The small market is the key bottleneck facing localization efforts. To ensure the system operates at full capacity, each component made by supporting industries must have an order quantity of at least 50,000 per annum - Photo: Le Minh Khue

Vietnam’s auto market had an output of less than 150,000 per annum during 2007-2014. This figure rose to 250,000-300,000 per annum in 2015-2020, less than 50% of the designed capacity of 680,000 per annum. This is extremely small compared with Thailand’s (3,000,000 per annum).

The small market is the key bottleneck facing localization efforts. To ensure the system operates at full capacity, each component made by supporting industries must have an order quantity of at least 50,000 per annum. For example, Vietnam produces about 3,000,000 motorbikes per annum, so the localization rate in this industry is 90%. Thailand, with an auto output of 3,000,000 per annum, has a localization rate of 80%.

Moreover, Vietnam’s auto industry is rather scattered, with tens of manufacturers. Small orders, excessive reliance on imported materials and huge discounting costs due to excess capacity are among the factors that make locally made auto parts more expensive than their imported counterparts.

The auto industry faces increasingly fierce competition, especially after 2018, when the import tax on cars from ASEAN becomes 0% and firms start to import cars. Vietnam imports cars mainly from Thailand and then Indonesia. These countries have developed auto industries and manufacture cars at a lower cost.

Vietnam’s auto industry cannot compete in the short run when its scale is small, production costs are high and the main countries that it imports cars from are in proximity and can produce them at low costs. 

Policy challenges

Since Vietnam joined the World Trade Organization (WTO) in 2007, policies for the auto market have changed constantly, showing how much policymakers struggle in terms of vision for the industry.

As auto tariffs fell in accordance with WTO commitments in 2007, car import soared, forcing the Government to adjust the special consumption tax, increase registration fees and impose many requirements on imported cars in 2009-2014.

The 2014-2018 period witnessed another wave of import as tariffs on cars from ASEAN gradually dropped to 0% in 2018. During this period, policymakers continued to revise the special consumption tax (there is a shift from the original price to the selling price as the base) and tighten requirements on imported cars [Decree 116/2017/ND-CP(1)]. These policies focused on protecting the domestic market through technical barriers.

Since 2017, policies aimed at supporting local producers have been implemented, but their aim is just to help auto assemblers lower prices rather than to boost localization. For example, Decree 125/2017/ND-CP on lowering tariffs on auto parts to 0% for those not made locally only tackles the gap between domestic and global production costs. Recently, the suggestion that the special consumption tax on locally made auto parts will only cover the localized parts (7-10%), whose value is already limited.

Supporting industries have only received attention in recent years. Decree 111/2015/ND-CP on the development of supporting industries and Resolution 115 on boosting these industries are part of these efforts. However, the resolution does not include any breakthroughs compared with the decree issued five years ago, except with respect to the vision for some key industries. 

The path ahead for the auto industry

There are 21 auto assemblers in Vietnam, as well as various supporting enterprises (80 level-one suppliers and 320 suppliers of levels two and three) for both motorbikes and cars. Among these supporting enterprises, 34% are domestic firms; the rest are foreign-invested enterprises from Japan (44%), Taiwan (14%), Korea, Malaysia, Germany, the U.S. and so on. In the value chain for the auto industry, Vietnamese firms focus mainly on simple components such as plastic components, chairs and so on. The more complex components, which require precision mechanics, are made mostly by foreign-invested enterprises. Compared with Thailand, with 700 level-one domestic suppliers and 1,700 suppliers of levels two and three, Vietnam has a very small supporting industry for car production.

As analyzed above, the localization of the auto industry will be effective only when the market is sufficiently large. This is a barrier that makes it hard for domestic car manufacturers and auto part producers to reach a consensus. However, from a broader perspective, supporting industries can thrive when they target the international market. The export of auto parts shows promise since the tax on Vietnamese parts exported to the EU, Japan, Canada and so on will fall to 0% after EVFTA and CPTPP take effect. In 2019, Vietnam’s auto part export extracted US$5.6 billion worth of revenue.

In other words, supporting industries can flourish independently of the auto industry. Supporting enterprises can aim for a bigger market without being constrained by the domestic auto industry. Policies to boost localization in the auto industry should be aimed at the auto industry instead of supporting industries.  SGT

(1)Some regulations have been relaxed in Decree 17/2020/ND-CP

Trinh Hoang

Ministry working to promote growth of support industries

The Ministry of Industry and Trade (MoIT) has introduced a range of measures to boost the growth of support industries in a bid to promote the engagement of local companies in production chains.