Automobile Industry in Vietnam Pre-WTO

The automobile industry in Vietnam was stirred up by the government’s decision to reduce tariffs on imported cars starting January 1, 2006. In addition, imports of used cars and their tariffs are also lowered, generating a fierce competition between the car makers in Vietnam. They respond to these government’s new rulings by immediately dropping their prices. For instance, locally assembled Toyota models decreased by $2,000 to $2,500, Mitsubishi cars are lowered by $4,000 to $12,000 apiece; Mercedes-Benz dropped their price by $5,000 to $10,000, and Daewoo by $1,000 to $2,000.

Foreign car makers in Vietnam have excuses to keep their prices high: high tariffs on imported parts, high production costs, and small market size, which all add up to elevate the retail price by 200% to 300%.

In addition, the car makers’ promise to raise the local content ratio (LCR) of a locally resembled car to 40% has not materialized after 10 years. Yet it appears to be a way to speed ahead in this fierce competition: in 2005, Honda Vietnam announced its plan of new production plan that would roll off lower-priced cars with high LCR.

A similar action by Honda in the motorbike market – the introduction of Wave Alpha in 2002 – initiated competition among the manufacturers and helped slash the prices in the local market. Perhaps history will repeat itself, as Hyundai, a Korean automobile manufacturer and a long-time investor in Vietnam, also publicized the transfer of its automobile engine production technology to its Vietnamese partner, the Vietnam Motor Industry Corporation. Consequently, an automobile factory, producing Hyundai buses and trucks, was inaugurated in northern Bac Giang province in March 2006.

To pave its way to WTO, the Vietnamese government agreed to relax the protection for the automobile industry. Now that Vietnam is looking forward to becoming a member by the end of this year 2006, related parties are also looking forward to the promised change. Gauged to be a potential yet underdeveloped market, the Vietnamese automobile industry is becoming increasingly attractive to the foreign carmakers.

This change, however, both offer opportunity and risk for Vietnam.  As demonstrated above in the case of Hyundai, the change has brought opportunity in that the company is transferring a new engine technology to be built in Vietnam and to hopefully lead to additional jobs for Vietnamese workers.  It is and it will in other cases lead to less desirable changes for some Vietnamese companies.  For example, Thailand is a much larger and more efficient automobile parts and vehicle manufacturer as it is the largest producer in Southeast Asia.  Even though Vietnamese wages are less than those in Thailand, economies of scale and of benefits achieved through the clustering of parts suppliers will make it increasingly difficult for Vietnamese car parts and vehicle manufacturers to match Thailand’s prices.  Thus, prices are likely to continue to drop in Vietnam and the consumer is likely to be the ultimate winner.

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