Automobile market full of potential but short on policies
Vietnam’s automobile market has great potential for development. However, such potentials are promoted only when automobile prices are raised to the common level of the region and the world, which much depends on the government’s policies.
Automobile sales in Vietnam have strongly recovered after many months of sluggishness. In October alone, automobile manufacturers and importers sold nearly 20,000 automobiles, of which members of Vietnam Automobile Manufacturer Association sold nearly 12,000 automobiles.
In the first 10 months, VAMA sold 92,130 automobiles of different kinds. If imported automobiles are included, the market sold nearly 150,000 automobiles. Tourism and trucks remained the best sellers.
The recovery was mainly on account of the government’s demand stimulus policy. Cutting value added tax and registration fee has helped prices of different kinds of automobiles reduce by $2,000-3,000 an automobile and has almost immediately had positive impacts the market.
Currently, most of domestic automobile manufacturers are failing to meet demand. As for the import automobile market, although the finance ministry has adjusted prices to calculate import duties, making CKD import prices increase by $1,000-3,500 an automobile. However, the volume of automobile import has not yet decreased.
If there is no unexpected change regarding the tax policy, it’s likely that Vietnam’s automobile sales may reach 200,000 automobiles.
However, such recovery is unsustainable because it depends on the government’s demand stimulus policy, which is temporary. Akito Tachibana, chair of VAMA, said that the purchasing power may reduce by 20 percent by early next year when the government abolishes the VAT and registration fee reduction policy.
Nevertheless, Vietnam is still offers huge potential for the automobile industry. Compared with Thailand, which has the most developed automobile industry in Southeast Asia, Vietnam’s automobile sales of 200,000 automobiles this year, are modest.
However, Vietnam’s automobile prices are almost twice as much as Thailand and 2.5-3 times as much as developed countries. Meanwhile, Vietnam’s per capital income in 2008 was just above $1,000 a year. Therefore, the above automobile sales of Vietnam are till very significant.
Over the last years, although there has been up and down time, the country’s automobile industry has still developed strongly.
In the first 10 months alone, total automobile sales were 1.5 times as many as the volume of 2007 and three times as many as 2006. This is impressive development. If automobile prices in Vietnam drops by half compared to the current level, which will be equivalent to that in Thailand, Vietnam’s automobile sales would be twice or even three or four times as many as Thailand.
The main reason for the rocket growth of automobile prices in Vietnam is taxes. Currently, the import duty for CKD automobiles is 83 percent and the special consumption tax 50 percent. Domestically-assembled automobiles are entitled to more incentives when the import duty is fixed at 20 percent for engines and 15 percent for components.
However due to the limited productivity of domestically-assembled automobiles, high costs for primary assembly at a intermediate company, packaging, transportation, the selling price is not much cheaper than imported automobiles. With tariff reduction and exemption under the country’s WTO entry commitments and Asean Free Trade Area Agreement (Afta), the automobile price will surely decrease in the next 10 years.
Under the country’s WTO commitments, by 2014, the import duty for different kinds of automobiles will reduce to 70 percent and by 2017 the import duty for passenger automobiles 47 percent. Within the framework of Afta, Vietnam committed to cut the import duty to 0 percent for automobiles of nine seats or less by 2018. By that time, if the special consumption tax is kept unchanged as currently, the automobile price would sharply reduce and this would be an important impetus for development of the automobile market.
Nevertheless, for the domestic-assembly automobile industry, the period of 2017-2018 would be a big challenge. Up to now, this industry still exists and develops thanks to the protection barrier, tariff. With the current production costs, no business would be able to exist once the import duty for automobiles imported from Asean countries is cut to 0 percent.
The biggest obstacle for development of Vietnam’s automobile industry is shortage of the supporting industry.
Vietnam’s automobile market has great potential for development. Nevertheless, such a potential is wakened up when the automobile price is brought to the common level of the region and the world. This completely depends on the government’s policy.
The finance ministry is planning to increase the special consumption tax applicable to 60 percent for automobiles with cubic capacity of less than three litres and 70 percent for automobile with cubic capacity of more than three litres. If this policy is applied, the automobile market will fall into recession.
Category: Business
