High taxes hinder growth of auto industry

According to the strategy approved by Prime Minister Nguyen Tan Dung in July, local automobile firms will produce 227,500 cars by 2020, 237,900 by 2025 and 1.5 million by 2035.

Though the strategy is considered conservative given that Vietnam’s 2035 target is smaller than Thailand's current output, few believe Vietnam will achieve it.

Shortcomings in tax policy remain a big obstacle to market development, car and part manufacturers said at a recent meeting organized by the Ministry of Industry and Trade on the nation's automotive strategy.

Bui Ngoc Huyen, director of auto maker Vinaxuki, said the high taxes imposed on domestically-made cars make them too expensive for locals to afford. In Vietnam, cars are subject to numerous taxes and fees, including import tax, value-added tax, special consumption tax and registration fees.

Up to 50 percent of residents in rural areas, and 90 percent in Hanoi and Ho Chi Minh City want to own automobiles, but few can afford them, he said. Automobile prices in Vietnam are 1.5-2 times higher than in other Southeast Asian countries like Thailand and Indonesia.

“Without tax incentives to encourage local production and consumption, Vietnam will fail to realize the strategy,” Huyen said.

Tran Ba Duong, chairman of the Truong Hai Auto Corporation, said Vietnam needs to cut the special consumption tax imposed on locally made cars. Under current regulations, cars are subject to a special consumption tax rate of 15-60%. Imported cars are taxed based on their Cost, Insurance Freight (CIF) price, while domestic vehicles are taxed based on their retail price.

“If the tax isn't cut, local producers will hesitate to expand investment, as they remain more expensive than imports,” he said.

Prices of locally-produced cars will be 20% higher than vehicles imported from Assocition of Southeast Asian Nations (ASEAN) countries when Vietnam eliminates import tariffs to meet its ASEAN Free Trade Agreement (AFTA) commitments in 2018, according to the Vietnam Automobile Manufacturers’ Association (VAMA).

Difficulties in credit access and a shortage of qualified laborers have also hindered the industry’s development, said Huyen. Car makers can only access 1-3 year loans, while the industry requires long-term investment.

Without careful preparation, insiders say, Vietnam will find itself in the same situation the Philippines did a few years ago, when producers began importing cars to meet rising demand, leading to a serious trade deficit.

The local auto market remains small compared to other countries in Southeast Asia, the institute said, adding that in 2012 it was half the size of the Philippines’ market, one-fifth of Malaysia’s, and one-24th of Thailand’s.

Local producers churn out some 100,000 cars every year, meeting 60-70% of local demand, it said.

Supporting industries

Under the strategy, Vietnam aims to increase the percentage of locally-produced parts used in domestic automobiles to 30-40 percent by 2020. The rate currently hovers around 10 percent on average.

Only a few manufacturers have exceeded 30 percent, despite the fact that these companies committed to a scheme that sought to gradually produce cars that were 100 percent locally-made.

Truong Hai's Duong said the government should create policies to encourage auto makers to help local small-and medium-sized enterprises manufacture parts.

Local enterprises could establish joint-ventures with foreign automobile component producers, or buy technology from them to develop supporting industries, Duong said.

If Vietnam cannot develop its own supporting industries, it will continue to benefit only from providing labor and factory space, he said.

A representative of part manufacturer 19-8 said the government should issue specific regulations that force auto makers to purchase spare parts from local firms. Without the regulations, local small and medium-sized enterprises won't be able to compete on the market.

Deputy Minister of Industry and Trade Le Duong Quang said car and part manufacturers should by all means cooperate, but Vietnam can't force auto-makers to buy components from local small and medium-sized enterprises. 

The cooperation should be implemented on a voluntary basis, he said.

To lure customers, each part manufacturer should focus on producing a limited number of high-quality components, he said.

Duong 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 is currently home to 18 foreign and 38 local car makers with a total annual output of some 460,000 vehicles, according to Nguyen Manh Quan, director 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% of car engine parts by 2010, the industry failed to reach that goal.

Quan said about 210 businesses participate in supporting industries, but they are small and medium-sized firms which mainly produce a handful of simple components.