Market

This is especially true as the production price of automotive technology falls due to economies of scale. To Vietnamese, developing this industry is more than an economic goal but also moniker of successful development – the dream is to make a “real” Vietnamese car.

Determining the automobile industry to be a key to the growth in the country’s industrial sector, in the early 1990’s, the Vietnamese Government offered a variety of incentives to attract both domestic and foreign investor’s money into the industry. In 2004, the Prime Minister signed Decision No. 177/2004/QD-TTg “Approving the development plan of Vietnam’s automobile industry till 2010, vision to 2020.” However, despite many expectations and privileges offered by the decree, the plan has turned out to be a bitter failure. In fact, the automobile industry in Vietnam is still stalled, it’s development hindered by major roadblocks in Vietnam’s economy and society.

The chicken or the egg?

Ironically, the biggest roadblock to Vietnam’s automotive development is traffic. According to a report by the Ministry of Construction in 2008, only 6.18 percent of area is used for traffic systems in Hanoi’s urban districts, while the portion in the suburbs is just 0.9 percent. In HCMC, the portion in center is between 8 percent and 14 percent, while its suburbs range from 0.2 percent to 2.8 percent. The global standard portion for traffic areas used in cities is generally from 15 to 20 percent.   These highly constrained areas simply do not fit vehicles, and ultimately their addition leads only to congested roads.

While the infrastructure issues are being resolved, the only option to ensure reasonable traffic flows on roads is to limit participation and possession of vehicles. Current Government policy does this with high taxation and technical requirements, keeping the price of vehicles artificially high, thus reducing the number of people who can afford them.

Yet   these   restrictions   go   against   the   development goals set out by the Government’s own plan.  Because the high external costs limit participation in the market for automobiles, it will be impossible to develop an efficient manufacturing industry.      Automobile manufacturing relies heavily on economies of scale, which in turn rely on significant levels of production output. In addition, without first developing a local market, it will be difficult for the industry to become competitive enough to export.

Some experts believe that rather than restrictions, the government should stimulate domestic consumption of cars, which consequently encourages investment in traffic infrastructure projects, and thus the system creates a cyclical self-fix.  However, privatized models like BOT (Build-Op-erate-Transfer) require high volumes of road usage to be profitable and the Government is not quite convinced that the negative impacts of significant traffic congestion caused by increasing automobile usage will be overvalued by the BOT style infrastructure improvements.

Ironically, while the conundrum over transport issues idles away, the government must still carry out a strong protection policy for the young automobile industry. But this also creates a disincentive to be efficient. It seems that car manufacturers are not living up to their promised rates of domestic production. In a survey of six major automotive manufacturers by the Ministry of Finance only one had reached a 10 percent level of domestic production capacity. Yet manufacturers still enjoy outstanding profits resulting from the distorted prices of cars in Vietnam’s market.   As an example, a 4 × 4 Ford Escape 2.3L price in Vietnam is US$ 37,634, while the price of this car in the U.S. is only US$21,020.

Need a change on perception

There are still 10 years more to mark the end of the automotive development strategy dictated by the Government. However to be practical, what the Government needs to do is create an effective industry in order to satisfy domestic demand and contribute to the national economy rather than a “complete” automobile manufacturing sector, in which all parts of a car are “made in Vietnam.”

The   government   has   a   wide   range   of choices fulfill these targets. Vietnam could be a specialized part in the global chain of automobile production like Thailand and Indonesia, which means to produce only what Vietnam has competitive advantages in.  An  individual  car has an average of more than 30,000 unique parts;  therefore  it  will  cost  a  huge  amount of investment for the country to develop all these supporting industries for automotive production.  Moreover,  providing  Vietnam could manage to do that, it is impractical for Vietnam’s  automotive  materials  to  compete with Multi-national Corporations, which have long  been  engaging  in  specialized  automotive support industries.

Most important for policy makers, is to clarify to the main conflicting goals.  Supporting the a local automotive industry in any manner requires significant changes to in- frastructure in the urban areas –where the concentration of wealth and capacity to support the cost of a vehicle are - and, reducing the price distortions in the market to spur an increase in efficient production in the domestic automotive industry.  These are difficult decisions, as both will impact the economy and society many years into the future. 

Source: www.vfr.vn