Stuck in Neutral: Vietnam's Automobile Industry Policy.

AuthorSchroder, Martin
  1. Introduction

    A plethora of changes is affecting Vietnam's nascent automotive industry. First, customs protection ended as Vietnam opted for closer regional economic integration. Under the ASEAN Economic Community (AEC), completely built-up vehicles (CBUs) can be imported duty-free if they meet the minimum local content requirement of 40 per cent since January 2018. Second, Vietnamese trade policy led to several free trade agreements (FTAs) that will decrease tariffs with a significant number of countries. Vietnam is opening its market beyond Southeast Asia because the recently signed FTA partners are some of the major vehicle producing nafions or regions such as the EU, Mexico (a signatory of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership, or CPTPP) and South Korea. Engaging these leading vehicle producing countries through FTAs implies that compefition will intensify for domestically made vehicles. Third, with the establishment of Vinfast in 2017, Vietnam saw the birth of a domestic, privately owned Original Equipment Manufacturer (OEM). (1) As the start-up carmaker that began car production only in 2019, its impact on the local industry remains speculative at the fime of writing. Finally, due to the global COVID-19 pandemic, domestic production and consumption have been negatively affected.

    Proactive trade policy and desired integration into international production networks thus result in lowering tarilT protection of the formerly shielded industry. Although the automotive industry has long been identified as a subsector that could spur industrial development, Vietnam's vision did not include a strategy to integrate the sector into regional production networks. It also did not clearly assign the private sector as the main engine of growth rather than the state-owned enterprises (SOEs), and there were no concrete implementation measures (Ohno 2009). UNIDO (2019) has identified the automotive industry for policy support as the sector has the potential for creating backward and forward linkages and higher value-added compared to Vietnam's light manufacturing industries. Thus, it is important to examine the policies that are directed for the development of the automotive industry, the extent to which these policies have supported the sector's development, and whether the policies have become better coordinated over time.

  2. Industrialization under Conditions of Globalization

    Despite efforts to industrialize during the centrally planned economy era and continued efforts after economic liberalisation in the late 1980s, Vietnam's manufacturing share of GDP of 16.5 per cent is only slightly larger than that of agriculture (14 per cent) in 2019 (World Bank 2020). If one accounts for the large share of the population working in agriculture, Vietnam can still be characterized as an agrarian country (Riedel 2015). Regarding automobile production. Auto Hoa Binh was founded in 1951, but it focused on military vehicles during the centrally planned economy era. As in many other industrial sectors, Vietnam's automotive industry was basically born in the middle of the 1990s after the government granted licences to foreign carmakers. As the country was an untapped market that was highly protected through tariffs, many original equipment manufacturers (OEMs) rushed to this market either by setting up their own plants or by relying on contract assembly. There were eleven different plants producing sixteen different brands with a combined annual production capacity of roughly 85,000 units by 1998 (Sturgeon 1998). This proliferation of brands and models, coupled with low annual production capacities (2) of individual plants, offered limited opportunity for local firms to become suppliers. (3) To make matters worse, total installed production capacity increased to roughly 150,000 units per year of which only 18 per cent was utilized in 2002 (Van Ho 2007). The highly fragmented automobile production structure is retained up to this day.

    Recently, production capacity has further expanded, largely due to (re)entry of other brands. Production increased from 26,706 in 2002 to 224,894 units in 2019 according to data from the Vietnam Automobile Manufacturer's Association (VAMA). This excludes Hyundai, which is not a VAMA member. Sales increased from 50,000 to 385,461 units during the same period according to VAMA. Currently, several carmakers continue to expand production capacity in anticipation of further market growth (Table 1).

    Most OEMs that have expanded their capacity significantly have ties with local private enterprises. (4) Hyundai produces in a joint venture with the Thanh Cong conglomerate, Kia and Mazda use THACO as their assembler, and industry newcomer Vinfast is a subsidiary of the Vietnamese Vingroup conglomerate. While production capacities have been further increased, they are still rather small by regional comparison (Schroder 2017). Notably, OEMs which have invested in capacity expansion have either no other significant production base in ASEAN (as in the case of Hyundai and Kia) or a relatively small production base in the region (Mazda). For Korean brands, it appears that they not only seek a significant share in a rather large domestic market that stands on the brink of motorization (5) but also intend to utilize Vietnam as their main regional production and export hub. This may explain why Hyundai aims to expand capacity to 100,000 units in 2020 and a further expansion to 170,000 units by 2025.

    Automotive industry development in Vietnam did not enjoy tariff protection for a long time, especially compared to other Southeast Asian countries such as Indonesia, Malaysia, the Philippines and Thailand.

    After Vietnam's accession to WTO in 2007, many protective measures could no longer be deployed for industrial development. Vietnam also actively engages in regional and global integration of its economy via commitments under the AEC and a few selected recent FTAs such as the Vietnam-European Union (EU) FTA, Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) and Vietnam-Korea FTA (VKFTA). The partner countries or regions are major global vehicle producers. With decreasing tariff barriers, low domestic production volume, Vietnam is arguably endangered by the higher production volume in FTA partner countries. However, lowered tariff barriers may allow Vietnam to integrate into global value chains (GVCs) by leveraging its comparative advantage in labour-intensive parts production. The aforementioned production capacity expansion of certain OEMs may indicate that Vietnam could even become a vehicle production and export hub if its supplier industry is sufficiently developed. Overall, it should be emphasized that Vietnam's automotive industry basically represents a case of industrialization under conditions of economic globalization. This is not exceptional as other industries such as textiles, garments and electronics have also developed under similar conditions (Tran and Norlund 2015). (6)

    Despite these adverse conditions, it is somewhat surprising that a domestic, privately owned carmaker with global ambitions was recently established. Vinfast was founded in 2017 and started production in 2019. To achieve industry entry at such lightning speed, Vinfast heavily relied on foreign know-how--its first three models are based on outdated platforms of BMW and General Motors-Opel. Currently produced models are basically batch-engineered cars that are only differentiated from the originals by cosmetic modifications. While this is parallel to the case of Malaysia's Proton, it appears to differ from Proton in certain regard.s--as Vinfast received little to no preferential government treatment and protection beyond the standard incentives provided for other OEMs. (7) What is also remarkable about Vinfast is that the carmaker seeks to position itself as a premium brand. Further, while current models all use conventional internal combustion engine technology, future models will be electric vehicles (EVs). In January 2021, Vinfast announced plans to produce three SUV models (Table 2). (8) The carmaker claims that all three vehicles have been developed in-house, that is, based on its own new platform. While this cannot be verified at the time of writing, it can only be stated that this would be a remarkable achievement. Apparently, these new models could spearhead Vinfast's entry to international markets, as customers in Australia, Canada, the EU and the US can pre-order these cars.

    Vinfast's EV ambitions faces several challenges. First, the government has only recently started to conduct a feasibility study on EV adoption and promotion in Vietnam (Nguyen 2018). In this endeavour, the government cooperates with Mitsubishi Motors. One initial result of cooperation was the creation of Vietnam's first EV charging stations with one in Hanoi on the grounds of the Ministry of Industry and Trade, and one each in Da Nang and Hoi An in Quang Nam prefecture. The latter two are part of a cooperation among Mitsubishi Electric, the University of Da Nang and Central Power Corporation, a subsidiary of Vietnam Electricity, which aims at training technical personnel and production of charging stations. Second, the absence of charging infrastructure effectively limits the driving range and utility of these vehicles. As the government has not yet decided on any concrete EV policy, it is doubtful whether Vinfast's strategy to succeed as an EV carmaker domestically can be successfully implemented in the foreseeable future. The final and probably most important reason for scepticism is less rooted in doubts over government policy or Vinfast's capability to produce EVs, but in economics: EV models' sales price is still at least US$5,000 higher than that of a similar sized conventional car. Since Vietnam's per capita GDP is still below US$3,000, it is unlikely that such vehicles will meet...

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