Policy makers, auto industry should set more realistic targets, analysts say

Ford Vietnam employees work on car frames at a factory in the northern province of Hai Duong. Only 112,000 cars were sold in Vietnam last year.

It seemed a tall order two decades ago. Now it seems next to impossible.

Vietnam has been trying to develop an automobile industry strong enough to make a car that it can proudly call a really Vietnamese product. But with the dependence on imported parts showing no sign of easing and foreign cars flooding the domestic market, the goal is more unrealistic than ever, industry insiders say.

“The failure in the localization policy for Vietnam’s auto industry has been foretold,” said Nguyen Minh Dong, an automotive consultant and engineer. “Policy makers made a mistake when forcing manufacturers to achieve a certain local content ratio without taking into consideration the required technology and capital.”

While many favorable tax policies have been introduced over the past 20 years, one after another, it was naïve to believe that they would be sufficient to boost production and use of local car parts, Dong said.

The auto industry needs huge investments and even major carmakers in the world are only capable of supplying between 36 and 45 percent of the components they need by themselves, he said.

The current policy calls for 30 percent local content by the tenth year of operation. Toyota Vietnam, which started its operations in 1996, has achieved a ratio of 7 percent. Other companies like Suzuki and Ford Vietnam use even fewer local parts, at around 2 or 3 percent.

Lofty goals

According to the Institute for Industry Policy and Strategy, the government has tried to help the auto industry in many ways since its inception. Car companies were given tax cuts of up to 100 percent from 1998 to 2003. When the regulation was revised in 2004, tax cuts of 30-70 percent were made available for three more years. To protect the industry, a very high import tariff was also set – 100 percent from 1991 to 2005 and 80 percent subsequently.

All the favorable policies were given to carmakers in exchange for the commitment that their products will use more locally produced parts. However, recent statistics show that most local content targets have not been met, the Institute for Industry Policy and Strategy said. For instance, the goal was to have a 50 percent local content in cars of nine seats in 2010, but the actual ratio fell far short at just 15 percent.

Officials at the Ministry of Industry and Trade have admitted that many foreign-invested car companies have not held up their end of the bargain. However, they also pointed out that the local car market was too small for carmakers to invest a lot on parts production and make it profitable.

The Vietnam Automobile Manufacturers’ Association has recorded car sales of 37,305 units between January and April. The association, which groups 17 companies, sold just 112,000 units last year. This compares to 800,357 vehicles sold in Thailand.

Catch 22

Dong agreed that the small market size did not encourage investment, but he still maintained it was policy makers that put the auto industry in a Catch 22 situation.

“The government, on the one hand, called for more production of car parts to support the industry, but on the other, restricted car consumption with high luxury taxes,” Dong said.

An analyst, who wished to remain anonymous, said the authorities trapped themselves with their own polices because they did not legally compel manufacturers to increase the ratio of local content. After many years enjoying preferential treatment, carmakers can just blame everything on low car sales in Vietnam, he said.

The end result is that the country has an auto industry whose main job is to manually assemble components imported from other countries, the analyst said. According to official data, Vietnam has to import nearly US$2 billion worth of car parts every year.

Since many local carmakers have not spent much money on building hi-tech production lines, chances are high that they will not feel much discomfort quitting manufacturing altogether and focus on importing cars.

The trend may have started already. Some companies including Honda Vietnam and Toyota Vietnam are importing cars made in Thailand.

Under a free trade agreement, Vietnam will have to remove all import duties on cars made by other Southeast Asian countries by 2018. The clock is ticking and analysts are worried that local auto industry will not be able to brace itself for the competition by then.

New plan

The Ministry of Industry and Trade now wants to fix the industry with a new 10-year plan.

This time it aims at mass production of only two car models with small engine capacity that can give Vietnam a competitive edge in the global market. Under the plan, focusing on a strategic car line will enable manufacturers to churn out 361,000 cars a year by 2020, meeting 65-68 percent of local demand.

Although the plan is still incomplete, many experts have already expressed their skepticism, and say this is likely to be yet another instance of overreaching.

Pham Xuan Mai, director of research and development at Truong Hai Group, said with only eight years left before the market opens up, Vietnam will not be able to make the so-called “strategic” car of its own.

Truong Hai, which assembles vehicles including South Korean KIAs and Hyundais, beat Toyota in sales for the second month in a row in April with 3,104 units.

Tran Ba Duong, chairman of the group, said it’s time to stop thinking that Vietnam has to make a car on its own.

Local companies should consider intermediate products that can link them to the global supply chain, rather than targeting finished products, he said. Even small and simple components can help them enter the world market as long as they are of good quality and reasonably priced, he said.

Duong said Truong Hai has been exporting its cargo boxes to the Middle East at prices 12 times lower than similar products made in South Korea.

Companies around the world now work together to make more products as fast as possible, and Vietnamese auto companies would do well to target the global supply chain, he said.