Vietnam automotive sector is small as compared to its South East Asian neighbours such as Thailand and Indonesia, but is very fast growing. Growth is still heavily reliant on domestic market.
Most global manufacturers operate in Vietnam through manufacturing joint venture companies entered into with local (often state-owned) companies.
Factories are currently mostly located in Southeast Vietnam and the Red River Delta. Among global manufacturers with factories in Vietnam include Toyota, Honda, Hyundai, Hino and Ford.
Its distribution sector is not completely open to foreigners. Foreign-invested manufacturing companies typically work with local distributor networks and agents to distribute fully assembled vehicles into the market.
Thaco is the largest automotive player in Vietnam, a local firm founded in 1997. It manufactures cars, buses and trucks, and has its own brand name of buses and trucks.
The company has a joint venture with Kia Motors to produce Kia branded cars from its main factory located in Chu Lai Economic Zone. It also produces and manufactures Mazda passenger cars through its VinaMazda subsidiary. Singapore-based Jardine Cycle & Carriage announced in May 2019 that it is increasing its stake in Thaco to 26.6 percent.
What has changed?
As part of its ASEAN Trade in Goods agreement (ATIGA), Vietnam has reduced import tariff for imported automotive from ASEAN to zero percent from 2018. Previously, there were high taxes up to 300% of cost to protect local automotive players.
This changed the landscape of Vietnam's local automotive industry. ASEAN zero-tariff resulted in steeper competition with lower cost imports flooding supply in the country.
Global manufacturers can consider capitalising on its existing ASEAN plants to supply into Vietnam.
1) Vietnam is expected to have solid automotive vehicle sales growth, but is set to benefit ASEAN neighbours which has strong automotive manufacturing
Vietnam has a booming economy and a growing middle class. Implementation of ASEAN zero tariff results in lower prices of passenger vehicles, therefore more vehicle ownership. Increased industrial activities also increases the number of trucks sold.
If we look at past trend, there was a drop in automotive vehicles sold in 2017 due to anticipation of lower vehicle prices with the implementation of ASEAN zero-tariff. However, on the overall, automotive sales grew quickly with CAGR of 20% from 2014 to 2018.
There are about 280,000 automotive vehicles sold domestically per annum, with passenger cars accounting for more than two-thirds. Most citizens still prefer motorcycles, as it is much cheaper and more equipped to face the notorious traffic jams in the cities.
Vietnam's local market growth will benefit ASEAN neighbouring countries that has strong automotive manufacturing. Due to low local volume as compared to Thailand and Indonesia and lack of expertise, Vietnam is not yet able to compete and manufacture automotive vehicles competitively.
Vietnam has a large gap if it wants to catch up to be as large as Thailand and Indonesia automotive market. In 2018, Thailand and Indonesia sold 1 million and 1.2 million vehicles respectively domestically, which is approximately four times the size of Vietnam's market.
2) Vietnam is encouraging local production of automotive vehicle through incentives, but faces an uphill challenge
With current market size and development level of the industry, Vietnamese CKD vehicles cannot compete with completely imported built-up (CBU) vehicles from ASEAN countries.
Vietnam faces a challenge to grow local parts manufacturers due to lack of expertise. International manufacturers prefer local parts manufacturer with in-house design capability i.e. produce components without detailed drawings, which is limited in Vietnam.
Vietnam is also a latecomer to the automotive industry, major automakers have already established production hubs in neighboring countries. The lack of a complete supply ecosystem makes it commercially not viable for automakers to localise their entire production.
Post ASEAN zero-tariff, the Government made some efforts to protect local production. It enacted a new decree to impose stricter regulations for imported cars as a non-tariff barrier. However, this is not enough to make international manufacturers manufacture in Vietnam.
Under the new decree, local car importers need to obtain Vehicle Type Approval (VTA) certificates from the country of origin, which certifies the quality, safety, and environmental protection of imported units in accordance with the current regulations.
Most importers have obtained VTA certificates especially from Thailand.
With new regulations in place, the Government hopes to reduce its dependency on imports, increase production of environmentally friendly cars, and develop supporting industries to ensure a sustainable growth.
The Government is also providing incentives to local companies to grow manufacturing. There is currently no automotive manufacturer with a full local production in Vietnam.
International OEMs have to consider the benefit of economies of scale it is currently getting from its other ASEAN plants against expanding or setting up local plant in Vietnam.
Vingroup, a Vietnamese conglomerate which focuses on real estate development, retail, mobile and various services, launched Vietnam's first national car brand named VinFast. Vinfast first cars will be delivered end of July 2019. The company is looking to reach a production capacity of 500,000 cars and a localisation ratio of 60 percent by 2025.
Success of VinFast could be the key to boost the country’s automotive sector and help revitalise the country’s industrialisation efforts. The government has given VinFast a 50 percent reduction on corporate income tax for its first 15 years of operation in order to compete with international OEMs.
3) Vietnam does not yet have a solid long-term automotive policy to position itself to compete with its ASEAN neighbours
Vietnam is still very much an automotive assembly hub, rather than a manufacturing one. It has weak supporting industries and low technologies, as compared with its ASEAN neighbours - Thailand, Indonesia and Malaysia.
Additionally, the distance between Vietnam and Thailand is not far, so the time required for shipments to reach the market is relatively little.
Due to the absence of a supporting industry, the cost of manufacturing a car in Vietnam is about 20% higher than neighboring countries which compels domestic manufacturers to import almost 60% to 80% of components.
In 2002, the Government announced the Strategy for Developing the Vietnamese Automotive Industry until 2010, with a vision until 2020. The strategy laid an emphasis on increasing local content of vehicles made in Vietnam.
However, Vietnam has officially admitted that it failed to meet the targets, and is unable to turn the automotive industry into a "spearhead industry" and provide a strong momentum for industrialisation.
For example, Thaco and Toyota, the two best performers has only managed to achieve localisation rate of 15 - 18 percent and 37 per cent respectively in 2016.
Vietnam does not yet have another long-term automotive policy. Up to now, it only has the launch of Vinfast to spark hope to reinvent its automotive industry. It is still early to be able to see the impact of Vinfast on the economy.
International automotive players will need to prepare for any change of policies by the Vietnam Government to transform its automotive industry.
In conclusion, with ASEAN zero tariff, global manufacturers may find it more profitable to manufacture in neighbouring countries such as Thailand, Indonesia and Malaysia than locally in Vietnam, where there is already economies of scale and supporting industries.
It is anticipated that the Vietnam Government will look at a longer term plan on how to make its automotive industry more sustainable.
Otherwise, Vietnam may end up like Philippines which has a long history of automotive production, but has suffered in the recent times due to policy inconsistencies, lack of local supporting industries, and competition from CBU imports due to reduced tariffs.
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Vietnam Investment Review, VBF 2018: Realities of Vietnam's Automotive Market, https://www.vir.com.vn/vbf-2018-realities-of-vietnams-automotive-market-64332.html
LSESU Emerging Market Forum, A Brief Look at Vietnam's Automobile Industry, http://www.lseemf.com/brief-look-vietnams-automobile-industry/, published 31 October 2018