by NGOC ANH 30/11/2021, 02:35

Reason for Vietnam’s low automobile localization rate

Vietnam’s automobile production can be recognized as a low value-added industry with a localization rate of only 5% in 2020.

Vietnam's automobile localization rate is only 5% in 2020.

Vietnam’s automobile production can be recognized as a low value-added industry with a localization rate of only 5% in 2020. According to VAMA, Vietnam has imported all kinds of spare parts and components with about US$4.0bn, which is equivalent to 40% of the total CKD sale value. Vietnam’s enterprises mainly import components from countries in the region, China, and countries of origin of automobile brands. South Korea and Thailand are the main markets for Vietnam in 2020, accounting for 26.6% and 18.5%, respectively, of auto parts import value.

Thailand has 690 tier 1 suppliers and 1,700 second-tier suppliers providing products and services to the automobile manufacturing industry, while Vietnam has only about 33 tier 1 suppliers and about 200 tier 2 suppliers.

VNDirect thinks Vietnam has a low localization rate and lack of supporting companies due to:

First, the domestic demand for automobiles is relatively small (296,000 units in 2020) compared with Thailand (792,000 units) and Indonesia (592,000 units).

Second, the automotive industry of Vietnam is quite young with the earliest automobile manufacturer starting the first factory in 2018.

Third, there are no policies to support supporting businesses like Thailand. Specifically, the Thailand government has many tax incentives for foreign automobile manufacturers. Companies located in this country are exempt from corporate income tax for up to eight years. At the Rayong automobile manufacturing center, where GM and Ford have factories, Thailand even reduces corporate income tax by up to 50%. Moreover, Thailand has imposed an 80% import tax on automobiles to keep manufacturing plants in the country.

According to Toyota Vietnam, the number of parts and components sold annually must reach about 50,000 sets to be viable for investment. Therefore, automobile manufacturers in Vietnam only do assembly and finishing stages such as peeling and painting, while the best-selling models such as Hyundai I10, Toyota Vios only have sales volumes of 20,000 - 30,000 units per year. The small production scale and not many incentives to attract additional investment have made production in Vietnam largely at the assembly stage. That makes the cost of manufactured automobiles in Vietnam 10 - 20% higher than that of major regional manufacturers such as Thailand, Indonesia, ...

The value chain of the automotive industry is divided into downstream and upstream sectors. Downstream includes the stages of designing, manufacturing components, and accessories for tier 1, tier 2 ... while the upstream sector of the value chain will be the businesses manufacturing, assembling, distributing, selling, and customer automobile. Local automobile enterprises are participating mostly in the assembly stage - the stage that accounts for the least proportion in the vehicle's value (15% of the automobile's value), said VNDirect.

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The 5-year CAGR for Completely Built-Up (CBU) automobile sales in 2014-19 reached 26.3%, while this figure for Completely Knock Down (CKD) automobile sales posted 10.2%. Especially in 2019, CBU automobile sales soared 87.1% YoY, accounting for 41.2% of automobile sales due to the removal of tariff barriers from ATIGA. In addition to tax incentives, sturdy chassis, eye-catching design, good driving experience, and high safety are the great advantage of CBU automobiles when compared to CKD automobiles.

In 2H20, CKD automobile sales with a 50% reduction in registration fees overwhelmed CBU automobiles. According to VAMA, CKD automobile consumption reached 120,958 automobiles (23.0% YoY), while CBU automobiles' volume was only 68,493 units (-2.6% YoY). However, CKD automobile sales decreased 6.4% YoY in 9M21 due to the effect of Covid-19, and the reduction of 50% of the registration fee for domestically assembled vehicles has expired at the end of 2020.

Meanwhile, CBU automobile sales soared 26.2% YoY thanks to strong growth from Chinese imported automobiles (440.0% YoY). VNDirect forecasted CBU automobile's market share would increase from 36% in 2020 to 45% in 2022. However, for the long term, the bestselling CBU automobiles would shift to CKD to take the initiative in supply. Therefore, it believes the proportion of CKD sales is still higher than the CBU sale percentage in 2022-25.

According to MOIT, CBU automobiles account for a large proportion of automobile sales due to the high domestic production cost. CKD automobile prices are high driven by low localization rates, and high imported auto parts prices due to import tax.