VinFast wants to export cars

There is a report out that VinFast wants to make cars for export, which we knew and I had written about previously. The weirder thing is that they want to jump straight to the US market, which is already pretty competitive and, I would say, saturated. The market is not doing that well - it fell 3% yoy this year through November. Plus, we are starting to see more articles like this: Owning a car will soon be as quaint as owning a horse.

Source: Marklines

Source: Marklines

Moreover, the competitive structure of the US market is pretty static. There are 22 players, with the newest being the Koreans, and they came in the 1980s. I have occasionally seen some of the new Chinese cars on the roads, but very rarely. The only two new entrants that have done well are smart cars and Tesla. Both of which brought something new to the market: tiny cars and EVs.

And really, only Tesla has been successful. Even with the skepticism around its guidance and its new cybertruck, it has reached a 1% share, above Volvo, Mitsubishi, Porshe and many others that have been competing for much longer.

Because of this, I just think that VinFast will face a long, tough slog to sell in the US, especially for a company without any name recognition. While I personally find that the VinFast cars look quite cool, they are somewhat generic (pics here).

Why go into the US?

Vehicle sales in VN. Source: VAMA and OICA

My first question was why go into the US? First, let’s back up and look at the Vietnamese market. I wrote about the market back on June 17, 2019, and what I said then stands: the market is just small. Only about 275,000 cars are sold a year, compared to the US market of around 15m in a bad year, and as high as 17.6m in 2016.

For VinFast to sell 100,000 cars in Vietnam, the market would have to grew 36% and Vinfast would have to take all of that. And VinFast has built up a really big manufacturing capacity - 250,000. That’s almost the whole market!

Source: OICA

So VinFast does have to export. But I think it makes more sense for the company to start competing in markets closer geographically. For example, it could spend on the Philippines, where about 400,000 vehicles will be sold. Plus there is a lot of growth in emerging markets, as people get richer. See the chart to the left, which shows how vehicle sales trend with income. So get in early on these markets and ride up with them.

It is not only a function of a small market. Or at least that is just one part of it. The other issue is that building a car plant is super expensive. There are a lot of fixed costs. And the only way to bear those fixed costs is to have a lot of volume. That’s why VinFast wants to go abroad.

But it will not be able to do what companies like Toyota and Hyundai were able to do in the States when they entered: sell very cheap but quality cars. The Japanese companies had inexpensive production and built a lot of the technology themselves. VinFast cars are based on Opel and BWM parts. This means the cars will probably be pretty high quality, but they won’t be differentiated. They also won’t be super cheap, or I doubt they will be.

Source: Vingroup

As of 9M2019, VinFast had revenues of VND4.3 trillion in its manufacturing segment. This is cars, scooters and phones. On this revenue, it had a negative gross profit of VND1.7 trillion. Not counting marketing, etc. It’s very likely they lost more than VND2 trillion. Manufacturing assets are 24% of VinGroup’s assets, or VND84 trillion. So it seems like Pham Nhat Vuong is betting the company on the success of cars and phones and really needs to get it working.

I hope it works out, because it would be good for the company and Vietnam, but I can’t say that I’m not worried.