Auto Makers Cope With Vietnam’s Escalating Interest Rates, Slowing Credit

A long shadow hangs over the seventh Vietnam Motor Show at the Saigon Exhibition & Conference Center in the country’s thriving business and commerce capital, as severe economic turbulence and government policies continue to dampen the growing demand for new vehicles.

With inflation hovering at about 20%; interest rates edging toward double digits, making consumer loans more difficult to obtain; and the government slowing credit flow in an effort to kick-start the economy, the new-car market is stalled.

Auto makers in the country sold 89,936 new vehicles through the year’s first 10 months, a slight uptick on year-ago’s 88,600, which was down 4.4% from like-2009. October deliveries, alone, stood at 9,258, marking an 11% decline from prior-year.

Looming on the horizon is another tax on new-vehicle purchases as the government seeks to keep ownership running in tandem with an infrastructure that already is stretched to capacity. Vietnam is a country with an infrastructure built for bicycles, which mostly have fallen into disfavor.

Signals are mixed as to how long these economic problems will last, but many observers believe the economy will start to make its way onto more solid ground in 2012.

The auto show is organized by the Vietnam Auto Manufacturers Assn., which represents the 10 auto makers that build vehicles in the country. OEMs such as BMW and Audi, which import completely built-up vehicles to sell in the market, aren’t represented at the annual event.

Stung by low sales, some VAMA members have shunned the show, including Ford, Hino, Isuzu and Mitsubishi. But thanks to Toyota, Honda, General Motors, Mercedes-Benz and state-owned bus maker Samco, more than 60 vehicles are on display for the estimated 120,000 visitors expected this year.

Toyota is the market leader, fully tapping into consumer needs with a product mix that ranges from the Vios and Altis sedans to the Innova MPV and Fortuner SUV.

The auto maker achieves the highest levels of localization, 17%-37%, on the six models it builds in Vietnam. It also exports some parts to its global network, such as pedals and antenna. Another four models arrive as CBUs.

Akito Tachibana, president of Toyota Vietnam, acknowledges the “difficulties and challenges” posed by the country’s current economic situation but is upbeat about its prospects. He sees it as a “promising country” with a growing skilled workforce.

Toyota, battered this year by the Japanese earthquake and tsunami in March and the recent Thailand’s floods, expects to undershoot its full-year target in Vietnam.

The tsunami caused a 30% production loss in June, slipping to 60% in July before bouncing back to full strength in August, meaning Toyota effectively lost a full month of vehicle output.

The full impact of the Thai floods is yet to be felt, but production is expected to be down by around a third. Toyota sold 31,000 vehicles in Vietnam last year, but Akito anticipates “a little bit less in 2011.”

Adding some spice to the Toyota stand, meanwhile, is the FT-86 Sports Concept developed in Japan with partner Subaru.

General Motors in September launched a new company, GM Vietnam, dropping the former Daewoo name. All cars sold in the country now will be badged Chevrolet, including legacy models.

Sales of two new cars, the Spark minicar and Captiva cross/utility vehicles, were launched here last month. The Orlando multipurpose vehicle and the halo Camaro sports car make their local debuts the show, the latter of which will arrive as a CBU but in small numbers.

The Orlando will be a key model for Chevrolet and is being priced aggressively, significantly undercutting its three main rivals, the Toyota Innova, Nissan Livina and Mitsubishi Zinger.

It’s all part of a bold strategy that GM is rolling out across the Association of Southeast Asian Nations to gain market share. This year’s sales target is 10,000-11,000 units.

GM Vietnam’s upbeat new managing director, Gaurav Gupta, is targeting a 30% sales increase for next year and eventually wants to see deliveries double. The auto maker has production capacity for 25,000 units annually, so the scope certainly allows it to raise sales.

GM Vietnam’s three key players are the Spark in the mini segment, the Cruze in the midsize-car segment and the Captiva/Orlando in the family segment. The Cruze, which recently hit 1million sales globally, is assuming key importance here and accounts for 30% of the brand's sales.

Gupta also has an aggressive plan for local content. Currently, GM’s localization rate ranges from 4%-20%. It is the only OEM in the country to export cars, sending the Viviant (a Daewoo legacy model) to Latin America.

GM Vietnam has not been affected by the Thai floods so far, Gupta says, having stocked its inventories beforehand. Despite the country’s difficult economic situation, he is upbeat about the future, expecting the market to grow 3%-5% in 2012.

Suzuki generates the biggest news at the show, with Masami Haga, the auto maker’s general director, announcing plans to invest about VND273 billion ($13 million) to build a new plant in  Dong Nai province.

The factory will be built alongside its existing motorcycle facility and be completed in 2013. When the new plant is up and running, it will be able to build 5,000 vehicles a year. The existing car factory, also in the same province, will close after production is transferred to the new factory.

Suzuki, which has been assembling vehicles in Vietnam for 15, now plans to return to the passenger-car segment with the Grand Vitara CUV after having quit a couple of years ago when Swift production was ended.

The Grand Vitara initially will arrive in CBU form, targeting annual sales of just 400 units. However, once the new factory comes on line, the midsize SUV will be assembled locally alongside Suzuki’s small light-commercial vehicle range.

Honda long has been a major player in the local market’s motorcycle segment, recently investing VND2.5 trillion ($120 million) in a third 2-wheel plant, due to open next year. However, it is a late entrant to the 4-wheel segment in Vietnam.

The auto maker launched its operations in 2006 with the Civic and has built 17,000 units to date. The other 3,000 units that helped it break the 20,000-vehicle sales barrier in five years come from the CR-V, which was added to the lineup in 2009.

Honda also assembles its 1.8L, 2.0L and 2.4L engine range locally. At the show, Honda wins the best dealer network award from J.D. Power. The sales network will increase “gradually,” says Akira Makino, director-automobile sales.

Honda displays its B-segment City and Jazz (Fit) models at the auto show, both built in neighboring Thailand, as it evaluates whether to add one or both to its product mix. Makino expects “bigger potential from smaller vehicles” in the future, and says the show provides the perfect environment to study customer interest.

Mercedes is the clear premium-car leader across the ASEAN region, building vehicles to which everyone in Vietnam aspires, earning a 58% share of the segment that is up from 51% in the prior fiscal year. BMW, Audi, Lexus and Porsche are left to fight among themselves.

This year, Mercedes expects to hit the 2,000-unit mark in Vietnam, up 25% from last year's total of 1,824. While not immune to the local economic crisis, it has been able to ride on a strong start to the year.

The auto maker’s three growth drivers are the C-Class and E-Class sedans and GLK SUV, all arriving as complete-knocked-down kits. A facelifted C-Class was introduced in the middle of the year and currently is sold out; the E-Class has just seen its range doubled from two to four variants; and the GLK has received a host of model-year upgrades.

Mercedes sales are being helped by a VND210 billion ($10 million) network expansion that has added three new dealers in the provinces. This has widened the brand’s footprint and brought immediate start-up demand, says Martin Schultz, director-sales & marketing.

Next to arrive will be a 37,660-sq.-ft. (3,500-sq.-m), state-of-the-art showroom able to accommodate up to 25 cars and lift the standard for Vietnamese showrooms to a new level. Thilo Grossman, director-aftersales, says the auto maker is driving forward its customer standards and investing heavily in training and quality meeting strict German factory standards.

Mercedes also has invested VND210 billion ($10 million) to improve its factory, and Schulz says the auto maker will “continue to invest in our operations.”

He concedes Vietnam’s overall economic situation is “fragile,” but predicts continuing premium-segment growth in 2012, despite its niche status that only accounts for 5% of the new-car market.