The Case of Vingroup and the Automotive Industry, Study notes of Marketing

Download The Case of Vingroup and the Automotive Industry and more Study notes Marketing in PDF only on Docsity! Vietnam’s Industrialization Ambitions: The Case of Vingroup and the Automotive Industry By Le Hong Hiep EXECUTIVE SUMMARY • Vietnam has officially admitted its failure to achieve industrialized economy status by 2020. This failure is partly due to its inability to grow a strong local manufacturing base and develop key strategic industries. • The participation of Vingroup, the country’s largest private conglomerate, in the automotive industry has sparked new hopes for Vietnam’s industrialization drive. The company, through its subsidiary Vinfast, aims to become a leading automaker in Southeast Asia with an annual capacity of 500,000 units and a localization ratio of 60 per cent by 2025. • Challenges that Vinfast faces include its unproven track record in the industry; the limited size of the national car market; the lack of infrastructure to support car usage in Vietnam; the intense competition from foreign brands; and its initial reliance on imported technologies and know-hows. • However, Vinfast enjoys certain advantages in the domestic market, including the large potential of the Vietnamese automotive market; its freedom as a new automaker to define its business strategies without having to deal with legacy issues; Vingroup’s sound business and financial performance and its ecosystem; strong support from the Vietnamese government; and nationalist sentiments that will encourage certain Vietnamese customers to choose its products. 19-J05102 01 Trends_2019-02.indd 7 16/1/19 12:26 PM • If Vinfast is successful, it will boost Vietnam’s GDP growth and reinvent the country’s automotive industry. Its success will also contribute significantly to the realization of Vietnam’s industrialization ambitions and bring private actors into the centre stage of the economy. If the company fails, however, it will cause considerable problems for both Vingroup and the Vietnamese economy. 19-J05102 01 Trends_2019-02.indd 8 16/1/19 12:26 PM 3 has therefore been one of the strategic industries that Vietnam would like to develop. In 2004, for example, the Vietnamese government considered the auto industry “a very important industry whose development should be prioritized”. In the same vein, in 2007, the government classified the automotive industry as a “spearhead industry” (công nghiệp mũi nhọn).3 In 1991, a joint venture between Japanese and Korean investors and Vietnamese partners called Mekong Auto became the first car manufacturer in post-reform Vietnam. Its factory, completed in 1992, assembled cars under business cooperation contracts with Fiat and Ssangyong. However, it was not until the mid-1990s that Vietnam’s automotive industry began to take clearer shape through joint ventures with foreign manufacturers such as Mitsubishi (1994), Toyota, Isuzu (1995), Ford and Hino (1996) to assemble vehicles under these brands for sale on the domestic market. They were later joined by other companies such as Honda (2005), Mercedes-Benz (2007), and GM (2011). Certain local companies, including Samco and Vinamotor, were also among the early players, but they mainly focused on assembling buses. In 2004, a local company called Vinaxuki was established to manufacture and assemble cars and mini trucks under its own brand name as well as some Chinese brands. It even attempted to develop an indigenous sedan model but this eventually failed due to the lack of technology and capital, as well as poor planning and management. The company ceased operations in 2015. Among the local auto companies, only Thaco (established 1997) and Thanh Cong (established 1999) have so far been successful. While Thaco is currently the largest contract manufacturer, assembler and distributor of automobiles in Vietnam for foreign brands such as Kia, Mazda and Peugeot, Thanh Cong is a large manufacturer, assembler and distributor of Hyundai passenger and commercial cars. However, even though Thaco and Thanh Cong are local companies rather than joint ventures, they 3 “20 Năm qua, DN Sản Xuất Lắp Ráp ô Tô Được ‘Nuông Chiều’ Đến Mức Nào?”, CafeF, 2014 <http://cafef.vn/vi-mo-dau-tu/20-nam-qua-dn-san-xuat-lap- rap-o-to-duoc-nuong-chieu-den-muc-nao-201408090205137633.chn>. 19-J05102 01 Trends_2019-02.indd 3 16/1/19 12:26 PM 4 mainly assemble cars with foreign brands. The added value that these two companies created and their impact on the indigenous automotive industry are therefore insignificant. Even after almost twenty years of development, the automotive market of Vietnam remains very small. According to the Vietnam Automobile Manufacturers’ Association (VAMA), 272,750 cars were sold by its members in Vietnam in 2017. Figure 1 shows the market share of VAMA members in 2016 and 2017. The small size of the Vietnamese automotive market can be explained by several factors. During the 1990s and early 2000s, Vietnam was a rather poor country with low per capita income. As such, most Vietnamese people could not afford cars, and motorbikes therefore became their favoured means of transport. Moreover, during this period, the Vietnamese government virtually suspended the import of motor vehicles. According to Prime Minister’s Decision No. 46/2001/QD-TTg dated 4 April 2001, used parts and used under-16-seater vehicles were prohibited from import; while new under-16-seater ready-made vehicles were only importable if licensed by the Ministry of Trade. Consequently, most automotive vehicles (except for some types of trucks and specialized vehicles) in the domestic market in the period 1991–2005 were sourced through foreign diplomatic missions and international organizations based in Vietnam. Only after the ASEAN Free Trade Agreement (AFTA) became effective for Vietnam and the country joined the WTO in 2007 did Vietnam begin to relax regulations on the importation of new and used cars. However, although quota limitations were removed, import tariffs remained high. Under Vietnam’s WTO commitments, the average tariff on imported cars was gradually reduced but remained at 70 per cent by 2014.4 The high tariffs make cars largely unaffordable to most Vietnamese customers and further constrain the expansion of Vietnam’s automotive market. 4 Tuan Phan and Van Anh Thi Nguyen, “Impacts of the Protection Policy for Vietnam’s Automobile Industry”, 2008, pp. 7–8 <https://mpra.ub.uni-muenchen. de/54067/1/MPRA_paper_54067.pdf>. 19-J05102 01 Trends_2019-02.indd 4 16/1/19 12:26 PM 5 F ig ur e 1: M ar ke t S ha re o f V A M A M em be rs in 2 01 6– 17 N ot e: T he st at is tic s d o no t i nc lu de T ha nh C on g, w hi ch is n ot a V A M A m em be r. So ur ce : V A M A . 36 % 24 % 11 % 5%4% 20 % 20 17 Th ac o To yo ta Fo rd H on da G M V ie tn am O th er s 41 % 21 % 10 % 4%3% 21 % 20 16 Th ac o To yo ta Fo rd H on da G M V ie tn am O th er s 19-J05102 01 Trends_2019-02.indd 5 16/1/19 12:26 PM 8 2018.8 Vuong used to study geology in the Soviet Union. In 1993, Vuong and his friends set up in the Ukraine a company called Technocom, which Vingroup claims as its forerunner. Technocom quickly rose to success in the instant noodle industry and helped Vuong and his business partners accumulate a considerable amount of wealth. In the early 2000s, Vuong and his partners saw great business potential in Vietnam, especially in the real estate sector, and decided to return to the country to establish in 2002 a company that was later known as Vingroup. Vingroup’s main business is real estate development, which currently accounts for most of its revenue and profit. By acquiring large and well- located land lots in major cities and developing projects within a short timeline but with reliable quality, Vingroup has earned a good reputation among homebuyers as well as local government authorities. This enabled the group to quickly expand its real estate business, which now includes residential, commercial, office and hospitality projects. Based on this success, the group has aggressively expanded into other businesses, such as retail, health care, education and agriculture, with the vision of establishing an ecosystem to support its real estate business. By 2017, Vingroup had become Vietnam’s largest private conglomerate by revenue. In 2017, the company recorded VND89.35 trillion (approximately US$4 billion) in revenue and VND5,655 billion (US$254 million) in net profit.9 In a clear shift in its business strategy, Vingroup announced in 2017 that it would enter the automotive industry by setting up Vinfast, a wholly owned subsidiary, to build cars, buses and electric scooters for domestic as well as export markets. In 2018, Vingroup also entered the smartphone industry by setting up a subsidiary called Vinsmart to produce mobile 8 “Pham Nhat Vuong”, Forbes, 2018 <https://www.forbes.com/profile/pham- nhat-vuong/#77a65494382e>. 9 “LNST Năm 2017 Sau Kiểm Toán Của Vingroup Đạt 5.655 Tỷ Đồng, Tăng Trưởng 27%”, CafeF, 2018 <http://s.cafef.vn/vic-257240/lnst-nam-2017-sau- kiem-toan-cua-vingroup-dat-5655-ty-dong-tang-truong-27.chn>. 19-J05102 01 Trends_2019-02.indd 8 16/1/19 12:26 PM 9 devices based on technologies transferred from Spanish hardware firm BQ, of which Vingroup had acquired a 51 per cent stake.10 It also plans to produce smart TV and other home appliances. Vingroup also established VinTech to invest in IT technologies, including artificial intelligence and big data. Based on these strategic shifts, the group announced the goal of transforming itself into a tech company by 2028.11 Whether Vingroup can realize its ambitions remains uncertain, but the implementation of its automotive strategy has so far attracted much public attention and generated substantial debate. It is a huge investment (up to US$3.5 billion) and can be a “maker” or “breaker” of Vingroup’s commercial success in the future. If Vingroup’s automotive business proves successful, it will turn the group into a manufacturing giant and facilitate its expansion into international markets. Moreover, it can also transform Vietnam’s automotive industry in a meaningful way. According to the group’s announcement, it aims to reach a production capacity of 500,000 cars and a localization ratio of 60 per cent by 2025.12 The pace of Vingroup’s implementation of its automotive business strategy has also impressed observers. Within just more than one year after its ground-breaking ceremony in September 2017, Vinfast’s manufacturing complex in Dinh Vu Economic Zone, Hai Phong, was completed and ready for production. With the total area of 335 hectares, it will be the third largest automotive manufacturing complex in the world, after Volkswagen’s complex in Wolfsburg (650 hectares) and 10 Nguyen Thi Bich Ngoc, “Vingroup Acquires 51% of Spanish Hardware Firm BQ to Make Smartphones”, Dealstreetasia, 2018 <https://www.dealstreetasia. com/stories/vingroup-acquires-51-in-spanish-hardware-firm-bq-to-make- smartphones-113548/>. 11 “Vingroup Công Bố Chiến Lược Trở Thành Tập Đoàn Công Nghệ”, VnExpress, 2018 <https://vnexpress.net/kinh-doanh/vingroup-cong-bo-chien-luoc-tro- thanh-tap-doan-cong-nghe-3795859.html>. 12 “ ‘Trận Đánh’ 3,5 Tỷ USD Của Tỷ Phú Phạm Nhật Vượng Được Nhận Xét Như Thế Nào?”, Soha, 2017 <http://soha.vn/tran-danh-35-ty-usd-cua-ty-phu-pham- nhat-vuong-duoc-nhan-xet-nhu-the-nao-20170906135722122.htm>. 19-J05102 01 Trends_2019-02.indd 9 16/1/19 12:26 PM 10 Hyundai Motors’ plant in Ulsan (502 hectares).13 In October 2018, Vinfast’s first two prototypes, a sedan and an SUV, were introduced at the Paris Motor Show. In November 2018, a small car model called Fadil was also unveiled in Hanoi. The company plans to deliver its first cars to customers in 2019, while its electric scooter models under the brand Klara have already been available on the market since November 2018. To accelerate its market participation, Vinfast has relied on partnerships with various foreign companies for designs, manufacturing equipment and components. For example, the designs of its first sedan and SUV models, the Lux A2.0 and Lux SA2.0, were done by Italdesign Giugiaro, while key technologies and manufacturing equipment were sourced from well-known partners, including BMW, Magna Steyr, Bosch, ZF, Siemens, Schuler, FFT, EBZ, Hirotec, ABB, Durr, GROB, Thyssenkrupp, MAG and Eisenmann. In order to achieve its localization ratio of 60 per cent, Vinfast has also worked with international suppliers to set up factories for parts and components in its complex in Hai Phong. In June 2018, Vinfast signed a Memorandum of Understanding (MoU) for a joint venture with Aapico Hitech Plc., one of Thailand’s leading auto parts manufacturers, to build a press shop in its complex to supply Body in White (BIW) parts for Vinfast products. Vinfast plans to have eight parts factories set up in its complex, including four wholly owned by Vinfast, two joint ventures between Vinfast and suppliers, and two wholly owned by suppliers.14 At the same time, the company has also acquired GM’s Vietnamese operations, including its Hanoi plant, dealer network and employee base. Vinfast’s city car model Fadil was licensed from GM. 13 Data from Popular Mechanics, cited in Duc Huy, “Nhà Máy VinFast - Điều Kỳ Lạ Giữa Vùng Biển”, VnExpress, 2018 <https://vnexpress.net/oto-xe-may/nha- may-vinfast-dieu-ky-la-giua-vung-bien-3816387.html>. 14 Bach Moc, “Vingroup Sẽ Dành 30% Diện Tích Tổ Hợp VinFast Thành Lập Khu Nội Địa Hóa”, Vietnambiz, 2018 <https://vietnambiz.vn/vingroup-se-danh- 30-dien-tich-to-hop-vinfast-thanh-lap-khu-noi-dia-hoa-53702.html>. 19-J05102 01 Trends_2019-02.indd 10 16/1/19 12:26 PM 13 buyers in major cities. Although Vietnam’s road system is improving through the participation of private investors under the Public-Private Partnership (PPP) model, Vietnam will need to build more highways within and between cities and reserve more urban spaces for parking facilities if it wants to give a boost to the automotive industry. However, given the government’s budget constraints and the controversies over PPP infrastructure projects, it will likely take a long time for the Vietnamese infrastructure system for cars to be upgraded to levels comparable to those in neighbouring countries, such as Thailand and Malaysia. Competition from imported cars will be another major challenge. Most Vietnamese car buyers would prefer imported cars over domestically produced ones. Even though Vinfast emphasizes its adoption of advanced international standards and the collaboration with world-class partners, certain Vietnamese customers may still hesitate about buying Vinfast products before the company has successfully built up its domestic record. To support Vinfast and domestic automakers, the Vietnamese government may try to adopt certain protectionist measures against imported cars. In fact, in a move designed to deal with the elimination of import tariffs on ASEAN cars, the Vietnamese government issued Decree No. 116/2017/ND-CP dated 17 October 2017 to introduce strict requirements for manufacturing, assembling and importing automotive vehicles and providing motor vehicle warranty and maintenance services in Vietnam. To implement Decree 116, the Ministry of Transport promulgated Circular No. 03/2018/TT-BGTVT three months later to provide for technical and environmental safety inspections of imported automotive vehicles. These two legislations created a lot of obstacles for car importers by increasing their administrative costs and prolonging import procedures, which effectively increased the price of imported cars. However, these measures did not prove to be as efficient as expected. Almost no cars were imported into Vietnam during the first quarter of 2018 due to these new regulations, but the number of imported cars gradually bounced back in subsequent months. Moreover, as Vietnam is now a member of the World Trade Organization and various free trade agreements, introducing protectionist measures, including technical barriers, will likely expose Vietnam to legal troubles and retaliation from other countries. 19-J05102 01 Trends_2019-02.indd 13 16/1/19 12:26 PM 14 Finally, Vinfast will have to invest heavily in R&D capabilities and human resource development to internalize the imported technologies and know-hows. For example, Vinfast’s engine shop was built completely by its contractor on a turnkey basis, and it has to rely on foreign suppliers for most other technologies and know-hows. Vinfast’s technical teams are reportedly rather inexperienced and still unable to master these technologies, leading to their reliance on consultants, especially AVL. Vinfast will also need to work with partners to establish facilities for manufacturing car components and spare parts to achieve the expected localization ratio of 60 per cent. However, certain partners, especially those who are expected by Vinfast to wholly own the facilities, may be hesitant since the success of their investment in a new facility in Vietnam will depend heavily on Vinfast’s future success — something that remains uncertain. It may make business sense that Vinfast, in the initial stage, had to take a short cut by importing most of their technologies, know-hows, parts and components, but in the long run, failing to internalize these resources will cause the company to produce just another type of “Made in Vietnam” cars, and not the type of “Made by Vietnam” cars that the company wishes to develop. Meeting this target, however, will be another significant challenge due to both the large investment needed and the lack of a relevant technological base and of qualified human resources in Vietnam. VINFAST’S OPPORTUNITIES The challenges for Vinfast will be massive, but several factors may yet play in Vinfast’s favour. First, the potential for the Vietnamese automotive market remains ample. Currently, the car ownership ratio in Vietnam is 16 cars/1,000 residents, significant lower than that of Malaysia (341/1,000), Thailand (196/1,000), and Indonesia (55/1,000).18 At the same time, as a country of 18 Data from Solidiance, cited in “Tỉ Lệ Người Việt Sở Hữu ô Tô Vẫn ở Mức Thấp”, Thanh Nien, 2017 <https://xe.thanhnien.vn/thi-truong-xe/ti-le-nguoi- viet-so-huu-o-to-van-o-muc-thap-12561.html>. 19-J05102 01 Trends_2019-02.indd 14 16/1/19 12:26 PM 15 94 million people with young demographics and a fast expanding middle class, Vietnam is a promising market with significant sale opportunities for Vinfast and other automakers if they can cater to the varied demands of local customers. Meanwhile, although it will not be easy for Vinfast to expand internationally before it has built up its track record at home, the success story of rather latecomers on the international automotive market such as KIA and Hyundai suggests that Vinfast does stand a chance if it has the right business strategies to build quality cars with good prices. Second, as a new player in the industry, Vinfast is no doubt facing many difficulties, but at the same time, it also enjoys certain benefits from being a latecomer. For example, the company can adopt new, advanced technological platforms or a forward-looking business strategy right from the beginning without having to deal with legacy issues. The company’s decision to develop e-scooters and electric cars are cases in point. Moreover, although Vingroup has not had a track record in the automotive industry, it has a good track record in other businesses, especially property development, which was what enabled the company to raise funds from financial institutions and win the trust of its partners and suppliers in the first place. Third, the sound business and financial performance of Vingroup over the years provides yet another strong foundation for the company to confidently take up the new challenge. Commenting on whether Vinfast is a risky gamble for Vingroup, President of the Vietnam Automotive Transport Association Nguyen Van Thanh observed that “It’s only risky if Mr Vuong does not have money … But Mr Vuong has money. He is now the richest man in Vietnam — if he does not dare to do the auto business, then nobody does”.19 Although the comment sounds simplistic, it does reflect the popular belief among a large segment of the Vietnamese public that Vingroup is the best-positioned company to lead Vietnam’s efforts in building up an indigenous automotive industry. Apart from having financial resources, the company’s business ecosystem in different 19 “ ‘Trận Đánh’ 3,5 Tỷ USD Của Tỷ Phú Phạm Nhật Vượng Được Nhận Xét Như Thế Nào?”. 19-J05102 01 Trends_2019-02.indd 15 16/1/19 12:26 PM 18 CONCLUSION: VINFAST AND VIETNAM’S INDUSTRIALIZATION PROSPECTS Considered altogether, Vinfast’s challenges seem to outweigh the advantages it enjoys. More importantly, Vinfast’s advantages mainly exist in the domestic market. In the international market, it will have to build up its track record from scratch and compete against established rivals. Nevertheless, it can be argued that the emergence of Vinfast remains a positive development for not only Vietnam’s automotive industry but also its industrialization ambitions. As stated by Vinfast in its introduction:22 By participating in the automotive industry, which generates spillover effects, Vingroup wishes to play a part in the development of Vietnam’s heavy industries and manufacturing base, and contribute to the country’s modernization and industrialization. The Vietnamese government is fully aware of the potential benefits of Vingroup’s participation in the automotive industry. Speaking at the ground-breaking ceremony of Vinfast complex in September 2017, Prime Minister Nguyen Xuan Phuc noted:23 This project is of great significance as it creates 25,000 jobs, leads to the emergence of hundreds of suppliers in supporting industries, and in the future will contribute to government revenue an amount equivalent to the current total inland revenue of Hai Phong City … The start-up of this project is a respectable act of patriotism. 22 Vinfast, “Về Chúng Tôi”, 2018 <https://vinfast.vn/ve-chung-toi.htm>. 23 “ ‘Trận Đánh’ 3,5 Tỷ USD Của Tỷ Phú Phạm Nhật Vượng Được Nhận Xét Như Thế Nào?”. 19-J05102 01 Trends_2019-02.indd 18 16/1/19 12:26 PM 19 It is not a coincidence that the messages of Vinfast and Prime Minister Phuc share nationalistic overtones. For Vingroup, the message underlines its strategy to become a national tech company as well as its marketing tactic to woo domestic customers. For the Vietnamese government, both Vinfast and Vingroup’s transformation into a tech company will bear heavily on the country’s industrialization prospects. At the national level, if Vinfast proves successful, it will provide a significant boost to the country’s GDP growth and reinvent Vietnam’s automotive industry. Meanwhile, the successful transformation of Vingroup into a tech company, in which Vinfast plays a critical role, influence more than just GDP statistics. The group’s transformation from a resource-based real estate developer into an innovation-based high-tech manufacturer, if successful, will symbolize Vietnam’s evolution from a resource- and labour-based economy into an advanced innovation-led and industrialized one. At the same time, Vingroup, a private conglomerate, playing a key role in developing the national automotive industry will further reinforce Vietnam’s market-based economic reforms. The government will accordingly be further incentivized to champion private conglomerates in developing other critical industries. It is too early to speculate about the success of Vingroup’s strategy to become a tech company or about the commercial viability of Vinfast itself. Various challenges, both domestic and international, can obstruct the company from achieving its goals. The group’s past successes provide no guarantee for Vinfast’s prospects, as the automotive industry is a completely different game played on a different field with different players and a different set of rules, in which Vingroup has had no experience. In case Vingroup’s bids falter, not only Vingroup but also the whole economy will suffer. The failure of Vinfast may cost Vingroup more than what it has won over the past two decades. Moreover, given Vingroup’s deep roots in the economy, the large amount of debts that it has accumulated, as well as the more than 50,000 employees on its payroll, should the group land in trouble, the government will need to provide intensive and costly support to sustain it. More importantly, Vietnam’s ambitions to develop an indigenous automotive industry to boost national industrialization will be hard hit. 19-J05102 01 Trends_2019-02.indd 19 16/1/19 12:26 PM