Vietnam autos report q2 2016

BMI Industry ViewBMI View: Higher imported car taxes could well lead to a slowing in growth within Vietnam's new vehicle sales market over 2016 from the elevated levels seen in 2015.. Ho

Q2 2016 www.bmiresearch.com

VIETNAM

AUTOS REPORT

INCLUDES 5-YEAR FORECASTS TO 2020

INCLUDES 5-YEAR FORECASTS TO 2020

Part of BMI’s Industry Report & Forecasts Series

Published by: BMI Research

Copy deadline: January 2016

© 2016 Business Monitor International Ltd

All rights reserved

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copyrighted in the name of Business Monitor International Ltd, and as such no part of this

publication may be reproduced, repackaged,redistributed, resold in whole or in any part, or used

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DISCLAIMER

Vietnam Autos Report Q2 2016

INCLUDES 5-YEAR FORECASTS TO 2020

Part of BMI’s Industry Report & Forecasts Series

Published by: BMI Research

Copy deadline: January 2016

© 2016 Business Monitor International Ltd

All rights reserved

All information contained in this publication is

copyrighted in the name of Business Monitor International Ltd, and as such no part of this

publication may be reproduced, repackaged,redistributed, resold in whole or in any part, or used

in any form or by any means graphic, electronic ormechanical, including photocopying, recording,taping, or by information storage or retrieval, or byany other means, without the express written consent

of the publisher

DISCLAIMER

BMI Industry View 7

Key Views 7

SWOT 9

Industry Forecast 11

Table: Autos Total Market - Historical Data And Forecasts (Vietnam 2014-2020) 11

Latest Developments 11

Structural Trends 11

Government Is Prioritising The Supplier Segment 18

Passenger Vehicles 19

Table: Vietnam Passenger Car Market - Historical Data And Forecasts 19

Commercial Vehicles 20

Table: Commercial Vehicle Market - Historical Data And Forecasts (Vietnam 2014-2020) 20

Latest Developments 20

Table: Key Players: Selected VAMA Members - Commercial Vehicle Sales For 10M14 22

Industry Risk Reward Ratings 23

Industry Risk/Reward Index 23

South East Asia Shines 23

'Make In India' Supports Ranking 24

Vietnam Still Most Likely Frontier Mover 24

Company Profile 25

GM Vietnam 25

Mercedes-Benz Vietnam 26

Regional Overview 27

Table: Asia Autos Production Investment 27

Incentives Powering Chinese Investment 28

Making In India Is Increasing Localised 29

Demographic Forecast 30

Table: Population Headline Indicators (Vietnam 1990-2025) 31

Table: Key Population Ratios (Vietnam 1990-2025) 31

Table: Urban/Rural Population & Life Expectancy (Vietnam 1990-2025) 32

Table: Population By Age Group (Vietnam 1990-2025) 32

Table: Population By Age Group % (Vietnam 1990-2025) 33

Methodology 35

Industry Forecasts 35

Sector-Specific Methodology 36

Sources 36

Risk/Reward Index Methodology 37 Table: Automotive Risk/Reward Index Indicators And Weighting Of Indicators 38

BMI Industry View

BMI View: Higher imported car taxes could well lead to a slowing in growth within Vietnam's new vehicle

sales market over 2016 from the elevated levels seen in 2015 However, given strong domestic demand and

a robust economic backdrop, we believe the market can still show solid growth of 16%, with commercial vehicles outperforming passenger cars.

Industrial Growth Favouring Commercial Vehicle Segments

Vehicle Sales By Segment, Units

Passenger car sales, units (LHS) Commercial vehicle sales, units (LHS) Passenger car sales, units, % y-o-y (RHS)

Commercial vehicle sales, units, % y-o-y (RHS)

2013 2014 2015f 2016f 2017f 2018f 2019f 0

100,000 200,000 300,000 400,000

0 25 50 75

e/f=BMI estimate/forecast Source: BMI/VAMA

Key Views

■ This quarter, BMI has extended its forecast period to 2020.

■ Over this period, we expect 85% sales growth from the Vietnamese new vehicle sales market, withpassenger cars (PCs) to outperform commercial vehicles (CVs)

• Vietnam was the fastest-growing auto market in Southeast Asia over 2015, with 11M15 sales up by 58%y-o-y

• For 2016, we are anticipating a slowdown in the stellar growth seen in Vietnamese auto sales over 2015

• The government is looking to slow the rate of new imported vehicle sales growth via the imposition of anew special consumption tax, which could increase the price of imported vehicles by up to 12%,according to media reports

• However, despite this measure, we believe that demand for new vehicles will remain robust from bothVietnamese consumers (boosting PC sales) and Vietnamese businesses (boosting CV sales).

• Autos manufacturers have come under increasing scrutiny from the tax authorities in 2015 after mediareports of tax evasion and relatively high transfer pricing abuse by local vehicle assemblers

• Toyota is currently the leading brand in Vietnam, with its Camry, Corolla and Fortuner models are all

popular

• However, second-placed Thaco produces the country's top-selling vehicle, the Kia Morning.

Vietnam Autos Industry SWOT

Strengths ■ Low rates of vehicle ownership, together with Vietnam's large population, provide an

opportunity for positive vehicle sales growth over the long term

■ Low manufacturing and labour costs

■ Loose monetary conditions and historically low interest rates provide a positivebackdrop for sustained credit expansion

■ Strong FDI inflows into the manufacturing sector bode well for the industry

• New vehicle sales grew at a stellar rate over 2015

• Strong demand for sub-compact and compact cars

Weaknesses ■ Lack of production incentives means that the automotive sector is not performing up

to its potential

■ Domestic supplier industry is not well developed, which results in automakers having

to pay high import tariffs on imported parts

■ The still underdeveloped road network in the country means that two-wheelers remain

a more sensible option for consumers

■ Motorbike sales will remain in a downtrend due to a lack of demand amid a saturatedmarket and with many Vietnamese trading up to a small car

• High taxes represent a barrier to new vehicle ownership

• Vietnam remains a poor country

■ New vehicle ownership will remain out of reach for the majority of Vietnamese citizensacross BMI's newly-extended forecast period to 2020

Opportunities ■ The market shows diversity, with long-term growth likely for both the

Vietnam Autos Industry SWOT - Continued

■ premium and small car segments The annual reduction of tariffs on CBU importsfrom other ASEAN nations in the next few years will give existing automakers as well

as new entrants a chance to increase their domestic sales through imports

■ ASEAN free trade agreement and recently announced Trans-Pacific Partnership (TPP)are set to reduce tariffs for ASEAN and TPP exporters into Vietnam

Threats ■ The eventual elimination of import tariffs in the Vietnamese auto market by 2018 due

to the AEC integration and TPP will become an obstacle to further development ofVietnam's immature domestic vehicle manufacturing industry

■ Rising traffic congestion presents an obstacle to new car sales

■ Any renewed slowdown in the Vietnamese economy would by extension lead to a fall

in new car sales

■ New import taxes could now see a slowing in new vehicle sales growth over the nearterm

Industry Forecast

Table: Autos Total Market - Historical Data And Forecasts (Vietnam 2014-2020)

2014 2015e 2016f 2017f 2018f 2019f 2020f

Vehicle sales, units 131,308 203,768 236,110 247,113 284,025 327,491 376,559

e/f = BMI estimate/forecast Source: National Sources/BMI

■ We are expecting commercial vehicles (+17%) to outperform commercial vehicles (15%)

■ Commercial vehicles will continue to outperform passenger cars as strong inflows of FDI boost industrialproduction, exports and, thus, demand for road freight services

■ Higher numbers of inbound tourists should boost demand for rental cars and minibuses/buses, lendingsupport to new vehicle sales over 2016

■ The establishment of a more substantial local production base could prove transformative in terms ofboosting domestic sales and developing a wider supplier segment

■ In this context, a DongFeng-PSA Peugeot Citroen joint venture (JV) is reportedly soon to begin local vehicle assembly through a partnership with local assembler Thaco Group.

■ The Trans-Pacific Partnership has been finalised and, if ratified by its members' governments, willimprove competition in the market and reduce prices

■ The domestic spare parts and components sector in Vietnam is small at present, although the government

is making it a priority

Structural Trends

Another Good Year Of Sales Growth In Prospect

Higher imported car taxes could well lead to a slowing in growth within Vietnam's new vehicle sales marketover 2016 from the elevated levels seen in 2015 However, given strong domestic demand and a robust

economic backdrop, we believe the market can still show solid growth of 16%, with commercial vehiclesoutperforming passenger cars.

In November 2015, the government issued a decree (Decree 108 - 108/2015/ND-CP) outlining how thespecial consumption tax on passenger cars and minibuses with less than 24 seats will now be calculated.The decree makes it more difficult for importers to avoid paying higher tax rates on imported models byusing common transfer pricing techniques

The move represents a positive for local manufacturers in the country but will increase the risk of a rise inthe prices of imports as automakers that had previously taken advantage of transfer pricing techniques tobolster profit margins are forced to wind back these practices The extent to which importers have beenusing transfer pricing techniques up until now is unknown but in August 2015 the General Department forTaxation ordered its offices to investigate automobile importers and distributors for possible tax fraud after

a local distributor was charged with manipulating retail prices to avoid tax payments, according to reports

by media site VietNamNet

This could suggest that tax avoidance through price manipulation is occurring more extensively across theindustry, which means the new tax measures could lead to falling profit margins for many importers in thecountry and could force a number of importers to raise retail prices Since completely built up (CBU)imported vehicles accounted for 26.2% of all vehicle sales in 10M15, a rise in the price of imported vehiclescould have a slowing effect on new vehicle sales growth across 2016

The new tax reforms under the decree also pave the way for changes to overall tax rates on vehicles thathave been suggested for July 1 2016 onwards According to government proposals, special consumption tax(SCT) rates on engines with displacements higher than 3,000cm3 will see increases from 60% to a

maximum of 150% depending on engine size This will negatively affect larger SUV, MPV and premiumsegment models, most of which are imported At the same time, the government will lower its SCT for carswith engines under 2000cm3 by between 5% and 25%

We have currently not factored this proposed change into our forecast as it still remains in the approvalstages If passed, we believe the market would see a slight deceleration from our current forecast of 15.9%growth in vehicle sales in 2016 and 13.2% average annual expansions over our newly-extended forecastperiod to 2020

Overall, the negative effects of tax increases raising vehicle prices will not prove sufficient to reverse ourlong-held bullish view on the sector Vehicle sales in Vietnam have remained impervious to past price

increases, with the country posting some of the fastest sales growth across Asia despite having some of thehighest vehicle taxes in the region The country's sales are being pushed by strong growth in private

consumption and we believe that this will continue to boost vehicle sales even against a backdrop of risingprices

Beyond the current year, we retain our long-held optimistic view on the medium-term outlook for

Vietnamese new car sales This quarter, BMI has extended its forecast period out to 2020 Over this period,

we are expecting new vehicle sales to show growth of 85%, to take total new vehicle sales to over the376,559 unit mark by 2020 We expect stronger growth in passenger car sales than in commercial vehiclesover the 2016-2020 period

Turning to the macroeconomic backdrop, in 2016 our Country Risk team forecasts strong private

consumption growth of 6.5% and this will filter into passenger car demand Vietnam's strengtheningconsumers have ramped up borrowing over the past 12 months to August, often to fund aspirational

purchases such as new cars, and we expect this to continue as employment prospects continue to improve

However, we highlight that commercial vehicles will continue to outperform passenger car segments.Vietnam has continued to attract strong inflows of foreign direct investment (FDI) given its relatively lowwages, competitive manufacturing industries and attractive industrial policies Indeed, FDI grew by anestimated 7.6% y-o-y to USD8.5bn which has bolstered industrial production, exports and infrastructureinvestments leading to a strong growth in freight demand In turn, this is translating into increased demandfor commercial vehicles and we expect this to continue over 2016

Further stimulating sales will be the gradual decrease in vehicle tariffs on vehicles assembled in the ASEANregion, which will place downward pressure on prices As part of the ASEAN free trade agreement Vietnam

is required to lower its tariffs on imported vehicles from the region from 40% in 2015 to 30% 2016, thus, asimport tariffs drop by a quarter in 2016 consumers will see their purchasing power increase

Furthermore, we believe these falling tax costs will actually passed on to the consumer by autos dealers and

manufacturers owing to the growing scrutiny on auto companies by tax authorities Indeed, in H215 Euro Auto, the official distributor for BMW Motor, was fined USD289,000 for tax offences which subsequently

led the government to encourage tougher scrutiny on all automotive importers and distributors, according to

a report by Thanhnien News Previous to this, a survey by the Vietnam Chamber of Commerce and USAIDalso found that 51% of automotive manufacturers in the country were abusing transfer pricing, making theindustry the third worst offending sector Thus, automakers will face mounting pressure to pass on costsavings to consumers

Further adding to the bullish picture for sales is the recent Trans-Pacific Partnership (TPP) deal Afterprotracted negotiations and various setbacks, the foreign trade representatives of the 12 countries (includingVietnam) involved in talks concerning the TPP announced they had come to an official agreement onSeptember 5 While the deal still requires ratification from each member state's government, if it is put intopractice it will help open up the Vietnam's booming passenger car market to yet more international carmakers operating across the TPP region by removing significantly large tariff barriers on imported vehicles.

As a result, the added competition would also encourage further declines in prices and encourage moreconsumers to purchase new vehicles

Production Dominated By Thaco

Market leader Thaco - which assembles vehicles for Kia, Mazda and Peugeot - accounts for over half of

the new vehicle sales market However, imported cars have seen rapid growth over recent years, nowmaking up around 40% of total sales, according to the Financial Times

Other companies with local production facilities include: Ford, GM Vietnam, Hino, Isuzu, Toyota, Vinamotor and Vinastar.

Growing FDI A Boon For Auto Production

Vietnam - Domestic Auto Production, Units (LHS); % chg y-o-y (RHS)

Source: VAMA, BMI

New Production Investments Will Face Old Problems

In line with this growing production and booming demand, Vietnam has seen a flurry of announcementsfrom foreign automakers declaring their intentions to begin, or ramp-up, manufacturing activities in thecountry We believe automakers are looking to establish operations in the country to capitalise on largesales growth opportunities about to be unlocked by the introduction of free trade between ASEAN members

in 2018 However, we stress that that these automakers will still face significant operational challenges inrealising sales growth across the region over the long run

Swarming Investment Providing Short-Term Support

Recent inflows of investment will provide support to Vietnamese vehicle production up to the end of ournewly-extended forecast period to 2020 and we forecast output to grow an average of 12.4% annually over

the period In April, Russian car manufacturer Sollers signed a memorandum of understanding with an

undisclosed local partner stating its intention to begin assembly operations in the country This was

followed by an announcement from Russian truck and bus producer, KamAZ, that it too would invest in

bolstering its assembly operations already established in the country under a JV with a local state-owned

company, VINACOMIN In May, the China-based JV between PSA Peugeot Citroen and Chinese automaker DongFeng also announced it would begin production in partnership with Vietnam's largest assembler THACO Group Finally, Indian manufacturer Tata Motors announced its partnership with local distributor TMT Motor JSC for the assembly of completely knocked down (CKD) kits of Tata models.

But Long-Term Challenges Still Lurk

However, as we have long stated, vehicle manufacturers in Vietnam remain uncompetitive compared withautomakers elsewhere in ASEAN owing to the country's small-scale production, its unfavourable tax

policies, and its limited rate of localisation (see 'Growing Threat Of Vehicle Manufacturer Withdrawals', April 7, 2015).

In particular, local content requirements could prevent them from exporting to the broader ASEAN marketeffectively once free trade in the region has begun Given that these new entrants are all only consideringbasic assembly of imported CKD and semi-knocked down (SKD) kits, they face a high risk that theirproducts will fail to meet the 40% local content requirements of the ASEAN Free Trade Area (AFTA).Thus, they may not qualify for tariff-free exports from Vietnam, which would cut them off from the broaderASEAN regional market

This poses a major threat to KamAZ and Sollers' export ambitions in the region owing to the lack of aRussia-ASEAN trade agreement For the Peugeot-DongFeng JV and Tata, this poses less of a problem ifthey are able to source components from India and China owing to ASEAN's free trade agreements withthese countries

Nevertheless, the long-term barriers to growth that are weighing on producers already operating in thecountry will weigh even more heavily on these new entrants owing to their relative inexperience in themarket, smaller scale and high dependence on imported components

Strong Outlook Hides Long-Term Weakness

Vietnam - Vehicle Production, Units

Vietnam - Vehicle production, units (LHS) Vietnam - Vehicle production, units, % y-o-y (RHS)

2013 2014 2015f 2016f 2017f 2018f 2019f 0

100,000

25,000 50,000 75,000

0 5 10 15 20

f = BMI forecast Source: OICA, BMI

Production Will Grow But Imports Still More Attractive

Despite the rise in auto production, the market will still be heavily reliant on imports for now due to the lack

of a strong presence of suppliers We also see the gradual abolishment of vehicle import tariffs under theASEAN Economic Community (AEC) over the 2015-2019 period as a key threat to the Vietnamese auto

sector, in light of the AEC (see 'AEC: Integration To Reinforce Current Production Leadership' September

12, 2014).

As tariffs are lowered, potential entrants will likely focus on their regional production facilities in Thailandand Indonesia and import CBUs into Vietnam instead of establishing greenfield production facilities in thecountry Indeed, our trade balance forecast shows net imports rising from 2015 to 2019 as sales growth ofimported vehicles accelerates This view is further supported by recent failures to encourage upstreaminvestments in the country For example, Hyundai Motor recently pulled out of its USD185.5mn jointventure with Ho Chi Minh based Truong Hai Autmobile JSC to set up the county's first engine factory

citing delays to the project Without these upstream investments the industry remains largely focused onsimple assembly operations, which bodes poorly for the long-term sustainability of the industry.

Government Is Prioritising The Supplier Segment

The domestic spare parts and components sector in Vietnam is small at present, although the government ismaking it a priority Given rapid economic growth in the region, there is significant development potentialfor the industry and the Ministry of Industry and Trade is looking to make the domestic industry morecompetitive As mentioned in the recently approved masterplan, the government aims to improve thelocalisation rate of cars manufactured in Vietnam to 35% by 2020 and 65% by 2035

The recent decision by Gentherm, a manufacturer of auto thermal management technologies, to open a new

manufacturing facility in the country is a positive for the sector The company has said that this facility willhelp it leverage Vietnam's competitive labour force and workplace environment and will support its

ambitious growth plans in Asia

BMI also sees potential opportunities in the government's plans to create a national industry hub in the Chu

Lai Economic Zone, with the project aiming to increase the scale of domestic production which willimprove the competitiveness of the sector as import tariffs are eliminated under the ASEAN Free TradeAgreement

In December 2015, Chinese tyre manufacturer Sailun Jinyu Group announced plans to invest a maximum

of CNY1.3bn (USD200mn) in building a second tyre facility in Vietnam The planned facility, which wouldsupply tyres for trucks and off-road equipment, is aimed to counter trade barriers in certain markets Thefacility would cater to the South American, North American and European markets as these markets do notallow the sale of Chinese-manufactured tyres The facility is expected to produce 1.2mn tyres for trucks andbuses, as well as 30,000 metric tonnes of off-road tyres The construction of the factory is scheduled to takethree years