From Two Wheels to Four

With a raft of recent international trade and tax agreements coupled with rising incomes and a growing middle class, owning a car is now within the reach of more Vietnamese people than ever, but is Vietnam ready for the changes ahead? By Simon Stanley. Photos by Vinh Dao and Reuters.

In 2005 there were just 209,000 passenger cars in Vietnam. Fast-forward to 2015 and the figure was approximately 2 million. Rising incomes, a growing middle class and cuts to car registration fees have all played a major role in pushing the numbers up. Possibly the most influential factor has been Vietnam’s ongoing compliance with the World Trade Organization (WTO) and its gradual integration into the ASEAN network. As a result, taxes, fees and restrictions have been falling away each year, spiralling down towards 2018 when import duties for ASEAN-made cars will be abolished.

For many years, with import tariffs and consumption taxes historically as high as 100 percent or more (plus VAT and registration fees), four wheels simply wasn’t an option for the majority of Vietnamese citizens. From the 90s onwards however, a small but lucrative private car market emerged, consisting primarily of business and government elites and a handful of embassies and five-star hotels. Mercedes-Benz was one of the first to spot the potential.

A Local Industry is Forged
Having arrived in Go Vap District in 1995, Mercedes-Benz Vietnam’s production line now rolls with the latest (and most luxurious) C-Class, E-Class and S-Class models, plus the GLC and GLK SUV range. Like many of the car manufacturers in Vietnam such as Kia and General Motors, everything is produced for the domestic market using imported parts (CKDs, or ‘completely knocked down’ kits), therefore side-stepping the full weight of import taxes while providing local jobs and expertise.

“Right now you would pay between 50 and 70 percent import duty on an imported full car (a CBU or ‘completely built unit’),” explains managing director Dirk Adelmann. “At the moment the CKD import duty is between 16 and 20 percent.”

A Mercedes-Benz is still an expensive option though, as, like other high-end brands, its luxury status attracts a luxury sales tax no matter where it’s put together. Furthermore, being a relatively small operation compared to the Mercedes-Benz factory in Thailand – currently the largest car producing country in Southeast Asia – cost per unit is also significantly higher.

“If you take a locally produced C-Class,” says Adelmann, “in Germany it starts at 33,000 euro (VND 803m). Here we’re selling it at roughly USD$63,000 (VND 1.41bn). So even when we produce locally, it still catches a much higher price tag than in Germany, mainly due to additional local taxes.”

Adelmann explains that despite the costs, demand for the famous three-pointed star is soaring. “When I became responsible for Mercedes-Benz Vietnam a few years back, we sold around 380 cars per year. Now we’re selling 350 to 360 per month.”

That could all change in 2018 when duties for CBUs imported from ASEAN member countries will effectively fall away. The same thing is likely to happen to cars imported from the EU around 2025 too, under the forthcoming European Free Trade Agreement with Vietnam.

Without import duties, and unable to compete in terms of scale and costs with countries like Thailand, ‘Made in Vietnam’ will no longer be the cheapest option. The entire industry and the thousands of jobs within it could potentially disappear over night unless steps are taken to protect them.

Traffic-growth-in-Vietnam-f
Looking Ahead

Wherever they come from and however much they cost, it’s clear that car numbers in Vietnam are only going one way. Anyone who’s tried to get across town in a hurry knows that Saigon’s rush hours are getting longer. Hit certain areas at the wrong time and you’re in for a lengthy wait. While Thu Thiem – the new district over the Saigon river – looks to have been designed with cars in mind, most of the city was not. District 1 is a prime example. “Getting there and getting through is really an issue,” says Adelmann. “With the pedestrian area for example, Nguyen Hue Street, I really like it and it’s a totally different city now, but of course it’s one less way to get through. There were no alternative roads built and the Metro may take a few more years to be up and running.”

British expat Tim English and his wife Sami purchased a car five years ago in readiness for the birth of their first child. Despite the mounting congestion, safety was their primary concern. They opted for a locally produced, mid-priced Chevrolet, saving themselves import and luxury taxes. Even with the 15 percent registration fee, the price wasn’t too dissimilar to purchasing the same model in the UK.

Traffic-growth-in-Vietnam-2In terms of the roads and infrastructure however, Tim feels that Vietnam is not yet ready for what’s ahead. “Saigon is clearly a city that is, over the next few years, going to really suffer from cars. The simple way of putting it is that public infrastructure is not keeping up with private capital movement. So even something as simple as building a massive block of flats causes problems because they’re often exiting out onto very small roads; roads that essentially will be gridlocked because the people buying those flats will, or will soon have a car.”

Parking is another concern. Although District 1’s major hotels, apartments and shopping malls, with their multiple levels of underground parking, appear to be doing the job, it only takes one ‘abandoned’ car on Pasteur Street at rush hour to send the surrounding area into meltdown. Someone in the town hall is clearly thinking ahead though; plans for eight underground parking garages, to be dug beneath Saigon’s parks and squares, are currently under consideration.

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Safety Concerns
For those of us from car-centric countries like Australia or the US, where the majority of the population essentially begins learning to drive the moment they’re born (albeit from the backseat), it can be easy to forget that many of Vietnam’s drivers won’t have such a lengthy relationship with the car.

“The quick way of describing many drivers in Ho Chi Minh City,” says Tim, “is that firstly they still think they’re on a motorbike, so the things they choose to do, like undercutting or pulling out without looking, to me it feels like they’ve forgotten they’re in a car – a great big dangerous object. Secondly, there’s no doubt that there’s an arrogance about having a car. Some clearly feel that they’re a step up above the motorbikes. ‘Aggressive’ isn’t the right word because you never see road rage, but it’s more like a bulldozing ‘you’re-getting-out-of-my-way’ approach.”

Road safety is a major part of Mercedes-Benz Vietnam’s ethos. Now in its 12th year, its annual Driving Academy has been bringing Vietnamese Mercedes owners together with Australian racing drivers for several days of intensive driver training, covering everything from how to sit correctly in the car to how to react in critical situations. “Safety. Design. Comfort,” says Adelmann. “Those are the three values we focus on. But it all starts with awareness. An airbag only works in combination with the seatbelt. If you don’t wear the seatbelt and the airbag is deployed, the airbag will hurt you. It will not protect you. That, amongst other things, is what we have to bring across.”

Whatever the future brings, it’s clear that Vietnam’s transportation system has some tough challenges ahead.

Published January 2016 – AsiaLIFE Vietnam

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