Measures to develop Vietnam’s automobile industry

Friday, 2019-11-29 17:47:56
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Vinfast is a new car brand of Vietnam.
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NDO – Vietnam’s automobile industry is growing slower than other countries in the region, with a gap of nearly 30 years; therefore, it is essential to set specific policies to attach the industry into the global value chain.

Great potential

At the 2019 Vietnam Supporting Industries Forum in Hanoi on November 28, Deputy Minister of Industry and Trade Do Thang Hai emphasised that being expected as a key industry, Vietnam’s automobile industry has great potential to develop. In fact, with the strong socio-economic development and the improvement of the quality of life, the industry has many opportunities to make breakthroughs in.

The Deputy PM said that with encouraging policies of the Government, the industry has gained significant achievements. The localisation rate of several domestically manufactured and assembled vehicles is quite high. The number of enterprises operating in the automotive and supporting industries has raised continuously with the participation of all economic sectors. The supporting industry serving for the automobile sector has seen positive shifts with the gradual increase of the proportion of enterprises manufacturing components and spare parts as well as the reduction of those assembling and manufacturing car bodies and trunks. Even Vietnam has exported many products.

Vietnam's automobile industry has grown rapidly in recent years. The average growth rate of domestically manufactured and assembled vehicles was about 10% per year during the 2015-2018 period. By the end of 2018, there are 358 automobile-related manufacturing enterprises, including 50 in assembling cars, 45 manufacturing chassis, bodies and trunks of vehicles and 214 in automobile components and spare parts.

Most major car manufacturers in the world, such as Toyota, Honda and Ford, have appeared in Vietnamese market; therefore, a number of satellite manufacturers and foreign components and spare parts suppliers have also invested in the country.

The development of supporting industry for the automobile sector will create favourable condition for enterprises to join the global value chain and attract more foreign direct investment as well as improve the production capacity and innovate their technologies. The supporting industry will also contribute to the expansion of industry clusters, and creates a network of suppliers of input products for other businesses in the country.

However, the Vietnamese automobile industry faces fierce competition of foreign rivals. The automobile industry in Thailand, Indonesia and Malaysia has developed since 1960.

Deputy Minister Hai also pointed out the limitations of Vietnam’s automobile industry such as the slow development in both quantity and quality compared to many countries in the region and the low localisation rate of private cars of up to 9 seats. In addition, machines and technologies are relatively backward; meanwhile the quality of supporting industry products is still low and their prices are relativily high. Many supporting enterprises for automobile industry have not had the sufficient capacity and technology to join the value chain of the domestic automobile industry.

Crucial measures

According to estimates by the Ministry of Industry and Trade,Vietnam spent around US$3.4 billion for automobile imports in 2019, mainly personal cars of less than nine seats. The cars are imported to Vietnam massively due to the zero tariff policy as committed in the ASEAN Trade in Goods Agreement (ATIGA).The volume of imported cars in the first seven months of 2019 increased by 500% over the same period last year and exceeded the threshold of 100,000 by the end of September. However, only 131,089 vehicles were manufactured and assembled. Meanwhile, car sales in the first six months of this year saw ayear-on-year increase of 21%.

Due to the low localisation rate and high price, Vietnam’s automobile industry competes with not only its predecessors but also other countries such as Myanmar, Laos and Cambodia.

The previous policies and strategies that were not suitable with market rules have caused Vietnamese cars to not be popular.

The relevant agencies set a target of too high localisation rate compared to the market volume, while facing with the lack of supporting policies to attract investment and create conditions for car owners. If the domestic automobile manufacturing and assembly industry cannot be maintained, the budget deficit will increase, because it contributes billions of US dollars to the State budget per year.

It is pleasing to see that there are new factors in Vietnam’s automobile industry. On the supply side, the market situation has gradually shifted as the Truong Hai Automobile Joint Stock Company (Thaco) raised its assembly capacity and the Vietnamese brand Vinfast was launched.

On the demand side, the market is also gradually opening for domestic vehicles. Nearly 400 Vinfast cars were selected to serve ASEAN Summit 2020. In addition, Vietnam's per capita income has increased to nearly US$3,000 per year.

However, the Vietnamese automobile market has now thesmallest capacity among five ASEAN countries that is developing the automobile industry. Therefore, the support from the State is very necessary to create sustainable market, as a premise to enhance the localisation in the industry.

Nguyen Trung Hieu, Head of the Policy Department under the Vietnam Automobile Manufacturers' Aossication (VAMA), said that Vietnam has the same potential as Thailand, but facing many disadvantages that make the prices of domestically manufactured and assembled cars higher than imported ones. For example, Vietnam lacks a high-quality steel and plastic industry, so the country is forced to import materials with very high logistics costs. Accordingly, despite plus 5% of transportation costs, the cars imported from Thailand are still 10%-20% cheaper than domestically manufactured cars.

At the 2019 Vietnam Supporting Industries Forum, representatives from Toyota Vietnam expressed their wish that the Government should soon issue policies to maintain and promote the sustainable and long-term growth of automobile market.

A representative from Thaco also proposed the removal of standards as applying the policy on tax exemption of imported components for domestically manufactured cars and the tax reduction of automobile components and supplies to 0%. Accordingly, the prices of domestically manufactured cars will also decrease, bringing benefits to consumers.

Enterprises also expected breakthrough policies on taxes, such as not adding the values of home-made components in the special consumption tax for the domestically manufactured and assembled cars as well as adjusting the import tax to 0% for a number of important assemblies of cars of less than nine seats. Regarding credit policies, preferential credit packages should be formed for the automotive supporting industry like credit packages for hi-tech agriculture.

According to experts, the adjustment of tax policy may shorten the budget revenue in the short term but it will contribute to protecting the market, improving the competitiveness of businesses and boosting the development of Vietnam automobile industry.

Over recent times, the Government has issued many preferential policies on taxes and finance for the automobile industry. However, Nguyen Thi Hai Binh from the Institute for Finance Strategy and Policies under the Finance Ministry, said there are three problems causing ineffective results for this industry, including the rapid and many changes of preferential policies for components, the lack of uniformity in some guidelines and policies, and the implementation of international commitments on tariff reduction to 0% for complete cars of all kinds. The risk of losing market share to foreign enterprises is still existing.

She also said that it is crucial to issue new preferential policies, focusing on rapid acceleration of major automobile manufacturing and assembling projects, as well as review and adjust the financial policies to encourage investment in the automobile industry with a preferential level suitable to the investment scale. Incentive policies on taxes and finance also need to encourage the development of environmentally friendly vehicles. Notably, it is necessary to amend the special consumption tax policies, corporate income tax and other incentives to attract investment projects to manufacture electronic cars. Nguyen Thi Tue Anh, Deputy Director of the Central Institute for Economic Management (CIEM) warned that foreign enterprises will certainly dominate the Vietnamese market in free trade conditions if Vietnam is not determined and does not set appropriate measures to develop the automobile industry in the near future. The Government should develop theoverall support policy, in which the tax policy must balance between domestic manufacturing and imports with priority to the domestic market and enterprises.