Nha Be Garment Company CEO Dinh Van Thap says if logistics are considered as a service to help manufacturers manage the task from factories to places of consumption or materials from suppliers to factories, then Vietnam’s logistics sector merely acts as representatives of transporters, notifying the delivery status of goods from ports to ports, ordering the delivery of goods after being unloaded on behalf of transporters and collecting fees on behalf of shipping companies.

Deputy Director of the Export-Import Department Tran Thanh Hai says it is highly necessary to help Vietnamese logistics companies grow and catch up with the integration process and export-import activities. Now it is time that logistics companies must endeavour to grow faster and stronger by increasing management capacity, train professional and highly-qualified staff and seize market opportunities to catch up with foreign enterprises, otherwise they risk losing on home territory.

Furthermore, the community of export-import and production enterprises must be firm supporters of logistics companies. In other words, these enterprises also need to collaborate with logistics providers for a clear division of labour and utmost efficiency. Export-import and production companies need to focus only on building brands, developing markets and enhancing product quality.

Meanwhile stages of materials supply and product distributions should be taken over by logistics service providers, which act as professional agents in the area. Export-import companies should place more confidence in the capacity of Vietnamese service providers, promote the “buy local” spirit in which Vietnamese prioritise using Vietnamese services, to help logistics firms have the opportunity to improve themselves, which in turn can help domestic export-import companies reduce goods transportation time, enhance reliability and cut costs. This is also an important goal in Vietnam’s plan to enhance the logistics sector’s competitiveness towards 2025.

According to Deputy Director Tran Thanh Hai, the plan recently approved by the prime minister is an important framework to direct policies for the logistics sector. As its name suggests this is an action plan, consisting of many short-term and medium-term solutions to help the logistics sector improve over the next ten years. First, the focus will be placed on fine-tuning the legal framework, institutions, state management mechanisms and support policies for the sector. In addition, Vietnam will concentrate on essential infrastructure for the sector’s development such as roads, bridges, stations, ports, customs warehouses as well as large logistics centres.

Vietnam is located at a favourable location, at the centre of Southeast Asia and is part of one of the world’s largest manufacturing hubs. The East Sea is also the busiest sea route in the world. As such, Vietnam possesses the opportunity to become a goods transit centre, from which goods can be distributed to different regions such as Northeast Asia, South Asia, Southeast Asia, the Americas and Oceania. Building strong logistics firms as the engines to pull the entire sector forward is one of the key tasks of this action plan.

The reality shows that any sector that wants to grow requires it to have pioneering enterprises, but such enterprises are missing in the logistics sector. At the same time, management agencies seem to lack fundamental, long-term and strategic investment to attract strong investment in this sector. It is clear that although logistics is a sector that generates huge profits, those aware of its value are not capable to tap into the potential while financially capable ones are rather indifferent. That is why it is necessary to introduce policies to encourage large enterprises to invest in logistics, thereby creating a wave to raise the greater interests of the business community in this sector.