US embassy cable - 04HANOI671

UNCLAS HANOI 000671 
 
SIPDIS 
 
SENSITIVE 
 
STATE PLEASE PASS TO USTR EBRYAN 
STATE ALSO FOR E, EB AND EAP/BCLTV 
USDOC FOR 6500 AND 4431/MAC/AP/OPB/VLC/HPPHO 
 
E.O. 12958: N/A 
TAGS: ETRD, EINV, ECON, VM 
SUBJECT: Vietnam Auto Taxes take their Toll on Manufacturers 
 
Sensitive but Unclassified -- Please protect accordingly. 
 
1. (SBU) Summary:  Increases in the Special Consumption Tax 
(SCT), VAT and import duties applied to cars manufactured 
from kits (CKDs) that went into effect January 1 are already 
negatively impacting the auto industry in Vietnam.  Sales 
across the industry fell dramatically in January.  Also, 
according to press reports Vietnam's largest automaker, 
Toyota, cut its workforce by 20 percent on March 1.  If the 
GVN does not reconsider these policies quickly, it may well 
face additional declines in tax revenues, shrinking 
employment in the auto sector and eventually shutdown of 
operations of one or more of the foreign invested auto 
manufacturers in Vietnam.  End summary. 
 
2. (U) A May 2003 National Assembly decision to increase the 
SCT, VAT and import duties on CKD automobiles went into 
effect January 1.  This decision implements a Ministry of 
Finance proposal to increase the VAT on all vehicles from 
five to ten percent in 2004; increase the SCT on CKD cars 
from five percent or less (depending on the model) 
incrementally up to 80 percent on some models by 2007; and 
increase the MFN tariff rates on CKDs by five to 10 percent 
per year until 2008. 
 
3. (SBU) In February, representatives of Ford Motor Company 
told Econ Counselor and Econoff that the dialogue with the 
GVN has improved since industry representatives met with 
Deputy Prime Minister (DPM) Vu Khoan in Chicago in December. 
At the request of the DPM, the Ministry of Industry set up a 
working group specifically tasked with talking to U.S. auto 
companies.  However, to date, the GVN has not taken any 
concrete steps toward reversing the tax and tariff increases 
that went into effect January 1.  As a result, vehicle 
prices have increased and auto sales are down significantly. 
According to Ford, after rapid expansion in the industry 
from 2000-2003, sales (of locally produced vehicles) dropped 
51 percent in January 2004.  Auto companies sold only 1244 
CKD cars in Vietnam in January 2004 compared with 2846 in 
January 2003.  Ford noted that the drop may be even more 
critical though, as these sales figures include cars that 
were ordered and paid for in December (before the tax/duty 
hikes went into effect), but not delivered until January. 
Ford sold only 70 cars in Vietnam in January, compared with 
240 in January 2003. 
 
4.  (SBU) According to press reports, on March 1 Toyota 
Motor Company cut its workforce in Vietnam almost 20 percent 
(from 670 to 545) as a direct result of falling sales. 
Toyota (which controls about a quarter of Vietnam's auto 
market) is the first auto company to cut employment.  While 
Ford does not currently have plans to lay off workers, it is 
"keeping the situation under constant review." 
 
5. (SBU) On March 4, during a meeting with Mr. Nguyen Thu 
Do, Deputy Director, Office of the Government, Econ 
Counselor pointed to the Toyota layoffs as a sign of the 
need for the GVN to take action on the auto tax issue.  Mr. 
Do said that the working group, which includes 
representatives of the Ministries of Industry, Finance, 
Trade and Planning and Investment, was expected to report to 
the DPM by the end of March. 
 
6. (SBU) Comment.  Representatives of foreign automakers 
with production in Vietnam predicted last year that GVN 
tax/duty policies would have a "disastrous" effect on the 
industry.  Falling sales and employment give credence to 
this prediction.  While automakers have not yet threatened 
to pull their investments, it remains to be seen how long 
their businesses can remain viable - particularly as both 
the SCT and MFN duties are scheduled to increase again next 
year.  If the GVN does not reconsider its auto policy 
quickly, it will face additional revenue losses, shrinking 
employment in the auto sector and eventually the shutdown of 
operations of one or more of the foreign invested auto 
manufacturers in Vietnam. 
Burghardt