Domestication rate of car production industry remains low

The reasons lifting Vietnam's car prices to the highest level in the world are low domestication rate and high tariff, which has pushed the country's automobile domestication policy closer to the bankruptcy dilemma, Ministry of Finance's inspectors said.

The conclusion was made after inspecting six companies including Toyota Vietnam, Honda Vietnam, Vietnam Daewoo, Vietnam Suzuki Ltd Co, Ford Vietnam, and Star Automobile Manufacturing Joint Venture.

Previously, the survey result of the ministry showed that the price of a Toyota Corolla 1.8MT produced in Vietnam was listed at $19,532 on November 8, 2008 while the same kind of car was sold at $15,350 per unit in foreign countries. Domestically made Toyota Camry 3.5 was valued at $38,510 per unit while the world's price was $24,215-28,685.

The inspectors confirmed that the implementation of government's automobile domestication at all above companies remained low compared with the producers' commitment as asking investment certificate of Ministry of Planning and Investment. Among them, Honda Vietnam's the domestication rate of automobile component production reached only average 10 percent per unit, followed by Toyota Vietnam's 7 percent of car value. Meanwhile, according to the initially granted investment license, the rate at Toyota Vietnam must be at least 30 percent in 10 years from starting production and business in 1996.

Also, the first investment license for Vietnam Suzuki required that the firm must reach the domestication rate of at least 38.2 percent of value of each car after 10 years of being operational. But in 2007, the rate was posted at only 3 percent. Lowest gainer was Ford Vietnam with the domestication rate of 2 percent against the committed 30 percent, Daewoo Vietnam and Star Automobile Manufacturing Joint Venture at 4 percent.

The investment certificates granted by the planning and investment ministry all required the commitment on domestication roadmap of automobile assembly and production. The main reason making these carmakers ignore their previous commitments is for the lack of strict supervision and treatment sanction. In details, the policy of tax calculation for disjointed components under the priority of encouraging domestication (domestically manufactured components enjoy low tariffs) limited the investment of foreign auto groups in component production.

Auto assembly and production joint ventures are mainly multinational companies so the production of auto components are invested much by holding firms and organised in the high centralisation trend to supply to their subsidiaries in region and world. Investment cost for in-place production of auto components is very high while imported components still suffer high tariff. Due to this, the automobile domestication policy of Vietnam is closer to the bankruptcy when import tariff exemption (0 percent) on automobile components will be applied in Asean from 2018.

More importantly, the unsynchronised policies on support industries have not caught up with the development of automobile joint ventures. Thus, JVs mainly focused on importing components from holding companies and regional member firms and ignored the in-place manufacture.

According to the inspectors, in 2008, the six carmakers operated with backward production lines, mainly primitive assembly. This made increase the production costs. Notably, high special consumption tax and import tariff affected strongly to car prices in Vietnam. As for below 5-seater cares, the tax and tariff account for 33 percent of car selling price.

Ministry of Finance confirmed that the price of imported components was high or low depending on the declaration of joint ventures. State regulators are short on managing or supervising prices of imported components into domestic car assembly and production firms. Inspectors previously ordered carmakers to check VAT calculation on all their agents in 2007 and 2008 according to the compulsory VAT of 10 percent on auto components.

However, when selling cars to agents, the VAT was only 5 percent left under current laws. So these makers were forced to pay over 10.5 billion dong and $153,311 worth of tax and tariffs to the state budget because of wrong calculation of some kinds of taxes.