The automobile industry in Vietnam and Thailand in a comparative perspective

MINISTRY OF EDUCATION AND TRAINING UNIVERSITY OF ECONOMICS HOCHIMINH CITY FULBRIGHT ECONOMICS TEACHING PROGRAMME HUNH TH KIU OANH THE AUTOMOBILE INDUSTRY IN VIETNAM AND THAILAND IN A COMPARATIVE PERSPECTIVE MASTER’S THESIS ON ECONOMICS MAJOR: PUBLIC POLICY CODE: 603114 Supervisor: Jonathan R. Pincus HOCHIMINH CITY, 2010 i CERTIFICATION I certify that the substance of the study has not already been submitted for any degree and is not being currently submitted for any other degrees.  I certify that to the best of my knowledge any help received in preparing the study and all sources used have been acknowledged in the study.  The study does not necessarily reflect the views of the Ho Chi Minh City Economics University or Fulbright Economics Teaching Program. Huynh Thi Kieu Oanh  ii ACRONYMS AND ABBREVIATIONS AFTA ASEAN Free Trade Agreement AICO ASEAN Industrial Cooperation Organization BBC Brand-to-Brand Complementation CEFT Common Effective Preferential Tariff CBU Completely Built Unit CKD Completely Knocked Down IEs Industrial Estates IL Inclusion List IKD Incompletely Knocked Down JVs Joint ventures LVCs light commercial vehicles Samco Saigon auto-mechanics Corporation TEL Temporary Exclusion List UK United Kingdom US United States VEAM Vietnam Engine & Agriculture Machinery Corporation Vinacoal Vietnam Coal Corporation Vinamotor Vietnam Motor Corporation WTO World Trade Organization iii 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 iv 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 v 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 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 BODIES MAJOR SUPPLYING INDUSTRIES Manufacture and Stamping of body panels Body assembly and painting Source: The changing nature of the Asian automobile industries (cited from http://www.unescap.org/tid/publication/chap1_2212.pdf ) Steel and other metals Rubber Electronics Plastic Glass Textiles COMPONENTS a. Manufacture of mechanical and electrical components, e.g. instruments, braking system, steering components 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 2 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 8 th , 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. 3 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. 4 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 [...]... before the increase in local content requirements, the high yen and the expectation of growing demand, the number of parts-makers and suppliers entering Thailand had been increasing During the period 1971 – 1985, there were around 30 multinational parts manufacturers in Thailand, dominated by Japanese companies (Kohpaiboon, 2008) After the 1997 crisis: Trade and investment liberalization and global and. .. Thailand s automobile industry developed more than Vietnam s Foreign automakers in Thailand appeared thirty years earlier than in Vietnam Japanese producers have become global leaders in Thailand and Vietnam, with the first-tier firms that supply directly to assemblers The development paths of Vietnam and Thailand have some similar points Firstly, the automobile industry in the two countries has developed... even if there is an increase in tariffs on parts, they must not increase prices of their products to increase market share For example, Vinaxuki automaker has kept product prices the same even as the costs of materials and parts have increased (NN, 2007) However, for JVs, an increase in taxes and tariffs forces automakers to increase car prices and limits the market and disadvantages consumers In fact,... on the basis of JVs, especially Japanese companies Secondly, both protect the domestic market through high tariffs and taxes as well as administrative measures such as local content requirements and banning vehicle imports However, in an aspect of developing orientation, Thailand is different from Vietnam Thailand has participated in the global automobile value chain while Vietnam has developed its automobile. .. to manage the automobile industry at present and in the future But these policies in recent years have not supported the companies well At present, automakers are calling for lower excise taxes to protect local companies because the market scale is too small and segmented If excise taxes are high, the market scale is low and vice versa Decreasing tax and tariff incentives has led to increasing car prices... this situation did not meet the government’s expectations In the recent years, along with negotiating to expand the market and join WTO and bilateral and multilateral agreements in the region, Vietnamese policies have changed toward decreasing protection Therefore, in 2004 the government decided to decrease protection for the automobile industry by reducing tariffs and taxes and deregulating trade policies... industry with an orientation toward 28 producing whole vehicles This means Vietnam wants to supply all parts in a vehicle The developing orientation of Vietnam is not suitable to integrative trend in this period Additionally, as mentioned above, Thailand s policies has contributed a large part in generating the high local content rate and has built the automobile industry supplier network as a pyramid... 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 8 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... 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 jointventure with the Philippines was formed in Vietnam, a company called... 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 . 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. 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. 3 Additionally, Thailand is an. 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