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The 34th WORKSHOP
 21 July 2007 (Sat.), GRIPS Campus in Tokyo, 14:00-17:00

Subject:
"Industrial Policies as Determinant of Localization:
The Case of Vietnamese Automobile Industry"

by
Ms. Nguyen Bich Thuy
PhD Candidate, Waseda University
On-leave Lecturer, University of Commerce, Hanoi

 Summary

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In the July workshop, VDF-Tokyo invited Ms. Nguyen Bich Thuy, a PhD candidate of Waseda University (Tokyo), and an on-leave lecturer of University of Commerce (Hanoi), to share the findings from her field survey about localization in the automobile industry in Vietnam. In the presentation, Ms. Thuy would like to discuss how the current industrial policies had influenced localization rate of the industry.

 

The presentation was begun by an overview of localization rates in some industries in neighboring countries, such as China, Malaysia, and Thailand. The data for Vietnam showed that localization rates varied by industries, from 20-40 percent in computer manufacturing industry to 70-80 percent in motorbike industry. Before discussing the surveyfs findings, Ms. Thuy elucidated some key glossaries used in her research paper, including localization and industrial policies. Further, she described the current status of the automobile industry in Vietnam, in which differences in production volumes, types of products, and market shares between domestic firms and foreign-invested firms were presented. She also showed the roadmap for localization in automobile industry in the period 2005-2010, and it was shown that the localization rates would also be diverse, depending on parts, components, types of automobile, and production volume.

 

The presentation was then continued with the findings. The surveyfs data showed that, in this industry, domestic firms had tried to catch up with foreign-invested counterparts in a number of criteria for localization, including capital investment, workforce, and development of supporting industrial services. The localization rate varied from only 1.5 percent to 60 percent, in which domestic firms had much higher rates than their foreign-invested counterparts. One striking finding was that there was almost no progress in research and development (R&D) activities in domestic firms. This situation, according to the presenter, might be due to the fact that most of the surveyed firms were automobile assembly firms. To explain for such low localization rates, particularly in foreign-invested firms, Ms. Thuy listed a number of possible causes, in which market, current industrial policies, prices, and autopart industry were most concerned. On the one hand, Ms. Thuy argued that most of the surveyed firms were reluctant to increase localization rate because of small domestic demand, and low quality of parts and components provided in domestic market. She even said that, according to some companies, it was also difficult to export their products, because they were facing fierce competition from automobile firms in other countries, particularly China and Thailand. And as such, average price was extremely high in comparison with average per capita income of the Vietnamese people. On the other hand, Ms. Thuy also commented that the current industrial policies, especially taxes, tariffs, and industrial human resources, were impeding localization process in many ways. Many firms said that they would not reduce prices if taxes and tariffs will not be considerably decreased. Moreover, Ms. Thuy argued that such policies would also harm consumers, as people would be more hesitant to buy a car than they could have bought. This in turn might negatively affect production of both domestic and foreign-invested firms. Regarding autopart industry, she asserted that the automobile supporting industries in Vietnam were too weak to guarantee both quantity and quality of parts and components for all automobile manufacturing firms. This again would create high production costs, and thus prices of automobiles.

 

To end the presentation, Ms. Thuy suggested some initial policy directions to improve localization rate for the industry. She thought that synchronized set of policy measures, such as industrial human resources and infrastructure development, would provide a large room for the development of the automobile industry in Vietnam.

 

Prof. Kenichi Ohno (GRIPS/VDF) started the Q&A session by asking Ms. Thuy to clarify her definition of local content, and he wonder whether localization meant percentage of parts and components in production costs. In response, Ms. Thuy said that the definition indicated all the domestic sources used in the production. Based on this answer, Prof. Ohno suggested Ms. Thuy be careful in interviewing Vietnamese and Japanese firms, because Japanese firms usually considered parts and components bought from other places/firms to be in localization rate, while, besides these, Vietnamese firms might also consider parts and components made by themselves. As such, localization rates of domestic and foreign-invested firms might be substantially different. In addition, Prof. Ohno commented that Japanese and Vietnamese firms had different business architectures, so that they might also have different perceptions on the same questions, such as product quality or R&D activities.

 

Dr. Mai Fujita (Institute of Developing Economies¾IDE) and Mr. Vu Tuan Khai (YNU/VDF-Tokyo) shared a common concern about discussion on automobile price. They argued that prices of parts and components must have different policy implications from prices of completed automobiles. Ms. Thuy responded that the presentation mentioned about the latter, not the former. She additionally gave some examples to show that both policy makers and automakers in Vietnam had been stuck in this problem due to different points of view.

 

In addition, Dr. Fujita also commented that the current research did not have strong arguments of why local content should be increased in the automobile industry, and she wondered whether the current internal and external economic contexts would allow Vietnam to do so. She suggested Ms. Thuy provide a literature review on both successful and failed cases to have more concrete opinions for Vietnam. Ms. Thuy thanked for these useful comments, and she added that this presentation focused only on how the current industrial policies had impacted localization progress in automobile firms, and concrete policy suggestions would be provided in the subsequent studies.

 

For policy suggestions, Prof. Ohno said that it would be really difficult in the case of Vietnam due to a number of constraints. For instance, he argued that small demand for automobiles might not attract more foreign firms to come. Also, it would be difficult for automobile manufacturers to reduce production costs due to such large costs as for buying raw materials, seeking good workers, and looking for providers of high quality parts and components. He suggested that automobile firms in Vietnam should look for niche markets, seek appropriate export-import strategies, or produce smaller cars. Though, he thought that conflicting policies would be the most concerned issue for the development of the industry: on the one hand, Vietnam wanted to develop this industry due to some advantages; on the other hand, Vietnam also wanted to limit the industry because of overloaded transportation infrastructure, especially in crowded urban areas like Hanoi and Ho Chi Minh City.

 

Agreeing with Prof. Ohno, Mr. Mac Quang Huy (Lehman Brothers Japan Inc.) added that localization in particular and the automobile industry in general had been in slow progress due to the weaknesses of fundamental policy sets, such as policies and strategies in improving and developing infrastructure and public transportation. However, he argued that, even these policy issues were solved, it would still be difficult for the industry to go further if the demand was too small.

 

Ms. Thuy thanked all the participants for their questions and comments. She would like to exchange further with them in her coming research.                          

 

The workshop ended one hour earlier than usual. However, we still had an informal meeting until 5:00 pm. Many research activities, ideas, and opinions were discussed and exchanged. We also announced the schedule for coming workshops. On Saturday August 18, 2007, in our 35th workshop, we will welcome Mr. Le Viet Hung (GRIPS) to discuss his findings on monetary transmission mechanism in Vietnam.

 

Paper (PDF238KB) | Slides (PDF678KB)                  

 (By Giang Thanh Long)

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