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Beleaguered auto industry could shift from assembly to imports if things do not improve

 
A man looks at a car during the Vietnam AutoExpo 2012 held in Hanoi on June 22, 2012. Photo: AFP

Launched with much fanfare and great expectations, Vietnam's domestic automobile industry has never been able to shift into top gear, and the long-standing target of developing it into a key part of the national economy now looks far-fetched.

Local car makers are unable to expand production amid lower sales, and they are blaming it on higher fees imposed on vehicle owners.

Meanwhile, supporting industries are ailing, their growth stifled by the small scale of the market, according to industry insiders.

Local car makers saw sales drop in the first five months of this year by 35 percent from the same period last year to 29,812 units, according to the Vietnam Automobile Manufacturers' Association (VAMA). The sale of multi-purpose vehicles went down by 44 percent to 5,484 units, and that of personal cars and commercial vehicles fell 39.6 percent to 9,005 and 30 percent to 1,469, respectively.

"Besides the tough economic situation and limited access to finance with very high interest rates, the increase in taxes and fees for car owners in Vietnam since January 1, 2012 has negatively impacted the purchase consideration of customers," said Ford Vietnam General Director and VAMA Chairman Laurent Charpentier.

Hanoi has raised the registration fee from 12 percent to 20 percent of the value of the automobile, and the license plate fee by 10 times to VND20 million (US$950) since then. Ho Chi Minh City has also increased the registration fee from 10 percent to 15 percent.

The Ministry of Transport has proposed an increase of 5 percent in annual restriction fees to VND20-50 million. The fee is unaffordable to most customers. It has frozen demand and the market will decline until the fee is cancelled by the government, he said.

To cope with the situation, most of VAMA's 18 members have cut their production and asked employees to temporarily stop work.

"We have to adjust the business plan to comply with sales reduction. The auto market is in a very tough situation this year," Charpentier said.

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Low sales have meant big inventories and stagnant production. One company representative said that firms make production plans based on sales projections for the following year and often buy components from three to six months ahead. Thus, they have ordered components for this year's production since late last year, when car sales in 2012 were forecast at 138,000 vehicles. With the current slow sales, the inventories of carmakers may triple the normal level, he said.

He said if the situation is not improved, carmakers will find it hard to maintain their production. They may shift from production to import of the vehicles only, threatening Vietnam's target of developing the automobile sector into a key industry, he added.

VAMA earlier this year had projected sales to be around 140,000 units, the same as last year. However, it now says the target should be less than 100,000, with some companies forecasting it could fall to 80,000.

The much lower sales volume would affect to the budget that government can collect from carmakers. Based on an average price of VND500 million for a passenger cars, the tax loss for the first four months was an estimated VND6 trillion, it noted.

Unstable policy environment

Do Huu Hao, chairman of the Automobile Engineers Association, said: "If we don't have a good policy to encourage the use of cars, the market will not be able to develop further."

He said if government policies do not support domestic automobile production, locals could buy imported vehicles, especially from 2018, when automobile from other members of the Association of Southeast Asian Nations (ASEAN) will enjoy a new 0-5 percent import tax, a steep fall from the current 83 percent, according to regional free-trade commitments.

At that time, Vietnam could spend some $4 billion each year importing completely-built cars, Hao said.

Investors have recently announced no plans to expand in the country. In fact, several have announced production and business development plans in Thailand and Indonesia, with investments of up to hundreds of millions of US dollars in each project.

The smallness of the market and weak supporting industries are barriers.

Pham Van Liem, deputy head of the Industry Research Institute under the Ministry of Industry and Trade, said compared to the small market size and demand, the number of automobile assemblers and producers is very high. Thus, the market share of each firm is small, at just several thousand units per year.

In other countries, component manufacturers require an annual production of at least 500,000 products each year to ensure effective production at a low cost, he said.

Unstable policies, especially regarding taxes, are making things particularly difficult for carmakers, according to VAMA.

Akito Tachibana, former chairman of VAMA, said the higher cost for cars will reduce demand, forcing car makers to reconsider their production and business plans. If the market continues to be in the same tough situation as it is now, the number of car assemblers could reduce to three from the current 18 by 2018. Most of the rest will focus on trade in imported cars.

"We hope for a transparent strategy with a stable roadmap and policies for the auto industry in Vietnam," said Charpentier. "The improvement of infrastructure, labor and a comfortable investment environment is indispensable to attract more foreign capital. There are chances for Vietnam to be a crucial part of the global auto industry."

VAMA is urging the government to cancel the restriction fee and reduce the registration fee to 5 percent.

New hopes

On June 22, local company Truong Hai began construction of a car engine manufacturing factory, the first of its kind in Vietnam, in the Chu Lai Open Economic Zone in the central province of Quang Nam. With technology transferred from South Korea's Huyndai Motor Corporation, the factory is expected to become operational in 2013.

With an investment of over $400 million, the factory will produce four-liter engines with Euro II and Euro III emission standards intended for trucks with loading capacities of between 2 and 4.5 tons, and 17- and 40-seat buses. It will also produce several other major parts of a car engine, and later transfer the manufacturing technologies to local producers.

Tran Ba Duong, general director of Truong Hai, said that the company plans to "participate deeply and strongly in the global production chain of automobiles for Vietnam and ASEAN markets."

In April, Truong Hai purchased a 51 percent stake, worth $3.5 million, in South Korea's vehicle maker Soosung. Accordingly, Soosung will offer technology transfer and provide components to Truong Hai, so that it could produce special purpose vehicles in Vietnam in the future.

Economist Nguyen Minh Phong from the Hanoi Socio-economic Research Institute said the new investment by Truong Hai will contribute to the development of supporting industries for the automobile sector in Vietnam, as it is being done with technology transfer from South Korean partners who are highly experienced.

With these investments, Truong Hai hopes to contribute to the establishment of a car production center in Quang Nam in the future. However, some industry insiders say this is not very feasible given that most car assembly plants are now in Hanoi and Ho Chi Minh City.

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