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Part of the puzzle

Released at: 08:39, 19/11/2017

Part of the puzzle

Photo: Viet Tuan

Vingroup’s launch of its Made-in-Vietnam motor vehicle brand Vinfast again raises questions about the ability of local component suppliers to meet requirements.

by Quynh Nguyen & Hai Van

Since leading property developer Vingroup announced plans in September to step into in the country’s automobile sector with its Vinfast motor vehicles, many have hoped the giant will finally realize the long-standing dream of Vietnam establishing an automobile manufacturing industry. Vingroup targets becoming a leading motor car manufacturer in Southeast Asia, producing 500,000 vehicles a year with a localization rate of 60 per cent by 2025. The birth of Vinfast is not only good news for the country’s auto industry but also has a positive influence on support industries, which have been far too weak for far too long.

Room for hope

After Vingroup announced its plans to make Vietnamese motor vehicles, a number of automobile accessory and component manufacturers expressed a desire to become partners of Vinfast. “We are willing to make large investments, just to have the opportunity,” Mr. Truong Hong Minh, CEO of the Nhat Minh Co., which specializes in manufacturing plastics, said at a recent conference on developing automobile support industries.

“The localization rate for our products remains low, at just around 20 per cent. Domestic suppliers must develop production and increase the quality of products in accordance with State policies. Mitsubishi has only used a number of small components from domestic manufactures, such as tires and batteries.” Mr. Kenichi Horinouchi, CEO, Mitsubishi Motors Vietnam

The opportunity Mr. Minh referred to may well be realized, because despite signing deals with many foreign partners in the design and supply of components, Vinfast must still acquire components produced in Vietnam in order to meet localization rates. “We are in the process of designing the first motor car and also want to link with all auto component manufacturers in

Vietnam to achieve localization goals in the future,” said Mr. Vo Quang Hue, Deputy CEO of Vinfast and former CEO of auto component maker Robert Bosch Vietnam. In the view of many analysts, the decision by Vingroup to appoint Mr. Hue, who was trained in automobile technology in Germany and worked for BMW and Bosch, shows its determination to increase localization rates.

Vinfast will cooperate with German partners in product development and the management of its new manufacturing complex. Its vehicles will be designed by Italian design houses, while the main components, such as engines, will be brought in from US and Europe. It will, however, engage Vietnamese companies to manufacture most of the necessary components. 

Recognizing the opportunities Vinfast will present, CEO of the Hanoi Plastics Company, Mr. Nguyen Thanh Nam, said the company will step up production line upgrades in the future to meet the standards needed to participate in the production chain. He acknowledged that plastics products supplied to the automobile industry have not developed sufficiently in recent years, due to the influence of import tax policies declining under roadmaps to integrate automobiles and components into the global supply chain.

In order to support auto component suppliers in seizing the opportunities, the Ho Chi Minh City Center for Support Industries has connected auto manufacturers with auto component suppliers, so they can identify demand and understand what difficulties they face. “The development opportunities for auto parts suppliers are huge,” said Ms. Le Nguyen Duy Oanh, Deputy Director of the Center. The average localization rate stands at just 15 per cent, so the opportunities are many for domestic enterprises to increase the rate if production lines are improved in a timely manner. If a localization rate of at least 40 per cent is achieved to qualify for tax incentives within ASEAN, or even 60 per cent, as announced by Vingroup, it would help develop the country’s domestic support industries.

“With a view to producing vehicles for the Vietnamese brand and serving the Vietnamese market and exports, we want to develop the support industry, initially reaching a localization rate of 40 per cent and moving towards 60 per cent in the future. This is an important premise for Vinfast and Vietnamese component suppliers to build up production lines.” Mr. Vo Quang Hue, Deputy CEO, Vinfast

The Vinfast project kicked off at a time when the government’s determination to develop the automobile industry is high. In a speech at the ceremony opening Vinfast’s plant in the northern port city of Hai Phong in September, Prime Minister Nguyen Xuan Phuc said that with per capita income of nearly $3,000, Vietnam will have to universalize motor cars in the near future. The determination of the government is displayed by a host of new policies on automobile assembly, support for Vietnamese component manufacturing enterprises, and modifications to import and excise taxes.

“Vietnamese enterprises can currently only supply certain components to partners in Japan and Europe. This is a good time for the government to create favorable conditions for enterprises in support industries to expand their production scale.” Ms. Le Nguyen Duy Oanh, Deputy Director, Ho Chi Minh City Center for Support Industries

Demand for automobiles, it’s been predicted, may reach 600,000 units a year by 2025. If the local automobile industry meets this demand, especially for vehicles of less-than-nine-seats, by 2025, it will be able to reduce import turnover by $3-7 billion at that time and $5-12 billion by 2030, improving the trade balance and macroeconomic stability.

Challenges ahead

There can be no denying the opportunities the Vinfast “dream” will bring to Vietnam’s auto component suppliers, but the question is whether they can meet needs. The auto component manufacturing industry has been in a poor state for some time, as evidenced by localization rates reaching just 7-10 per cent, while the original strategy aimed at 60 per cent by 2010.
Locally-manufactured products have low technological value and include tubes, plastics, tires, seats, mirrors, glass, wires, and batteries. In 2016, while Vietnam outlaid $2.3 billion on importing completely-built-unit (CBU) motor cars, the importation of components and accessories for assembly and repair totaled $3.54 billion, according to data from Vietnam’s General Department of Customs.

The country’s auto industry remains small, which explains why global component suppliers are yet to establish a strong presence, the Automotive Working Group (AWG) told the 2017 Vietnam Business Forum held in Hanoi in June. According to the group, more than 90 per cent of existing component suppliers in Vietnam are foreign-invested companies, and the majority of components and materials for auto manufacturing and components still need to be imported.

Moreover, a report from the Japan External Trade Organization (JETRO) showed that the localization rate in industrial products in Vietnam was 34.2 per cent in 2016; far lower than China’s 67.8 per cent, Thailand’s 57.1 per cent, and Indonesia’s 40.5 per cent. The Ministry of Industry and Trade (MoIT) also acknowledged that the domestic support industry remains underdeveloped. A recent report from the ministry revealed that Vietnam aimed for a 40 per cent localization rate for motor cars of less-than-nine-seats by 2005 and 60 per cent by 2010, but the current rate is a mere 7-10 per cent. The highest localization rate, of 37 per cent, is for Toyota Vietnam’s Innova.

According to Ms. Oanh, the difficulty for domestic auto component manufacturers is low productivity, which disqualifies them from joining global supply chains. “These companies have many opportunities, but the gap between the requirements of auto manufacturers and their capacity is substantial, especially in terms of quality and price,” she said.

After more than 20 years in Vietnam, though much higher than at other foreign manufacturers, Toyota’s localization rate is only 19-37 per cent, depending on the model. While pledging to increase the rate to 30-40 per cent within ten years of arriving in the country, in 2007 it stood at just 2-12 per cent. With vehicles of less-than-nine-seats, it was only 18 per cent. Even its goals regarding technology transfer were not met.

Mr. Phan Dang Tuat, Deputy Chairman of the Vietnam Supporting Enterprises Association, said that Vinfast’s goal of a 60 per cent localization will be a challenge. According to his calculations, a sedan usually has 24,000 components. Assuming that each enterprise makes six, it will require 4,000 enterprises to supply those components. But there are actually only 1,800 support enterprises in Vietnam. “The number may increase in the future, but the problem is whether they will have the capacity to meet requirements,” he said.

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