US embassy cable - 05HANOI106

UNCLAS SECTION 01 OF 02 HANOI 000106 
 
SIPDIS 
 
SENSITIVE 
 
STATE PLEASE PASS TO USTR EBRYAN 
STATE ALSO FOR E, EB AND EAP/BCLTV 
USDOC FOR 4431/MAC/AP/OPB/VLC/HPPHO 
GENEVA FOR USTR 
 
E.O. 12958: N/A 
TAGS: ETRD, EIND, ECON, VM, WTO 
SUBJECT: Vietnam: VM Industry on Auto Policy 
 
Sensitive but Unclassified -- Please protect accordingly. 
 
1. (SBU) Summary.  At an Amcham luncheon in Hanoi on January 
13, Vice Minister of Industry Do Huu Hao said that the GVN 
is currently "reconsidering" its policy (approved by the 
National Assembly in May 2003) to increase the special 
consumption tax (SCT) on automobiles to eighty percent by 
2007/8.  VM Hao refused however, to estimate when the 
National Assembly might consider any changes to the policy. 
VM Hao also highlighted GVN plans to transition from 
applying tariffs on auto kits toward applying tariffs on a 
part-by-part basis and to raise the tariffs on new and used 
completely built vehicles.  End Summary. 
 
2. (U) Vice Minister of Industry Hao spoke about the 
Government's strategy for development of the auto sector at 
an Amcham lunch on January 13.  In his prepared remarks, VM 
Hao provided a brief history of recent decisions affecting 
the auto industry and cited statistics on growth and 
development of the sector.  Of note, in 2003 42,550 autos 
were sold in Vietnam, but in 2004 that number dipped to 
32,847.  VM Hao emphasized the government's interest in 
encouraging automakers in Vietnam to increase local 
production - particularly of auto parts and engines. (Note: 
While some parts are produced in Vietnam, it is a very small 
amount and Vietnam does not currently produce engines.  End 
Note.)  He also detailed very optimistic GVN localization 
targets.  For example, the GVN hopes to reach 40-45 percent 
local content for passenger vehicles by 2010. 
 
3. (U) VM Hao also enumerated upcoming changes on auto 
tariffs.  The GVN plans to move from applying auto tariffs 
on auto kits to applying tariffs on a part-by-part basis. 
The GVN also plans to raise the tariffs on new and used 
completely built vehicles.  (Note:  Representatives of Ford 
Vietnam have told Emboffs that the industry is opposed to 
application of tariffs on a part-by-part basis.  End note.) 
 
4. (U) In January, in accordance with a 2003 decision 
(proposed by the Ministry of Finance and approved by the 
National Assembly) the GVN raised the SCT on autos from 24 
to 41 percent.  Additional increases are planned with the 
goal of reaching eighty percent in 2007/8.  In his remarks, 
however, VM Hao said the SCT plan is "under reconsideration" 
because enterprises are opposed to increases in the SCT. 
The Ministry of Planning and Investment (MPI) is currently 
working with the Ministry of Industry (MOI), the MOF, the 
Ministry of Science and Technology (MOST) and the Ministry 
of Transportation (MOTr) to develop a revised plan for the 
SCT.  However, given that the National Assembly has already 
approved the increase of the SCT to 80%, VM Hao said, it 
would also have to approve any changes to the policy.  When 
asked by the audience, VM Hao refused to provide any time 
frame for when this might occur. 
 
5. (U) During the a Q&A session VM Hao made very clear that 
there is not consensus among GVN ministries on the issue of 
the SCT.  He noted that his ministry (MOI) is in agreement 
with the Vietnam Automobile Manufacturer's Association 
(VAMA) that decreasing taxes is more likely to result in 
increased production and ultimately encourage localization. 
However, the GVN is concerned that if it decreases the 
consumption tax, Vietnam's already strained infrastructure 
will not be able to keep pace with production increases.  He 
also pointed out that Vietnam, as part of its WTO accession, 
has to harmonize the SCT rates applied to locally produced 
and imported vehicles.  The MOF wants the harmonized rate to 
be 80 percent, but other ministries think that rate is too 
high. In "his opinion," VM Hao said, the SCT rate should not 
be more than 20-25 percent, but he "does not know how MOF" 
would feel about a lower rate.  (Note:  Ambassador and 
Econoffs have - for two years - emphasized to officials 
throughout the GVN that harmonization should be at lower 
levels to encourage development of the industry.  End note.) 
 
6. (U) At one point, a representative of Ford Vietnam in the 
audience noted that GVN local content targets are too 
difficult for the industry to meet because Vietnam's auto 
industry lacks economy of scale.  When automakers initially 
invested in Vietnam, he said, the outlook for the industry 
was much higher than it is now, making localization 
commitments seem more reasonable.  He also pointed out that 
Vietnam would not be able to maintain local content 
requirements once it accedes to the WTO and suggested 
Vietnam eliminate local content requirements immediately. 
VM Hao said the MOI wants automakers to pay more attention 
to local content and to identify parts that could be 
produced in Vietnam both for local use and for export.  He 
pointed out that Toyota has already established an export 
center in Vietnam and exported about $25 million worth of 
parts in 2004.  He also noted that Toyota has a local 
content ratio of about 30 percent while other automakers 
only have 5-10 percent local content. 
 
7. (SBU) Comment: The lack of consensus within the GVN on 
the SCT policy is not new.  To date, the MOF has been 
victorious in gaining National Assembly approval for raising 
the SCT and fending efforts to revise the auto plan.  The 
MOI remains a welcome advocate of the automakers position. 
However, this ministry is no match for the powerful (and 
very revenue conscious) MOF.  On a bright note, we view VM 
Hao's public description of the split within the GVN on this 
issue and his statement that the GVN is reconsidering its 
SCT policy as a positive sign that opportunities still exist 
to press the GVN to freeze or even roll back the SCT rate. 
 
MARINE