1 Industry of Industry of Developing Countries Developing Countries in the Era of in the Era of Globalization: The Globalization: The Case of Vietnam Case of Vietnam Symposium on Advanced Material Symposium on Advanced Material Flow Analysis for the Sustainable Flow Analysis for the Sustainable Society Society September 25-26, 2006, Tohoku September 25-26, 2006, Tohoku University University Nozomu Kawabata Nozomu Kawabata Graduate School of Economics and Graduate School of Economics and Management, Tohoku University, Management, Tohoku University, Japan Japan
Transcript
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Iron and Steel Industry Iron and Steel Industry of Developing Countries of Developing Countries
in the Era of in the Era of Globalization: The Case Globalization: The Case
of Vietnamof VietnamSymposium on Advanced Material Flow Symposium on Advanced Material Flow
Analysis for the Sustainable Society Analysis for the Sustainable Society September 25-26, 2006, Tohoku September 25-26, 2006, Tohoku
Graduate School of Economics and Graduate School of Economics and Management, Tohoku University, JapanManagement, Tohoku University, Japan
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Structure of this presentationStructure of this presentation
►1 Steel industry in the process of 1 Steel industry in the process of industrializationindustrialization
►2 Overview of iron and steel industry in 2 Overview of iron and steel industry in VietnamVietnam
►3 New Policy Direction 3 New Policy Direction ►4 Reinforcing market function4 Reinforcing market function►5 Trade Policy for Steel and User 5 Trade Policy for Steel and User
IndustriesIndustries►6 FDI Attraction as a Policy for 6 FDI Attraction as a Policy for
1 Steel industry in the process 1 Steel industry in the process of industrializationof industrialization
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Major contradictions of steel Major contradictions of steel industry in developing countriesindustry in developing countries
Small domestic market High level of minimum efficient scale of production capacity
Necessity of coordination among small numbers of big project
Necessity of competition for efficiency
Nationalistic feeling to basic material industries
Necessity of technology and capital from foreign sources
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Industrialization strategy under Industrialization strategy under globalizationglobalization
► Collapse of CPEsCollapse of CPEs► Bad performance of import substituting Bad performance of import substituting
industrializationindustrialization High protectionHigh protection
► Good performance of export oriented Good performance of export oriented industrialization (Especially in East Asia)industrialization (Especially in East Asia) Lower protectionLower protection
► Importance of foreign investment and TNCsImportance of foreign investment and TNCs► Policy trend to liberalizationPolicy trend to liberalization
WTOWTO AFTAAFTA EPAEPA
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Steel strategies have changed in Steel strategies have changed in advanced ASEAN countriesadvanced ASEAN countries
► Until the midst of Until the midst of 1980s1980s State-led promotionState-led promotion Central state of SOECentral state of SOE Creation of Creation of
integrated steel integrated steel worksworks
High level High level protectionprotection
Center industry for Center industry for import substituting import substituting industrializationindustrialization
► From the late From the late 1980s1980s FDI and private FDI and private
sector-led promotionsector-led promotion Major role of FDI and Major role of FDI and
local business grouplocal business group Incremental building Incremental building
from downstream to from downstream to upstream processesupstream processes
Reasonable level of Reasonable level of protectionprotection
Backseat player for Backseat player for export-oriented export-oriented industrializationindustrialization
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Policy change produced good Policy change produced good resultsresults
► Until the midst of Until the midst of 1980s1980s Construction failure Construction failure
or or financial/technologifinancial/technological troublescal troubles
Capacity for policy changeCapacity for policy change
► Under economic integration, developing Under economic integration, developing countries should accelerate the countries should accelerate the industrialization process industrialization process
► Accelerated development necessitates the Accelerated development necessitates the speedy policy changespeedy policy change State-led investment State-led investment →Promotion of FDI and private →Promotion of FDI and private
investment investment Direct control →Indirect support to reinforce market Direct control →Indirect support to reinforce market
functionfunction
► Promoting policy of the Vietnamese steel Promoting policy of the Vietnamese steel industry is one of such a caseindustry is one of such a case
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2 Overview of Iron and Steel 2 Overview of Iron and Steel Industry in VietnamIndustry in Vietnam
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Production Structure of the Vietnamese iron and steel Production Structure of the Vietnamese iron and steel industry (2004)industry (2004)
Blast Furnace Pro. 187
Import of Scrap 163
EAF-Billet CC, Ingot casting factories Pro.658
(full operation)
Long rolling mills
Pro. 2366
(Cap. 4600 overcapacity)
Market of long products
About 2600
Import of billet
2174 Import of long products 257
Import of hot rolled coil, sheet, plate and tube products 1773
Import of cold rolled and surface treated coil and sheet products 1112
Pipe fitter
Pro. 236
Galvanizing and color coating factories
Pro. 176
Unit: 1000 ton Source: Author edited from data of SEAISI and VSA.
Market of flat and tube products
About 2900
Domestic Supply of Scrap 718
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Major problemsMajor problems
► Large scale production and distribution systems are Large scale production and distribution systems are not establishednot established
► Long sectorLong sector Over capacity of rolling millsOver capacity of rolling mills Shortage of steelmaking capacity Shortage of steelmaking capacity →Change to scrap →Change to scrap
shortage?shortage?► Flat sectorFlat sector
Shortage of rolling capacityShortage of rolling capacity Over capacity of galvanizing and pipe fitting factoriesOver capacity of galvanizing and pipe fitting factories Lack of production capacity of high grade steel Lack of production capacity of high grade steel
► Foreign trade systemForeign trade system General direction to liberalization and impromptu protectionGeneral direction to liberalization and impromptu protection Underdevelopment of concrete arrangementsUnderdevelopment of concrete arrangements
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3 New Policy Direction3 New Policy Direction
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The Market Structure is The Market Structure is ChangingChanging
► 1990s1990s VSC Group: Major player VSC Group: Major player
for modernization for modernization ► Subsidiaries (TISCO, SSC, Subsidiaries (TISCO, SSC,
Small companies and Small companies and householdshouseholds
► Opportunistic entry and Opportunistic entry and exitexit
► Outdated technologyOutdated technology
► NowNow VSC Group VSC Group
► 2.7 mil ton of annual 2.7 mil ton of annual capacitycapacity
Private and 100% FDI Private and 100% FDI companies (Hoa Phat, companies (Hoa Phat, Pomina, Sunsteel, etc)Pomina, Sunsteel, etc)
► 2.23 mil. ton2.23 mil. ton► Standard technologyStandard technology► Expansion from rolling Expansion from rolling
to steelmakingto steelmaking
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Investment by VSC(PFS, SSC)Investment by VSC(PFS, SSC)(1)(1)
►SSC/VSC’s Phu My Steelworks (started SSC/VSC’s Phu My Steelworks (started in 2006) is the most modernized EAF-in 2006) is the most modernized EAF-rolling mill in Vietnamrolling mill in Vietnam EAF-billet CC: 500,000 t/yEAF-billet CC: 500,000 t/y Long rolling: 300,000 t/yLong rolling: 300,000 t/y
►PFS (started in 2005) is the first cold PFS (started in 2005) is the first cold rolling mill in Vietnamrolling mill in Vietnam Pickling and Cold rolling: 400,000 t/yPickling and Cold rolling: 400,000 t/y
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Investment by VSC(PFS, SSC)Investment by VSC(PFS, SSC)(2)(2)
Phu My Steelworks under construction, Taken by the author, May 2005
Reversing cold rolling mill of PFS. From leaflet of the company.
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Significance of new factoriesSignificance of new factories
►VSC(SSC/PFS) should make new VSC(SSC/PFS) should make new factories competitivefactories competitive It is the test case for VSC’s future.It is the test case for VSC’s future. If VSC fails to operate these new If VSC fails to operate these new
factories, foreign inventors will suspect factories, foreign inventors will suspect the VSC’s capability as a business the VSC’s capability as a business partner. partner.
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Necessity of policy changeNecessity of policy change
►VSC’s overinvestment in long sector VSC’s overinvestment in long sector (EAF-rolling mill) may lead to troubles(EAF-rolling mill) may lead to troubles Exacerbating overcapacity of rolling millExacerbating overcapacity of rolling mill Crowding out the investment of private Crowding out the investment of private
companiescompanies Distortion of market selectionDistortion of market selection
►VSC cannot work on a big project VSC cannot work on a big project (especially in flat sector) by itself(especially in flat sector) by itself Financial and technological problemsFinancial and technological problems
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New direction of promotion New direction of promotion policypolicy
►Government should give all companies Government should give all companies equal footing equal footing
►Reinforcing the function of market Reinforcing the function of market economyeconomy Construction of infrastructureConstruction of infrastructure Setting rules on quality, safety an environmentSetting rules on quality, safety an environment Amendment of market failuresAmendment of market failures
►Absorbing the shock of liberalizationAbsorbing the shock of liberalization►FDI attractionFDI attraction
► In keeping with construction of EAF, In keeping with construction of EAF, fatal point will changefatal point will change Billet import → scrap importBillet import → scrap import
►Urgent challenge for governmentUrgent challenge for government Support to construction of port facilitySupport to construction of port facility Establishment of import proceduresEstablishment of import procedures Adjustment between import promotion and Adjustment between import promotion and
environmental regulationenvironmental regulation
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Proper regulation to reinforce Proper regulation to reinforce market functionmarket function
►Reinforcing the Construction LawReinforcing the Construction Law►Reinforcing the industrial standardReinforcing the industrial standard
→ →Exclusion of under qualified products Exclusion of under qualified products (re-rolled scrap, narrow strip, fake brand (re-rolled scrap, narrow strip, fake brand etc)etc)
►Standard of safety and environmentStandard of safety and environment → → Exclusion of inferior machines Exclusion of inferior machines
(Pollution from EAF, induction furnace etc)(Pollution from EAF, induction furnace etc)
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5 Trade Policy for Steel and User 5 Trade Policy for Steel and User IndustriesIndustries
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Two-tiered market structure Two-tiered market structure of cold rolled and surface of cold rolled and surface treated sheet productstreated sheet products
Cold Rolling Mill (PFS)
Pro. 180-240
(Cap. 400)
Import of high grade cold rolled sheets (Deep drawing sheet, electrical sheet, IF steel, loam plate,etc)
Import of normal grade cold rolled sheets
Galvanizing and color coating factories (BlueScope, SSSC etc)
Import of high grade surface treated sheets (Galvannealed, color-coated, tinplated)
Import of normal grade galvanized and color-coated sheets
Customer II (Mainly construction industry, partly domestic manufactures)
Customer I
(FDI manufacturers like car, motorbike, export-oriented appliance producers)
Import of hot coils
Competition
No competition
Competition
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Irrationality of current import Irrationality of current import duty on sheet productsduty on sheet products
► Taxation on high grade sheets does not Taxation on high grade sheets does not improve the status of PFS and galvanizing improve the status of PFS and galvanizing companiescompanies No competition between sheets for Customer I No competition between sheets for Customer I
and sheets for Customer IIand sheets for Customer II
► Import duty on high grade cold rolled sheets Import duty on high grade cold rolled sheets and surface treated sheets have a damaging and surface treated sheets have a damaging effect on Vietnamese economyeffect on Vietnamese economy Damage on competitiveness of FDI manufacturersDamage on competitiveness of FDI manufacturers
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Differentiation between high Differentiation between high grade steel and conventional grade steel and conventional
steelsteel►A problem: HS code system is not A problem: HS code system is not
always relevant to the classification of always relevant to the classification of steel products by qualitysteel products by quality
Galvannealed sheet for automotive
Galvanized sheet for construction
Same HS code
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New option: “User Specific Duty New option: “User Specific Duty Free Scheme (USDFS)”Free Scheme (USDFS)”
►When specific industries import the When specific industries import the specific parts and materials classified specific parts and materials classified by HS code, such imports are duty by HS code, such imports are duty free.free. For motorbike For construction
7209.16
7209.17
7209.・・
7209.15
72・・・・
(example)
Conventional one High grade one for motorbike
Subject to “USDFS”Duty Free
Taxation
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USDFS as a proven scheme in USDFS as a proven scheme in several countriesseveral countries
►USDFS will strike a balance between USDFS will strike a balance between the promotion of competitiveness of the promotion of competitiveness of FDI manufacturers and the protection FDI manufacturers and the protection of steel sheet producersof steel sheet producers
►USDFS and similar policies are/will be USDFS and similar policies are/will be installed by Mexican, Malaysian, installed by Mexican, Malaysian, Indonesian governmentsIndonesian governments
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6 FDI Attraction as a Policy for 6 FDI Attraction as a Policy for IndustrializationIndustrialization
Blast furnace and basic oxygen furnace of Nippon Steel Kimitsu Steelworks. From Company Pamphlet
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Possible projects in flat Possible projects in flat sectorsector
►Large scale galvanizing factory for Large scale galvanizing factory for high grade sheetshigh grade sheets
►Large scale cold rolling mill for high Large scale cold rolling mill for high grade sheetsgrade sheets
►Compact hot strip mill next to PFSCompact hot strip mill next to PFS►Large scale hot strip mill Large scale hot strip mill ► ISWISW
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Necessity of FDI in flat sectorNecessity of FDI in flat sector
►VSC cannot work on a big project in VSC cannot work on a big project in flat sector by itselfflat sector by itself
►Unlike the advanced ASEAN Unlike the advanced ASEAN countries, there is no private big countries, there is no private big business group in Vietnambusiness group in Vietnam
↓ ↓►FDI attraction is necessaryFDI attraction is necessary
FDI cannot be attracted by laissez-faire FDI cannot be attracted by laissez-faire regimeregime
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Conditions for FDI Conditions for FDI attraction(1)attraction(1)
►Consistency among market size, Consistency among market size, product mix, technology, feature of FDI product mix, technology, feature of FDI companiescompanies Market size of specific
segment
Ex. million tons of sheets for automobile
Product mix of new factories
Ex. CR, GI, GA
Possible FDI companies
Ex. Japan, South Korea
Technology
Ex. State of the art ISW
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Conditions for FDI Conditions for FDI attraction(2)attraction(2)
►Ex. Production of high-grade steel sheetEx. Production of high-grade steel sheet Vietnam has to wait some years until Vietnam has to wait some years until
market expansionmarket expansion State of the art technology for integrated State of the art technology for integrated
production is necessaryproduction is necessary Candidate list of FDI producers is short oneCandidate list of FDI producers is short one
►OK: Integrated producers in advanced countries OK: Integrated producers in advanced countries (including South Korea)(including South Korea)
►Questionable: Integrated producers in Taiwan Questionable: Integrated producers in Taiwan and BRICs and BRICs
►Impossible: Producers with no experience in Impossible: Producers with no experience in high grade steelhigh grade steel
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Role of government in attracting Role of government in attracting FDI FDI
►Giving a welcome to majority Giving a welcome to majority ownership of FDI producesownership of FDI produces
►Capacity of review and approval is Capacity of review and approval is necessary at MPI and MOInecessary at MPI and MOI
►Reliability as a partner is critical for Reliability as a partner is critical for joint venturesjoint ventures VSC should prove its managerial capacity VSC should prove its managerial capacity
as a reliable partner in Vietnamas a reliable partner in Vietnam► In case of ISW, strong commitment to In case of ISW, strong commitment to
provision of infrastructure is necessaryprovision of infrastructure is necessary
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7 Conclusion7 Conclusion
Hot strip mill and continuous descaling and cold rolling mill of Nippon Steel Kimitsu Steelworks
From Company Pamphlet
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The time of policy change in The time of policy change in Vietnamese steel industryVietnamese steel industry
► 1st stage1st stage Market Market
underdevelopmentunderdevelopment Absence of modern Absence of modern
playersplayers Central role of Central role of
governmental plan and governmental plan and SOEsSOEs
Construction of model Construction of model factoriesfactories
► Beginning: Drafting of Beginning: Drafting of Master PlanMaster Plan
► End: Building End: Building completion of PFS and completion of PFS and Phu My Steelworks Phu My Steelworks
competitioncompetition Global pressure to Global pressure to
liberalizationliberalization Growing importance of Growing importance of
private sector and FDI private sector and FDI sectorsector
Changing role of Changing role of government government
► Abolishment of Abolishment of privilege of SOEsprivilege of SOEs
► Amendment of market Amendment of market failure at some pointfailure at some point
► Commitment to FDI Commitment to FDI attractionattraction
► Commitment to Commitment to provision of provision of infrastructureinfrastructure
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ReferenceReference
► Kawabata, Nozomu(2005), Kawabata, Nozomu(2005), Higashi Ajia Tekko-gyo no Higashi Ajia Tekko-gyo no Kouzou to Dainamizumu (Structure and Dynamism of the Kouzou to Dainamizumu (Structure and Dynamism of the Iron and Steel Industry in East Asia)Iron and Steel Industry in East Asia), Kyoto: Minerva , Kyoto: Minerva Publishing (Japanese).Publishing (Japanese).
► Kawabata, Nozomu(2001), “The Current Vietnamese Steel Kawabata, Nozomu(2001), “The Current Vietnamese Steel Industry and Its Challenges,” in Industry and Its Challenges,” in Study on the Economic Study on the Economic Development Policy in The Transition toward a Market-Development Policy in The Transition toward a Market-Oriented Economy in The Socialist Republic of Vietnam Oriented Economy in The Socialist Republic of Vietnam (Phase 3) Final Report Vol. 2(Phase 3) Final Report Vol. 2, MPI and JICA. , MPI and JICA. http://www.econ.tohoku.ac.jp/~kawabata/VietnameseSteelEnglishhttp://www.econ.tohoku.ac.jp/~kawabata/VietnameseSteelEnglish.pdf.pdf
► Ohno, Kenich and Nguyen Van Thuong eds.(2005), Ohno, Kenich and Nguyen Van Thuong eds.(2005), Improving Industrial Policy FormulationImproving Industrial Policy Formulation, The Publishing , The Publishing House of Political Theory, Hanoi. House of Political Theory, Hanoi. http://www.vdf.org.vn/bookad.htmhttp://www.vdf.org.vn/bookad.htm
► Vietnam Development Forum(2006), Supporting Industries Vietnam Development Forum(2006), Supporting Industries in Vietnam from the Perspective of Japanese Manufacturing in Vietnam from the Perspective of Japanese Manufacturing Firms, April 24. Firms, April 24. http://www.vdf.org.vn/WS/WS%202006/Ohno12April06/VDFrhttp://www.vdf.org.vn/WS/WS%202006/Ohno12April06/VDFreport.pdfeport.pdf
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Thank you for your Thank you for your kind attention!kind attention!
