The "chase" of policy in Vietnam's auto industry

"In a few years, until 2018, when import tax from ASEAN will be 0%, will you continue to assemble or switch to importing?", a journalist asked Toyota Vietnam's leadership at the launch of a new car model in late 2015. The answer from General Director Yoshihisa Maruta at that time was that Toyota always wanted to assemble more cars in Vietnam, but when import tax is 0%, assembled cars will have difficulty competing with imported cars, so "we hope the government will have timely support policies".

Waiting anxiously for policy

Mr. Maruta's cautious and ambiguous response to the media shows the companies' passivity in their long-term strategic plans. Toyota wants to assemble, but that depends not only on Toyota, but also on the Government. Toyota and other FDI car companies maintain the mindset that assembling not only creates more affordable cars, but also solves the macro problems of income and employment.

Having a similar view, Mr. Pham Van Dung, General Director of Ford Vietnam, is more practical and strict, true to the character of someone who rose from being a CFO. In a meeting with the press at the end of that year, he said that assembly is always the priority, but business efficiency is the most important. That means, if importing brings higher profits, the company will switch to importing.

Throughout 2015-2016, the question "assemble or import" appeared everywhere, not only with experts but also with customers. Companies were so afraid of having to answer questions about policies that before the Q&A session at press conferences, the MC would say "Please only ask about products, we will discuss policy issues at another event".

In fact, an internal source from Toyota said that as soon as the CEO answered the press's questions, the company considered switching to imports. Shortly after that, in early 2016, information about the new Fortuner being imported, possibly from Thailand, spread quickly in the market. At the end of 2016, the company actually imported the Fortuner, but from Indonesia.

At the same time Fortuner appeared, Honda introduced the imported Civic. The two largest exhibitions, Vietnam Motor Show and Vietnam International Motor Show, were flooded with imported cars. Experts thought of the prospect of the market being dominated by imported cars. Mr. Vu Quang Tam, Deputy General Director of Honda Vietnam at that time, revealed that the companies would eventually switch to importing, only producing a few models with good sales. For Honda, it was City, for Toyota, it was Vios and Innova.

The remaining FDI companies in the industry are rushing to import, confident because imported cars have a good chance of winning. Suzuki added Ciaz, Isuzu added mu-X, Mitsubishi introduced new Outlander and Pajero Sport. Not imported from ASEAN but in the same line are Ford Explorer (from the US), Chevrolet Trax (from Korea).

At the same time, in the opposite sector of the industry, Hyundai Thanh Cong and Truong Hai decided to go against the flow, investing in assembly. In the second half of 2016, Truong Hai started to focus more on price, CX-5 and Mazda3 created a big gap compared to competitors. VAMA hopes that when entering 2018, reducing car prices will no longer be Truong Hai's sole advantage.

But import tax alone is not enough, the government has many tools to intervene in car prices to change the situation. Prioritizing assembly, 2018 is the time of domestic giants.

Vietnamese companies benefit from the policy

VAMA has appealed to the Prime Minister four times to review Decree 116, possibly extending the deadline or changing the regulations accordingly. All have received no response. Decree 116 has been in effect for more than 10 days, but there are no guiding circulars from relevant ministries, leaving the legal gap leaving airlines at a loss for what to do.

Previously, VAMA also made frequent recommendations. For each new policy, the Association only made one recommendation to have the weight of adjustment, because at that time VAMA's voice and influence dominated the industry. But now Truong Hai and Thanh Cong are rising more strongly, and in line with the Government's assembly orientation, so they have the ability to turn the situation around. These two companies also showed full support for Decree 116 to provide high-quality, clear-origin vehicles and increase responsibility for importers. The Ministry of Transport also said that the new regulations are to create equality between importers and assemblers. The representative of the Government, Minister and Head of the Government Office Mai Tien Dung affirmed that the Decree is protecting foreign manufacturers, not just Vietnamese manufacturers.

When the joint ventures have presented enough arguments to prove that the policy is disadvantageous to them, the policy makers have rejected it. Experts are concerned that VAMA's efforts will reach a dead end, and when "heaven does not accept the earth, the earth will have to accept the heaven". Importers are looking for ways to bring this issue to the exporting country to issue a Type Approval Certificate, only then can they import cars.

"If we start now, we will have the papers by mid-2018 if everything goes smoothly," said a Honda representative. With many companies making the same request, Thailand will likely have to amend its regulations to be able to export cars to Vietnam.

On January 9, after announcing a new price of 160 million higher than expected, the CR-V became the first victim of the conflict between import and assembly. Fearing that it would not be able to clear customs in early 2018, the Japanese car company had to clear customs in 2017 and pay a 30% import tax.

Honda imported the CR-V to take a shortcut in 2018 with the hope of reducing the price to compete with the CX-5, but when Honda calculated to run one step faster, it ended up missing the mark. Now the CR-V is not cheaper than before, but on the contrary, it is the most expensive and the only imported car in the segment. Even pure import companies like Mitsubishi have switched the Outlander to assembly.

Returning to assembling the CR-V is impossible for Honda, at least for the next few years, not to mention the cost of importing the production line, which is up to hundreds of millions of USD.At this point, assembly has the brightest future. Not only meeting domestic demand, the big guys also aim for export.

If it is possible to do assembly, why has the Vietnamese auto industry been sluggish for decades, still like a child that refuses to grow up?Industry experts say this comes from two reasons: Overlapping and inconsistency in policies and internal business networks of companies.

The government wants to develop the automobile industry but considers this vehicle a luxury product that needs to be limited. Without a strong enough market, the company does not have the confidence to invest money when the capital recovery period is long and the efficiency is low. If the market capacity can be increased, that will be the motivation for the company to increase assembly.

"But even if the market has enough quantity to invest in assembly, FDI companies are not very interested," an analyst said. Compared to Thailand, production costs in Vietnam are higher, the scale is smaller, and it is difficult to export back. Companies already have large factories in Thailand and Indonesia, and if needed, they can just import cars to sell. Without business efficiency, there will be no motivation to change.

This is the difference that creates advantages for Truong Hai and Thanh Cong.Mazda, Kia, Hyundai do not have large-scale factories in Southeast Asia. The opportunity to produce for export is vast, the remaining task is to produce as cheaply as possible. If you want cheap, the policy must support it.

In 2017, Decree 116 (tightening imports) and Decree 125 (zero component tax) both left imported cars unprepared, not to mention the proposal to exempt special consumption tax, if realized, would be a blow to a competitor that was gradually weakening. As for VAMA, when surprised by the rise of its competitor, it also lost its power to control and gradually lost confidence in the stability of the policy framework.

The business war is always decided by the strong. To be "front and back", first of all, it must be really big and in line with the industry's orientation. Decree 125 is effective for 5 years 2018-2022, a period long enough for Truong Hai and Thanh Cong to increase domestic value content, reduce vehicle prices and become the leaders of the game. After 2022, these giants can lower prices without the help of 0% import tax on components.

As for joint ventures, the import option, which used to be the only way forward, is now facing a difficult road. Returning to the assembly path or accepting to continue is a bumpy road with many fluctuations, depending on the potential and strategy of the parent company and the level of preference of Vietnamese customers.

Duc Huy