Though Vietnam's automotive market holds promise from rising per capita incomes and a huge population, carmakers remain plagued by inconsistent government policies.
Vietnamese automaker Vinaxuki announcing in July it must sell its factory to repay debts rang alarm bells over the future development of the country’s automotive industry. Since Vietnam introduced its “doi moi” (renovation) policy in 1986, many foreign carmakers, including Toyota, Honda, Suzuki, Tan Chong Motor, Ford, Mercedes Benz, and General Motors have opened factories to serve local demand. Local carmakers such as Truong Hai Motor, TMT Motor, Vinamotor, and Vinaxuki also did their best to cement a foothold in the market.
To date, however, all automotive factories are of small scale and most carmakers remain uncertain about their expansion plans.
Rising demand but low sales
Figures from the Vietnam Automobile Manufacturers’ Association (VAMA) revealed total sales last year of 157,810 units, up 43 per cent against 2013. From January to July this year carmakers and dealers sold 123,841 units, an increase of 59 per cent year-on-year.
Growth in sales implies rising demand in the automotive market, after years of decline due to the economic slowdown. However, addressing a press conference in Hanoi in late July, VAMA Chairman Mr. Yoshihisa Maruta said that the market is not growing as expected. “The automotive market size is still small and sales are not high,” said Mr. Maruta, who is also General Director of Toyota Motor Vietnam (TMV).
After 20 years in Vietnam TMV’s accumulated sales are around 310,000 units, while sales by Toyota Motor Thailand in 2014 stood at 326,000. Ford sold just 13,988 units in Vietnam last year, while its sales in Thailand reached 38,087 units.
In 2014 total sales in Thailand’s automotive market were 881,823 units, compared to 157,810 in Vietnam. This indicates how small Vietnam’s automotive market is, even though its population of 96 million far exceeds Thailand’s 60 million. This comparison excludes 1.2 million cars exported from Thailand to other markets, including Vietnam.
Owning a car is a dream for many Vietnamese, most of whom are trying to make the dream come true, which leads to growing demand in the market. Still, the high price tag remains the greatest barrier for Vietnamese people to own a car and this explains, at least in part, the modest sales compared with other markets like Thailand.
Industry insiders, however, insist that inconsistent policies are the key factor. Mr. Michael Behrens, General Director of Mercedes Benz Vietnam, said that frequent changes in policies and erratic proposals over the last few years have deterred consumers as well as carmakers.
The government is currently imposing high special consumer taxes and registration fees on motor cars. The lack of clear policies for locally-assembled motor cars after full integration with ASEAN in 2018 and the inadequate implementation of programs to address underdeveloped infrastructure also impact on the automotive industry.
Mr. Behrens said that motorization in Vietnam could begin in the year 2021 or 2022, when average per capita incomes reach $3,000, but added that this would also be dependent upon government policy.
“Prices are dependent on taxes and fees, market size, and the development of support industries,” Mr. Maruta said. “When production is small, production costs are very high.” He stressed the need to expand the local market size to attract more investment from component suppliers to Vietnam.
Mr. Nagai Katsuro, Economic Envoy at the Embassy of Japan in Vietnam, who led a Japanese business delegation to the Ministry of Planning and Investment earlier this year, said that automobile production costs in Vietnam are 1.2-1.3 times higher than the sales price of imported cars from Thailand, because of a shortage of domestic component suppliers. This explains the increase in imported cars over recent months. And when the import tax on motor cars from ASEAN and EU countries arriving in Vietnam fall to zero in 2018 and 2025, respectively, no one can be sure whether the case of Vinaxuki will be repeated.
Although the automotive industry has reached a localization ratio of only some 10 per cent after 20 years, and many economists describe this as a failure of the government, the government still wants to make it a key industry in the economy.
The Vietnamese Government last year officially introduced a strategy for automobile development to 2030, committing to stabilize automobile-related policies for at least ten years to encourage investment expansion by carmakers. This strategy replaces the outdated strategy released in 2002.
The government noted in the strategy that it will “implement existing policies and future policies consistently for at least ten years, ensuring they are appropriate to the trend of international integration in order to build up confidence among investors and carmakers and encourage them to increase investment.”
According to the strategy, the automobile industry will be a vital industry for the economy in the future. By 2020 the government targets locally-manufactured cars to meet two-thirds of local demand, while locally-manufactured buses will meet 90 per cent of local demand.
Over 227,000 automobiles in all segments are estimated to be manufactured in Vietnam over the next six years and the number is to increase to more than 862,000 by 2030. The localization ratio for four- to nine-seat cars is planned to increase to at least 30 per cent by 2020.
The introduction of this strategy provides new hope for carmakers, as the government noted that policy consistency was essential. However, it is just the first step in the future development of the industry.
What the government must do now is promulgate new tax and fee policies for the market. More importantly, it needs to have supportive policies for component suppliers and carmakers that would play a vital role in the industry’s development, according to Mr. Matura. “The government should consider steps to accelerate the growth of the overall industry and to drive the cost competitiveness of locally-assembled cars to maintain a sustainable automotive industry in Vietnam,” he said. “These factors will lead to suppliers and investors coming to Vietnam, which in turn would aid the growth and development of the industry.”