Why Vietnam’s auto industry never stepped on the gas

By Bui Sinh   October 15, 2018 | 06:49 pm PT
Why Vietnam’s auto industry never stepped on the gas
Car making projects in Vietnam have been around since the 90s, but the industry has not really lifted. Photo by VnExpress/Ngoc Thanh
Vietnam’s auto industry has suffered from rewards not being connected to production and the neglect of domestic suppliers.

It is evident that while joint ventures have continually received financial support and incentives without developing production, domestic suppliers have been ignored.

In this context, the emergence of VinFast – the year-old auto-making subsidiary of Vietnamese realty and retail giant Vingroup – is being seen as a keystone element in the development of the Vietnamese auto industry.

Standing alongside Vingroup are major incumbents, like Truong Hai Auto Corp and Hyundai Thanh Cong. Although it seems the right time has come for Vietnam’s car industry to move to a new level, the industry has failed to take shape for the last 20 years.

Car making projects in Vietnam have been around since the 90s. Production was first undertaken by the Hoa Binh (Vietnam Motors Corporation-VMC) and Mekong Auto Corporation in the form of business cooperation contracts (BCC) with other automobile manufacturers.

VMC assembled and manufactured different product lines for BMW, Mazda and Kia, while Mekong produced for Fiat and Ssangyong.

Subsequently, foreign companies began to invest in Vietnam in the form of joint ventures, like Toyota, Honda, Daihatsu, Ford and Mercedes.

The developmental strategy for the first stage of the industry was clear: attract FDI, create jobs, and create a favorable environment to nurture local producers of materials needed to produce cars.

The social rationale for this strategy was also to use the projects to provide growth opportunities for low-income provinces such as Vinh Phuc and Hai Duong.

At that time, even though consumption was primarily in the south of Vietnam, most manufacturers were located up north. To protect the fledgling joint ventures, which primarily manufactured CKDs (completely knocked down cars, to be assembled by the buyer), the government enforced a protectionist policy, closing the market for imported CBUs (completely built up cars).

In the early 2000s, tariffs on imported CBUs were very high, at 120 percent. This rate was reduced to around 60-80 percent after Vietnam joined the WTO in 2007; and it was to be further lowered pursuant to the ATIGA trade agreement's reduction schedule.

2018 is the first year in the schedule where imported cars of ASEAN origin (C/O form D) are subject to zero percent tariffs.

Since the Common Effective Preferential Tariff (CEPT) agreement was signed between ASEAN countries in 1992, car manufacturers have been forced to reconsider the strategy of producing and consuming cars within this region.

With Vietnam's accession to ASEAN, a country with a large population and unrealized market potential, car makers revised their long-term business strategy, reducing CKD production and moving towards 100 percent importing of CBUs from other countries in the region.

The only manufacturing hope lay with Korean firms Kia and Hyundai, both of whom had just begun to establish production and consumption in the Vietnamese market.

The emergence of Vietnam’s first home-made brand, VinFast, is a notable step forward, but it is still far too early for this to mean anything.

A strategy that failed

The strategy of using FDI to foster growth of the auto industry and increase localization has not been successful. Why?

A new car must go through a rigorous testing process by the manufacturer and the relevant independent accreditation bodies. Therefore, manufacturers are very careful when choosing components for their car models. Original Equipment Manufacturing Suppliers (OEM), otherwise known as parts suppliers, are selected at the development stage of the model, long before the car is introduced to the market.

Each vehicle has a Homologation Document that contains a complete set of vehicle assembly information. This kit must be approved by an independent body after testing, prior to the issuance of a Vehicle Type Approval. Compliance with technical documentation is compulsory to ensure quality and safety of the car.

Because Vietnam’s auto market is small and production is predominantly in CKD form, models are usually introduced to the markets one to two years late. This makes it impossible to change component suppliers. There have been many cases of joint ventures in Vietnam suggesting replacement of components with those sourced from inside the country, but not getting the parent company’s approval.

The Kia models sold in Vietnam are a good example. They run on Continental tires from Germany instead of Kumho, a Korean brand produced locally.

In 2006, import taxes on CKD cars were restructured. Instead of being taxed per whole kit, the tax was levied on individual components to make it more favorable for manufacturers who source components locally. Despite this, the localization ratio has not increased as desired by policy makers.

According to statistics compiled by McKinsey & Company, components sourced overseas make up 55 percent of the total cost of a car. Manufacturers cannot achieve the 40 percent localization rate required by the ATIGA trade agreement if the supply source is not available.

Because of the failed developmental strategy for domestic manufacturers, Vietnam is instead becoming a market for major production centers based in Thailand and Indonesia.

Over a long time, policies and resources have been poured into automotive joint ventures, but OEM Suppliers are key players in shaping the game. Most companies in the list of the 100 largest OEM suppliers are from Japan, Germany or the United States.

While China is the largest market for automobile production and consumption, accounting for 30 percent of the world market, only two companies make the above list, mainly producing aluminium chassis components.

So how can any real change happen?

If local OEMs, not joint ventures, receive these huge resources and are facilitated to build factories in Vietnam, then the production and business strategies of automakers in the ASEAN region might not be what they are now.

*Bui Sinh is an expert who had held senior positions in several luxury car companies in Vietnam, including Mercedes and Volvo.

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