Exports the only road ahead for car industry

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Vietnam's auto industry will not be able to achieve competitive economies of scale even if the domestic market were to double in size and the number of assemblers were to fall, Michael Pease, general director of Ford Vietnam Ltd, tells Thanh Nien Weekly.

Thanh Nien Weekly: Given the ups and downs it seems to be going through with regularity, where does the car market in Vietnam stand now?

Michael Pease: Vietnam's car market is dynamic and exciting and at a very important stage of its development.

In a newly industrialized country, you will see the focus on trucks and vehicles for business use.

But recently we have seen a strong growth in passenger cars as the economy matures and purchasing power increases. This emergence of a strong middle class consumer group has a big impact on the types of vehicles offered as these customers have different requirements.

As expected, fuel economy, affordable price and compact size are more important, but in Vietnam, consumers are also very aware of what is happening around the world, and they want the latest features, flexible and versatile seating, as well stylish cars that can capture their "image."

This change is being reflected in the range and choice of models in the market.

Vietnam's automobile development plan aims to produce all the components here in the coming years. Do you think this is feasible?

 

Very few countries produce all of the components for cars they assemble. The investment required for component localization is increasing in proportion to the sophistication in today's cars, which in turn requires a very high volume to be economic. So, we are seeing a rapid rise in suppliers who are regional or global suppliers for their component, and an effective reduction in small-scale local suppliers.

Within the ASEAN region we will have a free trade zone, which includes Vietnam, by 2018. At that time we could reasonably expect to see component suppliers exporting to all ASEAN countries from a single location. This may also happen to vehicles so that instead of one model being assembled in 3 or 4 locations in ASEAN it will just be assembled in one and exported to the other countries.

For both components and vehicles, this provides economies of scale, minimizes duplication in investment, and also assists in development of expertise in the source country.

Currently Vietnam has a very high number of assemblers (15) compared to the industry size (160,000 vehicles per year). With multiple models assembled in all factories the average production run is less than 3,000 units a year. At this volume it is almost impossible to localize beyond a very basic level. Most component manufacturers require annual production runs of at least 100,000 units a year, and this will require exports if they are to setup in Vietnam.

I think that the current Vietnam localization policy was established well before the ASEAN Trade Bloc was agreed, and was probably also based on a smaller number of high volume assemblers in Vietnam. Since events have changed this may be a good time to review and update the policy.

How will the disproportionately large number of assemblers affect development of the local market?

It is very difficult for any assembler to be profitable and invest in localization with such a small annual production for each model. But with high import taxes there is no alternative if companies want to sell here. Due to the small production numbers, profit margins are very low and companies can easily slip into a loss situation if there is a market slowdown.

What are the components that the auxiliary industry should focus on?

Vietnam has expertise in steel and iron products, which may be a good starting point. Additionally our fabric and textile capability may support a focus on interior trim parts; and rubber components may be a further area of opportunity.

Since exports will be an important part of business viability, small to medium sized parts, with relatively high local value addition, and a high labor component would seem to be the preferred direction.

Localization is an important objective for a sustainable automotive industry, but it will only come with improved scale of assembly in Vietnam, and only by the automotive assemblers and the government working in partnership to provide a strong business case for investors in the components business.

Should Vietnam become a producer of completed cars? Or is it better for it to just produce components for foreign carmakers?

A viable automotive industry will have far higher levels of localization than today, and I believe that we could see sheet metal stampings and engine manufacturing, but probably not full-scale localization of all components in the future.

Production of only car components without any local vehicle assembly is also unlikely, since suppliers always want to locate close to at least one of their main buyers.

So I think the best possible scenario is if we can develop a viable automotive industry here in the next eight years, we would have a similar profile to Thailand large scale assembly plants with majority of vehicles exported, using 70 percent plus ASEAN parts content and at least half of that sourced from within Vietnam.

What should be the starting point for Vietnam to become a producer of completed cars?

The first and most important step is to support the existing assemblers to become export orientated. Even if the domestic market doubles in size in the next eight years, it will still be less than 350,000 vehicles, and with even a reduced number of assemblers the economies of scale will not exist to compete with the high volume plants in Thailand and China.

I think that it is viable to plan for a more developed automotive industry here, but it is going to take significant commitment and investment from the government and the existing companies to make this happen. In the end it will be the car companies that make the decision where they locate their large volume plants and the component suppliers will follow.

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