The automobile industry in Vietnam and Thailand in a comparative perspective

Thailand has been successful in building industrial policies such as tariff and tax policies, local content requirements, supporting industrial development and cluster – based automobile

UNIVERSITY OF ECONOMICS HOCHIMINH CITY

MASTER’S THESIS ON ECONOMICS

MAJOR: PUBLIC POLICY

CODE: 603114

Supervisor: Jonathan R Pincus

HOCHIMINH CITY, 2010

ACRONYMS AND ABBREVIATIONS

VEAM Vietnam Engine & Agriculture Machinery

Corporation

ACKOWLEDGMENTS

To finish this paper, I have received many helps

I am heartily grateful to Professor Jonathan R Pincus for his supervision and guidance His support and guidance from the initial to the final level help me to develop this subject He also read and corrected my grammars very carefully and in details

Also I would like to thank FULBRIGHT teachers and staffs in helping me to broaden

my view and knowledge during my studying

And I would like to express my deepest gratitude to my parents and friends in supporting me

I offer my regards and blessings to all of those who supported me in any respect during the completion of the paper

Huynh Thi Kieu Oanh

CONTENTS

1 INTRODUCTION 1

2 THE AUTOMOBILE INDUSTRY 4

2.1 Performance 5

2.1.1 Thailand 5

2.1.2 Vietnam 9

2.2 Policies and development 13

2.2.1 Thailand 13

Before the 1997 crisis: protectism, agglomeration and development 13

Tariff and tax policy 14

Localization and other policies 15

Developments of the automobile cluster and supporting industries 18

After the 1997 crisis: Trade and investment liberalization and global and regional integration 19

Abolishing local content requirements and restructuring tariffs and other taxes 19

Promoting the development of related and supporting industries and large automobile cluster investments 21

2.2.2 Vietnam 22

Before 2004: High protection for agglomeration 23

After 2004: Protection decreasing, but remains high 25

2.3 Explaining the differences and learning 27

2.3.1 Differences 27

2.3.2 Explanation 28

The domestic market is shrunk by government’s policies, especially current tariff and taxes 28

Supporting industries in Vietnam have not developed, especially an autoparts industry to be able to localize production 31

Vietnam also has some policies, such as land, R&D, financing policies but they

are not clear and useful 33

2.3.3 Lessons 33

3 POLICY RECOMMENDATIONS 34

3.1 Changing the current tariff and tax policy 35

3.2 Developing of related and supporting industries 36

3.3 Development of infrastructure 37

4 CONCLUSION 38

REFERENCES 39

APPENDIX 1 42

TABLES Table 1 List of FDI automakers in Vietnam 10

Table 2 The production volume of 11 JVs (in units), 1996 – 2002 11

Table 3 Tariff and tax rate (%) related to CBU and CKD vehicles, before 1992 – present 14

Table 4 Regulations to Thailand’ zone 21

FIGURES Figure 1 Major functions within the automobile industry 1

Figure 2 Competitiveness Diamond 4

Figure 3 Thailand’s automobile production (in units), 1993 – 2008 6

Figure 4 Thailand’s automobile sales (in units), 1993 – 2008 7

Figure 5 Thailand’s automobile sales share by producers (%), 2005 7

Figure 6 Thailand’s automobile exports (in units), 1996 – 2008 8

Figure 7 The VAMA’s sales volume (in units), 2000 – 2009 11

Figure 8 Vietnam’s automobile sales share by companies (%), 2005 12

1 INTRODUCTION

The automobile industry was acknowledged as the “the industry of industries” in the twentieth century and is considered one of the most globalised industries today (Wad, 2009) From Figure 1, we see that the automobile industry is related closely

to many industries such as steel, electronics and textiles and contributes to the development of many service industries such as finance, marketing, retailing and banking So a country that has a developed automobile industry will create good conditions for promoting the development of other industries This industry contributes largely to socio - economic development and job creation So, in the ASEAN countries, such as the Philippines, Thailand, Indonesia, Vietnam and Malaysia, it is one of the most important and supported industries Development of the automobile industry, covering car and component manufacturing, is usually sought by policymakers in the developing and developed countries (Kohpaiboon, 2008)

Figure 1 Major functions within the automobile industry

Body assembly and painting

Source: The changing nature of the Asian automobile industries (cited from

b Manufature of wheels, types, seats, windscreens, exhaust systems, etc

Final assembly

CONSUMER MARKET

ENGINES AND TRANSMISSIONS

Forging and casing of engine and transmission

Machining and assembly of engines and transmissions

Vietnam’ automobile industry has begun since 1991 But up to now, it is small and underdeveloped Sales volume is very low, about 100,000 units per year This influences very much to generate economies of scale of assemblers and autoparts companies And now the local assembly industry in Vietnam is dominated by foreign-invested joint ventures (JVs) It is focused solely on serving the domestic market In recent years, Vietnam has had many incentives to protect its automobile industry with a view to increasing the local content and reducing the price of vehicles However, up to now, the local content rate is only about between 2% to 10% So, local assembly products are heavily reliant on imported parts In addition, car price is very high According to the survey of the Ministry of Finance, on November 8th, 2008 the Toyota Corolla 1.8MT was sold in Vietnam with the price

of 19,532 USD while in other countries, it was sold 15,350 USD Similarly, the Toyota Camry 3.5 is 38,510 USD in Vietnam while the world price is from 24,215 USD and 28,695 USD These results are against the government’s expectation and also demonstrate that Vietnam’s policies have not worked in the automobile industry

As mentioned above, the automobile industry is supported and encouraged by many countries in the ASEAN The automobile industry in these countries generated some achievements, especially Thailand Now Thailand’s automotive industry is a key sector in the overall economy that account for 11.3% of GDP in manufacturing and employed 1.2 million workers in 2008 (Sirisuwanangkura, 2009) The local content rate is between 60% and 80% depending on the type of vehicles Since

2005, Thailand has become the largest production hub of ASEAN and rank number

14 in global production in 2008 To achieve these results, the government’s policies contributed a large part

The study chose Thailand as a comparative object because Thailand and Vietnam are in the ASEAN region In the past, present and future, the WTO and regional commitments influence much to the automobile industries in Vietnam and Thailand

Additionally, Thailand is an example of success in the development of the automobile industry in the ASEAN

As known, these results in the automobile depend in large part on government policies Thailand has been successful in building industrial policies such as tariff and tax policies, local content requirements, supporting industrial development and cluster – based automobile industry development, while Vietnam’s policies have not promoted the domestic automobile industry

This study does not focus on finding out these results in two countries It demonstrates the ways in which the policies have resulted in differences So, the study focuses on answering these following questions:

1 Which policies influenced the development of the automobile industry in Thailand

in the last years?

2 Which policies used to support the development of the automobile industry in Vietnam?

3 Why are not Vietnam’s policies effective to the automobile industry in comparison with the effect of Thailand’s policies?

About methodology and collecting data: Almost data of the study is secondary data

It is collected from various sources, such as the reports of Vietnam’s Ministry of Industry, the VAMA, the websites of automobile companies in Vietnam, the available data of the TAIA from its website, the articles about Vietnam automobile market information at Vietnam automobile Magazine and other sources

About thesis restrictions: To write this paper, I put myself in the position of a policy

maker And policy commendations only focus on the side of state and are to repair the government failures

This paper is organized as follows The next section analyses the Vietnamese and Thailand’s automobile industries and explains the differences described above Section 3 gives policy recommendations The final section concludes and summarizes

2 THE AUTOMOBILE INDUSTRY

Using the diamond model of Michael Porter, there are four decisive factors in the competitiveness of the industry as shown in Figure 2 (Porter, 1998) It includes firm strategy, structure and rivalry, factor conditions, demand conditions and, related and supporting industries

The role of government policies in this model is to affect the other four factors with

a view to moving to higher levels of competitive performance These main policies include tariff and tax policy, localization, cluster-based development policy and supporting industry development

Figure 2: Competitiveness Diamond

Government policies Firm strategy,

structure and rivalry

Demand conditions

Source: Porter, 1998

Factor conditions

Related and supporting industries

Over time, impact of these policies has contributed to differences between Vietnam and Thailand Based on this model, the study demonstrates the effect of the policies through impact of the government’s policies to the other four factors

Figure 3 shows that the production of vehicles has picked up strongly after the post – 1997 crisis During the crisis, production fell rapidly, from 555,821 in 1996 to

143,250 in 1998 However, in 2005, production volume exceeded one millions units and Thailand is the largest production hub of automobiles in ASEAN In 2008, the total production of vehicles was 1,391,728 units, compared with only 143,250 vehicles in 1998 About the structure of products in 2008, Thailand mainly produced one-ton trucks and pick-up trucks This matches domestic demand as shown in Figure 4

Figure 3 Thailand’s automobile production (in units), 1993 - 2008

Source: The Thailand Automobile Industry Association (retrieved data from

http://www.thaiauto.or.th/Records/eng/records_menu_eng.asp, 10/2009)

Sales can be classified into two types: passenger cars and commercial vehicles In Thailand, domestic demand is weighted towards light commercial vehicles, especially one-ton vans and pick-up trucks Commercial vehicles in total accounted for around two – thirds of domestic demand The tax regime has favored the purchase of these vehicles rather than passenger cars In 2008, 238,990 passenger cars were sold, up by 30% from 182,767 units in 2007 More than 95% of local auto demand was met by domestic production Locally assembled one – ton pickups

account for about two-third of the total sector in Thailand This makes Thailand the second largest market for pickup trucks in the world, after the US

Figure 4 Thailand’s automobile sales (in units), 1993 – 2008

Source: The Thailand Automobile Industry Association (retrieved data from

http://www.thaiauto.or.th/Records/eng/records_menu_eng.asp, 10/2009)

Figure 5 Thailand’s automobile sales share by producers (%), in 2005

Source: The Thailand Automobile Industry Association, 2005

As shown in Figure 5, vehicle sales were dominated by two brands: Toyota and Isuzu Toyota has the largest market share, with 39.8% in 2005 Isuzu has greatly increased its market share and accounted for 25.4% Honda, Mitsubishi and Nissan follow with market shares of 7.7%, 6.8% and 5.9%, respectively United States automobile companies have also increased their presence in the market Japanese

manufacturers controlled nearly 90% of the market

After meeting domestic demand, the automobile companies export vehicles Thailand has become more export oriented since 1996 Exports have increased gradually from 1999 In 2008, a total of 775,652 units were exported with a value of 516,244 million THB Major car export markets were Australia, Indonesia and the

UK while vehicle components and parts were exported to Japan, the US and Malaysia

Figure 6 Thailand’s automobile export (in units), 1996 - 2008

Source: The Thailand Automobile Industry Association (retrieved data from

http://www.thaiauto.or.th/Records/eng/records_menu_eng.asp, 10/2009)

2.1.2 Vietnam

Before 1991, cars in Vietnam were mainly imported from the socialist countries Domestic companies had not invested in auto assembling, and were only focused on repairing imported vehicles

Since 1991 the automobile industry has begun to change dramatically as Vietnam opened its economy to international trade and investment In 1991, the first joint-venture with the Philippines was formed in Vietnam, a company called Vietnam Motors Corporation (VMC)

At present, Vietnam has 12 automobile joint-ventures (see Table 1), more than 40 foreign autopart companies and 100 domestic companies, including 20 Completely Knocked Down (CKD) kits assemblers and repairers, 20 body-trailer-barrel builders and 60 parts manufacturers Joint-ventures (JVs) consist of seven Japanese automakers (Daihatsu, Hino, Isuzu, Mitsubishi, Suzuki, Toyota and Honda), one Korean automaker (Daewoo), one Korean-backed licensed assembler (Mekong), one Philippine-backed licensed assembler (VMC), one German automaker (Mercedes), and one American automaker (Ford) JVs are capable of manufacturing any kind of vehicle demanded by the domestic market, but Hino Motors specializes

in heavy trucks

Most of the JVs were established before 1996 They play an important role in the Vietnam’s automobile industry The total registered investment capital of JVs is 574.7 million USD and total real investment capital to the year 2002 was 419.85 millions USD (74% of registered capital) In 2005, Honda invested in producing cars As of 2005, total real investment capital was about 536 million USD

By 2002, the total registered capacity of eleven JVs was 148,200 units per year However, these JVs used just 30% of total registered capacity and focused on assembling Before 2004, the activities of eleven JVs dominated the Vietnamese

automobile industry The production volume of the eleven JVs accounted for more than 90% of the domestic market Products were diversified in many models They produced mainly cars to satisfy domestic market demand Only Hino Motors Company specialized in heavy duty trucks

Table 1 List of FDI automakers in Vietnam

Start Date Location

Registered capital (million $)

Capacity (units/year)

1 MEKONG

CORPORATION Korea

License Assembler 1992 HCMC 60 5,000

2 VIETNAM MOTOR

CORP Philippine

License Assembler 1992 Hanoi 35 20,000

3 VIDAMCO Korea Automaker 1993 Hanoi 32 10,500

4 VINASTAR Japan Automaker 1994 HCMC 50 5,000

5 MERCEDES BENZ VN Germany Automaker 1995 HCMC 70 10,000

6 VISUCO Japan Automaker 1995 HCMC 21 12,400

7 VINDACO Japan Automaker 1995 HCMC 10 3,600

8 FORD VIETNAM US Automaker 1995 Hanoi 102 14,000

9 TOYOTA VIETNAM Japan Automaker 1995 Hanoi 89 20,000

10 ISUZU VIETNAM Japan Automaker 1995 HCMC 50 10,000

11 HINO VIETNAM Japan Automaker 1996 Hanoi 17 1,760

12 HONDA VIETNAM Japan Automaker 2005 Hanoi 70 20,000

Source: Compiled from websites of automobile companies

Table 2 shows the production volume of 11 JVs from 1996 to 2002 We see that in this period, the eleven JVs had assembled a total of 84,585 vehicles, achieved USD 1,976.6 million in sales and earned profits of USD 24.4 million The production volume of vehicles remains low, but is increasing annually In 1996, total production volume was only 5,538 vehicles However in 2000, automobile companies produced 13,955 units, up by 155% Production volume in 2002 was about 26,706 vehicles, a two fold increase over 2000

Table 2 The production volume of 11 JVs (in units), 1996 - 2002

Source: Compiled from report of the Ministry of Industry in order to use for the

Master Plan for Developing Vietnam’s Automobile Industry, 10/2004

Figure 7 The VAMA’s sales volume (in units), 2000 – 2009

VAMA is a non-profit organization founded in 2000, started with 11 JVs and today has 17 members The sales volume of VAMA represents that of Vietnam’s auto market Figure 7 shows that sales have risen rapidly since 2007, but are still low, only about 100,000 units per year Compared with sales of 13,239 units in 2000, volume has increased to 110,184 vehicles in 2008, nearly ninth times

In 2005, Toyota Vietnam sold nearly 12,000 units, up 29% year on year and accounting for 33.3% of VAMA’s overall sales Following Toyota is Ford, Vinastar and Vidamco with 14.3%, 11.9% and 11.9%, respectively The 12 JVs used only 3.7% of capacity in 1996, rising to 13.2%, 18% and 28.8% in 2001, 2002 and 2003 respectively It is very clear that capacity utilization rates in Vietnam’s automobile industry are extremely low and JVs are counting on an increase in the size of the domestic market as the country becomes more prosperous (Nguyen Bich Thuy, 2009)

Figure 8 Vietnam’s automobile sales share by companies (%), in 2005

Source: The Vietnamese Automobile Manufactures Association, 12/2005

Domestic Vietnamese automobile and autopart companies were mostly established

in the 1960s By 2003, Vietnam had more than 160 domestic companies in

assembly and manufacture of autoparts These included four state owned enterprises supported largely by the government They are Vietnam Motor Corporation (Vinamotor), Saigon auto-mechanics Corporation (Samco), Vietnam Engine and Agriculture Machinery Corporation (VEAM) and Vietnam Coal Corporation (Vinacoal) Recently, and especially since 2004, many 100% domestic investment companies, including private and state own enterprises, have been launched For example, Truong Hai auto company invested in producing Kia, Hyundai, Daewoo and Foton with investment capital of USD 330 million, and TMT corporation invested USD 250 million in manufacturing pickup trucks A majority of these companies import production lines and technology from China, and competition among enterprises is increasing

2.2 Policies and development

2.2.1 Thailand:

Before the 1997 crisis: protectism, agglomeration and development

The government’s support and promotion of this industry can be traced back to

1961 when the Thai Motor Industry Company, the first automobile assembly plant, was established Only a limited number of auto parts were domestically produced These included rubber parts, batteries and leaf springs In 1969, the Ministry of Industry formed the Automotive Industry Development Committee under a Cabinet Resolution of August 26th, 1969, in order to impose policies and measures with an aim to develop the local auto industry Policies and procedures were put in place to facilitate the process of moving from assembly to production The objective of production was import substitution and reducing the trade deficit Before 2000, the assembly companies and parts producers in Thailand were protected through five main policies: high rate of import tariff and taxes; restricted and limited use of imported auto parts; protected and controlled imports; no new operating plants; and, investment promotion

Tariff and tax policy:

Table 3 Tariff and Tax rate (%) related to CBU and CKD Vehicles,

before 1992 – present

Before

1992 1992 1999

2000 – present Completely built-up (CBU) vehicles

1 Before 1992, the classification of passenger vehicle was 2,300 cc engines

2 Excise taxes include municipal taxes

3 Excise taxes for one-ton pick-up trucks was 3.3% whereas for the so called

“pick-up passenger vehicle” is 19.8%

4 Numbers in parentheses are tariffs in 2005

Source: Kohpaiboon, 2008

Thailand used tariffs as a tool to protect the automobile industry Before 1992, tariff

rates on most vehicles, except CKD kits of pick up trucks, were over 100%

However, in 1990 the Ministry of Industry called off the limitation on the number of

allowed series and the Ministry of Commerce replaced it with tariff measures in order to continue restricting passenger car imports Tariff rates for CBU passenger cars over 2400 cc were reduced from 300% before 1992 to 68.5% For CKD kits of passenger vehicles with 2400 cc and below, tariff rates were decreased to 42% from 112% So, the tax burden for imported and domestically assembled cars was reduced Consequently, it resulted in a car-price decrease, which benefited consumers

Table 3 shows that tariffs and other tax policies were used to protect the domestic passenger car market more than commercial vehicles The tariffs on passenger car were 300% before 1992 and 68.5% in 1992 For commercial vehicles, the rates were 120% and 42% The excise tax rate applied before 1992 and in 1992 of CBU passenger car was 44% - 55% and 41.8%, much higher than that of pickup trucks

Localization and other policies:

The literature recognizes the important role played by local content regulations in forcing foreign investors to purchase parts locally (Humphrey and Oeter, 2000) The regulations in terms of local content and policies mentioned above created the conditions for the agglomeration of firms

Local content rates required by Thailand’s Ministry of Industry increased gradually over time and were different among the types of vehicles

At first, in 1972, the Ministry of Industry announced the required local content for passenger cars From January 1st, 1975, it required assemblers to use at least 25% locally produced contents The required percentage was raised from 25% to 50% within five years according to an announcement of the Ministry of Industry in 1978 After that, it also required that 15% of the parts used for truck and bus assembly with chassis and engine should be locally produced A minimum of 20% local contents was also required for truck and bus assembly with chassis and windshields

In 1979, the Ministry of Industry announced a standard matrix on the percentage of local contents required for truck and bus assembly It required manufacturers to increase their use of local parts by 5% per annum over the next 5 years

In 1980 the Automotive Development Committee announced regulations for van and jeep assembly The passenger-car assembling policy was applied to van assembly Likewise, CBU imports of vans and jeeps also fell into the car-assembly policy, while CKD imports of jeeps and vans, called “chassis with windshield” or

“chassis with engine”, were in compliance with the truck-and-bus policy Seven required parts for truck assembling were later announced, namely radiators, exhaust pipe sets (including mufflers), batteries, leaf springs, tires and inner tubes, safety glass and brake drums

Up to 1981, the locally-produced contents were much more expensive than the imported ones So, in 1982, the Ministry of Industry raised the local content limitation to 45% on passenger-car assembly Apart from the required local content, the Ministry began to announce lists of compulsory parts used for passenger-car assembly They might be applied to the rest of the overall contents

In 1984, in order to increase the use of identical parts, which would result in a decrease in capital required by autoparts manufacturers, the Ministry announced annual lists of required local contents for passenger cars and pickup assembly for

1986 – 1988 However, in 1986 the annual lists of required local contents for passenger-car assembly were replaced by Parts List A and Parts List B Part List A was compulsory to all assembly, while assemblers were able to choose the rest from contents stated in Parts List B Local contents in compliance with both Lists A and Lists B was set at a minimum of 54% in order to respond to the economic recession

of that year In addition, passenger-cars assembled from July 1st, 1987 were required to use locally produced engines in order to promote and support the auto parts industry

In 1989 the Automotive Development Committee required the assembly of pickups with an engine capacity of up to 2,500 cc to use locally manufactured engines In the same year, domestic car assembly was required to use local contents according

to List A, in addition to that of List B which could be chosen freely The total amount of local contents used was required to be at least 54% of the overall assembled parts

In 1991 the Ministry of Industry announced a new pickup truck policy In essence, all local contents lists were used, and locally manufactured engines were required for assembly of pickup trucks with engine capacity of more than 1,000 cc

Restricting the number of produced vehicle series and models was also a way to force firms to agglomerate In 1984, the Ministry of Industry announced that a maximum of 42 series of passenger cars could be produced by the industry, and only 2 models were allowed for each series In addition, any series that was not assembled would not be entitled to an assembly-concession renewal, and there would be no replacement concession for those series Besides, to reduce pollution and to upgrade quality and capability of domestic cars, the Ministry also required domestically produced cars to use exhaust-pipe systems certified by the Thailand Industrial Standards Institute

However, in 1990 in order to comply with the changing economic situation, international trade, and consumer demand, the Ministry of Industry announced an additional passenger-car assembly policy to end the limitation on the number of allowed series announced in 1984

In addition, Thailand used to prohibit and control imports, did not allow new operating plants and promoted domestic investment in order to protect the domestic automobile market Initially, in 1978 the Ministry of Industry disallowed registration of new automobile assembly plants Likewise, assembly of any new passenger – car series was also disallowed In the same year, the Ministry of

Commerce also disallowed CBU imports of cars in order to reduce the national deficit To 1989, enlargement of established plants was allowed but the Ministry disallowed new assembly registrations

In 1991, the Ministry of Commerce announced an abolishment of passenger car import restrictions while the import of used cars was prohibited But to 1994 the Ministry of Industry allowed new registrations of car-assembly plants in order to increase investment and competitiveness The Board of Investment Promotion granted rights and privileges concerning the Promoted Area Policy for the automotive industry The Ministry of Finance allowed a 50% special reduction on normal import duties, pursuant to the Brand-to-Brand Complementation Scheme (BBC Scheme)

From the policies mentioned above, we see that before the 1997 crisis, the Government afforded high levels of protection to the domestic market including assemblers, especially for passenger car assembly In the early 1990s, protection was reduced

Apart from these policies, to support Thailand’s automobile companies, the government focused on the development of the automobile cluster and supporting industries

Development of the automobile cluster and supporting industries:

The clustering of the Thai car industry started in the first half of the 1970s (Lecler, 2002) At that time, the clusters were small and formed naturally As shown above, the government used many policies such as local content requirements, banning CBU imports, restricted and limited use of parts to promote parts production So, during this time, some Japanese parts makers entered Thailand Instead of importing CKD from Japan to produce new vehicles, assemblers purchased locally to increase localization as required However, the related and supporting industries in Thailand