Automobile industry development - a hard nut to crack
Whether or not a product gains a firm foothold in the market relies heavily on the formulation of its development strategy. Yet, incorrect forecasts about the automobile industry in Vietnam have taught the country a valuable lesson.
In 1997 the Ministry of Industry and Trade formulated a national strategy for the automobile industry for 2010-2020, with a vision for 2030, in the hope of developing a key economic sector. The industry has since received a lot of incentives from the government to realise the target.
|Automobile industry development - a hard nut to crack
To this end, Vietnam rolled out the red carpet to welcome global giants such as Fiat, Sangyong, PMC, BMW, Mazda, GM Daewoo, Daihatsu, Toyota, Honda, Isuzu, Ford, Hino, Mercedes-Benz, Mitsubishi and Suzuki.
It hoped that these leading automobile manufacturers would transfer advanced assembling and production technology to Vietnam, aiming to raise the local content rate in its products to 60 percent in less than 20 years and 100 percent in the following years.
However, nearly 20 years have passed and Vietnam has yet to achieve its target. By 2010 the local content rate of less than 9-seat sedans was just 15 percent, much lower than the projected 50 percent. Similarly, the rates of more than 10-seat sedans and trucks were 30-40 percent compared to the set target of 60 percent.
In addition, leading automobile joint venture companies such as Honda, Toyota, BMW, Mercedes and Ford have to date imported accessories for assembling.
The domestic automobile industry is under mounting pressure from the import of complete knock-down (CKD) units, because import-export tariffs on CKD products will be slashed to zero percent as of 2018 under the ASEAN free trade area (AFTA).
Paradoxically, the government, on the one hand, plans to develop the automobile industry substantially to increase the number of car owners, and on the other hand, aims to limit individual transport by imposing the special consumption tax and raising registration fees on cars. As a result, Vietnamese people’s dream of possessing “Made-in Vietnam” cars is a long way from coming true.
Former Minister of Trade Truong Dinh Tuyen attributed the paradoxical situation of the automobile industry to errors in formulating the strategy.
“I myself do not understand what we need from our automobile industry,” he confided.
A setback in strategy
Vietnam is said not to have made any breakthrough in the automobile industry, although this product is highly competitive, brings in high profit, and has a big market demand.
Vietnam has some advantages in developing an advanced automobile industry, a dream that has taken many countries tens or even hundreds of years to realise. That’s why it aimed to manufacture Made-in Vietnam cars when formulating this strategy.
"If we want to develop this industry, tax protection is not the only instrument to use, because Vietnam has been selected by foreign investors as an investment venue for low production costs, not tariff barriers," said Tuyen.
"To develop it in Vietnam, we have to seek to reduce production costs to the lowest possible levels to increase competitiveness," he said.
Tuyen also pointed out that Vietnam’s automobile development strategy is not clear. “On the one hand we want to develop the industry and on the other hand to limit the number of cars hitting the road due to poor infrastructure,” he said.
“This is shallow thinking. We should have invested in infrastructure more than 10 years ago. The situation would be different if we had done so. Instead, the state has poured money into building seaports and airports,” said Tuyen.
Vo Tri Thanh, deputy director of the Central Institute for Economic Management, recalled Japanese experts’ advice that Vietnam should develop motorcycle manufacturing, judging from the country’s conditions, including local people’s average incomes and available infrastructure.
Falling on deaf ears, Vietnamese policymakers want to deliberately develop the automobile industry on a par with regional levels.
Thanh confirmed that the safeguarding measure -based automobile industry model is something of the past, dating back to the 1960s, and to develop such an industry requires technoloagy transfer and scale advantage.
China is a case in point. When the country joined the World Trade Organisation in 2001, its automobile industry was thought to face bankruptcy. Against the forecast, the industry has grown and flourished and even reached out to the wider world thanks to technology transfer and scale advantage.
While Vietnam has yet to secure the scale advantage, it should be part of the value chain of automobile giants to take advantage of their regional and global scale, Thanh suggested.
To have an advantage of scale, Vietnam must have high GDP per capita and good infrastructure – the two conditions out of its reach at the moment.