Vietnamese automotive industry

According to the General Department of Customs, in 2019, 142,000 vehicles were imported into Vietnam for $3.1 billion. This figure corresponds to an increase of 71% in number and 69.4% in value compared to 2018. 

This increase is the result of the ASEAN Trade in Goods Agreement (ATIGA) which has provided - since 1st, January, 2019 - full duty-free access for vehicles imported into Vietnam from an ASEAN member country.

In 2020, the European Union-Vietnam Free Trade Agreement (EVFTA) provides, in turn, the liberalization of customs duties on vehicles imported from the EU. This means that the Vietnamese automotive sector is likely to see a further surge in imports in the coming years. 

While these statistics highlight the opportunity that Vietnam represents for European automotive exporters, they do not take into consideration the consequences of the Covid-19 pandemic or the challenges that the entry into force of EVFTA poses for Vietnam. 

This cyclical deficiency is an opportunity for the CCIFV to display the landscape of the automotive sector in Vietnam (1) and to present the challenges for this sector in the light of the provisions of the EVFTA and the Covid 19 pandemic (2).

The Vietnamese automotive sector

In recent years, Vietnam has hosted many automotive assembly and production projects. For example, in June 2019, the first automobile manufacturing factory developed by a Vietnamese company was inaugurated. 

This development in the automotive sector is justified by the government's desire to meet domestic demand on the one hand and, to serve the regional market on the other. 

Vietnam has nearly one motorbike for every two inhabitants, making it the country with the most scooters per capita in the world. However, discussions on banning scooters in the country's major cities (Hanoi, Ho-Chi-Minh City, Danang) and the rapid development of the middle class could greatly benefit the automotive sector. 

Indeed, the middle class currently represents 13% of the Vietnamese population (22 million people) and is expected to double by 2026. The expansion of this social class is accompanied by a westernization of tastes, often translated by the possession of a car. The growth rate of car ownership in Vietnam is currently 10.5% and is estimated to rise to 12-15% over the next decade. 

This factor is helping to make Vietnam attractive to car manufacturers around the world, and it making Vietnam one of the four largest car manufacturers in Southeast Asia. 

However, despite this position, the Vietnamese automotive industry is highly dependent on imports. According to official data, the average localization rate in this sector is only 10 to 15%, one of the lowest in the region.  

This figure can be explained by the fact that Vietnam has not been able to invest in the development of an advanced automotive industry, which has reduced it to producing locally low-tech products such as tires, mirrors and seats. 

Faced with this reality, Vietnamese companies are forced to "import between $2 and $3.5 billion in components and parts for vehicle manufacturing, assembly and repair every year". This has an impact on the cost of production which has become higher for vehicles produced in Vietnam than for those imported. 

This second characteristic also explains the attractiveness of Vietnam for foreign manufacturers in general and European manufacturers in particular. 

The Vietnamese automotive market is therefore conducive to the development of trade and business. The recent ratification of the EVFTA should reinforce this trend or, at least, maintain it in view of the slowdown resulting from the Covid-19 pandemic. 

The stakes related to Covid-19 and the EVFTA

A sector slowed down by the Covid pandemic-19

If the Vietnamese automotive sector has a promising future, the Covid-19 pandemic has slowed down the growth in this field. Indeed, throughout the world, most car manufacturers and assemblers have been forced to suspend their activities, which has undeniably had significant negative effects. 

The economic repercussions on the Vietnamese sector are already visible. According to the report of the Vietnamese Automobile Manufacturers Association (VAMA), the automotive market has declined by 36% in the first four months of 2020. Over the year, the VAMA is forecasting a decline of at least 15% for the entire market.  

However, in Vietnam, the automotive market is estimated to contribute 3% to the gross domestic product. So, appearing as a key sector of the Vietnamese economy, the government quickly intervened to counter the effects of the pandemic on this market and to stimulate domestic demand. 

On June 28, the Vietnamese Prime Minister signed a decree providing for a 50% reduction in registration fees for locally manufactured and assembled vehicles until the end of the year. This measure has contributed to the recovery in automobile consumption, already visible in the second half of 2020. 
Despite these measures, the year 2020 will remain an extremely difficult year for the automotive sector worldwide. However, unlike the rest of the world, the Vietnamese automotive market could quickly return to positive growth thanks to the opportunities offered by the introduction of EVFTA.

EVFTA : Driving force for the Vietnamese Automotive Sector

The automotive sector was one of the key topics in the EVFTA negotiations. Since, the parties have agreed and adopted provisions to facilitate access to the Vietnamese automotive market for European cars. 

In 3 years time, this access will be facilitated by lighter administrative procedures but the attractiveness of this market is already strengthened by Vietnam's commitment to progressively reduce custom duties on motor vehicles and automotive components. 

First, concerning administrative procedures, Vietnam is committed to reduce unnecessary barriers to trade but also to comply with international regulations, in particular the 1958 UNECE Agreement. 

For example, this means that the conditions required by vietnamese law to import complete vehicles will be presumably fulfilled by the possession of a valid UNECE certificate. In other words, the implementation of EVFTA will put an end to tests and conformity reports for european complete vehicules. 

The "EC" certificate of conformity for EU vehicles will be recognized from 2025. As a result, the end of these formalities will increase the attractiveness of the Vietnamese market to Europeans.

In addition, the interest of EVFTA for European car manufacturers lies in the reduction of customs duties. 

Until August 1, 2020, cars, motorcycles and car components from the EU were taxed between 32 and 70%. Certain types of vehicles such as 150cc motorcycles or cars with less than 10 occupants will see their customs duties gradually reduced to 0% within 7 to 10 years. Similarly, imported components - representing nearly $3 billion annually - will be duty-free within 7 years. 

These tariff reductions are significant and will immediately contribute to the recovery of European exports to Vietnam, but also to Vietnamese economy in general.

These advantages will enable European manufacturers to be more competitive on the Vietnamese market, where Asian vehicles already benefit from duty-free access.

In summary, the current period is forcing the automotive industry into a phase of adjustment, but government measures and the entry into force of the EVFTA should support the industry in the long term. Simplified access to the Vietnamese market helped by tariff advantages and the growing purchasing power of the Vietnamese population should appeal to manufacturers in the Old Continent.

© Article written by the France-Vietnam Chamber of Commerce and Industry (CCIFV). Reproduction rights reserved.

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