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e-Magazine (For the Japanese version of this article)

Closure of Japanese Auto Manufacturers’ Vietnam Plants Zero Tariffs as of Year-End Launch of ASEAN Economic Community Imports and Sales from Thailand and Indonesia [Date of Issue: 27/February/2015 No.0240-0960]

Date of Issue: 27/February/2015

Closure of Japanese Auto Manufacturers' Vietnam Plants
Zero Tariffs as of Year-End Launch of ASEAN Economic Community
Imports and Sales from Thailand and Indonesia

Hirotaka Yamakawa
JIJI Research Institute Guest Researcher
News Department, JIJI Press

The ASEAN Economic Community (AEC) will be launched at the end of this year. Because tariffs will be eliminated within the region, some Japanese auto manufacturers with operations in Vietnam are likely to close their Vietnamese plants and import instead from Thailand and Indonesia which have substantial auto manufacturing industries. Zero tariffs within the AEC will make importing finished cars from these countries cheaper than producing them in Vietnam.

The Association of Southeast Asian Nations (ASEAN) Economic Community (AEC) will be launched at the end of this year, liberalizing the movement of goods, services, investment and people within a massive market of around 600 million people across the 10 ASEAN member nations. Tariff elimination within the AEC is attracting particular attention. With auto tariffs dropping to zero in 2018, manufacturers will no longer need several production bases in the region. This will inevitably produce clear winners and losers in the auto industry, with Vietnam likely to be hit the hardest. Rather than making their cars at a high cost in Vietnam, auto manufacturers can instead import and sell cars from Thailand and Indonesia, both of which have well-developed auto industries. Accordingly, we may well see some Japanese auto manufacturers close their Vietnamese plants over the next couple of years.

More than 150,000 new car sales last year

Thailand and Indonesia are the biggest car producers in ASEAN. Japanese and other auto manufacturers have been expanding their production in Thailand to the extent that the country is called "the Detroit of Asia". In 2012, auto production there reached a record 2.45 million cars, placing Thailand ninth in the world and marking the country's first entry into the top 10. New car sales in Thailand also reached a record 1.43 million in 2012, but fell in 2013 and again last year due to recession and other factors.

Auto production has soared in Indonesia in recent years, while domestic sales too have picked up. Japanese auto parts manufacturers continue to pour into the country with the same enthusiasm which they are displaying for Mexico. Car sales are said to rise once per capita GDP tops US$3,000, and that's where Indonesia is now. Last year, new car sales in Indonesia sat at 1.21 million units, 10,000 down on the previous year, but this still took the country past Thailand (880,000) to top the region.

In Vietnam, new car sales last year rose around 40,000 units on the previous year to 157,810, but a huge gap obviously remains between Vietnam on the one hand and Thailand and Indonesia on the other. Vietnam has a population of more than 90 million and incomes are rising, but new car sales have been flat. Even Toyota Motors, which boasts the most sales in Vietnam, only sells around 40,000 cars per annum. Other Japanese manufacturers appear to be struggling with sales of less than 10,000 per annum.

Friction between Ministry of Industry and Trade and Ministry of Finance

Why are new car sales so limited in Vietnam compared to Thailand and Indonesia? One major factor is the lack of a clear policy trajectory within the government. Just when it looks like the government might foster the auto industry as a means of pushing forward industrialization, tariffs are hiked up to increase auto-related tax revenue and regulations are introduced on total emissions as a way of relieving traffic congestion and reducing accidents. In particular, friction between the Ministry of Trade and Industry, which wants to build the auto industry, and the Ministry of Finance, which wants to raise auto tariffs to secure tax revenue, is slowing the growth of new car sales.

Another factor is the negative attitude of the Ministry of Transport toward more cars appearing on Vietnam's roads. Ho Chi Minh and Hanoi are both packed with motorcycles, with cars threading their way among them. Given the inadequacy of roads and other infrastructure, as well as the limited number of traffic lights and parking lots, a sudden surge in car numbers would make traffic congestion even worse. I've visited both cities almost every year for the last eight years, and every time I've struggled to get around.

Influx of cheap finished cars

With the launch of the ASEAN Economic Community locking in the 2018 elimination of auto tariffs, cheap finished cars from Thailand and Indonesia are likely to flood the Vietnamese market. As 2018 draws closer, consumers may even wait to buy cheap imports. Japanese car manufacturers are consequently very keen for the Vietnamese government to take sweeping measures. However, the government has been slow to act, with automobiles and auto components the only one of the six priority industries in Vietnam's industrialization strategy (electrical and electronic machinery, agricultural machinery, food processing, shipbuilding, environment and energy conservation, automobiles and auto components) for which a specific action plan has yet to be developed.

Looking ahead to expected market growth, Japanese manufacturers making cars in Vietnam are unanimous in wanting to continue manufacturing there, but are desperate for the government to come up with a concrete automobile plan as soon as possible so that they can make investment decisions. One senior executive at a Japanese auto maker notes that "as of 2018 when auto tariffs are eliminated, cars from Thailand and Indonesia will flood into Vietnam. We simply won't survive producing a few thousand vehicles a year. We urge the government to work on infrastructure and provide tax incentives to boost auto demand." Another executive emphasizes that "the Vietnamese government has yet to produce a clear auto policy. The longer it takes to comes up with a concrete automobile plan, the more difficult it will become for us to continue manufacturing in Vietnam." Japanese auto manufacturers with operations in Vietnam stand at a crossroads on whether or not they should continue manufacturing there.

Urgent need for subway development

Myanmar, a country very much in the spotlight these days, has recently been importing around 10,000 secondhand Japanese cars a month. At around 120,000 cars per annum, this is a market scale not far off Vietnam's new car sales. The Vietnamese government must press forward rapidly not just with auto policy, but also with the development of subways, roads and other urban infrastructure. Prime Minister Nguyen Tan Dung needs to make some rapid decisions and move these immediately into action. With auto tariffs disappearing within ASEAN in 2018, Vietnam has very little time left. In any case, it seems inevitable that some Japanese manufacturers will stop manufacturing in Vietnam and opt instead to sell cars imported from Thailand and Indonesia.

(original article : Japanese)
(For the Japanese version of this article)

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