4 January, 2017
“RECOMMENDATIONS TOWARDS DEVELOPMENT OF AUTOMOTIVE SUPPLY CHAIN AND INTEGRATION OF LOCAL COMPANIES BY FDI COMPANIES IN VIETNAM – OUTLOOK ON THE EU VIETNAM FREE TRADE AGREEMENT (EVFTA)
The Vietnamese vehicle market is not one of the biggest in ASEAN. Up to now, the domestic demands were provided with local suppliers, but due to the AFTA tariff elimination in 2018 and the import of vehicle manufactured in ASEAN (Thailand, Indonesia) in a foreseeable future, the development of local industry could be slowed down.
The development of the automotive supply chain in Vietnam implies the expansion of the domestic market and more precisely the increase of the domestic demands and suppliers. The supply chain involves multi-layered suppliers, as thousands of parts are needed to manufacture vehicles.
Since the local industry is composed of smaller businesses, fewer economies of scale are made and it appears more difficult for both local and foreign suppliers to meet the quality/cost/delivery (QCD) requirements. In addition, other requirements such as Research and Development (R&D) are necessary to keep up with the market, the purchasers’ needs and to maintain a continuous growth of sales.
Nevertheless, not all requirements are expected from suppliers, as it depends on their position in the supply chain. Currently, Vietnamese suppliers have to meet QCD requirements but, as they are not always fulfilled, local production still relies on imported parts. The development of local production may not prosper without resolving first the issue of insufficient capability of local suppliers.
Thus, regarding the changes Vietnam is about to face, market policies such as registration tax should be upheld and policies on local production should be clarified. A task force devoted to policies improvement would hasten the process.
Moreover, knowledge of foreign suppliers’ knowledges could benefit local ones and should be promoted through technology assistance and cooperation organization. By sharing foreign expertise with local suppliers, we obtain a win-win solution: foreign suppliers or original equipment manufacturers win in terms of competitiveness and local suppliers win in terms of knowledge.
Outlook on the EVFTA
The EVFTA signed on December 2nd 2015 opens new opportunities for both Vietnamese and European markets. As European companies are among leaders in the automotive industry, Vietnam offers a unique opportunity to extend to a promising market in South East Asia. Indeed, domestic demands are growing and expected to rise from 300,000 to 1,5 million cars sold by 2025. This can be explained by Vietnam’s young population – half is under thirty years old – and constant need of new industrial products. Human resource is one of Vietnam’s great advantages due to its young population and fast-growing middle class.
The most important issues
- Local suppliers are not ready yet to take over the automotive supply chain and still need foreign suppliers to teach them the know-how and to meet with the standard requirements.
- The policies are not conceived to promote local production and should be reviewed to open the market even more before the AFTA enters into force (2018).
- Competition within the ASEAN will shake the local production and it is important for Vietnam to oblige domestic suppliers to meet with strict requirements as to prevent foreign and local demands from turning to foreign suppliers.
For further information, please contact:
Oliver Massmann, Partner, Duane Morris
omassmann@duanemorris.com
