Mazda Engine Plant Baby Step Towards Industry Development

BMI View : The recent consideration by Mazda to develop a car engine plant in Vietnam represents some progress towards the auto industry's development. However, we believe that the Vietnamese government needs to simplify tax policies, boost infrastructure spending and enact attractive FDI policies in order to spur industrial growth. Further, we expect to see ongoing investments from component makers in the future due to the fact that Vietnam has one of the lowest labour costs in the region. While these suppliers may be unable to sell much of their products locally due to the lack of auto production, exporting these components from Vietnam is a viable alternative.

According to the Vietnam Investment Review, Japanese carmaker Mazda Co has approached local Vietnam authorities to recommend a suitable location for an US$600mn engine factory which it intends to develop in Vietnam. Currently Vina-Mazda, a member of Truong Hai Auto Co, assembles Mazda sedans in a factory opened last year. As of now, local assemblers mostly import components and such a plant will be an opportunity to increase local content.

Can Do Much Better
Vietnam- Domestic Vehicle Sales & Production, Units

BMI forecasts production of Vietnamese vehicles to grow at an annual average of 7.2% over the 2013-2016 period, hitting 52,000 units by 2016. Sales on the other hand are forecasted to grow at an annual average of 5.3% from 2013-2016 to hit 100,000 units by 2016. It should be noted that the starting base numbers are low, so such growth rates are expected.

While the materialisation of this project would see Vietnam making progress towards developing its automobile industry, BMI believes much more needs to be done for the industry to experience higher growth rates.

Simplifying Tax Policies: There are currently nine different taxes ranging from registration fee to environmental protection tax imposed on imported cars in Vietnam. BMI has previously highlighted the fact that increased import taxes are making imported cars unaffordable ( see our online piece, August 09, 'Increased Charges Dampen Demand'). We believe that the number of taxes needs to be reduced so as to make the purchase of a car more affordable and less confusing for businesses and consumers.

Investment In Infrastructure: While the Ministry of Industry and Trade (MOIT) has been making efforts to develop the automobile industry, the Ministry of Transport (MOT) and the Ministry of Finance (MOF) are concerned about road congestion and have therefore imposed tariffs on imported cars. Our infrastructure team believes that Vietnam needs greater investment in roads as currently many of her roads are just wide enough for two-wheelers.

While the government needs to make a concerted effort to improve Vietnam's road infrastructure to allay the concerns of MOT and MOF and therefore enable all three ministries to work harmoniously to develop Vietnam's automobile sector, we believe it would be a challenge in the short term due to the lack of credit as well as the banking sector's woes. However, it would be easier in the long term with the reforms the banking sector is currently undergoing, as well as the possibility of getting financing from abroad.

Attractive Investment Policies: We believe that the Vietnamese government needs to offer incentives such as tax breaks to attract more foreign direct investment (FDI) into the country. With investments from global automakers in the country, there can be knowledge sharing as well as a transfer of technology with the local players. Currently, most of the auto production in the country is just assembly of cars and that is insufficient for Vietnam to develop a competency in this sector. With FDI, Vietnam would have the chance to move up the value chain of production.

To be sure, while the fledging auto manufacturing industry takes time to gain traction, we believe the component industry could see more investments in the sector. Vietnam has one of the lowest labour costs in the region making it attractive for component manufacturers to base their production facilities in. While they may be unable to sell much of their products locally due to the lack of auto production, exporting these components from Vietnam is a viable alternative.

This article is tagged to:
Sector: Autos
Geography: Vietnam

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