VIETNAM – AUTOMOTIVE SECTOR – CURRENT ISSUES AND SOLUTIONS FOR INVESTMENT AND OUTLOOK ON MAJOR TRADE DEALS TPP11 AND EUVNFTA

1. VIETNAM – AUTOMOTIVE SECTOR – CURRENT ISSUES AND SOLUTIONS FOR
INVESTMENT AND OUTLOOK ON MAJOR TRADE DEALS TPP11 AND EUVNFTA
Author: Dr. Oliver Massmann
A. ISSUES AUTOMOBILE SECTOR
1. Small production and competition
2016, the Automobile market in Vietnam reached over 300,000 units (consisting of: 230,000 CKD
and 70,000 CBU vehicles). However, the overall production only covers around 50% of the total
capacity. Furthermore, investors do not decide to invest in long –term project due to big
fluctuations in the past and the lack of a stable market. It is very risky for suppliers to invest in
high investment producing parts due to disadvantages of small production. These high prices on
parts manufactured locally is affecting the competition between local parts and imported parts. As
a result, many suppliers cannot afford and sustain the production in the Vietnamese market.
Moreover, with the lack of local manufactured parts available in Vietnam, CKD vehicle assemblers
need to import the most parts and materials which is causing higher costs due to logistics,
packaging and import duty. Thus, these conditions are opening a gap between Vietnam CKD
vehicles and CBU vehicles from about 10-20%.
2. Critical delivery capability of suppliers
A fully assembled car is consisting of hundreds of parts. As a result, car assemblers need a well-
structured supply chain meeting their supply requirements. In Vietnam, many Vietnamese
suppliers cannot provide materials in the required QCD standards for being able to take part in the
international supply chain. Furthermore, the technology transfer, the right on use of patents,
licensing agreements and copywriting permits are still required and not developed enough to
ensure supply in global standard. Moreover, the safety standards for 4-wheel parts production is
not developed as required yet.
In addition, the government is not developing well-supporting policies or measures to ease the
production and trade for suppliers. In the last years, the government issued supporting decrees but
they contain complicated procedures. There is no list provided containing information about all
relevant suppliers available in Vietnam. As result, it is very difficult for companies to find all
needed suppliers to ensure efficient production.
Further policies for stabilizing the market are to be made. Countermeasures and infrastructure
development is a very important aspect to improve current issues. Moreover, the production cost
cap and the gap between CBU and CKD vehicles need to be narrowed by setting new regulations
or enforcing policies. Lastly, the government needs to give incentives to attract investments to
support the development of the automobile sector.

2. Suppliers should try to go in cooperation with foreign suppliers for transferring technology to
Vietnam and take part in databases for suppliers. National suppliers have to listen to international
companies to develop the understanding of vehicle assemblers and their requirements. If
assemblers find supplier companies understanding their needs and they are able to operate in the
way of those needs, new investments will be attracted in the future.
3. Issues with Decree 116/2017/n33-CP on requirements for automobile supplier, importer,
manufacturer and automobile aftersales guarantee and maintenance
a. Article 6, clause 2 point a rules that CBU importers must submit vehicle type approval
certificate (VTA) and COP factory certificate. These have to be issued from the overseas
authority. This is a major issue due to every agency is following national regulations and is
adjusting their work to domestic requirements. It is unbearable to demand that suppliers must
adjust work on regulations to each export country. In addition, there is no VTA authority in
some countries (for example: Korea), so that, the VTA certificate cannot be issued to CBU
importers in these countries. As result, the requirement of certificates’ issuance is a major
reason for slow development of the automobile sector. Thus, Vietnam is limiting market access
to some foreign investors in a very critical way. Furthermore, tests on safety and emission will
be conducted of every single CBU shipment. This provision will highly increase the production
time. However, the requirement of testing each shipment should be amended due to lack of
necessity. Moreover, the government should start accepting the UNECE certificate. It is an
internationally accepted certificate while it is meeting the Vietnamese requirements as well. In
addition, the government needs to act as fast as possible to create transparent and stable
environment for investors and their businesses in the automobile sector due to recent
production cancellations of some enterprises on import of CBU vehicles.
b. Article 7, clause 1, point a provides the requirement of test roads with 800m length for CKD
makers by 17 April 2019. The requirement of owning a test road is a huge financial burden,
even renting test roads is very expensive and most producers are not owning test roads or do
not have so much land available for that use.
B. ISSUES MOTORCYCLE SECTOR
1. Intellectual property
Intellectual property infringement is not only a small deal in Vietnam. Many Illegal imitations of
motorbikes and parts, for example, Honda or Piaggio are manufactured in Vietnam. This is causing
bad impacts on business and consumers due to lack of quality of imitated vehicles or parts of it.
Furthermore, decreasing prestige and competitiveness are notable consequences of intellectual
property infringement. There have to be further regulations on protection of intellectual rights and
guidelines on enforcing these rights should be provided soon.

3. 2. Increase of VAT
The increase of VAT from 10 to 12% on purchase of motorcycles is planned. Still, the motorbike
is the main transportation vehicle used by Vietnamese in cities and rural areas. The increase of
VAT will lead to worse socio-economy growth, thus, the government again should overthink the
necessity of this planned measure.
C. OUTLOOK ON MAJOR TRADE AGREEMENTS TPP 11 AND EUVNFTA
In January 2017, US President Donald Trump decided to withdraw from the US’ participation in
the TPP. In November 2017, the remaining TPP members met at the APEC meetings and
concluded about pushing forward the now called CPTPP (TPP 11) without the USA. The
agreement shall be signed by all member states by the first quarter of 2018. After that, it has to be
ratified in each member state before taking effect.
The effects of the TPP 11 promising great benefits for the automotive sector in Vietnam. The TPP
11 is targeting to eliminate tariff lines and custom duties among member states on certain goods
and commodities to 100%. Due to mostly high tariffs on vehicles, the TPP will impose great impact
on production, business and trade flows. For ensuring the better market access under the TPP,
suppliers must satisfy the regional value content requirements (RVC), thus, Vietnam will have to
adjust regulations to ensure the satisfaction of the requirements of the TPP. As a result, Vietnam
will be more competitive, but also be able to offer international standards to foreign investors.
One another notable major trade agreement is the EUVNFTA between the European Union and
Vietnam. The EUVNFTA offers great opportunity to access new markets for both the EU and
Vietnam. It will help to bring more capital into Vietnam. In addition, the EUVNFTA will boost
the most economic sectors in Vietnam. In particular, the agreement will impose new foreign direct
investment in Vietnam but there still remain problems regarding lack of infrastructure and low
technology. On the other hand, it will also give the chance for better transfer of technology from
Europe to Vietnam. Furthermore, the low labor costs in Vietnam are a big advantage for European
investors to do business in the automotive sector in Vietnam.
Furthermore, the Investor State Dispute Settlement (ISDS) will ensure highest standards of legal
certainty and enforceability and protection for investors. We alert investors to make use of these
standards! We can advise how to best do that! It is going to be applied under the TPP 11 and the
EUVNFTA. Under that provision, for investment related disputes, the investors have the right to
bring claims to the host country by means of international arbitration. The arbitration proceedings
shall be made public as a matter of transparency in conflict cases. In relation to the TPP, the scope
of the ISDS was reduced by removing references to “investment agreements” and “investment
authorization” as result of the discussion about the TPP’s future on the APEC meetings on 10th
and 11th
November 2017.

4. Further securities come with the Government Procurement Agreement (GPA) which is going to
be part of the TPP 11 and the EUVNFTA.
The GPA in both agreements, mainly deals with the requirement to treat bidders or domestic
bidders with investment capital and Vietnamese bidders equally when a government buys goods
or requests for a service worth over the specified threshold. Vietnam undertakes to timely publish
information on tender, allow sufficient time for bidders to prepare for and submit bids, maintain
confidentiality of tenders. The GPA in both agreements also requires its Parties assess bids based
on fair and objective principles, evaluate and award bids only based on criteria set out in notices
and tender documentation, create an effective regime for complaints and settling disputes, etc.
This instrument will ensure a fair competition and projects of quality and efficient developing
processes.
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If you have any question on the above, please do not hesitate to contact Dr. Oliver Massmann
under omassmann@duanemorris.com . Dr. Oliver Massmann is the General Director of Duane
Morris Vietnam LLC.
Thank you very much!