By Dr. Tung Bui - Faculty Director of Vietnam Executive MBA, University of Hawaii
Why does BMW choose the US to be its largest production site? What makes the US become again a competitive site for manufacturing and an attractive platform for automobile exports? Is there anything Vietnam can learn from the renaissance of the US automobile industry?
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| Workers at an auto assembly plant in Vung Ang Economic Zone, Ha Tinh Province. |
Foreign car makers such as Ford, Honda and Toyota are changing market strategies in Vietnam. Expecting drastic reduction of import taxes on automobiles, these companies are back to a simpler business model; that is just to export cars to Vietnam, instead of building cars locally. As part of the WTO agreement, Vietnam will have to significantly reduce taxes on imported automobiles, which are currently at 60%. Also, Vietnam will have to eliminate tariffs on cars imported from ASEAN countries by 2018. With no more tariff barriers, Vietnam is losing its competitive edge as a low-cost manufacturing base. Mazda initially planned to build a factory in Vietnam, but has now dropped the project.
In contrast, the car industry in the US seems to pick up momentum. With heavy financial rescue from the Bush and Obama administrations during the 2008 crisis, General Motors (GM) is back to business again along with other American brands. But most notably is the rush of foreign car manufacturers to the American soil. Mr. Norbert Reithofer, BMW chairman of the board, announced in New York on Friday March 28 that his company would invest an additional $1 billion in its factory in the US. For 20 years, BMW has invested $6-billion in its Spartanburg factory located in South Carolina that has an annual output of more than 300,000 cars. By the end of 2016, adding 800 more workers to its current total workforce of 8,000, the high-tech US factory is expected to produce 450,000 vehicles. As such, it will be the largest BMW factory in the world, exceeding the plant in Munich, Germany, which currently rolls out 340,000 cars yearly. BMW plans to produce the SUV X4, and a larger model, the X7.
This German investment is certainly good news for the US economy. In 2013, 70% of the luxury cars produced by BMW in the USA were exported to the world. This export corresponds to an estimated value of $7.7 billion, based on the US Department of Commerce data.
BMW has 28 production and assembly facilities in 13 countries. Why does BMW choose the US to be its largest production site? What makes the US become again a competitive site for manufacturing and an attractive platform for automobile exports? Is there anything Vietnam can learn from the renaissance of the US automobile industry?
Many foreign companies that have their factories in the US cite the benefits of the “Made in the USA” brand. Even with high corporate taxes and health costs, the US is still recognized to have a production infrastructure that is economically and politically stable and resilient. The US has relatively low energy costs. Its infrastructure is efficient and more resilient to natural disasters. As an example, the 2011 tsunami in Japan caused quite a bit of disruption to BMW and other high-tech manufacturers because it took time for Japanese part suppliers to recover from the earthquake. The US also possesses an extensive network of research-based universities, and foreign companies can benefit from technology transfer. Most international car makers have their R&D offices in the country.
With an increasingly sophisticated market, selling low-quality cheap cars might not be the answer to sustain the business. GM has learned this lesson the hard way. Facing increased labor cost in the US, GM moved some of its production in the early 2000′s to China to take advantage of cheap Chinese labor. The consequence of this culture of cost cutting has lead to quality problem that is currently costing GM billions of dollars in safety recall and replacement. In contrast, BMW looks for cost-reasonable quality workers able to operate in production lines using cutting-edge technologies. Facing low-cost competition in Asia, US workers have recently learned to be more productive and are today better educated in taking advantage of technologies. Boston Consulting reports that during the last decade, labor productivity rose much faster in the US than in Western Europe. Research by the Organization for International Investment (OFII) shows that foreign manufacturers pay US workers 14% more than the industry average. But the high productivity justifies the higher salary.
Another reason is the quality and availability of US-made parts. Foreign car makers use quite a few parts made in the USA for the cars they produce on American soil. Edmunds.com reports that in 2013, Honda and Toyota bought respectively $22 and $25 billion of American equipment, parts and supplies. Logistically, it would be cost-effective to have factories located close to the suppliers to save production time, shipping costs, taxes and duties. Last but not least, BMW also follows the marketing concept of of having production close to the customers. With cars produced in the USA, car manufacturers can reach out to their clients throughout the American continent and Europe faster and more cost-effectively.
Vietnam produced 40,470 cars in 2012, according to Paris-based International Organization of Motor Vehicles Manufacturers (OICA). In contrast to the US car industry, cars made in Vietnam have more than two-thirds of foreign parts. These parts from overseas are subject to a 20% import tax. Even with low labor cost, cars assembled in locations such as Hoa Binh with heavily taxed foreign parts will eventually cost more than their foreign competitors, once import tariffs on finished cars are gone.
Looking at the American manufacturing renaissance, it might be the time now for the Vietnamese automobile industry to revisit its business strategy. Building a car industry based only on intensive low-cost labor might still make sense in the Vietnamese market. An immediate solution would be to immediately cut or eliminate import tariffs for automobile parts to help reduce the domestic production costs. This move would work only if the savings on import taxes for parts could neutralize other costs related to energy costs, transit, delivery, logistical risks and marketing.
A more radical and long-term solution would be to undertake a thorough analysis of the entire supply chain of the automobile industry in Vietnam, brand by brand, model by model, type by type, and factory by factory. Decision makers involved in the future of Vietnam’s car industry need to come up with a balanced and sustainable solution, one that makes economic sense to foreign car manufacturers, and to Vietnamese car buyers.
Throughout its 110 year-long history of car making, the US car industry has seen happy and sad times. With only 20 years of building modern vehicles, automobile manufacturing in Vietnam is quite young. But it is now the time for Vietnam’s motor vehicles industry to rethink its business model to adapt to changing times.
Looking into the future, the fundamental issue is to create an ecosystem similar to the one of the US car industry that is conducive to producing state-of-the-art cars that meet the expectations of today’s drivers. Sooner than later, Vietnam should start building various components of its own ecosystem, one step at a time. The components include, but are not limited to: (1) coming up with fiscal incentives to encourage foreign car manufacturers to stay in the country, (2) building the supply base by encouraging local firms to produce more car parts with improved quality, (3) and improving the quality of engineering programs at Vietnamese universities to improve workers’ productivity. It takes time to build a successful industry. Any hasty shortcut might cause more harm than good.