Vietnam Playing Catch-Up in ASEAN Auto Sector

HO CHI MINH CITY – Vietnam faces tough going as it works to develop an upstream auto-parts manufacturing base, and meanwhile, regional liberalization through the ASEAN trade bloc is threatening the country’s vehicle-assembly segment.

In many ways, it is crunch time for Vietnam’s auto sector. Thanks to years of rapid economic growth, an increasing number of consumers are able to buy automobiles in a market traditionally dominated by motorcycles.

The government wants these consumers to buy Vietnamese – from the country’s well-established yet small assembly sector run by companies such as Truong Hai Automobile and Mekong Auto. It also wants this sector to build autos with Vietnamese-made parts.

Phong Quach, an analyst at Ipsos Business Consulting, says a 2014 government decree set a target that Vietnam’s automotive industry should source 35% of parts domestically by 2020 and 65% by 2035.

Last year, a policy aimed at facilitating these goals was put into place. For example, the parts industry can receive financial support for pilot production projects or preferential land leases and land-use permits.

It is too early to assess the impact of these incentives. “These policies were released recently, so we can’t judge if they are effective enough,” says Thuy Nguyen, an analyst at the Hanoi-based Vietnam Development Forum.

Vietnam’s parts industry needs to overcome multiple obstacles to advance. “The development of the auto-parts industry depends on the growth of the auto (-production) industry, which is still underdeveloped in Vietnam compared to other ASEAN countries,” Thuy says.

Labor and finance present two of the biggest problems for the industry, experts say. “Although Vietnam has a big advantage in a large labor pool, there is a shortage of skilled labor such as engineers,” Phong notes.

A possibly larger problem, however, is that the assembly segment that government officials want to see buying Vietnamese parts is itself far from robust.

Taxes have been hampering the development of strong domestic automotive companies. “While the government wants to grow the automotive industry, the ministry of finance imposes high taxes and fees and a registration process to limit the number of automobiles,” Phong says.

And, crucially, regional integration is threatening the industry, with various agreements among ASEAN’s 10 member countries in the Southeastern Asia region lowering import taxes on vehicles and parts.

The Vietnam Automobile Manufacturers’ Assn. believes this liberalization is a double-edged sword. “On the one hand, this can help domestic manufacturers reduce their import duty,” says Phan Thi Hoa, a VAMA representative. “On the other hand, it creates difficulties for the survival of local players due to the severe competition from Asian-imported products at 0% import duty from 2018.”

Thailand and Indonesia, the region’s largest auto producers, may flood the Vietnam market with cheap imports once the duty is zeroed out next year.

Thuy recommends several potential solutions to overcome such issues. “Effective policies must aim to solve the problem of attracting investments and help factories push output,” she says. “In order to solve the problem with output, first the government might want to consider bolstering domestic demand for automobiles and improving infrastructure to be more suitable and accommodate more vehicles.”

Other experts agree the Vietnamese government needs to be proactive in developing a sustainable assembly segment in a competitive regional marketplace, but it also needs to be smart – avoiding replicating strong neighboring sectors and instead developing Vietnam’s own strengths.

Competing with an “automotive assembly industry (that) is centred on Thailand, Malaysia and Indonesia with distinct advantages in this sector borne largely from longevity and the market size” makes no business sense for Vietnam – at least not where the 4-wheel (-vehicle) market is concerned, Chris Humphrey, executive director of the Singapore-based EU-ASEAN Business Council, tells WardsAuto.

And as ASEAN moves closer toward a zero-tariff regime, Vietnam will struggle even more to compete with vehicles manufactured in places such as Thailand, “given the capital costs in setting up car plants,” Humphrey says.

The fact that cars assembled in Vietnam heavily rely on imported parts from the region does not boost its competitiveness.

Dushyant Yashvikram Sinha, director-mobility practice at the U.S.-based consultancy Frost & Sullivan, says, “For years, Vietnam has been trying to develop the component sector by incentivizing local original-equipment manufacturing and (has) been expecting the growth in domestic demand to support the local industry.”

But these efforts have yet to pay off: “Falling import duties and large-scale production in neighboring Thailand (1.94 million vehicles in 2016) and Indonesia (1.18 million vehicles) have made imported CBUs (completely built-up units) more price-competitive and affordable,” he says.

In 2016, Vietnam only produced 236,000 vehicles, and components were sourced from Thailand and South Korea. As a result, Sinha says, “The local industry could never achieve the scale required to be competitive and grow.”

The immediate challenge, he says, is to “ensure the local industry’s viability – because despite a growing demand, cheaper imports from Indonesia, Thailand and India” are threatening the sector.

Yet, if Vietnam does create a parts sector, this might give its assemblers a lifeline. Humphrey notes “the zero-tariff regime (under the ASEAN Economic Community) does allow Vietnam to assemble components and parts to serve the auto-manufacturing industry elsewhere – for example, developing a supply industry to serve the auto-assembly industry in Thailand” – a country short of skilled labor.

Apart from the AEC and its ASEAN Trade in Goods Agreement that significantly eliminates intra-ASEAN import duties, Vietnam also should benefit from the negotiated (but yet to be ratified) European Union-Vietnam free-trade agreement, Humphrey says.

“With labor available, and a workforce that is keen to develop its skills and a good base from which to work, the prospects should be good for Vietnam” to develop its automotive sector, he notes.

The Vietnamese government’s Supporting Industry Enterprise Development Center, which helps small and medium industries forge ties with international buyers and partners, is trying to help by targeting the “fledgling vendor base,” such as in the automotive sector, Sinha says.

The center provides subsidies to local enterprises for initial R&D, pilot manufacturing and promotion. But will this be too little, too late to create a sustainable Vietnam auto-assembly and parts-making sector? We may find out by 2020.

– with Poorna Rodrigo in London