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Vietnam’s Automobile Market Heating Up
In response to the shortage of domestically assembled cars, auto dealers have resorted to imports. Domestic assemblers, meanwhile, are continuing to expand their investments. These changes in Vietnam’s automobile market stand in stark contrast to those in the global auto industry. According to both experts and consumers, the local car market is posting “torrid” growth.
Figures from the Vietnam Automobile Manufacturers’ Association (VAMA), whose members dominate Vietnam’s auto-making industry, show that its members continued to post soaring sales in October, reaching 11,762 vehicles and up 103% year-on-year. This was the fourth consecutive month in 2009 in which the market explanded. In fact, it saw a record surge in sales in the first 10 months. Apparently, every market segment is heating up. Cars with nine seats and below, including five-seat passenger cars and multi-purpose vehicles with six to nine seats, boasted the greatest jump in sales.
In October, 3,866 five-seat cars were sold, up by 368 units month-on-month. Similarly, consumers purchased 2,617 cars with six to nine seats in the same month, 174 units more than in September.
Most automakers attained rapid growth in the past quarter. According to Ford Vietnam, its third-quarter sales surpassed 2,150 units, twice as many as in the second quarter and over 150% higher than in the same period last year. October 2009 saw one of Ford Vietnam’s most impressive monthly sales figures (over 1,040 cars).
Experts used to predict that high-end cars would be adversely affected by the financial storm. However, reality has shown otherwise. In particular, Mercedes-Benz Vietnam, which produces luxury cars, saw a jump in sales. Over the past 10 months, it managed to sell over 2,450 cars, up 22% year-on-year, which is something of a record in VAMA.
By late October, VAMA’s members had sold 92,136 cars in total, approaching their annual target, set in early 2009, of 110,000 vehicles. Auto imports also escalated. Euro Auto, an importer of BMW cars, forecasts that it will achieve the highest annual sales in its three years in Vietnam.
These results, together with signs of economic recovery and the Government’s new incentive measures, are among the reasons why auto sales are expected to rise substantially in the remaining two months of 2009.
First, the tax and fee incentives applicable to cars and auto parts will be phased out soon, in accordance with a resolution issued by the Government on November 11. The resolution has also ended the speculation on whether the value-added tax (VAT) and registration fees imposed on cars and auto parts would remain in place. Under this decision, after December 31, registration fees for cars in Hanoi and HCM City will return to 12%, up from the current rate of 6%. The rate for other localities will rise from 5% to 10%. Moreover, from January 2010, VAT levied on cars and many other products will climb from 5% to 10%.
VAT and registration fees were slashed on February 1, 2009 to fuel investment and consumption, cushion the economic downturn and alleviate the difficulties faced by enterprises. VAT on cars, in particular, dropped by 50%.
On the other hand, at the end of the year, consumers are likely to lavish money on cars for use in the Lunar New Year. The race to purchase cars will become fiercer, so that consumers can enjoy the benefits of the current tax and fee reductions. Auto production and imports will therefore trail behind demand again. Consequently, sales agencies and distributors can revise up prices, as is currently the case in Hanoi and HCM City, even though the economy has yet to fully get out of the doldrums.
Domestic car assemblers are facing a constant dearth of cars while showrooms have declined new orders for 2009. Herein lies a paradox: buyers want to buy cars soon to save money, but end up paying more due to the shortage of automobiles.
Domestic output and imports are both increasing, but the shortage in the auto market, especially in passenger and multi-purpose vehicles, persists. It is common for consumers to wait or pay more to get their purchase. Products in high demand such as Corolla Altis 1.8 - 2.0, Camry 2010, Fortuner, Vios, Civic, Spark and Lacetti, which are assembled domestically, can only be delivered by February 2010 at the earliest, if orders for these cars are placed now. If consumers want their cars to be delivered immediately, they will have to spend an additional amount ranging from US$2,000 to tens of thousands of dollars, depending on models.
Buyers say that the additional sum of US$2,000-3,000 spent on each Altis 2.0 or Camry in 2009 is equivalent to the drop in the registration fee. In other words, consumers benefit little from the incentives offered by the Government.
Luxury cars penetrate the market
Enticed by bright market prospects, especially for high-end cars, some luxury car producers are trying to expand their share of Vietnam’s auto market.
Volkswagen has officially entered Vietnam by selecting its distributor. From now on, Vietnamese consumers can purchase Volkswagen cars through the official distributor. The automaker has also unveiled their four latest models, currently on the global market, and launched maintenance services that meet its standards in Vietnam.
In particular, New Beetle cars cost over VND1.1 billion apiece. Passat cars, which are medium-sized sedans, are priced at nearly VND1.4 billion. Tiguan, a compact sport utility vehicle (SUV), also fetches over VND1.5 billion and Touareg SUV more than VND2.2 billion.
Previously, Audi, another luxury car brand, expanded its distribution system to Hanoi and launched the Audi A4 2009, priced at nearly VND1.5 billion.
These cars are relatively expensive and will compete ferociously with existing luxury models currently in high demand in Vietnam such as the Toyota Camry or cars produced by Mercedes and BMW. It will be a challenge for newcomers to thrive in the market, but representatives from both automakers are optimistic about the opportunities available in an emerging economy like Vietnam.
The advent of Volkswagen will undoubtedly bring Vietnamese buyers more choices. The automaker can capitalize on consumers’ preferences for new and unique models to profit handsomely.
Euro Auto Corp., the official importer of BMW cars in Vietnam, says it is planning to bolster its market share after three years of operation in Vietnam. In a recent interview with the Saigon Times, Graeme Grieve, vice president, importer markets, BMW Group, said Vietnam was one of the fastest growing economies in the world. “This is an indication of increasing economic potential, which brings with it a growing affluence and purchasing power in the country.”
In October this year, the company launched the new BMW Z4 Roadster, offering a unique driving experience combining outstanding pleasure with distinguished design and supreme sportiness. In mid-2010, it will be launching the BMW X1, which is the first premium product in the compact SAV/SUV segment. “With the BMW X1, we will be establishing a new segment and expanding our product range,” Grieve said.
To achieve further growth, Euro Auto is planning to establish a new facility in Hanoi by 2011. Also, in Hanoi, it will focus on bringing an outstanding retail and after-sale experience to customers. Furthermore, it is considering the growth potential in other upcoming markets such as central Vietnam and the Mekong Delta.
Likewise, Porsche, another producer of luxury cars, has enterred Vietnam’s auto market and will continue to introduce new lines of cars. Apart from bringing more cars to Vietnam, automakers all promise to pour money into sales centers and after-sale services, which will be comparable to those offered by domestic assemblers and producers. This attests to the confidence car importers have in the development of Vietnam’s auto industry.
Producers continue investing
As the market for car imports is increasingly open, with tariffs gradually falling in line with Vietnam’s World Trade Organization (WTO) commitments, experts used to worry that the domestic auto market would be flooded with imported automobiles in the long run. However, this may not be the case as most automakers promise to continue boosting investments in Vietnam.
Thanks to its encouraging business results over the past 10 months, Mercedes-Benz Vietnam says it is moving in the right direction. The company ascribes its success to its thorough grasp of market trends. In particular, when auto sales hit rock bottom, Mercedes-Benz introduced the GLK line into Vietnam, with a US$3.3-million production line.
Udo Loersch, general director of Mercedes-Benz Vietnam, says that GLK, introduced in Vietnam in early June, is a special line of cars and heralds the arrival of a new type of luxury car in the global market. He says that Vietnam is the only country in the world where GLK products are made in the form of CKD cars and that their quality must meet the group’s most stringent standards.
Recently, Mercedes-Benz Vietnam launched E-Class 2009 (E300 Elegance Sedan and E350 Coupe), the newest offering in the E-Class line, which caters to business people and leaders and which has been successful in Vietnam, with over 1,500 cars sold since 2000.
Mercedes-Benz Vietnam has poured US$3.3 million into the production line for E-Class cars. Loersch says that the group has, once again, responded swiftly to changes in Vietnam’s market. He adds that the new E-class cars are well-equipped and have competitive prices.
Meanwhile, in March 2009, Ford Vietnam finished disbursing an additional investment of US$10 million in Vietnam and started operating a new assembly line in Hai Duong. Consequently, its capacity rose by 33% and new quality standards were introduced. The new production line makes use of a robotic system for plastic welding, which is highly precise. This is considered one of the most advanced production lines in Vietnam, and uses the same technology which Ford Motor adopted to produce luxury cars in Europe and North America. The production line is also an important part of Ford Vietnam’s development plan.
David Alden, chairman of Ford in Southeast Asia, says that Ford Motor will continue its long-term investment and expansion plan in Vietnam in particular and Asia Pacific in general.
Ford’s existing production line in Hai Duong is used to assemble Everest multi-purpose vehicles, Escape sports cars, Focus passenger cars and Transit vans. The new system will use robots to perform plasma welding to connect the car body to the roof. Michael Pease, general director of Ford Vietnam, says that the new assembly line will enhance the quality of high-end cars in Vietnam, helping Ford sharpen its competitive edge and reposition itself in the market.
After importing cars into the local market for years, Nissan, Japan’s third biggest automaker, has announced that it plans to sell its first made-in-Vietnam automobiles in 2010. While the details of the product have not been disclosed yet, it will probably be a family car, a line of product in which many local auto assemblers specialize. While Nissan will probably encounter enormous challenges in carrying out this plan, its leaders remain upbeat, claiming that Vietnam’s auto market is full of gaps which newcomers with appropriate business strategies should aim to fill. Besides, the robust growth of the market shows that a few domestic assemblers, with a limited number of products, are incapable of meeting demand.
Flemming Eltang, general director of Nissan Vietnam, says that the country has a strategic auto market with immense opportunities. Assembling cars domestically will help Nissan develop further, especially as the automaker hopes to capture 5.5% of the local market in the next three years.
Likewise, Thanh Cong Group, the sole importer, assembler and distributor of Hyundai passenger cars in Vietnam since June 2009, is stepping up its investment in a Hyundai passenger car assembly plant in the north. The factory, with an investment of over US$60 million, is located in Gian Khau Industrial Park, Ninh Binh Province. Its first phase will come on stream in late 2009, and the first Hyundai passenger cars assembled in Vietnam will enter the market in early 2010.
Le Ngoc Duc, general director of Thanh Cong Group, says that in the first phase, the plant will cover 68ha and has a design capacity of 40,000 units per annum. In the second phase, Thanh Cong plans to increase the localization rate by developing a 300-ha industrial complex where it will call on investors, domestic and foreign alike, to set up plants to produce auto parts.
Hyundai’s products distributed by Thanh Cong include Elantra, Getz, i30, Sonata, Tucson, Santa Fe, Veracruz, EQUUS and Genesis.
No developmentorientation yet
However, experts contend that investments by enterprises remain scattered and only serve immediate needs, instead of catering to long-term plans as is the case in other countries. Producers, distributors and importers have responded to the enticing prospects in Vietnam’s auto market, which has grown despite the current economic turmoil. Furthermore, the unexpected success of seasoned market players has prompted newcomers to swiftly enter Vietnam’s auto industry. Experts say that despite their high prices, cars are still in short supply in Vietnam, which testifies to the brisk demand from Vietnamese.
In addition, Vietnam is forecast to enter a period of robust consumption when it becomes a middle-income country. Thanks to their incomes and savings, Vietnamese can purchase luxury goods such as cars. At present, cars remain extremely costly in Vietnam because of protectionist barriers, especially staggering tariffs. However, the road map for tariff reductions has been determined, and prices should become more reasonable when protectionist measures are obliterated in the long run. In the meantime, imported cars produced by famous brands will stand shoulder to shoulder with locally assembled automobiles.
According to ministries and experts, the problem is that although Vietnam’s auto industry is replete with different models, it still relies on assembly and is still gripped by low localization rates, which do not justify the widespread protection they have received for over a decade. The biggest localization rate, which Toyota Vietnam achieves with its Innova products, is merely 30-35%. The figures for other producers range from 10% to 20%, and the parts produced locally are mostly simple ones.
Enterprises yearn for more tax incentives from the Government so that a strategic line of cars can be developed. However, a representative from the Taxation Policy Department under the Ministry of Finance says that businesses should just join hands with others to develop the products they choose.
This, in turn, has triggered a vicious circle, in which every automaker considers its line of products strategic, the debate rages on and Vietnam’s auto industry is still saddled with shortcomings.
In reality, since 1991, tariffs on completely built-up cars have been enormous (100% for passenger cars). Since 1998, local producers have enjoyed a 60-100% reduction in the special consumption tax for their first five years of operations. The tax break may be extended by one to five years if the automobile manufacturers incur losses.
In retrospect, the taxation policy in 1998-2005 fueled demand for cars with six to 15 seats. Automobiles with six to nine seats have performed the best as they are entitled to low taxes and have diverse functions. Unfortunately, local enterprises have not been able to seize this chance to flourish. Consequently, in this period of integration, when pressure from foreign competitors is mounting, the case for more incentives is no longer persuasive.
The taxation policy aims to offer appropriate protection to local automakers, help them develop a strategic line of cars, pave the way for imports and boost supplies to force local producers to slash prices and enhance quality in the future. Moreover, the policy also seeks to foster consumption, expand the market and make optimal use of taxes and fees.
In particular, in line with WTO commitments, auto tariffs must fall by 70% as of 2014. The import tax on passenger cars with an engine size of 2.5 liters and above will shrink from 90% to 52% as of 2019. The tariff on four-wheel drive vehicles will plunge faster and reach 47% by 2017. To avoid trade fraud, passenger vehicles will be subject to a uniform tariff rate of 47% as of 2017.
Pursuant to CEPT/AFTA commitments, signed with other ASEAN countries, tax reductions will be even more drastic. The tax levied on passenger vehicles with at least 10 seats and on trucks fell to 5% in 2006. Passenger cars with nine seats and below will be exempt from tax in 2018.
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