AUTOMOTIVE PARTS FROM MALAYSIA TO VIETNAM

1.0 Introduction

Malaysia is a main producer and exporter of vehicle parts, components and accessories, which have found acceptance in many foreign countries including Thailand, Singapore, Taiwan, Indonesia, Japan and The UK. Major automotive companies such as Mercedes, Mazda, Ford, General Motors, Suzuki, Nissan and Mitsubishi are increasingly making use of Malaysian products due to their excellent quality and competitive prices (Bizeurope, 2008). In accessing the current market position of Malaysia and Vietnam, it’s very important to know what’s happening in the general environment so as a consultant can put forward the idea of export automotive parts and components from Malaysia to Vietnam.

1.1 PEST Analysis of Vietnam

Vietnamese automobile industry is growing rapidly, with 200% sales ratio in February 2008, as the country is going through the phase of economic development. The automobile and auto spare parts industry in Vietnam was loosing track till the year 2005 as a result of inadequate capital investment, lack of economies of scale, not enough of experiences, low value parts by the local suppliers, insufficient of raw materials, absents of modern machineries, and poor technology. However, it recovered in 2006 and registered a good growth rate in South-East Asian countries by established a joint venture with foreign-owned original equipment manufactures, including Mitsubishi, Toyota, and Isuzu (which are becoming some of the first global OEMs in Vietnam). Today, the changing lifestyle, flexible bank loan structure, rising income, exchange-rate stability, political strength, high investment rate, top purchasing power, and top demand for passenger car segment are mounting the sales volume and import rate of automobile and auto parts in Vietnam (Timothy, 1998).

Before the year 2007, the Vietnamese government imposed higher taxes on automobile and auto parts, which increased the prices greater than in many Asian countries, to protect the local products and encourage the exports. This was eventually decreased the buying power of the nation and also restricted the growth of the local automotive industry. The rules and regulations of automobile industry in Vietnam were changed once the country became 150^th member of World Trade Organization (WTO) in January 2007. The import tax on auto-components has decreased to five percent in the early 2007. This has made the conditions favorable for foreign manufactures, specifically South Korea, Japan, US, and Europe, to put up for sale their automobiles and auto spare parts at lower prices. Although Vietnam was a motorcycle-oriented country in past years, its passenger car segment posted a good growth after the country officially becomes a member of the WTO. Furthermore, The Tax Policy Department is now calculating the import taxes based on individual vehicles parts rather than on a proportion of complete knock-down vehicles. The main intention of this new method is to encourage the domestic automobile manufacturers to utilize locally made car parts to replace imported product, which are much more costly than the domestic product (Timothy, 1998).

Vietnam’s population was estimated at 83.1 million in July 2005, and it is expected to reach 90 million by 2010, an annual growth rate of 1.6 percent. More than 60 percent of the population is under 25 years of age and approximately 15.5 percent is considered to be trained or skilled workers with elementary qualifications or higher (Vision, 2006). Vietnamese employees work a maximum of 48-hours per week and have fewer holidays compared with China and other ASEAN countries. However, a number of businesses, including foreign direct investment companies, are being encouraged by the government to adopt a 40-hour week. In the long term, Vietnam may lose its cost advantage in terms of longer working hours. Yet, labour costs are still relatively low compare with other countries in Asia, including China. Vietnam has dual minimum policies: one for local Vietnamese enterprise and the other for foreign-investing enterprise. However, a single minimum wage policy is likely to be reached by 2010 (Timothy, 1998).

Vietnam’s infrastructure is poor and presents considerable obstacles to automotive supply chain operation. Vietnam has no major expressways and only 26 percent of the national highways have two or more lanes. Only 10 percent of the capital city Hanoi is developed for roads, while in most global capitals, 25 to 30 percent is typically dedicated to vehicular traffic. Undeveloped infrastructure has been citied as a leading constraint in Vietnam, and when compared with other industrial and economic factors, transportation ranked high in investor considerations. Vietnam has eight major seaport complexes and the development of deep sea ports is currently underway. Though the level of ship traffic is lower than others countries in the region, significant growth is foreseeable and will help with Vietnam’s international trade (Timothy, 1998).

1.2 PEST Analysis for Malaysia

Malaysia is a developing country. From the year 1960 to 1971, the country’s economy was dependent on agriculture and primary commodities such as rubber and tin. Today, Malaysia is a middle-income country with a multi-sector economy. The GDP growth rate was 5.8% in 2006 and 5.9% in 2007. Domestic demand and dynamism in exports are the main reasons for the economic constancy in Malaysia. Malaysia’s economic is now depending on industry, agriculture, and services sector, which contributes nearly 115% to the GDP at 2007. Along with the research, Malaysia is one of the world’s main exporters of vehicle parts, components and accessories to Thailand, Singapore, Taiwan, Indonesia, Japan and The UK. The auto parts industry in Malaysia is maintaining the high reputation among their valuable customers locally and also in overseas. Engineering capabilities, industrial master plans, and technology advancements are the main factors for the high reputation. In consequence, the demand for Malaysia’s auto parts are continually increasing, especially among major automotive companies like Mercedes, Mazda, Ford, General Motors, Suzuki, Nissan and Mitsubishi. In addition, there are 343 auto parts manufactures in Malaysia. Up till now, RM 8.2 billion was invested by automotive components and parts manufactures in auto parts industry (MSC, 2007).

Malaysia is dedicated to fulfill its multilateral commitments under WTO and AFTA and has taken steps to liberalize its duty structure. Other measures have been taken as well. Since 2001, the equity policy for the automotive sector has been relaxed to allow up to 51% foreign equity on a case by case basis. In addition, domestic manufacturers and assemblers are currently free to multi-source from the most competitive suppliers globally, uninhibited from local content policy requirements (ELM, 2007).

Malaysia’s population was estimated at 25.2 million in 2007, an annual growth rate of 1.7 percent. More than 60 percent of the population in Malaysia is Malays and rest is Indians (8 percent) and Chinese (32 percent). Approximately 44 percent from the total population is consider to be trained or skilled workers with elementary qualifications or higher. Malaysian’s employees work a minimum of 48-hours per week and have more holidays compared with China. Up till now, labour costs are still relatively standard compare with other countries in Asia, including Vietnam and China. Besides, Malaysian’s salary can be divided into two types: one is national monthly minimum wages and the other is average wage for an employee in the manufacturing industry (Kiat, 2008).

Malaysia’s infrastructure is well-built and presents considerable benefits to automotive supply chain operation. Malaysia has 80,328-km road network, highways, and main roads. This mode of transport represents 90% of the goods and passengers traffic in Malaysia. Besides, Malaysia has rail network of more than 2,000 km, mainly located in Kuala Lumpur and along the coast of the Strait of Malacca. The railway service in Malaysia is continuously improving by the government. Additionally, there are tree main ports and airports in Malaysia, which currently growing in terms of exports (Kiat, 2008).

2.0 Market Enter Mode- Exporting

Exporting is a popular market entry mode for auto parts industries. Numerous auto parts manufactures have entered world market through exporting. The National Association of Manufacturing said that, 65 percent of the companies export their products to foreign markets, and that 75 percent of respondents expect their exports to either remain at current level or increase in 2005 (Smallbiz, 2008). This data indicates that exporting is a healthy level of export activity in the current world market. Since Malaysia is a middle income country with excellent infrastructure and technology advancements, exporting will be a very good and profitable entry mode to trade in their auto parts in Vietnam. Indirectly exporting the auto parts to the Vietnamese company, that handles the export transaction through an intermediaries, will be a cost-effective and unproblematic delivery mode if compare with direct exporting, that handles the export transaction in-house. Far greater investment in resources and loads of efforts are not requiring in indirect exporting as well as it is the easiest way for Malaysia that going to begin international sales to Vietnam for the first time. Document requirement and arrangement of payment in convertible currency are very important in exporting. Since Malaysia is going to become a new exporter of auto parts to Vietnam, payment by letter of credit, a procedures that can be handled reliably by cooperating banks in the countries of origin and destination, will counterbalance and secure the trade between Malaysia and Vietnam (Thomas, 2008).

3.0 Benefits, costs, and risks

Adding intermediaries in the channels of distribution will bring in a number of benefits for Malaysia’s auto part industry. For example:- If Malaysia put up for sale its auto parts directly to each retailer, there are will more than 100 contact lines from each manufactures to each retailers in Vietnam. The complexity of this distribution arrangement can be reduce by adding wholesalers from Vietnam as intermediaries between auto parts manufactures in Malaysia. If a single wholesaler serves as the intermediary, the number of contacts might reduce from 100 to 25 contact lines between the auto parts manufactures in Malaysia and the wholesaler in Vietnam. Reduction in the number of contacts will eventually bring in more efficiency into the distribution system by eliminate duplicate efforts in ordering, processing, shipping, and etc. Besides, intermediaries can help to reduce the cost of distribution by making transaction routine, standardize exchange relationships and fixed transaction. However, Malaysia might fail to notice the actual wants of the Vietnamese and also disable to be in touch with its valuable customers by using intermediaries in indirect exporting {Hement, 2004).

4.0 Conclusion

Economic, Political and social stability in Vietnam is eventually mounting the demand for auto parts and components as well as offering a number of opportunities for the foreign auto parts manufactures to enter the market. Subsequently, as a consultant would like to put forward the idea of exporting the Malaysia’s auto parts and components, which have found acceptance in many foreign countries including Thailand, Singapore, Taiwan, Indonesia, Japan and The UK, to Vietnam. This idea of exporting will ultimately add value for the GDP growth rate in Malaysia and also will satisfy the hunger of the Vietnamese.