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At its peril

Released at: 10:47, 20/03/2014

At its peril

Toyota Motor Vietnam's mantle as the leading motor car producer in Vietnam will be put at risk if it fails to keep up with the times.

by Minh Tien and Hai Bang

The 250,000th vehicle of Toyota Motor Vietnam (TMV) - an Innova - rolled out of its headquarters in northern Vinh Phuc province on October 31. In a tough market like Vietnam a quarter of a million cars would be a dream for most automotive companies in the country, as evidenced by Mitsubishi and Madza actually having left already.

Dominant position

Founded in September 1995 as a joint venture and with investment capital of $89.6 million, 70 per cent of which came from Toyota Motor Corporation, 20 per cent from the Vietnam Engine and Agricultural Machinery Corporation, and 10 per cent from KUO Singapore Pte Ltd, TMV has continually developed in sales, production scale and workforce. With a modest initial output of just two vehicles per day, 140 are produced daily 18 years later, for more than 30,000 a year. “Only two years after reaching the milestone of our 200,000th vehicle in November 2011, we are proud to announce the roll-out of our 250,000th vehicle,” said Mr Yoshihisa Maruta, CEO of TMV. 

Eighteen years has been more than enough time for consumers to recognise the quality of its products. Toyota’s designs may not be overly spectacular but are still attractive, and what consumers really prefer is durability and reliability. “The only thing I have to do with my car is remember to bring it in for a service,” said Mr Tran Han Thanh, the director of a construction company and owner of a Toyota Land Cruiser that ferries him to all parts of Vietnam’s north.

Durability, reliability and appearance are all important but won’t fully satisfy the demands of Vietnamese drivers, and Toyota knows this well. Its vehicles are all energy-efficient, with the lowest fuel consumption in the market even after many years on the road. Toyota also values its service quality, which was illustrated in research conducted by JD Power Asia Pacific on customer satisfaction when buying a car in Vietnam, where Toyota earned a relatively high 852 points on a 1,000-point scale.

TMV has been a pioneer in its time in Vietnam and successfully covered the medium and low cost segments in the market with various product lines and held an overall market share in the vicinity of 30 per cent. Figures for the first ten months of 2013 from the Vietnam Automobile Manufacturers’ Association (VAMA) put TMV’s sales at around 26,400, more than 40 per cent higher than in the same period of 2012, for a 34.7 per cent market share.

Despite having a long list of advantages, TMV may struggle to retain its top position if it fails to consider emerging threats not only from domestic manufacturers but also from regional competitors.

Threats from within

Despite the fact that Toyota has always emphasised the Kaizen spirit, with continuous improvement permeating through all research and development (R&D) and manufacturing activities, it seems that the Japanese manufacturer is falling behind in competing with emerging automakers. Last September Mr Maruta had to admit that TMV faces increasing difficulties and challenges from other manufacturers. Such rivals include two South Korean automakers - Kia and Hyundai.

Having arrived in Vietnam just recently, the two South Korean manufacturers have nonetheless managed to carve out significant advantages with various product lines, ongoing product development, a large number of showrooms and staff, and rapid development regarding product quality and customer service.

In 2009 the Kia Forte was something of a phenomenon in Vietnam. The mid-sized sedan was positioned in the same segment as the Toyota Corolla Altis but was 30 per cent cheaper and with a sleeker exterior and a modern interior equipped with options not found in the Japanese model. The increasing number of showrooms of the two South Koreans over the last few years indicates a new view by Vietnamese customers of the South Korean automobile industry.

And Toyota’s reputation was dented in 2011 when “whistle-blower” Le Van Tach, who was an engineer at TMV, released documents revealing three glitches in the Innova and Fortuner. He said that TMW had sold around 60,000 vehicles in Vietnam with quality defects. TMV initially rejected the figures and announced that a modest 167 vehicles suffered from defects. It took some time for the automaker to finally announce its largest ever recall, of over 65,000 cars, including the Innova, the Fortuner and the Camry, which left major questions over its transparency and sense of responsibility.

Threats from without

As the automaker with the highest localisation rate in Vietnam, from 19 to 37 per cent, TMV’s target has been to contribute to local support industries. Not only the first to complete a production line with four processes - stamping, welding, painting and assembly - TMV also made efforts to encourage component manufacturers under the Toyota Group to invest in Vietnam.

The purpose of increasing the localisation rate is to create a sustainable automobile industry for Vietnam by cutting production costs. The process of building support industries has been in place for nearly two decades now, from the time TMV first came to Vietnam. To date, though, it can only localise 253 components provided by 17 suppliers, which is a rather modest figure compared to regional countries, and production costs have not been cut significantly, as prices for CKD (completely knocked down, i.e. assembled in Vietnam) cars are not much lower that prices for CBU (completely built up, i.e. imported whole to Vietnam) vehicles. There is a belief among Vietnamese car buyers that the higher the localisation rate is the lower the quality will be. At just 10 to 20 per cent more expensive, many don’t hesitate to buy a high-quality imported motor car.

Import taxes on regular passenger car will fall from 60 to 50 per cent this year and be eliminated by 2018 under Vietnam’s tariff reduction obligations in the ASEAN Free Trade Area (AFTA) agreement, which it had to sign in order to join ASEAN. “Vietnamese buyers are expecting to buy cars at more reasonable prices by 2018,” said Mr Pham Van Tai, Deputy General Director of Truong Hai Thaco. “Existing automakers may play a different role by then, as importers. Then where will Vietnam’s automobile industry be?”

TMV has warned that Vietnam will lose opportunities to develop its automobile industry if the government fails to adopt suitable policies from now to 2025. The policies for the industry have always been in response to certain circumstances, not long-term goals. “The 50 per cent import tax will be maintained until 2018,” said Mr Duong Dinh Giam, Director of the Industrial Policy and Strategy Institute (IPSI) under the Ministry of Industry and Trade (MoIT), which prepares such policies. “The previous idea was to reduce it to 35, 20 and then 10 per cent before officially eliminating it.” This is to protect domestic manufacturers, but the more protection they receive the less cars may be sold, which has been the story of the last two decades. Mr Maruta admits that if the government doesn’t have policies to consolidate the gap in cost between CKD and CBU vehicles, it will be a challenge for Vietnam to maintain an auto industry, of which TMV is the main player.

 

Interview with Mr Yoshihisa Maruta, CEO of TMV

What are the advantages and challenges facing TMV in doing business in Vietnam?

Vietnam’s market is small but holds great potential, with advantages including the country’s young population, low labour costs, abundant skilled human resources and increasing economic growth. Incomes are rising but car ownership remains low.

TMV, as well as other automakers, faces a range of challenges, especially with Vietnam having joined the WTO, such as the small-scale of the market, underdeveloped support industries, unstable and short-term policies, poor infrastructure, high taxes, and administrative procedures that don’t fully support foreign investors, among other things.

How has TMV prepared for 2018, when there will be no import tax on CBU vehicles under the commitments made when Vietnam joined AFTA? How will the motor car industry look before 2018 and after?

I believe that five years is a very short period of time for the development of the automotive industry. Therefore, if there are no supporting policies and favourable conditions from the government to increase the competitiveness of automakers then it will be very difficult for assemblers to compete with imported CBU vehicles and, therefore, very few manufacturers will exist amid such fierce competition.

What are TMV’s strategies to differentiate itself from its competitors? What are its major strategies for 2014 and over the next five years?

In order to maintain stable operations we will carry on making continuous efforts to enhance product competitiveness by cutting production costs and improving service quality, retaining our leading position in Vietnam’s automobile market.

 

Make

Roll-out

Total sales as at November, 2013

Reference retail price

Corolla Altis

8/1996

43,500

VND734 million - VND899 million, ($34,498 - $42,253)

Camry

1/1998

32,000

VND982 million - VND1,241 million ($46,154 - $58,327)

Vios

8/2003

36,000

VND552 million - VND602 million ($25,944 - $28,294)

Innova

1/2006

68,000

VND694 million - VND800 million ($32,618 - $37,600)

Fortuner

2/2009

30,700

VND878 million - VND1039 million ($41,266 - $48,833)

 

Toyota Milestores

1995:               Toyota Motor Vietnam established
1996:               Breaking-ground ceremony held for its main factory in Vinh Phuc province
1997:               Training centre opened at the factory
                          Ho Chi Minh City branch opened
                         Spare parts warehouse (CPD) opened at the factory
1998:                Hanoi branch opened
1999:                ISO:14001 Certificate for Environmental Management Systems received
2003:                Stamping shop opened
2004:                Toyota spare parts export centre opened
                          Quick Maintenance Service introduced
2005:                50,000th vehicle rolled out
                          Toyota Vietnam Foundation (TVF) established
2007:                Quick Repair and Paint Service introduced
2008:                100,000th vehicle rolled out
                          Chassis factory opened
                           Four-hour Scratch Repair Service introduced
2009:                Toyota South Centre opened
2010:                 First Toyota Used Car Centre opened in East Saigon
2011:                 200,000th vehicle rolled out
2013:                 250,000th vehicle rolled out

 

 

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