What is driving Vietnam’s high auto prices?

High taxes and fees

By the end of 2022, more than 40 auto manufacturing/assembly firms were operating in Vietnam, with foreign invested companies accounting for 35 percent, and domestic companies for 65 percent. Together they meet about 70 percent of the domestic demand for autos with less than nine seats.

Auto prices in Vietnam are almost double compared with Thailand and Indonesia

Many global auto giants have manufacturing/assembly facilities in Vietnam, some of which have engaged deeply in global manufacturing chains. Trucks and buses manufactured/assembled in Vietnam have been exported to Thailand and the Philippines. An assessment by the Ministry of Industry and Trade (MoIT) suggests the domestic automotive sector is capable of manufacturing/assembling 323,892 autos a year, more than 1.4 times higher than the target set in the sector’s development strategy.

With a population of about 100 million people, Vietnam has major potential as an ASEAN auto market. However, the domestic automotive sector still focuses on four work stages including welding, painting, assembly and testing. Auto prices in Vietnam remain higher compared with other countries in the region (almost double prices in Thailand and Indonesia, and even higher compared with countries with developed auto industries such as the US and Japan).

A recent MoIT document sent to the Ministry of Finance attributes this to high taxes and fees and lower manufacturing output compared with design capacity. Another cause it identifies is the preferential tax policy applied to fully assembled auto imports. Under existing regulations, the import tax applied to autos in the Vietnamese market is 50-70 percent of the auto value. However, under the ASEAN Trade in Goods Agreement (ATIGA), fully assembled autos imported from ASEAN member countries with a localization rate of over 40 percent will continue to be exempt from import tax for an additional five years until 2027. Thailand and Indonesia the top two auto exporters to Vietnamare currently exempt from import tax (75 percent of Vietnam’s auto imports are from these two countries). This explains the high competitiveness of autos imported from Thailand and Indonesia in the Vietnamese market.

Problems and solutions

To develop the domestic automotive industry as well as to increase the localization rate and reduce auto prices, the MoIT proposed resolving two problems: 1) low market capacity, and 2) high manufacturing costs.

Thailand and Indonesia have attracted large-scale investment projects, putting competitive pressure on the Vietnamese automotive sector. According to the MoIT’s Industry Agency, the size of the Vietnamese auto market is equal to one third of Thailand’s and one fourth of Indonesia’s. The domestic cost of auto manufacturing is 10-20 percent higher compared with other countries in the region since Vietnam has to import most of components and spare parts for auto assembly.

The per-capita gross domestic product (GDP) in Vietnam remains insufficient for a majority of population to own autos. It is calculated that a minimum per-capita GDP of US$4,000 per year will help promote rapid growth of the automotive industry.

The MoIT admitted that Vietnam still lacks an appropriate policy to develop the automotive industry as well as mechanisms to attract foreign direct investment, and that the manufacturing capacity of domestic businesses remains low and the transport infrastructure inadequate. The ministry proposed additional preferences and support for potential auto manufacturing/assembly businesses. The ministry also proposed revoking regulations on the minimum discrete level of imported auto parts to facilitate the implementation of preferential tax programs.