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Vietnam’s VinFast takes the EV battle to Tesla with US push

Written by Nikkei Asia Published on   6 mins read

Will a bold plan for American sales, production, and IPO pay off for the challenger?

VinFast, the auto unit of Vietnam’s biggest conglomerate, has surprised everyone with its sudden moves to establish a foothold in the U.S. electric vehicle (EV) market. Depending on who you ask, the push is either a bold attempt to become the next Tesla, or a quixotic, costly effort that will end in failure.

VinFast unveiled several EVs at CES, the world’s biggest consumer electronics and technology expo, in Las Vegas in January and started taking preorders. Two months later, it said it would begin making EVs in the U.S. in 2024, building a USD 2 billion plant with an annual capacity of 150,000 cars in North Carolina.

Then, earlier this month, the company filed for an initial public offering in the U.S. and revealed plans to seek funding from the U.S. Department of Energy in an apparent effort to raise its name recognition in the world’s second-largest car market. VinFast also said it plans to build a plant in Germany.

Vingroup started as a real estate company in Vietnam in 2001, after Pham Nhat Vuong, the group’s founder and chairman, sold the food processing company he started in Ukraine. Vingroup then diversified into resort development, retailing, education, and hospital management. As a manufacturer, it briefly made smartphones and TVs. The company has a market value of around USD 12.4 billion, which puts it among the largest in the country.

Vingroup announced plans to enter the auto industry in 2017. The company began making internal combustion engine cars in 2019 at a plant in the northern Vietnamese port city of Haiphong.

VinFast was able to begin making cars in just two years, in a country where the auto parts industry is underdeveloped, by focusing on assembly and buying platforms, engines, and other key parts from foreign companies such as BMW, Bosch, and General Motors.

The Vietnamese government is behind Vuong, who has said, “I want to make my car business a success not for my company but for my country.”

Vietnamese President Nguyen Xuan Phuc and other top government and Communist Party officials regularly attend VinFast plant openings and new model launches. The government also began offering tax breaks to buyers of EVs after VinFast released its first EV models late last year.

The close cooperation between the Vietnamese company and the government is reminiscent of the Proton project undertaken by Malaysia in 1983 to create a national car brand. Mahathir Mohamad, who was prime minister at the time, tapped Japan’s Mitsubishi group to help the new automaker grow and turn the auto industry into Malaysia’s main driver of industrialization. Proton later ran into financial trouble and was bailed out by China’s Zhejiang Geely Holding, which is restructuring the company.

What lessons can Vietnam and VinFast draw from Proton? A careful look at recent moves by Vingroup and the Vietnamese government reveals that their goals differ from those of Proton and Malaysia.

At this year’s CES, VinFast said it will cease production of gasoline-powered cars by the end of 2022. That decision is understandable. For a latecomer to the industry like VinFast, focusing on EVs offers a quicker way to become competitive in the global auto market as EVs require far fewer parts than conventional cars.

Still, VinFast sold 36,000 cars in Vietnam last year, putting it in fourth place behind Hyundai Motor, Toyota Motor, and Kia. Its compact Fadil model was the top seller in the domestic market, with sales of 24,000 units. The Fadil is a rebadged Opel Karl, whose factory and sales channels were taken over by VinFast from General Motors when the U.S. automaker pulled out of Vietnam.

But if the company plans to focus on EVs, it makes sense to look to the U.S. and Europe, as it will take a long time for EVs to catch on in Vietnam. The company initially planned to enter Western markets with exports but realized it would not be able to compete unless it produced locally, according to sources close to the company.

VinFast sold 6,728 cars in the domestic market in the first three months of the year, but EVs accounted for less than 10% of the total, with sales of just 505 cars. The company produced more than 30,000 cars last year, but that number will likely fall as it phases out production of conventionally powered cars. The automaker now has an annual capacity of 250,000 units, and its excess capacity is certain to increase.

Thus, the company is not focusing on making cars in Vietnam, let alone building a national car brand.

The Vietnamese government has cut the registration tax for EVs to zero from 10% of the sales price and slashed the consumption tax on EVs from 15% to 3% to encourage drivers to switch to EVs. Since VinFast is the only EV seller in the market, it will certainly benefit from the move. But the government makes no distinction between locally made and imported cars. Thus, the lower rate will also apply to foreign EVs shipped from Japan and South Korea.

Vietnam applies three types of taxes to cars: the consumption tax, the value-added tax, and the registration tax. These apply to all cars, domestic and foreign. Tariffs apply only to imports, but vehicles shipped from Thailand and other ASEAN countries are no longer subject to import duties. As Vietnam has entered into free trade agreements with Japan, Europe, Canada, and Mexico, tariffs on cars from these countries will be slashed from the current 70% to zero by 2030.

Although Vietnam does not discriminate between domestic and overseas carmakers, one Japanese executive in the industry said, “It does not give us an incentive to boost local production.” Nevertheless, foreign vehicles are becoming more popular in Vietnam, which imported a record 160,000 cars last year. Imported cars now account for 40% of all sales, according to Vietnam’s customs office.

The country has opened up to foreign trade in recent years, joining 15 bilateral and multilateral free trade agreements. As a country with a steady trade surplus, it is difficult for Vietnam to adopt a protectionist policy through non-tariff barriers. But the real reason for Hanoi’s lack of interest in protecting its auto sector is that “the Vietnamese government does not see car manufacturing as a key industry,” said Hajime Yamamoto, a senior researcher at the Thai branch of Japan’s Nomura Research Institute.

In that sense, Vietnam is not following Malaysia’s example but rather emulating Australia by boosting exports of competitive products—smartphones, apparel, and agricultural products in the case of Vietnam—in exchange for opening the car market.

What unites Vingroup and Hanoi is their desire to create a global manufacturing brand as a symbol of the country’s industrialization.

But VinFast will face an uphill climb in the U.S. market. “Branding and marketing will be key, as well as broadening its distribution network,” said Daniel Ives, an analyst at U.S. brokerage Wedbush Securities. “It’s an EV arms race, with 100-plus [carmakers] going after the EV market globally, including stalwarts, all chasing Tesla.”

Nearly two decades ago, Honda Motor was ridiculed for its excessive dependence on the North American market. Asked how it would survive stiffer global competition, then-President Takeo Fukui replied, “No carmaker can survive unless it makes money either in North America or its domestic market.” China should now be added to the list, as it has overtaken the U.S. as the world’s biggest auto market.

VinFast excels in none of the key areas Ives mentioned and has yet to make a profit in the U.S., China, or even in its home country. Is its new endeavor a clever move to ride a wave of change in the industry, or foolhardy?

“Vingroup is the mainstay of the Vietnamese economy. If reckless investment hurts its business, we will be in trouble, too,” said an official at a Japanese carmaker.

This article first appeared on Nikkei Asia. It has been republished here as part of 36Kr’s ongoing partnership with Nikkei.


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