Why is Vietnam’s VinFast Building an EV Factory in the United States?

pacific money | Economy | Southeast Asia

The new automaker hopes that relocating its manufacturing to the US will help it take advantage of growing US demand for electric vehicles.

Earlier this year, Vietnamese automaker VinFast, a subsidiary of massive conglomerate Vingroup, announced that it is planning to build a $2 billion electric vehicle (EV) production plant in North Carolina. The total value of the investment, including battery production and other ancillary facilities, could be as high as $6.5 billion. Scheduled to be operational in 2024, the facility will create thousands of jobs and produce up to 150,000 electric vehicles a year. For its part, North Carolina has rolled out the red carpet offering $1.2 billion in incentives to VinFast.

This is an interesting role reversal from the world of global supply chains we are used to, where historically it is American, Japanese and Korean companies that relocate manufacturing to places like Vietnam to take advantage of lower production costs. A Vietnamese conglomerate investing billions in a capital- and technology-intensive production plant in North Carolina and President Joe Biden touting the American jobs it will create is a good way to flip the script. So what is the logic behind VinFast’s move?

The first thing to look at is the structure of the automobile manufacturing industry in Vietnam’s backyard in Southeast Asia. Thailand has historically been and continues to be the regional leader in automobile production, mainly for export. In recent years, Indonesia has been catching updriven by growing demand in its domestic market.

Thailand and Indonesia are also seeking to gain a foothold in global electric vehicle supply chains, and these efforts are supported by powerful state companies. By comparison, VinFast is a relative newcomer to auto manufacturing and will face stiff competition from these more established regional incumbents.

The second is the profile of electric vehicle demand and infrastructure, both globally and within Southeast Asia. Europe, the United States and China are the main drivers of global demand for electric vehicles at the moment. According to Forbes, electric vehicle sales in the US are forecast to reach 670,000 in 2022, an increase of 37% from the previous year. And this figure is expected to continue to grow.

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The same demand for electric vehicles does not yet exist in most of Southeast Asia, and even if it did, the charging infrastructure is not available for domestic markets to absorb electric vehicles on the same scale. That means that, for the time being, if electric vehicles are going to be a major component of car manufacturing in Southeast Asia, demand will mostly come from export markets.

VinFast has a large domestic manufacturing base in Hai Phong that is expected to eventually be capable of producing 950,000 units a year. Output from this facility can serve export markets in China, South Korea, Japan and throughout the region. But when it comes to tapping into the US EV market, VinFast made the strategic calculation that relocating manufacturing to North Carolina is the right move rather than basing production in Vietnam and shipping units across the Pacific. .

It’s a bold move and of course we don’t know how it will play out. The US market is crowded and competitive. And obviously it will be more difficult for VinFast to control production costs in the United States, which is one of the great comparative advantages of locating manufacturing in Vietnam.

But in the absence of comparable local demand for electric vehicles, and given that it will be competing against a regional car export giant like Thailand, Vietnam decided to go big by moving manufacturing directly to the US. And in doing so, it also sends a message about Vietnam’s rising profile in the global economy and its ability to change traditional production structures by offshoring capital and technology-intensive manufacturing to a high-income country.

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