The relatively small size of Vietnam’s auto market, the underdevelopment of support industries and expensive parts and components are the main reason the price of domestically assembled cars is 10-20 percent higher than those made in Thailand or Indonesia.
Competitive pressure in domestic market
Nguyen Trung Hieu, Head of Policy Department under the Vietnam Automobile Manufacturers Association (VAMA), said domestic enterprises sell a fuel tank cap for US$3.8, while a Thai product of the same kind is sold for US$1.5. The 200-300 percent gap in production cost is the same with plastic components. This means that for now, increasing the local content of cars does not benefit auto assemblers, as imported parts are much less expensive.
In a report presented to VAMA on November 3, Luong Duc Toan, Deputy Head of the Department of Industrial Manufacturing under the Ministry of Industry and Trade, said auto makers in Vietnam sold only 400,000 vehicles in 2019, compared with over one million in Thailand, whose population is about 30 percent smaller. Meanwhile, domestic support capability remains modest and has not met the country-based auto assemblers’ demand, Toan said. According to the official, Vietnamese auto manufacturers are now importing 80 percent of key parts such as engines, control systems and transmission gears, raising domestic car prices 10-20 percent higher than cars imported from other Southeast Asian countries.
Toan said the auto industry had seen major leaps forward in recent years and is now home to more than 40 auto manufacturers with several world-leading brands including Ford, Mercedes and Toyota. However, Pham Van Tuan, Director of the Eco Vietnam Limited Company, said that while Vietnamese enterprises are capable of making different parts and components but their products are more expensive than imported ones.
Flexible tax policy needed
A representative of Thanh Cong Group said domestic support industry enterprises only provide low-tech components such as windshield wipers, batteries, tires, and electric wires and therefore auto assemblers still have to import other parts and accessories.
More than half a billion dollars in tax returns have been awarded to firms since 2017 in a bid by the government to boost the country’s auto industry and supporting industry.
However, to increase the local content, according to the Vietnam Association for Supporting Industries (VASI), the government should adopt a stable tax policy that encourages enterprises to develop a proper investment strategy, manufacture parts and components for export and become suppliers in regional and global value chains. A zero (0) percent or very low tax rate should be applied to parts and other items that cannot be produced in Vietnam, the association says.
Economists believe flexible tax policies and tax reductions for imported components are important for the development of the domestic automobile industry. Auto firms want authorities to promptly simplify administrative procedures, including customs clearance formalities, and provide tax incentives for parts that cannot be processed domestically. They are also asking that foreign auto firms share technology and material know-how when entering the Vietnamese market.
VAMA predicts that automobile sales will reach one million vehicles per year by 2025, providing the opportunity for Vietnam to develop its support industries. By 2025, Vietnam will be able to make highly competitive supporting products, satisfying 45 percent of domestic production and consumption. That figure would rise to 70 percent by 2030.