Q2 2014 Vietnam

Q2 2014 www.businessmonitor.com

VIETNAM AUTOS REPORT

INCLUDES 5-YEAR FORECASTS TO 2018

ISSN 1749-0286 Published by:Business Monitor International Vietnam Autos Report Q2 2014

INCLUDES 5-YEAR FORECASTS TO 2018

Part of BMI’s Industry Report & Forecasts Series

Published by: Business Monitor International

Copy deadline: January 2014

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Vietnam Autos Report Q2 2014

CONTENTS

BMI Industry View ...... 7

SWOT ...... 9 SWOT ...... 9 Political ...... 10 Economic ...... 11 Business Environment ...... 12 Industry Forecast ...... 13 Table: Vietnam Autos Production, 2011-2018 ...... 13 Table: Vietnam Autos Sales, 2011-2018 (VAMA Members) ...... 17 Table: Vietnam Autos Trade, 2011-2018 ...... 20 Table: Vietnam - 2014 Import Tax Regime ...... 21 Industry Forecast – Passenger Cars ...... 23 Industry Forecast – Commercial Vehicles ...... 24 Table: Top Five Companies By CV Sales ...... 24 Industry Forecast – Suppliers ...... 24 Macroeconomic Forecasts ...... 30 Table: Vietnam - Economic Activity ...... 33 Industry Risk Reward Ratings ...... 34 Asia-Pacific – Risk/Reward Ratings ...... 34 Table: Asia-Pacific Autos Risk/Reward Ratings ...... 37 Company Profile ...... 38 Company Monitor ...... 38 GM Vietnam ...... 41 Mercedes-Benz Vietnam ...... 42 Automotive Asia Ltd ...... 44 Regional Overview ...... 45 Table: Vehicle Sales 2013 (CBUS) ...... 45 Global Industry Overview ...... 50 Table: Passenger Car Sales November 2013 (CBUs) ...... 50 Europe On Road To Recovery ...... 50 Tax Hike Skews Japan's Outlook; US Hits Sweet 16 ...... 52 China Is BRIC Bright Spot ...... 54 Demographic Forecast ...... 57 Demographic Outlook ...... 57 Table: Vietnam's Population By Age Group, 1990-2020 ('000) ...... 58

Table: Vietnam's Population By Age Group, 1990-2020 (% of total) ...... 59 Table: Vietnam's Key Population Ratios, 1990-2020 ...... 60 Table: Vietnam's Rural And Urban Population, 1990-2020 ...... 60 Methodology ...... 61 Industry Forecasts ...... 61 Sector-Specific Methodology ...... 62 Sources ...... 62 Risk/Reward Ratings Methodology ...... 63 Table: Automotive Risk/Reward Ratings Indicators And Weighting Of Indicators ...... 64

Vietnam Autos Report Q2 2014

BMI Industry View

According to the Vietnam Automobile Manufacturers Association (VAMA), vehicle sales of its members grew 20.0% in 2013, to 96,688 units. The strong showing in 2013 was largely attributed to the rebound in the automotive sector, which was ravaged by the recession that hit the country in 2012.

We remain bullish on the Vietnamese auto market, however, and forecast vehicle sales to grow 10.0% in 2014. While this is below 2013's growth rate, it is because vehicle sales have normalised and the higher base effects of 2013 will make it harder for them to continue growing at such a rapid clip.

Our bullish outlook on the sector chimes with our Country Risk team's optimistic view on Vietnam's economy. As the government takes steps to privatise the country's state-owned enterprises (SOEs), we see it as a harbinger for more free market reforms in the coming years, which will undoubtedly provide a boost to economic growth (see 'Privatisation Of SOEs Highly Positive For The Economy', January 8). BMI forecasts Vietnam's GDP to grow 5.9% in 2014 and 6.4% in 2015.

Besides the ongoing privatisation drive, another factor supporting auto sales is our outlook for stable interest rates in 2014. Our Country Risk team forecasts the State Bank of Vietnam's benchmark refinancing rate to remain on hold at 7.00% throughout 2014 (see 'New Credit Growth Target Suggests Monetary Policy To Be Kept On', December 30 2013). The resultant stability in consumer financing rates will continue to make it attractive for buyers to take on financing for their vehicle purchases.

We expect the outperformance of passenger car sales to continue in 2014, aided by the availability of affordable car loans. That said, we forecast commercial vehicle (CV) sales, which were impacted by weak demand from businesses in 2013, to grow 8.0% in 2014, as Vietnam's ongoing banking sector reforms and SOE restructuring begin to bear fruit.

We have also upgraded our 2015 vehicle sales growth forecast from 7.2% to 8.6% due to the gradual abolishment of import tariffs on vehicles imported from other ASEAN countries as part of the region's Trade in Goods Agreement. As duties are slowly reduced, imported cars, which were previously priced out of the local market due to high taxes, will now become more affordable for the average Vietnamese consumer. This will then result in sustained sales growth for the imported car segment.

Despite our more optimistic outlook for vehicle production in the coming years, we warn that a lot needs to be done in terms of policy changes to make Vietnam an attractive market for autos-related investment in the

Asia-Pacific region. Although the government has tried to increase domestic production in the industry, in particular by raising import tariffs on vehicles, there has been little in the way of rewards for companies which have chosen to invest. This is reflected in the 'rewards' section of BMI's industry Risk/Reward ratings for the autos sector in Asia, where Vietnam scores far below its neighbours in terms of the industry rewards on offer.

SWOT SWOT

Vietnam Autos Industry SWOT

Strengths ■ Low rates of vehicle ownership, together with Vietnam's large population, provide an opportunity for strong vehicle sales growth over the long term.

■ Low manufacturing and labour costs.

■ Stable interest rates will continue to make it attractive for consumers to utilise credit to purchase cars.

■ The cut in car registration fees is likely to see sustained growth in passenger car sales.

Weaknesses ■ Lack of production incentives mean that the automotive sector lags other sectors in attracting FDI.

■ Domestic supplier industry is not well-developed, which results in automakers having to pay high import tariffs on imported parts.

■ The still underdeveloped road network in the country means that two-wheelers remain a more sensible option for consumers.

Opportunities ■ The market shows diversity, with long-term growth likely for both the premium and small car segments.

■ The annual reduction of tariffs on CBU imports from other ASEAN nations in the next few years will give existing automakers as well as new entrants a chance to increase their domestic sales through imports.

Threats ■ The eventual elimination of import tariffs in the Vietnamese auto market by 2018 could prevent the development of a vibrant local vehicle industry.

Political

SWOT Analysis

Strengths ■ The Communist Party of Vietnam remains committed to market-oriented reforms and we do not expect major shifts in policy direction over the next five years. The one- party system is generally conducive to short-term political stability.

■ Relations with the US have witnessed a marked improvement, and Washington sees Hanoi as a potential geopolitical ally in South East Asia.

Weaknesses ■ Corruption among government officials poses a major threat to the legitimacy of the ruling Communist Party.

■ There is increasing (albeit still limited) public dissatisfaction with the leadership's tight control over political dissent.

Opportunities ■ The government recognises the threat corruption poses to its legitimacy, and has acted to clamp down on graft among party officials.

■ Vietnam has allowed legislators to become more vocal in criticising government policies. This is opening up opportunities for more checks and balances within the one-party system.

Threats ■ Macroeconomic instabilities continue to weigh on public acceptance of the one-party system, and street demonstrations to protest economic conditions could develop into a full-on challenge of undemocractic rule.

■ Although strong domestic control will ensure little change to Vietnam's political scene in the next few years, over the longer term, the one-party-state will probably be unsustainable.

■ Relations with China have deteriorated over recent years due to Beijing's more assertive stance over disputed islands in the South China Sea and domestic criticism of a large Chinese investment into a bauxite mining project in the central highlands, which could potentially cause wide-scale environmental damage.

Economic

SWOT Analysis

Strengths ■ Vietnam has been one of the fastest-growing economies in Asia in recent years, with GDP growth averaging 7.1% annually between 2000 and 2012.

■ The economic boom has lifted many Vietnamese out of poverty, with the official poverty rate in the country falling from 58% in 1993 to 20.7% in 2012.

Weaknesses ■ Vietnam still suffers from substantial trade and fiscal deficits, leaving the economy vulnerable to global economic uncertainties. The fiscal deficit is dominated by substantial spending on social subsidies that could be difficult to withdraw.

■ The heavily-managed and weak currency reduces incentives to improve quality of exports, and also keeps import costs high, contributing to inflationary pressures.

Opportunities ■ WTO membership and the upcoming ASEAN AEC in 2015 should give Vietnam greater access to both foreign markets and capital, while making Vietnamese enterprises stronger through increased competition.

■ The government will in spite of the current macroeconomic woes, continue to move forward with market reforms, including privatisation of state-owned enterprises, and liberalising the banking sector.

■ Urbanisation will continue to be a long-term growth driver. The UN forecasts the urban population rising from 29% of the population to more than 50% by the early 2040s.

Threats ■ Inflation and deficit concerns have caused some investors to re-assess their hitherto upbeat view of Vietnam. If the government focuses too much on stimulating growth and fails to root out inflationary pressure, it risks prolonging macroeconomic instability, which could lead to a potential crisis.

■ Prolonged macroeconomic instability could prompt the authorities to put reforms on hold as they struggle to stabilise the economy.

Business Environment

SWOT Analysis

Strengths ■ Vietnam has a large, skilled and low-cost workforce, which has made the country attractive to foreign investors.

■ Vietnam's location - its proximity to China and South East Asia, and its good sea links - makes it a good base for foreign companies to export to the rest of Asia, and beyond.

Weaknesses ■ Vietnam's infrastructure is still weak. Roads, railways and ports are inadequate to cope with the country's economic growth and links with the outside world.

■ Vietnam remains one of the world's most corrupt countries. According to Transparency International's 2012 Corruption Perceptions Index, Vietnam ranks 123 out of 176 countries.

Opportunities ■ Vietnam is increasingly attracting investment from key Asian economies, such as Japan, South Korea and Taiwan. This offers the possibility of the transfer of high-tech skills and know-how.

■ Vietnam is pressing ahead with the privatisation of state-owned enterprises and the liberalisation of the banking sector. This should offer foreign investors new entry points.

Threats ■ Ongoing trade disputes with the US, and the general threat of American protectionism, which will remain a concern.

■ Labour unrest remains a lingering threat. A failure by the authorities to boost skills levels could leave Vietnam a second-rate economy for an indefinite period.

Industry Forecast

Production

Vietnam's autos industry is still in its infancy as producers typically import completely knocked-down kits (CKDs), which are assembled and sold domestically. The domestic parts sector is small at present, although the government is making it a priority. Given rapid economic growth in the region, there is significant development potential for the industry, especially as less than 4% of the population owns a car.

Table: Vietnam Autos Production, 2011-2018

2011 2012 2013e 2014f 2015f 2016f 2017f 2018f

Total Production 31,181 40,470 42,898 46,808 51,498 55,351 59,691 64,584 Passenger Car Production 29,904 38,900 41,234 45,028 49,575 53,293 57,468 62,161 Commercial Vehicle Production 1,277 1,570 1,664 1,781 1,923 2,058 2,222 2,422

e/f= BMI estimate/forecast. Source: BMI, OICA

Production Will Grow But Importing Still More Attractive

According to Gaikindo, auto production in Vietnam rose 27.4% y-o-y in November 2013 (latest available), to 10,003 units, bringing output for the first 11 months of 2013 to 83,656 units, an increase of 24.5% y-o-y. This was the first time since November 2010 that monthly production crossed the 10,000 units mark.

However, auto production has been in a downtrend since late 2010. While the contraction in vehicle production mirrors the fall in domestic sales since 2011, caused by the economic recession in that period, there are also broader structural issues which have prevented an expansion in domestic auto production. The lack of a coherent auto policy, weak government incentives, and, poor supplier presence, have all combined to make local manufacturing an unattractive proposition for automakers (see 'Sales Soar, But Production Still Underperforming, September 23 2013).

Rising, But Not Up To The Mark

Vietnam - Domestic Auto Production, Units (LHS); % Chg y-o-y (RHS)

Source: BMI, Gaikindo

That said, the uptick in monthly production in the past few months does indicate to us that output would pick up in 2014. As previously highlighted, we believe the strong momentum in domestic sales will continue in 2014 on the back of the resurgence in the Vietnamese economy, as the government moves to privatise the country's state-owned enterprises and embark on a series of free market reforms in the coming years (see 'Sales To Build On Solid 2013', January 16). This, will then, result in local carmakers raising their output to meet higher demand. Against this backdrop, we have upgraded our 2014 and 2015 production growth forecast to 9.1% and 10.0% respectively.

However, due to a lack of attractive incentives to produce locally, we only see automakers with a strong presence in the domestic market, such as Toyota Motor and Ford Motor, increasing their output. In our opinion, it is unlikely that new entrants will set up production bases in the country to tap rising car demand, which still remains low in absolute numbers.

We also see the gradual abolishment of import tariffs on vehicles imported from other ASEAN countries as a key threat to the Vietnamese auto sector (see 'Will Abolishing Import Duties Decimate Local

Manufacturing', January 9). As tariffs are lowered, potential entrants will likely prefer to import completely built units into the country instead of establishing greenfield production facilities. Indeed, our trade balance forecast shows net imports rising from 2014 to 2018 as sales growth of imported vehicles accelerates.

In order to prevent the worst case scenario of the decimation of local manufacturing as import tariffs are eventually abolished, the Vietnamese government needs to put in place a strong and coherent auto sector policy, and ensure greater domestic supplier presence, which will then incentivise more automakers to invest in local production.

Supplier Segment Shares The Blame

An underdeveloped supplier segment has been an underlying problem in attracting vehicle production investment for many years. According to the CCI's report, the parts produced locally are very simple and the industry's technology as a whole is restricted to welding, assembly, painting and testing.

This means that while local content requirements have previously been set in order to necessitate investment, they have rarely been met. For vehicles with less than nine seats, the average rate of local content is just 15%, and for vehicles with 10 seats or more the level is 30-40%, vis-a-vis the 60% target.

Although the government has tried to increase domestic production in the industry before, particularly by raising import tariffs on vehicles, there has been little in the way of rewards for companies which have chosen to invest. This is reflected in the 'rewards' section of BMI's industry Risk/Reward Ratings for the autos sector in Asia, where Vietnam scores far below its neighbours in terms of the industry rewards on offer.

The industry's shortcomings will also have a financial impact. The autos trade deficit has been a concern for a number of years, prompting increases in import tariffs and regulations to weed out smaller unauthorised importers. However, tariffs will need to be lowered again in accordance with ASEAN trade obligations and with the sector not yet in a position to compete with its more productive neighbours, the CCI report expects Vietnam to be spending US$12bn per year on vehicle imports until 2025.

What Does The Government Need To Do?

To spur domestic production, we believe the government needs to do the following:

Simplifying Tax Policies: There are currently nine different taxes on vehicles, with taxes accounting for some 60% of the value of a new car in Vietnam. These range from registration fees to an environmental protection tax imposed on imported cars in Vietnam. BMI has previously highlighted that increased import taxes are making imported cars unaffordable (see our online service, August 9 2012, 'Increased Charges Dampen Demand'). We believe that the number of taxes needs to be reduced so as to make the purchase of a car more affordable and less confusing for businesses and consumers.

The recent measures to cut taxes, is a step in the right direction for the government's 2020 auto development plan.

Investment In Infrastructure: While the Ministry of Industry and Trade (MOIT) has been making efforts to develop the automobile industry, the Ministry of Transport (MOT) and the Ministry of Finance (MOF) are concerned about road congestion and have therefore imposed tariffs on imported cars. Our Infrastructure team believes that Vietnam needs greater investment in roads as currently many of its roads are just wide enough for two-wheelers.

Although the government needs to make a concerted effort to improve Vietnam's road infrastructure to allay the concerns of MOT and MOF and therefore enable all three ministries to work harmoniously to develop Vietnam's automobile sector, we believe it would be a challenge in the short term due to the lack of credit as well as the banking sector's woes. However, it would be easier in the long term with the reforms the banking sector is currently undergoing, as well as the possibility of getting financing from abroad.

Attractive Investment Policies: We believe that the Vietnamese government needs to offer incentives such as tax breaks to attract more foreign direct investment (FDI) into the country. With investments from global automakers in the country, there can be knowledge-sharing as well as a transfer of technology with the local players. Currently, most of the auto production in the country is just assembly of cars and that is insufficient for Vietnam to develop a competency in this sector. With FDI, Vietnam would have the chance to move up the value chain of production.

While the fledging auto manufacturing industry takes time to gain traction, we believe the component industry could see more investments in the sector. Vietnam has one of the lowest labour costs in the region, making it attractive for component manufacturers to base their production facilities in. While they may be unable to sell many of their products locally due to the lack of auto production, exporting these components from Vietnam is a viable alternative.

South Korean manufacturer Hyundai Motor has already committed to an agreement with local company Truong Hai Automobile, which will act as the company's exclusive distributor in the country. Hyundai will also set up an engine production plant with an annual production capacity of 10,000 engines for the domestic market in the initial phase, followed by an expansion to 50,000 to accommodate exports to China, after 2015. Fellow Korean manufacturer Kia Motors is also reportedly in negotiations with the economic zone's management regarding a project to produce 100,000 cars per year from 2015.

Sales

Table: Vietnam Autos Sales, 2011-2018 (VAMA Members)

2011 2012 2013e 2014f 2015f 2016f 2017f 2018f Total sales 110,938 78,558 93,093 102,358 111,160 119,610 129,425 140,845 Total sales (% 8.8 chg y-o-y) -1.1 -29.2 18.5 10.0 8.6 7.6 8.2 Passenger car 86,526 sales 64,620 43,030 55,078 61,302 66,819 72,165 78,660 Passenger car 10.0 sales (% chg y- o-y) 11.8 -33.4 28.0 11.3 9.0 8.0 9.0 Commercial 54,319 Vehicle sales 46,318 35,528 38,015 41,056 44,341 47,444 50,766 Commercial Vehicle sales (% chg y-o-y) -14.9 -23.3 7.0 8.0 8.0 7.0 7.0 7.0

Figures exclude Mercedes-Benz's sales. e/f = BMI estimate/forecast. Source: BMI, VAMA

Sales To Build On Solid 2013

According to the VAMA, vehicle sales of its members grew 20.0% in 2013, to 96,688 units. The strong showing in 2013 was largely attributed to the rebound in the automotive sector, which was ravaged by the recession that hit the country in 2012.

Surging In Line With Our Bullish Outlook

Vietnam - Domestic Auto Sales, Units (LHS); % Chg y-o-y (RHS)

Sales include Mercedes-Benz's figures. Source: BMI, VAMA

We remain bullish on the Vietnamese auto market, however, and forecast vehicle sales to grow 10.0% in 2014 (this excludes sales of Mercedes-Benz, which reports its figures separately). While this is below 2013's growth rate, it is because vehicle sales have normalised and the higher base effects of 2013 will make it harder for them to continue growing at such a rapid clip.

To Be Kept On', December 30 2013). The resultant stability in consumer financing rates will continue to make it attractive for buyers to take on financing for their vehicle purchases.

While the breakdown between 2013 passenger car and commercial vehicle sales is still unavailable, car sales growth handily outperformed CV sales growth. We expect this outperformance in passenger car sales to continue in 2014, aided by the availability of affordable car loans. That said, we forecast CV sales, which were impacted by weak demand from businesses in 2013, to grow 8.0% in 2014, as Vietnam's ongoing banking sector reforms and SOE restructuring begin to bear fruit.

Looking further forward, BMI forecasts The Vietnamese American Medical Association (VAMA) members' domestic auto sales to enjoy average annual growth of 8.6% over the 2014-2018 period, to hit 141,000 units by 2018. This is due to the following two reasons:

Formation of ASEAN Economic Community (AEC) By 2015: The AEC is expected to provide a huge boost to Vietnam's economy. Being an export-oriented economy, Vietnam is going to benefit from the free movement of goods under this accord. A rise in exports will boost the incomes of the rising middle class in the country. This increase in disposable incomes will translate in higher sales for consumer durables like cars. Furthermore being part of the AEC would mean that Vietnam would have to reduce or abolish its high automotive taxes, further providing a boost to vehicle sales.

Huge Domestic Market Of 90 Million People: Vietnam has the largest population in the Association of South East Asian Economies (ASEAN) of 90mn. BMI considers this to be a huge market with untapped potential. As investment enters the country and its economy grows, more jobs will be created and we can expect the share of middle class consumers to rise. This would increase discretionary spending for items like cars. BMI forecasts the average annual growth rate for Vietnam's economy to be 7.0% for the next 10 years.

Trade

Table: Vietnam Autos Trade, 2011-2018

2011 2012 2013 2014f 2015f 2016f 2017f 2018f

Vehicle trade balance, units -79,757 -38,088 -50,195 -55,550 -59,662 -64,258 -69,735 -76,761 Vehicle trade balance, units, % chg y-o-y 5.0 -52.2 31.8 10.7 7.4 7.7 8.5 9.4

f= BMI forecast. Source: BMI, VAMA

At present, the number of local parts used in car assembly is very low, with Suzuki Motor having a localisation ratio of 3% and Ford Motor 2%, according to VietNamNet Online. This is far below the current targeted ratio of 50%. Moreover, foreign manufacturers are yet to make a significant investment in transferring modern technologies to Vietnam.

The government wants local suppliers to provide 50-60% of all the necessary car parts for domestic production by 2020. Whether this can be achieved in such a short time, especially given a still-uncertain tariff backdrop, remains to be seen.

Industry Trends And Developments - Will Abolishing Import Duties Decimate Local Manufacturing?

BMI View: The gradual abolishment of import tariffs in the Vietnamese auto market will inevitably pose a threat to local manufacturing, especially to smaller carmakers, that may not have sufficient volumes to enjoy economies of scale. That said, we still see pockets of opportunity for domestic production as the AEC approaches in 2015.

As of January 1 2014, Vietnam has reduced its duties on vehicles imported from other ASEAN countries by 10-50% as part of the ASEAN Trade in Goods Agreement (ATIGA). Under the ATIGA, Vietnam will eventually eliminate all import duties on cars by 2018.

The table below highlights the new 2014 tax regime for vehicle imports from other ASEAN nations.

Table: Vietnam - 2014 Import Tax Regime

Type Of Vehicle Import Tax Emergency cars and prisoner transport vehicles 0-5% 4-seater to 9-seater cars 50% (Down from 60% in 2013) Trucks and other vehicles 0-50% Bicycle, motorcycle and electric vehicles Set to decrease but % not stated Completely knocked down kits 0-50%

Source: BMI, ASEANBRIEFING

Local Manufacturers At A Disadvantage?

While lower import taxes are definitely a boon for consumers as they will now get to enjoy cheaper cars, local carmakers such as Toyota Motor and Ford Motor have warned that the gradual removal of import tariffs will hurt domestic auto manufacturing as the industry will need to compete with cheaper imports flooding the Vietnamese auto market.

We believe there is some merit to this argument. We have stated before that auto production is underperforming and more needs to be done by putting the right policies in place to attract investment in the sector (see 'Sales Soar, But Production Still Underperforming', September 23 2013). Automakers have also been reluctant to commit to local assembly due to the still small domestic sales volumes and with import tariffs set to come down in the coming years it would make sense for many of these potential entrants to import cars into Vietnam through dealerships rather than set up local assembly operations.

Therefore, it is reasonable to assume that even if policymakers put in place attractive incentives now, it will be difficult for the Vietnamese auto sector to be able to reach the scale of Thailand and Indonesia, two thriving auto hubs in the region, in the space of a few years. It is only when domestic sales pick up to the levels seen in some of the bigger ASEAN markets that more manufacturing plants could be justified.

Imports Will Remain Strong

We believe the growth in car imports is set to accelerate in the coming years. For the first 11 months of 2013, the total vehicle sales of Vietnam Automobile Manufacturers Association (VAMA) members (automakers who have local assembly operations) came in at 85,507 units, an increase of 18.2%. On the other hand, the Vietnam Customs Office said that passenger car imports from Thailand and Indonesia (two

of the major car exporters to Vietnam) more than doubled in the first 11 months of 2013, to 8,826 units. As import taxes steadily decrease, imported car sales can only grow strongly from their existing low base.

Furthermore, it is our long-held view that the formation of the ASEAN Economic Community (AEC) in 2015 will accelerate trade in the region, as tariffs are further reduced, and result in automakers concentrating their investment in one or two production hubs in the region to reap economies of scale. On this front, we remain the most bullish on Thailand and Indonesia's potential and see carmakers increasing their output in these countries as they gear up to increase their exports to other ASEAN markets such as Vietnam (see 'Shipping And Auto Export Hubs Throw Up Interesting Possibilities', March 26 2013).

Is The Vietnamese Auto Industry Doomed?

That said, it is unfair to dismiss the potential of the Vietnamese auto industry and there remain pockets of opportunity, even as imported vehicles will pose greater competition in the future. Below we summarise the impact of the reduction in import tariffs.

■ Suppliers Will Remain Crucial

The growing imports of both used and new cars will mean that more consumers will require after-sales services as well as spare parts to keep their vehicles in a roadworthy condition. Additionally, automakers such as Toyota have long lamented the lack of localisation in the sector, which has resulted in them having to import certain components and paying high import taxes on them. In addition, Toyota enjoys a domestic market share of greater than 30% and is likely to continue its local manufacturing operations even as import duties are reduced. This will mean ample opportunities for auto suppliers to step in to commence production of parts which are currently unavailable locally.

Furthermore, under the AEC framework, ASEAN countries which want to export cars to the rest of the region need to ensure at least 40% local content in the vehicle. Once again, a higher concentration of suppliers will be necessary in the sector if some of the larger local automakers are keen to export some of their models to other markets.

■ 2-Wheeler Industry To Remain Attractive

Vietnam is one of the biggest two-wheeler markets in the ASEAN region. Motorbikes remain an affordable mode of transportation and are a practical option in a country where many of the roads are not wide enough to accommodate cars. The more than 38mn two-wheelers on Vietnam's roads attest to their popularity and we believe both manufacturers and suppliers in this segment still have plenty of growth potential.

■ Smaller Local Manufacturers Could Exit

Some of the smaller VAMA members may be forced to shutter their operations well before 2018 as car imports become more competitive vis-à-vis local manufacturing. These automakers may find it more feasible to produce in their existing production facilities in the rest of the region and export to the Vietnamese market.

Industry Forecast – Passenger Cars

We forecast passenger car sales to grow 11.3% in 2014, to 61,000 units. Toyota remained the sales leader in 2013, a title it has held on to since September 2012.

Industry News - Rolls-Royce Opens A Dealership In Hanoi

Rolls-Royce is set to open a new showroom in Hanoi in Q413. It has appointed Regal Motor JSC as its official importer-dealer for Vietnam.

The importer will also help Rolls-Royce to sell its high-end models in the country.

According to JSC's Asian regional manager, Herfried Hasenehrl, customers have a good understanding of the firm's products as well as its value proposition.

Industry Forecast – Commercial Vehicles

Commercial Vehicles

As Vietnam's banking sector stabilises and state-owned enterprizes restructuring efforts begins to bear fruit, we expect demand commercial vehicle (CV) demand from businesses to pick up in 2014.

We forecast CV sales to grow 8.0% in 2014, to 42,000 units.

Table: Top Five Companies By CV Sales

Manufacturer 2012 CV Sales (CBUs) 8M13 CV Sales (CBUs) Truong Hai (Thaco) 15,281 9,521 Suzuki 3,330 2,217 Vinaxuki 4,453 1,200 Vinamotor 2,555 1,157 VEAM 1,881 1,083

Source: BMI, VAMA

Industry Forecast – Suppliers

Suppliers

The domestic spare parts and components sector in Vietnam is small at present, although the government is making it a priority. Given rapid economic growth in the region, there is significant development potential for the industry. The Ministry of Industry and Trade is looking to make the domestic industry more competitive. BMI believes the parts segment needs to be better developed to attract vehicle producers to invest in the country. We believe the Vietnamese industry is in danger of being trapped in a vicious cycle where carmakers are reluctant to invest in production without a well-developed supplier base, yet suppliers want to see growth potential in vehicle assembly before investing.

To that, one move to boost domestic part production is the imposition of higher import tariffs on parts that can be made domestically. The government wants local suppliers to be providing 50-60% of all the necessary car parts for domestic production by 2020.

In October 2013, Bridgestone announced that it will invest will invest JPY41.6bn (US$424mn) to double the output of its passenger car radial tyre plant currently under construction in Haiphong. The plant's capacity will be increased to 49,000 tyres per day from 25,000 tyres currently and will be ready for operations in March 2014.

Bridgestone's move is part of a trend we are observing of more suppliers and manufacturers leveraging on Vietnam's low-cost production base. Vietnam has an abundance of raw materials such as rubber and this move is strategic for Bridgestone.

That said, we continue to emphasise the need for the Vietnamese government to do more to attract larger investments in the sector. Some of the necessary policies include preferred tax incentives, reduced export tariffs and better support infrastructure to connect production bases to the ports in the country.

Although Vietnam is not currently a major production base for the region, it has become Bosch's production and research and development (R&D) hub for certain products in South East Asia and has now secured double the original investment intended, while a move into new product areas has resulted in the acquisition of a Taiwanese supplier.

BMI also sees positive opportunities in the government's plans to create a national industry hub in the Chu Lai Economic Zone. The aim of the project is to increase the scale of domestic production in order to make the sector more competitive when import tariffs are eliminated under the ASEAN Free Trade Agreement in 2018.

Global Trends: Suppliers In Driving Seat But Could Fortunes Turn?

BMI View: The global auto supplier and equipment index has outperformed the global auto manufacturers index since the global financial crisis. We believe the possible reasons for this include the greater flexibility of EU suppliers, the rise in the average age of US cars and trade protectionism. Two future developments, which may cause a reversal in fortunes in favour of original equipment manufacturers' are a pick up in the European auto market and the upcoming AEC in 2015.

We recently highlighted original equipment manufacturers' (OEMs') greater bargaining power versus auto suppliers (see 'Illegal Cartels Highlight Low Supplier Power', October 1). However, we notice that this does not always translate into automakers' share prices outperforming. Indeed, when we chart the performance of the Bloomberg World Auto Manufacturers Index and Bloomberg World Auto Parts And

Equipment Index over the past 10 years, we realise that both suppliers and automakers have their own periods of outperformance.

It is important to realise that while suppliers' margins on the parts they sell are usually lower than the margins which OEMs enjoy on their cars, there are other dynamics at play that determine the actual financial results of firms and ultimately their share price performance. The accompanying chart illustrates the outperformance of suppliers versus carmakers since the global financial crisis in 2008-09. Below, we outline our arguments to try and explain this phenomenon and give our thoughts on changing industry trends, which may cause a reversal.

Suppliers Outperforming Since Global Financial Crisis

BW Auto Manufacturers & Parts And Equipment Indices (Top); Spread (Bottom)

Indices are rebased to 100 from August 2003. *BW = Bloomberg World. Source: BMI, Bloomberg

EU Suppliers More Nimble Than Carmakers

Vehicle sales in the EU have been contracting since 2008 and sales declines in some markets intensified when the eurozone crisis hit the region in 2010. This has led to heavy losses for European carmakers in the past few years. Further compounding their problems is their inability to shed large proportions of their

workforce, or expediently close underperforming factories, due to political pressure on some of these national carmakers to retain workers.

European suppliers, on the other hand, are less in the political limelight due to their smaller size and have therefore been able to rationalise their European operations faster. This has allowed them to be more nimble and re-orientate their businesses to find new growth opportunities in emerging markets (EMs) in Asia, Eastern Europe and Latin America, which are increasingly making up a bigger share of their sales (see 'Suppliers Continue To Shift Strategic Focus', June 24).

Therefore, it is no surprise that the share prices of European suppliers have recovered much faster and stronger than their carmaker counterparts since the global financial crisis.

Ageing US Fleet Makes Market Attractive For Suppliers

To be sure, the American consumer has deleveraged significantly since the financial crisis. However, the bumpy economic recovery has resulted in consumers holding on to their set of wheels longer and has also given rise to strong used car sales. Therefore, while new vehicle sales have been growing at a strong clip since 2009, the average age of the US vehicle fleet has recently climbed to an all-time high of 11.4 years.

In such an environment, suppliers would naturally perform better, as they are able to sell parts to OEMs for the production of new cars as well as sell replacement parts directly to the end consumers. As the vehicles on the road get older, it is reasonable to assume that spending on replacement parts has to rise to keep them in a roadworthy condition.

Trade Protectionism Puts Vehicle Imports At A Disadvantage

In recent years, trade protectionism, especially in emerging markets (EMs), has been on the rise. These countries have nascent auto industries, and in order to encourage automakers to produce domestically, they usually impose high tariffs on auto imports. While both auto parts and vehicle imports are taxed, parts are usually taxed at a lower rate. We believe this may be because governments realise that the lack of localisation in their domestic auto industries would still require local manufacturers to import components from overseas. A case in point is Vietnam, where the import tariff on completely built unit (CBU) imports from ASEAN will be 50% in 2014, but for car parts will only be 15-25%.

The upshot of this, in our opinion, is that suppliers would find it easier to export their parts to early emerging/frontier markets compared with automakers, whose exports may be priced out due to exorbitant tariffs.

Can Suppliers Continue Outperforming?

While there may definitely be other reasons for suppliers' share prices outperforming manufacturers in the past few years, the important question going forward is whether this trend will endure. We believe it is hard to tell at this point. However, we highlight two developments in the future, which may cause a reversal in fortunes.

■ Pick Up In The European Vehicle Market

Although BMI still maintains a bearish outlook on the European vehicle market, we expect the region to recover in the coming years. As sales in individual car markets begin to slow their rate of contraction, and eventually return to growth, on the back of pent-up demand, European carmakers' could begin to outperform suppliers.

■ Upcoming 2015 AEC Could Tilt The Scales In OEMs Favour

The upcoming ASEAN Economic Community (AEC) in 2015 will bring down trade tariffs within South East Asia (SEA) and by 2018 most, if not all, countries in SEA will cut their import tariffs to zero. This development may end up being a game changer for automakers as they concentrate their production in one or two hubs in the region and export their CBUs tariff-free to the rest of ASEAN.

Macroeconomic Forecasts

BMI View: Although we expect the Vietnamese economy to record yet another quarter of sub-par growth in Q413, we are beginning to see potential for upside surprises to domestic demand over the coming quarters. Recent data on foreign direct investment inflows, remittances, passenger car sales, and property market launches, suggests to us that domestic demand is on a nascent recovery, setting the stage for stronger 2014 growth.

The general consensus is expecting the Vietnamese economy to suffer yet another quarter of sub-par growth mainly due to subdued external demand and the lack of progress on banking sector reforms. This is closely in line with our view that real GDP growth will come in at just 5.3% in 2013, a slight improvement from 5.2% in 2012. Looking ahead to 2014, however, evidence of improving macroeconomic fundamentals in Vietnam (especially with regards to the outlook for domestic demand) suggests to us the balance of risks to our growth forecast of 6.0% is gradually tilting towards the upside.

Robust Remittances Could Boost Domestic Demand

Vietnam - Unrequited Transfers, US$mn

Source: BMI, Asian Development Bank

Remittances: According to estimates published by the World Bank, the Vietnamese economy is on track to record a bumper year for remittance inflows. The country is expected to receive US$10.6bn in remittances from Vietnamese citizens working abroad, a robust 6.5% increase from 2012. Crucially, we believe that remittance inflows will remain strong over the coming quarters as macroeconomic conditions in Vietnam continue to improve. Growing confidence in the stability of the Vietnamese dong should also help to encourage Vietnamese workers abroad, to a certain extent, to remit a larger share of their earnings back home. We believe that this will help to boost domestic demand while providing support for the currency.

Foreign Direct Investment: Total foreign direct investment (FDI) inflows are also set to surpass the government's full-year target of US$13bn, after data released by the Ministry of Planning and Investment showed that inflows surged by 19.5% year-on-year (y-o-y) growth over the first eight months of the year. The strong reading chimes with our view that the country's solid long-term growth story should continue to attract foreign investors over the coming years.

Automobile Sales: We are witnessing signs of a robust recovery in automobile sales, a sign that pent-up domestic demand is beginning to rebound. According to the Vietnam Automobile Manufacturers Association (VAMA), September vehicle sales of its members surged by 20.6% year-on-year (y-o-y), exceeding our already bullish forecast of 12.5% for the year (see 'Bullish On CV Sales In The Medium To Long Term', October 14 2013).

Developers Eyeing Property Market Rebound

Vietnam - Real Estate Index

Source: BMI, Blooomberg

Property Market: Meanwhile, we see increasing evidence that the Vietnamese property market may have bottomed out (see 'Early Signs Of A Recovery, But No Property Market Boom In Sight', August 14 2013). According to a quarterly report published by real estate agency CBRE Vietnam, the number of new launches surged by 12% y-o-y in Q313. Anecdotal evidence from the local media suggests to us that demand for real estate following the sharp decline in prices since 2011 may be recovering. To be sure, we maintain our view that we are unlikely to see a property market boom given the healthy pipeline of new units that will come online in 2014. Nonetheless, we acknowledge that consumer confidence is recovering and we could potentially see some upside surprises to domestic demand in 2014.

Expenditure Breakdown

Private Consumption: We expect private consumption to grow at a relatively resilient pace of 5.0% in 2014. However, we note that the risk of further bankruptcies among SMEs could potentially lead to widespread job losses, especially in export-driven sectors. Uncertainties over the outlook for employment could, in turn, prompt households to cut back on spending.

Gross Fixed Capital Formation: We foresee a pickup in private sector investment growth in 2014, partly led by increased foreign direct investment inflows. We believe lending rates will gradually ease over the coming months as the effect of recent rate cuts by the SBV begins to kick in. We are also seeing evidence that credit conditions are improving. Accordingly, we expect gross fixed capital formation growth to accelerate slightly from 4.1% in 2013 to 4.8% in 2014.

Public Spending: We expect total public spending to remain relatively resilient in 2014, expanding at a respectable pace of 6.1%. However, there is limited room for the government to increase spending further owing to concerns over the need to finance a potential bailout of ailing state-owned commercial banks.

Net Exports: Net exports remain the biggest downside risk to our outlook for the Vietnamese economy, although we expect external demand to pick up in 2014. Vietnam's trade account has fallen back into deficits in recent months, but we see the case for a substantial pickup in external demand on the back of a rebound in regional growth over the coming quarters. Accordingly, we still expect exports to expand at a moderate pace of 5.9% in 2014.

Table: Vietnam - Economic Activity

2010 2011 2012 2013f 2014f 2015f 2016f 2017f Nominal GDP, VNDbn 3 2,157,829 2,779,880 3,245,419 3,657,621 4,117,487 4,631,499 5,203,774 5,841,949 Nominal GDP,US $bn 3 112.9 134.6 155.5 175.0 200.2 227.8 257.4 291.4 Real GDP growth, % change y-o-y 3 6.4 6.2 5.2 5.3 6.0 6.9 7.0 7.0 GDP per capita, US$ 3 1,267 1,497 1,712 1,909 2,163 2,439 2,733 3,068 Population, mn 4 89.0 89.9 90.8 91.7 92.5 93.4 94.2 95.0 Industrial production index, % y-o-y, ave 1,5 14.1 10.9 7.0 7.6 8.7 9.6 9.9 9.8 Unemployment, % of labour force, eop 2,6 4.3 3.6 3.2 3.7 3.5 3.5 3.6 3.5

Notes: f BMI forecasts. 1 at 1994 prices; 2 Urban Area Only. Sources: 3 Asian Development Bank, General Statistics Office; 4 World Bank/UN/BMI; 5 General Statistics Office; 6 General Statistics Office/BMI.

Industry Risk Reward Ratings Asia-Pacific – Risk/Reward Ratings

The aim of BMI's Risk/Reward Ratings for the automotive industry is to detail the rewards and the risks that carmakers operating in a particular region - in this case Asia-Pacific - may face. The unique system assesses crucial factors, such as sales and output growth, international trade, market size and location, and the level of market competition, in addition to taking into account a country's economic and political backdrop. The ratings system allows analysts to fully expound the potential advantages and disadvantages of investing in Asian car markets, and offers an overall comparison of the key markets in the region.

Overall scores for most countries in this region have shifted downward on the back of relatively slower growth in 2013. Government stimulus measures for the auto industry in countries such as Japan, Thailand and China bolstered growth in the past few years. These are no longer present in 2013, and sales in these markets have started to wane.

That said, despite China's overall score falling from 66 to 64.96, it has now surpassed South Korea and Japan to take the first place in the ratings table. We remain bullish on the Chinese auto market despite our view for a H213 slowdown, and expect vehicle sales growth to among the highest in the region. The sheer size of the market offers plenty of long-term opportunities, especially to new entrants that are looking to grab market share from well-established incumbents. Lastly, as the Chinese economy re-orientates itself to a more consumption-driven one in the coming years, demand for passenger cars will continue to remain robust.

In second place is Japan, which has seen its score fall from 74 to 64.77, largely owing to its bleak domestic sales outlook. While we forecast sales to contract in 2013, our long-term sales growth forecasts are also nothing to cheer about, as the high level of vehicle ownership limits sales growth. Nonetheless, the country scores well in terms of country risk, with low levels of corruption and a sound legal framework bumping up the market's overall score. However, labour costs remain high owing to the rigidity of labour laws, which adds to the cost of expanding production.

Malaysia has made an impressive climb to third position, from fifth previously. The country is a leader in the Association of South East Asian Nations trade bloc, which has seen it attract regional production activities in the autos sector, especially those which are higher value-added (see 'DRB-VW Investment Demonstrates Value-Added Production', May 3 2013). With the ruling Barisan Nasional party voted back in

power in recent elections, we see greater stability in Malaysia's macro environment as well as auto sector policies.

In South Korea, exports take up a much larger share of production compared with domestic sales, and the country has dropped to fourth place with an overall store of 62.55 out of 100, down from 69. South Korea's historically poor labour relations surfaced once more in 2013, with Hyundai Motor suffering a production outage (see 'New Labour Dispute Adds To Hyundai's Woes', April 23 2013). Higher wage demands from unions in the past few years have raised operating costs. This weighs on the country's overall score, although long-term political and economic stability reduce the risks.

Singapore has made the biggest move upward, catapulting to fifth place from eighth previously, taking its overall rating to 59.76. While the country does not have any domestic production facilities, its conducive business environment and stable regulatory outlook gives it one of the highest risk ratings in the region. While recent loan curbs will weigh on car demand slightly, demand for cars still outweighs supply, which is regulated by the certificate of entitlement.

In sixth place is Australia, which has tumbled from its fourth position. The decision by Ford to terminate domestic production by 2016 (see 'Ford Throws In The Towel', May 23 2013), highlights the intensity of the detrimental impact on manufacturing brought about by a strong Australian dollar and high labour costs. Although the Australian dollar has been weakening lately, our downbeat outlook on the economy limits the auto market rewards to firms.

Dropping one place to seventh is Thailand. While we expect domestic vehicle sales to contract in 2013 following the end of the first car buyer scheme in 2012, the export outlook for the country remains bright. Strong government support, together with excellent support infrastructure, continues to attract auto sector- related investment from both suppliers and carmakers. BMI is bullish on Thailand's production growth potential for the next five years.

Hong Kong slides down one place to eighth. While its regulatory scores have improved further owing to government incentives to scrap old and polluting commercial vehicles (which will improve new vehicle sales), the country's lack of production facilities means that the market is unlikely to climb much further in the ratings in the foreseeable future.

In ninth place is India, which has moved up one notch. However, its overall score has dropped drastically from 55 to 50.91. The passenger car market is in its eight consecutive month of contraction, which has prompted the industry to seek a revival package from the government. Given that we expect consumer

confidence to remain low for some time, we have turned increasingly downbeat on the industry's prospects, resulting in a lowering of our industry rewards score to 48.68.

Indonesia has dropped to 10th place, from ninth previously. While the country's long-term auto sector growth potential is undoubtedly strong owing to the size and still underpenetrated nature of the domestic market, its country risk rating acts as a hindrance, with low scores for corruption, bureaucracy and legal framework. Furthermore, the recent hike in fuel prices will serve to heighten market risk in the short term.

Taiwan and Philippines have held their positions in 11th and 12th place respectively. Taiwan's strength is in its low corruption and strong regulatory framework, which boosts its country risk scores. The Philippines, on the other hand, benefits from a competitive landscape that is still underpenetrated by carmakers, providing opportunities for new entrants despite the dominance of Japanese brands in the market.

Vietnam and Pakistan have traded places in 13th and 14th. While Pakistan continues to suffer from weak demand in the auto sector, there are some measures introduced in the latest budget that are likely to boost the long-term potential of the industry (see 'Budget Brings Short-Term Pain But Long-Term Gain', June 28 2013). Vietnam, on the other hand, continues to suffer from the lack of a coherent auto sector policy by the government, which is hampering the production potential of the country.

Table: Asia-Pacific Autos Risk/Reward Ratings

Rewards Risks Autos Autos Country Industry Market Country Market Market Structure Rewards Risks Risk Risks Rating Ranking China 73.33 38.83 61.26 80.00 67.18 73.59 64.96 1 Japan 63.33 74.81 67.35 45.00 72.50 58.75 64.77 2 Malaysia 58.33 62.59 59.82 70.00 76.57 73.29 63.86 3 South Korea 55.00 77.50 62.88 50.00 73.60 61.80 62.55 4 Singapore 31.67 92.06 52.81 65.00 86.99 76.00 59.76 5 Australia 46.67 75.74 56.84 45.00 77.99 61.49 58.24 6 Thailand 46.67 49.26 47.58 85.00 69.73 77.37 56.51 7 Hong Kong 25.00 96.03 49.86 50.00 81.95 65.97 54.69 8 India 61.67 24.56 48.68 65.00 47.20 56.10 50.91 9 Indonesia 53.33 33.56 46.41 70.00 49.94 59.97 50.48 10 Taiwan 40.00 40.16 40.06 65.00 73.48 69.24 48.81 11 Philippines 31.67 39.59 34.44 80.00 57.24 68.62 44.69 12 Pakistan 45.00 18.00 35.70 70.00 42.00 56.00 42.00 13 Vietnam 28.33 38.60 31.93 65.00 49.50 57.25 39.52 14

Source: BMI

Company Profile Company Monitor

BMI View: Ford Motors' record 2013 sales in China have put the firm among the top five largest automakers in the market. China remains an important Asian market for the carmaker as it embarks on a strategic plan to diversify away from its main profit centre in North America, and going forward, we see the Asia Pacific region increasing its profit contribution to Ford's operations as the automaker's expansion strategy bears fruit.

Ford Motor had a phenomenal 2013 in China, where its sales reached a record of 935,813 vehicles, an increase of 49%. An expanded line of products, a sustained inland push, as well as strong demand helped to boost sales. The automaker introduced seven of its next generation global vehicles in the market in 2013, including the Ford Ecosport, Ford Kuga, the new Fiesta and the latest Mondeo. However, its Ford Focus remaining the best-selling model, with 2013 sales growing 36%, to 403,640 units.

No Longer An Underdog In China

We believe Ford can continue to build on its success in 2014. We highlighted the gain in sales of non- Japanese brands at the expense of their Japanese counterparts back in October 2012, as the outbreak of the Sino-Japanese dispute saw consumers boycotting Japanese marques (see 'Japan's Pain Is Korea's Gain Once More', October 2012). During that time, Ford's sales also experienced a positive tailwind from late 2012 and early 2013.

However, for much of 2013, Ford's success could be attributed to the company's successful local strategy and going forward, we see the firm's internal strengths driving its sales. The Ford brand is gaining traction in the market and the automaker's expansion plans will be a positive growth factor for sales in 2014. According to John Lawler, chairman and CEO of Ford Motor China, the firm plans to grow its domestic capacity and expand its dealership network in 2014 so as to "continue bringing high quality, safe, and fuel efficient vehicles to consumers."

The carmaker has certainly made great strides in the Chinese market where it was a late entrant compared with the first movers Volkswagen AG (VW) and General Motors Company (GM). It has steadily increased its market share over the years and 2013 was the first year since 2001 that its sales surpassed that of Toyota Motor. Toyota increased its sales by 9%, to 917,500 units, as the Japanese automaker recovered

from its 2012 slump in sales. In fact, Ford's 2013 domestic auto sales now make it the fifth largest carmaker in China.

Force In Its Own Right

China - 2013 Vehicle Sales Of Top Carmakers

Source: BMI

China A Crucial Pillar For Asian Strategy

North America remains the main profit centre for Ford and the region contributed US$7.08bn in operating income to the firm's business for the first nine months of 2013. However, the automaker has stated in its global 'ONE FORD' plan that it aims to diversify its profit sources by increasing its presence in some of the largest and fastest growing markets in the world. China is one such market where Ford is aggressively increasing its investment, as it makes up for lost time due to its rather delayed entry into the country.

The firm's Asian division has yet to post large profits as the carmaker is still in the stage of ramping up investment in the region (which is a cost to the company). Besides China, Ford is investing over US$1bn in India to build its Sanand manufacturing facility and double the number of dealerships in the country to 300 by 2015 (see 'Ford's India Strategy Finally In Right Gear', December 6 2012). While estimates suggest that

regional expansion plans could cost the company over US$5bn, we believe it will reap dividends for Ford in the long run.

Asia To Be Next Profit Centre

Ford - Operating Income By Geography (Outside North America), US$mn

Source: BMI, Company Financials

The Asia Pacific and Africa region bounced back from an operating loss of -US$116mn in 9M12 to an operating profit of US$309mn in 9M13. We see this region increasing its profit share in the coming years as investments in capacity and dealerships begin to pay off.

GM Vietnam

SWOT Analysis

Strengths ■ Good use of Chevrolet brand.

■ Third in terms of market share.

Weaknesses ■ Market share of 5% still trails Toyota's 35%.

Opportunities ■ Could increase sales in commercial vehicle segment by introducing more models.

■ Mass market positioning could benefit sales with Vietnam's steady GDP growth.

Threats ■ Strong competition from Ford and other brands which have similar market share.

Company Overview GM Vietnam Motor Company was established in 1993 by the former Daewoo Motor Corporation. In 2011, GM Vietnam decided to align its operations to make Chevrolet its retail brand and sells its cars under that brand in the country. However, it continues to provide after-sales care and spare parts for owners of Daewoo cars.

In 2012, GM Vietnam sold a total of 5,613 units of vehicles, a 45.8% y-o-y decrease. From that, 1,202 units were commercial vehicles and 4,411 units were passenger cars.

For the first eight months of 2013, GM Vietnam sold 3,090 vehicles.

Strategy GM Vietnam launched the new Chevrolet Colorado pickup truck imported from Thailand in March 2013.

It says the Colorado LTZ is equipped with a turbo-diesel engine that provides a combination of performance and fuel efficiency, as well as better performance on Vietnam's roads.

The pickup is distributed as a CBU vehicle imported from Thailand in GM Vietnam's dealer network nationwide at a price of VND729mn (US$34,570), including VAT.

Company Data ■ Number of employees: 600

Mercedes-Benz Vietnam

SWOT Analysis

Strengths ■ Strong global brand name

■ Sales leader among VAMA members in the luxury market

Weaknesses ■ Idle capacity at the plant could eat into profits

Opportunities ■ Expansion into Vietnamese cities with growing affluence

Threats ■ Competition from luxury brands not in VAMA, such as Audi

■ Volatile Vietnamese dong might require hedging, to protect profits

Company Overview Mercedes-Benz Vietnam (MBV) is a joint venture between Daimler (70%) and Saigon Automobile Mechanical Corporation (30%). MBV is introducing passenger cars and commercial vehicles (CVs) to the Vietnamese market under the brand and standards of Mercedes-Benz. The company is the 2012 sales leader among Vietnam Automobile Manufacturers Association (VAMA) members in the luxury vehicle market (includes both its passenger cars and CVs).

MBV's factory is located in Go Vap District, Ho Chi Minh City. The factory covers 105,000 square meters and has a production capacity of about 3,500 vehicles per year. The factory includes a Training Centre, which carries out sales, marketing and technical training courses to ensure a high level of employee competence.

MBV's total vehicle sales for 2012 were up 110% y-o-y to 1,929 units. While its passenger car sales contracted y-o-y, its commercial vehicle sales helped the company post a y-o-y increase in total vehicle sales. The company's 2012 market share in the vehicle market among VAMA members was 2.4%.

For the first eight months of 2013, Mercedes sold 974 vehicles.

Strategy During the period 2010-2012, Mercedes-Benz invested more than US$10mn in the assembly line of its factory and another US$10mn to expand its network nationwide.

Company Data Year established: 1995

General Director: Michael Behrens

No. of employees: 500-600

Automotive Asia Ltd

SWOT Analysis

Strengths ■ Selling more than one luxury brand gives the company diversification.

■ An increase in Audi's imports shows the luxury car market is performing better than the mass market.

Weaknesses ■ Lack of domestic production could make imported cars expensive.

Opportunities ■ New showroom in Hanoi would give company more exposure.

■ Expansion opportunities in Vietnamese cities with growing affluence.

Threats ■ Competition from Mercedes, which has domestic production.

Company Overview Automotive Asia sells both Audi and BMW brands in Vietnam through its dealerships. While sales in the passenger car premium market among Vietnam Automobile Manufacturers' Association (VAMA) members declined about 44% y-o-y, sales in the imported passenger car premium market (which Automotive Asia is in), declined just 29%. Furthermore, according to industry sources, Audi's 2012 imports increased y-o-y.

Automotive Asia, the official Audi Importer in Vietnam, is a joint venture between CFAO - the majority shareholder - and Openasia. Registered in December 2007, Automotive Asia launched Audi in Vietnam in October 2008.

Lien-A International JSC is the official distributor for Audi cars in Vietnam. To ensure Audi customers optimal operation of their cars in Vietnam, Lien-A International JSC operates its own branches in HCMC and Hanoi. Audi Ho Chi Minh City, the second Audi Terminal launched in South East Asia, was inaugurated in October 2008.

Strategy Automotive Asia is set to open a new 3,000 square foot terminal in Hanoi, which will serve as a showroom as well as a workshop, where painting and tooling services will be provided.

Operational Data General Director: Laurent Genet

Regional Overview

In this quarterly regional round-up, we examine the trends in Asian auto markets, which we believe will be dominant in 2014. We specifically focus on the Chinese, Indian, Indonesian and Japanese auto markets as we believe that important developments in the first half of 2014 will be crucial in determining the sales trajectory in these markets.

Table: Vehicle Sales 2013 (CBUS)

BMI Full-year Growth Forecast % BMI End-2013 (2013, % Chg Last Month Monthly Sales % Chg y-o-y YTD Sales Growth Sales y-o-y)

China December 2,100,000 16.0 21,980,000 13.8 21,635,298 12.1 India November 245,250 -14.2 2,063,446 -8.2 3,240,621 -6.7 Japan December 423,000 25.0 5,375,515 0.1 5,492,000 2.3 Indone sia November 111,785 7.8 1,132,174 10.3 1,232,800 10.4

*India's YTD sales figures refer to its FY2013/14 (April-March) figures and its 2013 BMI forecast refers to FY2013/14. Source: BMI, Trade associations

China: Positive Momentum To Continue In Early 2014

Chinese auto sales ended 2013 at a record high of 21.98mn units, an increase of 13.8%. We maintain our bullish outlook on the market in 2014 and see the strong sales momentum in the last few months of 2013 spilling over into early 2014. Consumer confidence remains high and we see it buoying passenger car demand.

However, we remain firm on our sector slowdown view for 2014, which is best demonstrated by the slower growth of 9.1% in vehicle sales we forecast for the full year. The recent reforms announced by the Chinese government will have the effect of slowing economic growth in the short term as the economy rebalances away from an investment-led model towards one where private consumption makes up a bigger share. Consumer sentiment will take a hit in the latter part of 2014 as economic growth falters and this will certainly have a negative impact on vehicle sales.

That said, we are of the view that despite a more challenging 2014 outlook for the sector, passenger car sales will still hold up reasonably well compared with commercial vehicle (CV) sales as the boost to private consumption will ensure more resilient demand for cars. As such, we forecast the passenger car segment to continue outperforming the CV segment in 2014 just as it did in 2013.

Japan: Up And Then Down

According to the Japan Automobile Manufacturers Association (JAMA), Japanese auto sales grew 0.1% in 2013, to 5,375,513 units. While sales came in slightly below our forecast of 5.5mn units, the broad trend of strong double digit y-o-y sales growth in Q413 was something we called for back in August 2013 (see 'Upgrading Sales Forecast Due To Favourable Base Effects', August 12 2013).

Will Remain Strong Until Q114

Japan - Domestic Auto Sales, Units (LHS); % Chg y-o-y (RHS)

Source: BMI, JAMA

As we have previously stated, we expect auto sales growth to remain positive from now until March 2014. This is because the government will raise the sales tax from 5% to 8% in April 2013, which will have the effect of buyers front-loading their vehicle purchases from now until the end of Q114.

However, we are less sanguine on the domestic market's prospects after Q114. We believe the Japanese economy is still fragile and corporates are also adopting a conservative stance in their outlook despite the recent positive economic indicators (see 'Corporates To Remain Conservative Despite Better Conditions', December 16 2013). We see consumer sentiment taking a hit after the sales tax increase, which will result in a likely retrenchment in private consumption. This will then negate the increase in auto sales experienced by the industry in Q114. Against such a backdrop, we forecast only marginal 2014 sales growth of 0.8%.

Upcoming Elections: Divergent Impact On India And Indonesia

With both India and Indonesia facing elections in Q214 and early Q314 respectively, the auto markets in these two countries will undoubtedly experience some knock-on effects from them. However, we believe the upcoming polls will weigh negatively on the Indian market, but may actually end up as a mild tailwind for the Indonesian market.

There is a high degree of uncertainty over the outcome of the Indian general elections, with no party currently standing out as being able to form a majority. While this has already been one of the reasons businesses are adopting a wait and see approach in the past few quarters (which has slowed investment activity), consumer sentiment will also remain downbeat in the run-up to the elections as buyers decide to defer their purchases, further clouding an already depressed market.

To take these looming headwinds into account, we have recently downgraded our Indian auto sales forecasts. While we expect sales to significantly contract in FY2013/14 (April-March), we are also of the view that the recovery in FY2014/15 will remain mild as high interest rates continue to weigh on the market.

Recovery Still Elusive

India - Domestic Passenger Vehicle Sales, Units (LHS); % Chg y-o-y (RHS)

December sales figures are an estimate. Source: BMI, Society of Indian Automobile Manufacturers (SIAM)

Indonesia: LCGC Segment Will Support Sales

In contrast, Indonesian vehicle sales are showing remarkable resilience even in the face of higher fuel prices and interest rate hikes in the past few months. One big reason for this is the launch of the low-cost green car segment in September 2013, which has already seen sales of over 36,000 units. We see the availability of fuel-efficient variants in this segment giving consumers an alternative in an environment of higher pump prices and thus propping up passenger car demand.

Additionally, the increased spending by political parties in the run-up to the elections could see consumer sectors in the country getting a boost, and we believe this will provide a mild tailwind to vehicle sales in the coming months.

However, with 70% of auto sales still requiring some form of financing, we cannot neglect the impact of interest rates on the sector, which our Country Risk team believes will remain elevated for H114 (see 'BI's

Hawkish Stance To Remain Unchanged', January 10). Indeed, our 2014 vehicle sales growth forecast of 7.8% (lower than 2013's growth) reflects the risk of tighter credit conditions on sales.

Global Industry Overview

In our last update of the year, we will not only be looking at how key markets are likely to end the year, but also look at projections for 2014. On the whole, it is looking like a better year for many markets that have struggled in 2013, while those that have enjoyed more rapid growth are likely to stabilise. All in all, it should be a better year for the industry.

Table: Passenger Car Sales November 2013 (CBUs)

BMI Full- year BMI Full- Growth year Forecast Growth % % BMI (2013, % BMI Forecast Monthly chg chg End-2013 chg y-o- End-2014 (2014, % Last Month Sales y-o-y YTD Sales y-o-y Sales y) Sales chg y-o-y) Core Europe November 710,712 0.3 338,926 -1.9 8,939,993 -1.8 8,992,379 0.6 Eastern Europe November 64,049 3.3 681,931 -1.4 744,906 -1.0 772,230 3.7 Japan November 378,597 16.7 4,203,069 -1.1 4,686,640 2.5 4,714,760 0.6 United States November 1,245,325 8.9 14,239,897 8.4 15,681,560 8.2 16,248,215 3.6 Canada November 133,860 6.5 1,630,076 4.0 1,754,982 4.7 1,801,522 2.7 Brazil November 223,748 -4.1 2,504,507 -3.1 2,765,994 -3.0 2,738,334 -1.0 India* November 201,520 -10.2 1,639,535 -5.3 2,601,426 -3.0 2,757,511 6.0 China November 1,696,278 16.1 16,151,800 15.1 17,633,538 13.8 19,432,158 10.2 Turkey November 64,117 23.0 563,456 19.0 667,536 20.0 694,237 4.0 Russia ** November 231,982 -3.5 2,512,965 -6.8 2,602,879 -6.5 2,524,793 -3.0

* year-to-date is financial y-t-d, full year forecast is Apr-Mar 2014 **AEB data (includes LCVs, therefore, forecast now includes LCVs)

Source: BMI, Trade associations

Europe On Road To Recovery

Our view that many markets in Europe would start to bottom out toward the end of 2013 is playing out, with November's passenger car sales showing a 0.3% year-on-year (y-o-y) increase for our Core Europe grouping (France, Germany, Italy, Spain, UK), and growth of 3.3% for Eastern Europe.

Strengthening sales in a number of Western European markets have prompted slight upward revisions to our year-end estimates for 2013, resulting in an expected 1.9% contraction for the Core Europe group. A

resurgence in Spanish sales has been a key driver of this growth, with a 15.1% y-o-y increase in November, following growth of 28.5% y-o-y and 34.4% y-o-y in September and October respectively. Sales for 11M13 are now firmly in positive territory, up 2.1% y-o-y and we expect 3.0% growth for the full year.

The UK has also continued its strong showing for the year, with sales up 9.9% y-o-y for 11M13 following a 7.0% increase in November. In Italy, while the market is still contracting, the declines are moderating each month, which is a promising sign. November sales fell 4.5% y-o-y, taking the 11M13 contraction to 7.7% y- o-y.

Looking ahead, we believe Italian private consumption will remain weak, which will still weigh on big ticket purchases such as cars. That said, we believe the y-o-y declines will continue to moderate and we forecast a 5.1% contraction for 2014. France should also see a better year, largely on the back of pent-up demand following four consecutive years of declining volumes. Although consumer sentiment is expected to remain relatively weak, we forecast growth of 2.0%, to 1.78mn units, which would still leave the market below its 2009 peak of 2.30mn units.

Slowly Stabilising

Passenger Car Sales By Country (CBUs)

3,500,000

3,000,000

2,500,000

2,000,000

1,500,000

1,000,000

500,000

0 2013e 2014f

France Germany Italy Spain UK

Notes: CCFA/VDA/ACEA/INE/Ministerio Del Interior/Department For Transport

In the markets of our Eastern Europe grouping there are also signs of progress, although there are still some clear underperformers such as Romania, Bulgaria and Slovakia. These have been outweighed for the year- to-date by markets such as Estonia, with sales up 7.9% y-o-y in November and 14.1% y-o-y for 11M13, to result in solid positive growth for the sub-region in November and a decline of just 1.4% y-o-y for 11M13. Poland, too, is staging a healthy recovery, which has prompted an upward revision to our 2013 forecast. We now expect Poland to end the year with growth of 6.0%, on the back of an improving private consumption picture. Such performances mean we expect the group to end the year with sales down just 1.0% in 2013.

In 2014, there will be some cautious consumer sentiment remaining. We expect those markets that are currently struggling to retain some weakness, with contractions forecast again for Bulgaria (4.5%) and Slovakia (0.2%). However, Estonia will continue to be an outperformer, although growth is forecast to slow to 10.0% in 2014, while Poland's steady recovery should be sustained with 5.0% growth. Czech sales should also return to positive growth of 3.0%, which will be a boost given the size of the market.

Tax Hike Skews Japan's Outlook; US Hits Sweet 16

The announcement that the Japanese consumption tax will be raised in March 2014 is impacting the passenger car market in the latter months of 2013 and is likely to do so heading into 2014. Growth of 16.7% y-o-y in November, following 18.4% y-o-y growth in October reflects not only a natural improvement in consumer sentiment, but also front-loading of purchases before the tax hike. Although the market is still down 1.1% y-o-y for 11M13, we expect this level of monthly growth to take the market into positive territory in December to end the year up 2.5%.

We expect this trend of purchases being brought forward to continue into Q114, as consumers look to beat the introduction of the higher tax. The reverse is likely to be true following the tax hike, however, with sales expected to tail off in the months immediately after. With sales expected to be strong earlier in the year, but dropping off later, we forecast very marginal growth of 0.6% for 2014.

Returning To Normal

US Light Vehicle Sales By Segment (CBUs)

20M

10M

0M 2014f 2017f 2008 2011 2016f 2013f 2007 2010 2015f 2006 2009 2012

Passenger Car Sales Light Commercial Vehicle Sales

Notes: US Dept of Transport/BMI

US light vehicle sales in November remained on course to meet BMI's forecast of 8.2% growth to 15.68mn units for 2013. Thanksgiving promotions and a weekend to end the sales month contributed to growth of 8.9% y-o-y, taking 11M13 growth to 8.4% y-o-y. BMI believes this is likely to be the last year of such substantial growth, however, as the market gets nearer to its natural 16mn units mark and the first signs of inventory build-up pose a risk to growth in 2014.

The light truck market is still the key driver of growth, up 11.8% y-o-y in November and 11.3% y-o-y for 11M13. Looking ahead, positive data from the residential housing sector, as part of an increasingly bullish macroeconomic picture, suggests that the truck segment will carry this growth into 2014 (see 'Weekly Data Analysis: Positive Housing, Manufacturing And Consumer Data', December 2). We forecast 5.3% growth in light truck sales in 2014, which is still robust by historical standards, despite representing a slowdown from current levels.

We also expect slightly slower growth of 2.0% for the passenger car segment in 2014, following estimated growth of 6.5% in 2013. Again, this is reasonable by pre-recovery standards and we expect one of the areas

driving this growth to be the premium segment. An improving economy and a raft of new model launches should make 2014 a good year at the higher end of the segment, particularly as the US is still one of the major global markets for the leading German luxury brands, looking to offset the European slump.

China Is BRIC Bright Spot

As Chinese passenger car sales surge on the back of healthy economic indicators to end 2013 on a high, we believe the positive sales momentum will spill over into early 2014. According to the China Association of Automobile Manufacturers, passenger car sales in November 2013 rose 16.3% y-o-y, to 1.7mn units. This has brought car sales for 11M13 to 16.15mn units, an increase of 15.1% y-o-y, prompting us to upgrade our 2013 forecast to 13.8% growth, to 17.6mn units, from 11.0% previously.

However, we remain firm on our sector slowdown view for 2014 (see 'Sector Slowdown View Pushed To 2014', September 13). As China's current stimulus-driven growth gives way in the latter part of 2014, this will hurt consumer sentiment and negatively impact car sales. Therefore, we maintain a relatively conservative forecast of 10.2% in 2014, although this is still considerable growth.

It is certainly a better outlook than that of the other BRIC markets. India's passenger vehicle segment has declined throughout the financial year, which began in March, most recently posting a 10.2% y-o-y decline in November. We believe growth will pick up in FY14/15, but until then market sentiment remains depressed.

China Is Near-Term Outperformer

Passenger Car Sales Growth By Country (% chg y-o-y)

-25 2014f 2015f 2010 2016f 2011 2017f 2012 2013f

Brazil Russia India China

Notes: National Association of Motor Vehicle Manufacturers (Anfavea)/AEB/SIAM/CAAM

Car sales in Brazil are looking particularly weak, as the expected Q413 uptick following a poor Q3 tempered by high base effects from 2012, did not materialise. November sales fell 6.6% y-o-y, dragging 11M13 sales down 3.1% y-o-y. BMI expects this market weakness to continue into December, and we have accordingly revised down our 2013 sales forecast to a 3.0% decline, from the 2.0% contraction previously forecast.

As the broader slowdown in consumer spending in Brazil impacts the passenger car segment, we forecast a further 1.0% decline in 2014. We believe the ongoing deterioration in the country's consumer story, combined with the government's tax incentive schemes expiring by the end of 2013, will impact the segment. Upside risk to this forecast comes from a potential change in autos leasing regulations, which would aim to encourage banks to issue more car lease agreements.

After being a BRIC state mainstay, Russia now appears to be running out of steam. Light vehicle sales declined 3.6% y-o-y in November, to 231,982 units, taking sales for 11M13 to a decline of 6.4% y-o-y, to 2,513,163 units. We believe that the country's weak consumer story is increasingly impacting the segment,

and forecast a 6.5% decline in the passenger car segment for 2013 and a 7% decline in light commercial vehicle sales.

Despite earlier announcements of car loan subsidy scheme, which came without a timeframe, we expect any such programme to have a limited impact compared to the growth seen under the previous subsidy programme, as the wider consumer story is weaker. Indeed, we forecast a 3% decline in the passenger car segment and a 2.4% drop in LCV sales in 2014 on the back of the ongoing deterioration in consumer sentiment.

Demographic Forecast Demographic Outlook

Demographic analysis is a key pillar of BMI's macroeconomic and industry forecasting model. Not only is the total population of a country a key variable in consumer demand, but an understanding of the demographic profile is key to understanding issues ranging from future population trends to productivity growth and government spending requirements.

The accompanying charts detail Vietnam's population pyramid for 2013, the change in the structure of the population between 2013 and 2050 and the total population between 1990 and 2050, as well as life expectancy. The tables show key datapoints from all of these charts, in addition to important metrics including the dependency ratio and the urban/rural split.

Population Pyramid

2013 (LHS) And 2013 Versus 2050 (RHS)

Source: World Bank, UN, BMI

Population Indicators

Population (mn, LHS) And Life Expectancy (years, RHS), 1990-2050

Source: World Bank, UN, BMI

Table: Vietnam's Population By Age Group, 1990-2020 ('000)

1990 1995 2000 2005 2010 2013e 2015f 2020f Total 68,910 76,020 80,888 84,948 89,047 91,680 93,387 97,057 0-4 years 9,315 9,323 7,128 6,898 7,229 7,152 7,012 6,575 5-9 years 8,606 9,212 9,253 7,023 6,791 7,052 7,181 6,968 10-14 years 7,857 8,541 9,162 9,117 6,899 6,619 6,757 7,147 15-19 years 7,359 7,788 8,492 9,050 9,011 7,686 6,866 6,726 20-24 years 6,644 7,222 7,673 8,333 8,874 9,148 8,936 6,802 25-29 years 6,006 6,470 7,065 7,471 8,112 8,528 8,772 8,837 30-34 years 5,138 5,890 6,352 6,910 7,286 7,703 8,022 8,680 35-39 years 3,888 5,065 5,803 6,242 6,763 7,011 7,208 7,940 40-44 years 2,463 3,826 4,994 5,719 6,147 6,472 6,685 7,127 45-49 years 2,017 2,409 3,753 4,935 5,648 5,894 6,054 6,589 50-54 years 1,968 1,959 2,346 3,700 4,855 5,306 5,521 5,926 55-59 years 2,046 1,891 1,885 2,237 3,542 4,278 4,677 5,330 60-64 years 1,669 1,934 1,790 1,734 2,068 2,795 3,352 4,444 65-69 years 1,412 1,522 1,771 1,610 1,562 1,673 1,906 3,104 70-74 years 1,028 1,216 1,322 1,530 1,399 1,360 1,379 1,695

Vietnam's Population By Age Group, 1990-2020 ('000) - Continued

1990 1995 2000 2005 2010 2013e 2015f 2020f 75-79 years 752 819 984 1,080 1,263 1,219 1,167 1,160 80-84 years 430 536 597 732 815 919 964 900 85-89 years 224 261 336 385 483 517 546 654 90-94 years 71 108 132 177 210 245 268 306 95-99 years 16 25 41 53 74 83 89 115 100+ years 2 4 7 12 17 21 24 30

e/f = BMI estimate/forecast. Source: World Bank, UN, BMI

Table: Vietnam's Population By Age Group, 1990-2020 (% of total)

1990 1995 2000 2005 2010 2013e 2015f 2020f 0-4 years 13.52 12.26 8.81 8.12 8.12 7.80 7.51 6.77 5-9 years 12.49 12.12 11.44 8.27 7.63 7.69 7.69 7.18 10-14 years 11.40 11.23 11.33 10.73 7.75 7.22 7.24 7.36 15-19 years 10.68 10.25 10.50 10.65 10.12 8.38 7.35 6.93 20-24 years 9.64 9.50 9.49 9.81 9.97 9.98 9.57 7.01 25-29 years 8.72 8.51 8.73 8.79 9.11 9.30 9.39 9.11 30-34 years 7.46 7.75 7.85 8.13 8.18 8.40 8.59 8.94 35-39 years 5.64 6.66 7.17 7.35 7.60 7.65 7.72 8.18 40-44 years 3.57 5.03 6.17 6.73 6.90 7.06 7.16 7.34 45-49 years 2.93 3.17 4.64 5.81 6.34 6.43 6.48 6.79 50-54 years 2.86 2.58 2.90 4.36 5.45 5.79 5.91 6.11 55-59 years 2.97 2.49 2.33 2.63 3.98 4.67 5.01 5.49 60-64 years 2.42 2.54 2.21 2.04 2.32 3.05 3.59 4.58 65-69 years 2.05 2.00 2.19 1.89 1.75 1.83 2.04 3.20 70-74 years 1.49 1.60 1.63 1.80 1.57 1.48 1.48 1.75 75-79 years 1.09 1.08 1.22 1.27 1.42 1.33 1.25 1.19 80-84 years 0.62 0.70 0.74 0.86 0.91 1.00 1.03 0.93 85-89 years 0.32 0.34 0.42 0.45 0.54 0.56 0.58 0.67 90-94 years 0.10 0.14 0.16 0.21 0.24 0.27 0.29 0.32 95-99 years 0.02 0.03 0.05 0.06 0.08 0.09 0.10 0.12

Vietnam's Population By Age Group, 1990-2020 (% of total) - Continued

1990 1995 2000 2005 2010 2013e 2015f 2020f 100+ years 0.00 0.00 0.01 0.01 0.02 0.02 0.03 0.03

e/f = BMI estimate/forecast. Source: World Bank, UN, BMI

Table: Vietnam's Key Population Ratios, 1990-2020

1990 1995 2000 2005 2010 2013e 2015f 2020f Dependent ratio, % of total working age 75.8 71.0 61.3 50.8 42.9 41.4 41.3 41.9 Dependent population, total, '000 29,712 31,567 30,734 28,617 26,741 26,860 27,293 28,655 Active population, % of total 56.9 58.5 62.0 66.3 70.0 70.7 70.8 70.5 Active population, total, '000 39,198 44,453 50,154 56,331 62,306 64,820 66,094 68,402 Youth population, % of total working age 65.8 60.9 50.9 40.9 33.6 32.1 31.7 30.2 Youth population, total, '000 25,778 27,076 25,544 23,038 20,918 20,822 20,950 20,690 Pensionable population, % of total working age 10.0 10.1 10.3 9.9 9.3 9.3 9.6 11.6 Pensionable population, total, '000 3,934 4,491 5,190 5,579 5,823 6,037 6,343 7,965

e/f = BMI estimate/forecast. Source: World Bank, UN, BMI

Table: Vietnam's Rural And Urban Population, 1990-2020

1990 1995 2000 2005 2010 2013e 2015f 2020f Urban population, % of total 20.3 22.2 24.4 27.3 30.4 32.3 33.6 36.9 Rural population, % of total 79.7 77.8 75.6 72.7 69.6 67.7 66.4 63.1 Urban population, total, '000 13,958 16,867 19,716 23,175 27,064 29,632 31,384 35,771 Rural population, total, '000 54,952 59,153 61,172 61,773 61,983 62,048 62,003 61,286

e/f = BMI estimate/forecast. Source: World Bank, UN, BMI

Methodology

Industry Forecasts

BMI industry forecasts are generated using the best-practice techniques of time-series modelling and causal/econometric modelling. The precise form of model we use varies from industry to industry, in each case being determined, as per standard practice, by the prevailing features of the industry data being examined.

Common to our analysis of every industry is the use of vector autoregressions. Vector autoregressions allow us to forecast a variable using more than the variable's own history as explanatory information. For example, when forecasting oil prices, we can include information about oil consumption, supply and capacity.

When forecasting for some of our industry sub-component variables, however, using a variable's own history is often the most desirable method of analysis. Such single-variable analysis is called univariate modelling. We use the most common and versatile form of univariate models: the autoregressive moving average model (ARMA).

In some cases ARMA techniques are inappropriate because there is insufficient historic data or data quality is poor. In such cases we use either traditional decomposition methods or smoothing methods as a basis for analysis and forecasting.

BMI mainly uses OLS estimators and in order to avoid relying on subjective views and encourage the use of objective views, BMI uses a 'general-to-specific' method. We mainly use a linear model, but simple non- linear models, such as the log-linear model, are used when necessary. During periods of 'industry shock', for example when poor weather conditions impede agricultural output, dummy variables are used to determine the level of impact.

Effective forecasting depends on appropriately selected regression models. We select the best model according to various different criteria and tests, including but not exclusive to:

2 2 ■ R tests explanatory power; adjusted R takes degree of freedom into account.

■ Testing the directional movement and magnitude of coefficients.

■ Hypothesis testing to ensure coefficients are significant (normally t-test and/or P-value).

■ All results are assessed to alleviate issues related to auto-correlation and multi-collinearity.

BMI uses the selected best model to perform forecasting.

Human intervention plays a necessary and desirable role in all of our industry forecasting. Experience, expertise and knowledge of industry data and trends ensure that analysts spot structural breaks, anomalous data, turning points and seasonal features where a purely mechanical forecasting process would not.

Sector-Specific Methodology

A number of principal criteria drive our extrapolations and forecasts for each autos variable.

■ Production And Sales

At a general level, we approach our forecasting from both a micro and a macro perspective, assessing the expansion plans of relevant multinationals/indigenous firms, while also taking account of the prevailing economic outlook. In this latter respect, our projections for macro variables such as industrial output, private consumption, government investment, monetary policy and GDP growth play a key role.

Figures for production are derived from a generic source (thereby ensuring maximum comparability between country data-sets), and include all vehicles with four wheels or more. For sales, we rely on data from government agencies and national automobile associations. Unless otherwise stated, sales numbers include domestically produced and imported vehicles, but not exports. The sector's contribution to GDP is projected by taking the US dollar production value as a proportion of nominal GDP, using our own macroeconomic and demographic forecasts.

■ Auto Imports And Exports

These variables are mainly calculated at the micro level, using individual company reports. Changes in government policy, particularly with regard to tariffs and quotas, also have a significant bearing.

Sources

Aside from government departments and official company reports, we rely on the International Organization of Motor Vehicle Manufacturers (OICA), other established think tanks, institutes, and international and national news agencies.

Risk/Reward Ratings Methodology

BMI's Risk/Reward Ratings (RRR) provide a comparative regional ranking system evaluating the ease of doing business and the industry-specific opportunities and limitations for potential investors in a given market. The RRR system divides into two distinct areas.

Rewards

Evaluation of sector's size and growth potential in each state, and also broader industry/state characteristics that may inhibit its development. This is further broken down into two sub categories:

■ Industry Rewards (this is an industry-specific category taking into account current industry size and growth forecasts, the openness of market to new entrants and foreign investors, to provide an overall score for potential returns for investors).

■ Country Rewards (this is a country-specific category, and the score factors in favourable political and economic conditions for the industry).

Risks

Evaluation of industry-specific dangers and those emanating from a state's political/economic profile that call into question the likelihood of anticipated returns being realised over the assessed time period. This is further broken down into two sub categories:

■ Industry Risks (this is an industry-specific category whose score covers potential operational risks to investors, regulatory issues inhibiting the industry, and the relative maturity of a market).

■ Country Risks (this is a country -pecific category in which political and economic instability, unfavourable legislation and a poor overall business environment are evaluated to provide an overall score).

We take a weighted average, combining industry and country risks, or industry and country rewards. These two results provide an overall Risk/Reward Rating, which is used to create our regional ranking system for the risks and rewards of involvement in the autos industry in a particular country.

For each category and sub-category, each state is scored out of 100 (100 being the best), with the overall Risk/Reward Rating a weighted average of the total score. As most of the countries and territories evaluated are considered by BMI to be 'emerging markets', our rating is revised on a quarterly basis. This ensures that the rating draws on the latest information and data across our broad range of sources, and the expertise of our analysts.

In constructing these ratings, the indicators in the table below have been used. Almost all indicators are objectively based. Given the number of indicators/datasets used, it would be inappropriate to give all sub- components equal weight. The weighting given is described in the table.

Table: Automotive Risk/Reward Ratings Indicators And Weighting Of Indicators

Indicator Weighting, % Rewards 70, of which Industry Rewards 65, of which Vehicle ownership, % of population 10 Total vehicle stock, mn 10 Total production 10 Production growth, five-year forecast average 10 Total vehicle sales 10 Sales growth, five-year forecast average 10 Country Rewards 35, of which Urban/rural split 10 Rigidity of employment 10 Labour costs 10 GDP per capita, US$ 10 Risks 30, of which Industry Risks 50, of which Regulatory environment 10 Competitive landscape 10 Country Risks 50, of which Corruption 10 Bureaucracy 10 Market orientation - openness 10 Legal framework 10 Long-term monetary risks 10 Long-term external risks 10 Long-term financial risks 10 Long-term policy continuity 10

Source: BMI