VinFast

Ake Lertsirirungsun & Note Tumrasvin

20 March 2019

Vingroup launch VinFast

VinFast: a new profit‐maker for Vietnamese conglomerate Vingroup?

In a recent paper entitled “Vietnam’s Industrialization Ambitions: The Case of Vingroup and the Automotive Industry,” author Le Hong Hiep, fellow at the ISEAS‐Yusof Ishak Institute in Singapore, gives his perspective on the Vietnamese automotive industry and speculates on the role of new start up VinFast. We expand on these views below.

“Vietnam produced 253k vehicles in 2018, compared to 2.14 mn in Thailand and 1.24 mn in Indonesia”

The Vietnamese government has identified the automotive industry as a key part of its strategy to achieve industrialised economy status. The industry itself, however, lags far behind those in neighbouring countries, in particular Thailand and Indonesia. Last year’s production volumes highlight this point: Vietnam produced 253k vehicles in 2018, compared to 2.14 mn in Thailand and 1.24 mn in Indonesia. In terms of the average localisation ratio for all vehicle types in Vietnam, the paper estimates this at around 7‐10% in 2016.

The small size of the Vietnamese auto market is behind this low output volume and can be explained by 1: low income per capita; and 2: high vehicle prices, due to high tariffs and limited import quotas. In short, 4‐wheelers are beyond the reach of most consumers, while 2‐wheelers not only provide a more affordable mode of personal travel, but also offer a quick‐fix for the lack of parking in many locations.

Two further obstacles to new investment in the auto industry are Vietnam’s state‐controlled economy and the government’s frequent and sudden policy changes. Neighbouring Thailand and Indonesia, on the other hand, benefit from successful auto policies. Thailand has the eco‐car scheme, which supports Sub‐Compact Car exports, while Indonesia’s Low Cost Green Car (LCGC) programme incentivises the production of affordable vehicles to stimulate first‐time‐buyer demand.

To achieve its industrialisation target, the government has thrown its full weight behind Vingroup’s decision to launch Vietnam’s first home‐grown auto brand under the VinFast moniker. Its debut models, the Klara e‐scooter, Fadil Sub‐Compact Car (rebadged Chevrolet Spark), LUX A2.0 (previous‐generation BMW 5 Series) and LUX SA2.0 (previous‐generation BMW X5) all hit the market in 2018.

The government has provided an array of supportive measures, including a 50% cut in corporate income tax (from 20%to 10%) for 15 years, a 50%cut in personal income tax for its employees, and various tax breaks (import custom duty, VAT and SCT), thus putting VinFast at a distinct advantage, particularly in the domestic sales market.

“We believe that VinFast will succeed in the domestic market, buoyed by generous supportive measures”

Le Hong Hiep believes that VinFast will benefit from being a national brand, as well as from Vietnam’s low vehicle density. Our view, however, is that the long‐term potential of this low vehicle density may be overstated. To illustrate, Light Vehicle sales in 2018 totalled 319k units. In 2018‐2028, the market is set to grow by 78%, but this would equate to just 568k units. Cost and economies of scale will therefore be major issues for VinFast, particularly when up against global players like Mazda and Hyundai, both of which have boosted capacity and set up partnerships with local enterprises, namely THACO and Thành Công, respectively.

On the global stage, VinFast is unimpeded by technology legacy issues, thus allowing the flexibility to keep up with worldwide technology trends. Expansion into the global market, however, is still some way off, as the brand’s flagship models, the LUX A2.0 and SA2.0, are based on older BMW technology, which may preclude them from qualifying for the latest emissions norms in some markets and diminish their consumer appeal at the global level.

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 and Fadil Small Car, rather than the LUX A2.0 and SA2.0 –particularly as 3.4 mn motorbikes were sold in Vietnam last year.

The worst case scenario would see VinFast emerge a loss‐maker, but even then, Vingroup is likely to turn this to its advantage. After all, its core business is property development, so in the event that the VinFast venture fizzles out, Vingroup will have acquired a valuable piece of land on which sits a manufacturing complex that could easily be adapted to suit the needs of another of its many businesses, which range from mobile phones to pharmaceuticals, to name but two.