Transforming auto assembly to component manufacturing

Factually, Vietnam has never been a manufacturer of autos as many press reports profess, but rather a more accurate statement would be that the country has had a fledging automotive assembly industry.

In 2015, the auto assemblers operating in the country churned out only an estimated 250,000 vehicles, compared to the more than 2.9 million imports from Thailand and Indonesia.

Much of the lack of competitiveness can be attributable to the fact that the localization rate for autos has historically been only about 10%, meaning that 90% of the components of the vehicle must be imported from other countries, which has always added substantial cost.

The production cost per vehicle in Vietnam has been at least 20% higher than that of neighbouring countries in Southeast Asia for the past several years, the automotive assemblers in the segment have said.

Had it not been for protectionist measures such as high import tariffs, they added, the industry would have died years ago as they have been the only thing that has kept it afloat.

However, with the coming into force of the ASEAN Economic Community and once the border tax on auto imports is eliminated in its entirety— it will no longer make good economic sense to assemble cars in Vietnam.

Logically, companies like Toyota and Ford will inevitably shift their production away to other countries

Given that the auto assembly segment is doomed, Chris Humphrey, the managing director of the ASEAN- EU Business Council, has gotten out front of the issue and is promoting transforming the segment into a parts and component manufacturer for assemblers based in other countries such as Thailand and Indonesia.

In other words, Mr Humphrey is suggesting the industry transform from low value assembly work to high value component manufacturing.

Currently there are some advocating for the Vietnam government to introduce legislation to create special consumption taxes on imported vehicles to raise funds to continue to subsidize or prop up the assembly industry.

Mr Humphrey argues that this really amounts to nothing more than trying to circumvent the ASEAN and other free trade agreements. Those that support these protectionist measures did not want free trade to begin with—and would have preferred bilateral trade agreements keeping in place protectionist measures for the assembly segment.

But why anyone would go to such great lengths to protect unprofitable assembly work is hard to understand when there are much more lucrative alternatives.

It is important to keep in mind that the forces driving the increased consumer demand for autos in Vietnam is the rise in the middle income ranks among the population, leading economists have said.

The momentum in higher incomes among the populous can only continue by shifting the economy from low value to high value industries whether those segments be in the manufacturing, retail or any other sector of the economy.

Vietnam imported 19,000 units in the first quarter of 2017, a 69% jump from the same three month period a year ago, customs data showed.

The import surge comes as higher salaries and wages drive Vietnamese consumers to switch from motorbikes to autos, with more than half of the imported autos classified as midsize sedans, according to the same data.