Industries

Automotive

Vietnam’s Automotive
Component Industry:
Ready to go global?*

*connectedthinking
Table of Contents

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

The Vietnamese Automotive Industry . . . . . . . . . . . . . . 3

Japanese Automakers:
The driving force behind Vietnam’s
automotive development . . . . . . . . . . . . . . . . . . . . . . . . 8

Infrastructure
– Transportation . . . . . . . . . . . . . . . . . . . . . . . 11
– Power . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
– Telecommunications . . . . . . . . . . . . . . . . . . 12

Labour Market . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12

The Investment Environment in Vietnam:

A comparison with other emerging Asian countries . . 14

ASEAN Free Trade Area and Common

Effective Preferential Tariff Impact . . . . . . . . . . . . . . . . 16

Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18

Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20

PricewaterhouseCoopers LLP | 
Introduction

Vietnam is the next investment destination for many:

Does this hold true for the automotive and auto parts
industry?

Increasing political and exchange-rate stability, along with promising gross

domestic product growth have catapulted Vietnam to the top of many
investors’ agendas.

On Jan. 11, 2007, Vietnam became the 150th member of the World
Trade Organization, six years after China gained membership. Vietnam’s
acceptance into the WTO validated its global economic viability and left
many people asking, “Is Vietnam the next China?”

Vietnam’s recently transformed and relatively young stock markets

currently offer some of the world’s highest returns, with the market index
skyrocketing from just over 300 points in early 2006 to well beyond 1,000
points by year’s end.

But what does rapid economic growth mean to the domestic automotive
and auto parts industry? Will Vietnam replicate the success China enjoyed
in the automotive industry after joining the WTO?

This study assesses the state of the Vietnamese automotive industry

and identifies the main drivers and key factors to consider with regard to
investing in Vietnam. For
�����������������������������������������������������
the intrepid, Vietnam does offer possible medium
to long-term opportunities. However, the Vietnamese automotive industry is
still in an early developmental stage and significant challenges remain.

 | PricewaterhouseCoopers LLP
The Vietnamese Automotive Industry

The automotive industry in Vietnam is relatively young. Before 1992, most vehicles were procured by the
government and imported from the former USSR and other Eastern-bloc countries.

In 1986, the Vietnamese government initiated a set of policy changes to stimulate and liberalize the
economy, known as the Doimoi (or renovation) policy. While the Communist Party remained in control
of the political system, the government incorporated elements of capitalism, granting auto assembly
licenses to more than 30 regional assemblers. These included state-owned enterprises, local Vietnamese
companies, joint ventures and foreign-owned original equipment manufacturers (OEMs). Complete knock-
down (known as CKD) assembly began in 1995, with Mitsubishi, Toyota and Isuzu becoming some of the
first global OEMs in Vietnam.

A decade later, Japanese auto assemblers have proved there is still a long way to go in order to achieve
economies of scale in automobile production in Vietnam. The table below depicts 2006 actual production
by Japanese auto assemblers.

Table 1: 2006 auto production in Vietnam by Japanese companies

AUTOMOBILE PRODUCTION COMPANIES
Capital Headquarter’s Production
Automaker Company Products Established Production Investment Stake Capacity (3)
Vietindo Daihatsu Automotive
1 Daihatsu Hijet, Citivan, Terios 1995 483 units US $12.3 million 26% 1,800 units
Corporation
medium and heavy-duty
2 Hino Hino Motors Vietnam, Ltd. 1996 645 units US $8.1 million 51% 1,000 units
trucks and buses
3 Honda Honda Vietnam Co., Ltd. (1) Civic 1996 1,651 units (2) US $62.9 million 42% 10,000 units
F-series, N-series,
4 Isuzu Isuzu Vietnam Co., Ltd. 1995 2,428 units US $15 million 35% 10,000 units
Hi-Lander
Lancer, Pajero, Jolie,
5 Mitsubishi 1,080 units 25%
Vina Star Motors Corporation Grandis
1995 US $16 million 5,000 units
Mitsubishi (VSM)
6 Canter 1,389 units 0%
Fuso
Carry, Wagon R+, Vitara,
7 Suzuki Vietnam Suzuki Corporation 1995 1,296 units US $21.7 million 35% 10,000 units
APV
Toyota Motor Vietnam Co., Ltd. Camry, Corolla, Hiace,
8 Toyota 1995 13,976 units US $49.14 million 70% 20,000 units
Land Cruiser, Innova, Vios
(1) Inclusive motorcycle business. (2) Started production in 2006. (3) Capacity figures from VAMA

Source: JAMA (Japan Automobile Manufacturers Association)

In recent years, new automobile sales in Vietnam have slowed. Among the factors affecting sales are:

• Consumer preferences for motor bikes - automobiles are too expensive for many Vietnamese;
• Better and more roads are needed;
• Parking is scarce;
• Tax policy

The table below shows the increase of special sales tax for passenger cars that has increased automobile
prices.

Table 2: Special Sales Tax

Year 2003 2004 2005 2006

Special Sales Tax 5% 24% 40% 50%

PricewaterhouseCoopers LLP | 
In 2006, the government lifted a ban on pre-owned car imports, allowing pre-owned vehicles aged less
than five years into the country. The auto market has also been held back by the state of Vietnamese
infrastructure, particularly the lack of highways and parking facilities.

Recent economic growth has been strong. GDP rose 6.8 percent from 1997 to 2004, 8 percent in 2005
and 8.1 percent in 2006. With this boom
�����������������������������������������������������������������
and stock market development, the local automotive industry
expects to reap significant benefits, but an overall strong economy has not yet translated into automotive
success.

Will the new wave of cheap cars “hit the spot?”

The market for passenger vehicles is already overcrowded with participants, but this has not stemmed
the steady flow of eager entrants. Many automotive companies, like Shanghai Automotive Industry Corp.
(SAIC), expect Vietnam’s WTO membership to result in an economic upturn. SAIC has announced plans to
establish a joint venture with an anticipated capital investment of $50 million.

Seven years ago, low-cost Chinese-made motorcycles took Vietnam by storm, taking substantial market
share from the Japanese market leader. Whether a similar situation will emerge with low-cost Chinese cars
is far from certain: quality perception is important to Vietnamese consumers and low-cost Chinese cars
will likely have to prove their worth by standing the test of time.

Sluggish automobile sales growth in Vietnam does not come as a surprise when the following factors are
considered:

• Underdeveloped infrastructure
• High taxes
• Low per capita income
• Removal of pre-owned car ban

One indication of whether an emerging economy has transformed itself from agriculture-based to
manufacturing-based (or experienced export-led expansion), is the growth of automobile sales compared
with the growth of motorcycle sales.

The ownership ratio of motorcycles to cars in Vietnam is one of the highest in the world and continues to
rise. The number of motorcycles is expected to double within the next 15 years, according to Vietnam’s
current motorcycle master plan demand forecast. By comparison, passenger car ownership levels in
Vietnam are among the lowest in the Asia Pacific region, with 1.5 units per 1,000 people in 2004. This is
an indicator of tremendous untapped market potential.

Table 3: Motorcycles in Vietnam

Year 2000 2005 2010 2015 2020

Population forecast (millions) 77.6 83.1 88.7 94.1 99.4
Motorcycle demand forecast (millions) 6.4 15.2 24.2 28.8 31.8
Average persons per motorcycle 12.2 5.5 3.7 3.3 3.1

Source: Vietnam Development Forum

 | PricewaterhouseCoopers LLP
 Table 4: Auto sales by unit and market share in 2006 and 2005 by VAMA members

  Year 2006 Year 2005 Change

Brand Unit % Unit % Unit %
Toyota 14,784 36% 11,813 30% 2,971 25%
Truong Hai 5,354 13% 4,325 11% 1,029 24%
Ford 3,610 9% 5,040 13% (1,430) -28%
Isuzu 2,344 6% 2,157 5% 187 9%
Vinaxuki 2,393 6% - 2,393
VinaStar (Mitsubishi) 3,398 8% 4,212 11% (814) -19%
Mercedes-Benz Vietnam 1,202 3% 1,683 4% (481) -29%
Visuco (Suzuki) 1,807 4% 3,365 8% (1,558) -46%
Vidamco (GM Daewoo) 1,634 4% 4,198 11% (2,564) -61%
VMC (BMW, Mazda, Kia) 659 2% 1,042 3% (383) -37%
Mekong (Fiat, Ssangyong, PMC) 597 2% 509 1% 88 17%
Hino 613 2% 541 1% 72 13%
Vindaco (Daihatsu) 530 1% 453 1% 77 17%
Vinacomin - Vinacoal 340 1% - 340
SAMCO 478 1% 538 1% (60) -11%
Honda 1,110 3% - 1,110
Total 40,853 100% 39,876 100% 977 2%
Source: Vietnam Automobile Manufacturers’ Association

Figure 1: Automobile sales in Vietnam in 2000-2006

Unit sales % Change

50,000 70%
45,000 60%
40,000 50%
35,000 40%
Unit sales

30,000
30% % change
25,000
20%
20,000
15,000 10%
10,000 0%
5,000 -10%
- -20%
2000 2001 2002 2003 2004 2005 2006

Source: Vietnam Automobile Manufacturers’ Association

Uncertainties about an increase in the special sales tax, the lifting of an import ban on second-hand cars,
the elusive domestic market and consistent infrastructure issues have hindered any significant progress in
the automotive and supporting industries.

PricewaterhouseCoopers LLP | 
The 2006 Vietnam Development Forum’s study on “Building Supporting Industries in Vietnam” found
that progress in automotive localisation (currently only 5-15% per unit assembled) is slow and far below
the level of competitiveness required by Japanese companies, which have been most active in the
Vietnamese automotive industry. Most significantly, the Forum reports that imported parts are still less
costly than locally produced parts, mainly because of economies of scale, and quality.

In addition, localisation operations have concentrated on producing low-value parts, which reflect the
low production volume of light vehicles (see Table 5) and the rather limited number of makes and models
being built. Consequently, the only viable option for the infant Vietnamese automotive industry is to import
CKD kits for assembly. As a result, Vietnam currently lacks the capital, experience and technology to
manufacture advanced auto parts and components locally.

Table 5: ASEAN Member Light Vehicle Capacity and Utilization Forecast

2006 2007 2008 2009 2010 2011 2012 2013 2014

Capacity 606,726 695,955 707,639 704,821 795,718 820,384 823,688 823,694 823,690
Indonesia
Utilization 64.60% 67.20% 76.60% 84.70% 84.30% 83.60% 87.70% 89.30% 89.70%

Capacity 767,000 916,033 1,025,355 1,030,045 1,030,055 1,029,934 1,030,045 1,030,051 1,030,048
Malaysia
Utilization 63.50% 51.50% 49.00% 54.10% 53.70% 54.90% 54.80% 54.50% 55.30%

Capacity 268,075 266,977 238,076 238,078 238,076 238,078 238,080 237,104 238,076
Philippines
Utilization 36.00% 39.30% 51.80% 55.00% 57.40% 59.90% 61.00% 61.30% 61.60%

Capacity 1,426,373 1,596,248 1,712,833 1,838,825 1,838,827 1,838,825 1,831,288 1,838,831 1,838,826
Thailand
Utilization 86.40% 84.10% 82.70% 82.20% 84.00% 87.20% 90.40% 91.30% 91.20%

Capacity 87,938 94,529 94,916 94,532 99,551 99,137 99,546 99,547 99,542
Vietnam
Utilization 47.70% 48.30% 51.40% 52.40% 54.10% 60.20% 63.00% 62.30% 62.60%

Source: PwC Automotive Institute AUTOFACTS Global Automotive Outlook, 2007 Q2 Release. Copyright 2007.
PricewaterhouseCoopers LLP. All rights reserved.

 | PricewaterhouseCoopers LLP
The lack of capital investment and Figure 2: The stages of automotive and auto parts
requisite experience/technology to industry in Vietnam
manufacture components considerably Creativity
hamper Vietnam’s automotive industry.
Coupled with stagnating automobile sales, STAGE FOUR
Technical Full capability in
Vietnam simply does not currently have absorption
STAGE THREE innovation and
product design as
the infrastructure necessary to support a Agglomeration Technology and
global leader
management
modern automotive industry. The results mastered, can
STAGE TWO
are disadvantages in quality, cost and Have supporting produce high- Japan, US, EU
quality goods
delivery. This prevents local Vietnamese STAGE ONE
industries, but still
under foreign South Korea,
suppliers from building financial resources Simple guidance Taiwan
manufacturing
and investing in capital improvement or under foreign
Thailand, Malaysia
management systems. Linking supply chain guidance
systems is only compounded by these Vietnam
challenges.
Source: Kenichi Ohno (VDF & GRIPS) 2004

For local Vietnamese suppliers, quality and Figure 3: Two Causes of High Prices
cost are the two key challenges impacting
the lack of economies of scale and the (1) Market size
No economics
country’s nascent automotive development. of scale
The primary operations being localized Small
market
are welding, painting and attaching bulky
items or low-value parts that are fit for local Low
sourcing, such as tires, batteries and wire High price Vicious Circle production
harnesses (see Wire Harness Case Study). efficiency

These challenges create problems for

global OEMs and suppliers in Vietnam that High parts
cost
want to locate and partner with acceptable High taxes No growth of
local suppliers. Furthermore, the majority and tariffs parts industries
(2) Tax factor
of acceptable local suppliers are usually
wholly owned subsidiaries or joint ventures; Source: Kenichi Ohno Vietnam Development Forum
most automotive parts companies that
have ISO accreditation are also wholly
owned foreign companies or joint ventures.

If auto parts are to be produced locally, Figure 4: Automobile Cost Comparison in 2004
solely to satisfy domestic demand, it is ( Vietnam’s parts = 100 )
unlikely that cost objectives can be reached
due to the lack of economies of scale. If
Tax factor
sufficient economies of scale cannot be 200
achieved, auto parts costs in Vietnam are Domestic taxes
likely to be higher than in other Association 150
Tariff
of Southeast Asian Nations (ASEAN) Parts cost
100
countries that produce the same models of
cars. Additionally, the lack of raw materials, 50
and the absence of a mold and die industry
and/or modern machinery present key 0
challenges in further developing the auto Vietnam Malaysia Thailand Philippines
parts support industry in Vietnam. Parts cost factor

Source: VDF estimate for a typical Japanese car model.

PricewaterhouseCoopers LLP | 
Japanese Automakers: The driving force behind
Vietnam’s automotive development

In Asia, the Japanese have a strong foothold in the automotive industry and are usually pioneers in
establishing external bases for automotive and auto-supporting industries, especially in emerging
countries. In the latest JETRO survey on Japanese companies’ international operations, released in March
2007, Japanese companies predicted that future sales and operating profits would primarily come from
overseas operations, with Asia contributing the highest sales increase of 39 percent.

In terms of business expansion, production of mid- and low-end products is an area in which Japanese
companies prefer to expand overseas at much greater levels than in Japan. This is also the case for the
entire global automotive and auto parts industry.

Table 6: Japanese companies’ expansion plans by industry

No. of Expand business Expand business

companies overseas in Japan
All companies 729 65.4% 52.8%
Chemicals 46 87.0% 58.7%
Food and beverage 49 73.5% 59.2%
Car/car parts/other transportation machinery 56 71.4% 46.4%
Coal and petroleum/plastics/rubber products 30 70.0% 53.3%
General machinery 63 66.7% 38.1%
Textiles/clothing 24 66.7% 50.0%
Electric equipment 39 64.1% 51.3%
Medical products and cosmetics 27 63.0% 55.6%
Precision equipment 40 62.5% 65.0%
Source: JETRO FY2006 Survey of Japanese Firms’ International Operations, March 2007

In the 2006 JETRO survey, China was four times more likely than Vietnam to be a destination for the
manufacturing of mid- to low-end products. However, Vietnam ranked higher than India, and Vietnam’s
ranking in the 2006 survey eclipsed 2005 survey results.

 | PricewaterhouseCoopers LLP
Table 7: Japanese companies’ expansion plans by operations (multiple answers per respondent)

Production Production
Sales operations (mid to low-end products) (high-end products)
2006 % 2006 % 2006 %
Ranking country/region survey changes country/region survey changes country/region survey changes
1 China 56.4% -1.8 China 33.5% -3.1 China 20.5% 5.2
2 United States 27.7% 1.8 Thailand 11.5% -2.7 Thailand 6.5% -0.4
3 Western Europe 19.9% 2.9 Vietnam 8.4% 3.2 United States 6.3% 1.5
4 Thailand 18.0% 0.6 United States 7.8% 3.2 Western Europe 5.7% 2.6
5 India 15.5% 2.3 India 5.7% 3.4 South Korea 2.9% 1.8%

Source: JETRO FY2006 Survey of Japanese Firms’ International Operations, March 2007

While China’s survey score, with regard to production of mid- to low-end products, is diminishing, the
shift is upward for higher-end products. Changes in China’s investment environment, such as rising labour
costs and concerns about reduced refunds on the value-added tax for labour-intensive products, have
influenced the shift. The Vietnamese mid-to-low-end manufacturing sector should benefit from these
trends in China.

In addition to the strong recent economic performances of Vietnam and India, the “China plus one”
strategy (investing in China and another country or region to reduce overdependence on China) seemed to
account for greater interest in the two countries. However, there are critical differences between Vietnam
and India in terms of the types of products Japanese companies produce. Japanese companies in the
iron and steel/non-ferrous metal/metal products industries, as well as those in the foods and beverages
industries, showed more interest in Vietnam, while those producing auto/auto parts, other transportation
machinery demonstrated greater interest in India. How Vietnam’s automotive industry will reflect these
results is yet to be seen.

Rising production and labour costs in Japan are catalysts behind the transfer of production bases for
Japanese companies. In the past three years (and in the next three years), the production base transfer
trend has been (and will be) from Japan to China, Japan to Thailand, and China to Vietnam.

Vietnam is an ideal place for skilled, labour-intensive manufacturing; labour costs are low and the quality
of its workforce has been praised by many foreign investors. Because global Japanese auto parts
companies exhibit systematic approaches to manufacturing, which includes built-in quality systems,
Vietnam has increasingly become a popular destination for wire-harness assembly for Japanese firms.

Unfortunately, due to low production volumes, current auto part production costs in Vietnam remain too
high and, thus, less competitive. As economies of scale cannot be achieved in low-volume manufacturing,
auto parts exported from Vietnam to Japan are primarily labour-intensive parts. Furthermore, the
localisation rate is low because most raw materials are imported. For Vietnam to become a more attractive
parts-manufacturing destination for Japanese companies and other global entities, cost reductions and
building upstream business is required.

Very few Western auto parts suppliers are currently doing business in Vietnam. US-based Johnson
Controls recently set up a plant in Binh Duong with an investment of US $8.0 million to supply automotive
interiors for export markets in Japan and Malaysia, as well as to serve the domestic markets.

PricewaterhouseCoopers LLP | 
Case Study: Wire Harnesses
As most of the raw materials for wire harnesses are imported, the main value-
adding that occurs in Vietnam is labour. Sumitomo Electric Industrial Ltd., Japan’s
largest supplier of wires, cables and optical fibers, is currently targeting Vietnam,
which is the largest automotive wire producer in Southeast Asia. Sumitomo
Electric’s first two wire harness operations in Vietnam, Sumi-Hanel Wiring Systems
and Sumidenso, have sales greater than US $100 million. Sumitomo recently
established another company, the Sumiden Vietnam Automotive Wire Co. Ltd., to
supply copper wire. Sumiden has investment capital of US $100 million and will
employ 8,000 workers, with operations scheduled to begin in mid 2007.

Wire harnesses are the leading automotive part exported from Vietnam. Global
Japanese wire harness companies like Yazaki, Furukawa and Sumitomo have
enjoyed growth and expanded their businesses to meet demand in Japan.
Furukawa, for example, has revised its investment promotion license more than 10
times since 1997 and it has enjoyed eightfold export growth during that time, from
US $12.3 million a year to more than US $100 million a year. Under a company
named CFT Vina Copper Ltd., Furukawa established, operates a joint venture with
CADIVI (a leading cable manufacturer in Vietnam), and Tomen to manufacture
copper rods and drawn wire.

Yazaki has two wire harness plants, in Binh Duong and Hai Phong, and has
enjoyed rapid export driven growth.

Thus, wire harnesses are a likely auto part to be produced in Vietnam for some
time to come, especially because most of the raw material is imported and
its production does not require advanced machinery. Most machinery used in
Vietnam would be considered obsolete by modern standards, and is either a
remnant from former East European socialist countries or second-hand Chinese or
Taiwanese equipment. Because wire harness manufacturing is so labour-intensive,
it is expensive in Japan, where hourly wage rates are substantially higher. Wire
harnesses can also be standalone parts that do not need to be sequenced “just-in-
time” on the production line.

10 | PricewaterhouseCoopers LLP
Infrastructure
Figure 5: Businesses’ problems with Infrastructure

Vietnam’s infrastructure, despite

improvements, is poor and presents
considerable obstacles to automotive supply
chain operations.

Transportation
Vietnam has no major expressways and only
26 percent of the national highways have two
or more lanes. Only 10 percent of the capital
city Hanoi is developed for roads, while in
most global capitals, 25 to 30 percent is
typically dedicated to vehicular traffic.
Source: Investment climate survey (2005), World Bank, feedback from firms
Other significant road infrastructure rating specific infrastructure sectors as either the first or second
restrictions: highest priority for infrastructure improvements.

• Vietnam’s road system consists of

210,447Km of roads, of which only
3,211Km are urban roads;
• Majority of roads are narrow and of
low quality;
Figure 6: Percentage of enterprises that consider the
• Parking is scarce in urban areas. transportation system a constraint for their
Hanoi and Ho Chi Minh City have business in some Asian countries
acute shortages of space.

Source: Vietnam Society of Automotive Engineers

% 30
Underdeveloped infrastructure has been cited
25
as a leading constraint in Vietnam, and when
compared with other industrial and economic 20
factors, transportation ranked high in investor
15
considerations.
10
Vietnam has eight major seaport complexes 5
and the development of deep sea ports is
currently underway. Though the level of ship 0
traffic is lower than other countries in the Malaysia India Thailand Indonesia Philippines Vietnam
region, significant growth is foreseeable and
will help with Vietnam's international trade.
Source: Investment climate surveys in Vietnam, 2005, World Bank

PricewaterhouseCoopers LLP | 11
Power
As Vietnam’s consumer and industry economy grows, the demand for power between 2006-2010
is projected to grow at 16% per year. Between 2011-2015, power growth demand is forecasted to
increase to 11% per year.

Telecommunications
Telephone density is approximately 42% and mobile telecommunications serves as the primary
growth agent. As the use of mobile communication devices continues to increase rapidly, telephone
density will grow and will remain one of the highest density figures in the world. While use of the
Internet is low, every year, several million people in urban areas gain access and Internet Service
Providers have ambitious expansion plans that, include broadband development.

Labour Market

Vietnam’s population was estimated at 83.1 million in July 2005, and it is expected to reach 90
million by 2010, an annual growth rate of 1.6 percent. More than 60 percent of the population is
under 25 years of age and approximately 15.5 percent is considered to be trained or skilled workers
with elementary qualifications or higher.

Vietnamese employees work a maximum of 48-hours per week and have fewer holidays compared
with China and other ASEAN countries. However, a number of businesses, including foreign direct
investment companies, are being encouraged by the government to adopt a 40-hour week. In the
long term, Vietnam may lose its cost advantage in terms of longer working hours.

Yet, labour costs are still relatively low compared with other countries in Asia, including China.

Vietnam has dual minimum wage policies: one for local Vietnamese enterprises and the other for
foreign-investing enterprises. However, a single minimum wage policy is likely to be reached by
2010.

The monthly minimum wage for workers in foreign investing enterprises is as follows:

• Approx. US $54 for unskilled workers in urban districts of Hanoi and Ho Chi Minh City
• Approx. US $49 in rural districts of Hanoi and Ho Chi Minh City
• Approx. US $44 for other provinces

There is no minimum salary for local Vietnames companies (“domestic private enterprises”). The
Ministry of Labour, War Invalid and Social Affairs (MoLISA) plans to set minimum wage levels for
three regions:

Region 1 — Inner Hanoi and inner Ho Chi Minh City

Region 2 — Suburbs of Hanoi and Ho Chi Minh City, inner Hai Phong, Ha Long (Quang
Ninh Province), Bien Hoa (Dong Nai), Vung Tau (Ba Ria – Vung Tau), Thu Dau
Mot town, Thuan An, Ben Cat, Tan Uyen (Binh Duong Province)
Region 3 — All other localities

12 | PricewaterhouseCoopers LLP
Figure 7: Changes in minimum, wages (Monthly Basis)
160

140
135 Rising labour costs
have become a pressing
121
120
110
issue in most emerging
101 countries, with strong
98
100
90 increases seen in China.
86
74 2005 Wages in other ASEAN
US $

80
73 69 2006 countries show upward
60
62
55 trends, but at less
50
advanced rates than in
40 35 China.

20

an
d
es
ia es m ou
) n) ia
ail on pin tna zh gg
ua Ind
Th Ind ilip Vie ng on
Ph Gua ( D
(
ina ina
Ch Ch

Source: JETRO Comparative Survey of the Labour Environment in ASEAN,

China, India, October 2006

Table 8: ASEAN Labour Challenges

Difficulty in recruitment of local staffs (general

Localization of management level employees

Difficulty in recruitment of local staffs (middle

Restrictions on staff dismissal and reduction

Heavy employer burden for pension, social

Labor issues (strikes, labor unions, etc.)
Personal costs of Japanese (expatriate)

Apart from rising

Restrictions on employment of foreign
Difficulty in recruitment of local staffs

labour costs, a
Increase of employee wages

Low rate of worker retention

shortage of engineers
is common in all
officers and staffs

emerging Asian
Other problems
insurance, etc.
and site chiefs
management)

countries. Vietnam is
(engineers)

Unknown
workers)

workers

no exception. Thailand
Total

Valid

faces the most critical

966 942 615 126 367 364 248 299 262 176 72 327 67 37 24
Total 100.0 100.0 65.3 13.4 39.0 38.6 26.3 31.7 27.8 18.7 7.6 34.7 7.1 3.9 2.5 shortage, due to the
897 881 571 121 351 349 226 284 242 157 71 320 65 36 16 rising trend of major
ASEAN Subtotal 100.0 100.0 64.8 13.7 39.8 39.6 25.7 32.2 27.5 17.8 8.1 36.3 7.4 4.1 1.8
C
automotive companies
201 199 123 49 86 106 82 53 26 28 9 86 3 2 2
o
u
Thailand 100.0 100.0 61.8 24.6 43.2 53.3 41.2 26.6 13.1 14.1 4.5 43.2 1.5 1.0 1.0 establishing R&D
n 172 169 85 30 61 64 56 47 52 9 32 45 13 8 3 operations in the
t Malaysia 100.0 100.0 50.3 17.8 36.1 37.9 33.1 27.8 30.8 5.3 18.9 26.6 7.7 4.7 1.7
r country.
y 96 94 58 18 28 26 20 25 3 4 14 31 7 3 2
/ Singapore 100.0 100.0 61.7 19.1 29.8 27.7 21.3 26.6 3.2 4.3 14.9 33.0 7.4 3.2 2.1
a
r 158 155 133 6 58 43 10 67 72 49 9 49 26 10 3
e Indonesia 100.0 100.0 85.8 3.9 37.4 27.7 6.5 43.2 46.5 31.6 5.8 31.6 16.8 6.5 1.9
a
185 181 109 6 69 68 33 59 74 61 2 79 10 9 4
Philippines 100.0 100.0 60.2 3.3 38.1 37.6 18.2 32.6 40.9 33.7 1.1 43.6 5.5 5.0 2.2

85 83 63 12 49 42 25 33 15 6 5 30 6 4 2
Vietnam 100.0 100.0 75.9 14.5 59.0 50.6 50.6 39.8 18.1 7.2 6.0 36.1 7.2 4.8 2.4

69 61 44 5 16 15 22 15 20 19 1 7 2 1 8
India 100.0 100.0 72.1 8.5 26.2 24.6 36.1 24.6 32.8 31.1 1.6 11.5 3.3 1.6 11.6

Source: JETRO report, “Actual Management Conditions of Japanese

Manufacturing Industry in Asia,” released March 2006

PricewaterhouseCoopers LLP | 13
Investment Environment in Vietnam:
A comparison with other emerging Asian countries

Problems with the legal and tax systems and protection of intellectual property rights are perceived to be
major business risks in China. In Vietnam, the major business risks include:

• Underdeveloped infrastructure
• Underdeveloped legal system and problems with legal procedures
• Underdeveloped or no accumulation of related industries

Despite these risks, Vietnam is viewed favorably when compared with other Asian countries for the
following reasons:

• Political and social stability

• Local currency
• Slowly increasing labour costs

Table 9: Japanese companies’ ranking of investment concerns

Underdeveloped legal
system/problems with legal
Ranking Political/social instability Concerns over local currency Underdeveloped infrastructure procedures
1 Philippines 52.5% Indonesia 23.5% India 57.2% China 59.9%
2 Indonesia 50.4% China 20.5% Vietnam 47.9% India 35.3%
3 China 41.3% Thailand 9.1% Philippines 32.2% Vietnam 32.2%
4 Thailand 28.3% Vietnam 8.5% Indonesia 29.8% Indonesia 28.2%
5 India 15.4% Philippines 7.9% China 21.6% Philippines 13.0%
6 Vietnam 9.7% India 6.5% Malaysia 7.8% Malaysia 6.5%
7 Malaysia 3.3% Malaysia 5.3% Thailand 7.4% Thailand 5.9%
8 Singapore 0.8% Singapore 3.3% Singapore 0.0% Singapore 0.0%
Underdeveloped or no
accumulation of related Problems with protection of
Ranking industries intellectual property rights High/increasing labor costs Risks/problems of taxation
1 Vietnam 31.4% China 59.2% Singapore 39.3% China 33.2%
2 Philippines 20.9% India 13.9% China 28.4% India 17.9%
3 India 18.4% Vietnam 11.9% Thailand 20.4% Indonesia 15.5%
4 Indonesia 15.1% Indonesia 9.2% Malaysia 13.9% Vietnam 10.2%
5 Malaysia 12.7% Philippines 9.0% Indonesia 5.5% Thailand 7.6%
6 Thailand 6.2% Thailand 6.2% Vietnam 5.1% Philippines 7.3%
7 China 4.7% Malaysia 4.1% Philippines 4.0% Malaysia 6.5%
8 Singapore 3.7% Singapore 1.6% India 3.5% Singapore 2.0%

Source: JETRO FY2006 Survey of Japanese Firms’ International Operations, March 2007

Compared with China, Vietnam has a superior investment environment with respect to political and
social stability, employee communication and lower foreign exchange risks. However, Vietnam has a less
positive perception regarding local suppliers, infrastructure, and research and engineering skills.

14 | PricewaterhouseCoopers LLP
Table 10: Investment in ASEAN countries and India, compared with China

(China = 0; positive values = superior; negative values = inferior)

ASEAN Thailand Malaysia Singapore Indonesia Philippines Vietnam India

Political and social stability 0.48 0.91 0.85 0.96 -0.23 -0.17 0.74 0.50
Communicativeness of employees 0.42 0.35 0.53 0.88 -0.07 0.63 0.20 0.72
Investment law transparency 0.39 0.69 0.66 0.93 -0.17 0.10 0.07 0.23
Tax system 0.32 0.50 0.62 0.97 -0.35 0.10 0.07 -0.13
Infrastructure 0.07 0.65 0.67 0.96 -0.60 -0.65 -0.75 -0.78
Ease of managing labor 0.34 0.52 0.21 0.85 -0.04 0.17 0.48 0.00
Research and engineering skills -0.14 -0.07 -0.10 0.75 -0.66 -0.35 -0.21 0.33
Local suppliers -0.31 0.28 -0.07 0.22 -0.71 -0.86 -0.85 -0.32
Foreign exchange risks -0.03 0.13 0.30 0.52 -0.68 -0.46 0.28 -0.13
Customs procedures 0.35 0.42 0.64 0.96 -0.14 0.23 -0.07 -0.41
Intellectual property protection 0.23 0.34 0.39 0.94 -0.12 -0.02 -0.07 0.04
Average 0.19 0.43 0.43 0.81 -0.34 -0.12 -0.01 0.04

Source: 2006 JETRO Whitepaper on International Trade and Foreign Direct Investment

According to the World Bank and the International Finance Corporation’s annual Doing Business
2007 Report, out of 175 countries surveyed, Vietnam’s position in “ease of doing business” slipped six
places from a ranking of 98 in 2005 to 104 in 2006.

Vietnam’s fall in the survey is largely because of the complexity of starting a business in Vietnam. These
challenges include:

• The numerous procedures and time necessary to begin operations

• The cost of minimum capital requirements
• Registering property
• Attaining credit
• Cross border trading
• Contract enforcement

Vietnam’s neighbors in the region fared better: Malaysia ranked 25th, and China and Russia ranked
93rd and 96th respectively. Nevertheless, Vietnam ranked higher than some other emerging economies,
including Brazil (121st) and India (134th).

Foreign currency risks in Vietnam are considered much lower than in other countries in Asia, partly
because the Vietnamese Dong has been stable over the past decade. It should be noted, however, that
the Dong is not a freely-convertible currency, and the Vietnamese monetary system has restrictions in the
foreign exchange system.

PricewaterhouseCoopers LLP | 15
 ASEAN Free Trade Area and Common Effective
Preferential Tariff Impact

As a participant in the ASEAN Free Trade Area (AFTA) and Common Effective Preferential Tariff (CEPT)
agreements, Vietnam could position itself as a hub for auto parts supply into ASEAN countries – if the
country utilizes its competitive advantages. Vietnam joined ASEAN in 1995 and has participated in
AFTA since 1996. In 1998, it became a member of Asia-Pacific Economic Cooperation and gained WTO
membership in 2007.

Table 11: Intra- and extra-ASEAN trade by commodity group, 2005 (in US $ millions)

Commodity group Intra-ASEAN Extra-ASEAN Total ASEAN

2-digit HS Total Total Total
code Description Exports Imports trade Exports Imports trade Exports Imports trade

Vehicles,
parts and
87 accessories 5,227 4,006 9,232 9,690 12,819 22,510 14,917 16,825 31,742
Percentage 57% 43% 43% 57% 47% 53%
Source: ASEAN Trade database

Within the ASEAN region, Thailand remains the leading exporter of auto parts to Japan, accounting for
nearly half of all exports from ASEAN, followed by Indonesia and the Philippines, whose respective shares
each account for almost a quarter of total exports. Vietnam currently provides 6 percent of the total auto
parts exports from ASEAN to Japan. Most exported parts are produced by global Japanese parts suppliers
that have established low-cost operations for the purpose of exporting back to Japan. Consequently, local
Vietnamese suppliers or state-owned enterprises are not currently exporting auto parts to Japan.

Table 12: Japan’s import from and export to ASEAN and China by commodity, 2005 (in US $ millions)

Type Category Total ASEAN Brunei Cambodia Indonesia Laos Malaysia Myanmar Philippines Singapore Thailand Vietnam China
Road Motor
Vehicles excl.
Import Cycles 7,777.1 61.0 - - 1.5 - 0.8 - 0.5 0.7 57.4 0.1 10.6
Road Motor
Vehicles excl.
Export Cycles 84,394.5 3,364.5 68.5 6.0 513.3 7.6 792.6 19.8 215.7 896.7 672.6 171.9 1,210.9
Trade balance 76,617.4 3,303.5 68.5 6.0 511.8 7.6 791.8 19.8 215.2 896.0 615.2 171.8 1,200.3
Parts of Road
Motor Vehicles
Import excl. Cycles 3,573.3 584.3 - - 137.3 - 18.6 - 127.6 3.9 259.8 37.1 627.5
Parts of Road
Motor Vehicles
Export excl. Cycles 23,804.9 3,042.0 0.7 0.9 611.8 0.2 589.4 1.1 276.9 98.6 1,412.6 49.7 2,423.5
Trade balance 20,231.5 2,457.7 0.7 0.9 474.5 0.2 570.8 1.1 149.4 94.8 1,152.8 12.5 1,795.9

Source: ASEAN Trade database

16 | PricewaterhouseCoopers LLP
 Figure 8: Japan auto parts import from ASEAN and
China in 2005

ASEAN
584.3 China
US$ Million 627.5
48% US$ Million
52%

Figure 9: Japan auto parts import from ASEAN

countries in 2005
Vietnam
Indonesia
6%
23%

Laos
0%
Malaysia
3%

Myanmar
Thailand 0%
45%

Philippines
22%
Singapore
1%

In 2006, auto parts exports from Vietnam to the United States totaled approximately
US $24 million, accounting for a mere 0.03 percent of all auto parts imported by the
United States. Total ASEAN auto parts exports to the United States totaled US $2.264
billion, accounting for 2.4 percent of the total auto parts imported, while the Chinese
Economic Area showed strong export growth with a market share of more than 9
percent and a total value of US $8.85 billion.

PricewaterhouseCoopers LLP | 17
Taxes

Vietnam has high taxes on luxury goods, especially on automobiles, which make car prices
in Vietnam higher than in many ASEAN and Asian countries. For most Vietnamese, cars are
unaffordable, and, as stated previously, this has restricted the growth of a local automotive industry.
At the same time, taxes applicable to the automotive and auto parts industry are designed to
encourage exports and protect local production. This policy is supported by significant corporate
tax incentives available to newly established companies, particularly to companies located in
investment zones or operating in encouraged sectors. Automotive and auto parts are not included
in the list of encouraged investment sectors, but investment projects in the automotive industry may
be entitled to tax incentives based on other criteria.

Encouraged investment projects are also entitled to import duty exemptions with regard to the
import of fixed assets.

Auto parts imported from ASEAN countries into Vietnam or exported from Vietnam to other
ASEAN countries are subject to an import duty of up to 5 percent if they satisfy ASEAN content
requirements.
Import duty refunds are available for raw materials used for producing goods for export. An
extension of import duty payment is also available to reduce working capital requirements.
Beginning in 2007, import duties based on the CKD scheme have been completely removed. Import
duties for disassembled parts will apply.

Within seven years of accession to the WTO, import duties applicable to completely built units
(CBUs) and parts will be reduced. Import duties on CBUs could be reduced up to 50 percent.
Import duty rates applicable to CBUs have been reduced to 80 percent in 2007, and a 5 percent
sales price reduction is expected. The quota for second-hand CBU imports will also be gradually
removed. WTO valuation principles are now implemented, instead of the arbitrary minimum dutiable
price system. Imported and locally produced CBUs will be subject to the same special sales tax
treatment from 2007. Under the WTO, incentives based on export ratios may be removed. New
incentives based on other criteria would apply.

18 | PricewaterhouseCoopers LLP
The two main positive impacts of Vietnam’s WTO membership on foreign direct investment are:
• Duty reductions – Import duties are considerably reduced for goods used as inputs for
domestic production as well as private and government consumption. In many cases,
import tariff rates on inputs for producing exports and other goods such as machinery and
equipment have been significantly reduced during the WTO negotiation process. Moreover,
exporters are refunded import duties on inputs used for producing exports.
• Liberalization of the services market – Under WTO classification, provision of services
will be divided into four modes:
 . Cross-border (e.g., electronic money transfer services between countries)
2 . Abroad consumption (e.g., tourist services)
3 . Commercial presence (e.g., foreign direct investment in services in Vietnam)
4 . Movement of natural person (e.g., foreigners come and provide services in Vietnam)

Liberalization of the services sector, especially in modes 1 and 4, will affect investment flows
to Vietnam. Initially, the services sub-sectors that were once closed or restricted from foreign
investment (such as distribution, transport, telecommunication, finance, etc.), will be largely
liberalized despite some limited conditions and a transitional period of three to five years.

Vietnam is actually engaged in a multitude of trade covenants. Vietnam is a member of AFTA,

the ASEAN-China Free Trade Association, the ASEAN-Korea Free Trade Association and is in the
process of negotiating free trade agreements with Japan, India, Australia and New Zealand.

Source: Vietnam: A Guide for Business and Investment, Ministry of Planning and Investment of
Vietnam, Foreign Investment Agency - FIA

PricewaterhouseCoopers LLP | 19
Conclusion

Opportunities for sourcing are available to global OEMs and suppliers in Vietnam, although it will require
an investment of time and resources in order to identify and select the right partners and parts to be
sourced. A thorough risk assessment will be needed in order to identify or develop Vietnamese suppliers
that have the experience, quality, cost control and ability to integrate into complex global supply chains.

While this may sound difficult for the tepid, for the intrepid Vietnam clearly offers medium term
opportunities. State-owned enterprise and privately owned automobile manufacturers that plan to
establish auto parts operations are potential partners and Vietnam’s membership of the World Trade
Organization and other free trade associations should help to create additional opportunities for auto parts
sourcing.

Vietnam’s prospects of becoming a global destination for investment by the automotive industry will
increase if several challenges facing the automotive industry can be addressed:

• Introduction of tax and regulatory policies that encourage the rapid growth of a domestic market
for passenger cars would help grow automotive manufacturing, as seen elsewhere, most notably
in China.
• Continued investment in vehicle infrastructure, specifically road and parking construction, will help
create an economy and environment more conducive to vehicle ownership.
• Ideally Vietnam will continue to prepare itself to become a high value added parts destination,
as part of an integrated plan to align Government policies in support of the promotion of hi-tech
industries and to position Vietnam as a clear investment alternative to China.
• Human resources are crucial to the development of the automotive industry. Rising labour cost
for unskilled labour and the shortage of skilled engineers are key challenges which need to be
addressed.

20 | PricewaterhouseCoopers LLP
Contacts General Inquiries

Dinh Thi Quynh Van Harry Wisniewski

Partner Global Automotive Knowledge
PricewaterhouseCoopers Vietnam Ltd.
Tel: + 84 4 825 1215
Management
Tel: + 1 313 394 6366
Email: dinh.quynh.van@vn.pwc.com
Email: harry.j.wisniewski@us.pwc.com

Oranuch Tritrungtusana
Mekong Automotive
PricewaterhouseCoopers Thailand
Tel: +66-2-344-1000
Email: oranuch.tritrungtusana@th.pwc.com

Stephen D’Arcy
Global Automotive Leader
Tel: +1 313 394 6755
Email: stephen.darcy@us.pwc.com

Wilson Liu
Asia Automotive Leader
Tel: +86 10 6505 9738
Email: w.liu@cn.pwc.com

PricewaterhouseCoopers LLP | 21
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