By James Pearson (LON:PSON)
HAIPHONG, Vietnam (Reuters) - At a time when auto companies in the developed world are facing a squeeze on their profits from cash-rich tech firms, Vietnam is betting car-making can be a ticket t o a more prosperous economy, just as it was for the likes of Japan and South Korea.
VinFast, a unit of Vietnam's largest conglomerate Vingroup JSC (HM:VIC), is set to become the country's first fully-fledged domestic car manufacturer when its first production models built under its own badge hit the streets next August.
"Where else in the world can you do this with this sort of speed?" said Shaun Calvert, vice president of manufacturing at VinFast Trading and Production LLC, looking out over an area of factory floor where nine months earlier there was only sea.
Calvert was speaking on a recent tour of the company's new plant, a sprawling island complex in the northern Vietnamese port town of Haiphong, where the two models will be built.
From a standing start, VinFast will have the capacity to produce 250,000 cars annually in the next five years or so, equivalent to 92 percent of all the cars sold in Vietnam last year, according to data collated by the Vietnam Automobile Manufacturers' Association (VAMA).
Vingroup says it only embarked on creating VinFast a little over a year ago and has earmarked about $3.5 billion for the project.
"We are driving the rapid expansion of the domestic automobile market so we are absolutely focused on winning here first," CEO Jim Deluca said ahead of the Paris Motor Show this week, where VinFast will reveal its first export markets.
"We're looking to expand both within ASEAN and outside."
Most cars sold in Vietnam are foreign brands assembled in the country from kits. But a series of free trade agreements have reduced import duties and are opening up the market. A 30 percent import tax on cars from other Association of Southeast Asian Nations (ASEAN) countries was scrapped this year.
ELECTRIC SCOOTERS
Vingroup already dominates the real estate market in Vietnam with Vinhomes, has entered the healthcare market with Vinmec, runs a chain of supermarkets called Vinmart, and entertains tourists at Vinpearl resorts.
"There's probably 4 million customers today who are associated with Vingroup in one way or another so it's a huge brand, it's an aspirational brand, and those customers are ready for a domestic VinFast product," said Deluca.
In a country synonymous with the motorbikes that zip around the clogged streets of Hanoi and Ho Chi Minh City, VinFast will also produce 250,000 electric scooters a year alongside the 250,000 cars, in an ambitious production target that's set to eventually increase to 1 million units each a year.
VinFast has also started on the development of a battery electric vehicle with Germany's EDAG Engineering (DE:ED4), to be introduced in the future, Deluca added.
"We felt on the car portfolio it was best to start with an internal combustion engine and then soon after that launch the battery electric vehicle," said Deluca. "From an infrastructure perspective, it's a lot easier to charge a scooter than it is an automobile."
The speed with which VinFast has moved has partly been possible due to a reliance on off-the-shelf parts.
VinFast's first two models, an SUV and a small sedan, are being built on a frame from BMW (DE:BMWG). The components have been engineered by Canadian firm Magna International's (TO:MG) Magna Steyr, while design work has been done by Italian design house Pininfarina (MI:PNNI).
"That gives us the ability to move very, very quickly and to come out with a vehicle that is 100 percent ours and looks like no other vehicles that are on the road today," Deluca said.
"NATIONAL PRIDE"
The company has also imported foreign expertise. At least five of the VinFast leadership team, including Deluca and Calvert, are veterans of General Motors Co (N:GM).
In June, the U.S. automobile giant agreed to transfer full ownership of its Hanoi factory to VinFast for the Vietnamese firm to produce small cars under a GM global license from 2019.
But, despite the institutional experience VinFast has acquired, a move into the highly competitive automobile industry is not without significant risks.
Local auto assembly companies have tried - and failed - in Vietnam to sell home-grown models to the masses. Regionally, companies such as Malaysia's Proton or Australia's Holden have struggled to gain traction outside their home countries.
"The key question is why the world needs yet another car brand in a era when hardware is commoditising," said Bill Russo, head of Shanghai-based consultancy Automobility Ltd and a former Chrysler executive.
"The fact that they have outsourced design and manufacturing and are relying on foreign R&D tells me they are following a traditional path that may not be competitive in an era of digital mobility services."
Bui Ngoc Huyen, chairman of Vinaxuki, which tried to establish a domestic automaker but ceased production in 2012 before its first car was officially launched, said Vingroup's deep pockets should help, but warned that building a brand would take time.
"You have to move from producing small and cheap cars to luxury ones," he said. "It will take several years for a new carmaker to fine tune its products and win the confidence of consumers. It will take between 10 and 20 years."
Deluca said VinFast's early models would be "very affordable" to lure local buyers, but declined to give details of pricing.
But in Vietnam, where hundreds of thousands of people take to the streets with flares and flags to celebrate moderate success after under-23 football games, VinFast is banking on an additional competitive edge
"We think national pride is a tremendous advantage for VinFast," said Deluca. "What we're doing here is something special for the men and women of Vietnam".