Car price competition: Buy or wait?

The Vietnamese automotive market in 2017 is like a tug-of-war, starting with the issue of retail prices. And once the psychological barrier of price for consumers is removed, the market will develop positively in the second half of the year.

Illustration.

Psychological conflict, market fluctuations.

The Vietnamese automobile market has never been as unstable as it has been in the first half of this year. Looking at car sales figures on a monthly basis, it's quite clear that the continuous ups and downs have created a sinusoidal graph, with one month of increase followed by one month of decline.

The first two months of the year don't offer much to talk about. This is always the quietest period of the year for the market. The reason is either the extended Lunar New Year holiday, or consumers have already had their shopping needs met before the holiday.

By March, with the aforementioned reasons no longer relevant, the market immediately saw a surge in purchasing power. According to statistics from the Vietnam Automobile Manufacturers Association (VAMA), total sales across the market in March 2017 reached 26,872 units, an increase of 52% compared to the previous month and an 8% increase compared to the same period in 2016.

This surge is not hard to understand. As the new year begins with the official start of travel and business activity, the increase in demand for cars is not surprising.

Another "obvious" reason is that the import tax rate on completely assembled cars from Southeast Asian countries has been reduced to 30% under the ASEAN Trade in Goods Agreement (ATIGA).

However, in the following month, car sales unexpectedly declined. According to VAMA's report, total car sales in April 2017 decreased by 18% compared to the previous month and also by 15% compared to the same period last year.

By May, overall car sales had recovered, with a growth rate of 6% compared to April.

The main reason for the fluctuating demand for automobiles in the market during the first half of this year is the unstable consumer sentiment.

Demand for shopping remains high. However, many consumers are anticipating a "storm" of price reductions that are expected to begin as soon as 2018 arrives.

Specifically, according to the ATIGA agreement's roadmap, from January 1, 2018, the import tax rate on completely built-up (CBU) automobiles from ASEAN member countries will officially be reduced to 0%. Many people assume that with a 0% tax rate, retail car prices could drop significantly starting next year.

Buy now or wait?

However, reality seems to contradict that reasoning.

The 0% import tax rate on CBU (completely built-up) cars imported from ASEAN countries since January 1, 2018, is a clear regulation. However, the problem lies in the fact that not all cars manufactured in this region, specifically Thailand and Indonesia, will automatically benefit from that tax rate.

Specifically, according to the ATIGA regulations, to qualify for a 0% tariff rate, vehicle models must achieve a localization rate within the ASEAN bloc of at least 40%. The key point is that not many vehicle models manufactured in ASEAN member countries meet this requirement.

This is perhaps one of the important reasons why car manufacturers, despite being aware of the tax reduction roadmap, are not really proactive in importing cars from ASEAN. For example, with the 30% tax rate currently applied this year, which is much lower than import taxes from countries outside the ASEAN bloc, if they switched many car models from domestic assembly (CKD) to import, the cost of cars would decrease significantly, and consequently, sales revenue would increase.

According to VAMA data, in the first half of this year, the proportion of cars imported from Thailand and Indonesia to the total sales volume of member companies accounted for only about 22.3%. Notably, pickup trucks alone accounted for 25% of that total. Since this type of vehicle currently enjoys a 5% import tax rate, the impact of import tax adjustments on selling prices in 2018 will not be significant.

Furthermore, it cannot be ruled out that some other taxes and fees applied to automobiles will also be adjusted in the near future.

For example, according to Government Decree 140/2016/ND-CP on registration fees, starting in 2018, localities can increase the registration fee for passenger cars with fewer than 10 seats from the current 10% to 15%. In Hanoi, the current 12% registration fee could also be adjusted to 17-18%. At this time, some localities are also beginning to consider adjustments.

Even pickup trucks, which currently enjoy an import tax rate of 5% and a registration fee of 2% (equivalent to trucks), are being proposed by the Ministry of Industry and Trade to be subject to the same fees as passenger vehicles with fewer than 10 seats. In addition, the Ministry of Industry and Trade is proposing that the Government submit to the National Assembly a proposal to adjust the special consumption tax policy for pickup trucks to be similar to that of passenger vehicles with fewer than 10 seats.

It should also be noted that, even with the few car models that may benefit from a 0% import tax rate from Thailand and Indonesia, import tax is only one component of the retail price. Along with import tax, there are a series of other taxes and fees that directly impact the selling price, such as excise tax, value-added tax, and registration fees.

Clearly, the prospect of lower car prices due to reduced import taxes under ATIGA since 2018 is not very promising, at least in terms of the percentage reduction. Meanwhile, due to the hesitation of many consumers, since the beginning of this year, car manufacturers have simultaneously launched aggressive price reductions and incentives for models in the mainstream segment.

Leading the price reduction trend is Thaco (Truong Hai) with its two major market share brands, Mazda and Kia, where the prices of many models are even lower than in some Southeast Asian markets. A series of other major car manufacturers are also actively participating in price reductions and promotions, such as Toyota, Honda, Ford, Hyundai, Nissan, Mitsubishi, and even imported car brands like Volkswagen, Renault, and Peugeot…

At this point, it can be said that the Vietnamese automotive market has experienced an unprecedented wave of price reductions in the mainstream car segment. Most car manufacturers, in one way or another, have implemented price cuts or incentives for consumers. Many models have seen their retail prices drop by hundreds of millions of dong since the beginning of the year.

According to VAMA representatives, the retail prices of most popular car models in Vietnam are now close to the regional average.

For the luxury car segment, currently most luxury models are manufactured and imported directly from Japan, Europe, or the United States, and therefore do not benefit from the 0% import tax rate. The import tax rate applied to these car models under the free trade agreements signed between Vietnam and Japan/Europe will remain relatively stable for the next 5 years.

Current market developments suggest that now is a good time for consumers to buy a car instead of waiting until 2018. In fact, current car prices are low, and car manufacturers are offering many incentives such as free accessories or support for registration fees. Meanwhile, the likelihood of further price reductions due to lower import taxes from Thailand and Indonesia is slim.

At the same time, the mentality of waiting until 2018 to buy a car in the worst-case scenario will lead to a herd mentality, overwhelming supply capacity, and customers may have to wait a very long time to receive their vehicles. In that case, those who bought cars in 2017 would likely be the beneficiaries for being "one step ahead".

According to Duc Tho/vneconomy