I shouldn't be surprised, but Vietnam's imposition of stringent checks on imported vehicles has sent shockwaves through international automakers, local consumers and also investors who see the country as a promising destination.
The new rules took effect just as Hanoi finally eliminated its 30% import tariff for automobiles from within Asean on Jan 1, two years after other developed members of the bloc. Coincidence? No. Protectionism? Absolutely.
Decree 116, announced in October 2017, requires emission and safety tests to be conducted on every batch of automobiles to be imported. In the past, only the first shipment of each model would be tested. The decree also requires all models to obtain Vehicle Type Approval (VTA) certification from authorities of the exporting country. Such certification shows the vehicle meets the standards of the country it will be sold in and is normally issued by the importing country.
How much more expensive will these rules make imported cars in Vietnam? That's what everyone is trying to figure out. The Japanese Chamber of Commerce and Industry in Vietnam estimated in December that emission tests could take two months and cost up to US$10,000 per shipment.
The governments of major exporters such as Japan, Thailand and the US have all voiced their concerns to Vietnam that the new rules would make it impossible for them to sell cars in the country. The decree might violate World Trade Organization (WTO) rules, they added.
Toyota, Honda and others have suspended exports to Vietnam pending clarification of the decree. They said the announcement came without advance notice and at a time Vietnam was expected to open up its automotive industry after the two-year grace period granted to Vietnam, Cambodia, Laos and Myanmar under the Asean Economic Community (AEC).
Consumers too are disappointed, as they had been putting off car purchases in hopes of getting better deals in 2018. According to the Vietnam Automobile Manufacturers' Association, vehicle sales including imports fell 10.4% last year to 272,750 units. Out of the total, 194,000 were made domestically and 77,700 imported, mainly from Thailand, Indonesia and Japan.
Now, consumers who have ordered cars face delays and higher costs as dealers of imported brands renegotiate terms and prices to reflect the cost of the new tests and related paperwork.
In fact, this is not the first time Vietnam has engaged in protectionism for its automotive industry. Six years ago, Circular 20 of the Ministry of Industry and Trade stipulated that importers must present papers in which car manufacturers specifically authorise them to handle their products. This effectively chased small importers out of the market.
Today the market is dominated by big companies including car assembly joint ventures for Toyota, Honda, Mercedes-Benz, Ford and others. The local champion is Truong Hai Automobile Co (Thaco), which makes its own trucks and buses and also assembles Mazda, Kia, Peugeot and Hyundai vehicles from imported parts. The remaining players are importers of Subaru, Volkswagen, BMW, Audi and Porsche.
After Decree 116 takes effect, many more auto import companies are expected to disappear, with only a handful of big players with deep pockets able to bear the cost and headaches of complying with the new testing rules. Price competition would be reduced and ultimately consumers would lose.
The bad news doesn't stop there. Hanoi is also considering raising the excise tax on pickup trucks, of which Thailand is the major exporter. According to Kasikorn Research Center, excise taxes on pickups with engine capacity below 2,500, 2,500 to 3,000 and over 3,000cc will be lifted to be on par with those of passenger cars, which are now taxed between 55% and 90%.
If the taxes are approved, pickup prices will rise for certain. Customers who buy such vehicles for agricultural or business purposes will be adversely affected.
Some say the new regulation is aimed at encouraging automakers to establish local production in Vietnam. But companies are probably heading to Vietnam regardless, given the growth projections and current low car ownership levels. BMI Research predicts vehicle output in Vietnam will double to 112,000 units by 2021, as car companies race to get a bigger slice of sales in the market of 93 million where incomes are rising and millions are looking to trade up from motorcycles to cars.
In that context, heavy-handed measures to protect domestic companies by setting up technical barriers are very disappointing for local consumers and Asean as a whole. The regional bloc just celebrated its 50th anniversary last year and integration has been proceeding smoothly. Such setbacks are unwelcome.