VinFast’s Ambitions and Challenges in Vietnam’s Car Market
Joe Black, member operations director at a co-working company in Ho Chi Minh City and a self-proclaimed “electric nut,” has fully embraced the first vehicle launched by VinFast, Vietnam’s most ambitious automobile manufacturer.
He purchased a Klara electric scooter as soon as it went on sale last November. “I really like it,” Black says. “I hate stopping at gas stations, and I like plugging in at night. It’s easy.”
VinFast was created in June 2017 as a wholly-owned subsidiary of Vingroup, Vietnam’s largest private corporation. Helmed by Pham Nhat Vuong, the country’s richest person, in recent years Vingroup has moved well beyond its traditional sectors of real estate and tourism into education, healthcare, retail, big data, smartphone production and, most recently, aviation.
Vingroup has placed a huge bet on VinFast by building the third-largest automobile manufacturing complex in the world on an island off Hai Phong and taking on powerful foreign competitors like Toyota and Honda.
Since Vietnam has almost no history of a native car manufacturing sector, VinFast has relied heavily on foreign expertise, partnering with brands like BMW, Siemens and Bosch to acquire engine and chassis technology, while the firm also bought General Motors’ Vietnam operations. This is the strongest play yet to create a national Vietnamese vehicle brand.
The Klara, along with the Impes and Ludo, two new e-scooters announced on September 12 and aimed at students, may be the most important part of this effort. While the country’s giant motorbike market is almost entirely gas-powered, meaning there is no charging infrastructure for e-scooters, Vingroup’s expansive commercial footprint through its VinMart convenience store chain provides a strong base to remedy this problem.
“In lieu of a charging station system, VinFast plans to establish a system of battery exchange stations,” Le Thi Thu Thuy, the company’s chairwoman, explained in an email. “Alternatively, VinFast will supply batteries to customers. Anytime their power is running low, customers can come to our battery exchange stations located everywhere to exchange for a fully charged battery at an extremely low cost.”
VinFast is currently rolling out such stations in Hanoi and Saigon, with thousands of locations planned by the end of the year.
Meanwhile, the three car models released thus far, all of which are gas-powered, face tough competition and some public skepticism.
Tran Cam Ha, a project manager working in Ho Chi Minh City, may seem like an ideal prospective customer for VinFast.
However, there is one major problem.
“I don’t trust Vietnamese products,” Ha says. “For example, for cars or motorbikes, I like Honda or something made in Thailand.”
Thuy, for her part, remains optimistic: “By the time of the grand opening of our automobile manufacturing plant on June 14, VinFast had received 10,000 purchase orders.”
As for the Klara, she said “tens of thousands” have been sold. These figures cannot be independently verified.
The move into automobile manufacturing
According to a February report from LMC Automotive, the global automotive industry forecasting firm, in 2018 Vietnam produced 253,000 vehicles, while Thailand manufactured 2.14 million and Indonesia built 1.24 million. VinFast hopes to produce 500,000 cars per year by 2025, meaning it would have to single-handedly double the entire country’s output within six years.
While Vietnam has become a manufacturing powerhouse in sectors such as electronics and textiles, it clearly lags far behind regional competitors in the car industry. The Vietnamese government has made changing this reality a prominent goal in the ongoing modernization of the country’s economy, and VinFast has therefore received substantial high-level support.
According to LMC Automotive, VinFast is enjoying a 50% cut in corporate income tax, from 20% to 10%, for 15 years, while employees have received a 50% personal income tax break. On a more visible level, Prime Minister Nguyen Xuan Phuc attended both the public debut of VinFast’s cars in Hanoi last November, as well as the completion ceremony for their factory in June. Such displays of government support for private industry are exceedingly rare in Vietnam.
Le Hong Hiep, a research fellow at the ISEAS-Yusof Ishak Institute in Singapore, says the goals of VinFast and the central government have aligned perfectly.
“They [VinFast] want to be a manufacturing powerhouse, and that has been reflected in their vision to be a technology company by 2028,” he said in a Skype call. “Automobiles are a key industry from which you can build a technological foundation to expand it to other manufacturing areas as well.”
Hiep added: “VinFast will contribute to the government’s goal of industrialization and modernization of the economy. They consider this industry strategic, which Vietnam will need to develop in order to transform its economy in the future. Because of this alignment between VinFast’s interests and industrial goals, the government has been willing to extend as much support as possible…to help them realize their business plans.”
As a result, both Hiep and LMC’s analysts are optimistic about VinFast’s short-term prospects. Assessing the company’s viability on a longer timeline, however, is more difficult, as the car models haven’t been on sale for long and the e-scooter models will likely form the bulk of their business in a country dominated by motorbikes.
“We believe that VinFast will succeed in the domestic market, buoyed by generous supportive measures, but profits will be driven by the Klara e-scooter…particularly as 3.4 million motorbikes were sold in Vietnam last year,” the LMC Automotive report says. “The worst-case scenario would see VinFast emerge as a loss-maker, but even then, Vingroup is likely to turn this to its advantage” by pivoting the expansive manufacturing facilities it has built to other industries.
The fight against foreign competition
Vietnam’s economy expanded by 7.1% in 2018, the fastest rate in over a decade, while the 2017 Wealth Report by Knight Frank found that the country is expected to have the world’s fastest-growing population of ultra-wealthy individuals over the next decade.
This means consumer spending power here is expanding dramatically, though cars still remain too expensive for most people.
Historically, substantial import tariffs kept car prices artificially high, however the ASEAN Free Trade Agreement eliminated fees on automobiles imported from regional member countries (namely Thailand and Indonesia) at the start of 2018.
The Vietnamese government responded with regulations attempting to make importing cars more difficult, an evident effort to support the nascent domestic industry.
According to a paper Hiep published in January, in late 2017 the government issued a decree to “introduce strict requirements for manufacturing, assembling and importing automotive vehicles and providing motor vehicle warranty and maintenance services in Vietnam.”
Another rule put in place three months later stipulated stringent technical and environmental safety inspections on imported vehicles, which frustrated importers for a time. In fact, no cars were imported in the first quarter of 2018, Hiep says.
However, imports have recovered, and then some: from January to August of this year, imported car sales grew by 178% over the same period last year, while sales of vehicles assembled in Vietnam fell by 14%. These figures don’t include VinFast, as they are not part of the Vietnam Automobile Manufacturers’ Association (VAMA).
At the same time, international trade agreements will make it difficult for the Vietnamese government to protect VinFast and other domestic producers too aggressively.
“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,” Hiep adds.
While VinFast claims to have received 10,000 car orders over the last year, this is a small figure compared to established competitors. According to the latest sales data from VAMA, in June, Toyota sold 7,554 vehicles nationwide, a 28.8% increase over the same month last year. Honda, meanwhile, sold 3,001 vehicles in that month.
Meanwhile, in terms of pricing, VinFast isn’t as competitive as may be expected. The Klara comes in two versions based on battery type, with the base model costing nearly USD1,300, somewhat less than a comparable gas-powered Honda motorbike. The Fadil hatchback, meanwhile, retails for USD20,000, more than a similar Honda model listed on the company’s Vietnam website for USD18,000.
The Lux A2.0, a luxury sedan, and the Lux SA2.0, a luxury SUV, both of which began delivery to customers a few weeks ago, start at USD65,000 and USD86,000, respectively. These ranges align with BMW or Mercedes price tags.
The public transit play
Facing strong competition from entrenched car makers like Honda and Toyota, VinFast is also looking to win public trust by providing public transportation, an important angle in major cities where mass transit projects have been hobbled by repeated delays.
On May 2, they announced the creation of VinBus, an electric bus manufacturer.
“The company will operate entirely under the non-profit business model with a view to developing a civilized and modern public transportation system, diminishing air and noise pollution in large urban areas,” Thuy, VinFast’s chairwoman, says. “It is expected that VinBus will kick off its transport services from March 2020, initially in five big cities, including Hanoi, Hai Phong, Da Nang, Ho Chi Minh City and Can Tho.”
The VinBus factory is currently under construction on the same island as VinFast’s car and motorbike plants, with plans to roll out 3,000 electric buses by next year. At this stage, however, it is unclear how these buses will be integrated into existing bus networks, while bus ridership rates are already falling since ride-hailing apps like Grab are seen as a more convenient alternative.
The race is on, then to convert skeptics like Ha, who would prefer to buy from Honda and doesn’t believe in e-scooters yet.
“I don’t think Vietnamese people like electric motorbikes now because it’s not convenient to use it,” she says. “There are more petrol stations than somewhere to charge them.”
