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June 27, 2007

Motorcycles in Vietnam
Although Vietnam imported thousands of mopeds during the American war period, it was not until the mid-1990s that motor cycles first emerged as important sources of personal transportation in the country. This was because of the lack of income for most of the population, making motorcycles entirely out of reach for the great majority, as well as the very poor state of the roads. Those machines which were imported, which were sourced in friendly communist societies in Eastern Europe, were hardly inspiring to the Vietnamese people in any case.

This situation changed in the 90s as Vietnam began to enter into the globalizing world and relocation of manufacturing facilities there made the ownership of a bike realistic for increasing numbers of people. The infrastructure was also greatly enhanced, at least partly in response to the requirements of foreign investors. Relations with the northern brother of China also improved – it was only in 1979 that the two countries fought a war in which tens of thousands were killed on either side. This meant that Chinese products were starting to enter Vietnam, together with locally-made Japanese products, notably from Honda, with some locally-owned production plants also increasing the competition in the market. Japanese products were notably superior in quality and also in price and although Chinese-made alternatives were attractively-priced, concerns about their reliability began to emerge quite quickly.

Motor cycle production is dominated by economies of scale and scope and this has meant that large producers, Japanese principally, have had a considerable market advantage over competitors from other countries. The rise of China has altered this situation as it has affected global value chains. The value chain concept is based on dividing each stage in the chain of production from raw materials to retail and identifying the specific costs and profits applying to each stage. Smart firms will integrate into their activities those stages which are profitable for them and outsource those which are not.

However, the rise of new firms and production centres has changed this situation. By 2005, three quarters of the world’s production of cycles took place in China, India and Indonesia. It is no surprise to find large producers following Honda’s strategy to ‘produce where the demand is.’ Just like the case of Chinese carmakers, local producers of bikes base their designs on existing models (either as part of an agreement or through reverse engineering of one sort or another) and can be, to a limited extent, responsive to specific forms of local demand. Production experience and knowledge has often been developed through working with Japanese ‘knocked-down’ products.

Local suppliers have been able systematically to replace some or all of these parts to the extent that locally-owned producers can now manufacture acceptable substitutes. The motor cycle industry in emerging markets is dominated by the quality-price equation together with the need for after sales service and acceptable resale value. Until recently, Chinese products failed in most ASEAN markets on all of these grounds. However, their entry into the markets demonstrated the extent to which the use of standardised parts and production methods could reduce costs, more so than in the case of Japanese items. The result was a shock for local firms which suddenly had a new model on which to base their production methods and to which they could add after-sales services.

The entry of Chinese firms has greatly changed Vietnam’s motor cycle market not just because of the provision of new and competing types of products but because of the impact on local firms and their strategies and capabilities. This phenomenon may be reasonably expected to be replicated in other ASEAN countries as Chinese firms enter new markets and make changes to the profitability of different stages of global value chains.

The research reported on in this story was conducted by Mai Fujita in a discussion paper for the Institute of Developing Economies entitled “Local Firms in Latecomer Developing Countries amidst China’s Rise: The Case of Vietnam’s Motorcycle Industry.”

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