A DETAILED ANALYSIS OF THE FAILURE OF VIETNAM’S AUTOMOBILE INDUSTRY (Draft version) Dam Quang Huynh National Economics University 1. Introduction The Vietnamese government considered the auto industry an important factor in economy and has announced many incentive policies in order to develop this industry such as taxation and trade policies in many years. Developing auto industry promotes the development of many other supporting industry. Indeed, manufacturing a car requires 2000 to 3000 components, and it is an opportunity for other companies produce automobile parts.

Determining the automobile industry to be a important key in the country’s industrial sector, in the early 1990’s, the Vietnamese Government offered a variety of incentives to attract both domestic and foreign investor’s money in order to develop the young industry. In 2004, the Prime Minister signed Decision No. 177/2004/QD-TTG “Approving the development plan of Vietnam’s automobile industry till 2010, vision to 2020. ” This was a turning-point of Vietnam auto industry after a long way of development.

However, despite many expectations and privileges offered by the decree, the plan has turned out to be a bitter failure. In fact, the automobile industry in Vietnam is still stalled, it’s development hindered by major roadblocks in Vietnam’s economy and society. Thus, this research aims to analyze the causes of the failure of Vietnam auto industry. 2. Purpose of the proposal The proposal aims to analyze causes of the failure of Vietnam auto industry by using Evaluating external environment and the five-forces model of competition analytical method.

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In addition, the proposal will also suggest several solutions for above problem based on the author’s knowledge and experience. 3. Method Methods are used involving data synthesis and analysis. Data and information used in this proposal are secondary data and collected from some major source such as internet, articles and other research or proposal related to auto industry in Vietnam. By combining analytical methods and data resources, this proposal is expected to emphasize the problem as generally as possible. 4.

An overview of Vietnam auto industry Periods of development Before 1992, most vehicles were procured by the government and imported from the former USSR and other Eastern-bloc countries. In this period, most of domestic companies are state-owned enterprises, and their main activity is fixing imported vehicles. Period 1991 – middle of 2003 In 1991 the Vietnamese automotive industry began to change dramatically with the licensing of the first two joint ventures Mekong and VMC, it has benefited from many preferential policies.

In this period, there were 11 automaker invested in Vietnam, and auto domestic company began to take shape, but their main activity is importing auto components for assembling and selling in domestic market such as Truong Hai and Xuan Kien. At the end of 2003, there were about 160 enterprises specializing in assembling, fixing and manufacturing component supporting for auto industry. Although there were a number of domestic firms, a relatively large market share is dominated by FDI enterprises such as Toyota, Hinno, MeKong, Isuzu, Ford, VMC, Mercedes. (chapter 6) Period 2003 – now 003 was a turning-point of Vietnam automobile industry when Vietnam Government approved the development plan of Vietnam’s automobile industry till 2010, vision to 2020. The government also have published a lots incentive policies in order to encourage economics sectors in investing in auto industry. In this period, auto domestic enterprises developed rapidly in capital scale and productivity such as Truong Hai and Xuan Kien. 5. Define the auto industry 5. 1. Localization rate The term localization is related to the manufacturing or assembling of automobiles.

In manufacturing of automobiles, There are many components which are imported from the other countries. The main reason for importing these components is lack of availability of some of these components in domestic suppliers locally, or sometimes car makers prefer to use the imported components because of high quality standards of certain components. For a car maker, localization means locally producing or manufacturing the components at its own plant or in ancillary units. Localization is very beneficial for an automobile maker as it cuts down the cost of the component and the car or automobile as a whole.

Also the waiting period between the order and receipt of the component is also reduced. This is also useful in socio-economic sense as higher localization means more production in the region which means more business and employment opportunities for the people of the region where automobile factories and ancillaries are located In automobile industry, localization rate is the proportion of total value of domestically produced components to the value of the completed product. According to Thuy (2007), Vietnam now applies calculation of local content rate by point list for automobile.

Auto parts are divided into 100 groups of parts and each group is assigned a certain local content rate. The auto parts that are sourced from other local auto part companies are understood as parts produced by the automobile companies themselves. In order to calculate local content rate, automobile companies must submit a declaration of their production stage or parts source locally. In the case products are processed domestically from imported semi-products, local content rate are calculated basing on value added of parts or part group. For the components inside the parts, local content rate by value are applied.

At present, if a companies import all the parts and components to assemble locally, only painting, welding, stamping operated locally can be calculated 12 percent local content rate. when calculating the local content rate of each single parts and components, they apply the formula: Local content rate (%) = %value added achieved x given weighted % of parts 5. 2. Supporting industry According to Junichi (2005), In the framework of business, supporting industries manufacture production parts as well as machinery and tooling to produce those production parts.

The modern production system consists of multi-layer processes such as final assembly, sub-assembly, production parts, tooling, machinery, and materials and raw materials. All production parts and sub-assembled components are combined in the final assembly process. In this structure of the production process, supporting industries are usually referred to as the industries that manufacture high-quality production parts, tooling, and machinery, which directly “support” the final and sub-assembly processes. The products in supporting industry are often produced by SME, and in a small scope.

Thus, in manufacturing of automobiles, the components such as engine, body or wheel are not considered as the products of supporting industry because they are produced by big enterprises. In automobile industry, supporting industries are usually referred to as the industries that manufacture production parts, tooling, and machinery, which support manufacturing auto’s component such as engine, body or wheel, etc. 5. 3. Define automobile industry. The Vietnamese government determined the automobile industry to be a important key in the country’s industrial sector.

Ohno and Cuong (2006) write The Vietnamese government distinguishes leading industries (cong nghi? p mui nh? n), important industries (CN quan tr? ng), and major industries (CN ch? y? u). However, the definitions and the criteria for the selection of these industries are not clearly known to the authors. There does not seem to be any consensus on them even among policy makers, either. Decision No. 177/2004/QD-TTG “Approving the development plan of Vietnam’s automobile industry till 2010, vision to 2020 has not define the automobile industry.

However, in this plan, the Vietnamese government published specific objectives in localization rate, automobile demand forecast and supporting industries for developing the automobile industry. Proposing specific objectives in the development plan of Vietnam’s automobile industry could be considered as a first step of taking form the criteria of an automobile industry Manufacturing a CBU (completely built-up) car requires from 2000 to 3000 components. Thus, it is understood that a perfect automobile industry is which has all auto’s part produced domestically.

In fact, there is no any country which self-produces auto’s components to assembly a CBU car. Instead, car maker often outsourcing the simple components producing process to other countries in order to take full advantage of cheap labor cost and enhance the competitive power. According to VDF(2010), Under global and regional integration, aiming at 100% local procurement is both unrealistic and undesirable. Each country should achieve localization of industrial inputs which is less than 100%. The optimal localization ratio depends, mong other things, on the characteristics of individual parts and components. In other words, a country can be considered as having a automobile industry if it achieve a specific localization rate in manufacturing and assembling automobiles. In order to increase the localization rate, each country must develop supporting industry which are the key element in boosting industrial capability There are many point of view about defining a auto mobile industry, but they can be divided into 2 main group.

The first focuses on localization rate, and the other is about market capacity. According to the second point, increasing the localization rate required a market capacity (demand) to promote the development of supporting industries. The author of this research reckons that a certain localization rate, specifically in this situation is 40%, can define a automobile industry, and this point of view will be applied to determine whether Vietnam has a automobile industry in this research.

The basis of this opinion will be analyzed in the next parts of this proposal. 6. The situation of automobile industry in Vietnam 6. 1. Localization rate. According to Thuy(2006), Automobile industry is expected to become a pillar industry having positive effect on the economy. It produces technology-intensive, high value-added products, as well as is a motive to promote the development of material industry, fuel industry, painting, plastic and many other supporting industries.

Increasing local content rate is the most important point in the governmental scheme of Vietnamese automobile industry development to the year 2010, in which local bus was planned to gain 40% local content rate in 2005 and 60% in 2010 (the localization rate of bus at present is 30 to 35%), luxury car was planned to increase to 20-25% in 2005 and 40-45% by 2010 (table1). And localization of locally-produced vehicles is interested by policy makers as well as public voice Table 1. Government’s scheme on local content of automotive products | 2005| | 2010| | Local contentrate| Estimated productionvolume| Local contentrate| Estimated productionvolume| Bus| 40%| 15,000| 60%| 36,000| Truck| 50%| 40,000| 65% – 70%| 100,000| Car from 4 to 9 seats| 30%| 3,000| 50%| 10,000| Professional car| 40%| 2,000| 60%| 6,000| Luxury car| 20% – 25%| 32,000| 40% – 45%| 60,000| Engine| 15% – 20%| | 50%| 100,000| Gear box| | | 90%| 100,000| Source: Report on Strategy to develop the Vietnameseautomobile industry to the year 2010, vision 2020 submitted to Vietnamese Prime Minister. Vietnamese Ministry of Industry.

However, after more than ten years from their establishment in Vietnam, these automobile companies all have no much progress in increasing local content, they mainly assemble vehicles with imported parts and components under CKD kits. And although the Strategy for development of the Vietnamese automobile industry was approved in October 2004 with much expectation from policy makers, there is no positive signal from automobile companies showing that they move toward increasing local content rate. This situation goes against expectation of Vietnamese policy makers and they are trying to break this stagnation

Table 2. Local content rate of automobile Joint ventures Source: Report on Vietnamese automobile industry from Vietnamese Ministry of Industry and field research. Note: * data from the field research on March 2007, the other ones are from a report of Ministry of Industry in 2006. From the development plan of Vietnam’s automobile industry till 2010, vision to 2020 was approved, the localization of auto enterprises in Vietnam (including both pure Vietnamese and FDI companies) is very low, it is around 10%.

According to Thuy’s research (2006), Table 2 shows us local content rate of 18 automobile companies belonging to VAMA. It is realized that joint venture listed from number 1 to number12 achieved modestlocal content rates, mainly less than 10%. Toyota and Honda are the best among Joint ventures with local content rates in some products gained 20%. While pure Vietnamese companies achieved higher local content rate from 35% to 60%. The above analysis shows that pure Vietnamese companies has a higher localization rate than FDI companies, but almost local content are simple components and have low added value.

If basing on localization rate respect, a country is generally considered to have automobile industry when the localization rate in manufacturing automobiles is higher 40%. However, according above analysis, the localization rate of Vietnamese auto industry is only around 10%. In other words, Vietnam has not constructed the automobile successfully yet if evaluating on localization rate point. 6. 2. Supporting industry. According to Thuy(2006), The automobile industry is lack of part and component suppliers.

There is no automobile companies being able to produce all parts and components for a car, they can only produce at most 36-42 percent of the car, the other parts out of 20,000 to 30,000 parts and components of a car must be bought from thousands of autopart companies. However, there are a small number of foreign autopart companies investing in Vietnam, to date, there are totally more than 100 autopart companies including pure Vietnamese ones and foreign invested ones. Ordinarily, “a carmaker needs at least 20 autopart suppliers with various parts and components”.

Vietnam has 35 joint venture and 40 pure Vietnamese automobile companies, so the automobile companies in general have only two or three domestic autopart suppliers. These number of autopart companies are too small to provide parts and components to the assemblers. Moreover, the automobile industry faces with the lack of supporting industries. The final products in the automobile industry require various kinds of supporting industries and the later are quite important for the development of the former.

Supporting industries cover a very wide range of parts and components used in assembly of final products through the supply of parts and components or immediate goods. Materials for locally produced parts and components such as steel ingot and steel plates… must import because domestic companies have not yet been able to produce. Moreover, the auto parts suppliers only concentrates on labor-intensive and low technology products, so locally-produced auto parts are not diversified. Additionally, VDF(2010) showed that part and component suppliers in Vietnam, both FDI and local, are few and scattered in comparison with Malaysia and Thailand.

Moreover, there is no comprehensive data on supporting industries. Another IPSI survey on the capability of local suppliers conducted in 2008 revealed that foreign assemblers and local suppliers shared similar views. For example, they agreed that: (i) A large number of relatively “easy” parts and components made of cast iron, steel or plastic continue to be imported because no local company can supply them. (ii) Engineering and technical capabilities of domestic suppliers are generally low and without ability to perform required QCD (quality, cost and delivery). iii) Capacity to supply large quantities with stable quality is low. (iv) Too much attention is placed on the cost of materials while far less attention is paid on costs associated with wastes, defects, inventories and uneven quality of inputs. (v) Local producers under cost cutting pressure are unable to invest in necessary human and physical capital for becoming viable part manufacturers. According to VDF and Cuong (2006), the undeveloped supporting industry in Vietnam has the cause from auto’s demand.

In other word, the market capacity is relatively small to encourage domestic and FDT companies invest in supporting industry for manufacturing automobile. In summary, If approaching on the viewpoint of supporting industry then Vietnam has not had a automobile industry yet. 7. The causes of the failure in building Vietnam auto industry 8. 1. Government polices on Vietnam auto industry 8. 2. 1. Protective industry policy The automobile industry development strategy for 2010-2020 approved by the Government clearly states that the automobile industry plays an important role in the modernization and industrialization of the country.

In fact, Vietnamese government did not promulgated any official plan for developing the automobile industry strategy, but a variety of incentive policies was offered in order to attract both domestic and foreign investor’s money into the industry such as taxation and quota policies before 2003. In 2003, the Prime Minister signed Decision No. 177/2004/QD-TTg “Approving the development plan of Vietnam’s automobile industry till 2010, vision to 2020. ” However, despite many expectations and privileges offered by the decree, the plan has turned out to be a bitter failure.

One of the causes that drive Vietnam’s auto industry to be failure is high protective policy that has been conducted in a long time. Since the Vietnamese auto industry came into being in 1991 with the licensing of the first two joint ventures Mekong and VMC, it has benefited from many preferential policies, especially in taxation. In the period of 1991 to 2001, CBU auto import tax was always very high, up to 100%. In 2007, Vietnam cut the car import tax three times, from 90% before Vietnam became a WTO member to 80% in mid January 2007, then to 80% in mid 2007.

Two additional tax cuts were implemented within three months, and the tax rate on brand new car imports was 60% at the end of 2007. After that, the Vietnamese government has change auto import tax several times, and import tax rate now is 78%. Generally, auto import tax is always maintained at a high level in order to promote the domestic companies increase the localization rate in auto manufacturing. In fact, this strategy of Vietnamese government was really failure, and the most significant evident is the localization rate has not achieved the target that was published in the master plan.

The failure to achieve a satisfactory proportion of locally produced components is due to a number of problems, including the incomplete implementation of the policy. The highly protective policies without specific binding conditions have facilitated enterprises to make big profit while the interests of the consumers have been ignored. Additionally, manufacturing automobile is a supply chain of producing components and parts system in assembling a CBU product process.

Thus, there is almost no country which self-produce all auto’s components, and countries which want to develop the auto industry must participate in this supply chain. In other word, becoming a link of the chain is considered as to be successful in building the automobile industry. Unfortunately, it is seem that the Vietnamese government has never cared about taking part in the auto supply chain but trying to increase the localization rate by applying a lot of preferential and favor policies to protect domestic companies.

However, this development strategy went into the failure. After near 20 years of development, Vietnam is still a components importer and assembler. Meanwhile, Malaysia and Thailand build up the supporting industries successfully and begin have their own auto brands. In today’s context, using the protective policy in automobile industry is no longer a good strategy because Vietnamese enterprises will have no incentive for the localization of their products. The failure of Vietnam’s auto industry has demonstrated above opinion. 8. 2. 2. Contradictory policies 8. 2.

The small market capacity As mentioned in the previous section, there are several viewpoint reckoned that the small market capacity (the viewpoint of demand problem) should be very difficult for domestic and FDI companies to invest in supporting industries which enhance the localization rate and take form automobile industry. Indeed, the auto demand each year is over 100 thousand vehicles, this number is too small to encourage enterprises develop system of supporting industries. If compared with Thailand and Malaysia, consumption power in Vietnam is relatively lower.

However, these countries have also experienced the current period of Vietnam, at the time their market capacity is also quite low. However, they quickly overcame this obstacle and built up their own system of supporting industries which support to automobile industry. Although the capacity of automobile consumption market of Vietnam is relatively small, but this is not the main cause of the failure of supporting industries, the lessons of Thailand and Malaysia were evidence. Instead of focusing on domestic demand, the Vietnam auto industry can orient toward exporting components by participating in global value chains.

In order to do this, it is necessary to have the support from the Government through policies. However, the policies on the development of the automobile industry has not focused on this issue. Additionally, Ohno and Cuong (2004) write the small market prevents producers from achieving cost reduction. Market size is a critical factor in the development of the automobile industry. A large market implies scale merit, high efficiency, strong growth of supporting industries and the possibility of a broader product mix, while a small market means the opposite of all these.

The Vietnamese automobile market, while growing strongly in the past few years, is still too small to realize production efficiency. In international comparison, Vietnam has far fewer cars than countries at similar income levels. Thus, it can be concluded that the small market size is one of the causes of the underdevelopment of Vietnamese automobile industry. However, if there are reasonable development policies such as export-oriented or participating in the global value chain then the small market capacity may be a disadvantage but it is also not the decisive factor to the failure of shaping an industry automobile. 8. 3. The lack of supporting industries Ohno (2004) suggested that the development of supporting industries will promote the localization rate. Thus, the development of supporting industries have a very close relationship with the localization problem. However, in recent years, the Vietnamese Government has not focused on developing supporting industries for the automobile industry, and this was evidenced by the number of companies provide components for the automobile industry is very limited.

Current auto’s components and parts produced in Vietnam, except FDI, is mostly provided by state-own companies, but the components have relatively low quality and high price, so do not meet quality requirements of the FDI auto manufacturing enterprises. In addition, the alignment of auto maker with components manufacturers is not close enough. The reason for this problem is the lack of suppliers of raw materials such as steel, plastic, rubber, electronic, etc. o, a chain such difficulties from the lack of basic raw material suppliers, the lack of alignment of the auto’s components producer with automobile assembler, small market size, the lack of development policies for supporting industries in essence lead to the plodding development of the Vietnamese auto industry in recent years. To develop supporting industries, there must be policies for developing small and medium enterprises (SMEs), because these companies belong to an important sector in 5 economics sectors in Vietnam, and they are appropriate above all others to do this.

However, Ohno (2004) suggests Vietnam has adopted the multi-sector economic principle which accepts the contribution of all sectors: farmers, family businesses, private enterprises, cooperatives, SOEs and foreign-invested enterprises. But the role of each sector has not been clearly specified in the process of industrialization and modernization. One of views concerning this matter is that the state-led view argues that the state, not the market, should guide and direct the development process, and many policy makers have still pursued above viewpoint in forming policies.

As a consequence, this led to the lack of policy for developing SMEs. Indeed, the SMEs are the most suitable for developing supporting industries. According to VDF(2010), Vietnam’s supporting industries are currently underdeveloped and policies to accelerate their growth are largely absent in comparison with the neighboring ASEAN countries such as Malaysia and Thailand which introduced vigorous promotion programs for supporting industries in the 1980s. By now both Malaysia and Thailand have highly developed policy mechanisms to promote SMEs in general and supporting industries in particular.

Compared with Malaysia, Vietnam really has not create a motivation for SMEs engaged in manufacturing and supplying components for automobile industry. Meanwhile, Malaysia published policies connected SMEs with the automobile assembly through policies of financial incentives, tax, business supporting, industrial connection. Such policies have created certain success in the development of supporting industries for the automobile industry in Malaysia. Like Malaysia, Thailand have published a lot of preferential polices for SMEs to develop supporting industries and achieved certain success.

Currently, in the ASEAN region, Thailand is the biggest auto manufacturer and assembler with a developed supporting industry. According to VDF(2010), In Vietnam, the only official document that directly addresses the problems of supporting industry development is the Master Plan of Supporting Industries in Vietnam until 2010, Vision of 2020 approved in 2007. But this master plan has much room for improvement. Although addressed in the master plan but there have not been suitable and clear policies for developing supporting industries. 8. 4. Other factor affected Vietnam’s automobile industry. 8. Conclusion 9. Reference

Thuy (2006), Nguyen Xuan, Industrial policy as determinant of localization: The case of Vietnamese automobile industry. Kenichi Ohno and Cuong, Vu Duy (2006), The Automobile Industry in Vietnam, Remaining Issues in Implementing the Master Plan, VDF. VDF(2010), Survey on comparison of backgrounds, policy measures and outcomes for development of supporting industries in Asian Kenichi Ohno (2004), Designing a Comprehensive and Realistic Industrial Strategy. Binh and Linh, Development of Automotive Industries in Vietnam with Improving the Network Capability Note: Several part in this proposal have not been completed yet.


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