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Should preferences be offered to develop the auto industry?

Released at: 17:50, 06/03/2017

Should preferences be offered to develop the auto industry?

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March 3 conference in Hanoi hears the state of play in the country's automobile industry.

by Duy Anh

Few foreign enterprises would be able to replace the role of Japanese motorbike joint ventures in Vietnam, especially popular brands like Honda and Suzuki. “The car manufacturing industry, meanwhile, is an example of unsuccessful cooperation between Vietnam and Japan,” Dr. Vo Tri Thanh, Deputy Director of the Central Institute for Economic Management, told a Vietnam-Japan conference in Hanoi on March 3.

Japanese automobile manufacturers have been seeking more preferential incentives to “stay”, while the Vietnamese side claims that the spillover effect the country receives from them has been rather limited and questions whether further incentives are necessary or warranted.

The reason for the failure of the domestic automobile manufacturing industry, according to Dr. Thanh, comes from inadequate policies in the 1990s. “Japanese enterprises do not treat the Vietnamese market as a place for technology transfer,” he said.

Agreeing, senior economist Dr. Pham Chi Lan said Japanese car manufacturing enterprises have already chosen Thailand, Indonesia or China over Vietnam as a manufacturing hub, and Vietnam has only appealed as a location for the assembly process. While car models are changing extremely fast on a global scale, Vietnam’s car manufacturing industry still consists of older models.

For the car manufacturing industry to develop, aside from preferential incentives, it needs to be of larger scale and feature technology transfer. Is it therefore too late to offer additional preferential incentives to develop the domestic car manufacturing industry?

Two years ago, when Toyota Motor Vietnam suggested certain changes be made for it to stay in Vietnam, Dr. Lan was confused over the value that Vietnam would receive. “I thought it was too much because Toyota’s manufacturing in Vietnam had only consisted of the assembly process and their products were not actually manufactured in Vietnam, and there was zero technology transfer to domestic enterprises,” she said.

In 2015, Toyota proposed changes to the way luxury taxes on completely-knocked-down (CKD) vehicles are calculated, saying the taxable price should be the factory price rather than the sales price. It also proposed the government lower import tariffs on CKD parts imported from Japan from 15-25 per cent to zero per cent.

It asked that the luxury tax be cut by 20 per cent or cut from 45 to 35 per cent. It also asked for a lower corporate income tax for automobile manufacturers, and for Vietnam to cover 50 per cent of the price gap between domestically-made cars and imported cars. The Ministry of Industry and Trade estimated that if Vietnam accepted covering 50 per cent of the price gap it would cost VND40 trillion ($2 billion).

From Japan’s perspective, Dr. Fukunari Kimura, Chief Economist at the Economic Research Institute for ASEAN and East Asia (ERIA), claimed that the risky and costly characteristics of the automobile industry are the reasons why brands must follow the laws of the market. Therefore, it takes time and specified policies for Japanese automobile manufacturer to “gain confidence” about staying in Vietnam.

“We recommend that if Vietnam wants to consistently develop its automobile industry, there should be appropriate policies in place and the government needs to create solid ground for both domestic and foreign automobile manufacturers to develop, especially companies operating in the auxiliary industry,” Dr. Kimura said.

In the latest industry news, Toyota Motor Vietnam expanded its dealer/branch network and authorized service stations in the south of Vietnam last month in order to meet increasing demand and bring better quality products and services to customers.

According to figures from the Vietnam Automobile Manufacturers Association (VAMA), 2016 industry sales 24.3 per cent against the previous year, to 304,427 units. Sales of cars assembled in Vietnam jumped 32 per cent, while imported units saw a 5 per cent year-on-year increase. The Truong Hai Auto Corp, which assembles trucks, buses and sedans, led the sales tally, followed by Toyota Motor Vietnam.

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