Integration of Vietnam Automobile Industry: Desire and Reality

11:23:42 AM | 9/15/2014

The Prime Minister's approval of the strategy and development plan of the auto industry of Vietnam by 2025, a vision towards 2035 with many new features compared with the previous strategy and plan confirms the importance as well as expectations of the development of this industry in the future. First, the promulgation of the strategy of the Prime Minister has drawn great attention of most enterprises that intend to participate in the auto industry. At least, enterprises can identify which direction they should adopt and what they should do. However, turning expectations into reality requires much concrete work; especially, it requires the preparation of the implementation of commitments of the AFTA in 2018.
Market size and capital sources
There are many reasons leading to the weakness of the automotive industry; however, according to many enterprises in the manufacturing, assembling, and import and the experts in this field, the main reason is due to the small market size; over nearly 6 years, there are around 100,000- 150,000 vehicles sold per year, resulting in a lack of motivation for development, especially enhancement of the localisation rate. With this size, the bigger investment will lead to higher losses due to high prices. It is obvious that regardless of the investment in the production of components and spare parts, the simple assembly costs of Vietnam are always at least 20 percent higher than overseas. This figure is just compared with Thailand and Indonesia. Therefore, in order to lower the cost of the products, the market must be large enough; the size must be from 500,000 units per year by 2020 when the stage of the motorisation begins. This is based on the research of many experts and the Ministry of Industry and Trade. The market size is too small that it is not only a reason that causes difficulty to attract large projects but also one of the main causes that prevents the development of the supporting industry. In contrast, the production of spare parts leads to difficulties to attract large investment projects because the auto producers do not want to buy the domestic components and spare parts because this may push up the costs of production and assembly. Ultimately, the main reason is due to the small market size despite the great demand. But how to promote market is still open or too general, which leads to series of the weaknesses of the industry itself and domino effects.
This is being seen as the biggest challenge; and it is even harder when the import tax of the automobile from ASEAN will be 0 percent in 2018. Who will continue to invest more and make greater investment in the auto industry of Vietnam is still an open question. In other words, where is the capital? In the development plan of the auto industry of Vietnam by 2020 and a vision to 2030 that has been approved does mention four main capital sources: fund raising from foreign investors, corporate equities, state budget partly supporting for the infrastructure, research and development and training of human resources, and other sources. However, according to the evaluation and analysis of most experts and enterprises, the capital mobilised from foreign investors is limited because most of them have been investing in the assembling industry in Vietnam for long time and many large firms are focused on investing heavily in countries such as Thailand and Indonesia because these countries have more specific preferences and strength in the auto industry in general and manufacturing of the spare parts in particular. Recently, Ford and Toyota have built more factories in Thailand and Indonesia, with an investment of US$500 million to US$2 billion in each plant. Recently, Nissan has also opened a new plant in Thailand with an investment of more than US$110 million. Regarding the corporate equities, the strategy has not specified the details of other sources. The small market size and limited funding sources will reduce the competitiveness of Vietnamese auto makers.
Specific action plans
Cars branded by Toyota, Ford, and Honda, whose large factories are based in Thailand and Indonesia, occupy overwhelming market share.
The above plan also outlined a number of measures and policies for the manufacturing sector and market share. However, many enterprises notice that the solutions are too general and not ground-breaking enough to reverse the situations of the auto industry and auto makers. According to Jesus N. Arias Jr., CEO of Ford Vietnam and President of the Vietnam Automobile Manufacturers' Association (VAMA), with this strategy, Vietnam has made its clear perspective on the development of the automobile industry in the new period. But, to successfully implement this policy requires specific action plans. The development of the policies needs an action plan with long-term stability, high predictability, high competitiveness, and strong support for the domestic market to reach potential large scale. The large-scale market requires the government to reduce tax and cumbersome administrative procedures as well as create a level playing field for all businesses. Especially, the government also needs to narrow the gap between the cost of locally assembled cars and the cost of the imported car. Tran Ba Duong, President of Truong Hai Auto Corp (Thaco), also supported the idea that policies should aim to develop market demand because this will help production be more effective. While the market is not big enough, the government needs to provide enterprises with more appropriate incentives on taxes, fees and credits, as well create non-tariff barriers to protect domestic producers. For example, the reduction of excise tax of the strategic products should be adopted quickly.
Recently, according to the Ministry of Industry and Trade, once the strategic plan is published, the specific policies on preferential credit, taxes, and fees will be proposed to promote the production and development of the auto market. This is very important, but many are concerned about if the published policies are attractive enough. The new policies have not counted for the obstacles, conflicts and overlaps between a number of provisions of relevant authorities like the Ministry of Industry and Trade that want to reduce taxes to simulate production and consumption and the Ministry of Finance that wants to collect more taxes and fees to comply with the integration commitments. This is a big challenge. Besides, it requires a long period to get the opinions of the National Assembly on adjusting some policies. The implementation of AFTA commitments lasts for the next 3 years and if the action plans could not be done quickly, it is difficult to meet the expectations and targets, and a majority of automakers are still very interested in the Vietnam market but they act as importers and distributors.