Auto local content strategy is a bust

Finance Ministry inspectors have wrapped up their work at the plants of six automobile assembly plants. They found that the localization strategy on which Vietnam has put high hopes has fallen far short of its goals.

 

Most major dailies carried stories December 10 reporting the findings of a Finance Ministry inspection of six foreign-controlled plants that assemble automobiles for the Vietnamese market. The data in this VNNet Bridge story is sourced from Tien Phong.

 

Production costs overly high

 

The Government’s auditors found that expenses for imported car parts and accessories account for 49 percent of total expenses, while five percent of the parts by value are sourced in Vietnam. Assembly costs account for five percent of the total, and overhead averages about seven percent. The tariff on imported car parts accounts for seven percent of the total cost of production, and the 27 percent luxury tax accounts for the remainder.

 

Among these expenses, fraud is most often found in the pricing of the purchases of imported car parts and equipments, which is not transparent.

 

According to the inspectors, all automobile joint ventures import car parts from related companies elsewhere in the world. These internal ‘transfer prices’ are declared by automobile joint ventures, but Government agencies do not know the true prices of the car parts

 

Other expenses of the joint ventures, such as the electricity, water, transport and handling bills have increased sharply every year.

 

The inspectors have found out that all the six joint ventures use out of date assembling lines, which contributes to the high production cost.

 

Meanwhile, high import tariffs and luxury taxes have raised the car sale prices of the manufacturers higher than the average price levels in the world.

 

Big preferences not enough to overcome inefficiencies

 

The Government’s auto sector development strategy dates from 2004. Since then, automobile joint ventures have enjoyed a lot of tax incentives. These aim to encourage automobile manufacturers to increase the ratio of locally made content.

 

The auto joint ventures also have other advantages, including low labour costs and a local production policy which imposes high tariffs on imported fully assembled cars.

 

However, the results have fallen far short of expectations.

 

By November 2008, the average local content at Toyota Vietnam had reached seven percent of the cars’ value. However, the investment license granted to the manufacturer stipulates that Toyota was to achieve a localization ratio of 30 percent by 2006.

 

Suzuki promised to reach 38 percent local content by 2006 and has so far achieved only three percent.

 

The localization ratio is even lower at Ford Vietnam, only two percent. Other car manufacturers reportedly have an average localization ratio of four percent.

 

The inspectors have found out that in some cases, the licensing bodies were so affectionate to manufacturers that they offered the tax incentives even higher than the allowed levels.

 

For example, Honda Vietnam got the permission from the Ministry of Plannng and Investment and Vinh Phuc People’s Committee to enjoy an exemption from corporate income tax (CIT) for one year more than allowed and also an extra year of reduced tariffs.

 

Toyota Vietnam has also enjoyed the tax incentives for longer than the allowed period.

 

Accounting Problems

 

With one exception, the auto joint ventures were not strictly following the regulations of the accountancy scheme stipulated by Vietnamese laws.

 

Five out of the six joint ventures were found to have a total of 27.2 billion dong and more than 1.5 million dollar in disallowed entries.

 

At Vietnam Daewoo, the inspectors found $373,325 dollars falsely entered into accounts. At Honda Vietnam, inspectors found that unreasonable expenses were charged against earnings, such as the money spent for healthcare of wives and children of Japanese experts, and money spent on entertainment of Japanese experts.

 

It is clear, comments Tien Phong, that the localization ratio of the cars made in Vietnam is unacceptably low in comparison with the demanded level. According to the plan, the local content embodied in these autos was to have reached 40-45 percent in 2005 and 60 percent in 2010. And it is obvious that there is still no ‘Vietnamese automobile industry’ that is worthy of the name. Rather than source parts within Vietnam, the six foreign makers have been able to import nearly all the parts they need.

 

Tien Phong thinks it is high time that Government agencies review the strategy on automobile industry development and apply new policies to develop it as a key industry.

 

Car prices are sky high, customers suffer

 

In November 2008, a Toyota Camry 2.4 assembled in Veitnam was priced at $29,539. The same model was sold for between $20,195 and $25,575 in other countries

 

A Camry 3.5 assembled in Vietnam was sold at $38,510, and for from $24,215 to $28,695 in other countries.

 

Toyota’s Corolla 1.8Mt made in Vietnam was priced at $19,523, while the same model was sold at $15,350 in other countries.