This document summarizes the automotive industry in Vietnam. It discusses Vietnam's economy and infrastructure challenges. The motorcycle ownership ratio is very high compared to cars due to underdeveloped infrastructure and high taxes. The number of motorcycles is expected to double in the next 15 years. Japanese automakers have been driving development by assembling parts in Vietnam, though costs remain high due to low production volumes. Infrastructure such as roads and parking require improvements to better support the industry. Taxes on automobiles are also very high, making cars unaffordable for most Vietnamese. Overall, opportunities exist for global companies to source parts in Vietnam by establishing local partnerships, but challenges around infrastructure, costs, and taxes remain barriers to the industry's growth.

1. Strategic Management
Lab Assignment
Submitted By-
Shashwat Shankar
(IMB2018017)

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Figure:- Map of Vietnam
Vietnam country profile
Vietnam, a one-party Communist state, has one of south-east Asia's fastest-growing economies and has
set its sights on becoming a developed nation by 2020. It became a unified country once more in 1975
when the armed forces of the Communist north seized the south.
FACTS
President Nguyen Phu Trong
Area 329,247 sq km
Major language Vietnamese
Major religion Buddhism
Life expectancy 73 years (men), 81 years (women)
Currency dong
Population 92 million

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Prime minister Nguyen Xuan Phuc
GDP (PPP) 2019 $769.928 billion
Special Sales Tax 50%
Motorcycle demand forecast (millions) 31.8%
Demographics of Vietnam Cities
Figure:- Population of Vietnam distribution

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The Vietnamese Automotive Industry
Sluggish automobile sales growth in Vietnam does not come as a surprise when the following factors are
considered:
1. Underdeveloped infrastructure
2. High taxes
3. Low per capita income
4. Removal of the pre-owned car ban
The ownership ratio of motorcycles to cars in Vietnam is one of the highest in the world and continues to
rise. The number of motorcycles is expected to double within the next 15 years, according to Vietnam’s
current motorcycle master plan demand forecast.
Figure:- Number of domestic automobiles sold in Vietnam

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Figure:- The market size of Vietnam
Challenges
1. Localization operations have concentrated on producing low-value parts, which reflect the low
production volume of light vehicles and the rather limited number of makes and models being
built. Consequently, the only viable option for the infant Vietnamese automotive industry is to
import CKD kits for assembly.
2. Vietnam currently lacks the capital, experience, and technology to manufacture advanced auto
parts and components locally. Vietnam simply does not currently have the infrastructure
necessary to support a modern automotive industry. Linking supply chain systems is only
compounded by these challenges.
3. The primary operations being localized are welding, painting and attaching bulky items or
low-value parts that are fit for local sourcing, such as tires, batteries and wire harnesses. These
challenges create problems for global OEMs and suppliers in Vietnam that want to locate and
partner with acceptable local suppliers.
4. The lack of raw materials, and the absence of mold and die industry and/or modern machinery
present key challenges in further developing the auto parts support industry in Vietnam.

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Japanese Automakers: The driving force behind Vietnam’s automotive
development
Figure:- Top countries making an investment in Vietnam
Vietnam is an ideal place for skilled, labor-intensive manufacturing; labor costs are low and the
quality of its workforce has been praised by many foreign investors. Because global Japanese
auto parts companies exhibit systematic approaches to manufacturing, which includes built-in
quality systems, Vietnam has increasingly become a popular destination for wire-harness
assembly for Japanese firms. Unfortunately, due to low production volumes, current auto part
production costs in Vietnam remain too high and, thus, less competitive. As economies of scale
cannot be achieved in low-volume manufacturing, auto parts exported from Vietnam to Japan are
primarily labor-intensive parts. Furthermore, the
localization rate is low because most raw materials are imported. For Vietnam to become a more
attractive parts-manufacturing destination for Japanese companies and other global entities, cost
reductions and building an upstream business is required.

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Figure:- Japanese investment in Vietnam
Infrastructure
Vietnam’s infrastructure, despite improvements, is poor and presents considerable obstacles to
automotive supply chain operations. Other significant road infrastructure restrictions:
1. Vietnam’s road system consists of 210,447Km of roads, of which only 3,211Km are
urban roads;
2. Majority of roads are narrow and of low quality;
3. Parking is scarce in urban areas.
4. Hanoi and Ho Chi Minh City have acute shortages of space.
Vietnam has dual minimum wage policies: one for local Vietnamese enterprises and the other for
foreign-investing enterprises. However, a single minimum wage policy is likely to be reached by
2018. The monthly minimum wage for workers in foreign investment enterprises is as follows:
Approx.​ US $54 for unskilled workers in urban districts of Hanoi and Ho Chi Minh City
Approx.​ US $49 in rural districts of Hanoi and Ho Chi Minh City
Approx.​ US $44 for other provinces
There is no minimum salary for local Vietnamese companies (“domestic private enterprises”).
The Ministry of Labour, War Invalid and Social Affairs (MoLISA) plan to set minimum wage
levels for three regions:
1. Region 1 —​ Inner Hanoi and inner Ho Chi Minh City

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2. Region 2 — Suburbs of Hanoi and Ho Chi Minh City, inner Hai Phong, Ha Long (Quang
Ninh Province), Bien Hoa (Dong Nai), Vung Tau (Ba Ria – Vung Tau), Thu Dau Mot
town, Thuan An, Ben Cat, Tan Uyen (Binh Duong Province)
3. Region 3 —​ All other localities
Honda must focus on the cities which are present in Region 1 and Region 2 ​.Moreover, it must
not come up with its premium segments all over, as the nation’s demography suggests that
passenger vehicle sales is almost three times the sales of commercial vehicles. Major cities
include
● Ho Chi Minh City
● Hanoi
● Thu Dau Mot
● Thuan An
● Bien Hoa
Investment Environment in Vietnam: A comparison with other emerging
Asian countries
In Vietnam, the major business risks include:
1. Underdeveloped infrastructure
2. Underdeveloped legal system and problems with legal procedures
3. Underdeveloped or no accumulation of related industries
Despite these risks, Vietnam is viewed favorably when compared with other Asian countries for
the following reasons:
1. Political and social stability
2. Local currency
3. Slowly increasing labour costs

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Figure:-Japanese ranking of investment concerns
Vietnam’s fall in the survey is large because of the complexity of starting a business in Vietnam.
These challenges include:
1. The numerous procedures and time necessary to begin operations
2. The cost of minimum capital requirements
3. Registering property
4. Attaining credit
5. Cross border trading
6. Contract enforcement
Vietnam’s neighbors in the region fared better: Malaysia ranked 25th, and China and Russia
ranked 93rd and 96th respectively. Nevertheless, Vietnam ranked higher than some other
emerging economies, including Brazil (121st) and India (134th).
Taxes
Vietnam has high taxes on luxury goods, especially on automobiles, which make car prices in
Vietnam higher than in many ASEAN and Asian countries. For most Vietnamese, cars are
unaffordable, and, as stated previously, this has restricted the growth of the local automotive
industry. At the same time, taxes applicable to the automotive and auto parts industry are
designed to encourage exports and protect local production.
Conclusion
Opportunities for sourcing are available to global OEMs and suppliers in Vietnam, although it
will require an investment of time and resources in order to identify and select the right partners
and parts to be sourced. A thorough risk assessment will be needed in order to identify or
develop Vietnamese suppliers that have the experience, quality, cost control and ability to
integrate into complex global supply chains. While this may sound difficult for the tepid, for
intrepid Vietnam clearly offers medium-term opportunities. State-owned enterprise and privately
owned automobile manufacturers that plan to establish auto parts operations are potential
partners and Vietnam’s membership of the World Trade Organization and other free trade
associations should help to create additional opportunities for auto parts sourcing.