Foreign car firms can smell the burning of engine oil as the Vietnamese market heats up.
Vietnam will emerge as the second fastest-growing production hub for cars in Southeast Asia after the Philippines between 2017 and 2021, according to BMI Research, a part of Fitch Group.
Output of passenger cars is expected to surge over 60 percent to 84,000 units during the period.
BMI analysts predict Vietnam’s average annual car output growth could reach 10 percent over the next five years, thanks to increased investment from foreign manufacturers.
French automaker Groupe PSA, which owns brands such as Citroen and Peugeot, and Korea’s Hyundai Motors are among those looking to take advantage of the country’s increasingly affluent population and low existing car ownership. Only 2 percent of Vietnamese households own a car, according to Pew Research Center.
Aside from these investments, there are also growing challenges to Vietnam’s role as a regional production hub.
The cost of vehicle production in Vietnam is around 20 percent higher than in other regional countries due to the country’s heavy reliance on imported parts.
When it comes to the localization rate in car manufacturing, Vietnam performs poorly with 20-40 percent, compared to 90 percent in neighboring Thailand.
From 2018, import tariffs on automobiles imported from Southeast Asian countries will be cut from the current 30 percent to zero, which is likely to hurt the local auto manufacturing industry, said BMI.