Gloomy future for spearhead industry

Auto traders said the industry could not prosper when taxes and fees stay high, whereas Vietnam has determined the automotive industry as one of the spearhead industries to develop until 2020.

Given the high inventories of local automakers, Laurent Charpentier, chairman of the Vietnam Auto Manufacturers Association (VAMA), raised his voice: “If the current unfavorable conditions drag on, the joint-ventures will find it hard to maintain their production and in the future, there will be only importers.”

Such a warning shows that it is difficult for the auto industry to develop as a key industry in the coming period.

The Ministry of Industry and Trade identifies the auto industry as one of the key industries in its development strategy until 2020. The Central Institute for Economic Management (CIEM) also includes the auto industry in the list of 12 key industries with potentials for development from now to 2020.

The reason why the automotive industry is chosen as a key industry is that this sector has made great contributions to the State budget, around US$2 billion per year, generated some 50,000 direct jobs and hundreds of thousands of indirect ones, and stimulated the development of supporting industries as well as other industries and services.

However, local auto firms forecast a dreary picture for the industry in the coming time if the Government adopts measures to restrict the number of personal vehicles.

At the meetings with VAMA, the Ministry of Planning and Investment and the Ministry of Industry and Trade have reiterated determination to develop the auto industry, but the current policies on taxes and fees are going against such a desire, said Charpentier.

While the trade ministry hopes to promote the leading role of the auto industry, the Ministry of Transport wants to limit the number of private vehicles to reduce traffic congestion, and the Ministry of Finance seeks to collect more from auto businesses. Imposing high taxes and fees means inhibiting the development of the market.

Gaurav Gupta, vice chairman of VAMA, general director of GM Vietnam, stressed: “I have a feeling that there is new policy every two weeks as there have been constant changes in tax and fee polices since the year’s beginning, from car registration fee hike to the ban on roadway and sideway parking in Hanoi and now the personal vehicle restriction fee.”

The Vietnam market is not so attractive to foreign auto part suppliers due to the small market size, said a representative from Toyota Vietnam. The annual output of the local market is still stuck around 120,000-130,000 units over the past years.

The release of new taxes and fees will discourage the industry players from expanding their businesses and investing in supporting industries. Hence, the chance for Vietnam to join the global value chain will be slim, said VAMA.

Twelve of the 18 members of VAMA are joint-ventures between local companies and foreign auto manufacturers such as Toyota, Ford, Honda, Mercedes-Benz, Suzuki and Mitsubishi, with the total registered capital of less than US$2 billion. So far, no foreign automaker has revealed intention to invest further in the domestic auto industry as they find the local supporting industries underdeveloped, while the development policies and strategies for the auto industry are ambiguous and unstable.

The policies for the local auto industry, especially the tax ones, have been changed constantly. As such, no producer is able to make long-term investment plan.

In a bid to save the auto market, a representative of VAMA proposed registration fees should be reduced to 5% for sedans and 2% for trucks, value-added tax should be cut and personal vehicle restriction fee should not be imposed.

Asked what would happen if the three proposals were turned down, the representative said the auto joint-ventures would suffer severe impacts. The joint-ventures would find it hard to maintain their production and might switch to importing completely built-up vehicles, since import tax rate will be zero in 2008 under the commitment made to AFTA.

Realty shows that most joint-ventures have added distribution of imported cars to their operations since Vietnam was officially opened for foreign investors.