Overcoming Regulatory Hurdles: Decree No. 116 and Vietnam's Auto Industry

Decree No. 116: Shaping Vietnam's Automobile Industry

Decree No. 116, issued on October 17, 2017, specifies conditions for the manufacturing, assembly, importation, and offering of warranty and maintenance services of automobiles. The decree requires importers to submit vehicle type approval (VTA) certificates for unused completely built-up (CBU) vehicles issued by competent overseas authorities starting January 1, 2018. This VTA requirement – designed to meet both safety and emission specifications – drew fierce reactions from auto firms operating in Vietnam, including foreign-invested ones.

At the annual Vietnam Business Forum 2017, the Automotive Working Group noted that most auto enterprises in Vietnam were unable to find suitable overseas VTA certificates to match specifications set for unused CBU units, as each country’s government only tests and certifies against local regulations for domestic-usage vehicles – export vehicles are out of scope.

Circular No. 03 and Criticism

Under Circular No. 03 issued by the Ministry of Transport (MoT) in January 2018, which guides the implementation of import-related regulations prescribed in Decree No. 116, the procedure of conducting emission and safety tests for each model of automobile class (or two if the importer asks for one model for the emission test and the other for the safety test) has been criticized as meaningless and a waste of time and money. According to the Japanese Chamber of Commerce and Industry in Vietnam, the testing process could take up to two months and cost up to $10,000 each time. Many auto firms have complained about Vietnam’s unnecessary red tape regarding VTA certificates for imported automobiles, blaming it for the scarcity of CBU units over the past two months.

Shifting Trends Among Manufacturers

However, the wind’s direction seems to have changed. Manufacturers including Honda, Ford, GM, Mitsubishi, and Nissan, who import vehicles from Thailand to Vietnam, have reportedly submitted the VTA form to the MoT and received the ministry’s approval. Honda Vietnam brought home a shipment of more than 2,000 unused CBU units, including models like Jazz, Accord, CR-V, and Civic. More than 1,000 units are under customs clearance at SPCT – Hiep Phuoc port in Ho Chi Minh City, with the remaining units sent to Dinh Vu port in northern Haiphong city for customs clearance.

Several automobile firms are restarting their import of automobiles from Thailand after the Thai government approved the certification as required in Decree No. 116, the Vietnam Automobile Manufacturers’ Association (VAMA) reported. VAMA noted that some countries have had to change their laws to issue VTA certificates for units to be exported to Vietnam, as it is not a type of certificate available in many exporting countries.

Ford and GM's Efforts

Ford, GM, and many others worked tirelessly to gain VTA from the authorities of Thailand – the leading exporter of automobiles to Vietnam in 2017 with 38,244 units, equivalent to over 39% of the total automobiles shipped to Vietnam. Ford Vietnam imports vehicles only from the US and Thailand. The firm worked with the US manufacturer to self-issue safety certificates for vehicles to be shipped to Vietnam, while teaming up with the UK Vehicle Certification Agency to grant emission certificates for US-made vehicles. For those ordered from Thailand, Ford Vietnam succeeded in obtaining a combined safety and emission certification from the Thai Department of Land Transport.

Such regulations set for auto import in Decree No. 116 and Circular No. 03 have only been applied for the first time, making auto firms tentative to meet regulations and concerned about emerging obstacles. Prior to making large-scale unused CBU orders, Ford Vietnam plans to import one vehicle to test the duration of testing procedures and validate certifications. GM Vietnam is also striving to meet the regulations to import Colorado pickups and Traverse SUVs to Vietnam but has not confirmed when such shipments could arrive.

Production Resumption Conditions

A well-informed source from a Hanoi-based auto firm indicated that overseas automakers will only reset the production of vehicles for the Vietnamese market once Vietnam approves the certificates granted by overseas competent agencies or organizations. It takes some 20-30 days to manufacture four-wheeled vehicles. Previous CBU shipments would normally arrive in Vietnam around two months after production if import and tax procedures went smoothly. With the strict import regulations set for unused vehicles in Decree No. 116 and Circular No. 03, the timing of such shipments to Vietnam is now unpredictable.

Market Impact and Stock Units

The automobile market witnessed a scarcity of imported vehicles, which is expected to continue in March. Units sold in these months are those imported in 2017 and left in stock because many overseas manufacturers had to cancel the manufacturing of units for the Vietnamese market from December to March.

Domestic Production Push

There has been much recent discussion on how to increase the localization rate of made-in-Vietnam vehicles as the country faces a wave of made-in-ASEAN vehicles, whose localization rates reach at least 40% and are immune from import duties in 2018 under Vietnam’s commitment to the ASEAN Free Trade Area. According to the Ministry of Industry and Trade, the localization rate of nine-seat or under cars manufactured in Vietnam has reached around 10%, while in ASEAN countries it climbed to around 65-70%, and even up to 80% in Thailand.

Localization rates indicate the state of Vietnam’s fledgling auto industry. However, over the past couple of decades, Vietnam has offered a number of tax and land-use-related incentives to overseas investors, hoping to facilitate the auto industry and bolster the growth of others such as metallurgy and electronics.

Concerns and Efforts for Localization

Expressing concern about the localization rate, economic expert Ngo Tri Long claimed that foreign-invested firms prioritize production and business operations that bring the most profits. “Vietnam’s auto industry will earn no profits if it leans completely on foreign-invested auto firms – which receive a lot of incentives as history has shown.”

Once again, the question of boosting domestic automobile manufacturing and assembly became urgent in a meeting between the Government Office and auto firms in late February this year. “As a VAMA member, auto firms ought to pay due attention to the manufacturing and assembly of vehicles in Vietnam, instead of talking more about imports,” stressed Tran Ba Duong – chairman of the domestic-invested Truong Hai automobile firm (Thaco), the nationwide lead industry manufacturer.

Hyundai Thanh Cong's Production Goals

Hyundai Thanh Cong Auto Vietnam JSC is enhancing domestic production in line with the national automobile development strategy. Domestic production now contributes to 80% of the firm’s total vehicles. The joint venture aims to lift domestic output to 95% in the near future, Le Ngoc Duc, general director of the firm, said.

Vinfast and Foreign Investments

Besides Vietnamese auto brand Vinfast’s $3.5 billion project with a capacity of 500,000 vehicles per year, invested by Vietnam’s leading real estate developer Vingroup, the domestic auto market is placing hope on foreign-invested firms like Toyota and Mitsubishi Motors. Toyota Vietnam is considering restarting the assemblage of its Fortuner model if imports encounter difficulties.

Mitsubishi Motors' Plans

In a meeting with Deputy Prime Minister Vuong Dinh Hue in mid-January, Kozo Shiraji, executive vice president of Mitsubishi Motors Corp., reaffirmed Mitsubishi’s plan to invest in a second auto factory in Vietnam, totaling $250 million. The firm is currently considering the factory’s location. Designed with a capacity of 30,000-50,000 units per year, the factory is expected to be operational by 2020.

Reference: Vietnam Investment Review