Car price tug of war: Buy or wait?

The Vietnamese auto market in 2017 is like a tug of war with the starting point being the story of retail prices. And when the psychological price knot of consumers is removed, the market in the second half of the year will develop positively.

Illustration.

Psychological tug of war, market ups and downs

The Vietnamese automobile market has never been as unstable as it has been in the first half of this year. Looking at the purchasing power of automobiles on a monthly basis, it is quite clear that the continuous fluctuations have created a sine-shaped graph with one month of increase followed by another month of decline.

There is not much to say about the first two months of the year. This is always the quietest time of the year for the market. The reason is either because of the long Lunar New Year holiday, or because consumers have had enough shopping needs met before Tet.

By March, when the above reasons were put aside, the market immediately increased its purchasing power. According to statistics from the Vietnam Automobile Manufacturers Association (VAMA), total sales volume in the entire market in March 2017 reached 26,872 units, an increase of 52% compared to the previous month and an increase of 8% compared to the same period in 2016.

It is not difficult to understand this acceleration. When the wheel of a new year with the need for travel and business officially operates, the demand for buying cars increases again, which is not surprising.

Another “obvious” reason is that the import tax rate on completely built-up cars from countries in the Southeast Asian region according to the roadmap of the ASEAN Trade in Goods Agreement (ATIGA) has been reduced to 30%.

However, the following month, car purchasing power suddenly dropped in a surprising way. VAMA’s report showed that the total number of cars sold in the entire market in April 2017 decreased by 18% compared to the previous month and also decreased by 15% compared to the same period last year.

By May, total car purchasing power recovered with a growth rate of 6% compared to April.

The main reason for the continuous fluctuations in car purchasing power in the market in the first half of this year is the unstable psychology of consumers.

Shopping demand is still high. However, many consumers are waiting for a “storm” of discounts that is expected to start happening as soon as 2018 begins.

Specifically, according to the roadmap of the ATIGA agreement, from January 1, 2018, the import tax rate for completely built-up (CBU) cars from ASEAN countries will officially decrease to 0%. According to the common reasoning of many people, with a 0% tax rate, the retail price of cars from next year may decrease sharply.

Buy now or wait?

However, reality does not seem to follow that reasoning.

The 0% tax rate for CBU cars imported from ASEAN countries since January 1, 2018 is a clear regulation. But the problem is that not all cars manufactured in this region, specifically Thailand and Indonesia, will automatically enjoy that tax rate.

Specifically, according to the regulations of ATIGA, to enjoy a 0% tax rate, car models must achieve a localization rate within the ASEAN bloc of 40%. The key point is that not many car models produced in ASEAN member countries meet this regulation.

This is probably also one of the important reasons why, despite knowing the tax reduction roadmap, car manufacturers are still not really active in importing cars from ASEAN. For example, with only a 30% tax rate applied this year, much lower than the import tax rates from countries outside the ASEAN bloc, if many car models are switched from domestically assembled (CKD) to imported, the cost of cars will decrease significantly and from there, sales revenue will increase.

According to VAMA data, in the first half of this year, the proportion of imported cars from Thailand and Indonesia in the total sales volume of member units only accounted for about 22.3%. Notably, among them, pickup trucks alone accounted for 25%. This type of vehicle is currently subject to a 5% tax rate, so in 2018, the impact of the import tax adjustment on the selling price will not be much.

Not to mention, it is possible that some other taxes and fees applied to automobiles will also be adjusted in the near future.

For example, according to Decree 140/2016/ND-CP on registration fees of the Government, from 2018, localities can increase the registration fee for passenger cars with less than 10 seats from the current 10% to 15%. For Hanoi, the current registration fee of 12% can also be adjusted to 17-18%. At this time, some localities have also begun to consider adjustment options.

Even for pickup trucks, which currently enjoy an import tax rate of 5% and a registration fee of 2% (equivalent to trucks), the Ministry of Industry and Trade is proposing to apply the same fee rate as passenger vehicles with less than 10 seats. In addition, the Ministry of Industry and Trade also proposed that the Government submit to the National Assembly an adjustment in the special consumption tax policy for pickup trucks similar to passenger vehicles with less than 10 seats.

It should also be noted that even for the few models that can enjoy a 0% tax rate when imported from Thailand and Indonesia, import tax is only a part of the retail price. Along with import tax, there are a series of other taxes and fees that directly affect the selling price such as special consumption tax, value added tax or registration fee.

Obviously, the prospect of car price reduction thanks to import tax reduction under ATIGA since 2018 is not very optimistic, at least the discount rate. Meanwhile, due to the hesitation of many consumers, since the beginning of this year, car manufacturers have simultaneously launched strong discounts and incentives for cars in the popular segment.

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

Up to this point, it can be said that the Vietnamese automobile market has experienced an unprecedented widespread price reduction in the popular car segment. Most car manufacturers, in one way or another, have implemented price reductions or incentives for consumers. Many car models, since the beginning of the year, have had their retail prices reduced by hundreds of millions of VND.

According to VAMA representative, the retail price of most popular cars in Vietnam is now close to the regional average.

For the luxury car segment, most luxury car models are currently manufactured and imported directly from Japan, Europe or the US, so they will not enjoy a 0% import tax rate. The import tax rate applied to these car lines according to the free trade agreements signed between Vietnam and Japan/Europe will be relatively stable in the next 5 years.

Market developments are showing that this is a good time for consumers to buy cars instead of waiting until 2018. In fact, car prices are currently low, car manufacturers are also offering many incentives on gift accessories or support for registration fees. Meanwhile, the possibility of price reduction thanks to tax reduction for cars imported from Thailand and Indonesia is not much.

At the same time, the psychology of waiting until 2018 to buy a car in the worst case scenario will lead to a mass effect, overloading the supply capacity, customers may have to wait a long time to receive the car. At that time, car buyers in 2017 seem to be the ones who benefit from being "a step ahead".

According to Duc Tho/vneconomy