Vietnam’s Growing Automobile Industry brings Opportunities to Investors

May 28, 2020

Vietnam’s automotive industry is growing rapidly and has been doing so continuously during recent years. On average, the growth of the automobile market has been 20-30 percent annually, beating the projected numbers made by Vietnam’s Ministry of Industry and Trade.

 

Car assembly line

 

In June 2019, the Vietnamese conglomerate Vingroup officially inaugurated its car manufacturing site, Vinfast Factory. The factory is not only state-of-the-art and in line with Industry 4.0 standards, it is also the first domestic automobile factory in Vietnam, competing against international car manufacturers such as Toyota, Ford, Nissan, Honda and Kia, already present in Vietnam. The rapid growth of manufacturing sites has also caused heavy investments in suppliers of spare parts, giving the sector a much-needed extra boost.

As of today, the motorbike is the most common choice of transportation in Vietnam. However, the countries fast-growing middle class is driving a shift in the transportation market, as car-ownerships steadily increases. During the first nine months of 2019, Vietnam imported more than 100,000 cars, marking an increase of 267 percent compared to the same period previous year. The import growth was mainly driven by cars with less than nine seats, indicating an increasing use of private cars, highlighting the rising purchasing power of the Vietnamese people.

Yet, the Vietnamese automobile industry faces stiff competition from nearby countries as the country still has to import around 80-90 percent of all raw materials required to produce cars. This results in a domestic cost of producing cars around 10-20 percent higher than those in the nearby countries, and as the ASEAN zero-tariff policy rules, imported cars are bought at a cheaper price than domestically produces vehicles. To tackle this problem, in November last year, Vietnam’s Ministry of Finance proposed a tax policy to reduce or waive the tax on domestically manufactured car components, which would reduce the total production cost. Further, the Ministry also proposed an increasing tax on certain vehicles, which is expected to increase the prices of imported cars. At the same time, the Ministry of Industry and Trade proposed a decreased corporate tax rate for automobile manufacturers, and it’s supporting industries. All proposals are still to be accepted.

Meanwhile, the European Union Vietnam Free Trade Agreement (EVFTA) is in the last stages of being finalized. The Vietnam National Assembly are scheduled to ratify the deal on the 8th of June, which is the final stage before completion. As a result of the agreement, Vietnam’s automobile industry will be opened to major European car markets, such as Germany, France and UK. In return, Vietnam has guaranteed to eliminate all import tariffs on EU automotive exports, both cars and components, to Vietnam during the coming seven to ten years.

Of course, supply chain disruptions caused by the recent COVID-pandemic is affecting the automobile industry in Vietnam. The global virus outbreak is likely to stun the rapid growth in the short term as it goes through a period of adjustment. Nevertheless, government incentives and rising Vietnamese trade volumes, aided by FTA’s, together with booming domestic sales forecasts a rising demand of Vietnamese manufactured cars in the longer perspective. Vietnam’s Industrial Policy and Strategy Institute predicts than car sales will rise from 2018’s levels of around 300,000 vehicles to 800,000 vehicles by 2025, and hitting the million mark by 2030.

In conclusion, there is a tremendous growth expected in the Vietnamese automotive manufacturing sector, as both domestic sales and international trade are on the rise. As many foreign investors wish to enter either Vietnam or Southeast Asia as a whole, this could be one of the golden opportunities in the upcoming years.


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