From property developer to car maker
As one of the largest private companies in Vietnam, Vingroup began its existence as a property developer and has gradually branched out into other areas, from education and healthcare to entertainment, retail and agriculture. And now the firm wants to make its own cars under the brand name VinFast.
VinFast has set its sights on becoming a major manufacturer in Southeast Asia, with an annual capacity of 500,000 vehicles by 2025 and products ranging from diesel cars to electric cars and bikes. In the initial stage, the company expects to produce approximately 100-200,000 units a year. Its first products will be electric bikes, to be rolled out in the next 12 months and then cars one year later.
Vingroup said that it has signed an agreement with Credit Suisse under which the latter will arrange a loan of up to US$800 million for VinFast to carry out its ambitious project.
The firm also announced that the designs for its cars’ engines and main structures will be purchased from leading European and American companies, while the exterior designs will be undertaken by Italian design houses, which have worked on designs for famous car brands such as Audi, Bentley, Ferrari and Porsche.
Notably, Vingroup stated that it has assembled a team comprising experts in the global automotive industry in order to take part in research and production management. VinFast will also forge links with domestic suppliers to develop and manufacture car parts with an aim of reaching a domestic content of 60% and will export its cars to regional countries.
Unfulfilled car dreams
Since the early 1990s the government has determined car manufacturing as a key sector by introducing various tax incentives with the aim of establishing a strong local automotive industry. But after 25 years, car prices in Vietnam remain prohibitively expensive, while the rate of domestic content remains extremely low.
Last year the Ministry of Industry and Trade admitted that Vietnam has totally failed to meet the target of 60% local content in nine-seaters or smaller cars by 2010, as the average rate is only about 7-10%. The highest rate belongs to the Toyota Innova but is only at 37%, far below the requirements.
Meanwhile in Thailand, the domestic content has reached as high as 90% for pick-up trucks and 70% for passenger cars, according to the Southeast Asian country’s Board of Investment.
Prior to Vingroup, another local firm, Vinaxuki, also nurtured a great ambition and invested heavily in manufacturing workshops, with the aim of producing cars with high local content. But the dream was soon shattered in 2015 when Vinaxuki had to sell a factory to pay off its debt and its unfinished cars are now left covered in dust. The company’s failure is attributed to a lack of funds and tax policies, which made it unable to finish its cars and compete with imported products.
The primary reason for the stagnation of the Vietnamese automotive sector and the wide gap between domestic and foreign prices is an unclear and inconsistent strategy. On the one hand, the government wants to prop up the supporting industry to bring down car prices but, on the other hand, high excise tax is levied to discourage car use due to poor infrastructure and environmental concerns.
Challenges and opportunities
From 2018 when tariffs on cars that meet 40% ASEAN regional content will be cut to zero, a torrent of cheap cars from countries in Southeast Asia will certainly flood the Vietnamese market, creating even more pressure on the already languishing local automotive industry. This is good news for Vietnamese consumers but could spell the ultimate demise of the local automotive industry as car-makers will simply import completely built cars instead of investing in manufacturing lines.
In a gloomy picture, Vingroup’s recent commencement of a car manufacturing facility in the northern port city of Hai Phong is a silver lining, helping to keep the dream of made-in-Vietnam cars alive.
But enormous challenges are lying ahead as manufacturing cars is an entirely different area from its traditional businesses in the services sector. It is no easy task to make cars as it requires thousands of different parts and a high level of technology.
Furthermore Vingroup will face the challenge of changing the Vietnamese consumers’ strong preference for foreign goods. Recently, BKAV, a Vietnamese technology firm, launched the second generation of its locally produced Bphone smartphone, to little fanfare from Vietnamese consumers. Very few express any interest in buying a Vietnamese-made smartphone and still prefer iPhones or other devices made by foreign companies, which they believe are better value for money.
Nevertheless there is still room for hope as Vingroup has proved to be a leading contender in every area of business in which it has been involved and has become a major brand in the mind of Vietnamese consumers. With an impressive track record, there are grounds to believe that Vingroup’s endeavour in this new business will bring fruitful results, especially as its effort has received the support of the Vietnamese government leader.
Prime Minister Nguyen Xuan Phuc said at the ground-breaking ceremony on September 2 that Vietnam having its own car brand is highly significant for building an independent economy. He added that it would be a miracle if VinFast could roll out its first cars in the next two years.
Vingroup Vice Chairman Nguyen Viet Quang said that engaging in heavy industries is part of its long-term strategy to gradually reduce the proportion of property development. He is confident that consumers will support its locally made cars given its strengths in capital resources, world-leading experts and particularly consumers’ confidence in the premium quality of its products and services in the past few years.
Furthermore, Vietnam’s car market has great potential for growth as the country’s car ownership remains significantly lower than that of regional countries. The Ministry of Industry and Trade has projected that Vietnam’s annual car demand will reach 450 -500,000 units by 2020, 800-900,000 units by 2025 and 1.5-1.8 million by 2030.
If Vingroup could tap into this market and succeed, it could help Vietnam to save an enormous amount of US dollars spent on car imports and truly revive the domestic automotive industry.
