Tax policy is "squeezing" the desire to localize cars

Localities want to collect more taxes quickly, so investing in assembling and importing complete cars is encouraged more than investing in production.

High cost and risk are the reasons why automobile businesses are not interested in investing in localization in Vietnam.

If the investment in localization reaches 50%, it will take 5 years to start paying value added tax and it will take at least 5 more years for brand building and product marketing to reach the break-even point and from the 12th year onwards, tax payments will increase. That is the reality commented by Mr. Bui Ngoc Huyen, General Director of Xuan Kien Automobile Company in a letter to senior leaders.

According to Mr. Huyen's calculation, to have an output of 100,000 vehicles/year with 5-8 seat passenger cars, engines under 1,800 cc and a localization rate of 50%, it is necessary to invest about 350 million USD (equivalent to 7,385 billion VND). This investment level is to build factories and invest in related equipment, such as a metallurgical foundry for mold casting (300 billion VND), a mold processing factory equipped with a machining center, high-tech milling machines using modern software (1,000 billion VND), a stamping factory including 3 automatic stamping lines with robot assistance and 50 stamping machines with a force of 100 - 2,000 tons (1,200 billion VND)... In addition to capital for this fixed asset, about 2,000 billion VND of working capital is also needed.

Mr. Huyen said that if by the 10th year, the factory's capacity is 80%, which means 80,000 vehicles/year, the revenue will only reach 20,000 billion VND (about 250 million VND/vehicle) and the tax payable will be about 7,000 billion VND/year. "Meanwhile, if we only assemble and import complete cars like the best selling company at present, Toyota Vietnam, with about 23,000 vehicles in 2013, the amount of tax that the company can pay will be more than 10,000 billion VND/year," Mr. Huyen said.

With the fact that businesses pay a lot of taxes to the budget, are rewarded and commended, and especially the current tax policy allows localities to retain 40% of revenue from value added tax, it is not difficult to understand why localities encourage businesses to import complete or simply assembled cars.

However, along with these immediate benefits, the story of using labor, reducing trade deficit, promoting available resources without exporting raw resources, or reducing prices for consumers, as well as the sustainability and longevity of the manufacturing industry and supporting industry are not much discussed and are also raised by businessmen who are passionate about the automobile industry in particular and industrial development in general.

In fact, the current import tax on spare parts and components is only 0-5%, which Mr. Huyen also considers a great competitive advantage, among the lowest in the world, causing foreign auto companies to only assemble and import complete vehicles. Meanwhile, investing in localization in Vietnam will take 10 years to see results, and even the risk is too great.

From his experience in making cars, Mr. Huyen said that if we invest in high technology for design, casting, mold processing, stamping, welding, cutting, painting, testing, we can achieve 39% localization. If we add the sub-chassis system, fuel tank and some other details, we can achieve more than 40%. Other spare parts such as tires, rims, seats, glass, batteries, lights are worth about 10-12% of a car.

However, in reality, foreign-invested automobile companies are not interested in investing in molds and car body manufacturing because it is expensive. Training engineers to undertake design also takes decades. Therefore, while the Vietnamese market is still small and output is low, automobile companies bring car bodies from abroad to Vietnam for assembly with almost 0% tax.

According to statistics from the General Department of Customs, as of May 15, 2014, 8,747 completely built-up cars with less than 9 seats were imported into Vietnam out of a total of nearly 18,000 completely built-up cars of all kinds imported. The number of imported cars with less than 9 seats also increased by about 30% compared to the same period last year. The reason is said to be that the import tax on completely built-up passenger cars from the ASEAN region is only 50% compared to the level of more than 70% in 2013.

According to VnEconomy