Vietnam Auto Industry could have Fastest Growth in Southeast Asia, but Challenges Remain

HCMC – According to Vichai Jirathiyut, president of the Thailand Automotive Institute, Vietnam’s automotive industry will have the fastest growth in Southeast Asia over the next 20 years. This growth will be the result of increasing consumer demand, a young workforce, and strong governmental support for the industry.
 
Vichai has predicted that Vietnam’s automotive industry will annually produce 220,000 units by 2020 and 1.5 million units by 2035.
 
Vietnam’s Automobile Manufacturers’ Association (VAMA) has produced similarly rosy numbers. In 2014, there were 157,810 vehicles sold in the country, this was a 43 percent year on year increase. Breaking these numbers further down, there was a 43 percent increase in the sale of personal cars, with 100,000 units sold, and a 42 percent increase in truck sales, with 57,371 vehicles sold.
 
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According to Vietnam’s Ministry of Industry and Trade, the country’s local automotive industry will see a growth rate of 4.4 percent this year, producing 200,000 vehicles.
 
Challenges ahead
 
Achieving this growth may be difficult, however. Many companies are currently reconsidering their Vietnam business strategy in reaction to the ASEAN tax cut roadmap that Vietnam must follow. The ASEAN Trade in Goods Agreement, which will be implemented in 2018, will allow cars to be imported duty-free from other ASEAN countries. This may result in Vietnam becoming increasingly dependent on foreign vehicles as import taxes levied on automobiles will sharply drop or be exempted following the roadmap of tariff reduction commitments resulting from the trade agreement.
 
Vietnam is also battling against the auto industry’s current low localization rate, 10-30 percent depending on the type of vehicle. As a result, when the import tariffs on foreign made vehicles are lowered in 2018, the importation of vehicle parts into Vietnam for assembling will be more expensive than importing completely built vehicles.
 
The Director General of Toyota Vietnam, Yoshihisa Maruta, recently stated that the company may stop manufacturing cars in Vietnam and instead switch to importing cars – this will allow them to benefit taxwise from the ASEAN agreement. Yoshihisa explained that it takes three years to launch a new car model, but the tax rate on imported cars from other ASEAN countries will be reduced to zero percent in 2018.
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Yoshihisa has called upon the Vietnam government to develop a specific support policy for foreign companies, failing this, car manufacturers will be forced to make the financial decision to import cars into Vietnam rather than manufacturing them in country. In March of this year, Toyota had the second highest level of auto sales in Vietnam, with a 29 percent market share.
 
An additional weakness that Vietnam must contend with is the fact that its supporting industries are very weak – if no effort is made to improve this area, foreign auto companies which have already entered the country will start to look to other countries to locate their operations in.
 
Vietnam has much catching up to do when it is compared to neighboring countries such as Thailand and Indonesia, who have much more fully developed auto industries. However, the country seems determined to develop a strong local auto industry. If this industry continues to receive enthusiastic government backing and takes advantage of the country’s young workforce, this strategy could well be successful in the long run.

This article was first published on Vietnam Briefing.

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