Auto maker Vinaxuki recently announced plans to sell its plant in Hanoi’s Me Linh District to repay its debts amid prolonged losses.
It has laid off most of its employees leaving mainly security guards in a factory that used to employ hundreds of workers and engineers.
It owed VND1.6 trillion ($72.7 million) to banks as of late last year and VND 17.7 billion in taxes as of late June besides VND9.8 billion for employees’ social and health insurance premiums in 2014.
The company has yet to make public the reasons for its business failure, but its director, Bui Ngoc Huyen, has told reporters on several occasions that difficulties in getting loans and high taxes imposed on domestically produced cars have stymied the development of local car makers. They can only get loans for one to three years whereas the industry requires long-term investment.
The high taxes make locally made cars too expensive, he said.
In Vietnam, cars are subject to a slew of tariffs and fees like import, value-added and special consumption taxes and registration fees. As a result, automobiles cost twice as much as they do in other Southeast Asian countries like Thailand and Indonesia.
Last December the Chu Lai Open Economic Zone in the central Quang Nam Province canceled the investment license it had issued for the country’s first car engine factory after its investor, the Ho Chi Minh City-based Truong Hai Automobile JSC, failed to begin work on it.
When work began in 2012, the $185.5-million plant was to have produced several major components for car engines, including the body, and later transfer technologies to local producers.
A lot of hopes were pinned on it for developing Vietnam’s supporting industries and increasing local content in automobile production.
But the project was delayed for years due to difficulties in meeting the emission standards set by the government.
Due to the delay, South Korean partner Hyundai Motor Corporation last January announced its withdrawal from the project. It said a technology transfer contract it had signed with Truong Hai Automobile SJC had expired, and the delay would affect its production and sales plans in ASEAN member countries.
Without Hyundai, Truong Hai could not go ahead with the plant.
The failure is a huge setback to the dream of making cars in Vietnam.
The automobile industry has been focusing mainly on assembling in the last two decades since it was established.
Its future looks even bleaker considering Vietnam is set to reduce and then eliminate in 2018 import tariffs under its ASEAN Free Trade Agreement (AFTA) commitments.
Vehicles are now subject to an import tax of 50-70 percent, but once the tax goes it will be difficult for domestic manufacturers to compete with imports. Vietnam imports most components or vehicles in knocked-down form, which are subject to a tariff of 10-30 percent.
This means cars cost 20 percent more to make in Vietnam than in other ASEAN countries, according to the Vietnam Automobile Manufacturers’ Association (VAMA).
This encourages foreign firms to shift their focus away from production to merely selling imported products.
Pham Tat Thang, an economist at the Ministry of Industry and Trade’s Trade Research Institute, said foreign auto companies invest in Vietnam partly because of the incentives offered by the government to protect local production and the country’s low-cost labor.
When the country no longer has these advantages, they would obviously wind up production here, he said.
A similar trend is being witnessed in the electronics sector. In 2008 Sony shut down its plant here after 18 years of operation, and switched to importing its products made in other countries.
Others like Canon, Sharp, and LG have also started to depend on imports.
Vietnam's auto imports hit US$3.8 billion in the first eight months, a five-year high and an increase of more than 80 percent from the same period last year, according to the General Statistics Office.
This included $1.9 billion spent on more than 74,000 imported cars, nearly double last year’s number. The rest was for auto parts and accessories.
Government to back industry
Despite being protected for the past two decades, local auto makers have not developed as strongly as had been hoped.
The industry failed to achieve the government’s goal of producing 50-90 percent of engine parts by 2010.
Some 210 businesses are in supporting industries, but they are small and medium-sized enterprises that mostly produce a few simple parts.
The country’s auto market remains small compared to the rest of Southeast Asia. In 2012 it was half the size of the Philippine market, a fifth of Malaysia’s, and a 24th of Thailand’s.
There are opinions that Vietnam should not continue to develop the industry because it does not benefit the economy much. Critics say the government has failed to protect consumers’ interests – by disallowing them access to cheap imports – and has instead protected an auto industry that has been ailing for years despite many incentives.
But Deputy Minister of Industry and Trade Tran Tuan Anh, says: "Vietnam is a new market, the automobile industry is still in the early stages. I respect the business ways of both domestic and foreign invested enterprises.
“The auto industry will be developed as planned.”
Economist Nguyen Mai said there is no reason for a country with a population of 90 million not to have a developed automobile industry. “The most important thing is that we have to have a suitable development policy.”
A strategy approved by Prime Minister Nguyen Tan Dung in July envisages production of 227,500 cars by 2020, 237,900 by 2025 and 1.5 million by 2035.
It also seeks to increase the ratio of domestically made components to 30-40 percent by 2020. The average rate now hovers at around 10 percent. Only a few manufacturers exceed 30 percent despite the fact that the industry had committed to gradually produce cars that were 100 percent locally made.
One of the hurdles facing the industry thus far is the contradictions among local authorities in defining policies.
Le Quoc Phuong, deputy head of the Ministry of Industry and Trade’s Centre of Industry and Trade Information, said the government wants to grow the automobile industry, but the Ministry of Finance slaps high taxes and fees to limit private vehicles because of poor infrastructure.
This kind of working at cross-purposes has been one of the reasons for the industry’s sluggish development, he said.
Vietnam has 18 foreign and 38 local car makers with a total annual output of some 460,000 vehicles, according to the ministry.