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Copyright ©  1999-2013  Vietnam Venture Group, Inc. All rights reserved.  May 26, 2003

AUTO INDUSTRY BLUES
 (c) 2003 Saigon Times Weekly


What Will Become of the Car Industry?
By Staff Writers

In early May, 2003, the number of newly registered automobiles began to soar in HCM City. Traffic police sources said on average, they handled 200 applications for car registration each day, five times as many as before. The reason for the surge: car buyers want to avoid much higher registration fees to be applied soon. Over the last few years, automobiles have become a dream of many households in Vietnam's major cities of  Hanoi and HCM City. Many international carmakers are already in place to hastily help wealthy consumers realize their dream.

Dream and reality. Ten years ago, when Vietnam promised to restrict the number of international car manufacturers allowed to enter the new market, many rushed to Vietnam. In a short time, the number of licensed automobile assemblers soared to a dozen. Some chose (like GM) wisely to stay out of the fray. Others, such as Chrysler came in, sniffed around, and left just as quickly.

Virtually overnight, Mekong Auto, Vietnam's first car assembling joint venture licensed in 1992, saw itself besieged for joint venture partnerships by world-famous automakers like Mercedes-Benz, Toyota and Ford.

Mekong Auto is a US$30 million partnership grouping together South Korean, Japanese and Vietnamese companies. Although the partners are not world-famous carmakers, it was Mekong Auto that rolled out Vietnam's first SUVs (sport utility vehicles) with the now locally well recognized Mekong brand. This first assembler was followed suit by ten other carmakers that pledged to bring in a total investment capital of more than half a billion U.S. dollars.

Spurred by business opportunities in a freshly opened market of [then] upwards of 70 [now 80] million people, in-coming car assemblers hoped for a short-term quantum leap in future sales. Although the annual per capita income in Vietnam was then less than US$300, investors counted on a forecast that it would jump to the level that made a car affordable to a great number of households. "The market is small now, but it will soon expand," car assemblers affirmed at the time.

However, flamboyant car salespeople soon saw their high hopes watered down. Sales and production grew at a snail's pace. Until 2001, the 11 automakers in Vietnam produced less than 20,000 units per year, way below their designed capacity of 150,000 [earlier reported as 200,000] units.

Analysts cited several reasons for the lackluster performance. The exponential growth of the per capita income did not come about. Vietnam's annual per capita GDP was only US$420 in 2002. According to experts, a country's per capita income must reach US$1,000 so that its car industry survives and makes profit, and US$3,000-4,000 if the industry is to maintain a rapid growth.

 In Vietnam, added to the problem of affordability are a host of other disadvantages such as underdeveloped infrastructure and the local population's die-hard habit of going on motorbikes.

Hopes revived with the new Domestic Enterprise Law that helped many to obtain licenses and come out of their business closets in which they hid earlier illegal businesses.  Some car assemblers in Vietnam began to smile in 2000 when the number of cars sold in that year almost doubled that of the previous year-from 6,963 to 13,955 units. Ever since, the industry has sustained an impressive growth rate of approximately 30%.  Almost 20,000 Vietnam-assembled cars were sold in 2001, and the figure rose to nearly 27,000 last year. Also in 2001, for the first time ever, some of the carmakers were in the black.

The car sales became so promising that in April last year, Toyota Vietnam's general director said, "Although the [Vietnamese] market remains small, we expect the number of cars to be sold will soar in the next few years, maybe 10 times bigger than the current figure."

To date, Toyota boasts the most successful carmaker in Vietnam. It was able to reach the breakeven point a couple of years ago and has remained profitable since. Set up in 1995 with investment capital of US$95 million, Toyota Vietnam built last year a car-stamping factory worth US$7 million to become the first auto manufacturer to introduce such a technology into the country.

The former chairman of VAMA (Vietnam Automobile Manufacturers Association) whose membership include all the 11 car assemblers, said Toyota’s decision to invest in the stamping factory was a "courageous one," even as the factory is running far below its designed capacity. The stamping facilities would be business-efficient only if they produce 20,000 units a year.

Late last year, Toyota Vietnam put new customers on its waiting list when buyers had to wait for two months or more to get their ordered cars. This news was aired by the BBC in its Vietnamese program. At the time, Toyota's sales agents nationwide sold out all Toyotas they received, including samples on display. Its factory based in Me Linh, Vinh Phuc Province, that can produce 30 cars per day, was unable to meet the soaring demand by the turn of the year.

In 2002, Vidamco which assembled Daewoo-branded cars sold 3,719 automobiles (vs. 2,906 cars in 2001). The U.S. Ford Vietnam came third with 3,685 units sold (vs. 1,915 in 2001). Luxury cars by Mercedes-Benz and VMC (which assembles BMW cars) also registered high sales.

The trend was expected to continue this year. In the first quarter, Toyota alone sold close to 1,900 cars trailed by Vidamco and Vinastar with 1,114 and 733 cars sold, respectively. In total 7,315 cars were sold during the first three months of this year (see box).

Tax problems. However, in early 2003, high hopes for a sustainable high growth rate of the automobile industry was dampened by a Ministry of Finance (MOF) decision to raise taxes imposed on cars assembled in Vietnam. In late February, MOF unveiled its new tax rate plan in which import tax for completely knocked down (CKD) component kits would rise to 20%-30% as of April 1, to 50% as of 2004, and 100% in 2005.

More importantly, the 5% special consumption tax (SCT) rate applicable to cars assembled in Vietnam with CKD kits were projected by MOF to soar to 50% in 2004 and 100% in 2005.

Other measures to support the growth of the local car industry  were mentioned, such as permitting the change of functions of cars and boosting infrastructure development. The spokesperson said carmakers had to be responsible for realizing their localization rate commitments stated in their investment licenses. The new policy was expected to spur the growth of the car industry outlined in its development plan for 2010-2020.

Despite authorities' efforts to appease worries, the new decision disgruntled car assemblers and provoked their outcries. They all said the new taxes would hike the prices of locally assembled cars. For instance, the retail-selling price of a Toyota Corolla would skyrocket to US$35,000 apiece, one and a half times compared with the current price, and significantly reduce the market size. The new decision as viewed by the car assemblers would kill Vietnam's entire local car industry

VAMA predicted that the application of the new tax plan would slash sales of locally made cars between 65% and 85%. "Vietnam will lose forever a real opportunity to develop its automotive industry," warns the VAMA.

According to VAMA, the collapse of the local car industry will lead to the unemployment of 5,000 workers and a loss of investment of up to US$500 million contributed by its members.

Reacting to car assemblers' outcries, just two weeks before the new tax scheme became effective on April 1, MOF backed down with an announcement of a temporary suspension. Authorities were "awaiting the Government's final decision on a proposal by automobile assemblers." Meanwhile, VAMA sent its petition concerning the development of the car industry to the National Assembly which is now in session in Hanoi.

In his report presented to Vietnamese lawmakers, Finance Minister Nguyen Sinh Hung revised the ministry's tax roadmap proposed previously.  According to Hung's plan, Vietnam-based car assemblers would enjoy a 70% reduction in SCT until 2004, a 50% reduction in 2005, a 30% reduction in 2006 and zero reduction in 2007.

Why are prices so high and localization rates so low? Currently, Vietnamese have to pay high prices for their cars whether they are imported or locally assembled. A breakdown of the retail-selling price of Fiat Siena, a passenger car assembled by Mekong Auto, may give us some clues.

CBU (completely built up), or imported cars have to bear an import duty of up to 60% of their original price plus a 160% SCT. Although enjoying a 0% value-added tax (VAT), these two taxes alone raise the retail-selling price of imported cars to 320% of their initial price (see box).

Compared with imported counterparts, locally assembled cars have to bear a 5% VAT. However, they have enjoyed a much lower import duty of 20% and even a lower SCT, only 5%. In case of Fiat Siena, whose retail-selling price is [only!] 206% of the original price, costs account for up to 70% of the total price.

In an interview with the local press last year, K. Hagiwara, deputy general director of Vinastar, blamed high retail prices on the small number of cars sold. Car assembly facilities are very costly, he said. Therefore, the cost per unit when making 100 cars is 100 times higher than that for making 10,000 cars.

By comparison, Thailand produces half a million cars, and South Korea makes over 1 million cars a year, while Vietnam produced 27,000 cars last year. Therefore, cost per car in Vietnam is very high, boosting unit prices, asserted Hagiwara.

Hagiwara added that if Vietnam's annual car demand rose to 200,000 units, the fixed costs per unit would plummet. Higher demand would also bolster the local production of parts. Then, production prices of locally assembled cars would be equal to those in Indonesia or the Philippines, with taxes excluded, elaborated Hagiwara. "The demand for cars is the most crucial element for the localization rate and unit prices in the car industry," he said.

According to a Vietnamese expert, almost all carmakers have failed to realize their localization pledged rates. "Carmakers have shown no signs of carrying out big plans to produce kits requiring high technologies," he said. "Producing these parts need huge investment."

Scenarios for the car industry. With the Finance Minister Nguyen Sinh Hung's proposal before the Vietnamese legislature, the worse scenario for the local car assembly business seems to be unlikely. VAMA painted this bleak picture when it said that the imposition of the new tax plan in April would slash the total number of cars to be sold by its members from 27,000 in 2002 to less than 20,000 this year, 5,700 in 2004 and 3,100 by 2005, a situation that will lead to the demise of the industry (see chart).

If the new MoF tax roadmap is approved by the National Assembly, carmakers will have several years ahead to survive. However, the Vietnamese Government will not be able to protect the local automobile market forever as it must comply with AFTA, the ASEAN Free Trade Area. In the competition with regional rivals in Thailand, Indonesia, the Philippines and Malaysia, Vietnam's car industry is the underdog because it was born later, has high production costs, achieves a lower localization rate, gains no export markets and lacks supporting industries, remarked a government official.

Malaysia's postponement of its tax reduction for imported cars may give rise to another scenario. Similarly, the Vietnamese Government may apply for a further delay of tax reduction for imported cars as did Malaysia. This will save some more time for Vietnam-based car assemblers to prepare themselves for open competition.

Several Vietnamese experts back a different scenario. According to them, existing foreign carmakers in Vietnam have focused only on assembling relatively high-priced cars while there is strong demand for cheaper automobiles. Exemplifying the case is that of inexpensive Chinese-made motorbikes which have dominated the market over the past few years.

Experts said there would be a huge market for passenger cars with a capacity below 1,300cc and a price of less than US$10,000. Likewise, carmakers should seek ways to meet the demand for small- and medium-size trucks used in rural areas and inter-provincial buses which replace tens of thousands of cars already in use for several decades.

What will become of Vietnam's existing car industry? The answer is not yet in sight. "In order to chart out a definite future for the industry, Vietnamese authorities and car assemblers should sit together to discuss the most appropriate measures," says Furui, administration manager of Mekong Auto.

 
How many cars sold in first quarter
Last year, Toyota sold 7,335 automobiles of all models. In the first quarter of this year, Toyota alone sold close to 1,900 cars, more than one-third of the total number of cars sold by 11 automobile assemblers in 1996. The first-quarter sales of other carmakers are:
Vidamco                    1,114
Vinastar                        733
Mercedes-Benz               730
Ford                             724
VMC                             689
Visuco                          649
Vidaco                          281
Mekong Auto                240
Isuzu                           228
Hino                             46
Total                        7,315, up 33.9% year-on-year
(Source: VAMA)

Who Buys Cars in Vietnam
The profile of carmakers' customers is switching [away from government sector and] towards private and business owners. A report from Toyota Vietnam released earlier this year shows that the private sector, including individuals and enterprises, accounted for up to 56% of its clientele in 2002, up from 50% in 2001. Last year, 38.2% of the customers who bought a Toyota were State-owned enterprises, 5% less than the 43% mark in 2001. According to local press sources, a similar trend has taken place at other carmakers in Vietnam.

VAMA officials attributed the change to the economic development in Vietnam and justifiable policies by the Government. The trend is expected to continue in the years to come.

How many cars needed
According to statistics by traffic police, by the end of 2001, the number of registered cars in Vietnam was 535,000. With a forecast growth of 12%/year during the 2001-2010 period, the number of registered automobiles in Vietnam will be 1,100,000 by 2010. The number of cars needed in 2010 will be 120,000-130,000 units. Of this, passenger cars account for 45-50%, or 54,000-60,000; commercial cars 50-55%, or 60,000-66,000.


©2003
Saigon Times Weekly, May 24, 2003 (No. 22 in 2003) No.607 since publication began.  
All rights reserved. Please contact Saigon Times for information http://www.saigontimesweekly.saigonnet.vn


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