Vietnam saw auto industry revenues surge in 2014 amid the rapid expansion of a young, style-conscious middle class following 15 consecutive years of economic growth of over 5%.
While major regional vehicle markets Indonesia and Thailand experienced annual declines in sales last year, revenues in Vietnam shifted into high gear, lunging 43 per cent on-year, according to the Vietnam Automobile Manufacturers Association (VAMA).
Toyota, Mercedes-Benz, Ford and Honda all reported solid annual sales increases, despite relatively high import taxes imposed on both completely built-up (CBU) vehicles and completely knocked down (CKD) imports.
Completely built-up and completely knocked-down
Quite simply, when a resident purchase a foreign vehicle brand in Vietnam, they have the option of choosing either a CBU or a CKD version.
In order to protect the local auto industry the government has levied higher import duties on all CBU foreign vehicles. This, in substance, serves as a penalty tax and has created an economic incentive for the manufacturer to opt to sell the CKD version.
CBU
A CBU vehicle is imported as a fully finished unit, ready to drive once it arrives on Vietnam’s shores. One can think of it as 100% foreign made, being that it was assembled by a foreign workforce generally using parts made in its country of origin.
In short, no Vietnamese labour or assembly were involved. As such, the import duty levied on a CBU vehicle is determined in accordance with the ASEAN Trade in Goods Agreement (ATIGA).
The ATIGA pact, signed in February 2009, came into effect on May 17, 2010. Under it, Vietnam has agreed to phase out vehicle-import duties from ASEAN countries from 50% this year to 40% by 2016, 30% by 2017 and completely eliminate it in 2018.
Although there is a common belief that a CBU vehicle is completely manufactured and assembled in its country of origin, this is not always the case. Quite a few CBU models – particularly from Honda and Toyota – imported into Vietnam have been assembled in Thailand.
CKD
A CKD vehicle is imported as a knock-down kit that relies on local assembly. While most of the individual parts have usually been manufactured in the vehicle brand’s country of origin, the assembling of the vehicle was performed in a local plant by a Vietnamese workforce.
To receive additional tax preferences, many manufacturers have also incorporated local content (Vietnamese-made parts like tyres, windows, and headlights) into the vehicle. In view of the jobs created by CKD vehicles, the import duty imposed on them has been significantly lower.
A number of leading importers have said that while high taxes have put the brakes on Vietnam's domestic auto market in the past, the complete elimination of tariffs on the other hand, will most likely destroy the market entirely.
Yoshihisa Maruta, general director, of Toyota Vietnam said the situation has put his company’s business strategy in limbo and it has not yet decided which path to follow, either to continue assembling vehicles in Vietnam or importing vehicles for domestic sale.
With the tariffs being phased out, it obviously will be less expensive for the customer to import a CBU vehicle as opposed to the current CKD model the company has been following.
In addition, the reduced tariffs are also certain to bring about stiffer competition from other manufacturers in the industry – especially from India he said, hinting that the company may be forced to close all operations in Vietnam.
Toyota Vietnam led the market in car sales for 2014, selling 41,200, holding a 31 per cent of the market share. Any legitimate cost benefit analysis won’t support gearing up financial investment and automotive manufacturing in Vietnam at these modest levels of production.
Vinastar, a joint venture assembling Mitsubishi vehicles, has already announced it will switch to the CBU model by 2018 adding that this really isn’t a difficult decision as consumers naturally will migrate to the lower cost model.
Suzuki Vietnam has declined to talk about its future business plans. However, the manufacturer late last year chose Ertiga, a 7-seat car imported from India as its strategic car model to compete with other rivals.
Hyundai, a well-known RoK brand for which many Vietnamese hoped would invest in the automotive industry, has recently announced that it will shift its focus on production to Malaysia.
For his part, Dezan Shira & Associate suggested that without government support Vietnam, vehicle manufacturers will be forced to make the clear cut financial decision to import vehicles rather than assemble them in country.
VOV
