September 13, 2014
– After 2018, what will Vietnam’s status be in ASEAN’s auto industry?
Over the past two years, ASEAN have been mentioned alongside Europe, the U.S., Japan, as well as BRIC countries (Brazil, Russia, India and China) in reports by international car producers. This is because ASEAN will become a free trade area by 2018, with a market demand of 4.7 million cars as of 2020, ranking fourth in the world. In fact, the number of cars sold at present is already significant (3.4 million units, ranking eighth globally), but the attention given to ASEAN remains limited because the market is fragmented and influenced in many aspects by Japanese carmakers. This is likely to change as, in view of ASEAN’s immense potential, car producers based in the U.S., Europe and Korea hope – despite a high price to be paid – to reduce the share of their Japanese counterparts in this market.
Distorting rules of globalization
Daniel Nacass of Mitsubishi says the Japanese carmakers have a firm grip on the Southeast Asian market. True enough, over the past 40 years, Japanese cars have dominated the markets in Indonesia and Thailand. While they do not boast the same beauty and elegance as those made in Europe, they are sufficiently well-equipped to endure harsh weather and poor road quality and sufficiently spacious to accommodate a big family.
Japanese carmakers have also established an extensive network of auto part producers (tier 1 and tier 2). In 2012, Japan accounts for about 80% of the cars sold in ASEAN. This dominance has left a profound influence on the globalization process in ASEAN’s auto industry.
Thailand’s and Indonesia’s success stories and Vietnam’s paradox
The strongest auto industries in ASEAN hinge on important principles.
Their products cater to local markets. Countries such as Thailand and Indonesia, where demand is more than one million cars per annum, channel impressive volumes of funds into production and design in the auto industry. The Philippines and Vietnam, where demand is over 100,000 cars per annum, has extremely small assembly plants. When ASEAN becomes one big, unified market, these small plants may be merged into bigger ones. The challenge for Vietnam, then, is to develop a sufficiently big market to protect its local auto industry.
To slash logistics costs and apply the just-in-time production model, supporting firms must be located near assembly plants. In Thailand, the auto industry is situated in the region around Bangkok. To produce 2.6 million cars per annum, Thailand has developed 16 assembly firms, 709 first-tier supporting firms and over 1,100 second-tier supporting firms. The figures for Indonesia with 12 auto firms and an output of 1.2 millions cars per annum are 166 first-tier firms and 336 second-tier firms. On average, an assembly firm turns out more than 100,000 cars per annum. In contrast, Vietnam needs over 17 assembly firm nationwide to make 100,000 cars. It has few supporting companies (33 first-tier firms and 181 second-tier firms). Consequently, the development of Vietnam’s auto industry leaves much to be desired.
Successful firms pride themselves on high-quality products. An economy dependent on consumer good production is assessed according to four main criteria: product quality, labor costs, and the localization rate and plant efficiency. As a luxury product subject to stringent safety standards, cars must be of good quality and have affordable prices.
According to HIS Standards Store, Thailand and Indonesia attain similar results in terms of these criteria. Thailand fares better in terms of localization while Indonesia has lower labor costs. With the exception of labor costs, Vietnam ranks last across different criteria. Worse still, its product quality is woeful: out of one million parts produced in Vietnam, 200 items fall short of the prescribed standards, much higher than the figures for the Philippines (15), Malaysia (12), as well as Thailand and Indonesia (about five).
Post-2018 changes
With a dynamic economy, a population of about 650 million and a huge appetite for means of transport (57 vehicles per 1,000 people as compared with 284 in Korea and 455 in Japan), ASEAN stands a good chance of developing its auto industry further.
Aware of this opportunity, Indonesia fleshed out a development plan for its auto industry in 2011, aiming to outperform Thailand in the further. The plan depends on two key principles.
Indonesia aims to become the biggest market so as to draw more investment. Given its economic and political stability with expected growth of nearly 6% in 2014 and policies that favor affordable, eco-friendly cars, Indonesia seems to be on the right track. Frost & Sullivan, a market research firm, predicts that Indonesia’s car market will continue to expand by 6.5% to reach 1.31 million cars and surpass Thailand’s where demand continues to drop by 11.7% to 1.175 million in 2014.
Meanwhile, Indonesia seeks to keep labor costs lower than Thailand’s and nurture supporting industries capable of competing with Thai producers in terms of product quality and capacity in order to lure investors from Thailand. Even Toyota is reconsidering its US$60 million investment in Thailand and plans to trim this amount if the political chaos there persists. Some other companies have started to review their investment plans in Thailand, too.
L’Usine Nouvelle, a French magazine, says that Europe’s carmakers, led by Renault, and some supporting firms, are mulling over plans to pour money into Indonesia to penetrate ASEAN’s market.
As for Vietnam, the Ministry of Industry and Trade proposed a plan for the period up to 2025, with a vision on 2035. This strategy was approved by the Prime Minister on July 16, 2014.
This is an important strategy. However, first it should entail concrete action to tackle existing challenges such as the great number of assembly plants relative to the small market size and the scattered location of these factories. Secondly, product quality and efficiency must improve to pave the way for labor skill and technology upgrading. Finally, infrastructure and tax policies also need to be improved, so that the auto industry can become an engine for industrialization.
After 2018, competition will intensify. Vietnam needs to adopt drastic reform if she wants to thrive in ASEAN’s market.
(By Dr. Khuong Quang Dong)