This webinar examines how the automotive industry in the Indonesia and Vietnam are facing the challenges brought about by technological advancement and changing consumer expectations.
SINGAPORE APEC STUDY CENTRE WEBINAR
Tuesday, 17 November 2020 – Singapore APEC Study Centre at ISEAS – Yusof Ishak Institute hosted a webinar on “The Future of the Automotive Sector in Selected APEC Economies: Case of Indonesia and Vietnam”, delivered by Dr Moekti Prasetiani Soejachmoen, Chief Economist of PT Danareksa (Persero) and Head of Danareksa Research Institution in Indonesia and Professor Martin Schröder, Associate Professor at the Department of Automotive Science, Graduate School of Integrated Frontier Sciences, Kyushu University, Japan. He is also a Visiting Researcher at the Research Institute of Automobile and Parts Industries, Waseda University, Japan.
The webinar commenced with an introduction by Dr Moekti on the Indonesian automotive Industry which was first engaged largely in simple assembly and import of cars. With recent developments in technology, the industry has turned its focus to the production of low emission vehicles and electric cars. Today, Indonesia’s automotive sector ranks third in the automotive value chain in Asia with the industry dominated by companies involved in authorised sales and spare parts. Most auto-assemblers in Indonesia are Japanese brands and many Tier 2 and 3 companies are small and medium businesses. Domestically, the automotive sector places fifth in the global value chain index, signifying the developing nature of the industry and its high dependence on auto-parts imports.
Examining the automotive sector more closely, Dr Moekti observed that technological advancement is a critical driving force behind the transformation of the sector. These advancements include the electrification of vehicles, advances in materials science, autonomous drivers and robot automation. They have far-reaching impacts on both enterprises and people as there may be a shift in the skills required by the industry leading to the increased need for people to upgrade their existing skills. The automotive sector has the highest operational stock of industrial robots, but robot installation has been decreasing gradually, with adoption rates remaining relatively low compared to the plastics industry and Thailand’s automotive industry.
Dr Moekti also elaborated on the impact of the COVID-19 pandemic. On the supply side, the lockdown in China caused a severe disruption in the regional value chain and supply of auto-parts. The impact was exacerbated domestically by the shutdown of manufacturing and production due to physical distancing. Additionally, the concurrent drop in vehicle sales has dealt a heavy blow to demand, resulting in a consequential decline in cash flow and employment. While the impact of the pandemic has been harsh, it has also highlighted the heavy dependence on China in the regional value chain, forcing businesses to consider dual-sourcing strategies and a more flexible production.
In closing, Dr Moekti highlighted that the automotive industry was considered as one of the priority sectors in the Making Indonesia 4.0 plan. While the roadmap of the automotive industry aims to have a 30% production output of electric vehicles by 2035, it may be impeded by its heavy reliance on imports, high labour and logistics costs, and low productivity. Furthermore, the workforce has yet to achieve sufficient skills and industry-education sector linkages remain weak. The development of electrical vehicles may not be as swift due to issues such as its high prices and the “wait-and-see” approach that Original Equipment Manufacturers (OEMs) and infrastructure providers employ; neither party wants to start production before the other.
The webinar was then handed over to Professor Schröder who began by outlining the current state of Vietnam’s automotive industry. Despite the positive trend in automotive sales, production of automotive in Vietnam remains marginal compared to other countries such as Thailand and Malaysia. Sales expansion has also remained pessimistic due to the high taxes imposed. Unlike the conventional pyramid structure of the automotive industry, the present structure of the Vietnamese automotive sector is that of an inverted pyramid where there is a decreasing number of Tier 1, 2 and 3 businesses, respectively. Such a phenomenon could be attributed either to the inclusion of both the motor cycle and automobile firms in the data, and/or because Vietnam is often used as an export destination. In recent years, there has been an expansion in production capacity by local and Korean carmakers without a significant production network in ASEAN. In contrast, Japanese carmakers with established production networks within ASEAN have not expanded its production capacity in Vietnam. While there may be limited opportunities for Vietnam to expand its position with Japanese brands in producing labour-intensive or low value-added parts, Korean brands such as Hyundai may use Vietnam as their regional production and export hub.
Next, Professor Schröder proceeded to discuss Vietnam’s automotive industry policies where he notes that Vietnam generally pursues global and regional economic integration. Such policies could mean that they would be unable to engage in small-scale automotive production when competing against leading producing countries such as Germany and Japan. Professor Schröder also highlights that most production goals have not been met. Such an impediment could be due to Vietnam’s inconsistent policies on the role of the automotive sector. Presently, Vietnam suffers from the absence of an automotive ministry, resulting in policy deadlock. In addition, the lack of a dedicated automotive programme frequently results in inter-ministerial conflict. Apart from economic integration, Professor Schröder observed that Vietnam has also implemented several Non-Tariff Barriers (NTBs) to protect against imports, which were eventually discontinued. An example includes the Vehicle Type Approval implemented in 2018 which required imports to meet Vietnamese safety standards. Batch inspection resulted in increased in costs and delayed delivery to customers. Recently, efforts at supporting production have been made by waiving the import duty of components that cannot be sourced locally for carmakers who commit to minimal production.
Professor Schröder also introduced Vinfast, a new brand established in 2014 by a local conglomerate which offered a re-badged models based on older BMW and Opel platforms. Despite the discounts to capture sales and market share, prices of Vinfast models remain costly. While Vinfast has become the number five brand in sales, its sales are still below its installed production capacity, bringing to question the sustainability of its business model.
In his closing remarks, Professor Schröder notes the development of the Vietnamese automotive industry is seemingly decoupled from governmental policies which often appear to be in deadlock. In addition, he observes that despite Vietnam’s economic integration strategy, the weakness of the local supplier industry is not addressed in its policy direction.
The webinar concluded with Dr Moetik and Professor Schröder engaging in a question and answer session with the participants. Questions answered included the position of electric vehicles in the future automotive industry with respect to its demand-side policies, the role Vinfast plays in the Vietnamese automotive sector and how the recent signing of the Regional Comprehensive Economic Partnership (RCEP) would affect the strategies and production arrangements of automotive in both countries.