Increasing political and exchange rate stability along with rapid economic growth have catapulted Vietnam to the top of many investors' agendas, particularly those in the automotive sector. A new study from PricewaterhouseCoopers, 'Vietnam’s Automotive Component Industry: ready to go global?’ takes a closer look at the state of the Vietnamese automotive industry and identifies main drivers and key challenges to consider before investing in Vietnam.
Vietnam's entry to the World Trade Organisation (WTO) in January 2007 has led to much anticipation that it will replicate the success experienced by the automotive industry in China since it joined in 2001. The accession to WTO membership, together with strong indicators of growth, are likely to lead to an upturn in activity in Vietnam's automotive sector. Car ownership levels are among the lowest in the Asia Pacific region, and as such a booming economy should start to release previously untapped market potential in the Vietnamese automotive sector.
Some challenges do however remain and Vietnam will need to address a number of factors in order to keep pace with the Chinese automotive industry. The Chinese government has pursued policies to ease purchases of light vehicles, leading to an upsurge in demand. In contrast Vietnamese automobile sales have stagnated in recent years due to a number of policies that have discouraged ownership of new vehicles, including a rise in the special sales tax on ‘complete knock down’ assembled passenger cars from 5% in 2003 to 50% in 2006.
Development of the auto market has also been held back by the pace of investment in improved infrastructure across Vietnam. The country at present has no expressways and only 26% of the national highways have two or more lanes. Just 10% of the capital city of Hanoi is developed for roads – whereas in most major capitals this ratio is typically at least 25%. The country's total road system consists of 210,447km of which only 3,211km are urban roads. There is also a scarcity of parking in urban areas with an acute shortage in Hanoi and Ho Chi Minh City. More roads, more parking facilities and lower taxes are needed to help jumpstart the domestic automotive market in Vietnam.
Dinh Thi Quynh Van, partner, PricewaterhouseCoopers said:
“Vietnam has a number of positive factors that position it as an emerging investment destination for the automotive sector. But investors need to be aware it may not be a quick win and that despite some similarities it is a very different market to China. It offers opportunities but investors will need to be prepared to take a long term view.”
Beyond the demand for vehicles, opportunities are also emerging for global OEMs and suppliers to build Vietnam into their sourcing and supply chain arrangements. However it will require an investment of time and resources in order to identify and select the right partners and parts to be sourced. A thorough risk assessment will be needed to identify suppliers that have the experience, quality, cost control and ability to integrate into complex global supply chains. State-owned enterprises and privately owned automobile manufacturers are developing plans to establish auto parts operations and over time these companies will become potential partners. Membership of the WTO and other free trade associations will also help in the creation of opportunities for auto parts sourcing. Investors will need to adopt a committed and patient approach to the Vietnam automotive market. Those companies prepared to take this route are likely to find themselves well positioned in a sector with clear growth potential
