International SEPT Program, University of Leipzig

POSSIBILITIES OF DEVELOPIG TECHOLOGY

TECHOLOGY-ITESIVE
ITESIVE IDUSTRY I
VIETAM ATURAL RESOURCED
RESOURCED-BASED
BASED ECOOMY
Case study of pangasius value chain

ame of Student:
Email of Student:
SEPT ID umber:
Martriculation umber:

Pham Hue Chi

phamhuechi@yahoo.com

Module umber:
Supervisor:
Date of submission:

103
J.Professor Dr. Utz Dornberger
15 March 2009

1768044

SMALL ETERPRISE PROMOTIO & TRAIIG PROGRAM

2008/2010

EW SCIETIFIC DISCOURSES

OF SME PROMOTIO
March 2009

POSSIBILITIES OF DEVELOPIG TECHOLOGYITESIVE IDUSTRY I VIETAM ATURAL

RESOURCED-BASED ECOOMY
Case study of pangasius value chain

Pham Hue Chi

Student number: 1768044
Supervisor: J.Professor Dr. Utz Dornberger

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Table of Contents

Abstract ______________________________________________________________________ 7
1. Literature review ____________________________________________________________ 8
1.1 atural resource-based economy__________________________________________________ 8
1.2 Technology-Intensive Suppliers in Resource-based Value Chains _______________________ 9

2. Fishery industry and pangasius value chain in Vietnamese economy_________________ 10

2.1 Overview of Fishery industry and pangasius sub-industry ____________________________ 10
2.2 Vietnamese pangasius Value chain _______________________________________________ 12
2.3 T-supplier in pangasius value chain ______________________________________________ 15

3. Factors for development of T-suppliers in value chain ____________________________ 16

3.1 Size and growth of pangasius industry ____________________________________________ 16
3.2 Structure of the industry _______________________________________________________ 17
3.3 Geographical concentration _____________________________________________________ 20

4 System for development of the T-supplier in pangasius value chain __________________ 20

4.1 R&D strategy _________________________________________________________________ 20
4.2 Cooperation with Research/Education Institutes____________________________________ 21
4.3 Cooperation between T-suppliers and other actors of the value chain __________________ 22
4.4 Cooperation with Financial Institutes _____________________________________________ 23
4.5 Deepening existing Cluster and develop related fishery technological & service Cluster ___ 24

Conclusion __________________________________________________________________ 27

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List of Figures:
Figure 1: Top 10 Vietnamese Export Items in Value, 2008 ............................................................12
Figure 2: Vietnamese pangasius export, 2004-2008 .......................................................................12
Figure 3: Simplified Vietnamese pangasius value chain .................................................................13
Figure 4: The five actor model ........................................................................................................23
Figure 5: Cluster and Economic Diversification .............................................................................25
Figure 6: Vietnamese Pangasius Value Chain, Mekong Delta, Vietnam ........................................29

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List of Tables:
Table 1: Pangasius export in the total fishery products export........................................................17
Table 2: Descriptive statistics of pangasius processor ....................................................................19

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Abbreviation
US$

United State Dollar

GDP

Gross Domestic Product

T-supplier

Technological supplier

MNC

Multi- Nation Corporation

VASEP

Vietnam Association of Seafood Exporters and Producers Center of

Fistenet

Center of Science, Technology, Fishery Industry

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Abstract
In recent years economists have come to see rich natural resource endowments as a curse or
precious bane that undermines development and slows economic growth. Resource-based
development undeniably involves major risks. &onetheless, the resource curse is not inevitable, as
the examples of Australia, Canada and the Scandinavian countries demonstrate. (Rudiger Ahrend,
2005)
The debate of optimizers against pessimistic view on the development potential of natural
resource-based economies has lighted up the hope for most developing countries, whose industrial
production and exports are often heavily dependent on natural resources.
This essay will address the case of Vietnam and question the possibility of developing technologyintensive Industry in Vietnamese natural resource based economy. A deep focus will be made on
the highest growing part of fishery industry, the pangasius sub-sector, which has made significant
economic performance throughout the last decade. Then an innovation system to develop such
industry will be put forward for discussion.

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1. Literature review
1.1 atural resource-based economy
Pessimistic view on the development of natural resources-rich countries was introduced firstly
among economists in 1995. Statistical analysis led by Sachs and Warner among 67 countries and
series of followed studies arrived at a negative correlation between the export rate of primary
goods and GDP growth. Among possible reasons for such negative result, consisting of resource
conflicts, rent seeking behavior, the volatility of prices, creeping deindustrialization, experiences
in most of the countries show that profits earned during periods of high commodity prices had
rarely been invested in a diversified industrial base (Dornberger, 2008). If they had been invested
otherwise, the results could have been vice versa, as the case of Australia, Canada, Chile and
Nordic Countries have shown.
The Finnish economy had started with exportation of forestry products before they succeeded in
promoting local production of wood processing machinery and chemical products, thus increasing
productivity and competitiveness of the forestry industry. The fishery and ship building industry
in Norway has been backed up by the local production of machinery and equipment. Variety of
related industries and internal suppliers is the main reason for Norwegians success. The strong
local mining machinery and equipment supplier to mining industry was the case of Australia. Not
only do they achieve high growth rate, but they also boost the productivity of their customer in the
primary industry.
In all these cases, the real long-term benefits come not from the presence of natural resources
themselves (forests, mines, oceans, etc.), but rather from the other activities which occur around
them such as the development and export of related machinery, equipments, services and complex
value-added products. Many activities have evolved around natural resources and then survived
the depletion of those same natural resources that gave rise to them. (Indira Singh, 2001)
Resource-based development can be a source of growth, especially via export. The fast growth of
natural-based industries accompanied by increasing income from export of such primary products
can lead to a high demand of investment goods, either imported or produced locally. Keys to
success of a few above mentioned resource-rich countries is how to promote local supply of
investment goods to the fast growing natural resource-base industry in primary sector. Developing
a countrys natural resources, via expansion of the technology-intensive industry and highly
specialized services can therefore help the process of modernizing a country.

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1.2 Technology-Intensive Suppliers in Resource-based Value Chains

The idea of current Value Chain and Cluster was initially based by Hirschman in 1958 with his
book The Strategy of Economic Development and the theory of Unbalanced growth. He
described four types of linkages between industries in the economy for his arguments that,
economic development of a country can only be obtained by investing into an industry that has
strong linkages, especially backward linkage with others. The growth of one industry will then
spur the growth in other related sectors through backward linkages and spillover effect. His term
linkage has been later developed in the literature of Value chain and Cluster as the
interdependence, inter- and cooperative relation between many economic actors located close to
each other.
There are several example of linkage effect in natural resource-based economies. Firstly, it is the
Argentinean Oil Seed Industry, which has experienced extremely rapid growth and generated 25%
of Argentina's exports. An important processing industry has grown from converting agricultural
inputs such as soybeans and sunflower seeds into oils and oil byproducts. The growth of this
industry, through its linkage, then pushed the establishment of domestic machinery sector. The
sector displays high growth and nowadays supplies 90% of the machinery required by oil
processing plants. Moreover, it in turn helps to improve the competitiveness of Argentina's oil
seed industry.
The Chilean Mining Industry appears to be another example. Several industries have grown
together with the extraction of copper ore in which the country has strong comparative
advantages. Over 25% of the world's copper ore reserves are located in Chile.

Domestic

production currently supplies two-thirds of the inputs, 40% of the equipment, 70% of the
engineering services and 60% of the costs of input machinery and engineering services for goods
and services produced by domestic industries (Indira Singh, 2001).
In these examples, it is clearly recognized the role of machinery/technology suppliers in relation
with the development and improvement of competitiveness of resource-based industries. Through
their capacity for efficiently and swiftly supplying price-competitive products, T-suppliers
generally create advantages for downstream industries. Suppliers of embedded technology create
additional advantages by adapting methods and technologies, providing technical support,
installation and debugging services, and by offering innovative products. T-suppliers also play an
important role in the development of learning capacities, because some types of knowledge
creation depend on close relationships between suppliers and customers and on an implicit
exchange of information. T-suppliers actively develop collective knowledge, promote the transfer
of technology, enhance cooperation in R&D, boost information transfer, and promote the
development of opportune and efficient solutions. The transfer of tacit knowledge embedded in
goods and services has become particularly important in this respect (Dornberger 2008).
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T-suppliers contribute to rapid technological growth and safeguard technological continuity. A

recent analysis of 50 clusters concluded that major process innovations were introduced by
machinery and materials producers. Improvements and modifications in production methods,
associated inputs, and product design, are essential in creating opportunities for technology
accumulation (Pietrobelli & Rabellotti 2004). The absence of competitive domestic suppliers,
however, will force firms to satisfy their demand with imports. This increases the danger of
creating a gap between capabilities domestically available and those required in natural resourcebased industries. (Dornberger 2008).

2. Fishery industry and pangasius value chain in Vietnamese economy

2.1 Overview of Fishery industry and pangasius sub-industry
Resource-based economies are often although somewhat arbitrarily - defined as economies in
which natural resources account for more than 10 per cent of GDP and 40 per cent of exports.
(Rudiger Ahrend, 2005). According to this definition, Vietnam has a typical natural resourcebased economy, with 60% of GDP coming from exports of natural products. In 2008, total export
turnover of Vietnam is 62.9 billion US$, of which 67% (42.2 billion US$) contributed by a group
of ten important export items consisting of crude oil, garment, footwear, fishery products, rice,
coffee, rubber, coal, furniture, electronics/computer spare parts. Nine out of ten export industries
in this group are rooted from natural resources.
Among this group, fishery products have played a significantly important role throughout the
decade, which for years have been the fourth ranked item in terms of value (4.56 billion US$) in
Vietnamese export list, following crude oil (10.45 billion US$), garment (9.1 billion US$), and
footwear (4.7 billion US$) in 2008.
With the present global economic crisis, exports of Vietnam have been challenged with reduction
in global market demand, thus leading to decrease in export volume of almost export items. The
year 2008 has seen a fall in export volume of Vietnamese coffee, rubber and rice. The current
coffee industry of Vietnam has not yet been considered a firm growing industry because of low
quality products. Most of coffee exports remain as raw coffee or at low level of processing. The
same situation is found in raw rubber exported. Due to fluctuation in global price and volume, rice
export has now been carefully governed by central authorities. Although exports of wood and
furniture kept increase in 2008, its growth pace has decreased in comparison with previous years
due to difficulties in market expansion. For garment, footwear and also furniture, Vietnam
remains a processing country largely dependent on imported raw materials. Due to low efficiency
in export of crude oil and coal, Vietnam government aims at reducing export volume by setting up
refinery plants along the country. With the first domestic oil refinery plant capable of 2.6 million

Page | 10

ton per year operating in February 2009 and other 2 refinery plants under construction, it is
expected that Vietnam will reduce the export of crude oil in years to come.
In this context, fishery product emerges as an exceptional case with continual increase in both
export volume (33.7%) and value (19.8%) throughout crisis. The profitability of fishery industry
has even risen thanks to decrease of input prices. In global playing field, Vietnam is placed in the
top 10 leading exporters of fishery products and the first fast growing country in the item.
Generally, fishery industry is considered core industry and Comparative Advantages of Vietnam
(Michael Porter 2008).

Among fishery products exported, shrimp and pangasius are the top leaders. Although shrimp is
still the biggest exporter (1.6 billion US$, accounting for 33% total export value of fishery
products in 2008), pangasius, with its high growth rate has nearly catched up approximately 32%
share in export volume. In 2008, 657,000 ton pangasius was exported at 1.48 billion US$,
increased by 69% and 51% in compare with volume and value of the same in 2007 respectively.

The growth in number of overseas market is also significant. In only one year, from 75 foreign
markets in 2007, Vietnamese pangasius has expanded to 107 destinations in 2008 (Luong Le
Phuong 2008). The export market has been balanced among nations, in which European countries
accounts for the biggest share of 39.2%, followed by fast emerging Russia (14.4%) and Ukraine.
This makes the big difference from those first days when the U.S accounted for nearly 90% of
Vietnam pangasius export; founds a solid basement for Vietnam pangasius in International
market. Arabian countries are the new market of Vietnam pangasius, forerunning China and U.S
with a surprisingly high growth of 324.6% in value and 224.3% in volume.
In production side, with currently 100 pangasius processing factories at total capacity of 1.5
million ton, Vietnam has the largest and fastest growing farmed pangasius industry all over the
world.

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Figure 1:: Top 10 Vietnamese Export Items in Value, 2008

Crude Oil
Garment & Textile
Footwear
21.5%

Fishery Products

11.1%
24.7%

Rice

10.8%

Wood & Furniture

6.9%
3.1%
3.7%

5.2%

6.3%

6.6%

Electronics/computer spare
parts
Coffee
Rubber
Coal

Source: Ministry of Agriculture and Rural area development, 2008

Figure 2: Vietnamese pangasius export, 2004-2008

2008
Pangasius Export in Volume 2004-2008
2004

Pangasius Export in Value, 2004-2008

2004

700

1,600
1,400
1,200
1,000
800
600
400
200
0

600
500
400
300
200
100
0
2004

2005

2006

2007

Unit: 1,000 ton

2008

2004

2005

2006

2007

2008

Unit: Million US$

Source: Ministry of Agriculture and Rural area development, 2008, adapted from &guyen Huong Tra, 2007

2.2 Vietnamese pangasius Value chain

(Adapted from Nguyen Huong Tra 2007)

The simplified
fied Vietnamese pangasius value chain is illustrated in Figure 3, the full in Figure 6.
The main value-creating
creating stages are broodstock production/ nursing, farming, processing and
distribution.

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Figure 3: Simplified Vietnamese pangasius value chain

Source: &guyen Huong Tra, 2007

Broodstock production
100 percent of the fry used in the Vietnamese pangasius value chain now is reproduced
artificially. Broodstock production and nursing are carried out by a large number of State-owned
and private hatcheries.

Farming
Farming is dominated by small farmers. About 15,000 families now grow pangasius in the
Mekong Delta. However, lured by the high profit of the business, there occur a large number of
fish growing facilities own by different people, who come from government bodies and institutes.
They benefit from different sources rather than only fish growing and often have good relation
with processing companies, creating a complex and unhealthy competition in supply of fish.

Few processing companies have set up their own farms. They usually have a much larger size, but
their share in the total fish production of the Mekong Delta remains rather small. Pangasius are
farmed in intensive or semi-intensive ways. Extensive methods are not used in pangasius farming
as in shrimp culture in Vietnam. There are three categories of culture: ponds, cages or enclosures.
Many pangasius farmers participate in a famer club, or in other way called farming union or fish
production union.

Processing
Pangasius processing, by contrast, is the playing field of officially-registered firms, who may own
more than one factory and process many kinds of seafood, not just pangasius. There are 108
pangasius processors in the Mekong Delta (Hong Van, 2008), and the largest ones are located in
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the provinces of An Giang, Can Tho and Dong Thap. Processors take fish from their own farm or
buy it from farmers, middle traders or even other processors. At the processing factories, fresh
living pangasius are checked for appropriate size and quality, and then fed into the processing line
as the main input. They typically follow a bleed-skin-fillet process and end up as frozen fillets for
export. On average, three kilos of fresh fish give one kilo of frozen fillet.

Distribution
As far as the distribution stage is regarded, the first thing to be noted is that the pangasius industry
was primarily developed for export, the overseas distribution is more important than domestic
channel in the value chain.
Nowadays around 95 percent of processed pangasius are exported. Most go to foreign wholesalers
and re-processors who resell the products to retailers, more often after adding several further
processing steps to conform with the quality, food safety and labeling requirements of the
destination markets, and more importantly, to add value. In this regard, Vietnamese pangasius
value chain is largely attached to the frozen commodity market, with block-frozen and
individually quick frozen (IQF) fillets as the core products. Today, all processing companies are
engaged in direct export. Lured by the high profit in the booming business, hundreds of exporters
and seafood companies, who had conventionally produced and traded in other kinds of seafood,
entered the value chain with no pangasius processing and/ or farming facilities. So, there are much
more pangasius exporters than those carrying out the processing. However, none of them, neither
processors nor pure exporters, have tried to invest in the distribution system abroad. They either
sell to the wholesaling frozen commodity market or in few cases, to big retailers.
Most fish oil and fish powder are re-used by processing companies for their own fishmeal
factories, and thus not distributed. A small amount goes directly from processing companies to
feed mills and connect to another value chain. Diesel is produced by few processing companies
and large farmers. The farmers re-use it for the power generators in the fish farms to save cost.
Processing companies sell diesel to fuel retailing firms in the Mekong Delta under long-term
contracts.

Middle trading
In Vietnam as a whole, farmers sell a large proportion of their production to middle trader.
Smaller farmers are more likely to sell to middle traders because it is harder for them to maintain a
long-term relationship with processing companies directly. Processing companies also need
middle traders to supply big lots of raw materials rather than spending too much time with
thousands of small farmers. Thus middle traders help balance the supply and demand of fish
among actors and stages within the chain. Their services are necessary at each stage of the chain.
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Suppliers and support industry

There are a lot of suppliers and support facilities for the pangasius value chain in Vietnam. Except
for infrastructure, the most important ones come into three groups:

Feed mills and feed additive suppliers;

Suppliers of other material inputs, such as equipment and vehicles, chemicals and
medicine; and

Providers of services, among which the most important are veterinary, labs, environment
treatment, transport, packaging and maintenance.

Those suppliers and service providers can be classified into two groups: labor intensive activities
such as net repairs, butchering, transport and cleaning services. The second group is technological
suppliers which provide products and services such as vaccines, engineering, consulting,
machinery, water treatment, chemicals, controlling systems and other products.

2.3 T-supplier in pangasius value chain

Because of the low labor cost, most of actors in pangasius value chain are using labor intensive
methods in their production. The local T-industry has not yet developed with basic engineering
equipments at low level of technology.
In the first step of the value chain, hatching and farming equipment is still rather simple. No
automatic equipment has been used for feeding and fish management. Manual harvest takes place,
causing a lot of stress and quality degradation. Construction is simple with some self-made
materials. Power generators and oxygenation equipment are the only machinery used. They are
provided by the local engineering companies and national distributors of international companies.

There are much more equipment, tools and furniture for processing. It ranges from simple tables
and hand tools for workers, to automatic conveying lines, filleting machines and cooking
equipment. Level of automatization ranges a lot among processing companies, but most
companies still use manual work instead of machines in slaughtering, filleting, skinning, freezing
and cooking because of the low labor cost in Vietnam. Refrigeration and cold storage is the hightech investment and always the most expensive part of a processing factory. During the first years
the whole processing line was imported, now most furniture, conveying lines and processing
machines are manufactured domestically. All compressors in the refrigeration systems are
imported, but the mechanical parts are bought from local companies. Like suppliers of farming
equipment, suppliers of processing equipment belong to other value chains.

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Most important vehicles in the pangasius industry in Vietnam are well-boats and refrigerated vans.
Well-boats are used for transportation of fresh fish and supplied by local ship builders.
Refrigerated vans and containers are used for transportation of the finished products; they are
manufactured abroad and supplied as a part of the transport package service of the local service
operators.
All veterinary supplies and most chemicals in the Vietnamese pangasius value chain are supplied
by international companies. Only few industrial disinfectants for processing factories are produced
by local companies. Veterinary products include medicine and treatment equipment. No vaccine
for pangasius has been invented. All suppliers mentioned above do not serve the pangasius
industry alone. They are in other value chains. They develop new products and services for
pangasius as a part of their product upgrading strategies (Nguyen Huong Tra, 2007).

There are several factors proved beneficial for the entry of new firms, such as the initial
internalization and the new trend to externalize production activities. A number of ex-processor
has seen the market gaps and started up new firms. They have found easy access to the market,
making use of established relationships.
From literature review and experiences of different natural resource-based countries, it is noted
that the development of T-intensive industries is rooted from the demand of domestic primary
industry for machinery, equipment, vaccine, ect. for processes during the Chain. To find out
whether there is a pull from pangasius value chain to the T-supplier, analysis of different related
factors is necessary.
3. Factors for development of T-suppliers in value chain
As mentioned earlier, the development of T-suppliers depends on the size of the primary industry.
A large and increasing local demand is required for the growth and deepening of supplier
industries. Moreover, the structure of primary production system also matters. A structure
characterized by discrete, multi-stage activities and involving the use of a large and varied number
of materials, parts and components are more amenable to linkage. (Dornberger, 2008) Moreover,
other external factors as increase in labor cost, higher requirements of customers on quality will
urge for changes in primary industry, thus require more involvement of high tech equipments and
methods.
3.1 Size and growth of pangasius industry

Along these arguments, it is uncontroversial that Vietnamese pangasius sector has been growing
fast and size of the industry is large enough to generate the growth of surrounding suppliers. The
sector is a potential market for suppliers of farming equipment, processing machinery, vaccines

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Following tables show the percentage of pangasius sector in the total fishery industry from only
15% in 2004 to 55% in 2008 in terms of volume. It can be seen from such that the number is not
only significant but also increases at incredibly fast growth rate, double (2006) and 69% (2008) in
volume and 51% (2008) in value.

Table 1: Pangasius export in the total fishery products export

2004

Volume
(ton)
80,000

Value
(US$)
180,000,000

Share in
Value
8%

Share in
Volume
15%

2005

125,000

295,000,000

11%

20%

2006

286,600

736,872,503

22%

35%

2007

389,000

980,000,000

26%

43%

2008

657,000

1,480,000,000

33%

55%

Year

Source: Fistenet, 2008

Similarly, as earlier shown in Figure 2, the export of pangasius draws an upward line from 2004 to
2008, with a dramatic leap in 2008 in both volume and value.
3.2 Structure of the industry
3.2.1 Multi-stage with participation of many actors

As it can be seen from the full map of the pangasius Value chain, although the industry consists of
only 4 main stages, many activities of T-suppliers are involved from brood stock supply to final
distribution to consumers. The more developed the value chain, the deeper participation of the Tsuppliers in processes. In brood stock supply/hatchery and nursing step, laboratories can take
responsibilities of providing new fish species, new raising method. Insurances, finance institutes
and other technological services are also needed in this step. Some inputs like chemicals,
industrial accessories, pharmaceuticals and new feeds will serve the process to enhance the
competitiveness of the chain. Farming steps requires much more number of equipments, from
basic facilities like power generator, oxygenation equipment, automatic conveying lineto
modern ones, which are currently not used in Vietnam as floating house and feed silo,
slaughtering facilities, cameras and cones, etc. Process machinery, cooking equipments,
refrigerator and cold storage are needed in processors factories. In export step, export consulting
agencies play important role to back up small local enterprises in information on regulations,
foreign markets and technical methods for distribution to overseas market.

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Generally suppliers of capital goods, inputs and services have many possibilities to sell their
products/services throughout the whole Value chain; one supplier can serve different stages of the
chain.

3.2.2 Rare vertical integration, loose linkage among actors with dominant role of processing
companies
There are a huge number of farmers (1500) involving in farming steps and around 100 of
processors in one stage. Studies show that vertical integration in pangasius value chain is rare.
Both backward and forward linkages between different stages of the value chain are loose. This
weakness of the industry has clearly shown during the global economic crisis. Though the
pangasius export set up an incredible growth both in volume and value in 2008, it is forecasted to
remain the same this year when reduction in global demand really hits the industry. Farmers
worrying about their thousands of fish output decided to delay raising more in the new season.
According to the Association of Fresh fish, only 50% of 3,600 hectare farming areas was used in
the early months of 2009, which will lead to lack of input for processing companies. Total
processing capacity of 100 enterprises, of which only 30% is used now seem to exceed the
demand. On the other hand, brood stock and hatcheries keep on producing fry and suffer from loss
when small fish cannot be transferred to farms.
The matter of raw materials supply seems to be critical in pangasius industry for years. Before
2007, facing the lack of input for production, processing companies compete for limited supply of
fish. Two years later, even though farming area has increased, they found themselves in the same
difficulty. The situation in another way can be explained by the lack of overall governance and
coordination among different actors of the chain. There are too many farms and too many
processors with the same products.

Going deeper into the structure of Vietnamese pangasius value chain, it should be emphasized that
processors plays a dominant role in the sector. They participate in many stages of the chain rather
than only in processing. In the farming stage, some of them establish their own farm to raise fish
or open a famer club to gather small input suppliers for production plants. As buyers, they have
great impact on the farmers by setting requirements on quality and quantity of fish. They send
their staffs to train the farmers of new technology and farming methods. Through five-actor model
applied in farmer clubs, processing companies also arrange a financial source to farmers from
their cooperation with banks. In distribution stage, they are linked with overseas customers
because most of them are direct exporters and thus distributors of products from their own
factories to foreign wholesalers. Processing companies directly receive information about market
demand, types, volume, quality required by overseas customers, and then translated into their
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production and to farmers through their input orders. From this special characteristic of the value
chain, it is possible to analyze the structure of processing sub-sector as key actors in the chain. We
can briefly see that other actors of the chain such as farmers who engage in farming stage and
private hatcheries cannot be of large size.

3.2.3 Atomistic structure with small sized members

The following statistics is adapted from the thesis body of Nguyen Huong Tra, 2007, studying 30
out of 33 processing companies in Mekong Delta area, Vietnam. At the moment of her study,
there were totally only 33 enterprises setting business in processing pangasius in Vietnamese
Value chain. This year, the number of processing companies has increased to 100 with many new
comers. They vary in their business diversity, investment and grow potential. However, they have
the same characteristics of small size and young operation age in the field.

As Vietnamese pangasius industry has only emerged for only a decade, most of its participations
are basically young, with the length of engagement in processing of 4.8 years and 67% factories
five or less. In addition, in terms of capital and investment, they are all small sized by the
European definition of SMEs, which refers to both employment and turnover/balance sheet
dimensions. 26 out of 27 processors, though they employ a big volume of workers, fail the
turnover criterion of EU 50 million.

Table 2: Descriptive statistics of pangasius processor

N
Description

Mean

Valid
27

Missing
0

Capacity (tons/day)

27

134

Number of workers

27

1,595

Salary (US$/month)

26

1,545

Total Sales 2006 (US$)

25

22,986,462

Export Sales 2006 (US$)

25

22,699,490

Domestic Sales 2006 (US$)

21

1,195,719

Years in Pangasius
processing

16
11
Annual Growth 2004 - 2006
Source: &guyen Huong Tra, 2007

4.8

0.62

From the characteristics of the actors in the value chain, it can be seen that T-suppliers and other
service providers can benefit from an atomistic structure of the industry, which involves numerous
firms of small size in different stages. Firstly, selling equipments to a large number of customers
Page | 19

will reduce the risk to suppliers. Secondly, the large number of customers will create intense
rivalry among them to a limited supply of products & service in early stage of domestic
development of T-industry. Requirements on quantities, quality, delivery times and price are low
and suppliers enjoy good bargaining power. Because the customers are relatively small and of the
same size, the possibilities of small suppliers to cooperate with them is higher than when they
grow up.
To conclude, because the pangasius is in a very initial stage of development, its non-oligopolistic
structure creates favorable condition to foster the establishment and growth of local T-suppliers.
3.3 Geographical concentration

Pangasius industry is highly concentrated in Mekong delta, Vietnam. Because of the weather
condition and farming custom, pangasius cannot be farmed anywhere else but found at wild in the
Mekong River. It has provided a traditional livelihood for poor farmers in the Mekong Delta,
Vietnam for hundreds of years before the export oriented pangasius business started in the 1970s
to Hong Kong, Taiwan and Singapore, and recovery period of the industry in 1980s to the U.S
market. 90% of the pangasius production nowadays is farmed in the Mekong Delta. Over the past
ten years, pangasius farming area in the Mekong delta has tripled to more than 6,160 hectares of
water surface and supplied 1,128,000 tons a year for export-oriented processing. An Giang, the
most important pangasius farming province of Vietnam, reported a total harvest of 268,091 ton in
2008, followed by Dong Thap with 285,300 ton, Can Tho 207,770 ton.
According to the overall plan for pangasius production and distribution of Mekong Delta River in
2010-2020 distributed by the Vietnam Ministry of Agriculture and Rural Area Development,
8,600 hectare farming area will be placed in 9 surrounding cities in Mekong Delta River for
annual output of 1,250,000 ton of raw fish, equivalent to 500,000 ton of processed products.
Accordingly, Mekong Delta River will continually be the center of pangasius industry in the
future. This is an ideal condition for the T-suppliers to establish variety lines of products and
finance special machinery.
4

System for development of the T-supplier in pangasius value chain

From analysis above, several favorable conditions are mentioned for the development of Tsuppliers in Vietnamese pangasisus value chain. In the following part, a recommendation based on
such analysis will be proposed for further discussion.
4.1 R&D strategy

Vietnamese pangasius value chain is at very initial stage, however developing at a bubble growth
of the unbalance between input and output. The processing sub-sector is at low level, from which
almost products are frozen fillet at low added value. For future development and enhancement of
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competitiveness, its time for processing companies to upgrade their products and processing
chain, which will require modern machinery, construction services, transportation, etc. Farmers
are in the need of new feed and veterinary inputs, and also more farming equipments. As the
service and product providers to those companies, T-suppliers need to set up a strategy for their
own development, because they cannot invest in all areas due to constraints on capital and
resources. An R&D strategy concentrating on incremental innovation, based on their current
capability, is likely feasible with basic level of technology. In early stage, low technology level
can meet their demand. For long term growth, T-suppliers are more likely requested to invest
more on R&D or find different ways of technology approach. A catch up in technology of local
producers can be made through foreign direct investment by joint venture, cooperation with
foreign partners, technology sales, license, technical servicesIn such relations, technology can
be transferred or gradually learnt by doing. However, experiences in FDI attraction of many
countries show that joint venture does not always work in terms of technology transfer; careful
consideration thus should be taken here by each supplier in their certain case.

Local infant T-industry faces constraint on capital for investment in R&D, which should be
backed up by governments supporting program. In 2000, Vietnam government has clearly set a
supporting program for investment in mechanical & machinery industry, consisting of mechanical
suppliers for fishery industry. Based on this program, 50 projects are entitled of favorable loan in
12 years at annual favorable interest rate of 3%. However, the program ends up with only 24
projects financed due to conflict administration regulations, most of which engaged in ship
building, automotive machinery and transportation. For development of the industry, further effort
from the government is required for overall and more effective promoting programs.
4.2 Cooperation with Research/Education Institutes

Technology transfer depends much on the absorptivity of the suppliers themselves. Recruitment of
qualified technical staffs or training program is outstandingly vital to improve the ability of the
company to learn new technology. In case the level of education of the whole region is low,
training is necessary, especially specialized training to support the development of skills required
by local T-suppliers.

Study by Nguyen Huong Tra reveals that, because the Mekong Delta River used to be rural area
with farming tradition, education level of local people is extremely lower than other parts of
Vietnam. For this reason, a training center plays an important role to improve the quality of labor.
Moreover, participation of a research/education institute is crucial for the development of knowhow and new technical appliance to the industry. There should be a close cooperative relationship
Page | 21

between universities or research institutes and T-suppliers to ensure that research results are close
to what is needed by enterprises and market. New methods will be required in veterinary,
biotechnology, environment protection and modern equipments for farming and processing, etc.

Mekong Delta river area has a specialist institute, which takes the leading role in developing and
promoting programs for the development of the region. This institute also cooperates with
different university in the area concerning this issue and several efforts have been made to find
appropriate models for the development of the pangasius, key industry of the region. In 2007, the
University of Can Tho introduced their study on Market for pangasius industry of Mekong Delta
area, Vietnam, accompanied with 4 groups of solution to promote the industry. Early 2008,
faculties of two Universities in the region (An Giang and Can Tho) have cooperated with
University of Wageningen (Holland) for a project on the improvement of Vietnamese pangasius
value chain.
Other cities in the area have at least one faculty of a university specializing in Agriculture
development. This is a very good condition to cooperate on a specialized program in fishery
technology to promote the T-supply industry in the region.
4.3 Cooperation between T-suppliers and other actors of the value chain

Cooperation of T-suppliers with different actors of the value chain, demonstrating the relation of
service/product providers with customers and market, is the first requirement for the development
of this industry. In Vietnamese pangasius value chain, coordination with thousands of farmers is
difficult and effort consuming. However, thanks to the innovative ideas of processing company by
establishing farmer club, such cooperative relation is much easier and effective. T-suppliers
should enhance the relationship with farmer club as a channel for customers approach. Through
such channel, information exchange takes place and benefits both participators. On one side, Tsuppliers are informed of demand on new feed and technology; on the other side, farmers are
trained and consulted to improve their farming business.

Concerning relation with processing companies, as analyzed earlier, the possibility of cooperation
for infant T-suppliers is much higher at the moment when almost processors are small sized and
young in the field. Moreover, the current crisis has alarmed them of the need for upgrading
competitiveness; processing companies are very open for cooperation. For instance, some of them
have set up a joint-venture with a fuel company to distribute diesel from pangasius fat, others
commit in a long term contractual basis with farmers, veterinary providers. In this light, Tsuppliers and processing companies can set up a cooperative relation in R&D projects in the fields
of feed upgrading, the development of new vaccines, and of machinery for food processing.
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4.4 Cooperation with Financial Institutes

Investment on technology, which is capital intensive, cannot be carried out without the backup of
Financial Institutes. In Vietnamese pangasius value chain, there exists already a model of five
actors between banks and other participators of the value chain. In the five-actor model,
processing companies, farmers, hatcheries, banks, feed and veterinary service providers sit
together and discuss the needs and offers and negotiate an agreement on how to support farmers
and hatcheries. The farmers can produce fish and receive huge money upon harvest; they need
money to buy production inputs. The bank can extend loans; he needs security to make sure he
will be paid back. The feed suppliers and veterinary service providers have the high quality
farming inputs; they need to sell them and get money. The processing companies have big export
sales and can provide security for loans; they need fresh fish for raw material and they need to
control the quality of that fish. Under an overall agreement, the farmers buy feed and veterinary
service from the input suppliers on credit and do not pay until harvest. The bank backs up
payment for the suppliers with a credit contract.
The processing companies offer security to the bank to make sure the credit contract will be
honored; they inspect the feed and veterinary suppliers and approve what types of feed and
medicine can be used in farming. In the model, value chain actors are closely linked by common
interest, large funds and inputs go to farming, big fish supplies are secured and every one receive
their money when the process completes. The processing companies has a central role in this
model, as they coordinate all the arrangements before the transactions take place, monitor
activities and cross-check information when the process is running, market the outputs for money
and make sure payments are made to different parties at the end.
Figure 4: The five actor model

Source: &guyen Huong Tra, 2007

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Because of its effectiveness, this model should be promoted to other T-suppliers of machinery and
services as well. Additionally, specific lending programs to promote R&D activities of T-suppliers
can be set up by commercial banks in cooperation with Central banks and the government.
4.5 Deepening existing Cluster and develop related fishery technological & service Cluster

Pangasius industry enjoys the favorable geographical concentration in Mekong Delta area.
Currently the benefit from geographical concentration, or otherwise simply defined as cluster
mainly focuses on the reduction of transportation cost among different actors of the chain, the
supply of cheap unskilled labor. In the future, other benefits of the geographic concentration
should be promoted such as for attracting private and public institutions in financing and
education. Vietnam government and relevant bodies have planned to improve the performance of
this existing pangasius cluster. Studies of two Universities and Institute for region development,
as mentioned earlier, have integrated a proposal for the development of this industry consisting of:

A policy favorable to the industry set under the cooperation among different authorities,
promoting agencies such as Department of Growing seafood, Department of Trade,
Department of Agriculture and Forestry product processing, banks, Ministry of
Agriculture and Rural Area, etc. to supply loan, trade promotion, investment of cold
storage to processing companies;

Methods to reduce farming cost and enhance quality of fish fry;

Cooperative model between farmers and processors, which VASEP and Mekong Delta
Union for Fish management are key facilitators;

Methods for market expansion, which emphasize on trade promotion in existing and
potential markets under the organization of Department of Trade, Department of
Agriculture and Forestry product processing.

Based on value chain approach, they come up with the plan of deepening the cluster with a model
of Processor - Farmer - Trader - Bank, promoting information exchange among 5 main cities in
the area, where a large proportion of population is engaged in pangasius industry. Pangasius
processing companies will be the center of linkages who gives guidance on raising process,
volume, harvesting methods to farmers on a contractual basis. Farmers commit with other actors
as feed suppliers and veterinary service providers. Government encourages investment on
refrigerators and storage service. Other actors as banks, domestic distributors are also involved.
They are encouraged to participate in the cluster by additional benefits as buying input at
wholesale price, information exchange on market demand, production capacity forecast, price
fluctuation, etc. (Van Anh, 2009). This model will not only promote the growth of pangasius
value chain through cooperative and closer linkages among different actors of the chain, but also
Page | 24

call for the competitiveness enhancing of each actor. In the future, improving existing pangasius
cluster should go along with establishing a new related cluster of T-suppliers and supporting
services. Developing different clusters of related industries creates the efficiency of proximity
where producer of one industry supplies its products for another sector located in the same area.
On the other hand, such producer appears as the end user of a third party. These different value
chains support the development of each other by cost reduction, exchange of information &
technology, innovation spillover, and other externalities. On this basis, Competitive Advantage of
the Industry, and later on, of a nation is developed.

In a visit to Vietnam in late 2008, Michael Porter introduced his approach on the development of
Vietnamese Competitive Advantage. According to him, Vietnam have some simple clusters which
account for considerable global market share in footwear, fishing and fishing products (more than
4%), apparel, furniture (more than 1.24%) These clusters currently tend to be narrowly focused
on individual products. There is limited collaboration among companies, suppliers and other
institutions. Some clusters, like coffee, have the potential to significantly increase their
performance if they adopt a collaboration approach. For Vietnams case, Cluster concept should
be applied to promote economic diversification. Together with upgrading existing export products
and services, deepening existing clusters, Vietnamese government should promote the
establishment of other related clusters, turn niche products into clusters, and build clusters around
MNCs.

Figure 5: Cluster and Economic Diversification

Source: Michael Porter, 2008

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Many regions of Vietnam have built natural resource-based clusters, most of which products are
export oriented, because they have advantages of labor cost and natural endowments. On one
hand, we should encourage productivity in those existing clusters to add more local value, because
what important is not using the low costs of abundant factors in a country, but deploying them
productively to create value. Building deeper clusters in areas where it has existing positions and
advantages is important, because regions grow not by jumping into entirely new areas. Instead,
new areas tend to grow out of older areas. Fishery industry, which has for long the traditional
industry of Mekong Delta area, may give a rise to associated clusters in related industries such as
fishery machinery, biotechnology or other technological services. Additionally, a country cannot
rely on one cluster to drive the economy but broaden into many clusters specializing in different
categories. Not only is the productivity of export industries vital to Competitiveness but also that
of local industries. Therefore, Clusters of related industries should be promoted along with export
oriented concentration.

In above model, Michael Porter has mentioned other ways of building new clusters as attracting
MNCs to operate in location based domestic large market, which Vietnam benefits from. This can
become the hubs of new clusters, even if the country has not been strong in a particular field. He
took the example of Thailand who has developed a reasonably good automotive engineering
manufacturing cluster. They didnt do it through startups but by attracting assembly plants from
international companies. What has grown up around them is a whole cluster. Today, Thailand has
quite a good position, not in the whole automotive sector, but in certain segments of the market
like pickup trucks. Thats where they have built a supplier base and local firms.

Whichever approaches used to promote existing clusters or build new ones, answers to the
question of how a country succeed in diversifying an economy rely on recognizing all the
opportunities it has to build on its strengths and create policies that will encourage firms,
institutions and suppliers to move to a higher level of competitiveness. Apparently, in Porters
suggestion to Vietnam, although natural resource-based industries in current clusters should be
further promoted, its time to change from Comparative Advantage of those natural resources to
Competitive Advantages through building industrial basement of a diversified economy.

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Conclusion

Increase in global price of raw materials due to rising demand for global primary goods since
2000 has opened new opportunities for economic development of many resource-rich developing
countries, including Vietnam. However, the countries face the challenge of changing the growth
of primary industries into opportunities to build a broad industrial base. Pangasius industry is one
of the fast growing sectors, which is currently considered a Comparative Advantage of Vietnam.
The geographical concentration of different activities of pangasius industry is a good basement for
promoting a cluster with active participation of T-suppliers. This can be a suitable model to
improve the competitiveness of the pangasius primary industry and promote initial development
of technological base economy.
The non-oligopolistic structure of Vietnamese pangasius industry is another favorable factor for
the development of T-suppliers, which can be carried out through cooperative relation between Tsuppliers and different actors of the value chain. Furthermore, highly intensive participation in one
processing sector in the chain causes strong competition among hundreds of processing
companies, which will enhance the competitiveness through process improvements and
innovation.
T-suppliers will benefit from these beneficiary factors for a healthy start up. However, this
requires for strong strategic planning and support from local authorities. Vietnam government has
shown their attention to the development potential of an industrial base from the opportunity
caused by resource based industries. Enterprises have been backed up with certain incentives for
investment in T-industries. Many entrepreneurs have seen themselves the potential of this market.
For opportunity comes true, further efforts in creating favorable conditions which encourages the
R&D activities, innovation of local T-suppliers are needed.

Development of an industry experiences different periods: (i) natural resource-based stage (ii)
investment based period and (iii) technological innovation and management era. In the first
period, development is dependent on the variability of natural resources and low labor cost. The
industry is characterized with low investment and technology, low value added output; export
composes mostly of raw materials. Local producers hardly carry out direct marketing and market
approach but depend on foreign importers in product distribution to the overseas end-users. Local
services and technology suppliers are undeveloped and unmotivated. Output Volume is most
important as people only care about high growth in quantity. This period is challenged because
natural resources are finite, damages to environment accompanied by fast exploitation, foreign
dependency and backward technology.

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In the next step, development period is mainly described of value concept, when capitals are
attracted into production from private sector; many processing factories are established to add
more value into products. In this period, people pay more attention to the value of output and
export. Expansion of processing capacity put great pressure on supply of input, which lead to
expansion of farming area and brood stock production. In addition, strong competition of many
actors in one stage urges for coordination, consequently lead to the establishment of cooperation
union (VASEP).

The third period of technological innovation and management comes to create the industrys
Competitive Advantage. This period can be reached by investment in technology and management
(Nguyen Huu Dung, 2006)

Vietnamese pangasius industry currently matches the second development period. Whether the
industry can change from second to third stage depends on significant breakthrough in
management of the pangasius value chain. Priority should be put in promoting the competitiveness
of the chain through coordination between different actors of the chain, creating a positive
competition among actors and encouraging the participation of related services and technological
suppliers. Once the development of pangasius natural resources-based industry can promote the
growth of such, an industrial base of the region, and later the country has gradually established for
the future aim of building a stable diversified economy.

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Annex
Figure 6: Vietnamese Pangasius Value Chain, Mekong Delta, Vietnam

Source: &guyen Huong Tra, 2007

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