Workers on a car production line at a Ford Vietnam Assembly Plant in Hai Duong Province
The automobile industry could go bankrupt when tariffs on vehicles imported from ASEAN countries are abolished in 2018, the Ministry of Industry and Trade has warned.
Vietnam will have to gradually eliminate the import tax on completely built units under its ASEAN Free Trade Agreement (AFTA) commitments.
CBU cars are now subject to an import tax of 60 percent, meaning the car industry is now protected.
But once the tax goes, it will be difficult for it to compete with imports because of higher prices. The local industry imports most components, which are subject to a tariff of 20 percent.
Vietnam produces only 6-25 percent of auto components.
Though by 2015 the government plans to scrap the import tax on parts not produced locally, industry insiders said the plan could change, adding, on the other hand, the tariff cut is a certainty because of Vietnam's AFTA commitments.
Ngo Van Tru, deputy head of the Heavy Industry Department, said the auto industry could perish if the government does not support it, and Vietnam would then be totally depending on imports, worsening the trade deficit in the process.
Foreign automakers are torn between staying and leaving, but would stay if Vietnam guarantees stable policies.
Yoshihisa Maruta, president of Toyota Motor Vietnam, said: "Without favorable policies and conditions to help improve our competitiveness, I think completely knocked-down vehicles (assembled by local car companies) cannot compete with imported cars.
"At Toyota, we always expect to develop production and contribute more and more to the development of Vietnam's automobile industry.
"However, it depends much on the government's policy and direction in the coming time."
Pham Van Dung, financial director of US-owned Ford Vietnam, said his firm is waiting for a specific road map for the tax cut under AFTA and policies to help local companies develop suitable business strategies.
The Ministry of Finance has said the import tariff will be cut to 50 percent in 2015, but has yet to announce the reduction in the following two years.
Vietnam imported over 17,100 cars costing US$314 million in the first half, respectively 22.2 percent and 9.4 percent higher year-on-year, according to customs. South Korea and Thailand were the two biggest exporters, shipping 8,450 and nearly 3,300 vehicles.
With the tariff elimination just five years away 2018, car manufacturers fear there is not enough time.
"Five years is a very short time for the development of the automobile industry," Maruta said.
"Now the most important thing for Vietnam is to maintain the operation of existing carmakers."
Much has been said about Vietnam's auto industry not making good on its growth potential in the last two decades, but foreign investors seem to have favored other ASEAN members like Indonesia and Thailand.
Industry insiders blamed this on the frequent policy changes that have deterred foreign investors and prevented "a clear image" of the industry from emerging.
Every other year the government changes plans for vehicles or vehicle categories it wants to focus on, and has kept taxes high despite the difficulties faced by manufacturers, they said.
When more than 43,000 automobiles were sold in Vietnam in 2003, making it the fourth largest auto industry in Southeast Asia after Thailand, Malaysia, and Indonesia, expectations rose that it would surpass Indonesia soon.
But years of tax hikes, which now account for around 60 percent of local retail prices, have caused it to plunge from that exalted status to below the Philippines.
While sales dropped to below 100,000 in 2012 compared to 165,000 the previous year because of high taxes and the general economic slowdown, Indonesia signed a four-year contract worth $2.7 billion with Toyota and received investment proposals from Volkswagen and Ford too.
Ford also announced it would invest more than $1 billion in Thailand, which has a thriving car industry.
In a move to promote the local industry, Vietnam is considering cutting special consumption tax on automobiles by 30-70 percentage points and registration fees by 50-70 percentage points.
Cars made in the country are now subject to special consumption tax of 30-60 percent and a registration fee of 12 percent in Hanoi and 10 percent in some other provinces and cities as the government seeks to limit the use of large vehicles on the country's congested roads.
The ministry also plans to eliminate tariffs on components that cannot be produced in the country.
The proposals are to be submitted to the National Assembly by the end of 2014 and are expected to take effect in 2015, the ministry said.
Carmakers said they appreciate the government's efforts to promote the market. The removal of import tax on components could help them compete with imports, but no company has stated it has plans to expand production.
"In the current situation, it is a short-term solution to promote the market and support consumers and enterprises," Maruta said.
"But to develop the industry, a long-term and strategic plan is mandatory."
Carmakers also said if the special consumption tax reduction applied the same for both locally produced and imported cars, it cannot help the carmaker to survive and develop their production.
The industry said it needs not just tax cuts but also clear government plans so that companies can decide strategy.
Vietnam originally planned to focus on small trucks, buses, fuel tankers, and fire trucks until the Ministry of Industry and Trade in 2009 suggested a shift to passenger vehicles with six to nine seats.
Vietnam needs to do more to develop the supporting industry, which now has some 210 businesses making auto parts.
The number is just a fifth of that in Indonesia, an a fiftieth of that in Thailand.
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