Vietnam to scrap outdated automobile localization rules

Vietnam's Ministry of Science and Technology released Friday a circular removing legal documents regulating the calculation of localisation rate in the automobile industry.

As per the circular signed by Deputy Minister of Science and Technology Le Xuan Dinh, after nearly 20 years, regulations related to the localisation rate will not apply starting October 1, 2022. The regulations are being scrapped as they are no longer consistent with developments in automobile manufacturing technology.

The Vietnam Association of Mechanical Industry (VAMI) had informed the Prime Minister and related ministries that the documents determining the automobile localisation rate overlapped each other and were inappropriate. They should be abolished to help increase the competitiveness of domestic enterprises, the association had said.

It argued that the removal of these regulations would help improve the business investment environment, create favourable conditions for domestic automobile manufacturers and assemblers to maintain production in the context of the fierce competition with CBU (completely built units) automobiles imported from ASEAN with a zero percent tax rate from 2018.

The Ministry of Industry and Trade (MoIT) agreed that there were many limitations in the regulations and that they needed to be revised.

In the context of global integration, automakers can designate factories in different countries to produce different components based on their respective strengths in order to ensure that the intra-regional localisation level is high enough to enjoy the import tax rate of 0% when automobiles are traded within the bloc.

Therefore, the regulations related to methods of determining the localisation rate were no longer relevant.

According to the MoIT, the current method of determining the localisation rate, applied since 2004, does not fully reflect the value and technological content of auto components in the total finished product.

For example, the value of interior and exterior components in each car model will vary greatly depending on the materials and manufacturing technology applied.

There are models with mechanical seats and felt covers, but there are also models with electrically adjustable seats, leather covers and heating. While the localisation points could be the same for these seats, the technology features, materials and prices are different.

Under current regulations, Vietnam calculates the localisation rate by clusters of details produced in the country. In international practice, countries calculate this as a percentage of domestic production value. This makes it difficult for businesses to enjoy the preferential import tax rate of 0% if the localisation rate within the bloc, as with ASEAN, is 40%.

In addition, regarding the discrete level of imported auto parts, components must come in clusters, accompanied by many different details. For example, if a car seat consists of 3 pieces, the enterprise must import all 3 pieces from the same place of origin. However, in the context of integration, businesses benefit greatly from the removal of tariffs by many partner countries, so they can import discrete components from different partners or from different countries to get preferential treatment.

Vietnam’s automobile industry remains a fledgling one after more than 30 years since the country opened its door to foreign investment. The current average localization rate of passenger cars with up to nine seats is as low as 7-10%, according to data released by Deputy Minister of Industry and Trade Do Thang Hai last August. The government target is 30-40% by 2020, 40-45% by 2025 and 50-55% by 2030.

The current localisation rate is now 40-50% for trucks, and 55% for buses, according to the MoIT.