Automotive Supporting Industry: Opportunities and Challenges

 

In recent years, the Vietnamese mechanical engineering industry in general and the automobile manufacturing and assembling industry in particular has seen certain strong breakthroughs. The profits from the automobile assembling industry have attracted both domestic and foreign firms. According to the Vietnam Motors Industry Corp. (Vinamotor), the assembly of a sedan in Vietnam averagely generates a profit of US$5,000 and the surplus earnings are even higher in other product line-ups.

 

However, Vietnamese mechanical companies fail to grasp opportunities of this super-profit industry. Normally, a car needs from 20,000 to 30,000 parts but the number of parts production companies in Vietnam is too small. According to the Ministry of Industry, the Vietnamese auto industry has merely more than 60 parts suppliers.

 

The demand for auto parts in Vietnam surpasses the supply. Car parts are mainly imported from China, Thailand, Malaysia and Indonesia. Particularly, in 2002, Toyota spent US$150 million to import components for its factory in northern Vinh Phuc Province and the import expenditure reached US$460 million in 2005.Meanwhile, the Japanese carmaker only disbursed US$2.3 million on locally made parts. VMC, which assembles Mazda cars, paid out US$280 million on imported components while it only spent US$1.2 million on local parts, mainly electric wires, tyres and inner tubes.

 

Vietnam only has several car parts producers like the Mechanical Co. 19-8 and INOUE Rubber Co. but they have a few types of products. Many other enterprises are trying to produce more components but they face difficulties in finances and technologies. Hence, foreign firms like Nissan, Dezen and many joint ventures with China and Malaysia arrived in Vietnam to make car parts like metal parts, seats, air-conditioning system and engines.

 

The infant car parts production industry is facing numerous hardships in production and business processes, especially in the process of international economic integration.

 

In a hope of having an actual auto industry, the Government highly protects foreign-led car joint ventures which pledged to raise the locally sourced parts ratio to 30-40 per cent after 10 years in Vietnam. However, very few enterprises can raise the local parts content to nearly 20 per cent.

 

This has resulted from various reasons. Subjectively, foreign-invested car joint ventures are not compulsory to raise the localisation ratio. The policies of the Vietnamese Government have a lot of shortcomings. Domestic parts suppliers do not have prominent products and are unknown to car producers. Further, with poorer technologies and management capacity, Vietnamese products cannot compete with regional ones. The main sources of materials are imported from foreign countries. The financial capacity of Vietnamese enterprises is lower because they are heavily reliant on banks.

 

The soundest solution is that all competent organs and investors join forces to develop the Vietnamese automobile industry. A unified long-term development strategy must be produced to avoid fragmented investment and development in the industry, which is only based on short-termed market demands.

 

However, a general solution, orientation and methodology for the investment and development of the auto parts production should be shortly carried out with the participation of both domestic and foreign investors. Investors need strategic development steps and solutions and join hands with their rivals to coexist in the increasingly competitive market.

According to the Institute for Industrial Strategies and Policies (IPSI) under the Ministry of Industry, Vietnam will have to invest VND18,000 billion (US$1.16 billion) in develop the domestic auto industry from now until 2010.

The manufacturing of parts and accessories is a crucial factor to develop the auto industry but we are still very weak at this. For example, steel to produce cylinders, pistons and shafts is very demanding. However, Vietnam is capable of making construction steel. The production of aluminium, crinite, hard steel ignite plates is much more difficult. The electrolytic paint is also imported.

 

To cope with these difficulties, in my opinion, domestic should further join hands together. We can develop the auto industry from assembly and all other industries are also similar.

 

It is not easy to develop an auto industry because capital is the first necessary condition. An enterprise needs at least VND100 billion (US$6.3 million) and averagely VND200 billion for an auto assembly line. This is too big a sum of money for a State-owned enterprise and even a much bigger sum for a private enterprise. If the requirements are too high, none can be eligible for this industry. As a result, it is unclear for the time Vietnam has an auto industry. The quality and environment standards should be based on the Vietnamese standards. Most enterprises seriously invest in auto production and all their products meet all conditions for traffic. Hence, assembly should be the basis for the development.

 

The most important thing is to give up the idea of making a 100 per cent Vietnamese made automobiles. Vietnam should gradually become a link of the global or regional auto industry. Being a link, Vietnam will be capable of making global quality parts. This is a trend in the global auto industry. Hence, we should stop at the assembly industry and orient to be a link of the world automotive industry. We can make tyres, batteries, canopies or other parts instead of all parts.