• Finance Ministry to align rates with WTO commitments, allowing tariffs of zero to 30 percent

• Could cut average tariffs in half on materials companies import to assemble vehicles

Vietnam plans to drop taxes on auto parts in a last-ditch effort to save domestic manufacturers, which are bracing for a deluge of foreign cars on the country’s motorbike-covered streets next year.

A Finance Ministry proposal could cut average tariffs in half, to 7 percent, on the materials companies import to assemble vehicles. Although the communist government wants a homegrown car industry to serve increasingly rich Vietnamese, it’s also battling pollution and gridlock on alleyways built for two-wheel rides.

The lower rates, covering up to 163 car parts from engines to fuel pumps, aim to help producers compete after 2018, when tariffs fall to zero on vehicles inside the Association of Southeast Asian Nations’ trade zone.

Aligning Tax with WTO

On auto components, the finance ministry said it’s moving to align taxes with commitments under the World Trade Organization, allowing tariffs of zero to 30 percent, as well as under the ASEAN Trade in Goods Agreement, which eliminates tariffs.

The levies average 14 percent to 16 percent now, and the ministry is weighing two options. One would shrink the average to 7 percent for vehicles with nine seats or fewer and 1 percent for trucks under five tons by erasing tariffs on 163 goods. The other would focus on zero-rating 19 goods, bringing the average down to 9 percent to 11 percent for vehicles with nine seats or fewer and 7.9 percent for the trucks.

“Especially in the early stages of development, many countries have measures to protect the local market,” the ministry said of support for the auto industry in its Aug. 8 proposal, “so that domestic companies have time to develop, while raising the rate of localization.”

No Windfall Predicted

Mercedes-Benz Vietnam isn’t predicting a windfall from the reduced tariffs on supplies.

“It is most likely that only two to three auto brands in Vietnam have impacts or get benefit from this,” communications manager Nguyen Minh Tuan told Bloomberg BNA Aug. 29 by email. “For the premium segment, it should be unchanged.”

Benefits are subdued partly because car makers must meet an annual production target to qualify for the tax breaks, according to the finance ministry’s proposal.

An occasional Maserati or Porsche can be spotted around town, but the mass market is dominated by brands like Toyota, which claimed 22 percent of sales reported by the Vietnam Automobile Manufacturers’ Association in July, and Ford, which nabbed 13 percent.

“Ford supports government measures that will improve the competitiveness of Vietnam’s vehicle manufacturing industry as it prepares to fully integrate with ASEAN,” the company told Bloomberg BNA in an emailed statement Aug. 29. “Together with VAMA, we will continue to work with government on all policy issues and proposals affecting the auto industry to help ensure its long-term competitiveness.”

Assembly Competition

Vietnam has the world’s second-highest motorbike ownership rate, which at 86 percent is right on the tails of Thailand’s 87 percent, Pew Research reported in 2015.

But as the removal of ASEAN tariffs portends an influx of cars, sources say all the new four-wheel imports will struggle to squeeze onto Vietnam’s narrow roads.

“We want to beat Thailand in being an automakers assembly hub, not in traffic congestion,” Benjamin Yap, senior partner at RHTLaw Taylor Wessing Vietnam, told Bloomberg BNA Aug. 29 by email. “I’m afraid the infrastructure is still lacking to support the increased demand.”

The auto association typically sees double-digit sales growth each year, but so far 2017 figures are down 2 percent compared to 2016.

Ken Duong, managing partner of Duong Global Business Consulting Group, said Vietnamese shoppers might be waiting for ASEAN tariffs to disappear in 2018. But he attributes a bigger share of the slowdown to Uber and Grab.

“With the middle class opting to use a car-hailing app en masse, the need for car ownership decreases,” Duong told Bloomberg BNA Aug. 29 by email.