Industries Automotive Vietnam’s Automotive Component Industry: Ready to go global?* *connectedthinking Table of Contents Introduction . 2 The Vietnamese Automotive Industry . 3 Japanese Automakers: The driving force behind Vietnam’s automotive development . 8 Infrastructure – Transportation . – Power . 2 – Telecommunications . 2 Labour Market . 2 The Investment Environment in Vietnam: A comparison with other emerging Asian countries . 4 ASEAN Free Trade Area and Common Effective Preferential Tariff Impact . 6 Taxes . 8 Conclusion . 20 PricewaterhouseCoopers LLP | Introduction Vietnam is the next investment destination for many: Does this hold true for the automotive and auto parts industry? Increasing political and exchange-rate stability, along with promising gross domestic product growth have catapulted Vietnam to the top of many investors’ agendas . On Jan . , 2007, Vietnam became the 50th member of the World Trade Organization, six years after China gained membership . Vietnam’s acceptance into the WTO validated its global economic viability and left many people asking, “Is Vietnam the next China?” Vietnam’s recently transformed and relatively young stock markets currently offer some of the world’s highest returns, with the market index skyrocketing from just over 300 points in early 2006 to well beyond ,000 points by year’s end . But what does rapid economic growth mean to the domestic automotive and auto parts industry? Will Vietnam replicate the success China enjoyed in the automotive industry after joining the WTO? This study assesses the state of the Vietnamese automotive industry and identifies the main drivers and key factors to consider with regard to investing in Vietnam . ����������������������������������������������������For the intrepid, Vietnam does offer possible medium to long-term opportunities . However, the Vietnamese automotive industry is still in an early developmental stage and significant challenges remain . 2 | PricewaterhouseCoopers LLP The Vietnamese Automotive Industry The automotive industry in Vietnam is relatively young . Before 992, most vehicles were procured by the government and imported from the former USSR and other Eastern-bloc countries . In 986, the Vietnamese government initiated a set of policy changes to stimulate and liberalize the economy, known as the Doimoi (or renovation) policy . While the Communist Party remained in control of the political system, the government incorporated elements of capitalism, granting auto assembly licenses to more than 30 regional assemblers . These included state-owned enterprises, local Vietnamese companies, joint ventures and foreign-owned original equipment manufacturers (OEMs) . Complete knock- down (known as CKD) assembly began in 995, with Mitsubishi, Toyota and Isuzu becoming some of the first global OEMs in Vietnam . A decade later, Japanese auto assemblers have proved there is still a long way to go in order to achieve economies of scale in automobile production in Vietnam . The table below depicts 2006 actual production by Japanese auto assemblers . Table 1: 2006 auto production in Vietnam by Japanese companies AUTOMOBILE PRODUCTION COMPANIES Capital Headquarter’s Production Automaker Company Products Established Production Investment Stake Capacity (3) Vietindo Daihatsu Automotive 1 Daihatsu Corporation Hijet, Citivan, Terios 1995 483 units US $12.3 million 26% 1,800 units 2 medium and heavy-duty Hino Hino Motors Vietnam, Ltd. trucks and buses 1996 645 units US $8.1 million 51% 1,000 units 3 Honda Honda Vietnam Co., Ltd. (1) Civic 1996 1,651 units (2) US $62.9 million 42% 10,000 units 4 F-series, N-series, Isuzu Isuzu Vietnam Co., Ltd. Hi-Lander 1995 2,428 units US $15 million 35% 10,000 units Lancer, Pajero, Jolie, 5 Mitsubishi 1,080 units 25% Vina Star Motors Corporation Grandis (VSM) 1995 US $16 million 5,000 units 6 Mitsubishi Fuso Canter 1,389 units 0% 7 Carry, Wagon R+, Vitara, Suzuki Vietnam Suzuki Corporation APV 1995 1,296 units US $21.7 million 35% 10,000 units 8 Camry, Corolla, Hiace, Toyota Toyota Motor Vietnam Co., Ltd. Land Cruiser, Innova, Vios 1995 13,976 units US $49.14 million 70% 20,000 units (1) Inclusive motorcycle business. (2) Started production in 2006. (3) Capacity figures from AMAV Source: JAMA (Japan Automobile Manufacturers Association) In recent years, new automobile sales in Vietnam have slowed . Among the factors affecting sales are: • Consumer preferences for motor bikes - automobiles are too expensive for many Vietnamese; • Better and more roads are needed; • Parking is scarce; • Tax policy The table below shows the increase of special sales tax for passenger cars that has increased automobile prices . Table 2: Special Sales Tax Year 2003 2004 2005 2006 Special Sales Tax 5% 24% 40% 50% PricewaterhouseCoopers LLP | 3 In 2006, the government lifted a ban on pre-owned car imports, allowing pre-owned vehicles aged less than five years into the country . The auto market has also been held back by the state of Vietnamese infrastructure, particularly the lack of highways and parking facilities . Recent economic growth has been strong . GDP rose 6 .8 percent from 997 to 2004, 8 percent in 2005 and 8 . percent in 2006 . With this ����������������������������������������������������������������boom and stock market development, the local automotive industry expects to reap significant benefits, but an overall strong economy has not yet translated into automotive success . Will the new wave of cheap cars “hit the spot?” The market for passenger vehicles is already overcrowded with participants, but this has not stemmed the steady flow of eager entrants . Many automotive companies, like Shanghai Automotive Industry Corp . (SAIC), expect Vietnam’s WTO membership to result in an economic upturn . SAIC has announced plans to establish a joint venture with an anticipated capital investment of $50 million . Seven years ago, low-cost Chinese-made motorcycles took Vietnam by storm, taking substantial market share from the Japanese market leader . Whether a similar situation will emerge with low-cost Chinese cars is far from certain: quality perception is important to Vietnamese consumers and low-cost Chinese cars will likely have to prove their worth by standing the test of time . Sluggish automobile sales growth in Vietnam does not come as a surprise when the following factors are considered: • Underdeveloped infrastructure • High taxes • Low per capita income • Removal of pre-owned car ban One indication of whether an emerging economy has transformed itself from agriculture-based to manufacturing-based (or experienced export-led expansion), is the growth of automobile sales compared with the growth of motorcycle sales . The ownership ratio of motorcycles to cars in Vietnam is one of the highest in the world and continues to rise . The number of motorcycles is expected to double within the next 5 years, according to Vietnam’s current motorcycle master plan demand forecast . By comparison, passenger car ownership levels in Vietnam are among the lowest in the Asia Pacific region, with .5 units per ,000 people in 2004 . This is an indicator of tremendous untapped market potential . Table 3: Motorcycles in Vietnam Year 2000 2005 200 205 2020 Population forecast (millions) 77 .6 83 . 88 .7 94 . 99 .4 Motorcycle demand forecast (millions) 6 .4 5 .2 24 .2 28 .8 3 .8 Average persons per motorcycle 2 .2 5 .5 3 .7 3 .3 3 . Source: Vietnam Development Forum 4 | PricewaterhouseCoopers LLP Table 4: Auto sales by unit and market share in 2006 and 2005 by VAMA members Year 2006 Year 2005 Change Brand Unit % Unit % Unit % Toyota 4,784 36% ,83 30% 2,97 25% Truong Hai 5,354 3% 4,325 % ,029 24% Ford 3,60 9% 5,040 3% (,430) -28% Isuzu 2,344 6% 2,57 5% 87 9% Vinaxuki 2,393 6% - 2,393 VinaStar (Mitsubishi) 3,398 8% 4,22 % (84) -9% Mercedes-Benz Vietnam ,202 3% ,683 4% (48) -29% Visuco (Suzuki) ,807 4% 3,365 8% (,558) -46% Vidamco (GM Daewoo) ,634 4% 4,98 % (2,564) -6% VMC (BMW, Mazda, Kia) 659 2% ,042 3% (383) -37% Mekong (Fiat, Ssangyong, PMC) 597 2% 509 % 88 7% Hino 63 2% 54 % 72 3% Vindaco (Daihatsu) 530 % 453 % 77 7% Vinacomin - Vinacoal 340 % - 340 SAMCO 478 % 538 % (60) -% Honda ,0 3% - ,0 Total 40,853 00% 39,876 00% 977 2% Source: Vietnam Automobile Manufacturers’ Association Figure 1: Automobile sales in Vietnam in 2000-2006 Unit sales % Change 50,000 70% 45,000 60% 40,000 50% 35,000 40% % change 30,000 30% 25,000 20% 20,000 Unit sales 15,000 10% 10,000 0% 5,000 -10% - -20% 2000 2001 2002 2003 2004 2005 2006 Source: Vietnam Automobile Manufacturers’ Association Uncertainties about an increase in the special sales tax, the lifting of an import ban on second-hand cars, the elusive domestic market and consistent infrastructure issues have hindered any significant progress in the automotive and supporting industries . PricewaterhouseCoopers LLP | 5 The 2006 Vietnam Development Forum’s study on “Building Supporting Industries in Vietnam” found that progress in automotive localisation (currently only 5-5% per unit assembled) is slow and far below the level of competitiveness required by Japanese companies, which have been most active in the Vietnamese automotive industry . Most significantly, the Forum reports that imported parts are still less costly than locally produced parts, mainly because of economies of scale, and quality . In addition, localisation operations have concentrated on producing low-value parts, which reflect the low production volume of light vehicles (see Table 5) and the rather limited number of makes and models