Back in the 1940s, the Japanese government was facing a question it found hard to answer: should it develop the automobile industry?

There was stark division on the issue, with some arguing that if the country could import vehicles from other countries, it did not seem essential to develop the products oneself.

However, thanks to the implementation of several policies supporting the production of auto parts and components, the country is now among the world's giant auto manufacturers with many well-known brands.

The story could be a very good lesson for Viet Nam, which is also seeking answers to a similar question, Nguyen Thi Xuan Thuy, director of the Integration Policy and Strategy Division under the Institute of Industrial Policies and Strategies (IIPS), said.

There are justifiable reasons to pose this question.

In two years, the tariff on complete-built-in (CBU) units on automobiles imported from ASEAN nations will be zero per cent under the ASEAN Free Trade Agreement. So consumers will be able to purchase new cars without paying as much money as they currently do.

In particular, the local part supply industry is still underdeveloped, not to mention concerns over environmental problems potentially caused by the industry.

Thuy said "Domestic manufacturing and assembling enterprises in the country still have to import automobile spare parts from various sources such as ASEAN, Japan, China, South Korea and Europe."

"The import raises the production costs directly due to import tax and indirectly through additional costs such as transportation."

Vu Quang Tam, deputy general director of Honda Viet Nam, once told a Vietnam News Agency correspondent that unlike the production of motorbikes, for which the localisation rate (the percentage of locally-made components used to assemble a bike) reached nearly 97 per cent, the rate of the automobile industry was still very low.

In a recent conference on industry development, the average localisation rate was reported to be much lower than the target of an average 40 per cent set for 2020 and 60 per cent for 2025.

Tam explained that the size of the Vietnamese automobile market is not large enough to attract investors to manufacture auto parts and components.

Thuy agreed, saying "The scale of the market is now much smaller than other countries' in the region (only equivalent to one-fifth of Thailand or one-sixth of Indonesia)."

"With such a small scale, we don't have any advantage of scale. That's why the local production cost of a vehicle is 20 per cent higher than that of other ASEAN countries."

Pham Van Tai, Permanent Deputy Director of Truong Hai Auto Corporation (THACO) admitted "With deeper international integration, especially after 2018, local auto manufacturing and assembling firms like THACO will face severe competition from auto firms in ASEAN member countries."

Despite having high localisation rate (15-20 per cent for passenger cars, 35-45 per cent for trucks and 50-65 per cent for buses), the company still have to find ways to overcome the common difficulties caused by modest market size, Hai said.

Honda Viet Nam leader Tam added that the part supply industry was facing hardship, partly due to the Government's support policies which had not fully worked.

For instance, some part suppliers of the company had to import steel and iron from abroad because most steel and iron products produced domestically were serving the construction industry.

Tran Thanh Van, general director of Dry Cell and Storage Battery Joint Stock Company (PINACO) which supplies batteries to many leading automotive and motorbike makers, said 60-70 per cent of the materials needed for production are imported.

"Therefore, policies related to monetary and exchange rates and fluctuations on the international market affect us."

Besides this, there is unfair competition between locally made batteries and imported ones since importers usually declare lower prices to evade tax.

He said "While local battery producers are bound by regulations on environment and responsible for used batteries, importers are not bound by such regulations."

Van suggested that the Government create a sound competitive environment in which all businesses have the same responsibilities in terms of tax, environment and other issues.

Market potential

According to Thuy, if Viet Nam is not going to continue producing or assembling vehicles, it will not only have a negative effect on auto makers, but also result in lost opportunities to develop other potential related sectors, such as mechanical engineering, rubber, plastics, electronics and magnet wire.

In fact, the automobile market in Viet Nam is considered very prospective.

According to experts, the potential of a country's automotive market is assessed based on factors such as the size and structure of the population, the per capita income, the number of vehicles per 1,000 inhabitants and the development of infrastructure.

"It can be seen that the elements of population, income and infrastructure conditions are favourable for the development of the Vietnamese automotive market in the next 10 years," Thuy said.

Regarding the population, Viet Nam has over 90 million inhabitants and the population of the middle class is growing with per capita income estimated to reach the threshold of US$$3,000 in 2020.

Viet Nam's automobile market is expected to enter the stage of motorisation in the 2020-2025 period when automotive consumption rate (motorisation) will reach 50 vehicles per 1,000 inhabitants, Thuy said.

Road traffic systems are growing strongly with intercity connection through a network of highways, which will also create more favourable conditions for traveling by private cars, she added.

How to develop

According to Thuy, with the presence of the world's large manufacturers and automobile assemblers, such as Toyota, Honda, Ford, GM and Mecedes-Benz, it will be unfortunate if Viet Nam cannot take advantage of this opportunity to build an automotive industry and foster the growth of the auto parts sector.

Viet Nam now has a vast network of part suppliers for motorbike production, which is the basic foundation for the development of the auto parts industry, Thuy said.

"Without the domestic automotive industry, in the future, when the needs of the Vietnamese people increase, Viet Nam will have to import a large amount of new CBU and even used ones from abroad, which will put pressure on trade balance and raise environmental issues."

Besides this, when the motorbike industry is saturated, if the automotive industry does not grow, suppliers of motorbike parts will not have a chance to continue their operation.

Honda Viet Nam Deputy General Director Tam said auto consumption is an obvious trend. However, to develop the industry, it is necessary to develop co-operation among ministries and agencies to define "which market segment should we focus on."

It would make priority policies more focal and effective, he said, adding that related ministries should seek common ground on the issue.

Currently, the Ministry of Industry and Trade wants to increase the scale of the market, while the Ministry of Transport is facing pressure of infrastructure development and the Ministry of Finance tends to limit the purchase of personal cars by imposing more fees.

Thuy suggested that Viet Nam learn by example from the experiences of other regional countries to develop specific and suitable planning for the domestic automobile industry.

Among ASEAN nations, currently there are five countries manufacturing vehicles — Thailand, Malaysia, Indonesia, Philippines and Viet Nam.

The four neighboring countries already have policies and programmes in place to promote the industry with clear incentives for businesses or vehicle segments that meet the conditions set.

Notably, Thailand has developed a programme on eco cars, Indonesia is producing low cost green cars, Malaysia has established a fund to assist domestic car assembly and the Philippines has enacted a new comprehensive strategy to rebuild the automotive industry.

In the future, the Vietnamese automobile industry will need to overcome the pressure of competition after 2018, narrow the gap in production costs, take advantage of FTAs to increase exports of spare parts and participate in the world and region's supplying chains. 

VNS