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CASE STUDY 3: Samsung Electronics Viet Nam (SEV)

Samsung has been in Viet Nam since 1996, originally producing colour TVs. Its
presence has been boosted since 2007 by a number of large investments in mobile
phones and related activities, of which the largest is the US$ 7.5 billion complex in
Bac Ninh Province. Since that facility began operations in 2009, Samsung and mobile
phones have played a major role in Viet Nam’s exports and lead evaluation of the
country’s participation in electronics GVCs. SEV established the second largest
mobile phone factory in Thai Nguyen in 2013 with a US$ 2 billion investments.
Prior to 2007, Samsung manufactured mobile phones in six facilities: two in China,
two in Brazil, one in India and one in the Republic of Korea. In 2007, the company
considered locations for new facilities to meet global demand and to reduce the
concentration in Chinese factories. SEV commenced operations in 2009, and by 2015,
Viet Nam accounted for 50 per cent of all Samsung mobile phone production. The
process was disrupted in 2016 by a manufacturing defect related to faulty batteries in
Galaxy Note 7 smartphones, assembled in Viet Nam, which led to a multi-billion-
dollar recall and discontinuation of the top-end model. In 2017, 30 per cent of Samsung
mobile phones were being assembled in Viet Nam. Samsung accounted for 23 per cent
of Viet Nam’s merchandise exports in 2016, and mobile phones and their parts made
up 19 per cent.
SEV received generous tax incentives. The Bac Ninh operations only began to pay
taxes in 2013. In 2016, Samsung’s tax bill of US$ 300 million represented about 15
per cent of SEV’s net income (reported in Samsung’s financial statement as US$ 1.9
billion on sales of US$ 18.1 billion), which is less than Viet Nam’s corporate tax rate
of 20 per cent. In 2016, Samsung established a US$ 300 million R&D centre in Hanoi,
employing 1,500 people and positioning SEV to expand into higher value-added
activities; it was also an instrument for obtaining added incentives accruing to “high-
technology enterprises” under Viet Nam’s Law on Investment.
Samsung employed 109,000 workers in SEV and other subsidiaries in Viet Nam at
the end of 2017. They were overwhelmingly semi-skilled; 89 per cent high school
graduates, 7 per cent with post-secondary vocational qualifications, and 4 per cent with
university degrees. Three-quarters were female. Although Samsung’s wage bill is
confidential, wages in the communications equipment and electronics components
industries more than doubled between 2008 and 2014, which was presumably driven
by the large increase in labour demand from Samsung. During this period, employment
in manufacturing increased from 3.2 million to 5.8 million, and in the communications
and electronics industries, the growth in jobs was much faster. Samsung performed
inspections and audits of all suppliers to ensure compliance with its guidelines on
labour rights, workplace health and safety and employment benefits.
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Samsung reports a “localization ratio” of 57 per cent in Viet Nam, i.e. all value added
retained locally (including profits retained for reinvestment). Local content in the more
usual sense of the value of local goods and services as a percentage of total value added
is 40 per cent (according to Samsung) and closer to 30 per cent (according to
Vietnamese officials).
In 2014, only ten Vietnamese domestic firms were suppliers, and the four first-tier
suppliers among them provided paper packaging products. The 63 other first-tier
suppliers in Viet Nam were from the Republic of Korea (53), Japan (7), Malaysia (1),
Singapore (1) and the UK (1). Samsung reported in 2017 that the number of
Vietnamese suppliers had increased to 215, of which 25 were first-tier suppliers while
the others were second-tier suppliers. They were providing either services (e.g. meal
catering, recreational travel, and cleaning and sanitation) or paper packaging products,
which did not enter into the assembly and manufacturing of Samsung’s actual final
products.
Since 2014, in collaboration with the Vietnamese government, Samsung has held an
annual workshop known as the Samsung Sourcing Fair. The first workshop was
attended by over 200 domestic suppliers responding to Samsung’s plan to source 91
parts locally, but upon assessment, Samsung found that none of the participants could
meet its requirements. Since 2015, Samsung has also offered a three-month technical
consultation programme, in which experts from the Republic of Korea are deployed
to Vietnamese firms to help improve manufacturing processes. At the end of 2017,
Samsung had 26 firms enrolled in the programme and estimated large productivity
gains and a reduction in defects from the participating firms. However, the numbers
are small, and Samsung has emphasized that firms like itself cannot be expected to
spend large sums to meet inadequacies in the domestic supply base. An alternative
solution is for domestic firms to identify roles as second-tier suppliers, and for the
first-tier suppliers to help them improve their capabilities.
https://www.unido.org/sites/default/files/files/2018-06/EBOOK_GVC.pdf