Expensive lessons on developing automobile industry

With the initial plan to develop the country's automobile industry rapidly along with the intelligent calculation of foreign investors about consumption market, within some years of 1990s, Vietnam licensed the entry of 11 automobile assembly joint venture at the same time.

Meanwhile Japan, Korea, although being the superpowers of automobiles, have only some automobile manufacturers, which are sufficient to create an economic sector bur do not cause monopoly and create necessary competition. The automobile manufacturing industry requires large investment with high productivity in order to have reasonable prices. In the meantime, Vietnam's market is small but has up to 11 joint ventures with productivity of several thousand to tens of thousands of automobiles a year.

In addition, according to the world's economists, a country with per capita income of at least $3,000 a year or higher and a large size of population has significant automobile consumption power.

At the time when the joint ventures entered Vietnam, the country's per capital income is only several hundred US dollars a year. Meanwhile, export of automobiles is very hard when the region has already automobile giants such as Japan, Korea and other big manufacturers as China, India and so on.  

When the small market is shared among 11 joint ventures, they would naturally import almost all necessary components, parts and only assemble automobiles in Vietnam. On the contrary, each big automobile firm in other countries has thousands of small and medium businesses as satellite businesses produce, supply components for different kinds of automobiles that they manufacturers.

Those satellite businesses are selected carefully, ensure technology qualifications, product quality, production scope, competitive prices and are strictly supervised by automobile manufacturers. When newly entering Vietnam, the automobile joint ventures have not yet had standard satellite businesses produce components; hence, they had to import components.  

They all committed to gradually increase the localization rate, which, however depends on development capacity of supporting industries, satellite businesses for the automobile industry in Vietnam. The market's small scope makes them not eager to develop supporting industries, which is simply because of economic insufficiency.

Perhaps, right when committing about localization rate, some of the 11 joint ventures knew that they would be hard to realize such a commitment. However, they still committed in order to be licensed, acquire a room in the market, which was very attractive by that time.

While designing to developing the automobile industry, Vietnam has not had any strategy on developing supporting industries to serve the country's automobile industry. For example, the development strategy of mechanical industry set various targets however Vietnam has achieved only some modest results. By 2008, Toyota still could not buy a made in Vietnam standard screw for their automobile assembly in Vietnam.

The rubber, plastic, chemical, steel industries, although having posted some development over the last time, is still far away from quality that is required by the automobile industry. This is not only the reason for the joint ventures' delayed localization commitment realization but also the opportunity of development for some supporting industries and related to the automobile industry in Vietnam is also missed.

Meanwhile, in Thailand, although they do not have so many automobile assembly joint ventures as Vietnam, Thailand has recently been proud of becoming one of reliable suppliers of some automobile components across the region.

Vietnam has offered excessive incentives and protection to the automobile assembly joint ventures with the confidence that investors would seriously realize their commitments.

Nevertheless, the country was short on close watchdog and supervision over foreign investors' commitment implementation like increasing Vietnam's domestication ratio or supplying products with competitive prices.

As a result, after over one decade, not any joint venture fulfills the commitment localization rate and the selling price of domestically-assembled automobiles is overly high compared with other countries.

With the incentives, the joint ventures do not bother competing against others but they only complain about difficulties that they meet and continuously ask the country's government to continue offering protection for them.

Building the automobile industry relies heavily on foreign investments with incentive, protection for them, which on one hand makes Vietnam's automobile industry develop sluggishly, and on the other hand, create difficulties for Vietnamese businesses when joining this industry.

It is expected that the above lessons would be paid attentions to when the country revises its development strategies in the coming time.