Stalled car industry unable to find new growth engine

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Workers on an assembly line in a Ford Vietnam plant in northern Vietnam. Photo by Luu Quang Pho

Much has been said about Vietnam's auto industry not making good on its growth potential over the last two decades, and officials and industry insiders have traded blame for this failure.

Officials have blamed the auto makers and assemblers for not taking advantage of incentives they've been given, while the government has taken flak for unstable, unclear plans and policies, as also unreasonable tax hikes.

As foreign investors seem to favor other ASEAN members like Indonesia and Thailand; and Vietnam's auto industry struggles to stay afloat, the lack of policy and tax support has come into focus again.

Industry insiders say that over the last two decades since the auto industry was established, frequent policy changes have deterred foreign investors and prevented "a clear image" of the industry from emerging.

They say the government has changed plans every couple of years about the vehicle or vehicle categories it wants to focus on, and it has kept increasing taxes despite difficulties faced by local firms.

The local market has thus lost its competitiveness and has never matured although the industry's first company, Mekong Auto, was established in 1991, a Thoi Bao Kinh Te Saigon Online report cited insiders as saying.

The joint venture company to assemble autos was established at a time when consumption in Vietnam was just several thousand vehicles a year.

Sensing significant growth potential, automobile giants Toyota, Ford, Mercedes Benz, Isuzu, Mitsubishi and Daewoo entered the market a few years later. By 2000, ten auto assembly joint ventures had been licensed, and annual demand was still less than 20,000 units, mostly for the use of businesses and government offices.

When more than 43,000 automobiles were sold in Vietnam in 2003, making the country 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 increases, which now account for around 60 percent of local retail prices, have caused it to fall far from being the third largest market in the region to below the Philippines.

Consumption dropped by more than a quarter in 2004 when the special consumption tax was raised from 5 to 24 percent for cars smaller than five seats, and by a further one-third the next year when the tax was raised to 40 percent.

By the end of last year, the special consumption tax had been increased to between 45 and 50 percent for five-seat cars and smaller, 45-60 percent for cars between six and nine seats, and 30 percent for vehicles between ten and 16 seats.

Other fees, applied to all automobiles, include a 10 percent value-added tax, a registration fee of 20 percent of the car's value in Hanoi and 15 percent in Ho Chi Minh City, a number plate fee of up to VND20 million (US$956), and import tariffs of around 20 percent for components and 74 percent for finished products.

The import taxes are expected to be reduced to between 47 and 70 percent in 2014 under Vietnam's WTO commitments, while the Common Effective Preferential Tariff agreement among ASEAN members requires Vietnam to cut import taxes gradually to zero in 2018 for vehicles which are imported from and are 40 percent ASEAN.

The Vietnam Automobile Manufacturers Association says taxes from local companies alone have contributed around $2 billion to the state budget, but this is not worth the loss of foreign investor interest in the industry.

While automobile consumption 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 as well.

Ford also announced it would pour more than $1 billion into Thailand, dubbed by international economists as the "Detroit of the East" for its flourishing car industry.

Uncertainty reigns

Officials from the Ministry of Finance and the Ministry of Industry and Trade met with experts mid-April with the attendance of Deputy Prime Minister Hoang Trung Hai in one of several conferences since early this year to discuss long-term development plans (until 2020) for the industry.

Some people at the meeting suggested that Vietnam focuses on five-seat cars and trucks as they have been the best sellers.

It was originally planned that Vietnam would focus on small trucks, buses, fuel tanks and fire trucks, until the Ministry of Industry and Trade in 2009 suggested a shift to passenger cars having between six and nine seats. This would help focus resources, give clearer sense of direction and facilitate efficient production and investment, it was said.

However, experts say such rapid changes in plans have prevented the government from issuing effective policies that would boost the industry, such as having strategic product lines.

Truong Thi Chi Binh, director of Supporting Industry Development Center under the Ministry of Industry and Trade, said Vietnam's automobile development policies have been a failure because they have been inconsistent.

"The market is torn into little pieces of different types of vehicles," Binh told Thoi Bao Kinh Te Saigon Online.

"Local consumption is only around 100,000 a year but there are as many as 17 assembling and manufacturing companies working on all kinds of vehicles. That means a heavily fragmented market."

She said the country needs to choose a type of vehicle and turn it into a strategic segment that can sustain for a long time and push the industry forward.

Investing in such a strategic product would only sustainable if its annual output reaches at least 70,000 units, she said.

Four or five years ago, there were car makers in Vietnam which could achieve that output volume for just one model of car, Binh said. But continuous changes in policies and subsequent drop in sales have "disrupted" the market and plunged the industry into the doldrums without much hope of a turnaround.


For businesses in the used car segment, bad just got worse.

The auto industry as a whole has been stagnating amidst the economic slowdown that has decreased purchasing power considerably, and high taxes and fees imposed on the vehicles have made things much more difficult.

But a recent decision by the Prime Minister to increase import taxes on used cars could sound the death knell for this market segment.

According to the decision, import taxes imposed on used cars with engines of one liter downwards would increase to US$5,000 from the current $4,200 and that on vehicles with 1-1.5 liter engines would rise to $10,000 from $9,600. The decision would take effect on June 20.

As late as last month, Vietnam had increased the tariffs imposed on vehicles with engine capacities of less than one from $3,500 and those with 1-1.5 liters from $8,000 to the current levels.

In a showroom in Hanoi's Tran Khat Chan Street filled with second hand cars Toyota, Kia Morning, Hyundai and other makes there are no customers coming in. Sales manager Nguyen Van Minh said the tax increase would be a big blow to second hand car dealers.

"Because the taxes increase frequently, nobody wants to buy cars," he said. "As it is, with existing sales, we don't make enough to pay the rent and salaries, let alone make a profit."

So far this year his dealership has only managed to sell a few low-end cars priced below VND500 million, and the tax increase would make things much worse, Minh said.

"Despite the tax hike, to attract customers, we will not increase our selling prices, but reduce imports to avoid losses," he said.

His firm, like many others that used to trade in new imported cars, was hit hard by a regulation in 2011 that required importers of cars with less than nine seats to show proof that they are authorized dealers of foreign carmakers. Unable to do so, they had shifted to trading in used cars. "But now, in the current situation, we have no way to do business."

A sales representative of car dealership Nhat Anh on Le Van Luong Street said the market segment of second hand cars would become stagnant again after a short time of growth when Vietnam decreased the registration fees on used cars with 10 seats downwards to 2 percent from April 1. Earlier, Hanoi had imposed registration fees of 12 percent on used cars.

"The tax hike would make used cars too expensive. With the tax increase in April, we had already raised selling prices of a Kia Morning car by $400, and we cannot continue increasing the prices if we want to keep customers," he said.

Vietnam spent $187 million on importing 10,000 completely built cars in the first four months of this year, down 0.5 percent in volume but up 1.8 percent in value over the previous period last year, according to the General Statistics Office.

By Ngan Anh

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