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Home / Industry Report / Auto Parts Industry

AUTO PARTS INDUSTRY 

Progress in automotive localisation (currently only 5-5% per unit assembled) is slow and far below the level of competitiveness required by foreign companies, which have been most active in the Vietnamese automotive industry. 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 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. The lack of capital investment and requisite experience/technology to manufacture components considerably hamper Vietnam’s automotive industry. Coupled with stagnating automobile sales, Vietnam simply does not currently have the infrastructure necessary to support a modern automotive industry. The results are disadvantages in quality, cost and delivery. This prevents local Vietnamese suppliers from building financial resources and investing in capital improvement or management systems.

Linking supply chain systems is only compounded by these challenges. For local Vietnamese suppliers, quality and cost are the two key challenges impacting the lack of economies of scale and the country’s nascent automotive development. The primary operations being localized are welding, painting and attaching bulky items or low-value parts that are fit for local sourcing, such as tires, batteries and wire harnesses.These challenges create problems for global OEMs and suppliers in Vietnam that want to locate and partner with acceptable local suppliers.

Furthermore, the majority of acceptable local suppliers are usually wholly owned subsidiaries or joint ventures; 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, solely to satisfy domestic demand, it is unlikely that cost objectives can be reached due to the lack of economies of scale. If sufficient economies of scale cannot be achieved, auto parts costs in Vietnam are likely to be higher than in other Association of Southeast Asian Nations (ASEAN) countries that produce the same models of cars.

Additionally, the lack of raw materials, and the absence of a mold and die industry and/or modern machinery present key challenges in further developing the auto parts support industry in 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 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 international 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 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 VietnamUS-based Johnson Controls recently set up a plant in Binh Duong with an investment of US $80 million to supply automotive interiors for export markets in Japan and Malaysia, as well as to serve the domestic markets. 

Source: PWC (2007)

 

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