Develop car loan at Toyota dealers in Vietnam a case study of TFSVN

Definition of the problem  Consumer lending, car loan attributes  Credit risk elements, types of risk  Result analysis: Vietnam automotive industry, Vietnam automotive market, Toyota

NGUYỄN HOÀNG DUY

DEVELOP CAR LOAN AT TOYOTA

NGUYỄN HOÀNG DUY

DEVELOP CAR LOAN AT TOYOTA

This paper could not have been completed without the help, encouragement and support from a number of people who all deserve my sincerest gratitude and appreciation

First of all, I would like to express my special thanks to Dr A Pr Phạm Văn Năng,

my thesis instructor I’m indebted to his inspiration, scholarly supervision and intellectual support throughout the course of writing this graduation paper His continual encouragement, careful reading, critical comments and patient guidance made my work more enjoyable and easier

I would like to thank all my beloved teachers at University of Economics Ho Chi Minh City (UEH), the Post-graduate Faculty for their support and valuable knowledge and experiences during my study at UEH

Special words of thank also go to all my colleagues at Toyota Financial Services Vietnam, Toyota Motor Vietnam, Toyota Authorised Dealers and other interviewees for their willing participation and ideas in the study I greatly appreciate their generosity with their time and efforts in helping me Without them this paper could not have been possible Finally, my deepest gratitude and appreciation go to my family, my friends and my classmates Their love, support and constant encouragement gave me a great deal of strength and determination that help me during the time of writing this paper

Nguyễn Hoàng Duy

In order to complete this dissertation, the author spent time on studying, collecting relevant information, exchanging ideas with experts, working for and

accumulating practical facts from the company’s operation and business I hereby

declare that the submitted work has been done by me, data and findings given in this

thesis is true and correct I agree to any crosscheck about the mentioned information

and the dissertation

Nguyễn Hoàng Duy

INTRODUCTION

CHAPTER 1: OVERVIEW OF CAR LOAN 1

1.1 Consumer loan 1

1.1.1 Consumer loan 1

1.1.2 Personal loan 1

1.2 Car loan 1

1.2.1 Car loan 1

1.2.2 Car loan of Banks 2

1.2.3 Common car loan attributes 2

1.3 CAMPARI Model – The Risk management model of Car loan 5

1.4 Credit risk 7

1.5 Overdue debt 8

CHAPTER 2: CAR LOAN AT TOYOTA DEALERS & TFSVN 10

2.1 Overview of Vietnam’s economy in recent years 10

2.1.1 The economic growth 10

2.1.2 GDP per capita 11

2.1.3 Stabilizing the Macro-economy 11

2.2 Overview of Credit institutions in Vietnam 14

2.2.1 Overview of the forms of credit institutions 14

2.2.2 Reform of Vietnam’s banking system 15

2.2.2.1 Overview 15

2.2.2.2 Prospects 16

2.2.2.3 Needs for and potentials of consumer finance 17

2.3 Vietnam automotive industry 18

2.3.1 Development of automotive industry 18

2.3.2 Vietnam’s master plan of the automotive industry 19

2.4 Toyota Motor Vietnam 23

2.4.1 Introduction 23

2.4.2 Toyota dealer network 24

2.5 Automotive market & Toyota sales in Vietnam 26

2.5.1 Car model purchase in 2009 26

2.5.2 Toyota sales in the world 28

2.5.3 Toyota sales in Vietnam 30

2.5.3.1 Toyota market share in Vietnam 30

2.5.3.2 Toyota sales from Jan to Jun 2010 33

2.5.4 Toyota customer profile 34

2.6 Toyota Financial Services Vietnam (TFSVN) 35

2.6.1 Information on TFSVN 35

2.6.1.1 Incorporation of TFSVN 35

2.6.1.2 Organizational structure 36

2.6.1.3 Legal status 36

2.6.1.4 Legal framework 37

2.6.1.5 Objectives and Scope of business 38

2.6.1.6 TFSVN’s car loan products 39

2.6.1.7 TFSVN’s SWOTs 41

2.6.1.8 Car loan comparison among Banks and TFSVN 41

2.6.2 Car loan at Toyota dealers 44

2.6.2.1 Growing proportion of car loan in Toyota sales 44

2.6.2.2 Car loan sales 46

2.6.2.3 Car loan to individual 48

2.6.2.4 Individual car loan by Bank types and TFSVN 49

2.6.3.4 Short-term capital for medium to long term lending 55

2.6.4 Loan classification and Provision 55

CHAPTER 3: RECOMMENDATIONS FOR TFSVN 57

3.1 TFSVN’s Credit risk management 57

3.1.1 TFSVN’s Credit risk management principles 57

3.1.2 TFSVN’s Credit risk management process 57

3.1.3 Credit assessment 58

3.2 The orientation of development 63

3.2.1 Niche strategy 63

3.2.1.1 Sales performance 63

3.2.1.2 Customer retention 64

3.2.1.3 Dealer support 64

3.2.2 New products launch 65

3.2.2.1 Car loan to fleet customers 65

3.2.2.2 Car loan for used cars 66

3.2.2.3 Agency for insurance 67

3.2.3 Implement low cost business model 68

3.2.4 Efforts for sustainable growth 68

3.2.5 Short term and Mid-long term plan 70

CONCLUSION 72

LIST OF REFERENCES 73

LIST OF INTERVIEWEES 75

LIST OF APPENDICES 76

APPENDIX 1 77

TOYOTA FINANCE GROUP’S EXPERIENCES IN CONSUMER FINANCE

APPENDIX 3 89

ECONOMIC ITEMS

BTC : Banking Training and Consultancy

FDIC : Federal Deposit Insurance Corporation

TASS : Toyota Authorised Service Station

TFSVN : Toyota Financial Services Vietnam

TFSC : Toyota Financial Services Corporation

VAMA : Vietnam Automobile Manufacturers’ Association

Table 2.1: The structure of Vietnam’s economy 10

Table 2.2: List of 17 members of VAMA 19

Table 2.3: Forecasts of automotive output up to 2020 and Existing and required production capacity up to 2010 20

Table 2.4: Dealers scale 25

Table 2.5: Car model purchase in 2009 26

Table 2.6: Toyota production by region 29

Table 2.7: Toyota sales by region 29

Table 2.8: Estimation of automotive market, Toyota sales and Toyota market share 30

Table 2.9: Market share of VAMA members in 2008 and 2009 31

Table 2.10: Toyota customer profile (Percentage) 34

Table 2.11: An interest rate comparison among Banks and TFSVN 42

Table 2.12: A car loan comparison among typical Commercial local bank (Techcombank), Foreign bank (HSBC) and the Financial company (TFSVN) 42

Table 2.13: Financed portion and Collateral of car loan 44

Table 2.14: Toyota sales and car loan 45

Table 2.15: Car loan at Toyota dealers 46

Table 2.16: Ratio of customer profile 47

Table 2.17: Car loan to individual 48

Table 2.18: Individual Car loan by bank types and TFSVN 49

Table 2.19: Market share of individual car loan by bank type and TFSVN 51

Table 2.20: Loan classification and Provision 55

Table 3.1: Estimated living expense 60

Figure 1.1: Car loan process 4

Figure 1.2: Types of credit risks and affect 7

Figure 1.3: Days of overdue and ratio of return 9

Figure 2.1: Vietnam’s GDP per capita 11

Figure 2.2: Export-Import Growth Rate (%) 13

Figure 2.3: The system of credit institutions in Vietnam 14

Figure 2.4: Automobile market size in Asian countries in 2009 22

Figure 2.5: Establishing Solid Foundation 24

Figure 2.6: Vietnam market segment movement in FDI automakers 2007-2009 27

Figure 2.7: Circle of Vietnam automotive industry 28

Figure 2.8: Toyota market share during 2000-2009 31

Figure 2.9: Market share of VAMA members 32

Figure 2.10: Toyota sales from Jan to Jun 2010 33

Figure 2.11: Customer profile 35

Figure 2.13: TFSVN’s lending process 40

Figure 2.14: Individual car individual loan by bank type and TFSVN 50

Figure 2.15: Market share of individual car loan by bank type and TFSVN 52

INTRODUCTION

1 Rationale of the study

In recent years, the world and Vietnam economy faced so many difficulties due to the financial crisis and the threat of economic recession Economical difficulties have posed tremendous effects on the world and domestic automotive industry, globally vehicle sales were much lower than previous years, and some big car makers announced loss and are at the verge of bankruptcy However, rescue plans and economic packages of many countries and Vietnam have brought optimistic signs for the economy and people’ lives We have the right

to believe in that the crisis or difficulties would end soon and people’ lives are better

With statistics of past years, financial service sector has been improving and Toyota financed cars has been increasing in Vietnam by years Toyota Financial Services Vietnam (TFSVN) was established in the context of not only difficulties but also opportunities TFSVN’s financial products and services are designed for Toyota and for Vietnam market Those are innovative, which were developed from global experiences of Toyota Financial Services Corporation (TFSC), and consider Vietnam’s practical elements The establishment

of TFSVN is to support Toyota, increasing its market share in Vietnam, to bring car buyers another opportunity to own their desired cars All is for Vietnamese prosperous lives and the success of Toyota authorized dealers

As credit institutions, TFSVN care profit and consider it a motivation for a better performance generally Credit is one of key business activities, which bring main income or profit to the company However, this kind of activity is the most risky with bad consequences such as increasing costs, low revenue or loss, bad financial capacity and finally damage the company image and reputation, even bankruptcy Credit risks always accompany with credit activities and cannot be eliminated completely, but only prevented or minimized by efficient risk management policy

At TFSVN, the setting up and implementing credit risk management policy is a necessity, together with possible strategies, in order to improve the competitiveness That’s

why I chose the topic “Develop car loan at Toyota dealers in Vietnam – A case study of

TFSVN”

2 Definition of the problem

 Consumer lending, car loan attributes

 Credit risk elements, types of risk

 Result analysis: Vietnam automotive industry, Vietnam automotive market, Toyota

Motor Vietnam, The situation of car loan at Toyota dealers

 Toyota Financial Services Vietnam An analysis of the company, in order to improve the company’s competitiveness and minimize risk

3 Research questions & objectives

The objective of the thesis is to understand the issues of TFSVN and then we can find out strategic solutions to improve competitiveness and credit risk management

 Study on risks and risk management in providing credit services to Toyota car buyers

 Possible strategies of credit services and products

 To increase Toyota sales volume and its market share

 To increase the company’s profit and market share

 How is the market?

 What are advantages and disadvantages, Strength-Weakness-Opportunity-Threat

of the company?

 What is efficient credit risk management?

 What is the orientation of development?

4 The object, scope and methodology of the study

 Object of the study:

 Toyota, Automotive industry and market

 The situation of car loan at Toyota dealers in Vietnam

 Toyota Financial Services Vietnam

 Scope of the study: activities of Toyota, Toyota dealers and TFSVN in the period from

2005 to 2009

 Methodology of the study: statistics – analysis – summarization

The primary data was collected and generated by the author, the research relied on the data from TMV, TFSVN, Toyota authorized dealers, VAMA, the master plan of Vietnam automotive industry and companies Moreover, the secondary data was from policies and decisions of government, relevant ministries, newspaper, former researches, etc The author also exchanged ideas with experts in finance and automotive industry about car market, car loan, credit risk management and the market trend

5 Significance of the study

Toyota is the first car maker in Vietnam which launched financed car services of its own TFSVN is the 33rd financial company of TFSC in the world The pioneer position gives Toyota and TFSVN not only opportunities to develop but also difficulties and challenges The success of TFSVN is the motivation which local and foreign banks in Vietnam compete with and other car makers shall plan to establish their financial company of their own In the coming time, in addition to individual loan, the company expands to corporate loan Those experiences and success will open a way to the future ahead

6 Structure of the study

Introduction of the study

Introduction is about the research, including background, the problems to be solved, research rationale, introducing its scope, methodology, and the significance of the study

Chapter 1: Overview of car loan

The chapter is a review of some theories and definitions which are applied and referred for analysis throughout the paper: consumer loan, car loan, the risk management model of car loan, credit risk, overdue debt Especially the car loan CAMPARI model shall be figured out

as an efficient management way to manage risk and support a better sales performance of the financial company

Chapter 2: Car loan at Toyota dealers & TFSVN

The overview of Vietnam economy, some relevant issues of the economy; introducing a general picture of background for the company’s business, in particular the banking sector and needs for potentials of consumer finance

The analysis in the chapter: Vietnam automotive industry and market, Toyota, the situation of car loan at Toyota dealers and TFSVN’s establishment and its sales performance To highlight the situation and the background where TFSVN was established and came into operation The purpose of analysis is to define problems and opportunities TFSVN have and what to do to in the future This chapter concentrated on sales performance, a comparison among TFSVN and other banks This would bring the reader a clear picture of the car loan market at Toyota dealers, and so that we can find out solutions to success for TFSVN in the next chapter

Chapter 3: Recommendations for TFSVN

In this chapter, we work out the credit risk management and the orientation of development for TFSVN And then a conclusion on all what we have discussed and a possibility for any further research on thesis topic

CHAPTER 1: OVERVIEW OF CAR LOAN

1.1 Consumer loan

1.1.1 Consumer loan

The division of retail banking that deals with lending money to consumers This includes a wide variety of loans, including credit cards, mortgage loans, and auto loans, and can also be used to refer to loans taken out at either the prime rate or the sub prime rate

1.1.2 Personal loan

Money loaned to individuals (usually on non-secured basis) for personal, family or household purposes; as opposed to business or commercial lending It’s also called consumer credit or consumer lending

A personal loan is an unsecured loan, meaning the borrower does not put up any collateral

or security to guarantee the repayment of the loan For this reason, personal loans tend to carry high interest rates If a borrower owns a home, a lower interest rate alternative is a home equity loan However, this option requires that the borrower put up his or her home or other real estate property as collateral

A loan, whether a personal loan or another type of loan, is typically used to finance a large, one-time purchase or expense The borrower is given all the money at once and agrees

to pay back a certain amount per month until the debt is repaid The monthly payment includes both principal (the amount you borrowed) and interest

Personal loans tend to carry higher interest rates than loans secured by collateral such as a home The relatively high interest rate compensates for the fact that you aren’t guaranteeing repayment of the personal loan with some kind of asset

1.2 Car loan

To purchase an automobile that will be driven predominantly for personal or business Financed amount will include vehicle price and insurance if allowed by regulations The finance vehicle is a secured property

1.2.2 Car loan of Banks

The local and foreign banks have actively expanded their credit activities, among that especially car loan in both individual and corporate This is one of the main banking activities that bring a significant profit to the banks In addition, the banks promote car loan program in order to meet the increasing need of car buyers that makes the car loan market more exciting The banks have launched car loan program since 2001 They cooperated with car makers

in giving consultancy to customers about the car model and loans that met customer’s need and budget And the banks provide car buyer financial services, with reasonable interest rate, long term, high financed portion, etc

After nearly 10 years of implementation, revenue from car loan holds a significant part of the bank’s total profit The banks actively work with auto manufacturers to launch promotion, preferential interest rate or promotional gifts to customers This partnership is to promote car sales and expanding the banks’ customer database

For example, from 15-Mar to 30-Apr-2010, Techcombank in cooperation with Benz Vietnam conducted a promotional campaign Among that, the bank shall provide Mercedes-Benz car buyers a preferential interest rate for the first 12 months of the loan term, 7.99%/year for sedan or under 7-seat vehicles and 11.9%/year for Sprinter (16-seat vehicle) Besides brand-new car loan, several banks financed used car after the government allowed used car importation This service has been very potential and expected to develop strongly in the future Brand-new, used car importation and car price decrease have made the automotive market more exciting and lead to stronger car consumption

Mercedes-1.2.3 Common car loan attributes

 Product benefits

- Financing customers to purchase and own their favorite car Car Loan provides customers with the financing package to drive the car they've always dreamt of

- Documentation, car register are in customer’s name

- Fast and easy arrangement of loans, simple application and quick credit process

- Monthly or periodical repayment to the banks or the financial companies

 Application criteria

18 to 65, monthly income can cover the monthly repayment

 Business enterprise: operating business at least 2 years

 Product attributes

 Loan term: max 4 or 5 years

car price, that depends on borrower’s demand, financial capacity and loan term

 Secured asset: the financed car or real estate

 Repayment mode: interest calculation on declining balance

 Periodical repayment: monthly interest and principal

 Fee and charge: according to SBV and the bank’s current regulations

 Document required for application

Individuals

 Identification card

 Household registration book/ Temporary residence book

 Marital Status Certificate

 Car purchase contract

 Proof of income

 Identification card and household registration book of Committees

 VAT report of the last 6 months

 Tax report of the most recent year

 Car purchase contract

 Bank statement of the last 6 months (if any)

 The loan procedure

 The car dealer signed purchase contract with car buyers and transfer the contract and customer information to the bank

 The bank collected documents, investigating and making credit decision

 Customers made down payment to the car dealer and the car dealer commence the process of car registration

 The car dealer sent receipt of car register to the bank for disbursement

 After disbursement, the bank collected original documents and worked with customer for monthly repayment

Figure 1.1: Car loan process

1.3 CAMPARI Model – The Risk management model of Car loan

CAMPARI stands for Character – Ability – Means – Purpose – Amount – Repayment - Insurance

Basic characteristics of customers who are honest, determined, transparent in loan payment Manner of payment on previous and existing obligations is important because it is a very strong indication not only of ability to pay but also of responsibility Applicants with records of collection cases, repossessions, bankruptcy, swindling, bounced checks or even serious personal problems are normally rejected

 Resume of borrower: name, age, education, family, former profile

 Payment history

 Stability of residence

 Life style

 The honesty in making the application and providing information

 Access Credit Information Centre (CIC)

 Reputation in the industry, in the working field

 Fame of the company where customers work for

Evaluating customer’s ability in business organization, finance management and other specialist skills such as marketing, sales, finance in order to run and manage their business

 Finance management

 Business organization and management

 Sales & Marketing skills

Acknowledging borrower’s income, the source of payment With this understanding, the banks or financial companies can evaluate customer’s financial capacity and the loan settlement

 Properties, real estate, assets

 Secured asset is just the back-up for the repayment

 Secured asset is to ensure that borrower conduct his/her commitment to payment obligations

 Secured asset is insured with TFSVN as the beneficiary during the loan term

1.4 Credit risk

Credit risk is the risk of financial loss occurring as a result of default by a borrower or counterparty on their obligation to the Bank Risk is potential unexpected problems which bring physical damage to the banks and financial institutions, causing profit decline or loss Then the banks and financial institutions have to spend an additional amount to fulfill a financial affair

Figure 1.2: Types of credit risks and affect

Risk of capital stagnancy

Affecting customers’ capital usage

Obstructing and making difficulties for

Profit decline

Principal lossProvision implementation

According to item 1 article 2 on loan classification, making provision and using provision

to settle credit risk in banking activities of financial institutions of the Decision 493/2005/Q NHNN dated 22nd April 2005 issued by the governor of State Bank of Vietnam (SBV) Credit risk is the possibility of losses in the banking activities because customers or borrowers do not make or are not able to perform their obligations under commitment

- Credit risk happens when a borrower makes a default in settling debt obligations under the contract, including principal or/and interest The default might be a delayed payment or non-payment

 Credit risk causes financial losses, lowering net income and reducing market value

of principal In severe cases, it can lead to big losses, or even bankruptcy

 In developing countries like Vietnam, the banks is short of a diversity of personal financial services, products are still poor, credit is considered as a main income source and even a unique source, especially for small banks Therefore, credit risk is likely high or low which determine the business efficiency of the bank

 Otherwise, risk and profit expectations of the banks are involved each other, higher risk higher return Risk is an objective factor that we cannot eliminate it completely, but only minimize its happening and damage

The following categories apply, as per Decision 493/2005/QD-NHNN and its amendments:

Balance of overdue debt Total balance

Overdue debt customers All customers

 Group 1 – Current Loans: loans which are following payback schedule and overdue

less than 10 days

 Group 2 – Special mention loans (delay): loans overdue from 10 to 90 days

 Group 3 – Sub-standard loans (delinquent): loans overdue from 91 to 180 days

 Group 4 – Doubtful loans (legal): loans overdue from 181 to 360 days

 Group 5 – Loss loans (write-offs): loans overdue more than 360 days

Figure 1.3: Days of overdue and ratio of return

Source: Banking Training & Consultancy (2009), Training course of banking risks

365days

CHAPTER 2: CAR LOAN AT TOYOTA DEALERS & TFSVN

2.1 Overview of Vietnam’s economy in recent years

2.1.1 The economic growth

Vietnam was successfully preventing an economic decline, maintaining a sensible and sustainable economic growth Vietnam's economy remains strong, with real GDP growth estimated to have reached nearly 8.48% in 2007, 6.23% in 2008 and 5.32% in 2009 Following the impetus of economic recession in months of 2008 year-end, for the whole year of 2009, GDP increased by 5.32%, of which the agriculture, forestry and fishery sector rose by 1.83%; the industry and construction by 5.52%; and the services by 6.63%

Table 2.1: The structure of Vietnam’s economy

Source: Vietnam General Statistics Office (2009)

GDP growth rate in 2009 has reached 5.32%, exceeding the adjusted target 5.2%, the highest

in South East Asia Vietnam was in 10 countries with positive growth in the world

Positive growth was in 3 sectors of Agriculture, Industry and Services

- Agriculture sector was up 1.83%, agriculture at 1.32%, forestry at 3.77%, fishery at 4.28%

- Industry sector was up 5.52%, construction at the highest rate up to 11.36% (down in last year), electricity-water at 9.02%, mining industry at 7.62%, process industry at 2.67%

- Service sector was up 6.63%, higher than general growth rate

2.1.2 GDP per capita

Vietnam GDP per capita in 2009 was at USD 1,064 (at exchange rate about 18,118 VND/USD) This was meaningful in many aspects The GDP per capita in 2009 was higher than past years, likely higher and higher by years The income exceeded the rate of USD 1,000/person If the growth rate in 2010 reach 6.5%, CPI fewer than 7%, population at about

88 million according to the population count, GDP per capita in 2010 shall reach USD 1,110 Vietnam was removed from the low income countries, changed to medium income

[For details, we can refer the appendix 3 – Economic Items]

Figure 2.1: Vietnam’s GDP per capita

Source: Vietnam Economic Times (2010), Economy of Vietnam & the World 2009-2010

2.1.3 Stabilizing the Macro-economy

Investment and development

Total realized investment capital in 2009 at current prices was estimated increasing by 15.3%

as against 2008 and equal 42.8% of GDP During this period, the state sector grew by 40.5%, the non-state sector by 13.9% while the FDI sector decreased by 5.8% Of the capital

investment from the state sector, the funding from the state budget took 21.8% of the country’s total investment, equaling 106.8% of the yearly estimate

Government revenues and expenditures

As estimated, total government revenues from beginning of the year to 15/12/2009 was approximate to the annual estimate, of which domestic revenues accounted for 102.5%; revenues from crude oil was equal 86.7%; revenues from import-export: 101.6% Of the domestic revenues, receiving from the state-owned enterprises equaled 106.2%; from FDI enterprises (excluding crude oil): 88.8%; from non-state industrial, commercial and service taxes: 95.6%; taxes imposed on high-income persons: 87%; petroleum fees: 157.5%; and other fees: 90.8%

As estimated, total Government expenditures from beginning of the year to 15/12/2009 was equal 96.2% of the yearly estimate Of which, spending for investment and development accounted for 95.2% (only spending for capital construction was 93.4%); for economic and social development, national defense and security: 99.6%; for paying debts and aids: 102.7% The Government overspending in 2009 was 7% of GDP

Although the decreased rate of the import turnovers was higher than that of the export turnovers, the trade deficit in 2009 was still at an estimate of USD 12.8 billion, reduced by 28.7% as against 2008 and equal 22.5% of 2009’s total export turnovers

Figure 2.2: Export-Import Growth Rate (%)

Source: Vietnam Economic Times (2010), Economy of Vietnam & the World 2009-2010

Export decline was due to many reasons The most important one is the negative impacts

of the financial crisis and economic depression in the world The large current export market was narrowed, export to Japan down 27.7%, to Australia down 48%, to ASEAN down 16.4%,

to EU down 14.4%, to USA down 5.5%

The growth targets for 2006-2010 are based on the following three considerations

 Rising capital inflows, mainly in the form of foreign direct investment, should drive economic growth, particularly following Vietnam’s accession to the WTO in January 2007

 Large-scale infrastructure investment, led by the private sector, should lift the economy The Vietnamese government plans to call for a total investment of VND 2,677 tri-million during 2006–2010, equivalent to 40.0% of GDP per annum

 Improvements in direct and indirect financing channels are expected to stimulate the development of Vietnam’s economy Internal and external pressures are thought to encourage reforms in Vietnam’s financial sector, in part because:

5 State-owned Commercial Banks (SOCBs)

SYSTEM OF CREDIT

INSTITUTIONS

33 Foreign Bank Branches

54 Representative offices of Foreign Bank

5 Joint Venture Banks

39 Joint-Stock Commercial Banks

Vietnam Bank for Social Policy

17 Finance Companies

People Credit Fund System:

- Central Peoples Credit Fund and 24 Branches

- 926 Local credit funds

13 Financial Leasing Companies

Source: The State Bank of Vietnam’s website (2010), Credit Institutions System

- Vietnam has promised to gradually open its markets in the financial sector as a condition of joining the WTO in January 2007, and

- The Vietnamese government plans to privatize its national commercial banks

2.2 Overview of Credit institutions in Vietnam

2.2.1 Overview of the forms of credit institutions

Figure 2.3: The system of credit institutions in Vietnam

Overall, the financial services industry in Vietnam remains in its initial stage of development, despite its rapid growth in recent years Demand for financial services is generally considered weak, with about one-half of all personal savings held in foreign currency, gold or other assets outside the financial system; the banking industry is characterized by its small size in terms of deposits and loans and by the relatively large number of banks, both foreign and domestic; and after expanding rapidly in recent years, growth in Vietnam's insurance sector is showing signs of slowing, partly due to global financial crisis However, the global economy and domestic one have been receiving optimistic signs of a recovery and development

2.2.2 Reform of Vietnam’s banking system

2.2.2.1 Overview

The process of shifting the banking sector on to a commercial footing has progressed slowly The government, which is committed to strengthening the industry, embarked on a comprehensive reform program in 2001, underpinned by market-oriented reforms and state-

owned enterprise reform The main developments in the industry are as follows:

Despite some diversification, SOCBs remain dominant

The four main SOCBs, namely the Bank for Investment and Development of Vietnam (BIDV), the Bank for Foreign Trade (Vietcombank), the Bank for Industry and Commerce (Vietinbank), and the Bank for Agriculture and Rural Development (VBARD) – still account for around 70% of all loans, in part because most state-owned enterprises (SOEs) are expected to bank with them

In late 2007 Vietcombank’s initial public offering was completed The equitization of the other large banks is likely to be delayed as a result of government worries about overheating

of the stock exchange, and the potential for excessive inflows of portfolio investment

Joint-stock banks attract foreign interest

The joint-stock banking sector, which comprises private or part-private banks that are much smaller than the country’s SOCBs, accounts for around 15% of total lending Although most joint-stock banks are small to attract foreign investor interest, they are keen to attract such investment in order to expand their capital base, in addition to improve their management expertise In 2005 and early 2006, three large joint-stock commercial banks, including Saigon Thuong Tin Commercial Bank (Sacombank), Asia Commercial Bank (ACB) and Vietnam Technological and Commercial Joint Stock Bank (Techcombank) sold 10%, 8.56% and 10% stake to foreign banks, respectively

Foreign banking operations remain limited

Local banks currently dominate lending activity Foreign banks face restrictions on their lending, but these will be eased substantially over the next few years In 2007, the SBV established the rules that foreign banks must follow if they wish to incorporate in Vietnam: the parent bank must have at least US$ 10 billion in total assets, maintain a capital adequacy ratio of at least 8%, and be profitable for three consecutive years in its country of origin Six foreign banks have so far shown an interest in incorporating locally and amongst them HSBC, Standard Chartered and ANZ were turned to 100% foreign-invested banks

2.2.2.2 Prospects

The financial services industry in Vietnam remains potential for the following reasons:

 Deposits and electronic-based payment systems are expanding

Vietnam remains largely a cash-based economy, reflecting the unwillingness of many people to disclose their financial position and their wariness of electronic-based payment systems However, bank deposits are rising rapidly, and are forecast to grow at an average rate of nearly 22% a year during the forecast period As a result, the use of debit cards and automated teller machines (ATMs) will also increase

 Demand for credit remains strong

Growth in bank lending accelerated to an estimated 38% in 2007, despite new prudential requirements for lending introduced by the SBV The SBV has tightened its regulations on bank lending in two ways First, it has decreed that commercial banks may allocate no more than 40% of their short-term funds to medium- and long-term lending, and that banks must maintain a capital adequacy ratio of 8% and limit lending to any one borrower to no more than 15% of the bank’s equity Second, it has introduced a new risk-rating system, which regulates the proportion of a loan’s value that banks must keep in a risk fund reserve

 SOCBs are set for a period of restructuring and competition

Over the next five years the burgeoning private sector will spearhead demand for bank lending, although the supply of financial services is unlikely to be sufficient to meet this demand The fact that SOCBs account for 70% of banking sector assets, together with the government's implicit and explicit support for SOEs, means that bank lending is mostly channeled towards SOEs But there may be some improvement in the forecast period, in line with the government's efforts to move away from its traditional practice of directed policy lending and its moves to widen access to bank finance, particularly for small and medium-sized private enterprises

The government is moving to equitize the SOCBs, which will force them to operate on a more commercial footing and will enable them to raise capital by selling shares rather than relying on state funds

2.2.2.3 Needs for and potentials of consumer finance

Vietnam’s consumer financial market is considered to be in its initial stage of development but with great potential with increasing demand for consumer credit from both individuals and organizations in recent years

Though all credit institutions are allowed to sell loans, players in the market are mainly joint-stock commercial banks, by which main services provided in the market include car

severe with the participation of foreign invested banks, joint-venture banks as well as the world’s leading financial institutions providing consumer services In particular, General Electric Money (GE Money), a branch of General Electric Corporation was granted a license

to open a representative office in Hanoi and Ho Chi Minh in 2006 Prudential and Socieùteù Geùneùrale have stepped into Vietnam’s potential consumer financial market with such services

as car loan and house loan

With the population of around 86 million people, more than 50% of which are young, Vietnam’s consumer financial market is anticipated to develop sharply and become more and more competitive in the coming time

2.3 Vietnam automotive industry

2.3.1 Development of automotive industry

Around 18 years ago, when Vietnam promised to restrict the number of international car manufacturers allowed to enter the market, many rushed to Vietnam to book a place for future hope Consumption was too small at that time In a short time, the number of licenses granted soared to a dozen However, some like Chrysler or Peugeot, abandoned their project as quickly as they came after having had measured carefully the market

The Vietnam Automobile Manufacturers’ Association (VAMA) is a non-profit organization founded in 2000, started with 11 members and today VAMA has 17 members who have been making their restless efforts and contributions to the development of the national economy in overall, as well as the national automobile industry in particular Vindaco (Daihatsu Vietindo) was the first member of VAMA dissolved in Jun 2007 Through the years since the Association’s initiation, VAMA members have achieved remarkable progress and proved themselves as the leading contributors to the national economy with over USD 1.3 billion of tax payment and over 75,000 direct and indirect jobs by the end of 2009 Besides, there are about 160 domestic automobile and part producers, making mainly commercial and agricultural vehicles

Table 2.2: List of 17 members of VAMA

6 Toyota Motor Vietnam Company Limited 10/1996 Toyota

7 Vietnam Daewoo Motor Company Limited

9 Vietnam Suzuki Corporation (Visuco) 11/1996 Suzuki

10 Vina Star Motors Corporation (Vinastar) 3/1995 Mitsubishi

11 Saigon Transportation Mechanical

16 Vietnam Motors Industry Corporation 9/2003 Vinamotor, Transinco

Source: Vietnam Automobile Manufacturers’ Association (2010)

In addition, the Vietnam automotive market also consist of CBU importers such as Euro

Auto for BMW, Automotive Asia for Audi, PSC for Porsche, World Auto for Volkswagen and

others

2.3.2 Vietnam’s master plan of the automotive industry

The master plan of the automotive industry was approved by the Prime Minister in

October 2004, containing totally seven sections It covers matters like government’s

perspectives, overall and detailed targets, orientation of the industry up to 2010; required

investment projects; financial sources; supporting policies, and allocation of responsibilities to various organizations

Table 2.3: Forecasts of automotive output up to 2020 and Existing and required

production capacity up to 2010

Production capacity up

to 2003

Demand forecast for

2010

Additional required investment

Source: Vietnam Government (Oct 2004), The Decision 177/2004/QD-TTG, The Master Plan

for Developing Vietnam’s Automotive Industry

The table shows the production capacity in 2003 and forecast of automobile output up to

2020 and demand forecast for 2010 It also indicates that there is no need of any investment into production of up to 5-seat cars, while there is for 6-9 seat and 10-16 seat cars Besides, localization rates are also projected by the master plan Accordingly, the rate in 2010 for popular vehicles (trucks, buses and cars), high-class vehicles (trucks, buses and cars) and specialized vehicles are 60%, 40-50% and 60% respectively Furthermore, it also plans for the exports of automobile and automotive parts and accessories to be 5-10% of the total output of the industry in 2010

Automotive in Vietnam is planned to become an important industry by 2020 However, its current development process is far behind expectation and target The master plan is built

to help the industry reach the targeted growth

2.3.3 Finance and supporting policies

The master plan also expects automotive industry needs VND 16,000-18,000 billion in the period 2001-2010 and VND 35,000-40,000 billion in the period 2010-2020 The government aids by providing credit to projects approved by the Prime Minister

Seven supporting policies have been approved: (1) tariff policy; (2) market policy; (3) investment policy; (4) science and technology policy; (5) human resource policy; (6) capital attraction policy; and (7) industrial management policy

The main contents of these supporting policies are the government’s commitment to assist the automobile industry in various ways The science and technology policy stipulates that official financial support will be available to R&D (Research & Development) activities

as well as projects which transfer modern technology of multinational corporations (MNCs) to produce (i) engines and gearboxes, and (ii) drive, transmission, and steering parts There will also be a budget for training and re-training of managers, designers, and professional workers

The equitization of automobile assemblers and manufacturers is a priority

2.3.4 The automobile markets in East Asian countries and Vietnam

East Asia is regarded as one big factory where each country plays a specific role and contributes to the overall production scheme In this region, enhancing industrial capacity independently from neighbouring countries is impractical and ineffective China and ASEAN

4 (Thailand, Indonesia, Malaysia and Philippines) are Vietnam’s main competitors as well as potential partners in production Vietnam should not compete directly with these countries in the fields in which they excel Instead, Vietnam should identify its dynamic comparative advantage, build industrial agglomeration around it, and participate in the regional production

network to supplement and enhance the capability of other countries As Vietnam grows, the production capacity of East Asia as the factory of the world should be strengthened

Figure 2.4: Automobile market size in Asian countries in 2009

Source: author’s collection

In automobile, Thailand has emerged as the regional production centre boasting a large agglomeration of supporting industries, a trend that is accelerating under regional free trade Vietnam, a country which started modern automobile production three decades behind Thailand, should not try to replace Thailand as the mother factory Instead, Vietnam should support and complement the Thai automobile industry and thereby enhance the regional production capacity and product mix More concretely, the following two strategic pillars are recommended for Vietnam

 Parts exportation: Vietnam should become an export base for selected automobile

parts Production should be large-scale and initially 100% export-oriented since domestic parts demand is currently too small But over time, parts can also be supplied

to domestic assemblers as the domestic market expands

 Assembly of certain car models: Vietnam should assemble certain automobile models

which are not produced by the mother factory in Thailand or elsewhere, especially

those that require small lots and frequent modification in specifications (since Vietnam’s automobile industry has developed under such conditions) It is up to MNCs

to assign particular models to be produced in Vietnam, but the Vietnamese government can actively encourage and work with MNCs to promote such a move Due to low pace of international integration, Vietnam’s Economic Freedom Index by Heritage

Foundation in 2010 is ranked 144 under category of “repressed”, while this index of Thailand

is ranked 64 under category of “moderately free” Under the context of accelerating trade

liberalization, Thailand also passed the master plan submitted by Thai Automotive Institute, revising some policies which are no longer appropriate such as localization requirement and protection of domestic market Automotive industry now becomes very important industry of Thailand with very fast growth of both production and exports

2.4 Toyota Motor Vietnam

2.4.1 Introduction

Name: Toyota Motor Vietnam (TMV)

Establishment: 05th Sep 1995

Headquarters: Phuc Thang Ward, Phuc Yen Town, Vinh Phuc

Hanoi Branch: 8th floor, Viglacera Tower, Me Tri, Tu Liem

HCMC Branch: 9th Floor – Centre Point, 106 Nguyen Van Troi, Phu Nhuan District

Investment capital: $US 89.6 million

Partners: Toyota Motor Corporation (70%)

Vietnam Engine & Agricultural Machinery Corporation (VEAM) (20%) KUO Singapore Pte Ltd (10%)

Employees: nearly 1,400 employees (including seasonal members)

Car models: Hiace, Camry, Corolla Altis, Innova, Vios & Fortuner

(Locally-produced)

Mission: Toyota devotes utmost effort for customers’ full satisfaction

Be a good corporate citizen with social contribution to help people to improve the quality of life

Make great contribution to the development of local industry Achieve stable, long-term growth for the company in Vietnam

Bearing in mind the spirit of “Growth, challenge and Development”, TMV strongly believes

they are able to share the benefits of their growth to drive to a new bright future of

Figure 2.5: Establishing Solid Foundation

Source: Toyota Motor Corporation

2.4.2 Toyota dealer network

Toyota has 21 authorized dealers in Vietnam until August 2010, 6 in Hanoi, 9 in HCMC, Dong Nai, Binh Duong and 6 in provinces of Quang Ninh, Hai Phong, Buon Ma Thuot, Da Nang, Vinh-Nghe An, Can Tho In 2010 and 2011, new Toyota dealers shall open in Vung Tau, Long Bien – Hanoi, a branch of Toyota Buon Ma Thuot in Nha Trang

Toyota pays much attention to network expansion, which is the biggest among venture automakers While Ford Vietnam has 11 dealers: 5 in the north, 2 in the central and 4

in the south Mekong Vietnam has 13 dealers One of Toyota’s policies is to ensure the

availability of cars to customers and to bring convenience to car buyers

To become a Toyota dealer, the company has to meet their requirements and standards

of service such as inspection system, showroom, maintenance station, etc Furthermore,

Toyota reviews their distributors’ performance and results every year and rewards the best

one It is to create a sound competition environment among dealers and requires them to

continuously improve to deliver the best services to customers Every of their dealers are

allowed to carry out specific campaigns to promote their sales

Table 2.4: Dealers scale

Source: Toyota Motor Vietnam

In 2008 Toyota has passed over General Motors to become the biggest automotive marker in the world This is an important advantage for Toyota Vietnam and its dealers in attracting customers and promoting Toyota brand Moreover, Toyota quality is proved and Toyota is famous