BMI Vietnam Autos Report Q2 2014

Q2 2014
www.businessmonitor.com
VIETNAM
AUTOS REPORT
INCLUDES 5-YEAR FORECASTS TO 2018
ISSN 1749-0286
Published by:Business Monitor International
Vietnam Autos Report Q2 2014

INCLUDES 5-YEAR FORECASTS TO 2018
Part of BMIs Industry Report & Forecasts Series

Published by: Business Monitor International
Copy deadline: January 2014
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CONTENTS
BMI Industry View ............................................................................................................... 7
SWOT .................................................................................................................................... 9
SWOT ..................................................................................................................................................... 9
Political ................................................................................................................................................. 10
Economic ............................................................................................................................................... 11
Business Environment .............................................................................................................................. 12
Industry Forecast .............................................................................................................. 13

Table: Vietnam Autos Production, 2011-2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Table: Vietnam Autos Sales, 2011-2018 (VAMA Members) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Table: Vietnam Autos Trade, 2011-2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Table: Vietnam - 2014 Import Tax Regime . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Industry Forecast Passenger Cars ............................................................................................................ 23

Industry Forecast Commercial Vehicles .................................................................................................... 24
Table: Top Five Companies By CV Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Industry Forecast Suppliers .................................................................................................................... 24
Macroeconomic Forecasts ............................................................................................... 30

Table: Vietnam - Economic Activity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
Industry Risk Reward Ratings .......................................................................................... 34

Asia-Pacific Risk/Reward Ratings ............................................................................................................ 34
Table: Asia-Pacific Autos Risk/Reward Ratings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
Company Profile ................................................................................................................ 38

Company Monitor ....................................................................................................................................
GM Vietnam ...........................................................................................................................................
Mercedes-Benz Vietnam ............................................................................................................................
Automotive Asia Ltd .................................................................................................................................
38
41
42
44
Regional Overview ............................................................................................................ 45

Table: Vehicle Sales 2013 (CBUS) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
Global Industry Overview .................................................................................................. 50

Table: Passenger Car Sales November 2013 (CBUs) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
Europe On Road To Recovery .................................................................................................................. 50

Tax Hike Skews Japan's Outlook; US Hits Sweet 16 ...................................................................................... 52
China Is BRIC Bright Spot ....................................................................................................................... 54
Demographic Forecast ..................................................................................................... 57

Demographic Outlook .............................................................................................................................. 57
Table: Vietnam's Population By Age Group, 1990-2020 ('000) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58
Page 4

Table: Vietnam's Population By Age Group, 1990-2020 (% of total) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59
Table: Vietnam's Key Population Ratios, 1990-2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60
Table: Vietnam's Rural And Urban Population, 1990-2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60
Methodology ...................................................................................................................... 61
Industry Forecasts ..................................................................................................................................
Sector-Specific Methodology ....................................................................................................................
Sources ................................................................................................................................................
Risk/Reward Ratings Methodology ............................................................................................................
61
62
62
63
Table: Automotive Risk/Reward Ratings Indicators And Weighting Of Indicators . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64
Page 5
BMI Industry View

According to the Vietnam Automobile Manufacturers Association (VAMA), vehicle sales of its members
grew 20.0% in 2013, to 96,688 units. The strong showing in 2013 was largely attributed to the rebound in
the automotive sector, which was ravaged by the recession that hit the country in 2012.
We remain bullish on the Vietnamese auto market, however, and forecast vehicle sales to grow 10.0% in
2014. While this is below 2013's growth rate, it is because vehicle sales have normalised and the higher
base effects of 2013 will make it harder for them to continue growing at such a rapid clip.
Our bullish outlook on the sector chimes with our Country Risk team's optimistic view on Vietnam's
economy. As the government takes steps to privatise the country's state-owned enterprises (SOEs), we see it
as a harbinger for more free market reforms in the coming years, which will undoubtedly provide a boost to
economic growth (see 'Privatisation Of SOEs Highly Positive For The Economy', January 8). BMI forecasts
Vietnam's GDP to grow 5.9% in 2014 and 6.4% in 2015.
Besides the ongoing privatisation drive, another factor supporting auto sales is our outlook for stable
interest rates in 2014. Our Country Risk team forecasts the State Bank of Vietnam's benchmark refinancing
rate to remain on hold at 7.00% throughout 2014 (see 'New Credit Growth Target Suggests Monetary Policy
To Be Kept On', December 30 2013). The resultant stability in consumer financing rates will continue to
make it attractive for buyers to take on financing for their vehicle purchases.
We expect the outperformance of passenger car sales to continue in 2014, aided by the availability of
affordable car loans. That said, we forecast commercial vehicle (CV) sales, which were impacted by weak
demand from businesses in 2013, to grow 8.0% in 2014, as Vietnam's ongoing banking sector reforms and
SOE restructuring begin to bear fruit.
We have also upgraded our 2015 vehicle sales growth forecast from 7.2% to 8.6% due to the gradual
abolishment of import tariffs on vehicles imported from other ASEAN countries as part of the region's
Trade in Goods Agreement. As duties are slowly reduced, imported cars, which were previously priced out
of the local market due to high taxes, will now become more affordable for the average Vietnamese
consumer. This will then result in sustained sales growth for the imported car segment.
Despite our more optimistic outlook for vehicle production in the coming years, we warn that a lot needs to
be done in terms of policy changes to make Vietnam an attractive market for autos-related investment in the
Page 7
Asia-Pacific region. Although the government has tried to increase domestic production in the industry, in
particular by raising import tariffs on vehicles, there has been little in the way of rewards for companies
which have chosen to invest. This is reflected in the 'rewards' section of BMI's industry Risk/Reward
ratings for the autos sector in Asia, where Vietnam scores far below its neighbours in terms of the industry
rewards on offer.
Page 8
SWOT
SWOT
Vietnam Autos Industry SWOT
Strengths
Low rates of vehicle ownership, together with Vietnam's large population, provide an
opportunity for strong vehicle sales growth over the long term.
Low manufacturing and labour costs.
Stable interest rates will continue to make it attractive for consumers to utilise credit
to purchase cars.
The cut in car registration fees is likely to see sustained growth in passenger car
sales.
Weaknesses
Lack of production incentives mean that the automotive sector lags other sectors in
attracting FDI.
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.
Opportunities
The market shows diversity, with long-term growth likely for both the premium and
small car segments.
The annual reduction of tariffs on CBU imports from 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.
Threats
The eventual elimination of import tariffs in the Vietnamese auto market by 2018 could
prevent the development of a vibrant local vehicle industry.
Page 9
Political
SWOT Analysis
Strengths
The Communist Party of Vietnam remains committed to market-oriented reforms and

we do not expect major shifts in policy direction over the next five years. The oneparty system is generally conducive to short-term political stability.
Relations with the US have witnessed a marked improvement, and Washington sees
Hanoi as a potential geopolitical ally in South East Asia.
Weaknesses
Corruption among government officials poses a major threat to the legitimacy of the
ruling Communist Party.
There is increasing (albeit still limited) public dissatisfaction with the leadership's tight
control over political dissent.
Opportunities
The government recognises the threat corruption poses to its legitimacy, and has
acted to clamp down on graft among party officials.
Vietnam has allowed legislators to become more vocal in criticising government

policies. This is opening up opportunities for more checks and balances within the
one-party system.
Threats
Macroeconomic instabilities continue to weigh on public acceptance of the one-party

system, and street demonstrations to protest economic conditions could develop into
a full-on challenge of undemocractic rule.
Although strong domestic control will ensure little change to Vietnam's political scene
in the next few years, over the longer term, the one-party-state will probably be
unsustainable.
Relations with China have deteriorated over recent years due to Beijing's more
assertive stance over disputed islands in the South China Sea and domestic criticism
of a large Chinese investment into a bauxite mining project in the central highlands,
which could potentially cause wide-scale environmental damage.
Page 10
Economic
SWOT Analysis
Strengths
Vietnam has been one of the fastest-growing economies in Asia in recent years, with
GDP growth averaging 7.1% annually between 2000 and 2012.
The economic boom has lifted many Vietnamese out of poverty, with the official
poverty rate in the country falling from 58% in 1993 to 20.7% in 2012.
Weaknesses
Vietnam still suffers from substantial trade and fiscal deficits, leaving the economy
vulnerable to global economic uncertainties. The fiscal deficit is dominated by
substantial spending on social subsidies that could be difficult to withdraw.
The heavily-managed and weak currency reduces incentives to improve quality of

exports, and also keeps import costs high, contributing to inflationary pressures.
Opportunities
WTO membership and the upcoming ASEAN AEC in 2015 should give Vietnam
greater access to both foreign markets and capital, while making Vietnamese
enterprises stronger through increased competition.
The government will in spite of the current macroeconomic woes, continue to move
forward with market reforms, including privatisation of state-owned enterprises, and
liberalising the banking sector.
Urbanisation will continue to be a long-term growth driver. The UN forecasts the

urban population rising from 29% of the population to more than 50% by the early
2040s.
Threats
Inflation and deficit concerns have caused some investors to re-assess their hitherto
upbeat view of Vietnam. If the government focuses too much on stimulating growth
and fails to root out inflationary pressure, it risks prolonging macroeconomic
instability, which could lead to a potential crisis.
Prolonged macroeconomic instability could prompt the authorities to put reforms on

hold as they struggle to stabilise the economy.
Page 11
Business Environment
SWOT Analysis
Strengths
Vietnam has a large, skilled and low-cost workforce, which has made the country
attractive to foreign investors.
Vietnam's location - its proximity to China and South East Asia, and its good sea links
- makes it a good base for foreign companies to export to the rest of Asia, and
beyond.
Weaknesses
Vietnam's infrastructure is still weak. Roads, railways and ports are inadequate to
cope with the country's economic growth and links with the outside world.
Vietnam remains one of the world's most corrupt countries. According to

Transparency International's 2012 Corruption Perceptions Index, Vietnam ranks 123
out of 176 countries.
Opportunities
Vietnam is increasingly attracting investment from key Asian economies, such as

Japan, South Korea and Taiwan. This offers the possibility of the transfer of high-tech
skills and know-how.
Vietnam is pressing ahead with the privatisation of state-owned enterprises and the
liberalisation of the banking sector. This should offer foreign investors new entry
points.
Threats
Ongoing trade disputes with the US, and the general threat of American
protectionism, which will remain a concern.
Labour unrest remains a lingering threat. A failure by the authorities to boost skills
levels could leave Vietnam a second-rate economy for an indefinite period.
Page 12
Industry Forecast
Production
Vietnam's autos industry is still in its infancy as producers typically import completely knocked-down kits
(CKDs), which are assembled and sold domestically. The domestic parts sector is small at present, although
the government is making it a priority. Given rapid economic growth in the region, there is significant
development potential for the industry, especially as less than 4% of the population owns a car.
Table: Vietnam Autos Production, 2011-2018
2011
2012
2013e
2014f
2015f
2016f
2017f
2018f
Total Production
31,181
40,470
42,898
46,808
51,498
55,351
59,691
64,584
Passenger Car Production
29,904
38,900
41,234
45,028
49,575
53,293
57,468
62,161
1,277
1,570
1,664
1,781
1,923
2,058
2,222
2,422
Commercial Vehicle Production
e/f= BMI estimate/forecast. Source: BMI, OICA
Production Will Grow But Importing Still More Attractive
According to Gaikindo, auto production in Vietnam rose 27.4% y-o-y in November 2013 (latest available),
to 10,003 units, bringing output for the first 11 months of 2013 to 83,656 units, an increase of 24.5% y-o-y.
This was the first time since November 2010 that monthly production crossed the 10,000 units mark.
However, auto production has been in a downtrend since late 2010. While the contraction in vehicle
production mirrors the fall in domestic sales since 2011, caused by the economic recession in that period,
there are also broader structural issues which have prevented an expansion in domestic auto production. The
lack of a coherent auto policy, weak government incentives, and, poor supplier presence, have all combined
to make local manufacturing an unattractive proposition for automakers (see 'Sales Soar, But Production
Still Underperforming, September 23 2013).
Page 13
Rising, But Not Up To The Mark

Vietnam - Domestic Auto Production, Units (LHS); % Chg y-o-y (RHS)
Source: BMI, Gaikindo
That said, the uptick in monthly production in the past few months does indicate to us that output would
pick up in 2014. As previously highlighted, we believe the strong momentum in domestic sales will
continue in 2014 on the back of the resurgence in the Vietnamese economy, as the government moves to
privatise the country's state-owned enterprises and embark on a series of free market reforms in the coming
years (see 'Sales To Build On Solid 2013', January 16). This, will then, result in local carmakers raising
their output to meet higher demand. Against this backdrop, we have upgraded our 2014 and 2015
production growth forecast to 9.1% and 10.0% respectively.
However, due to a lack of attractive incentives to produce locally, we only see automakers with a strong
presence in the domestic market, such as Toyota Motor and Ford Motor, increasing their output. In our
opinion, it is unlikely that new entrants will set up production bases in the country to tap rising car demand,
which still remains low in absolute numbers.
We also see the gradual abolishment of import tariffs on vehicles imported from other ASEAN countries as
a key threat to the Vietnamese auto sector (see 'Will Abolishing Import Duties Decimate Local
Page 14
Manufacturing', January 9). As tariffs are lowered, potential entrants will likely prefer to import completely
built units into the country instead of establishing greenfield production facilities. Indeed, our trade balance
forecast shows net imports rising from 2014 to 2018 as sales growth of imported vehicles accelerates.
In order to prevent the worst case scenario of the decimation of local manufacturing as import tariffs are
eventually abolished, the Vietnamese government needs to put in place a strong and coherent auto sector
policy, and ensure greater domestic supplier presence, which will then incentivise more automakers to
invest in local production.
Supplier Segment Shares The Blame
An underdeveloped supplier segment has been an underlying problem in attracting vehicle production
investment for many years. According to the CCI's report, the parts produced locally are very simple and
the industry's technology as a whole is restricted to welding, assembly, painting and testing.
This means that while local content requirements have previously been set in order to necessitate
investment, they have rarely been met. For vehicles with less than nine seats, the average rate of local
content is just 15%, and for vehicles with 10 seats or more the level is 30-40%, vis-a-vis the 60% target.
Although the government has tried to increase domestic production in the industry before, particularly by
raising import tariffs on vehicles, there has been little in the way of rewards for companies which have
chosen to invest. This is reflected in the 'rewards' section of BMI's industry Risk/Reward Ratings for the
autos sector in Asia, where Vietnam scores far below its neighbours in terms of the industry rewards on
offer.
The industry's shortcomings will also have a financial impact. The autos trade deficit has been a concern for
a number of years, prompting increases in import tariffs and regulations to weed out smaller unauthorised
importers. However, tariffs will need to be lowered again in accordance with ASEAN trade obligations and
with the sector not yet in a position to compete with its more productive neighbours, the CCI report expects
Vietnam to be spending US$12bn per year on vehicle imports until 2025.
What Does The Government Need To Do?
To spur domestic production, we believe the government needs to do the following:
Page 15
Simplifying Tax Policies: There are currently nine different taxes on vehicles, with taxes accounting for
some 60% of the value of a new car in Vietnam. These range from registration fees to an environmental
protection tax imposed on imported cars in Vietnam. BMI has previously highlighted that increased import
taxes are making imported cars unaffordable (see our online service, August 9 2012, 'Increased Charges
Dampen Demand'). We believe that the number of taxes needs to be reduced so as to make the purchase of a
car more affordable and less confusing for businesses and consumers.
The recent measures to cut taxes, is a step in the right direction for the government's 2020 auto development
plan.
Investment In Infrastructure: While the Ministry of Industry and Trade (MOIT) has been making efforts
to develop the automobile industry, the Ministry of Transport (MOT) and the Ministry of Finance (MOF)
are concerned about road congestion and have therefore imposed tariffs on imported cars. Our Infrastructure
team believes that Vietnam needs greater investment in roads as currently many of its roads are just wide
enough for two-wheelers.
Although the government needs to make a concerted effort to improve Vietnam's road infrastructure to allay
the concerns of MOT and MOF and therefore enable all three ministries to work harmoniously to develop
Vietnam's automobile sector, we believe it would be a challenge in the short term due to the lack of credit as
well as the banking sector's woes. However, it would be easier in the long term with the reforms the
banking sector is currently undergoing, as well as the possibility of getting financing from abroad.
Attractive Investment Policies: We believe that the Vietnamese government needs to offer incentives such
as tax breaks to attract more foreign direct investment (FDI) into the country. With investments from global
automakers in the country, there can be knowledge-sharing as well as a transfer of technology with the local
players. Currently, most of the auto production in the country is just assembly of cars and that is insufficient
for Vietnam to develop a competency in this sector. With FDI, Vietnam would have the chance to move up
the value chain of production.
While the fledging auto manufacturing industry takes time to gain traction, we believe the component
industry could see more investments in the sector. Vietnam has one of the lowest labour costs in the region,
making it attractive for component manufacturers to base their production facilities in. While they may be
unable to sell many of their products locally due to the lack of auto production, exporting these components
from Vietnam is a viable alternative.
Page 16
South Korean manufacturer Hyundai Motor has already committed to an agreement with local company
Truong Hai Automobile, which will act as the company's exclusive distributor in the country. Hyundai
will also set up an engine production plant with an annual production capacity of 10,000 engines for the
domestic market in the initial phase, followed by an expansion to 50,000 to accommodate exports to China,
after 2015. Fellow Korean manufacturer Kia Motors is also reportedly in negotiations with the economic
zone's management regarding a project to produce 100,000 cars per year from 2015.
Sales
Table: Vietnam Autos Sales, 2011-2018 (VAMA Members)
2011
2012
2013e
2014f
2015f
2016f
2017f
2018f
110,938
78,558
93,093
102,358
111,160
119,610
129,425
140,845
Total sales (%
chg y-o-y)
-1.1
-29.2
18.5
10.0
8.6
7.6
8.2
Passenger car
sales
64,620
43,030
55,078
61,302
66,819
72,165
78,660
Total sales
Passenger car
sales (% chg yo-y)
Commercial
Vehicle sales
Commercial
Vehicle sales (%
chg y-o-y)
8.8
86,526
10.0
11.8
-33.4
28.0
11.3
9.0
8.0
9.0
46,318
35,528
38,015
41,056
44,341
47,444
50,766
-14.9
-23.3
7.0
8.0
8.0
7.0
7.0
54,319
7.0
Figures exclude Mercedes-Benz's sales. e/f = BMI estimate/forecast. Source: BMI, VAMA
Sales To Build On Solid 2013
According to the VAMA, vehicle sales of its members grew 20.0% in 2013, to 96,688 units. The strong
showing in 2013 was largely attributed to the rebound in the automotive sector, which was ravaged by the
recession that hit the country in 2012.
Page 17
Surging In Line With Our Bullish Outlook

Vietnam - Domestic Auto Sales, Units (LHS); % Chg y-o-y (RHS)
Sales include Mercedes-Benz's figures. Source: BMI, VAMA
We remain bullish on the Vietnamese auto market, however, and forecast vehicle sales to grow 10.0% in
2014 (this excludes sales of Mercedes-Benz, which reports its figures separately). While this is below
2013's growth rate, it is because vehicle sales have normalised and the higher base effects of 2013 will
make it harder for them to continue growing at such a rapid clip.
Our bullish outlook on the sector chimes with our Country Risk team's optimistic view on Vietnam's
economy. As the government takes steps to privatise the country's state-owned enterprises (SOEs), we see it
as a harbinger for more free market reforms in the coming years, which will undoubtedly provide a boost to
economic growth (see 'Privatisation Of SOEs Highly Positive For The Economy', January 8). BMI forecasts
Vietnam's GDP to grow 5.9% in 2014 and 6.4% in 2015.
Besides the ongoing privatisation drive, another factor supporting auto sales is our outlook for stable
interest rates in 2014. Our Country Risk team forecasts the State Bank of Vietnam's benchmark refinancing
rate to remain on hold at 7.00% throughout 2014 (see 'New Credit Growth Target Suggests Monetary Policy
Page 18
To Be Kept On', December 30 2013). The resultant stability in consumer financing rates will continue to
make it attractive for buyers to take on financing for their vehicle purchases.
While the breakdown between 2013 passenger car and commercial vehicle sales is still unavailable, car
sales growth handily outperformed CV sales growth. We expect this outperformance in passenger car sales
to continue in 2014, aided by the availability of affordable car loans. That said, we forecast CV sales, which
were impacted by weak demand from businesses in 2013, to grow 8.0% in 2014, as Vietnam's ongoing
banking sector reforms and SOE restructuring begin to bear fruit.
We have also upgraded our 2015 vehicle sales growth forecast from 7.2% to 8.6% due to the gradual
abolishment of import tariffs on vehicles imported from other ASEAN countries as part of the region's
Trade in Goods Agreement. As duties are slowly reduced, imported cars, which were previously priced out
of the local market due to high taxes, will now become more affordable for the average Vietnamese
consumer. This will then result in sustained sales growth for the imported car segment.
Looking further forward, BMI forecasts The Vietnamese American Medical Association (VAMA)
members' domestic auto sales to enjoy average annual growth of 8.6% over the 2014-2018 period, to hit
141,000 units by 2018. This is due to the following two reasons:
Formation of ASEAN Economic Community (AEC) By 2015: The AEC is expected to provide a huge
boost to Vietnam's economy. Being an export-oriented economy, Vietnam is going to benefit from the free
movement of goods under this accord. A rise in exports will boost the incomes of the rising middle class in
the country. This increase in disposable incomes will translate in higher sales for consumer durables like
cars. Furthermore being part of the AEC would mean that Vietnam would have to reduce or abolish its high
automotive taxes, further providing a boost to vehicle sales.
Huge Domestic Market Of 90 Million People: Vietnam has the largest population in the Association of
South East Asian Economies (ASEAN) of 90mn. BMI considers this to be a huge market with untapped
potential. As investment enters the country and its economy grows, more jobs will be created and we can
expect the share of middle class consumers to rise. This would increase discretionary spending for items
like cars. BMI forecasts the average annual growth rate for Vietnam's economy to be 7.0% for the next 10
years.
Page 19
Trade
Table: Vietnam Autos Trade, 2011-2018
Vehicle trade balance, units

Vehicle trade balance, units, % chg
y-o-y
2011
2012
2013
2014f
2015f
2016f
2017f
2018f
-79,757
-38,088
-50,195
-55,550
-59,662
-64,258
-69,735
-76,761
5.0
-52.2
31.8
10.7
7.4
7.7
8.5
9.4
f= BMI forecast. Source: BMI, VAMA
At present, the number of local parts used in car assembly is very low, with Suzuki Motor having a
localisation ratio of 3% and Ford Motor 2%, according to VietNamNet Online. This is far below the current
targeted ratio of 50%. Moreover, foreign manufacturers are yet to make a significant investment in
transferring modern technologies to Vietnam.
The government wants local suppliers to provide 50-60% of all the necessary car parts for domestic
production by 2020. Whether this can be achieved in such a short time, especially given a still-uncertain
tariff backdrop, remains to be seen.
Industry Trends And Developments - Will Abolishing Import Duties Decimate Local Manufacturing?
BMI View: The gradual abolishment of import tariffs in the Vietnamese auto market will inevitably pose a
threat to local manufacturing, especially to smaller carmakers, that may not have sufficient volumes to
enjoy economies of scale. That said, we still see pockets of opportunity for domestic production as the AEC
approaches in 2015.
As of January 1 2014, Vietnam has reduced its duties on vehicles imported from other ASEAN countries by
10-50% as part of the ASEAN Trade in Goods Agreement (ATIGA). Under the ATIGA, Vietnam will
eventually eliminate all import duties on cars by 2018.
The table below highlights the new 2014 tax regime for vehicle imports from other ASEAN nations.
Page 20
Table: Vietnam - 2014 Import Tax Regime
Type Of Vehicle
Import Tax
Emergency cars and prisoner transport vehicles

4-seater to 9-seater cars
0-5%
50% (Down from 60% in 2013)
Trucks and other vehicles

Bicycle, motorcycle and electric vehicles
0-50%
Set to decrease but % not stated
Completely knocked down kits
0-50%
Source: BMI, ASEANBRIEFING
Local Manufacturers At A Disadvantage?
While lower import taxes are definitely a boon for consumers as they will now get to enjoy cheaper cars,
local carmakers such as Toyota Motor and Ford Motor have warned that the gradual removal of import
tariffs will hurt domestic auto manufacturing as the industry will need to compete with cheaper imports
flooding the Vietnamese auto market.
We believe there is some merit to this argument. We have stated before that auto production is
underperforming and more needs to be done by putting the right policies in place to attract investment in the
sector (see 'Sales Soar, But Production Still Underperforming', September 23 2013). Automakers have also
been reluctant to commit to local assembly due to the still small domestic sales volumes and with import
tariffs set to come down in the coming years it would make sense for many of these potential entrants to
import cars into Vietnam through dealerships rather than set up local assembly operations.
Therefore, it is reasonable to assume that even if policymakers put in place attractive incentives now, it will
be difficult for the Vietnamese auto sector to be able to reach the scale of Thailand and Indonesia, two
thriving auto hubs in the region, in the space of a few years. It is only when domestic sales pick up to the
levels seen in some of the bigger ASEAN markets that more manufacturing plants could be justified.
Imports Will Remain Strong
We believe the growth in car imports is set to accelerate in the coming years. For the first 11 months of
2013, the total vehicle sales of Vietnam Automobile Manufacturers Association (VAMA) members
(automakers who have local assembly operations) came in at 85,507 units, an increase of 18.2%. On the
other hand, the Vietnam Customs Office said that passenger car imports from Thailand and Indonesia (two
Page 21
of the major car exporters to Vietnam) more than doubled in the first 11 months of 2013, to 8,826 units. As
import taxes steadily decrease, imported car sales can only grow strongly from their existing low base.
Furthermore, it is our long-held view that the formation of the ASEAN Economic Community (AEC) in
2015 will accelerate trade in the region, as tariffs are further reduced, and result in automakers
concentrating their investment in one or two production hubs in the region to reap economies of scale. On
this front, we remain the most bullish on Thailand and Indonesia's potential and see carmakers increasing
their output in these countries as they gear up to increase their exports to other ASEAN markets such as
Vietnam (see 'Shipping And Auto Export Hubs Throw Up Interesting Possibilities', March 26 2013).
Is The Vietnamese Auto Industry Doomed?
That said, it is unfair to dismiss the potential of the Vietnamese auto industry and there remain pockets of
opportunity, even as imported vehicles will pose greater competition in the future. Below we summarise the
impact of the reduction in import tariffs.
Suppliers Will Remain Crucial
The growing imports of both used and new cars will mean that more consumers will require after-sales
services as well as spare parts to keep their vehicles in a roadworthy condition. Additionally, automakers
such as Toyota have long lamented the lack of localisation in the sector, which has resulted in them having
to import certain components and paying high import taxes on them. In addition, Toyota enjoys a domestic
market share of greater than 30% and is likely to continue its local manufacturing operations even as import
duties are reduced. This will mean ample opportunities for auto suppliers to step in to commence production
of parts which are currently unavailable locally.
Furthermore, under the AEC framework, ASEAN countries which want to export cars to the rest of the
region need to ensure at least 40% local content in the vehicle. Once again, a higher concentration of
suppliers will be necessary in the sector if some of the larger local automakers are keen to export some of
their models to other markets.
2-Wheeler Industry To Remain Attractive
Vietnam is one of the biggest two-wheeler markets in the ASEAN region. Motorbikes remain an affordable
mode of transportation and are a practical option in a country where many of the roads are not wide enough
to accommodate cars. The more than 38mn two-wheelers on Vietnam's roads attest to their popularity and
we believe both manufacturers and suppliers in this segment still have plenty of growth potential.
Page 22
Smaller Local Manufacturers Could Exit
Some of the smaller VAMA members may be forced to shutter their operations well before 2018 as car
imports become more competitive vis--vis local manufacturing. These automakers may find it more
feasible to produce in their existing production facilities in the rest of the region and export to the
Vietnamese market.
Industry Forecast Passenger Cars

We forecast passenger car sales to grow 11.3% in 2014, to 61,000 units. Toyota remained the sales leader in
2013, a title it has held on to since September 2012.
Industry News - Rolls-Royce Opens A Dealership In Hanoi
Rolls-Royce is set to open a new showroom in Hanoi in Q413. It has appointed Regal Motor JSC as its
official importer-dealer for Vietnam.
The importer will also help Rolls-Royce to sell its high-end models in the country.
According to JSC's Asian regional manager, Herfried Hasenehrl, customers have a good understanding of
the firm's products as well as its value proposition.
Page 23
Industry Forecast Commercial Vehicles

Commercial Vehicles
As Vietnam's banking sector stabilises and state-owned enterprizes restructuring efforts begins to bear fruit,
we expect demand commercial vehicle (CV) demand from businesses to pick up in 2014.
We forecast CV sales to grow 8.0% in 2014, to 42,000 units.
Table: Top Five Companies By CV Sales
Manufacturer
2012 CV Sales (CBUs)
8M13 CV Sales (CBUs)
15,281
9,521
Suzuki
3,330
2,217
Vinaxuki
4,453
1,200
Vinamotor
2,555
1,157
VEAM
1,881
1,083
Truong Hai (Thaco)
Source: BMI, VAMA
Industry Forecast Suppliers

Suppliers
The domestic spare parts and components sector in Vietnam is small at present, although the government is
making it a priority. Given rapid economic growth in the region, there is significant development potential
for the industry. The Ministry of Industry and Trade is looking to make the domestic industry more
competitive. BMI believes the parts segment needs to be better developed to attract vehicle producers to
invest in the country. We believe the Vietnamese industry is in danger of being trapped in a vicious cycle
where carmakers are reluctant to invest in production without a well-developed supplier base, yet suppliers
want to see growth potential in vehicle assembly before investing.
To that, one move to boost domestic part production is the imposition of higher import tariffs on parts that
can be made domestically. The government wants local suppliers to be providing 50-60% of all the
necessary car parts for domestic production by 2020.
Page 24
In October 2013, Bridgestone announced that it will invest will invest JPY41.6bn (US$424mn) to double
the output of its passenger car radial tyre plant currently under construction in Haiphong. The plant's
capacity will be increased to 49,000 tyres per day from 25,000 tyres currently and will be ready for
operations in March 2014.
Bridgestone's move is part of a trend we are observing of more suppliers and manufacturers leveraging on
Vietnam's low-cost production base. Vietnam has an abundance of raw materials such as rubber and this
move is strategic for Bridgestone.
That said, we continue to emphasise the need for the Vietnamese government to do more to attract larger
investments in the sector. Some of the necessary policies include preferred tax incentives, reduced export
tariffs and better support infrastructure to connect production bases to the ports in the country.
Although Vietnam is not currently a major production base for the region, it has become Bosch's production
and research and development (R&D) hub for certain products in South East Asia and has now secured
double the original investment intended, while a move into new product areas has resulted in the acquisition
of a Taiwanese supplier.
BMI also sees positive opportunities in the government's plans to create a national industry hub in the Chu
Lai Economic Zone. The aim of the project is to increase the scale of domestic production in order to make
the sector more competitive when import tariffs are eliminated under the ASEAN Free Trade Agreement in
2018.
Global Trends: Suppliers In Driving Seat But Could Fortunes Turn?
BMI View: The global auto supplier and equipment index has outperformed the global auto manufacturers
index since the global financial crisis. We believe the possible reasons for this include the greater flexibility
of EU suppliers, the rise in the average age of US cars and trade protectionism. Two future developments,
which may cause a reversal in fortunes in favour of original equipment manufacturers' are a pick up in the
European auto market and the upcoming AEC in 2015.
We recently highlighted original equipment manufacturers' (OEMs') greater bargaining power versus auto
suppliers (see 'Illegal Cartels Highlight Low Supplier Power', October 1). However, we notice that this
does not always translate into automakers' share prices outperforming. Indeed, when we chart the
performance of the Bloomberg World Auto Manufacturers Index and Bloomberg World Auto Parts And
Page 25
Equipment Index over the past 10 years, we realise that both suppliers and automakers have their own
periods of outperformance.
It is important to realise that while suppliers' margins on the parts they sell are usually lower than the
margins which OEMs enjoy on their cars, there are other dynamics at play that determine the actual
financial results of firms and ultimately their share price performance. The accompanying chart illustrates
the outperformance of suppliers versus carmakers since the global financial crisis in 2008-09. Below,
we outline our arguments to try and explain this phenomenon and give our thoughts on changing industry
trends, which may cause a reversal.
Page 26
Suppliers Outperforming Since Global Financial Crisis

BW Auto Manufacturers & Parts And Equipment Indices (Top); Spread (Bottom)
Indices are rebased to 100 from August 2003. *BW = Bloomberg World. Source: BMI, Bloomberg
EU Suppliers More Nimble Than Carmakers
Vehicle sales in the EU have been contracting since 2008 and sales declines in some markets intensified
when the eurozone crisis hit the region in 2010. This has led to heavy losses for European carmakers in the
past few years. Further compounding their problems is their inability to shed large proportions of their
Page 27
workforce, or expediently close underperforming factories, due to political pressure on some of these
national carmakers to retain workers.
European suppliers, on the other hand, are less in the political limelight due to their smaller size and have
therefore been able to rationalise their European operations faster. This has allowed them to be more nimble
and re-orientate their businesses to find new growth opportunities in emerging markets (EMs) in Asia,
Eastern Europe and Latin America, which are increasingly making up a bigger share of their sales (see
'Suppliers Continue To Shift Strategic Focus', June 24).
Therefore, it is no surprise that the share prices of European suppliers have recovered much faster and
stronger than their carmaker counterparts since the global financial crisis.
Ageing US Fleet Makes Market Attractive For Suppliers
To be sure, the American consumer has deleveraged significantly since the financial crisis. However, the
bumpy economic recovery has resulted in consumers holding on to their set of wheels longer and has also
given rise to strong used car sales. Therefore, while new vehicle sales have been growing at a strong clip
since 2009, the average age of the US vehicle fleet has recently climbed to an all-time high of 11.4 years.
In such an environment, suppliers would naturally perform better, as they are able to sell parts to OEMs for
the production of new cars as well as sell replacement parts directly to the end consumers. As the vehicles
on the road get older, it is reasonable to assume that spending on replacement parts has to rise to keep them
in a roadworthy condition.
Trade Protectionism Puts Vehicle Imports At A Disadvantage
In recent years, trade protectionism, especially in emerging markets (EMs), has been on the rise. These
countries have nascent auto industries, and in order to encourage automakers to produce domestically, they
usually impose high tariffs on auto imports. While both auto parts and vehicle imports are taxed, parts are
usually taxed at a lower rate. We believe this may be because governments realise that the lack of
localisation in their domestic auto industries would still require local manufacturers to import components
from overseas. A case in point is Vietnam, where the import tariff on completely built unit (CBU) imports
from ASEAN will be 50% in 2014, but for car parts will only be 15-25%.
Page 28
The upshot of this, in our opinion, is that suppliers would find it easier to export their parts to early
emerging/frontier markets compared with automakers, whose exports may be priced out due to exorbitant
tariffs.
Can Suppliers Continue Outperforming?
While there may definitely be other reasons for suppliers' share prices outperforming manufacturers in the
past few years, the important question going forward is whether this trend will endure. We believe it is hard
to tell at this point. However, we highlight two developments in the future, which may cause a reversal in
fortunes.
Pick Up In The European Vehicle Market
Although BMI still maintains a bearish outlook on the European vehicle market, we expect the region to
recover in the coming years. As sales in individual car markets begin to slow their rate of contraction, and
eventually return to growth, on the back of pent-up demand, European carmakers' could begin to
outperform suppliers.
Upcoming 2015 AEC Could Tilt The Scales In OEMs Favour
The upcoming ASEAN Economic Community (AEC) in 2015 will bring down trade tariffs within South
East Asia (SEA) and by 2018 most, if not all, countries in SEA will cut their import tariffs to zero. This
development may end up being a game changer for automakers as they concentrate their production in one
or two hubs in the region and export their CBUs tariff-free to the rest of ASEAN.
Page 29
Macroeconomic Forecasts
BMI View: Although we expect the Vietnamese economy to record yet another quarter of sub-par growth in
Q413, we are beginning to see potential for upside surprises to domestic demand over the coming quarters.
Recent data on foreign direct investment inflows, remittances, passenger car sales, and property market
launches, suggests to us that domestic demand is on a nascent recovery, setting the stage for stronger 2014
growth.
The general consensus is expecting the Vietnamese economy to suffer yet another quarter of sub-par growth
mainly due to subdued external demand and the lack of progress on banking sector reforms. This is closely
in line with our view that real GDP growth will come in at just 5.3% in 2013, a slight improvement from
5.2% in 2012. Looking ahead to 2014, however, evidence of improving macroeconomic fundamentals in
Vietnam (especially with regards to the outlook for domestic demand) suggests to us the balance of risks to
our growth forecast of 6.0% is gradually tilting towards the upside.
Robust Remittances Could Boost Domestic Demand

Vietnam - Unrequited Transfers, US$mn
Source: BMI, Asian Development Bank
Page 30
Remittances: According to estimates published by the World Bank, the Vietnamese economy is on track to
record a bumper year for remittance inflows. The country is expected to receive US$10.6bn in remittances
from Vietnamese citizens working abroad, a robust 6.5% increase from 2012. Crucially, we believe that
remittance inflows will remain strong over the coming quarters as macroeconomic conditions in Vietnam
continue to improve. Growing confidence in the stability of the Vietnamese dong should also help to
encourage Vietnamese workers abroad, to a certain extent, to remit a larger share of their earnings back
home. We believe that this will help to boost domestic demand while providing support for the currency.
Foreign Direct Investment: Total foreign direct investment (FDI) inflows are also set to surpass the
government's full-year target of US$13bn, after data released by the Ministry of Planning and Investment
showed that inflows surged by 19.5% year-on-year (y-o-y) growth over the first eight months of the year.
The strong reading chimes with our view that the country's solid long-term growth story should continue to
attract foreign investors over the coming years.
Automobile Sales: We are witnessing signs of a robust recovery in automobile sales, a sign that pent-up
domestic demand is beginning to rebound. According to the Vietnam Automobile Manufacturers
Association (VAMA), September vehicle sales of its members surged by 20.6% year-on-year (y-o-y),
exceeding our already bullish forecast of 12.5% for the year (see 'Bullish On CV Sales In The Medium To
Long Term', October 14 2013).
Page 31
Developers Eyeing Property Market Rebound

Vietnam - Real Estate Index
Source: BMI, Blooomberg
Property Market: Meanwhile, we see increasing evidence that the Vietnamese property market may have
bottomed out (see 'Early Signs Of A Recovery, But No Property Market Boom In Sight', August 14 2013).
According to a quarterly report published by real estate agency CBRE Vietnam, the number of new
launches surged by 12% y-o-y in Q313. Anecdotal evidence from the local media suggests to us that
demand for real estate following the sharp decline in prices since 2011 may be recovering. To be sure, we
maintain our view that we are unlikely to see a property market boom given the healthy pipeline of new
units that will come online in 2014. Nonetheless, we acknowledge that consumer confidence is recovering
and we could potentially see some upside surprises to domestic demand in 2014.
Expenditure Breakdown
Private Consumption: We expect private consumption to grow at a relatively resilient pace of 5.0% in
2014. However, we note that the risk of further bankruptcies among SMEs could potentially lead to
widespread job losses, especially in export-driven sectors. Uncertainties over the outlook for employment
could, in turn, prompt households to cut back on spending.
Page 32
Gross Fixed Capital Formation: We foresee a pickup in private sector investment growth in 2014, partly
led by increased foreign direct investment inflows. We believe lending rates will gradually ease over the
coming months as the effect of recent rate cuts by the SBV begins to kick in. We are also seeing evidence
that credit conditions are improving. Accordingly, we expect gross fixed capital formation growth to
accelerate slightly from 4.1% in 2013 to 4.8% in 2014.
Public Spending: We expect total public spending to remain relatively resilient in 2014, expanding at a
respectable pace of 6.1%. However, there is limited room for the government to increase spending further
owing to concerns over the need to finance a potential bailout of ailing state-owned commercial banks.
Net Exports: Net exports remain the biggest downside risk to our outlook for the Vietnamese economy,
although we expect external demand to pick up in 2014. Vietnam's trade account has fallen back into
deficits in recent months, but we see the case for a substantial pickup in external demand on the back of a
rebound in regional growth over the coming quarters. Accordingly, we still expect exports to expand at a
moderate pace of 5.9% in 2014.
Table: Vietnam - Economic Activity
2010
2011
2012
2013f
2014f
2015f
2016f
2017f
2,157,829
2,779,880
3,245,419
3,657,621
4,117,487
4,631,499
5,203,774
5,841,949
112.9
134.6
155.5
175.0
200.2
227.8
257.4
291.4
6.4
6.2
5.2
5.3
6.0
6.9
7.0
7.0
1,267
1,497
1,712
1,909
2,163
2,439
2,733
3,068
89.0
89.9
90.8
91.7
92.5
93.4
94.2
95.0
Industrial
production index,
% y-o-y, ave 1,5
14.1
10.9
7.0
7.6
8.7
9.6
9.9
9.8
Unemployment,
% of labour force,
eop 2,6
4.3
3.6
3.2
3.7
3.5
3.5
3.6
3.5
Nominal GDP,
VNDbn 3
Nominal GDP,US
$bn 3
Real GDP growth,
% change y-o-y 3
GDP per capita,
US$ 3
Population, mn
Notes: f BMI forecasts. 1 at 1994 prices; 2 Urban Area Only. Sources: 3 Asian Development Bank, General Statistics
Office; 4 World Bank/UN/BMI; 5 General Statistics Office; 6 General Statistics Office/BMI.
Page 33
Industry Risk Reward Ratings

Asia-Pacific Risk/Reward Ratings
The aim of BMI's Risk/Reward Ratings for the automotive industry is to detail the rewards and the risks
that carmakers operating in a particular region - in this case Asia-Pacific - may face. The unique system
assesses crucial factors, such as sales and output growth, international trade, market size and location, and
the level of market competition, in addition to taking into account a country's economic and political
backdrop. The ratings system allows analysts to fully expound the potential advantages and disadvantages
of investing in Asian car markets, and offers an overall comparison of the key markets in the region.
Overall scores for most countries in this region have shifted downward on the back of relatively slower
growth in 2013. Government stimulus measures for the auto industry in countries such as Japan, Thailand
and China bolstered growth in the past few years. These are no longer present in 2013, and sales in these
markets have started to wane.
That said, despite China's overall score falling from 66 to 64.96, it has now surpassed South Korea and
Japan to take the first place in the ratings table. We remain bullish on the Chinese auto market despite our
view for a H213 slowdown, and expect vehicle sales growth to among the highest in the region. The sheer
size of the market offers plenty of long-term opportunities, especially to new entrants that are looking to
grab market share from well-established incumbents. Lastly, as the Chinese economy re-orientates itself to a
more consumption-driven one in the coming years, demand for passenger cars will continue to remain
robust.
In second place is Japan, which has seen its score fall from 74 to 64.77, largely owing to its bleak domestic
sales outlook. While we forecast sales to contract in 2013, our long-term sales growth forecasts are also
nothing to cheer about, as the high level of vehicle ownership limits sales growth. Nonetheless, the country
scores well in terms of country risk, with low levels of corruption and a sound legal framework bumping up
the market's overall score. However, labour costs remain high owing to the rigidity of labour laws, which
adds to the cost of expanding production.
Malaysia has made an impressive climb to third position, from fifth previously. The country is a leader in
the Association of South East Asian Nations trade bloc, which has seen it attract regional production
activities in the autos sector, especially those which are higher value-added (see 'DRB-VW Investment
Demonstrates Value-Added Production', May 3 2013). With the ruling Barisan Nasional party voted back in
Page 34
power in recent elections, we see greater stability in Malaysia's macro environment as well as auto sector
policies.
In South Korea, exports take up a much larger share of production compared with domestic sales, and the
country has dropped to fourth place with an overall store of 62.55 out of 100, down from 69. South Korea's
historically poor labour relations surfaced once more in 2013, with Hyundai Motor suffering a production
outage (see 'New Labour Dispute Adds To Hyundai's Woes', April 23 2013). Higher wage demands from
unions in the past few years have raised operating costs. This weighs on the country's overall score,
although long-term political and economic stability reduce the risks.
Singapore has made the biggest move upward, catapulting to fifth place from eighth previously, taking its
overall rating to 59.76. While the country does not have any domestic production facilities, its conducive
business environment and stable regulatory outlook gives it one of the highest risk ratings in the region.
While recent loan curbs will weigh on car demand slightly, demand for cars still outweighs supply, which is
regulated by the certificate of entitlement.
In sixth place is Australia, which has tumbled from its fourth position. The decision by Ford to terminate
domestic production by 2016 (see 'Ford Throws In The Towel', May 23 2013), highlights the intensity of the
detrimental impact on manufacturing brought about by a strong Australian dollar and high labour costs.
Although the Australian dollar has been weakening lately, our downbeat outlook on the economy limits the
auto market rewards to firms.
Dropping one place to seventh is Thailand. While we expect domestic vehicle sales to contract in 2013
following the end of the first car buyer scheme in 2012, the export outlook for the country remains bright.
Strong government support, together with excellent support infrastructure, continues to attract auto sectorrelated investment from both suppliers and carmakers. BMI is bullish on Thailand's production growth
potential for the next five years.
Hong Kong slides down one place to eighth. While its regulatory scores have improved further owing to
government incentives to scrap old and polluting commercial vehicles (which will improve new vehicle
sales), the country's lack of production facilities means that the market is unlikely to climb much further in
the ratings in the foreseeable future.
In ninth place is India, which has moved up one notch. However, its overall score has dropped drastically
from 55 to 50.91. The passenger car market is in its eight consecutive month of contraction, which has
prompted the industry to seek a revival package from the government. Given that we expect consumer
Page 35
confidence to remain low for some time, we have turned increasingly downbeat on the industry's prospects,
resulting in a lowering of our industry rewards score to 48.68.
Indonesia has dropped to 10th place, from ninth previously. While the country's long-term auto sector
growth potential is undoubtedly strong owing to the size and still underpenetrated nature of the domestic
market, its country risk rating acts as a hindrance, with low scores for corruption, bureaucracy and legal
framework. Furthermore, the recent hike in fuel prices will serve to heighten market risk in the short term.
Taiwan and Philippines have held their positions in 11th and 12th place respectively. Taiwan's strength is in
its low corruption and strong regulatory framework, which boosts its country risk scores. The Philippines,
on the other hand, benefits from a competitive landscape that is still underpenetrated by carmakers,
providing opportunities for new entrants despite the dominance of Japanese brands in the market.
Vietnam and Pakistan have traded places in 13th and 14th. While Pakistan continues to suffer from weak
demand in the auto sector, there are some measures introduced in the latest budget that are likely to boost
the long-term potential of the industry (see 'Budget Brings Short-Term Pain But Long-Term Gain', June 28
2013). Vietnam, on the other hand, continues to suffer from the lack of a coherent auto sector policy by the
government, which is hampering the production potential of the country.
Page 36
Table: Asia-Pacific Autos Risk/Reward Ratings
Rewards
Risks
Risks
Autos
Market
Rating
Ranking
67.18
73.59
64.96
45.00
72.50
58.75
64.77
59.82
70.00
76.57
73.29
63.86
77.50
62.88
50.00
73.60
61.80
62.55
31.67
92.06
52.81
65.00
86.99
76.00
59.76
Australia
46.67
75.74
56.84
45.00
77.99
61.49
58.24
Thailand
46.67
49.26
47.58
85.00
69.73
77.37
56.51
Hong Kong
25.00
96.03
49.86
50.00
81.95
65.97
54.69
India
61.67
24.56
48.68
65.00
47.20
56.10
50.91
Indonesia
53.33
33.56
46.41
70.00
49.94
59.97
50.48
10
Taiwan
40.00
40.16
40.06
65.00
73.48
69.24
48.81
11
Philippines
31.67
39.59
34.44
80.00
57.24
68.62
44.69
12
Pakistan
45.00
18.00
35.70
70.00
42.00
56.00
42.00
13
Vietnam
28.33
38.60
31.93
65.00
49.50
57.25
39.52
14
Autos
Market
Country
Structure
Industry
Rewards
Market
Risks
Country
Risk
China
73.33
38.83
61.26
80.00
Japan
63.33
74.81
67.35
Malaysia
58.33
62.59
South Korea
55.00
Singapore
Source: BMI
Page 37
Company Profile
Company Monitor
BMI View: Ford Motors' record 2013 sales in China have put the firm among the top five largest
automakers in the market. China remains an important Asian market for the carmaker as it embarks on a
strategic plan to diversify away from its main profit centre in North America, and going forward, we see the
Asia Pacific region increasing its profit contribution to Ford's operations as the automaker's expansion
strategy bears fruit.
Ford Motor had a phenomenal 2013 in China, where its sales reached a record of 935,813 vehicles, an
increase of 49%. An expanded line of products, a sustained inland push, as well as strong demand helped to
boost sales. The automaker introduced seven of its next generation global vehicles in the market in 2013,
including the Ford Ecosport, Ford Kuga, the new Fiesta and the latest Mondeo. However, its Ford Focus
remaining the best-selling model, with 2013 sales growing 36%, to 403,640 units.
No Longer An Underdog In China
We believe Ford can continue to build on its success in 2014. We highlighted the gain in sales of nonJapanese brands at the expense of their Japanese counterparts back in October 2012, as the outbreak of the
Sino-Japanese dispute saw consumers boycotting Japanese marques (see 'Japan's Pain Is Korea's Gain
Once More', October 2012). During that time, Ford's sales also experienced a positive tailwind from late
2012 and early 2013.
However, for much of 2013, Ford's success could be attributed to the company's successful local strategy
and going forward, we see the firm's internal strengths driving its sales. The Ford brand is gaining traction
in the market and the automaker's expansion plans will be a positive growth factor for sales in 2014.
According to John Lawler, chairman and CEO of Ford Motor China, the firm plans to grow its domestic
capacity and expand its dealership network in 2014 so as to "continue bringing high quality, safe, and fuel
efficient vehicles to consumers."
The carmaker has certainly made great strides in the Chinese market where it was a late entrant compared
with the first movers Volkswagen AG (VW) and General Motors Company (GM). It has steadily
increased its market share over the years and 2013 was the first year since 2001 that its sales surpassed that
of Toyota Motor. Toyota increased its sales by 9%, to 917,500 units, as the Japanese automaker recovered
Page 38
from its 2012 slump in sales. In fact, Ford's 2013 domestic auto sales now make it the fifth largest carmaker
in China.
Force In Its Own Right

China - 2013 Vehicle Sales Of Top Carmakers
Source: BMI
China A Crucial Pillar For Asian Strategy
North America remains the main profit centre for Ford and the region contributed US$7.08bn in operating
income to the firm's business for the first nine months of 2013. However, the automaker has stated in its
global 'ONE FORD' plan that it aims to diversify its profit sources by increasing its presence in some of the
largest and fastest growing markets in the world. China is one such market where Ford is aggressively
increasing its investment, as it makes up for lost time due to its rather delayed entry into the country.
The firm's Asian division has yet to post large profits as the carmaker is still in the stage of ramping up
investment in the region (which is a cost to the company). Besides China, Ford is investing over US$1bn in
India to build its Sanand manufacturing facility and double the number of dealerships in the country to 300
by 2015 (see 'Ford's India Strategy Finally In Right Gear', December 6 2012). While estimates suggest that
Page 39
regional expansion plans could cost the company over US$5bn, we believe it will reap dividends for Ford in
the long run.
Asia To Be Next Profit Centre

Ford - Operating Income By Geography (Outside North America), US$mn
Source: BMI, Company Financials
The Asia Pacific and Africa region bounced back from an operating loss of -US$116mn in 9M12 to an
operating profit of US$309mn in 9M13. We see this region increasing its profit share in the coming years as
investments in capacity and dealerships begin to pay off.
Page 40
GM Vietnam
SWOT Analysis
Strengths
Good use of Chevrolet brand.
Third in terms of market share.
Weaknesses
Market share of 5% still trails Toyota's 35%.
Opportunities
Could increase sales in commercial vehicle segment by introducing more models.
Mass market positioning could benefit sales with Vietnam's steady GDP growth.
Strong competition from Ford and other brands which have similar market share.
Threats
Company Overview
GM Vietnam Motor Company was established in 1993 by the former Daewoo Motor
Corporation. In 2011, GM Vietnam decided to align its operations to make Chevrolet its
retail brand and sells its cars under that brand in the country. However, it continues to
provide after-sales care and spare parts for owners of Daewoo cars.
In 2012, GM Vietnam sold a total of 5,613 units of vehicles, a 45.8% y-o-y decrease.
From that, 1,202 units were commercial vehicles and 4,411 units were passenger cars.
For the first eight months of 2013, GM Vietnam sold 3,090 vehicles.
Strategy
GM Vietnam launched the new Chevrolet Colorado pickup truck imported from Thailand
in March 2013.
It says the Colorado LTZ is equipped with a turbo-diesel engine that provides a
combination of performance and fuel efficiency, as well as better performance on
Vietnam's roads.
The pickup is distributed as a CBU vehicle imported from Thailand in GM Vietnam's
dealer network nationwide at a price of VND729mn (US$34,570), including VAT.
Company Data
Number of employees: 600
Page 41
Mercedes-Benz Vietnam
SWOT Analysis
Strengths
Strong global brand name
Sales leader among VAMA members in the luxury market
Weaknesses
Idle capacity at the plant could eat into profits
Opportunities
Expansion into Vietnamese cities with growing affluence
Threats
Competition from luxury brands not in VAMA, such as Audi
Volatile Vietnamese dong might require hedging, to protect profits
Company Overview
Mercedes-Benz Vietnam (MBV) is a joint venture between Daimler (70%) and Saigon
Automobile Mechanical Corporation (30%). MBV is introducing passenger cars and
commercial vehicles (CVs) to the Vietnamese market under the brand and standards of
Mercedes-Benz. The company is the 2012 sales leader among Vietnam Automobile
Manufacturers Association (VAMA) members in the luxury vehicle market (includes both
its passenger cars and CVs).
MBV's factory is located in Go Vap District, Ho Chi Minh City. The factory covers
105,000 square meters and has a production capacity of about 3,500 vehicles per year.
The factory includes a Training Centre, which carries out sales, marketing and technical
training courses to ensure a high level of employee competence.
MBV's total vehicle sales for 2012 were up 110% y-o-y to 1,929 units. While its
passenger car sales contracted y-o-y, its commercial vehicle sales helped the company
post a y-o-y increase in total vehicle sales. The company's 2012 market share in the
vehicle market among VAMA members was 2.4%.
For the first eight months of 2013, Mercedes sold 974 vehicles.
Strategy
During the period 2010-2012, Mercedes-Benz invested more than US$10mn in the
assembly line of its factory and another US$10mn to expand its network nationwide.
Company Data
Year established: 1995

General Director: Michael Behrens
Page 42
No. of employees: 500-600
Page 43
Automotive Asia Ltd

SWOT Analysis
Strengths
Selling more than one luxury brand gives the company diversification.
An increase in Audi's imports shows the luxury car market is performing better than
the mass market.
Weaknesses
Lack of domestic production could make imported cars expensive.
Opportunities
New showroom in Hanoi would give company more exposure.
Expansion opportunities in Vietnamese cities with growing affluence.
Competition from Mercedes, which has domestic production.
Threats
Company Overview
Automotive Asia sells both Audi and BMW brands in Vietnam through its dealerships.
While sales in the passenger car premium market among Vietnam Automobile
Manufacturers' Association (VAMA) members declined about 44% y-o-y, sales in the
imported passenger car premium market (which Automotive Asia is in), declined just
29%. Furthermore, according to industry sources, Audi's 2012 imports increased y-o-y.
Automotive Asia, the official Audi Importer in Vietnam, is a joint venture between
CFAO - the majority shareholder - and Openasia. Registered in December 2007,
Automotive Asia launched Audi in Vietnam in October 2008.
Lien-A International JSC is the official distributor for Audi cars in Vietnam. To ensure
Audi customers optimal operation of their cars in Vietnam, Lien-A International JSC
operates its own branches in HCMC and Hanoi. Audi Ho Chi Minh City, the second Audi
Terminal launched in South East Asia, was inaugurated in October 2008.
Strategy
Automotive Asia is set to open a new 3,000 square foot terminal in Hanoi, which will
serve as a showroom as well as a workshop, where painting and tooling services will be
provided.
Operational Data
General Director: Laurent Genet
Page 44
Regional Overview
In this quarterly regional round-up, we examine the trends in Asian auto markets, which we believe will be
dominant in 2014. We specifically focus on the Chinese, Indian, Indonesian and Japanese auto markets as
we believe that important developments in the first half of 2014 will be crucial in determining the sales
trajectory in these markets.
Table: Vehicle Sales 2013 (CBUS)
Last Month
Monthly Sales % Chg y-o-y
YTD Sales
%
Growth
BMI End-2013
Sales
BMI Full-year
Growth
Forecast
(2013, % Chg
y-o-y)
China
December
2,100,000
16.0
21,980,000
13.8
21,635,298
12.1
India
November
245,250
-14.2
2,063,446
-8.2
3,240,621
-6.7
Japan
December
423,000
25.0
5,375,515
0.1
5,492,000
2.3
Indone
sia
November
111,785
7.8
1,132,174
10.3
1,232,800
10.4
*India's YTD sales figures refer to its FY2013/14 (April-March) figures and its 2013 BMI forecast refers to FY2013/14.
Source: BMI, Trade associations
China: Positive Momentum To Continue In Early 2014
Chinese auto sales ended 2013 at a record high of 21.98mn units, an increase of 13.8%. We maintain our
bullish outlook on the market in 2014 and see the strong sales momentum in the last few months of 2013
spilling over into early 2014. Consumer confidence remains high and we see it buoying passenger car
demand.
However, we remain firm on our sector slowdown view for 2014, which is best demonstrated by the slower
growth of 9.1% in vehicle sales we forecast for the full year. The recent reforms announced by the Chinese
government will have the effect of slowing economic growth in the short term as the economy rebalances
away from an investment-led model towards one where private consumption makes up a bigger share.
Consumer sentiment will take a hit in the latter part of 2014 as economic growth falters and this will
certainly have a negative impact on vehicle sales.
Page 45
That said, we are of the view that despite a more challenging 2014 outlook for the sector, passenger car
sales will still hold up reasonably well compared with commercial vehicle (CV) sales as the boost to private
consumption will ensure more resilient demand for cars. As such, we forecast the passenger car segment to
continue outperforming the CV segment in 2014 just as it did in 2013.
Japan: Up And Then Down
According to the Japan Automobile Manufacturers Association (JAMA), Japanese auto sales grew 0.1% in
2013, to 5,375,513 units. While sales came in slightly below our forecast of 5.5mn units, the broad trend of
strong double digit y-o-y sales growth in Q413 was something we called for back in August 2013 (see
'Upgrading Sales Forecast Due To Favourable Base Effects', August 12 2013).
Will Remain Strong Until Q114

Japan - Domestic Auto Sales, Units (LHS); % Chg y-o-y (RHS)
Source: BMI, JAMA
As we have previously stated, we expect auto sales growth to remain positive from now until March 2014.
This is because the government will raise the sales tax from 5% to 8% in April 2013, which will have the
effect of buyers front-loading their vehicle purchases from now until the end of Q114.
Page 46
However, we are less sanguine on the domestic market's prospects after Q114. We believe the Japanese
economy is still fragile and corporates are also adopting a conservative stance in their outlook despite the
recent positive economic indicators (see 'Corporates To Remain Conservative Despite Better Conditions',
December 16 2013). We see consumer sentiment taking a hit after the sales tax increase, which will result in
a likely retrenchment in private consumption. This will then negate the increase in auto sales experienced by
the industry in Q114. Against such a backdrop, we forecast only marginal 2014 sales growth of 0.8%.
Upcoming Elections: Divergent Impact On India And Indonesia
With both India and Indonesia facing elections in Q214 and early Q314 respectively, the auto markets in
these two countries will undoubtedly experience some knock-on effects from them. However, we believe
the upcoming polls will weigh negatively on the Indian market, but may actually end up as a mild tailwind
for the Indonesian market.
There is a high degree of uncertainty over the outcome of the Indian general elections, with no
party currently standing out as being able to form a majority. While this has already been one of the reasons
businesses are adopting a wait and see approach in the past few quarters (which has slowed investment
activity), consumer sentiment will also remain downbeat in the run-up to the elections as buyers decide to
defer their purchases, further clouding an already depressed market.
To take these looming headwinds into account, we have recently downgraded our Indian auto sales
forecasts. While we expect sales to significantly contract in FY2013/14 (April-March), we are also of the
view that the recovery in FY2014/15 will remain mild as high interest rates continue to weigh on the
market.
Page 47
Recovery Still Elusive

India - Domestic Passenger Vehicle Sales, Units (LHS); % Chg y-o-y (RHS)
December sales figures are an estimate. Source: BMI, Society of Indian Automobile Manufacturers (SIAM)
Indonesia: LCGC Segment Will Support Sales
In contrast, Indonesian vehicle sales are showing remarkable resilience even in the face of higher fuel prices
and interest rate hikes in the past few months. One big reason for this is the launch of the low-cost green car
segment in September 2013, which has already seen sales of over 36,000 units. We see the availability of
fuel-efficient variants in this segment giving consumers an alternative in an environment of higher pump
prices and thus propping up passenger car demand.
Additionally, the increased spending by political parties in the run-up to the elections could see consumer
sectors in the country getting a boost, and we believe this will provide a mild tailwind to vehicle sales in the
coming months.
However, with 70% of auto sales still requiring some form of financing, we cannot neglect the impact of
interest rates on the sector, which our Country Risk team believes will remain elevated for H114 (see 'BI's
Page 48
Hawkish Stance To Remain Unchanged', January 10). Indeed, our 2014 vehicle sales growth forecast of
7.8% (lower than 2013's growth) reflects the risk of tighter credit conditions on sales.
Page 49
Global Industry Overview

In our last update of the year, we will not only be looking at how key markets are likely to end the year, but
also look at projections for 2014. On the whole, it is looking like a better year for many markets that have
struggled in 2013, while those that have enjoyed more rapid growth are likely to stabilise. All in all, it
should be a better year for the industry.
Table: Passenger Car Sales November 2013 (CBUs)
BMI
End-2014
Sales
BMI Fullyear
Growth
Forecast
(2014, %
chg y-o-y)
Last Month
%
Monthly
chg
Sales y-o-y
November
710,712
0.3
338,926
-1.9
8,939,993
-1.8
8,992,379
0.6
Eastern Europe November
64,049
3.3
681,931
-1.4
744,906
-1.0
772,230
3.7
-1.1
4,686,640
2.5
4,714,760
0.6
8.4 15,681,560
8.2 16,248,215
3.6
Core Europe
%
chg
YTD Sales y-o-y
BMI Fullyear
Growth
Forecast
BMI (2013, %
End-2013 chg y-oSales
y)
Japan
November
378,597
16.7
4,203,069
United States
November
1,245,325
8.9
14,239,897
Canada
November
133,860
6.5
1,630,076
4.0
1,754,982
4.7
1,801,522
2.7
Brazil
November
223,748
-4.1
2,504,507
-3.1
2,765,994
-3.0
2,738,334
-1.0
India*
November
201,520 -10.2
1,639,535
-5.3
2,601,426
-3.0
2,757,511
6.0
China
November
1,696,278
16.1
16,151,800
15.1 17,633,538
13.8 19,432,158
10.2
Turkey
November
64,117
23.0
563,456
19.0
667,536
20.0
694,237
4.0
Russia **
November
231,982
-3.5
2,512,965
-6.8
2,602,879
-6.5
2,524,793
-3.0
* year-to-date is financial y-t-d, full year forecast is Apr-Mar 2014 **AEB data (includes LCVs, therefore, forecast now
includes LCVs)
Source: BMI, Trade associations
Europe On Road To Recovery

Our view that many markets in Europe would start to bottom out toward the end of 2013 is playing out, with
November's passenger car sales showing a 0.3% year-on-year (y-o-y) increase for our Core Europe
grouping (France, Germany, Italy, Spain, UK), and growth of 3.3% for Eastern Europe.
Strengthening sales in a number of Western European markets have prompted slight upward revisions to our
year-end estimates for 2013, resulting in an expected 1.9% contraction for the Core Europe group. A
Page 50
resurgence in Spanish sales has been a key driver of this growth, with a 15.1% y-o-y increase in November,
following growth of 28.5% y-o-y and 34.4% y-o-y in September and October respectively. Sales for 11M13
are now firmly in positive territory, up 2.1% y-o-y and we expect 3.0% growth for the full year.
The UK has also continued its strong showing for the year, with sales up 9.9% y-o-y for 11M13 following a
7.0% increase in November. In Italy, while the market is still contracting, the declines are moderating each
month, which is a promising sign. November sales fell 4.5% y-o-y, taking the 11M13 contraction to 7.7% yo-y.
Looking ahead, we believe Italian private consumption will remain weak, which will still weigh on big
ticket purchases such as cars. That said, we believe the y-o-y declines will continue to moderate and we
forecast a 5.1% contraction for 2014. France should also see a better year, largely on the back of pent-up
demand following four consecutive years of declining volumes. Although consumer sentiment is expected
to remain relatively weak, we forecast growth of 2.0%, to 1.78mn units, which would still leave the market
below its 2009 peak of 2.30mn units.
Slowly Stabilising
Passenger Car Sales By Country (CBUs)
3,500,000
3,000,000
2,500,000
2,000,000
1,500,000
1,000,000
500,000
0
France
UK
2013e
Germany
2014f
Italy
Spain
Notes: CCFA/VDA/ACEA/INE/Ministerio Del Interior/Department For Transport
Page 51
In the markets of our Eastern Europe grouping there are also signs of progress, although there are still some
clear underperformers such as Romania, Bulgaria and Slovakia. These have been outweighed for the yearto-date by markets such as Estonia, with sales up 7.9% y-o-y in November and 14.1% y-o-y for 11M13, to
result in solid positive growth for the sub-region in November and a decline of just 1.4% y-o-y for 11M13.
Poland, too, is staging a healthy recovery, which has prompted an upward revision to our 2013 forecast. We
now expect Poland to end the year with growth of 6.0%, on the back of an improving private consumption
picture. Such performances mean we expect the group to end the year with sales down just 1.0% in 2013.
In 2014, there will be some cautious consumer sentiment remaining. We expect those markets that are
currently struggling to retain some weakness, with contractions forecast again for Bulgaria (4.5%) and
Slovakia (0.2%). However, Estonia will continue to be an outperformer, although growth is forecast to slow
to 10.0% in 2014, while Poland's steady recovery should be sustained with 5.0% growth. Czech sales should
also return to positive growth of 3.0%, which will be a boost given the size of the market.
Tax Hike Skews Japan's Outlook; US Hits Sweet 16

The announcement that the Japanese consumption tax will be raised in March 2014 is impacting the
passenger car market in the latter months of 2013 and is likely to do so heading into 2014. Growth of 16.7%
y-o-y in November, following 18.4% y-o-y growth in October reflects not only a natural improvement in
consumer sentiment, but also front-loading of purchases before the tax hike. Although the market is still
down 1.1% y-o-y for 11M13, we expect this level of monthly growth to take the market into positive
territory in December to end the year up 2.5%.
We expect this trend of purchases being brought forward to continue into Q114, as consumers look to beat
the introduction of the higher tax. The reverse is likely to be true following the tax hike, however, with sales
expected to tail off in the months immediately after. With sales expected to be strong earlier in the year, but
dropping off later, we forecast very marginal growth of 0.6% for 2014.
Page 52
Returning To Normal
US Light Vehicle Sales By Segment (CBUs)
20M
10M
2017f
2016f
2015f
2014f
2013f
2012
2011
2010
2009
2008
2007
2006
0M
Passenger Car Sales

Light Commercial Vehicle Sales
Notes: US Dept of Transport/BMI
US light vehicle sales in November remained on course to meet BMI's forecast of 8.2% growth to 15.68mn
units for 2013. Thanksgiving promotions and a weekend to end the sales month contributed to growth of
8.9% y-o-y, taking 11M13 growth to 8.4% y-o-y. BMI believes this is likely to be the last year of such
substantial growth, however, as the market gets nearer to its natural 16mn units mark and the first signs of
inventory build-up pose a risk to growth in 2014.
The light truck market is still the key driver of growth, up 11.8% y-o-y in November and 11.3% y-o-y for
11M13. Looking ahead, positive data from the residential housing sector, as part of an increasingly bullish
macroeconomic picture, suggests that the truck segment will carry this growth into 2014 (see 'Weekly Data
Analysis: Positive Housing, Manufacturing And Consumer Data', December 2). We forecast 5.3% growth
in light truck sales in 2014, which is still robust by historical standards, despite representing a slowdown
from current levels.
We also expect slightly slower growth of 2.0% for the passenger car segment in 2014, following estimated
growth of 6.5% in 2013. Again, this is reasonable by pre-recovery standards and we expect one of the areas
Page 53
driving this growth to be the premium segment. An improving economy and a raft of new model launches
should make 2014 a good year at the higher end of the segment, particularly as the US is still one of the
major global markets for the leading German luxury brands, looking to offset the European slump.
China Is BRIC Bright Spot

As Chinese passenger car sales surge on the back of healthy economic indicators to end 2013 on a high, we
believe the positive sales momentum will spill over into early 2014. According to the China Association of
Automobile Manufacturers, passenger car sales in November 2013 rose 16.3% y-o-y, to 1.7mn units. This
has brought car sales for 11M13 to 16.15mn units, an increase of 15.1% y-o-y, prompting us to upgrade our
2013 forecast to 13.8% growth, to 17.6mn units, from 11.0% previously.
However, we remain firm on our sector slowdown view for 2014 (see 'Sector Slowdown View Pushed To
2014', September 13). As China's current stimulus-driven growth gives way in the latter part of 2014, this
will hurt consumer sentiment and negatively impact car sales. Therefore, we maintain a relatively
conservative forecast of 10.2% in 2014, although this is still considerable growth.
It is certainly a better outlook than that of the other BRIC markets. India's passenger vehicle segment has
declined throughout the financial year, which began in March, most recently posting a 10.2% y-o-y decline
in November. We believe growth will pick up in FY14/15, but until then market sentiment remains
depressed.
Page 54
China Is Near-Term Outperformer

Passenger Car Sales Growth By Country (% chg y-o-y)
50
25
Brazil
Russia
India
2017f
2016f
2015f
2014f
2013f
2012
2011
2010
-25
China
Notes: National Association of Motor Vehicle Manufacturers (Anfavea)/AEB/SIAM/CAAM
Car sales in Brazil are looking particularly weak, as the expected Q413 uptick following a poor Q3
tempered by high base effects from 2012, did not materialise. November sales fell 6.6% y-o-y, dragging
11M13 sales down 3.1% y-o-y. BMI expects this market weakness to continue into December, and we have
accordingly revised down our 2013 sales forecast to a 3.0% decline, from the 2.0% contraction previously
forecast.
As the broader slowdown in consumer spending in Brazil impacts the passenger car segment, we forecast a
further 1.0% decline in 2014. We believe the ongoing deterioration in the country's consumer story,
combined with the government's tax incentive schemes expiring by the end of 2013, will impact the
segment. Upside risk to this forecast comes from a potential change in autos leasing regulations, which
would aim to encourage banks to issue more car lease agreements.
After being a BRIC state mainstay, Russia now appears to be running out of steam. Light vehicle sales
declined 3.6% y-o-y in November, to 231,982 units, taking sales for 11M13 to a decline of 6.4% y-o-y, to
2,513,163 units. We believe that the country's weak consumer story is increasingly impacting the segment,
Page 55
and forecast a 6.5% decline in the passenger car segment for 2013 and a 7% decline in light commercial
vehicle sales.
Despite earlier announcements of car loan subsidy scheme, which came without a timeframe, we expect any
such programme to have a limited impact compared to the growth seen under the previous subsidy
programme, as the wider consumer story is weaker. Indeed, we forecast a 3% decline in the passenger car
segment and a 2.4% drop in LCV sales in 2014 on the back of the ongoing deterioration in consumer
sentiment.
Page 56
Demographic Forecast
Demographic Outlook
Demographic analysis is a key pillar of BMI's macroeconomic and industry forecasting model. Not only is
the total population of a country a key variable in consumer demand, but an understanding of the
demographic profile is key to understanding issues ranging from future population trends to productivity
growth and government spending requirements.
The accompanying charts detail Vietnam's population pyramid for 2013, the change in the structure of the
population between 2013 and 2050 and the total population between 1990 and 2050, as well as life
expectancy. The tables show key datapoints from all of these charts, in addition to important metrics
including the dependency ratio and the urban/rural split.
Population Pyramid
2013 (LHS) And 2013 Versus 2050 (RHS)
Source: World Bank, UN, BMI
Page 57
Population Indicators
Population (mn, LHS) And Life Expectancy (years, RHS), 1990-2050
Source: World Bank, UN, BMI
Table: Vietnam's Population By Age Group, 1990-2020 ('000)
1990
1995
2000
2005
2010
2013e
2015f
2020f
68,910
76,020
80,888
84,948
89,047
91,680
93,387
97,057
0-4 years
9,315
9,323
7,128
6,898
7,229
7,152
7,012
6,575
5-9 years
8,606
9,212
9,253
7,023
6,791
7,052
7,181
6,968
10-14 years
7,857
8,541
9,162
9,117
6,899
6,619
6,757
7,147
15-19 years
7,359
7,788
8,492
9,050
9,011
7,686
6,866
6,726
20-24 years
6,644
7,222
7,673
8,333
8,874
9,148
8,936
6,802
25-29 years
6,006
6,470
7,065
7,471
8,112
8,528
8,772
8,837
30-34 years
5,138
5,890
6,352
6,910
7,286
7,703
8,022
8,680
35-39 years
3,888
5,065
5,803
6,242
6,763
7,011
7,208
7,940
40-44 years
2,463
3,826
4,994
5,719
6,147
6,472
6,685
7,127
45-49 years
2,017
2,409
3,753
4,935
5,648
5,894
6,054
6,589
50-54 years
1,968
1,959
2,346
3,700
4,855
5,306
5,521
5,926
55-59 years
2,046
1,891
1,885
2,237
3,542
4,278
4,677
5,330
60-64 years
1,669
1,934
1,790
1,734
2,068
2,795
3,352
4,444
65-69 years
1,412
1,522
1,771
1,610
1,562
1,673
1,906
3,104
70-74 years
1,028
1,216
1,322
1,530
1,399
1,360
1,379
1,695
Total
Page 58
Vietnam's Population By Age Group, 1990-2020 ('000) - Continued
1990
1995
2000
2005
2010
2013e
2015f
2020f
75-79 years
752
819
984
1,080
1,263
1,219
1,167
1,160
80-84 years
430
536
597
732
815
919
964
900
85-89 years
224
261
336
385
483
517
546
654
90-94 years
71
108
132
177
210
245
268
306
95-99 years
16
25
41
53
74
83
89
115
100+ years
12
17
21
24
30
e/f = BMI estimate/forecast. Source: World Bank, UN, BMI
Table: Vietnam's Population By Age Group, 1990-2020 (% of total)
1990
1995
2000
2005
2010
2013e
2015f
2020f
0-4 years
13.52
12.26
8.81
8.12
8.12
7.80
7.51
6.77
5-9 years
12.49
12.12
11.44
8.27
7.63
7.69
7.69
7.18
10-14 years
11.40
11.23
11.33
10.73
7.75
7.22
7.24
7.36
15-19 years
10.68
10.25
10.50
10.65
10.12
8.38
7.35
6.93
20-24 years
9.64
9.50
9.49
9.81
9.97
9.98
9.57
7.01
25-29 years
8.72
8.51
8.73
8.79
9.11
9.30
9.39
9.11
30-34 years
7.46
7.75
7.85
8.13
8.18
8.40
8.59
8.94
35-39 years
5.64
6.66
7.17
7.35
7.60
7.65
7.72
8.18
40-44 years
3.57
5.03
6.17
6.73
6.90
7.06
7.16
7.34
45-49 years
2.93
3.17
4.64
5.81
6.34
6.43
6.48
6.79
50-54 years
2.86
2.58
2.90
4.36
5.45
5.79
5.91
6.11
55-59 years
2.97
2.49
2.33
2.63
3.98
4.67
5.01
5.49
60-64 years
2.42
2.54
2.21
2.04
2.32
3.05
3.59
4.58
65-69 years
2.05
2.00
2.19
1.89
1.75
1.83
2.04
3.20
70-74 years
1.49
1.60
1.63
1.80
1.57
1.48
1.48
1.75
75-79 years
1.09
1.08
1.22
1.27
1.42
1.33
1.25
1.19
80-84 years
0.62
0.70
0.74
0.86
0.91
1.00
1.03
0.93
85-89 years
0.32
0.34
0.42
0.45
0.54
0.56
0.58
0.67
90-94 years
0.10
0.14
0.16
0.21
0.24
0.27
0.29
0.32
95-99 years
0.02
0.03
0.05
0.06
0.08
0.09
0.10
0.12
Page 59
Vietnam's Population By Age Group, 1990-2020 (% of total) - Continued
100+ years
1990
1995
2000
2005
2010
2013e
2015f
2020f
0.00
0.00
0.01
0.01
0.02
0.02
0.03
0.03
Table: Vietnam's Key Population Ratios, 1990-2020
Dependent ratio, % of total working age

Dependent population, total, '000
1990
1995
2000
2005
2010 2013e
75.8
71.0
61.3
50.8
42.9
41.4
2015f
2020f
41.3
41.9
29,712 31,567 30,734 28,617 26,741 26,860 27,293 28,655
Active population, % of total
56.9
Active population, total, '000
58.5
62.0
66.3
70.0
70.7
70.8
70.5
39,198 44,453 50,154 56,331 62,306 64,820 66,094 68,402
Youth population, % of total working age
65.8
Youth population, total, '000
60.9
50.9
40.9
33.6
32.1
31.7
30.2
25,778 27,076 25,544 23,038 20,918 20,822 20,950 20,690
Pensionable population, % of total working age

Pensionable population, total, '000
10.0
10.1
10.3
9.9
9.3
9.3
9.6
11.6
3,934
4,491
5,190
5,579
5,823
6,037
6,343
7,965
Table: Vietnam's Rural And Urban Population, 1990-2020
1990
1995
2000
2005
2010
2013e
2015f
2020f
Urban population, % of total
20.3
22.2
24.4
27.3
30.4
32.3
33.6
36.9
Rural population, % of total
79.7
77.8
75.6
72.7
69.6
67.7
66.4
63.1
Urban population, total, '000
13,958
16,867
19,716
23,175
27,064
29,632
31,384
35,771
Rural population, total, '000
54,952
59,153
61,172
61,773
61,983
62,048
62,003
61,286
Page 60
Methodology
Industry Forecasts
BMI industry forecasts are generated using the best-practice techniques of time-series modelling and
causal/econometric modelling. The precise form of model we use varies from industry to industry, in each
case being determined, as per standard practice, by the prevailing features of the industry data being
examined.
Common to our analysis of every industry is the use of vector autoregressions. Vector autoregressions allow
us to forecast a variable using more than the variable's own history as explanatory information. For
example, when forecasting oil prices, we can include information about oil consumption, supply and
capacity.
When forecasting for some of our industry sub-component variables, however, using a variable's own
history is often the most desirable method of analysis. Such single-variable analysis is called univariate
modelling. We use the most common and versatile form of univariate models: the autoregressive moving
average model (ARMA).
In some cases ARMA techniques are inappropriate because there is insufficient historic data or data quality
is poor. In such cases we use either traditional decomposition methods or smoothing methods as a basis for
analysis and forecasting.
BMI mainly uses OLS estimators and in order to avoid relying on subjective views and encourage the use
of objective views, BMI uses a 'general-to-specific' method. We mainly use a linear model, but simple nonlinear models, such as the log-linear model, are used when necessary. During periods of 'industry shock', for
example when poor weather conditions impede agricultural output, dummy variables are used to determine
the level of impact.
Effective forecasting depends on appropriately selected regression models. We select the best model
according to various different criteria and tests, including but not exclusive to:
R2 tests explanatory power; adjusted R2 takes degree of freedom into account.
Testing the directional movement and magnitude of coefficients.
Hypothesis testing to ensure coefficients are significant (normally t-test and/or P-value).
All results are assessed to alleviate issues related to auto-correlation and multi-collinearity.
Page 61
BMI uses the selected best model to perform forecasting.
Human intervention plays a necessary and desirable role in all of our industry forecasting. Experience,
expertise and knowledge of industry data and trends ensure that analysts spot structural breaks, anomalous
data, turning points and seasonal features where a purely mechanical forecasting process would not.
Sector-Specific Methodology
A number of principal criteria drive our extrapolations and forecasts for each autos variable.
Production And Sales
At a general level, we approach our forecasting from both a micro and a macro perspective, assessing the
expansion plans of relevant multinationals/indigenous firms, while also taking account of the prevailing
economic outlook. In this latter respect, our projections for macro variables such as industrial output,
private consumption, government investment, monetary policy and GDP growth play a key role.
Figures for production are derived from a generic source (thereby ensuring maximum comparability
between country data-sets), and include all vehicles with four wheels or more. For sales, we rely on data
from government agencies and national automobile associations. Unless otherwise stated, sales numbers
include domestically produced and imported vehicles, but not exports. The sector's contribution to GDP is
projected by taking the US dollar production value as a proportion of nominal GDP, using our own
macroeconomic and demographic forecasts.
Auto Imports And Exports
These variables are mainly calculated at the micro level, using individual company reports. Changes in
government policy, particularly with regard to tariffs and quotas, also have a significant bearing.
Sources
Aside from government departments and official company reports, we rely on the International
Organization of Motor Vehicle Manufacturers (OICA), other established think tanks, institutes, and
international and national news agencies.
Page 62
Risk/Reward Ratings Methodology

BMI's Risk/Reward Ratings (RRR) provide a comparative regional ranking system evaluating the ease of
doing business and the industry-specific opportunities and limitations for potential investors in a given
market. The RRR system divides into two distinct areas.
Rewards
Evaluation of sector's size and growth potential in each state, and also broader industry/state characteristics
that may inhibit its development. This is further broken down into two sub categories:
Industry Rewards (this is an industry-specific category taking into account current industry size and
growth forecasts, the openness of market to new entrants and foreign investors, to provide an overall
score for potential returns for investors).
Country Rewards (this is a country-specific category, and the score factors in favourable political and
economic conditions for the industry).
Risks
Evaluation of industry-specific dangers and those emanating from a state's political/economic profile that
call into question the likelihood of anticipated returns being realised over the assessed time period. This is
further broken down into two sub categories:
Industry Risks (this is an industry-specific category whose score covers potential operational risks to
investors, regulatory issues inhibiting the industry, and the relative maturity of a market).
Country Risks (this is a country -pecific category in which political and economic instability,
unfavourable legislation and a poor overall business environment are evaluated to provide an overall
score).
We take a weighted average, combining industry and country risks, or industry and country rewards. These
two results provide an overall Risk/Reward Rating, which is used to create our regional ranking system for
the risks and rewards of involvement in the autos industry in a particular country.
For each category and sub-category, each state is scored out of 100 (100 being the best), with the overall
Risk/Reward Rating a weighted average of the total score. As most of the countries and territories evaluated
are considered by BMI to be 'emerging markets', our rating is revised on a quarterly basis. This ensures that
the rating draws on the latest information and data across our broad range of sources, and the expertise of
our analysts.
Page 63
In constructing these ratings, the indicators in the table below have been used. Almost all indicators are
objectively based. Given the number of indicators/datasets used, it would be inappropriate to give all subcomponents equal weight. The weighting given is described in the table.
Table: Automotive Risk/Reward Ratings Indicators And Weighting Of Indicators
Indicator
Weighting, %
Rewards
70, of which
Industry Rewards
65, of which
Vehicle ownership, % of population
10
Total vehicle stock, mn
10
Total production
10
Production growth, five-year forecast average
10
Total vehicle sales
10
Sales growth, five-year forecast average
10
Country Rewards
35, of which
Urban/rural split
10
Rigidity of employment
10
Labour costs
10
GDP per capita, US$
10
Risks
30, of which
Industry Risks
50, of which
Regulatory environment
10
Competitive landscape
10
Country Risks
50, of which
Corruption
10
Bureaucracy
10
Market orientation - openness
10
Legal framework
10
Long-term monetary risks
10
Long-term external risks
10
Long-term financial risks
10
Long-term policy continuity
10
Source: BMI
Page 64

BMI Vietnam Autos Report Q2 2014

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Q2 2014

Vietnam Autos Report Q2 2014

Part of BMIs Industry Report & Forecasts Series

Business Monitor International

2014 Business Monitor International

Vietnam Autos Report Q2 2014

Industry Forecast .............................................................................................................. 13

Industry Forecast Passenger Cars ............................................................................................................ 23

Industry Forecast Suppliers .................................................................................................................... 24

Macroeconomic Forecasts ............................................................................................... 30

Industry Risk Reward Ratings .......................................................................................... 34

Company Profile ................................................................................................................ 38

Regional Overview ............................................................................................................ 45

Global Industry Overview .................................................................................................. 50

Europe On Road To Recovery .................................................................................................................. 50

Demographic Forecast ..................................................................................................... 57

Business Monitor International

Vietnam Autos Report Q2 2014

Table: Automotive Risk/Reward Ratings Indicators And Weighting Of Indicators . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64

Business Monitor International

Vietnam Autos Report Q2 2014

BMI Industry View

Business Monitor International

Vietnam Autos Report Q2 2014

Business Monitor International

Vietnam Autos Report Q2 2014

Low manufacturing and labour costs.

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

Business Monitor International

Vietnam Autos Report Q2 2014

The Communist Party of Vietnam remains committed to market-oriented reforms and

Vietnam has allowed legislators to become more vocal in criticising government

Macroeconomic instabilities continue to weigh on public acceptance of the one-party

Business Monitor International

Vietnam Autos Report Q2 2014

The heavily-managed and weak currency reduces incentives to improve quality of

Urbanisation will continue to be a long-term growth driver. The UN forecasts the

Prolonged macroeconomic instability could prompt the authorities to put reforms on

Business Monitor International

Vietnam Autos Report Q2 2014

Vietnam remains one of the world's most corrupt countries. According to

Vietnam is increasingly attracting investment from key Asian economies, such as

Business Monitor International

Vietnam Autos Report Q2 2014

Table: Vietnam Autos Production, 2011-2018

Passenger Car Production

Commercial Vehicle Production

e/f= BMI estimate/forecast. Source: BMI, OICA

Production Will Grow But Importing Still More Attractive

Business Monitor International

Vietnam Autos Report Q2 2014

Rising, But Not Up To The Mark

Source: BMI, Gaikindo

Business Monitor International

Vietnam Autos Report Q2 2014

Supplier Segment Shares The Blame

What Does The Government Need To Do?

To spur domestic production, we believe the government needs to do the following:

Business Monitor International

Vietnam Autos Report Q2 2014

Business Monitor International

Vietnam Autos Report Q2 2014

Table: Vietnam Autos Sales, 2011-2018 (VAMA Members)

Sales To Build On Solid 2013