Over the past three decades, Vietnam has looked to boost its levels of industrialisation by developing an indigenous automotive industry. Yet so far it is home to only a handful of assembly facilities and has few supporting industries to show for its efforts.

In 2002, the government set a target of increasing the localisation ratio – which refers to the proportion of parts used in final assembly that are not imported – for passenger cars to between 20 and 25 per cent within the next three years. By 2010, that figure should have been between 40 and 45 per cent. Yet in 2016, the average ratio for all vehicle types was just 10 per cent. Without localised production, the country’s automotive industry cannot provide the momentum for industrialisation that the government wants.

Hopes for an indigenous automotive industry were rekindled recently, however, when the Vietnamese conglomerate Vingroup announced plans for a locally produced car through its subsidiary VinFast.

Within a year, VinFast had built a 350 hectare manufacturing complex in the northern city of Hai Phong and developed two prototypes – a saloon and an SUV – that debuted at the 2018 Paris Motor Show to much fanfare. The company now plans to have its first model on the market this year.

Vingroup, chaired by Pham Nhat Vuong – the country’s first self-made billionaire – currently makes most of its revenue from real estate development. The group has also expanded into retail, health care, education and agriculture.

By 2017, it had become Vietnam’s largest private conglomerate, with US$4 billion in revenue and US$254 million in net profit.

It entered the automotive industry in 2017 and smartphone industry a year later. It also established a subsidiary to invest in technologies such as artificial intelligence and big data, with a view to transforming itself into a tech company by 2028. The group has set itself the ambitious goal of becoming a leading Southeast Asian carmaker by 2025, with the capacity to produce 500,000 vehicles a year from parts that are at least 60 per cent locally made.

To achieve this, it has worked with international suppliers to set up eight factories producing parts and components in Vietnam. The company also acquired General Motors Vietnam to produce cars under licence and started developing electric scooters, which have been on the market since November.

Despite its impressive debut, VinFast faces significant challenges – the most serious of which is competition from international giants. Commercial success will therefore depend on whether it can produce quality cars at reasonable prices.

To do so, it will need to take advantage of economies of scale, but the small domestic market is a major impediment. In 2017, the combined sales of the Vietnam Automobile Manufacturers’ Association totalled just 272,750 units.

Expanding this market requires cars that are more affordable to the average Vietnamese consumer, so VinFast and other domestic carmakers need to lobby the government to lower taxes and fees.

Underdeveloped road infrastructure is another challenge that Vietnamese carmakers face. Frequent traffic jams and a lack of parking spaces have long discouraged the country’s city dwellers from owning cars. At the same time, those who are in the market for a new vehicle are more likely to buy imported models than domestically made ones.

VinFast needs to build brand recognition and invest heavily in its research and development capabilities, but the country’s lack of relevant technological and human resources will make this a challenge.

Yet a number of factors are also working in the company’s favour. First, there is great potential for growth in Vietnam’s automotive market. Currently, there are only 16 cars in Vietnam for every 1,000 residents – significantly less than in Malaysia (341), Thailand (196), or even Indonesia (55). As a demographically young country of 94 million people with a rapidly expanding middle class, Vietnam could prove fruitful for VinFast and other carmakers if they can cater to the varied demands of local customers.

Second, as a new player, the company can adopt advanced technologies and a forward-looking business strategy without having to deal with legacy issues. Its decisions to develop e-scooters and electric cars are cases in point.

Third, the group’s solid business ecosystem and customer base of about 5 million bring with them unique advantages in terms of marketing its automotive products in the domestic market.

Fourth, Vingroup enjoys strong political support from the Vietnamese government. Its success in the real estate business owes much to its political connections, which will bring its VinFast subsidiary further advantages as the company aligns its commercial goals with the government’s industrial policy objectives.

In the past year, the company’s manufacturing complex has been visited by the Vietnamese prime minister, chair of the national assembly, and communist party chief Nguyen Phu Trong. The government also provided VinFast with various preferential policy incentives, including a 50 per cent reduction on corporate income tax for its first 15 years of operation. Such incentives are expected to help it navigate any financial difficulties in its first few years of operation.

Finally, nationalist sentiment could also work in VinFast’s favour. Right from the beginning, it has mobilised such sentiments to connect with potential customers and win the government’s support. As an example, VinFast deliberately held the groundbreaking ceremony for its new complex on September 2, 2017 – Vietnam’s national day.

Its name also appeals to patriotic pride, standing for Vietnam – phong cách (style), an toàn (safety), sáng to (innovation), tiên phong (pioneer), according to the company.

Taken together, the challenges facing VinFast may seem to outweigh the positives. But it can be argued that the group’s emergence remains a positive development for Vietnam’s automotive industry and the country’s ambitions to industrialise as a whole.

If VinFast is successful, it will provide a boost to Vietnam’s GDP and reinvent its automotive industry. The group’s transformation from a real estate developer into a hi-tech manufacturer will also symbolise Vietnam’s evolution from a resource- and labour-based economy into an innovation-led, industrialised one. At the same time, if Vingroup can play a key role in developing the automotive industry, it will reinforce Vietnam’s market-based economic reforms and put private actors at centre stage of the economy.

However, if the group fails both it and the country will suffer. Given Vingroup’s deep roots in Vietnam’s economy, the large amount of debt it has accumulated and the more than 50,000 employees on its payroll, if it gets into trouble, the government will have to provide costly support. More importantly, Vietnam’s ambitions to develop an indigenous automotive industry and boost industrialisation will have taken a hit.

By Le Hong Hiep - The South China Morning Post - January 26, 2019