TPP and the bright spot for Vietnam automobile sector

According to the tax cut schedule, until 2018 the tax rate on automobiles imported from member countries of ASEAN and ASEAN +3 will be reduced to 0 – 5%. With the low production capacity and localization ratio at present, Vietnam is likely to become the export market of regional nations, especially Thailand and Indonesia, causing many challenges for the development of the industry and domestic enterprises. According to Vietnam Industry Research and Consultant Jsc (VIRAC), the localization rate of Vietnam automobile industry reaches merely 10%, while the ratios in Thailand, Malaysia and Indonesia are respectively 85%, 80% and 75%. In that context, the Trans-Pacific Partnership Agreement (TPP) is considered as a bright spot for the growth of Vietnam automobile sector.

On October 5th, 2015, TPP is formally adopted after more than five years of negotiation with the participation of 12 member states, in which there are 4 countries with large automobile industries (USA, Japan, Canada and Mexico). However, different production conditions have made them dissent in making decisions related to the issues of tariffs and rules of origin. Mexico and Canada requested the localization rate of 62.5% to enjoy tax exemption ( which is equivalent to the provisions of the NAFTA, as this high rate had created a wave of investment and help Mexico become the leading components supplier for the US market). Meanwhile, Japan – one of the largest automobile manufacturers in the world requires a level of 32.5%, due to the fact that they rely on imported components from Thailand and Indonesia for production, while the US approved the rate of 50%. After months of negotiations, four countries agreed with the intra ratio of 45%, which is later adopted by 12 member states.

Thus, it can be seen that the TPP really brings a new opportunity for the components and spare parts manufacture sector in Vietnam, while the two largest suppliers in ASEAN which are Thailand and Indonesia did not participate in this agreement. In order to satisfy the intra rate of 45%, Japanese investors may have to move the production of components from these two countries to member states to enjoy the tax exemption. Among 12 countries joining the TPP (Australia, Brunei, Canada, Chile, Peru, Malaysia, Mexico, the US, New Zealand, Japan, Singapore and Vietnam), Vietnam can be considerred as the most potential market for Japanese automakers, because the labor source is plentiful and cheap, and a lot of Japanese auto brands have invested in building manufacturing and assembly infrastructure in Vietnam recently. However, Vietnam’s labor quality is not high, especially in sectors requiring technical factors – such as high-tech component manufacturing, in addition to the small scale of the market, they can be barriers for Japanese investors in moving production lines to Vietnam.

The “Vietnam Automobile Industry Report Q2/2017” elaborated by VIRAC draws an all-around picture about the Vietnam automobile market, including the information about the Trans – Pacific Partnership Agreement (TPP) as well as its tariff regulations and rules of origins. The report discusses the overall scenario, analyze the like impacts of keys elements in the market through the aspects: input components – spare parts, production – consumption, export – import, price movement as well as the distribution system. The report also gives the forecast in the near future and clarify some threats for investors intending to join the industry. Specific data about leading producers and main suppliers in the market, such as Truong Hai, Toyota and Ford, … are also included.