VietNamNet Bridge – The auto industry is necessary for Vietnam, but whether it can survive depends very much on domestic tax policy, especially after 2018.

In the next three years, Vietnam will have to comply with most of the commitments of slashing import duties on finished cars (CBUs - completely built units) and auto spare parts from other countries in the region and the world. These commitments are not within the framework of the WTO that Vietnam joined in 2007, but from the country’s participation in the ASEAN Free Trade Area (AFTA), ASEAN-China and ASEAN-Korea Free Trade Areas, as well as new multilateral commitments.

In the WTO, the story is somewhat softer with a gradually reducing roadmap to 70%, 50% and 47% reductions from seven to 12 years (beginning in 2007). Meanwhile, the impact of free trade agreements is taking place faster and stronger. For example, the import duties on complete passenger cars fell to 60% in 2013 and 0% in 2018.

Photo: After more than 20 years, Vietnam's automobile industry still focuses on assembly.

With such a large tax cut, 2018-2019 can be considered a decisive time for the fate of Vietnam's automobile industry, when local auto manufacturers (both joint ventures and foreign-owned) will no longer be protected by the tariff barrier.

Moreover, the non-tariff protective measures such as regulations on the required localization ratio, the fields of foreign investment restrictions (after sales service, sponsorship, car insurance etc) and discrimination between imported cars and spare parts with domestically produced goods will also be abolished.

While the "day of judgment" is not far away, the future of the Vietnam auto industry seems to be vague as local manufacturers have not taken advantage of the protection time to develop. Some assemblers such as Toyota Vietnam and Vinastar are considering whether to focus on manufacturing or importing and distributing cars in Vietnam, as it is cheaper to import CBUs than to import spare parts for assembly in Vietnam.

The failure of the auto industry can hardly be blamed on stakeholders, such as manufacturers, importers - distributors, the government or consumers.

For manufacturers, especially foreign enterprises, they can’t be blamed for not actively investing in supporting industries to lower the cost of production. Even with major production facilities worldwide, with output of a few hundred thousand to millions of cars a year, they still have an independent supply network, as well as a potential market in Vietnam, with annual sales of about 100,000 vehicles.

To call for the participation of supporting manufacturers, the local market must be large enough or Vietnam must have export markets, and Vietnam does not have these factors.

In this context, the role of organization of the state is very dim. Many development plans for the auto industry have been introduced without rational foundation. However, the shortcomings of these plans are hardly the cause for the failure of the automobile industry in Vietnam if they are compared with the following problems.

On the one hand, the government wants to have a developed domestic auto industry with production and consumption of hundreds of thousands of units per year, with cheaper or at least cars not much more expensive than the rest of the world and the region, so that a large segment of the population can purchase cars.

But on the other hand, for fear of overloading infrastructure, especially in large cities, as well as fear of loss of budget revenue, the government has issued taxes and charges to restrict the increase of cars and tax revenues for the budget (part of which is to invest back into infrastructure).

The "dilemma" in policy and development is one of the main reasons hindering the development of the domestic auto industry. The inadequacies of auto industry planning are the consequence of this situation, rather than the cause.

As for domestic consumers, they cannot be blamed for not having enough money to buy cars at high prices or unwilling to buy because of our worry about traffic congestion and limited parking space. They cannot also be blamed for choosing imported cars, which are more expensive but have better quality than domestic products.

So, what is the future for Vietnam’s automobile industry in the next three to four years?

The first thing that we can predict is the price of cars will certainly drop to the same level in the ASEAN region, as import taxes from this region will decrease to 0%.

If the government boldly chooses to expand the automobile market rather than tightly regulate this industry to avoid infrastructure overload or shortness of tax revenues to the budget, the taxes and the charges on cars will definitely be lower. The auto market thus will be expanded in scope.

A larger and faster growing domestic auto market will naturally stimulate the development of supporting industries and auto spare parts industry in Vietnam.

A large auto market with many car users means more budget revenue from taxes and fees, although the tax rates will fall. This will give the government more funds for infrastructure development and also encourage the private sector to invest in toll-collecting infrastructure works such as highways, tunnels, bridges, and parking lots, especially when the investment form of public-private partnerships (PPP) is encouraged.

Infrastructure development will increase the demand for automobiles, thus causing an increase in auto production and consumption.

Clearly, Vietnam still needs a key automotive industry, but the future of the industry will depend largely on whether the Government is willing to or is able to lower taxes and fees to encourage expansion of the domestic automobile market.

VNE/VNN