Vietnam’s Automobile Production: Still Remaining Assembly only

The lack of a supportive industry, continuous changes in tax policy and low domesticalization rate are obstacles to the growth of Vietnam’s automobile production. At the seminar in the sixth international exhibition on transportation means and supportive industries recently held in Hanoi, many experts express their concern about the development of the automobile industry in coming time.

 

Too many weaknesses remain

 

At the seminar, experts bitterly assess that after fifty years of development, the automobile production industry just stays at the “assembling” stage, exposing weaknesses of a small industry and poor supportive industry. Though large the turnover of over 100,000 cars per annum may seem, over 40 automobile producers simply assemble, many of which apply obsolete technology and equipment, produce low quality cars and “rely on” the State for support.

 

There are now more than 60 enterprises manufacturing tools and equipment for Vietnam’s automobile industry. However, almost all these enterprises are of small scale. Their products are mainly simple spare parts, high technology content and the domesticalization rate are low.

 

In 2008 – 2009 and the first half of 2010, sales of domestic automobile manufacturing and assembling enterprises is quite stable, with an average growth rate of 10 percent per annum regardless of impacts from the global economic crisis.

 

Statistics of the Ministry of Trade and Industry shows that a further number of approximately one million cars are put into use between 2002 and 2009, the growth rate reaches 4.25 times and the growth rate of Vietnam’s automobile industry is 60.1 percent. What has been done by domestic automobile manufacturing and assembling enterprises has not come up to the expectations of management authorities and the market.

 

Moreover, since the production volume of each automobile model in Vietnam is too small, the acceleration of domesticalization for developing supportive industries faces many difficulties. For instance, the volume of cars manufactured and assembled by 54 domestic enterprises in 2009 is over 152,000 ones. On average, each enterprise churns out 2,800 cars – too small a number to be divided amongst 400 car models present in Vietnam market for spare part manufacturers to see the profit from investment made in this area.

 

The industry supporting automobile production brings about US$30 million per year. However, enterprises have small investment scale (less than VND20 billion/each) with simple products.

 

There are also not many prospects for export since domestic enterprises are not able to produce major materials. On the other hand, while technology plays the decisive role in car production, almost all domestic enterprises are not transferred modern technology of the world. The development of this industry is strongly influenced by policy mechanism. Changes in tax policy make the automobile manufacturing and assembling industry face heaps of difficulties.

 

Forecasts for the future

 

Enthusiastic support to stimulate demand from the government via reduction in VAT and registration fee and large investments in transportation infrastructure are constructive support to Vietnam’s automobile industry. As forecasted by the Ministry of Trade and Industry, after 2020, tourist cars will account over 70 percent of the car consumption market.

 

However, the largest pressure for this industry will be in 2018 when Vietnam’s automobile market has to be completely opened for imported cars as committed with ASEAN/AFTA. According to commitment with ASEAN, import tax will fall faster and more significantly, i.e. import tax for cars of less than nine seats will be reduced to 0 percent in 2018. It is highly likely that many domestic automobile producers will have to dissolve their companies or switch to import cars.

 

In seeking for a solution to this problem, the Ministry of Trade and Industry believes that the automobile industry of Vietnam needs to have more specific plan for the development of tourist cars, beside continuing to offer priority to trucks and buses. To put a stop to the fragmented development as it is now and to achieve the production scale big enough to serve the domesticalization programme, the proposal to establish a policy for the development of a specific type of car is certain.

 

Besides, it is also necessary to set an appropriate tax level to guarantee benefits and responsibilities of enterprises and consumers, aiming at sustainable development of Vietnam’s automobile industry.

 

Following are ideas of experts about this issue:

 

Preferential treatment and subsidy should no longer be offered to the automobile industry, Mr. Nguyen Van Phung, Deputy Head of Tax Policy department, Ministry of Finance

 

Domestic automobile manufacturing and assembling enterprises are offered too much preferential treatment and subsidy via tax policy. They, therefore, are too reliant on such support, not making effort to grow. This industry should not be offered preferential treatment any more.

 

Figures recorded from different years show that car consumption in Vietnam market mainly depends on income of people and purchasing power of the market, not simply on tax policy. In my opinion, in the time to come, tax policy for the automobile industry should subsidize domestic production appropriately and figure out a development strategy, create favourable conditions for import, increase supply without causing influence of import excess in order to cause a pressure to boost domestic production, reduce price and improve quality, promote consumption and expand the market.

 

To cope with tax reduction according to the commitment with WTO and ASEAN, the Ministry of Finance has not had any specific plan, up to this moment. There are currently two views. The former believes that there needs to be a roadmap for reducing import tax between now and 2018 while the latter proposes the maximum tariff rate to be stabilized until 2018.

 

There needs to be a developed mechanical industry to serve as a driving force for the development of the automobile industry, Mr. Du Quoc Thinh – Secretary General of Vietnam Auto Engineers Association

 

Without a developed mechanical industry, Vietnam will not be capable of conducting the domesticalization programme, ensuring stable development for the automobile industry and if so, Vietnam will keep assembling cars always. Moreover, it is necessary that a strategic type of car be identified in order to guide supportive industry. The Ministry of Trade and Industry is establishing a decree on developing supportive industry. However, many problems remain. It is also making a proposal to amend the strategic plan so that the automobile industry can develop in line with real conditions.

 

The major problem lies in the fact that almost all domestic automobile enterprises (mainly FDI ones) already make their production plans years ahead to order spare parts from suppliers at mother company. The number of spare parts and engines will be imported to Vietnam according to such plans. Enterprises will assemble and use some simple components manufactured domestically. As such, when the market changes and the consumption rockets unexpectedly, they need time for additional import. This fact shows that the lack of a developed mechanic industry impedes the development of the domestic automobile industry after nearly 20 years of operation.

 

It is necessary that automobile products be specialized

 

With a growth rate of 10 – 15 percent per annum, it is estimated that there will be about 2.8 – 3 millions cars of all types. A comprehensive transportation infrastructure will create opportunity for the automobile industry to develop. However, if the supportive industry is not developed, Vietnam will be a place for car assembling and consumption only. Usage of domestically produced spare parts is an important condition for Vietnam to have its own automobile industry.

 

In order for the automobile industry of Vietnam to develop, the possibility of participating in the global chain of added value, i.e. Vietnam can have a large number of a certain product made. For instance, it can produce a screw of good quality for a big automobile manufacturer instead of making investment to produce a complete car from more than 2,000 spare parts. Each country should produce a number of components instead of having a complete car produced.