Driving Forces: Why Vietnam Is Emerging As A Prime Hub For The Automotive Industry – 3 Compelling Reasons

Driven by the lowest rate of car ownership among Southeast Asian peers, the advantages from numerous current and potential free trade agreements, as well as the Government’s favorable investment incentives, Vietnam’s automobile industry is expected to expand rapidly.

Opportunities from the domestic market

With a population nearing 100 million, Vietnam stands as the 3rd most populous country in Southeast Asia, following Indonesia and the Philippines, and ranks 15th globally in terms of population.

At the same time, the country has consistently witnessed substantial growth in its GDP over the past two decades, achieving a compound annual rate of 5% in real terms. This rate surpasses the global average by 1.7 times. If this upward trend persists, the consuming class in Vietnam is expected to reach 77 million people by 2030.

Meanwhile, the average number of cars in Vietnam is currently around 50 per 1,000 people, a comparatively lower figure compared to other Southeast Asian nations, according to the Ministry of Industry and Trade. The demand for automobiles in Vietnam is projected to surge, with an estimated 800,000-900,000 new cars to hit the roads annually by 2025. This number is anticipated to further increase to about 1.5-1.8 million vehicles by 2030.

Notably, there is a growing demand for mid-range cars with 9 seats or less, particularly among Vietnamese families. The current trend indicates that the number of vehicles with less than 9 seats is increasing at a rate of 20-30% per year, and is likely to constitute 70% of Vietnam’s car market by 2025.

As Vietnamese consumers increasingly prioritize mobility and lifestyle, automakers are presented with a golden opportunity to establish themselves in a market with immense growth potential.

Opportunities from trade agreements

The EU-Vietnam Free Trade Agreement (EVFTA) — which came into effect on August 1, 2020 — has brightened the country’s automotive industry outlook.

The ratified EVFTA will help Vietnam reduce the price of imported cars from Europe and provide greater access for car exporters in Vietnam to the European market. Specifically, cars manufactured and assembled in Vietnam can be entitled to an import tax of 0% from 2028 if they achieve the localization rate as required. In the EU, the number of new car registrations reached more than 10.9 million vehicles in 2022, representing an attractive market of 13.3% of new registered vehicles globally.

Additionally, some domestic businesses have successfully taken advantage of Vietnam being a member of the ASEAN Economic Community to export vehicles to other countries in the region. According to data from the ASEAN Automobile Federation (AAF), the ASEAN region purchased nearly 2.2 million new passenger cars in 2022, an increase of 23% compared to 2021.

Government support

Vietnam has been actively fostering an environment conducive to the growth of the automotive industry. Under the National Strategy to Develop the Automotive Industry, the government aims to achieve an annual production capacity of 466,400 vehicles by 2025, meeting 70% of the national demand, and export 37,000 units to the international market.

To achieve the targets, the government offers a range of support policies and incentives, attracting foreign direct investment (FDI) and promoting the development of a robust automotive ecosystem. Investment incentives include corporate income tax breaks, reduced import duties on machinery and equipment, as well as 0% import duty for a number of automotive components that Vietnam is not capable of producing.

Further, the Vietnamese government has demonstrated a commitment to developing supporting infrastructure, such as industrial zones and research and development facilities, tailored to the needs of the automotive sector. This proactive approach creates a favorable business environment, encouraging both domestic and international automotive companies to invest and participate in the country’s automotive growth story.