Vietnam won't abandon auto industry despite looming threats

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Vietnam now has 18 foreign and 38 local businesses producing cars with a total output of some 460,000 cars a year, However, their firms mainly focus on assembly, welding, painting and cleaning.PHOTO COURTESY OF TUOI TRE
An official at the government’s economic think tank said Vietnam will not give up on its auto industry, despite the looming threat from the duty-free imports that will begin flowing into the country in 2018.
Dr. Duong Dinh Giam, chief of the Industrial Policy and Strategy Institute, was speaking to Tuoi Tre (Youth) newspaper, amid a growing consensus that Vietnam's underdeveloped car industry will be swallowed by the upcoming ASEAN Trade In Goods Agreement which will allow duty-free cars to be imported from ASEAN countries.
Giam said “automobilization” is inevitable once a country's annual per capita income exceeds US$3,000.
In Vietnam, the process is expected to begin between 2020 and 2023, when the 100-million-plus population is expected to be clamoring for cars.
Demand is projected to equal a few billions dollars in purchases, a year.
If the country doesn't develop local production but relies completely on imports, its foreign exchange balance will be upset, he said, adding that the auto industry will also help create a system of supporting industries and tens of thousands of jobs.
“We should not give up on such an important industry because of immediate difficulties,” said Giam, whose agency was tasked with drafting a plan to develop Vietnam’s auto industry by 2020 for the Ministry of Industry and Trade.
According to Giam, the institute will advise the government on how to support businesses so Vietnam will have a competitive line of products in hand--namely personal cars, trucks and small buses with engines smaller than 1.5 liters.
The demand for these cars is “very big” in Vietnam, he said, adding that local businesses already enjoy certain advantages and high market volumes.
The government plans to support consumers by reducing assorted fees and lowering the special consumption tax from the current 45 percent to 5-10 percent on small engine cars.
Giam said tax incentives will help decrease car prices by VND25-50 million (US$1,175-2,350), and since locally-made cars are not subject to import duties and overseas shipping fees, they'll be able to compete with imported vehicles.
On the other hand, the institute will propose that the government not start reducing import tariffs until 2017, according to the official.
At that time the tax should be adjusted to 30 percent from the current 50 percent, and be brought down to zero the following year, in accordance with Vietnam’s commitments.
Technical barriers should also be applied to imported cars to protect Vietnamese consumers, he said.
Asked about the chance that foreign-owned businesses will milk these incentives without meeting their localization commitments and then turn to importing cars when the duties are removed, Giam admitted that many foreign companies in Vietnam have failed to localize their products as promised.
The localization rate (that is the percentage of parts produced locally) on a car in Vietnam is currently around 10 percent on average. A few manufacturers have exceeded 30 percent localization, despite the fact that these companies committed to a scheme that sought to gradually produce cars that were 100 percent locally made.
The recommended solution will be to establish a fund that will provide direct assistance to automotive manufacturers wherein the level of assistance will depend on the business' ability to meet government objectives, he said.
Supports and incentives will also be given at certain stages of production, meaning that only businesses which truly invest in their manufacturing activities in Vietnam are eligible for the preferences, he added.
Or to be outsourced? 
Pham Dinh Thi, deputy chief of the Ministry of Finance’s Tax Policy Department, told Tuoi Tre that Vietnam should target a few key portions of the assembly line because a holistic auto industry remains a "pipe dream" for now.
During a meeting with relevant ministries in 2003, Thi said every automotive manufacturer present stood up to protest to the reduction of import duties, claiming that it would kill the local auto industry.
However, Vietnam has forged cooperative plans with a number of international communities and must fulfill its pledges to level the playing field, he said.
Chairman Tran Ba Duong, of the Truong Hai Auto Corporation, agreed that it would be impossible to produce and sell an entirely made-in-Vietnam car, given that neighboring countries like Thailand and Indonesia have already developed their auto industries so well.
But, local businesses still have opportunities to provide components for famous producers targeting the ASEAN market, he said.
Vietnam now has 18 foreign and 38 local businesses producing cars with a total output of some 460,000 cars a year, according to Nguyen Manh Quan, head of the Ministry of Industry and Trade’s heavy industry department.
However, their firms mainly focus on assembly, welding, painting and cleaning, he said.
Although the government planned to produce 50-90 percent of car engine parts by 2010, the industry has failed to reach that goal.
Quan said about 210 businesses participate in supportive industries, but they are small and medium-sized firms which mainly produce a handful of simple components.

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