The components and systems supplier segment of the auto industry is facing many challenges because it is still a fledgling industry compared to some of its neighbors like Thailand. At the same time it is providing incredible opportunities and with the right steps, can quickly leapfrog to an advanced/developed industry status with greater contribution to the country’s GDP.
Current manufacturing in the country, caters predominantly to the two wheeler producers and the aftermarket segment of vehicles where the requirements in terms of technology, quality, processes, logistics, management systems, costing etc. are not as demanding as OEMs (Original Equipment Manufacturers) need. Because of the low volumes the many car manufacturers in the country resorted to CKD (Completely Knocked Down) assembly operations and hence do not buy components locally.
Many factors show that this is about to change, and augurs well for the component industry
Govt’s initiative to encourage manufacturing in the country (“Decree 116”), have made the likes of Toyota, Hyundai and others, expand their production operations to make more vehicles within the country.
Volumes of vehicles are expected to surge 30% in 2020 from the 7.5 million two wheelers and 250,000 cars last year. Other economic indicators predict a swell in consumption because of the high population at 93 mn and the poor vehicle density. (16 per 1000 in 2016, compared to 341 in Malaysia and 196 in Thailand), which gives an indication of the potential demand. The average GDP growth rate of 7% (achieved in the maintained in the past years) would of course ensure this potential materializes. Establishment of a new production facility with a planned capacity of 250,000 vehicles by VinFast, the home grown automaker is indicative of the forecasted escalation in demand for vehicles which would translate to demand for local components as well. The statutory local content norms for vehicle manufacturers is another big driver for manufacturing.
Apart from this the industry will look at export opportunities. Many MNC will start looking at Vietnam as a manufacturing base as soon as the skill levels go up and as long as the competitive advantages are retained, like the wiring harness business has already done. It constitutes nearly 50% of automotive exports from Vietnam.
The many big brand multinational suppliers coming into the country on the back of VinFast would obviously bring in the most advanced systems and technology with proven products. It is the other home grown tier 2 suppliers, mainly in the SME sector, those who aspire to manufacture and assemble parts for direct supply to the vehicle manufacturers, who would need to buck up to take advantage of the demand surge.
While local manufacture is being given a boost it has the opportunity to right away go in for the latest advanced technologies and skip some steps in modernization. In fact it has the option to even choose between electric/hybrid or conventional IC (Internal combustion) engine powered vehicles. And it should do that. However sometimes it may be advisable not to invest in very advanced high cost equipment. Volumes in the near future do not warrant high automation. Capital expense planning is very critical to financial success in the cyclical automotive business. In fact not planned prudently it may erode the competitive position of a business. And so a cautious and progressive increase in capital expenditure as the demand picks up is needed.
What will also be rational is to bring in the “appropriate” technology. Those that will foster the competitive position of the country in terms of employment generation, cost, skilling, and of course the competence building of the managerial/supervisory personnel.
Vietnamese labor cost advantage is being noticed by the world in the light of substantial increases in China. The escalating trade war between USA and China could probably create a new trade route, with a lot of value addition taking place in Vietnam. The SME sector must be ready to seize this opportunity
Supplying to the vehicle industry is not something everyone with a manufacturing facility can do. The specifications, standards, process controls, plant certifications required etc. can be daunting for the inexperienced. Those already manufacturing parts for the spares market do have some advantage to get into OEMs. JVs, technology tie-ups, collaborations, are some ways by which up- gradation is possible quickly. Globally experienced advisors can also be of great help and can facilitate industry keep pace with the change.
By V D Umashanker
Contact author at: vdumashanker@gmail.com or LinkedIn profile: https://www.linkedin.com/in/umashanker-v-d-308a5320/