Workers in an assembly line at the Toyota Hoa Binh Company
Many foreign firms in Vietnam have shifted their focus away from production to trading imported products as import tariffs have fallen under free trade agreements.
Late last year Japan's Mazda Motor Corp sent a letter to Prime Minister Nguyen Tan Dung saying it cannot set up a factory in Vietnam as planned, and would instead sell imported automobiles in the country.
Minister of Planning and Investment Bui Quang Vinh said it was regrettable since such projects are vital to the country. Vietnam hopes foreign investment would help it develop key sectors like automobiles, electronics, and processing industries by bringing technology.
Most other auto firms manufacturing in Vietnam, like Toyota, Ford, and Honda, have increasingly resorted to importing and selling products. Their ratio of imported cars now matches locally made ones.
Even a few years ago 75 percent of their cars had been produced locally.
At motor shows too, imports predominate whereas even five or six years ago few imported cars were to be seen.
A similar trend is being witnessed in the electronics sector. A few years ago Sony shut down its plant in the country and switched to importing products it makes in other countries.
Others like Canon, Sharp, and LG have also started to depend on imports.
Vietnam allowed foreign firms to import and distribute their products since 2009 under WTO commitments it has made.
Economist Pham Chi Lan blamed the trend on the free trade deals Vietnam signed with ASEAN, China, South Korea, and others that allow goods to be imported from them at tariffs of 0-5 percent.
With such low tax rates, foreign invested firms earn bigger profits from trading imports than by making them here, she said.
Under its ASEAN Free Trade Agreement (AFTA) commitments, Vietnam has to eliminate tariffs on cars imported from ASEAN member countries by 2018.
The vehicles are now subject to an import tax of 60 percent, meaning domestic auto manufacturers are now protected.
But once the tax goes it will be difficult for them to compete with imports because of higher prices. They import most components, which are subject to a tariff of 20 percent, since Vietnam produces only 6-25 percent of auto parts.
This means cars cost 20 percent more to build in Vietnam than in other ASEAN countries.
Though by 2015 the government plans to scrap the tax on parts, industry insiders fear the plan could change, while on the other hand the tariff elimination is set in stone because of Vietnam's AFTA commitments.
Many car manufacturing factories operate at 50 percent of their capacity, Vu Manh Quan, head of the Heavy Industry Department, said.
The primitive state of the supporting industry is another reason for foreign firms to focus on imports rather than production. A Canon executive said the local market cannot supply the materials and equipment the company needs, so the firm imports up to 60 percent of them.
Local companies only supply basic materials like packages and sticking tape.
An economist who asked not to be named said the trend of shifting to imports would gather pace when Vietnam signs a free trade agreement with South Korea next year.
Economist Nguyen Minh Phong said this is likely to worsen Vietnam's trade deficit and act as a drag on the development of local manufacturing, causing the country to miss its target of industrialization and modernization.
It would also hit jobs, he said.
"To mitigate the situation, we have to facilitate production in Vietnam and review the competitiveness of some industries."
Losing out to neighbors
Vietnam has become less attractive to foreign investors than some other ASEAN members like Indonesia, Thailand, and Malaysia.
This more than the global economic slowdown is the real reason foreign investment in Vietnam is slowing.
Phong said while the government has tried to improve the investment environment by ensuring economic stability, combating inflation, and restructuring the banking system, "the efforts are not enough amid increasingly fierce competition from regional countries."
Since Vietnam has not carried out reforms, investors do not see new investment opportunities, he said, adding corruption has assumed serious proportions.
Nguyen Duc Thanh, director of the Economy and Policy Research Center at the Hanoi National University's Economics University, said foreign investors are interested more in Indonesia, Thailand, Myanmar, and some other ASEAN member countries.
Many Japanese firms - the biggest investors in Vietnam - like Toyota and Mitsubishi are expanding investment in Indonesia, Myanmar, and Malaysia, but not in Vietnam.
To improve its competitiveness in attracting FDI, Vietnam would need to improve its business environment, especially reducing red tape and passing clearer insolvency laws, Phong said.
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