Oct. 29 (Bloomberg) -- After almost two decades of waiting for Vietnamese consumers to become rich enough to afford cars, manufacturers including Toyota Motor Corp. and Ford Motor Co. will have to contend with cheaper imports.
Current Vietnamese duties of 60 percent will be eliminated by 2018 for cars imported from within the Association of Southeast Asian Nations, Met Arias, chairman of the Vietnam Automobile Manufacturers Association and managing director of Ford’s unit in the country, said in an interview Oct. 23. Without a major parts industry, car production costs are higher than elsewhere in the region because of taxes on imported components, he said.
The government cited the auto industry as an important driving force under a plan to become a “modern industrial country” by 2020. The impending abolishment of protective duties risks giving automakers little incentive to modernize or continue running plants in Vietnam even as the country’s ascent to middle-income status means more people can now afford cars.
“I was one of the early believers in Vietnam’s auto industry,” said Keith Schulz, general director of lubricant maker Vilube Corp. in Ho Chi Minh City, who was a consultant to automakers setting up plants in the nation in the mid-1990s. “But by 2018, it sounds like this industry will be cracked open like a clam, and real economics will take over.”
The country’s auto industry is in danger of collapsing with the planned elimination of industry import taxes, Vietnam News reported in August. The nation needs immediate measures to avoid becoming a major importer of cars, it said, citing Ngo Van Tru, deputy head of the Ministry of Industry and Trade’s heavy industry department.
“Five years is a very short time for makers to enhance competitiveness considering the current auto and supporting industry,” Yoshihisa Maruta, president of Toyota Motor Vietnam, said in e-mailed comments.
Based on sales last year, the top five foreign automakers with plants in Vietnam are Toyota, General Motors Co., Ford, Suzuki Motor Corp. and Daimler AG’s Mercedes-Benz, according to figures from the automobile association.
Sales of vehicles assembled in Vietnam rose 20 percent through the first nine months of this year to 67,045, led by Toyota’s 23,324, according to figures from the group.
“If the government doesn’t significantly improve the situation for the local manufacturers, there is always a risk” of some makers shutting plants after 2018, said Michael Behrens, CEO of Mercedes-Benz Vietnam Ltd.
Imported cars will be cheaper than domestically produced ones when duties are lifted unless changes are made, such as cutting taxes on parts that aren’t available in Vietnam, said Arias in the interview in Ho Chi Minh City. Carmakers operating locally must be able to compete with Thailand, where many vehicles are made in free-trade zones and parts are sourced locally or imported without duties, he said.
Last November, Toyota said it will meet growing demand in emerging markets by boosting production in Thailand, from where it already exports to regional countries including Indonesia, Malaysia and the Philippines.
General Motors’ Thai unit exports to 77 markets and has production lines capable of making left- or right-hand drive cars, according to the Detroit-based company’s website.
Vietnamese consumers prefer motorbikes for now. Vietnam has more than 38 million motorbikes on the road as of this month, up 6 percent from last year, according to the National Traffic Safety Committee. About two million cars are currently registered, according to the committee.
Auto sales in Thailand, with a population of 67 million people, were about 1.43 million units in 2012, according to data from Toyota Motor (Thailand) Ltd. Vietnam, with 89 million people, will probably see sales of new cars rise about 17 percent to 109,000 vehicles this year, Ford estimates.
The government still makes it very expensive to own a car in Vietnam, with the inclusion of consumption, value-added and registration taxes, said Horst Herdtle, CEO of Euro Auto Corp., which sells Bayerische Motoren Werke AG imports in the country.
“It seems like the Vietnamese government wants to have a car industry, but they don’t want cars on the road,” Herdtle said. “That is a kind of paradox.”
The situation reflects the disparate objectives of the government bodies that influence the local auto industry. The Ministry of Finance, which applies tax policy, is primarily concerned with revenue, while other government agencies may want to cut taxes, said Arias.
The Ministry of Planning and Investment, which oversees the licensing of foreign projects, in September cited the auto industry as an example of inconsistent policies hurting investors from overseas.
The transport ministry is worried about the impact that car purchases may have on the environment and traffic flow, said Deputy Minister Nguyen Ngoc Dong.
“Take places like Bangkok, Singapore, Taiwan: They all discourage vehicles for individuals,” Dong said in an interview in July. “For Vietnam, because the level of infrastructure development is low, we have to accelerate the growth of public transportation.”
Arias said any new master plan that emerges for the auto industry should ensure national and provincial policies are aligned and meet rules set by the World Trade Organization. The proposal should also address the competitiveness of the industry through tax cuts, he said.
“The government has to lower the cost of doing business in Vietnam,” said Arias.
To contact Bloomberg News staff for this story: Jason Folkmanis in Ho Chi Minh City at firstname.lastname@example.org
To contact the editor responsible for this story: K. Oanh Ha at email@example.com