Slow auto sales in Vietnam: An opportunity for affordable brands?

Lawson Dixon, an automotive business development professional, said the industry has suffered mainly due to uncertainty in the implementation of policies, such as proposals to increase or decrease registration fees and the mooted introduction of a certificate of entitlement (COE) scheme similar to that in Singapore.

“This uncertainty, coupled with the general economic downturn, has seen new-car sales reduced by around 40 per cent from 2011, to 95,000 units in 2012,” he told Campaign Asia-Pacific.

Dixon was formerly managing director at Y&R Vietnam, as well as CEO and founding shareholder of Chrysler Vietnam and Ducati Vietnam at Indochina Automotive JSC.

According to Matthew Collier, CEO at Y&R Vietnam, other factors that have affected the industry in Vietnam include a growing young population, an emerging middle class, a weakening local currency and a tightening of lending criteria.

He added that the Vietnamese government has tried to slow the purchase of vehicles by taxing them beyond the reach of most of the population. “The obvious downside is that vehicle sales have plummeted by over a third since 2009, which has had a huge impact on the vehicle manufacturers who have a presence in Vietnam,” Collier said.

Another issue is that the country'sroad and parking infrastructure is not ready for large amount of cars. David Smail, chairman and ECD at BBDO Vietnam, noted that there is an extreme shortage of parking in urban areas, meaning most people still have to have drivers for their cars, who can find faraway places to park. “Or they risk parking quite far away," he added. "This is even a problem for motorbikes.”

The good news is that the Vietnamese government this month reduced the registration tax fees to 10 per cent for new cars and 2 per cent for used cars to boost the sector. While the industry is not bullish about this year's outlook, Michel Borelli, managing director at Lowe Vietnam, said it is forecasting new cars sales to grow 8 per cent compared with last year.

Luxury mindset

While it is wait-and-see how the industry will fare this year, BBDO's Smail said the premium end of the car industry is not affected as much. He added that there are plenty of Mercedes, Audis and BMWs in the country, alongside the large Toyota and Lexus SUV varieties.

But the question remains, can members of the emerging middle class, who may have had their eye on an entry-level vehicle, afford it now? Is there an opportunity for affordable cars to enter the market?

In a country like Vietnam, which has the perception of luxury items as the 'tangibalisation of success', can the concept of "affordable" or "economical" cars work?

Dixon noted that affordable cars are being seen increasingly on the roads, with the four-seater Chevrolet Spark Lite starting from US$14,500, while the two-seater Chevrolet Spark Van costs US$11,000.

Import duties, he added, are in fact being reduced slightly every year, in line with WTO commitments, and consumers seem to be comfortable with these tax levels. “It’s been the uncertainly of implementation of policies to do with ownership, particularly in HCMC [Ho Chi Minh City] and Hanoi, along with the general economic malaise, that has driven volumes down,” Dixon said.

Tata Motors, which is known for manufacturing affordable cars, is not marketing its vehicles in the country yet. Suzuki, meanwhile, will be assembling its Swift model in Vietnam this year. Dixon expects the brand to see good success with the model.

“Overall though, ‘cheap’ brands have not been successful in Vietnam, with consumers preferring to stick to well-known brands, particularly with larger investments such as cars or even motorbikes,” he said.

Smail agreed, saying that car buyers in Vietnam are sceptical. “If they're going to invest in a car, they'd still rather go for a more expensive brand than risk being seen in something 'economical', regardless of how much more practical it is––especially when carrying families or given the climate and rain," he said. "I would see an opportunity for something like a Smart, because it's small but does carry some cachet. And it is practical."

Lowe's Borelli said Vietnam has seen several “cheap” car brands fail over the years, with the exceptions being Hyundai and Kia, which are seen as fashionable and stylish, yet affordable. "In fact, 2012 witnessed the most dramatic drop of mainstream car sales, while top luxury brands such as Ferrari, Rolls-Royce, Bugatti and Bentley posted their best sales ever," Borelli said.

Bike industry

While economic factors might have affected the motorbike industry, the effect is not as drastic as on the car industry, which has had a very high tax rate.

“Motorbike brands hold three of the top 10 brands most recognised by Vietnamese,” Y&R’s Collier said. “As public transport is not strong enough to support the local population, specifically in the larger cities, the only way for the general population to get around is primarily by motorbike, so there’s always a necessity for purchase.”

He noted that bikes are as much of a status symbol as cars are in more developed markets. As more young people come into the workforce, he added that they are purchasing and upgrading frequently.

Dixon and BBDO’s Smail believe that Vietnam will continue to be a bike market. There are around 30 million motorbikes on the road in Vietnam, translating into bike ownership of 2.9 per capita. Key brands include Honda, Yamaha and Suzuki.

“So regardless of taxes, unless there was a major shift in the taxation and registration, it will continue to be bikes,” Smail said. “The big shift in motorbikes has been from the geared variety into more gearless scooters, especially in the urban areas. Scooter prices have been steadily rising with new models. But the ‘geared’ bike like the Honda Dream will continue to remain very affordable, especially with Chinese imports.”

Scooters were once regarded as a luxury item, but as there are more models available, their status has slipped somwhat.

Dixon noted that more than 2 million motorbikes are sold every year, making Vietnam the fourth largest bike market in the world, after China, India and Indonesia.

“By comparison, Vietnam has one of the lowest car penetrations in all of Asia, even lesser than Laos or Cambodia,” he said. “Honda is market leader by far in the motorbike market, followed by Yamaha. These brands rely on selling high-volume, low-margin ‘commodity’ scooters," he said.

“At the other end of the spectrum, larger leisure and luxury brands are beginning to make their market entry, with Suzuki testing the market with their Hyabusa and Gladius models, while Harley-Davidson is expected to make a much-anticipated launch sometime this year.”