Leading the Way is a column written by PricewaterhouseCoopers professional staff. It appears in the Business section of the Bangkok Post twice each month. The column provides specialised advice to corporate decision-makers in Thailand on global and local business trends.
This article appeared in the December 19, 2006 issue of the Bangkok Post.
By Oranuch Tritrungtusana
This is the fourth article in a four part series, entitled Inside Automotive. In this article, we will look at the emerging automotive market in Vietnam, and the investment opportunities it presents.
The auto assembly industry in Vietnam is somewhat fragmented, with more than 30 assemblers producing as few as 100, and as many as 10,000 units a year each. Total annual production is just over 60,000 units, and final assembly is done with imported kits. Considering that Vietnam has 84 million people and only 600,000 own cars, there is a huge untapped market.
What about the auto-parts industry?
As the auto industry itself has not yet fully developed, the parts industry is in its initial stages. The localisation rate is quite low, especially in passenger cars and light commercial vehicles, so there may be an untapped opportunity for supplying original equipment manufacturers (OEMs) locally, as long as the quality and cost are right. In addition, the export sector is showing positive signs, with 40% growth from 2004 to 2005.
How is the two-wheeler segment doing?
The export sector for motorcycles and parts has shown dramatic growth, generating US$6.2 million in 2001, to more than $70 million in 2005. Meanwhile, the domestic market has been up and down for the past five years. For example, new motorcycle registrations in 2005 totalled 1.6 million, against 1.8 million in 2001. Despite the fluctuating nature of the domestic market, the number of motorcycles in Vietnam is expected to rise from 17 million today to 32 million in 2020. Currently, one in every five Vietnamese owns a motorcycle.
GDP growth in Vietnam averages 8% a year. Can that number be a predictor for auto sales growth?
While this may hold true in some countries, it is not that simple in Vietnam, where car prices are among the most expensive in Asean. The luxury tax rate is 50%, the import tax is 90%, and value-added tax 10%. Therefore, a car priced at $10,000 abroad is sold for $25,000 in Vietnam. For example, in the Philippines, a Toyota Camry 2.4L is selling for $25,000, while it is priced at $55,000 in Vietnam. As the average salary of a factory worker in Vietnam is $55 per month, and that of an engineer $220, many Vietnamese cannot afford cars.
On a positive note, the auto-parts sector has shown more growth, because it has export markets and is not restricted by the small local market. Also, because Vietnam has a number of competitive advantages, such as cheap labour, political and currency stability, we may see more foreign direct investment from Japan, Taiwan and Korea.
The auto industry aside, what is the current investment climate in Vietnam?
The outlook is optimistic. Foreign direct investment (FDI) registered in 2006 exceeds $6.5 billion. Within five years, the government expects newly registered capital may exceed $30 billion, of which $24-25 billion may be from FDI.
Recent administrative and legal reform as reflected in the common ''Enterprise Law'' and ''Investment Law'' are being welcomed by investors. Trade liberalisation and equality between domestic and foreign investors after the country's accession to the WTO will continue to move forward.
What advice can you give those who plan to invest in the Vietnam auto industry?
Investors choose Vietnam for a number of reasons, not just because of the cheap labour cost, or the relatively young workforce (more than 60% of the population is under 30). Diversification of risk on investment in emerging markets is one of the key factors, especially for Japanese investors.
Whether now is the right time to invest depends on your company's strategy. To be successful, you need to fully understand the Vietnamese market, and have a clear idea of why you are going there. You may decide to bring your own technological systems and processes, and have pre-secured agreements for the best tax incentives and regulations.
A strategic location is also key. For example, if you are export focused, it is essential to be close to a seaport, as the logistical cost of transporting materials is high due to the country's limited transport infrastructure. Alternatively, domestic market-focused companies may choose to locate themselves closer to the factories that produce raw materials, such as plastic and rubber.
As you would before making an investment in any new project or country, conducting a proper market study is crucial. Talking to those who are already in the industry may help give you clearer direction, and a better idea of what to expect.
