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Tuesday, August 28, 2007

Vietnam too weak in capability to make sedans

presented by Md moshiur rahman.

Vietnam should relinquish the dream of manufacturing its own cars as it does not have enough capability to do that, say experts.

Low capability

According to the Ministry of Industry and Trade, investors are now rushing to set up car assembly workshops with surprisingly low capital, even lower than the price of a car. Two of the 35 domestic automobile manufacturers have capital of less than VND10bil ($625,000).

Phan Dang Tuat, General Director of the Institute for Industry Policy and Strategy (IPS) under the Ministry of Industry and Trade, made the comparison that a wedding gown shop in Vietnam must have the capital of VND20bil ($1.25mil), while some investors intend to assemble cars with just several billion dong.

Investors rush to set up car assembling workshops, while no one thinks of producing car parts to provide for car assemblers, though Vietnam is still very weak in supporting industries.

Mr Tuat cited an example: Toyota has 1,400-1,600 car part suppliers, while in Vietnam there are only 60 car part suppliers, which serve 50 car assemblers.

Just focus on fortes

Vietnam has been considered a car market full of potential, which is believed to be a foundation for developing an automobile industry. Why not make cars domestically, when several billions of dollars are spent every year to import cars?

However, Mr Tuat said that Vietnamese enterprises should know their fortes and shortcomings to decide where to invest. He cited Truong Hai and Xuan Kien as the two examples. The two manufacturers' sales have been very successful, ranking the second and third among Vietnam Automobile Manufacturers' Association (VAMA) members, just after Toyota (Toyota sold 1,774 units in July, Truong Hai 956 and Xuan Kien 608). Mr Tuat said that the manufacturers followed the right way when focusing on buses and vans, which the market needs and fit their capability.

Mr Tuat said that Vietnam should draw lessons from Europe's stories. The continent, which is considered as having a powerful automobile industry, has only five nations successful in car manufacturing, while other countries still have to face a lot of difficulties.

Making sedans requires super technologies. A driving seat of a Mercedes Benz S500 has 26 small engines. One automobile manufacturer in the world needs several thousand car part suppliers. "It is clear that making sedans should not be seen as the job of Vietnamese enterprises

More About Vietnam car industry

:Creating an auto industry

There is a paradox in Vietnam's strategy on creating an auto industry. Industrial architects want Vietnam to find a place on the world's auto manufacturing map, first to meet domestic demand and second to jump into the regional and world markets. These ambitious plans overlook the fact that Vietnam's auto industry is around 30 years behind other players in the region. That's not to say that Vietnam will never achieve those goals, but it suggests there's no point in trying to go too fast. The industrial planners want the 11 auto joint ventures operating here to look beyond simply assembling cars from imported parts and increase the ratio of locally made parts. But in a country which cannot produce a 100 per cent locally made motorbike, the request to increase the car part localisation rate in the next few months sounds like mission impossible. Global conditions govern such long-term development. Due to its participation in AFTA, under the terms of CEPT Vietnam must remove all non-tariff trade barriers by January 2009, and normalise import duties on products with a 40 per cent or higher Asian content in the 0-5 per cent range. Due to its imminent admission to WTO, it will also be unable to rely on local content requirements to develop the local car industry. Hence any protection policy must be implemented quickly to allow the local industry time to grow. In the mid 90s when car companies were fighting each other for entry to Vietnam's market, the government acted to protect locally produced cars by implementing various measures such as banning second hand car imports in a bid to generate a CKD-dominated domestic market. From 25,000 units in 1996, the market has grown to 30,000 in 1997, 36,000 in 1998, 41,000 in 1999, and 45,000 in 2000. However, those are production figures. Actual sales were 20,000 units in 1996 and 1997, 26,000 in 1998, and 21,000 in 1999. They reached their peak of 43,600 units in 2003 before news of the tax rise due to take effect on the first day of 2004 was released. The automobile industry depends enormously on economy of scale, something very difficult to achieve in such a limited market as Vietnam's. The optimal size for a single plant is said to be over 200,000 units per year. If Vietnam goes ahead and tries to establish a car industry and promote supporting industries, it would seem to be doomed to failure since the domestic market is too small to support such a move and likely to remain that way for some time. A recent report released by the Ministry of Industry reveals that the eleven foreign invested auto joint ventures currently in operation have an assembling capacity of 148,200 cars per year. To date, however, they have reached just 30 per cent of the designed capacity. Up to the end of 2003, they had assembled a total of 117,137 cars with total turnover of nearly VND3 billion ($198,000). The total investment capital under the licence granted to the eleven joint ventures should be $574.7m, but in reality they have invested around $450m, a little over 80 per cent. Mr Do Huu Hao, vice Minister of Industry, said that fundamentally Vietnam has been in the process of formulating an automobile industry with the participation of well-known car manufacturers. Through the operation of joint ventures, the Vietnam partners have updated technologies and techniques of assembling and manufacturing high grade cars, attracting a large number of workers and creating the preconditions for the development of support industries. However, the lack of spare parts manufacturers in Vietnam means the joint ventures have to rely on importing almost all parts for assembling cars resulting in higher prices. New projects on assembling and manufacturing four seat cars won't be granted licences. However, projects specialising in assembling and manufacturing specialised vehicles such as trucks, vans and buses, and those specialising in manufacturing spare parts, will be facilitated and encouraged. In the judgement of the Ministry of Industry, most of the foreign joint ventures are focusing on assembling, not promoting technology transfer or human resources management in auto industry technology. Authorities feel this should be changed. While a number of domestic companies are now working on automobile parts production, most of them have very small capacity while the parts being produced domestically are of low value added and are few in number. The average localisation rate of foreign joint ventures is only 2 to 10 per cent, except for Toyota whose rate is up to 13 per cent. The localisation rate in light trucks and buses (below 24 seats) is around 10 to 20 per cent, while buses with more than 24 seats have a localisation rate of over 30 per cent.

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