Vinfast, a subsidiary of Vietnam’s Vingroup, the communist country’s largest private conglomerate, last month rolled out its first made-in-Vietnam automobile model, a combustion engine hatchback that at a sticker price of about US$19,000 has taken on Japanese and Korean brands in the nation’s fast-revving domestic market.
The company hopes to launch 12 different models of automobiles including electric vehicles by 2020, aiming at a production of 250,000 vehicles a year in the first phase of a $3.5 billion investment in a 335-hectare production facility in the northern coastal town of Haiphong.
The company aims to ramp up production to 500,000 vehicles by 2025.
“This is the first step into heavy industry,” said Le Thi Thu Thuy, chairwoman of VinFast, in addressing a recent business function in Bangkok. “We will start out with the domestic market but our goal is to turn Vietnam into a manufacturing hub for automobiles. A car company is about supply chains.”
Those might have been construed as fighting words for anyone in the audience from Thailand’s automotive industry, long billed as the “Detroit of Asia” and a crucial component of the nation’s export earnings.
Indeed, Vinfast’s rapid entry (it launched its auto-making project in September 2017) into local production of its own brand of vehicles has sparked concerns among Thai authorities.
Thailand’s gross domestic product (GDP) is expected to grow under 3.5% this year, whereas Vietnam anticipates another 6.7% surge. Thailand’s GDP per capita per annum is $7,200, whereas Vietnam’s is $2,600. However, that figure is closer to $6,000 for residents of Vietnam’s two main cities, Ho Chi Minh and Hanoi.
Economists generally see $3,000 per capita per annum income as the inflection point for consumer booms in emerging markets. Vietnam has 98 million potential consumers, compared with Thailand’s 69 million, many of them aging and already deep in debt.
“I think Vietnam is at the tipping point for car consumption,” said Vinfast’s Thuy Le. “Car ownership is very low in Vietnam, about 20 cars for every 1,000 people. The number in Thailand is ten times that. It is just a matter of time before the take-off comes in Vietnam.”
Thailand’s automotive industry has reason to worry, especially since Vietnam has recently entered two new big free trade agreements (FTAs), including with the European Union, that Thailand has missed.
That owes in part to the country’s status as a military coup-installed regime for the past five years, but now that it has returned to electoral democracy entering new FTAs could be on the cards again.
On June 30, Vietnam entered the European Union-Vietnam Free Trade Agreement (EVFTA), which promises to lower tariffs in both directions, including for Vietnam-made automobiles.
Last year, Vietnam also entered the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPATPP), an offshoot of the TPP initiated by former US President Barack Obama but ditched by current President Donald Trump. The CPATPP will lower tariffs for Vietnam’s exports to 11 countries, including Australia, Canada, Japan, New Zealand and Singapore.
Thailand’s Trade Policy and Strategy Office has warned that since Thailand is not a member of either FTA that automotive suppliers in Thailand should prepare for many foreign car-makers to relocate to Vietnam to take advantage of the FTA deals and cheaper labor costs.
Last year, vehicles and vehicle parts and accessories were Thailand’s leading export item, amounting to $38.4 billion in foreign exchange and making the sector Thailand’s top export earner accounting for 15% of total exports, according to Bank of Thailand figures.
In 2018, Australia was the largest market for Thailand-manufactured cars, with shipments amounting to $5.8 billion, or 55% of total Thai exports to the country. For Thailand-made automotive parts, the largest market was the 10-member Association of Southeast Asian Nations (ASEAN), with shipments of $6 billion.
Thailand has signed 13 total FTAs, including the ASEAN FTA (AFTA) and a separate TAFTA with Australia.
Thailand has built up its automotive industry since the mid-1990s, and now ranks 12th worldwide as an automotive manufacturer, having attracted all the major Japanese brands including Toyota and Honda, the elite German brands BMW and Mercedes Benz, as well as American maintains Ford and Chevrolet.
There are now more than 2,500 parts suppliers based in the country, providing the largest automotive cluster in the region.
Ambitions to establish an automotive industry as a first step to wider industrialization are hardly unique to Vietnam or Thailand. Most of the main ASEAN economies barring Singapore have taken a stab at becoming auto production bases, with varying degrees of success.
Malaysia took the national car route with the Proton, originally a joint venture with Mitsubishi Motors but now with China’s Geely as its main strategic partner.
After revving its own national car plan, Indonesia has been promoting investment in its Low Cost Green Car (LCGC) model since 2013, providing tax incentives to several Japanese car-makers which are obliged to raise the local parts content up to 80%. LCGC models now account for 20% of passenger car sales in the country.
Although any vehicle with more than 40% local parts content from a fellow ASEAN member enjoys zero import tariffs under AFTA, there is little production coordination within the bloc.
“Each country has their own policy and they compete with each other,” said Titikorn Lertsirirungsun, Southeast Asia manager for LMC Automotive, an automotive market projection house headquartered in the United Kingdom.
Thailand has avoided the national car draw, focusing instead on encouraging all-comers to the kingdom with tax incentives for investments not only in assembly but also in local parts production.
There have been some big success stories, namely the one-ton pickup segment, which accounts for 40% of domestic sales and 20.5% of the country’s automotive exports last year. Thailand ranks only after the United States and Mexico in pickup production worldwide.
In 2007, the government offered tax incentives to attract investment in its eco-car platform, a mini, low-fuel consumption vehicle that meets European emission standards.
Five Japanese brands invested in phase one and six comprising Toyota, Nissan, Honda, Mitsubishi, Mazda and Suzuki have invested in phase two of the program. The scheme stipulates minimum annual production of 100,000 units for each investor, a provision which aims to encourage manufacturers to seek export markets.
Thailand’s latest push has been in electric vehicles, arguably the cars of the future. The Board of Investment (BOI) has offered tax incentives to encourage international brands to invest in assembly of hybrid EVs and battery powered BEVs for the past four years, though with varied success.
The government claims to have attracted $4.7 billion in applications to produce hybrid-electric cars, plug-in hybrid electric and battery vehicle production facilities, as well as EV stations.
Mercedes Benz and BMW enjoyed impressive sales of their locally assembled hybrid and plug-in EVs in 2017-2018, with the new technologies appealing to wealthy buyers.
Given the still inherent high costs of all EVs, most analysts do not see them replacing combustion engine vehicles on the Thai market, let alone the just emerging Vietnam market, any time soon. The battery accounts on average for 30-40% of production costs of EVs, and the global price of lithium is on the rise.
The Bangkok-based Kasikorn Research Center, estimates that BEVs would account for 10% of Thai vehicles sales in the year 2028, and 20% in 2038. BEVs accounted for only 1.3% of total vehicles sales in Thailand in 2018, out of 1,261,000 units sold.
This might raise some questions about Vinfast’s ambitions to launch EV models in Vietnam, where per capita income remains relatively low, although rising quickly.
Analysts suggest Vinfast might have better luck concentrating on two-wheeler EV’s, which it already launched on the domestic market in December. Vietnam’s annual demand for motorcycles is close to 3.5 million, as the motorcycle-clogged streets of Hanoi and Ho Chi Minh City attest.
As for Vinfast’s prospects for beating out Thailand as an auto-manufacturing hub, it is still early days. The parent company Vingroup is the largest listed stock on Vietnam’s stock market, while its founder, Pham Nhat Vuong, reportedly has a net worth of $6.7 billion.
While Vingroup’s revenues come chiefly from property investments (in 2017 total revenue was $4 billion with a net profit of $254 million), in December it launched Vietnam’s first smart phone manufacturing facility and it has diversified into health care and retail.
Significantly, the company appears to enjoy the support of Hanoi, which is keen to create national champions that can compete on a global scale.
“It is a huge investment of $3.5 billion and can be a maker or breaker of Vingroup’s commercial success in the future,” noted Le Hong Hiep, author of the recently published Vietnam’s Industrialization Ambitions: The Case of Vingroup and the Automotive Industry.