The Vietnam automobile industry at a crossroads

The outlook for the Vietnam automobile industry remains stable despite the coronavirus.

The Vietnam automobile industry has developed gradually since the government announced an automobile industry development policy in 1998. It is forecast that global commercial vehicle production will decline by 22 percent to 2.6 million units in 2020, compared to 2019. The coronavirus pandemic affected the global auto industry as plants remain shuttered and caused a 3.0 percent decline in global real GDP in 2020.

The Vietnam automobile industry is no exception. According to a report from the Vietnam Automobile Manufacturers’ Association (VAMA), the industry registered only 11,761 units — consisting of 7,796 passenger cars, 3,652 commercial vehicles and 313 special purpose vehicles — in April 2020. It indicated that sales of passenger cars decreased by 40 percent, commercial vehicles by 26 percent and specialized vehicles by 16 percent, compared to the previous month. The whole automobile market over the first four months of 2020 decline by 36 percent. The main reason for the decline in sales was the impact of the coronavirus pandemic, for which the country imposed social distancing measures to prevent the spread of the coronavirus outbreak. People also bought fewer new cars.

It is estimated that 70 percent of the supply of Vietnam’s automobile vehicles are domestic assemblies while imported assembled vehicles make up the remaining 30 percent. In Vietnam, there are three main forms of automobile production: Complete Knocked-Down (CKD), in which factories in Vietnam have imported 100 percent of components for vehicle assembly; Semi-Knocked-Down (SKD), in which factories assembled vehicles with some localized components; and Complete Built-Up (CBU) which refers to vehicles that are manufactured 100 percent abroad and imported to Vietnam.

Vietnamese automobile traders have to pay taxes and high fees which go to state revenues, and face concerns about urban congestion. Domestic firms are weak for a variety of reasons. They have not yet cooperated, associated and specialized between automobile assembly and production, with production of spare parts and components; and their products also do not have the latest technology. 

So far, the Vietnamese automobile industry remains largely dependent on imported spare parts and in Vietnam almost of the value of spare parts and components of automobile industry are from FDI enterprises. The problem for the sector is its weakness in technological innovation.

The industry faces opportunities as well as risks. The risk is for domestic companies. Some local auto traders voiced concerns about the government’s policies and urged ministries to take more comprehensive measures. The government tax policies for the automobile industry are not yet effective, the domestic firms have to pay tax on imported materials and supplies to produce auto parts. While imported CBU cars have a 0 percent tax rate, so the price structure of domestic cars is higher than imported ones. 

The Vietnamese government plays an important role in helping the country’s automobile industry, specifically through the Special Consumption Tax. The price of buying a car in Vietnam is more expensive than other ASEAN countries, like Thailand or Indonesia, because of high taxes and the cost of producing in the country. On the other hand, countries in the ASEAN region have more competitive prices and higher localization rates than Vietnam. 

The Vietnam Ministry of Trade also acknowledges that domestic businesses were facing stiff competition from imported products when Vietnam signed its free trade agreement with the EU and the comprehensive partnership agreement and Transpacific (CPTPP) which includes many countries producing high quality cars. Furthermore, ASEAN import taxes to Vietnam have fallen to 0 percent since 2018.

Despite the coronavirus’ impact on Vietnam’s economy, the automotive industry in Vietnam expects to bounce back. In the coming years, the volume of imported cars will significantly increase due to high domestic demand, that could cause the domestic automobile enterprises serious trouble. The Vietnam Ministry of Finance proposes a new Special Consumption Tax that will apply to cars under nine seats manufactured and assembled domestically and suggest the tax reduction for the localization of components and productions parts. It is not clear when the new rule will apply, but these proposals will not only help the domestic assembled cards to compete with imported CBU cars buts also bring great benefits for the economy, despite the fall in tax revenue collection.

Significantly, on May 20, Vietnamese Prime Minister Nguyen Xuan Phuc approved a plan to reduce by 50 percent auto registration fees until the end of the year. The move is to help domestic enterprises recover and to stimulate cars consumption for domestically-made and assembled cars, instead of imports. It will also save car buyers money, but domestic automakers do not know when exactly the reduction in fees will apply. 

In the past 30 years, Vietnam joined various bilateral and multilateral trade agreements such as the Comprehensive and Progressive Agreement for Trans-Pacific Partnership, the Vietnam–EU Free Trade Agreement and Investment Protection Agreement, and the Regional Comprehensive Economic Partnership (RCEP). The country began to remove import tariffs on cars from ASEAN countries since 2018 as part of their ASEAN Free Trade Areas commitments.

In early January 2020, Vietnam and the European Union signed a free trade agreement, signalling opportunities to further boost trade between Vietnam and Europe. If the FTA is approved by the Vietnam National Assembly, the import tax rate for CBU cars from the EU to Vietnam will be around at 55-75 percent, competing with domestic cars.

Furthermore, Vietnam’s middle class is expanding rapidly and that helps to boost consumer spending. According to a PwC report the number of middle class Vietnamese will reach 44 million by 2020, and 95 million by 2030, that development will transform lifestyles in Vietnamese society and increase consumer spending, especially of higher value-added products. The country’s living standard is on the rise creating opportunities for foreign auto enterprises to invest in the country.

Vietnam’s luxury car market is also expected to develop strongly this year despite the impact of the coronavirus pandemic. Consumer preferences to choose luxury cars is now trending. Vinfast is the automotive brand of the Vingroup conglomerate and wants to become the leading automobile and motorcycle manufacturer in Southeast Asia. Trường Hải Auto Corporation Thaco is a leading car manufacturer in Vietnam and accounted for 32 percent of Vietnam’s automobile market. The company plans to manufacture and assemble cars in the future. 

There are some positive signs in the industry. Although Vietnam’s economy was impacted by the coronavirus pandemic, the economy aims for for 5 percent GDP growth in 2020 and next year, signalling the prosperity of the whole economy.

However, the future outlook for the industry might be tied to the green economy as the Vietnamese government pursues a policy in reducing CO2 emissions and ease public health concerns by 2030. The Vietnamese government also aims to stimulate manufacturing and increase the volume use of e-vehicles “including the National Automobile Development Strategy by 2025 and tax change decrees.” The Vietnam government needs to adapt flexible policies to help the automotive industry face new challenges arising from international markets and new geopolitical factors.

By Thoi Nguyen – The Diplomat – May 22, 2020