HANOI UNIVERSITY

FACULTY OF MANAGEMENT AND TOURISM

----------oOo----------

AUTOMOBILE INDUSTRY
IN VIETNAM

Students: Nguyen Hai Dang,

Nguyen Quang Huy, Ngo Phuong Linh,

Dang Phuong Thao

Course: Microeconomics

Tutor: Ms. Le Thu Trang – Tutorial 10

Date: 19 December 2016

 TABLE OF CONTENTS

Table of contents ............................................................................................................. 1

List of figures ................................................................................................................... 2
1. Introduction ......................................................................................................... 3
2. Products ............................................................................................................... 4
3. Supply for cars in Vietnam................................................................................. 6
4. Demand for cars in Vietnam .............................................................................. 9
5. The market as a whole ...................................................................................... 12
6. Recommendation ............................................................................................... 13
7. Conclusion.......................................................................................................... 13
References ...................................................................................................................... 14

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 LIST OF FIGURES

Figure 1: The sales products as of November 2016 ................................................... 6

Figure 2: Automobile manufacturer market share in Viet Nam
as of November, 2016 ................................................................................... 7
Figure 3: Outputs of automobile industries in Viet Nam from 2011 to 2015 .......... 8
Figure 4: Vietnamese traffic as a whole ...................................................................... 9
Figure 5: Car purchased 2013-2014 and 6 months of 2015 ..................................... 10

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1. Introduction
a. About the industry
The automotive industry is a wide range of companies and organizations involved in the
design, development, manufacturing, marketing and selling motor vehicles. It is one of
the world's most important economic sectors by revenue.

In the Southeast Asian region, Thailand and Indonesia currently have a very competitive
automotive industry. However, but this will gradually change. According to president of
Thailand Automobile Institute, Mr. Vichai Jirathiyut, Vietnam’s automobile industry will
enjoy the fastest growth in Southeast Asia in the next 20 years because of rising demand
and help from government (Tuoi Tre News). After many years of slow growth the last
couple of years, Vietnam has seen a significant boom in car sales. The growth of
automobile industry in Vietnam was highly appreciated in the past 3 years because while
the other country has difficult time, Vietnam enjoy great growth 55% from 158,487
vehicle sales in 2014 to 245,409 unit in 2015 (Sundjojo, 2016).
b. Historical briefings
The automotive industry began in the 1890s with a lot of manufacturers that pioneered
the horseless carriage (the early period of automotive manufacturing). For many decades,
the United States led the world in automobile production. In 1929 before the Great
Depression, and the U.S. automobile industry produced over 90% of automobile in
use. After World War II, the U.S. produced about 75% of world's auto production. In
2012, China appeared to be one of the countries which had developed automobile
industry beside America and Japan. The production of China was doubled the U.S, while
Japan ranked at the third place at that time.

In Vietnam, after the reform in 1986, Vietnam auto industry started to develop. In 1991,
Vietnam government introduces foreign funds to develop automobile manufacture and
assemble industry. After 20-year development, Honda, Toyota, Ford, GM, etc. entered
Vietnam through sole proprietorship or joint-investment. They established automobile
assemble enterprises in Vietnam. Meanwhile, Vietnam established domestic auto
enterprises.
c. Interest of industry

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Although taxes for car have increased in recent years, car market still witnessed the
growth of demand at the very first months of 2016. According to a report of
Vietnam Automobile Manufacturers Association (VAMA), the growth of sales of
passenger cars is 24%, commercial vehicles is 40%, and special-purpose vehicles is 50%.
SUV and truck are become popular choice to most Vietnamese. In top 10 selling cars in
Vietnam, Ranger has taken the first place of the chart after a half year. This position used
to belong to Toyota Vios, which is in second place this year. It was followed by Ford
EcoSport, Toyota Fortuner, Mazda CX-5 or MPV Innova, which are also popular SUV.

2. Product
Automobile or car is a four-or-more-wheeled, self-powered motor vehicle used for goods
or passenger transportation. It can be met in typical day in many shapes, sizes and colors.
a. Characteristic of product
 General characteristics:
Automobile-owned ratio in Vietnam was very low in compare to other country in
Southeast Asia and to the world. While only 10% of Vietnamese families owned autos,
53% of Filipino families, 54% on Indonesian families and 93% of Malaysian families do.
In addition, due to the low and stable interest rate, auto credit grew sharply. The
Government also reduced vehicle registration fee, therefore, auto sales increased
significantly. The import tariffs on vehicles imported from ASEAN will be abolished
gradually. Therefore, auto price is expected to decline strongly due to the market
penetration of imported autos from Thailand and Indonesia. Beside of that, Vietnam is
considered as one of the lowest production cost countries. We believe that automobile
supply will be very abundant. Due to the growth of both demand and supply, Vietnam
automobile industry is expected to grow continuously. Although there are many
advantages, Vietnam automobile industry also encounters many challenges. Firstly, the
lack of production incentives means that the automotive sector lags other sectors in
attracting FDI. While leading automobile manufacturers in the world as Toyota, Honda,
Mazda, and Ford increase their investment in Thailand, Indonesia… Vietnam is still a
small producer with negligible output. Secondly, the underdeveloped supplier segment
shares the blames in attracting auto production investment. While the growth rate of this

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sector in Thailand and Indonesia was 12.3% in the period from 2010 to 2013, Vietnam
Did not have any significant change. Therefore, assembling firms depend strongly in
parts imported. Thirdly, undeveloped road network prevent the consumption of
automobile. Because of the undeveloped transport infrastructure, two-wheelers are
preferred than auto.
 Market segments:
Based on main business activities, Vietnam automobile market is divided into two
segments that are manufacturing and distribution. Generally, almost manufacturing firms
has their own distribution system as Truong Hai, TMT, and Toyota… Whereas, almost
distribution firms are agents of venture carmakers as Toyota, Ford… or import and
distribute vehicles of famous automobile makers. HHS (Dongfeng trucks distributor),
SVC (agents of Toyota, Ford, GM…), HAX (agent of Mercedes-Benz Vietnam) are
typical distribution firms.
Based on origin of vehicles, Vietnam automobile market includes two segments that are
Complete Built-Up vehicles (imported vehicles) and Completely Knocked Down vehicles
(domestic vehicles). The preference of imported vehicles was illustrated by the growth of
market share of this segment, which was contributed mainly by luxury cars. INDUSTRY
CHARACTERISTICS 10 According to General Department of Vietnam Customs, in the
first 6 months of 2014, Korea was still the largest imported auto supplier of Vietnam with
7,740 units, 8% lower than the first half of 2013. Vietnam also imported 4,960 units from
Thailand (increase by 50.5%, yoy), 4,630 units from China (increase by 127%, yoy) and
1,430 from Japan (increase by 66%, yoy)

Based on the use of vehicles, Vietnam Automobile market consists of two segments that
are Commercial Vehicles (CV) and Passenger Cars (PC). Commercial Vehicles such as
trucks, buses are used for transporting goods or paid passenger; therefore, it is a very
important segment. Key players in this segment are THACO, Cuu Long (TMT),
Vinaxuki, Isuzu or foreign manufacturers as Dongfeng or SINO. In contrast, recently,
passenger cars such as 4 to 9-seats cars are referred very much. Key players include
Toyota, Ford, Honda KIA, and Mazda…
b. Differentiation

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The automotive industry is becoming more and more competitive. To stay leaders,
vehicle manufacturers and component makers need product differentiation to take
positions on a scale of value and competitive advantage.

Product differentiation refers to brand, size, color, shape, etc. Because of the product
differentiation, the product of each firm is distinguished from the products of other. The
very first way to differentiate the products is having brand name and logo. Automobile
organizations sell their products with several of brand names like Ford, Toyota, Mazda,
etc. They also have unique logos, for example, Lexus’s logo with letter L which was
encased inside an oval while Ford’s logo is Henry Ford’s signature embedded into an
oval. Moreover, the products have a different design to distinguish it from others. It is
easy to see that each automobile brand has their own design, from color, model to
technology, for their products. This distinction help customers connect with brands. This
causes the diversity for the products in car market.

3. Supply for cars in Vietnam

In Viet Nam, the automobile market consists of 3 major product lines: Passenger cars,
Commercial vehicles (trucks and buses), and Special-purpose vehicles. The sales outputs
of each product as of November 2016 are illustrated in the following chart:

12527
3. Special-purpose vehicles

13565
2.2 Buses

76662
2.1 Trucks

90227
2. Commercial vehicles

140921
1. Passenger cars

0 40000 80000 120000 160000

Figure 1: The sales products as of November 2016

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Although there is dozen of a supplier in the market, 74% of the shares are held by three
manufacturer and distributors: Truong Hai Auto Corporation, Toyota Viet Nam, and Ford
Viet Nam. These companies have a high number of domestic assembly plants and a wide
range of localization products. According to Viet Nam Automobile manufacturers’
association (VAMA), Thaco is the leader in the business with 102,500 units sold from
January till November in 2016, followed up by Toyota and Ford with 50,703 and 26,112
units sold consecutively. Despite having very high output prices as well as having their
own segment in the market, the market shares of luxury cars distributors such as Lexus
and Mercedes Benz are relatively small compare to the size the market as a whole.

1% 1% 0%
2% 1%
2% 1% 1% 1% 0%
3% 2%
3%
4%
42%
4%

11%

21%

Thaco Toyota Ford Honda GM Vietnam

Visuco (Suzuki) Isuzu Dothanh Mitsubishi Mercedes-Benz Vietnam

VEAM Hino* Vinamotor SAMCO TCIEV

Lexus Mekong (Fiat, Ssangyong, PMC) SANYANG

Figure 2: Automobile Manufacturer market Share in Viet Nam as of November, 2016

In present, the car industry in Viet Nam is heavily relied on imported accessories and
material. Most manufacturers can only produce about 30% of a car; the remaining parts
are expected to be produced by the parent companies or offshore partners. The factory
will then assemble all the parts to produce a complete car. The following chart presents
the number of production in automobile business over the years in Viet Nam as reported
by The International Organization of Motor Vehicle Manufacturers also known as OICA

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(Organisation Internationale des Constructeurs d’Automobiles). Looking into the details,
we can clearly see that the figures fluctuate a lot over the years. There are two main
reasons contribute to this inconsistency: underdeveloped supporting industries and
inappropriate policies as well as high amount of taxes. Those conditions make car
manufacturer insecure and discourage them to invest more into the business.

60000 40.00%

50000 30.00%

20.00%
40000
10.00%
outputs
30000
0.00% % change
20000
-10.00%

10000 -20.00%

0 -30.00%
2011 2012 2013 2014 2015
Figure 3: Outputs of automobile industries in Viet Nam from 2011 to 2015

There are several factors affect the supply elasticity of automobile industry in Viet Nam.
First, because manufacturers have to import most of a car’s parts, firms cannot change the
production rate quickly enough in response to a change in the price due to restriction
access to costs of production. Furthermore, because they cannot produce most of their car
parts, the cost of production will be relatively high which makes supply even more
inelastic. Finally, due to a large and complex number of taxes and policies, there are
several barriers to enter the industry which will restrict the number of producers. In
conclusion, we can say that car market in Viet Nam has an inelastic supply.
In the coming years, Vietnamese economy is expected to have a stable growth rate
(World Bank). This will lead to a higher income for the long run which is likely to
increase the demand for luxury goods such as cars. Another factor that also increases the
demand for cars is the improvement of infrastructure. Therefore, the demand curve for
car will shift to the right which led to an upward movement along the supply curve of the

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equilibrium point. Furthermore, as a part of ASEAN Free Trade Area commitments as
well as Trans-Pacific Strategic Economic Partnership Agreement, Vietnam will have to
remove all tariffs on imports from ASEAN and other countries in TPP. Consequently, the
number of import cars will increase and make the supply curve to shift to the left in the
following years.

4. Demand for cars in Vietnam

After many years of slow growth and stagnation, the last couple of years have seen a
significant boom in car sales in Vietnam. Having been known for its staggering usage of
motorbikes, Vietnam now appears to be rapidly heading for the age of the automobile.

As mentioned above, Vietnam has a large portion of its population using motorbikes as
means of transportation. However, according to a survey by GlobalWebIndex on behalf
of Ford Motor, about 54% of the participants told that they used their personal cars
regularly (once a week), compare with 50% using motorbikes. The survey also showed
various other means of transportation that Vietnamese people use.

Figure 4: Vietnamese traffic as a whole

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Ignoring the speculation that the price of car is to be reduced in 2018 (due to tax
declination), the national car market keeps on growing as a whole, not leaving only
personal cars. Vietnam Automobile Manufacturers’ Association (VAMA) reported that
their sales of cars after the first 6 months of 2015 are 103.542 units, 57,24% more than in
the same period in 2015. Specifically, passenger cars sales increase by 45%, commercial
cars 75% and SUVs 136%. Likewise, Vietnamese consumers purchased 214,000 cars in
the first nine months of 2016 - a year-on-year leap of 31%. The graph below represents
the car purchases from 2013 to 2014, and the first 6 months of 2015. Although the figures
fluctuated over the years, it highlighted the growth in 2015. The main reason for the
growth is the deduction of registration fee (15% to 10%), import duty (70%) for members
of WTO and 50% for ASEANs.

Figure 5: Car purchased 2013-2014 and 6 months of 2015

Despite that, the price of domestic cars has soared since the beginning of 2016 due to the
Government's adjustment of special consumption taxes on imported automobiles. As a
result, many car dealers increase the price of cars to the public, effectively lower the
demand. When the Government imposes tax on cars, (for example, cars having 2.5L -
3.0L cylinder will be imposed tax from 50% to 55%; 3.0L - 4.0L: 90%, 4.0L - 5.0L:

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110% and 5.0L - 6.0L: 130%; 6.0L and above: 150%) the price is increased, while the
quantity demanded falls, represented by the movement of the demand curve. Tax did not
shift the demand curve, because it increases the price and lower the demand. Therefore, it
is not entirely the factor that creates the automobile boom in Vietnam. The main reason
for the boom is economic growth and stability. After some years of slower economic
growth, the Vietnamese economy is looking stronger again, and Vietnam’s income per
capita is reaching a stage where increasing car ownership is to be expected. This provides
people with the confidence to make the significant investment for a car. Other factors that
make cars a more desirable option are improvements in infrastructure traffic and air
becoming worse due to pollution in cities (making the car a safer and ‘healthier’ option)
and, importantly, the increasing social normalization of car ownership. Having a car is a
must-have in the middle-class, and it represents the social status and a central position of
the owners.

The inelasticity of demand for car relies on many attributes. One of the closest substitutes
for cars is motorbikes. Vietnam has already developed into a country of motorbikes, with
about 45 million units nationwide, and it plays an essential role on everyday life mobility
and the economy of the nation. Secondly, with the popularity of motorbikes, it would
seem like cars remain as a luxury product, and only the middle-class are willing to afford
them. For that reason, when the price of cars rises, it would result in a decrease in
demand. Transportation is Vietnam is regarded as a narrow defined market, because there
are many substitutes for cars, such as motorbikes and public transportations. Finally, cars
are affected by extrinsic factors, namely gasoline. If price of gasoline rises, people will
seek different means to travel. By the time the price falls, people would already have
found better ways that are less consuming than using cars. In short, the car market in
Vietnam is extremely elastic in demand.

It is expected that in the upcoming years, the tariffs on cars are to be reduced, making
way for the appearance of more cars in Vietnam. Furthermore, the rapid economic growth
could also contribute to the rising number of cars. Demand for cars is likely to go up,
along with the increase in income. These prospects can shift the demand curve of cars to

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even further to the right, leading to an upward movement along the supply curve of the
equilibrium point.

5. The market as a whole

a. Equilibrium
According to the previous part, the car market in Viet Nam is extreme elastic in demand
even there is a boom in car sales in Viet Nam in the last 2 years. In general, the car
market in Viet Nam is affected by many factors as high tax, low income, many close
substitutes, etc. that makes the demand in car is always inferior beyond the supply in car.
b. Market structure
Vietnam automobile industry is an oligopoly. The first characteristic of this market is it
has few firm, and in Vietnam Truong Hai Auto Corporation, Toyota Vietnam and Ford
Vietnam are the main manufacturer. One of the greatest barriers to entry in the
automobile industry is the extremely high amount of capital that is required to purchase
physical manufacturing plants, raw materials, as well as to hire and train employees. It
takes a great amount of capital, not only for the manufacturing process but also to keep
up with the latest innovations in order to compete with the industry leaders. Moreover, to
make cars affordable to customers, manufacturing companies have to have ability to
mass-produce. By developing new technologies, manufacturers can improve the quality
of automobiles on the market as well as reduce costs throughout the manufacturing
process. This helps manufacturer achieve economies of scale, which is a significant
barrier.
c. Government intervention
A survey conducted by a market research company as saying that 90 percent of buyers in
Hanoi and Ho Chi Minh City could not afford a car because of the multiple high taxes the
government imposes on each vehicle (Vnexpress). For example, in the U.S., a BMW
760Li fetches $140,000 while the average cost of buying the vehicle in Vietnam is
$318,000, according to Sai Gon Giai Phong (Vnexpress). The taxes and fees including
import tax, special consumption tax, value-added tax, and registration fees. For this
reason, a car in Vietnam is also much more expensive than in its neighboring country,
Thailand. According to Vnexpress, a Suzuki Swift assembled in Vietnam sells for
VND550 million (roughly $26,000) but in Thailand it is sold at only $15,000. These taxes

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make the cost of the cars higher two or three times than original price. These taxes are
applied because Vietnamese infrastructure is developing and traffic congestion is usually
met in big cities. Therefore, the government has this solution to prevent this problem.

6. Recommendations

Basing on the analysis of the automobile business in Viet Nam, in this section, some
recommendations will be listed to help improve the market’s productivity as well as
remove exist obstacles and problems. First of all, even though the Vietnamese
government has targeted car manufacturing as a ‘spearhead industry’, domestically
produced cars have also been subject to a range of frequently changing taxes and fees due
to the need for state revenue as well as concerns about urban congestion. Therefore,
policies maker should pay more attention to address this absurd problem. Secondly,
although the infrastructure is under improvement every year, traffic congestion is not
likely to ease in the upcoming period. One main reason to this problem is that there is
little to none communication between government departments such as the transportation
department and the investment plan department. This leads to an unbalanced between the
number of new buildings and the number of new infrastructures. Finally, government and
organizations should work together to find out a solution to help develop a strong
supporting industry.

7. Conclusion

In conclusion, the automobile market in Vietnam is full of potential of becoming a

leading industry in Vietnam, and it has seen a considerable increase in the demand in
recent years. The willingness to sell from the suppliers also rises, represented by the
number of outputs and imported vehicles. Overall, with the adjustment in taxes and fees,
as well as many improvements by the Government, the industry is expected to soar in the
near future, contributing to Vietnam’s growth in economy and becoming an irreplaceable
means that benefits Vietnamese people substantially.

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