Current Condition Of The Vietnams Automobile Industry Economics Essay

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According to "Vietnam autos Report Q4-2010 - New Market Report Published" by Press Office stated that:

"Fluctuating tariffs are still a factor in Vietnam's 12th position out of 14 markets in BMI's Business Environment Ratings for the autos sector in Asia Pacific. The highest score is for market risk, which stands at 85.0. Its country risk score has also risen from 49.8 to 51.5, taking its total score for risks to realization of returns up to 68.2. Vietnam is still a country we would expect to see climb the ratings in the future, particularly if its vehicle tariff policy becomes more consistent."

Among three kinds of duties on cars, namely import tariff, special consumption tax and value added tax, import tariffs have the highest rate. Moreover, it is an exclusive difference that affects on the price of a car between domestic assembled or produced cars and imported cars. Thus, in order to find out reasons influent on imported cars that have indirectly impact on local cars, it is crucial to investigate the trend of import duties in Vietnam.

IV.1-The current condition of the Vietnam's automobile industry

IV.1.1-The Vietnamese automotive industry

As mentioned above, the automotive industry in Vietnam is still quite young compared with other Asian countries. The industry initiated producing operations before 1992, when the government enhanced the Doi Moi (renovation) policy to stimulus and liberalize the economy in 1986. Presently, there are 17 automotive companies including state-owned enterprises, joint ventures, foreign-owned original equipment manufactures (OEMs) and local Vietnamese companies. The leading company in Vietnam is Toyota Motor Vietnam which accounts for 25.2 per cent market share. Although the industry was affected significantly from the global crisis in 2008, the sale of entire the members marked a good result with the impressive growth of 7 per cent (table 6).

Table 6: Auto sales by unit and market share in 2009 and 2008 by VAMA members


Jan.-Dec. 2009

Jan.-Dec. 2008


















Truong Hai
















GM Daewoo
































VinaStar (Mitsubishi)








Mercedes-Benz Vietnam
















Visuco (Suzuki)
















VMC (BMW, Mazda, Kia)
















Vinacomin Vinacoal*








Mekong (Fiat, Ssangyong, PMC)















Source: Vietnam Automobile Manufactures' Association (VAMA)

The table below shows the sales of all members in VAMA in each production line in 2009 and 2008. The main revenue of local manufacturers derived from commodity vehicles, next are passenger cars, SUV, MPV and the last is bus chassis. Most significantly, the sale of passenger produced in Vietnam surged up to 47 per cent in 2009.

Table 7: VAMA sales - Total market and segments in 2009 and 2008

















Passenger Cars






Comm. Vehicles






Bus chassis










Source: Vietnam Automobile Manufactures' Association (VAMA)

Economic growth in Vietnam has been increase rapidly and stable with the average rate of 7.6 per cent from 1991 to 2008, 5.32 per cent in 2009 and 6.78 per cent in 2006. Facing with the global crisis in 2008, the Vietnamese economy still had an impressive growth. According to World Bank's report in 2010, Vietnam is one of the quickest growth rates in East Asia Pacific (EAP) both before and after the crisis. The Vietnamese growth is not only outstanding in terms of a high rate but also a stable growth rate. Thus, from one of the poorest countries in the 1990s with the income per capita of US$98 according to ADB data, now Vietnam has already arranged in the lower income country status with the GDP per capital of US$1.024 by 2008. The positive sights benefit for the development of the Vietnamese automotive industry. The local automotive industry expects to reach significant stimulus from the economy and the government.

According to statistic of Vietnam's General Statistic Office (GSO) declared that Vietnam's income per person increase steadily from 2007 to 2010. Average incomes went up approximately 10% in 2010 from $1074 in 2009 to $1160 and it was estimated an increase at $1300 in 2011.

Actually, the sale of both imported cars and locally assembled and produced cars increase consecutively until now.

Figure 3: Automobile sales in Vietnam in 1998-2009

Source: Vietnam Automobile Manufactures' Association (VAMA)

Figure 4: The sales of local enterprises and the volume imported new car

Source: Vietnam Automobile Manufactures' Association (VAMA)

Figure 5: The stages of automotive and auto parts industry in Vietnam


Technical absorption

Stage 4

Full capability in innovation and product design as global leader


Stage 3

Technology and management mastered can produce high-quality goods

Stage 2

Have supporting industries, but still under foreign guidance

Stage 1

Simple manufacturing under foreign guidance

Thailand, Malaysia

Japan, US, EU

South Korea, Taiwan


Source: Kenichi Ohno (VDF &GRIPS) 2004

IV.1.2 Key factors and relations for competitiveness of the industry


In Vietnam's Business environment Survey belonging activities of the Consulate General in December 2010, the American chamber declared that one of the problems is Vietnamese infrastructure that is "lack and slowness". This problem is considered as an obstacle to the automotive industry. Moreover, underdeveloped infrastructure is cited as the highest constrain in Vietnam compared to Asian nations.

Currently, Vietnam has not expressways and the national highways having two or more lanes account for just 26 percent. In addition, the capital for investment in Vietnam is much lower than other countries. For example, only 10 percent of capital fund of Hanoi is used for developing roads, while it is 25 percent to 30 percent in most global capitals.

The supporting industries in Vietnam

One of the most important deciding the development of the automotive industry is the supporting industries. Because it contributes towards the localization rate that affect on the cost of producing a completed car. Mr Sugiyama Hideji Vice former of the Ministry of Economy, Trade and Industry of Japan confirms that they are called supporting industries but they have a crucial role in developing industry.

Currently, the process in automotive localization is slow and far below the level of manufactures themselves given and committed, it is only from 2% to 7% per unit assemble according to the inspection report of the government in 2008. According to the report, one of prevailing issues in the supporting industries in Vietnam is out of date machines that cause low productivity and quality. Clearly, a small market is a difficulty for local company to gain economies of scale. Although, the domestic producer can choose foreign markets to broaden the distribution network, it is difficult to compete with China, Thailand and Korea.

One reason leading to the underdeveloped supporting industries in Vietnam is failure in implementing domestic content percentage requirement. Theses targets were mentioned in the Master Plan of the automobile industry and approved by the Prime Minister in October 2004. According to the Plan, the localization ratios of popular vehicles (trucks, coaches, and cars), high-class vehicles (trucks, coaches and cars), and specialize vehicles are 60%, 40-50% and 60% respectively in 2010. In order to achieve these targets, the government provided both finance and supporting policies such as tariff policy, market policy, investment policy, science and technology policy, human resource policy, capital attraction policy and industrial management policy to support the manufacture. However, they are "not concrete" and "the industrial strategy still remains general" (Ohno 2004). Thus, they are causes why the localization rate in the Vietnamese automobile enterprises is much lower than the targets. That leads to direct effects on the development of supporting industries.

Obviously, the locally produced parts are less competitive than imported part. Actually the current condition of the supporting industries is in the vicious circle of cost element and economies of scale.

In addition to most auto parts produced in Vietnam has concentrate on the low value component such as glass, seats, wire and tire which are not required high technology, model, expensive equipments and skilled labors.

Table 8: ASEAN member light vehicle capacity and utilization forecast













Utilization (%)



























Utilization (%)






Source: PwC Automotive Institute AUTOFACTS Global Automotive Outlook, 2007 Q2 Release. Copy right 2007.

According to the Vietnam Development Forum (VDF) in 2006 assessed that the relative undeveloped auto part industries may harms the development of the Vietnamese automotive industry. Undeveloped supportive industries cause low rate of domestic parts and components appearing in a completely assembled car in Vietnam.

Labor market

Vietnam's population was estimated at 86 million in 2009 and it has the third largest population in South East Asia after the Philippines and Indonesia. The Vietnamese population is young population with more than 60 percent is under 25 years of age and nearly 15.5 percent are trained and skilled workers with elementary qualification or higher. Beside one of the most attractive of this market is cheap labor cost in comparison with other ASIA countries including China.

Figure 6: Change in wages (Monthly Basis)

Source: JETRO Comparative Survey of the Labor Environment in ASEAN, China, in October 2006.

Low cost labor used to be a comparative advantage of Vietnam. Recently, according to the Survey of Japanese - Affiliated Firms in Asia and Oceania enhanced by Japan External Trade Organization in October 2010, increasing in employee wage is cited as a problem in almost of countries surveyed. Vietnam is not outside this issue, 80 percent firms operating in Vietnam agree that this is the most serious change beside worker's capability and low rate of workers retention. Vietnam ranked the highest average wage raise in 18 countries surveyed with 14 per cent in while Thailand is 4.6 per cent, Malaysia is 5 per cent. Although, the labor cost in Vietnam is sill the lowest among these countries but it can not deny that this emerging issue will affect negative in attracting foreign investments. In addition, according to Vietnam's Business environment Survey belonging activities of the Consulate General in December 2010, Director of international financial corporation (IFC) Simon Andrew state that 50% enterprises do not want broaden their operations and one of the reasons is that the level of labor and Vietnam can not win in global game if only based on cheap labor resources. Seriously, these prevailing weaknesses in labor market may hamper industries required capital intensive also labor intensive such as automotive industry.

The size of the market

The size of the domestic market is an important element for enterprises to assess and decide the potential of development process. This factor is much more crucial when the initial target of the industry is to dominate the local market. A sufficient size of the domestic market helps the auto industry achieving economies of scale which reduces the cost of locally produced parts and cars. This is essential for the industry before integrating the global market and competing with prevailing developed industries in the world.

The size of automotive domestic market in Vietnam is assessed quite "small" in comparison with Asian nations. In order to having a developed automobile industry, it is necessary to have a huge initial investment capital for equipment, factories, technology, R&D and so on. Thus, it is difficult for them to reduce production cost, make profit and reinvest in productions if sales volume not exceeds 300.000 units a year (Takayasu, 1998, p22). The current domestic car sale of Vietnam in 2009 was nearly 120.000 units a far distance with above estimation.

However, Vietnam has particular advantages. However, the Vietnamese automobile industry is assessed that is a new emerging and potential market with its dramatic economic growth and population of more than 86 million with low car ownership rate. (Nguyen, 2007).

5. Vietnamese government policy toward the automobile industry

Taxation contributes a main tool of all policies to stimulus for the development of the Vietnamese automobile industry, especially in the early period. The aim of imposing all restrictions in the industry is to diminish the importation of cars from outside and encourage the production and assembly in the country. In order to reap the goal, both encouraging and discouraging measure are utilized. On the one hand, the government supports local production through corporate tax incentives to newly establishment such as income tax exemptions or import duty refunds for raw material used for export. One the other hand, high import duty imposes on completed built units (CBU).

Currently, a new imported car to Vietnam has to subject to three taxes that are import duty, excise tax, and value added tax. For example a new 5 seats car imported to Vietnam, the price itself has to added to three taxes import duty, excise duty and value added tax with the rate are 83 %, 50% and 10% respectively.

For example:

The price of a new 5 seats car imported into Vietnam is $30.000. The price of this car after added cost of all duties which is calculated according to this table is $90.585.

The price of a new imported car:


The import duty



The special sale tax



The value added tax





Clearly, these taxes are important factors deciding to how high in terms of price of a car that is sold in Vietnam.

Figure 7: Two causes of high prices

Small market

High price

Low production efficiency

Vicious Circle

High parts cost

High taxes and tariffs

Source: Kenichi Ohno Vietnam Development Forum

V- The impacts of import tariff on the Vietnamese automobile industry

V.1 The import tax duty on CBU imported into Vietnam

Taxation policy is the main tool of policy makers in management of the automobile industry. It has direct effect on decision of business and production of the automobile makers. (Nguyen, 2007).

Table 9: CBU imported car duty



Nov 2005

Jan 2007

Aug 2007





Apr 2008


Import duty (%)









Source: The general department tax

The table illustrates that the fluctuation of import tax duty on new cars from 2001 to 2009. From the role of the taxation policies, Vietnamese policymakers had particular changes in terms of import tax duties on new car in particular, and on the automobile industry based on given goals.

Before 2001 the import duty was 100 percent, it was an extremely high import duty imposed and it may be also the highest in the timeline for Vietnamese new imported new car. With the special consumption tax (SPT), the value added tax (VAT), and the other fees applied, these are reason why the price of a same car in Vietnam was always much more expensive than other countries. Thus, imported car hardly entered into Vietnam. A main reason to explain for these measures is protection the automobile industry in early stage to establish a truly automobile industry to able to compete against foreign manufactures in the domestic market.

Table 10: Current new locally produced cars prices in Vietnam and in the US

Brand name


Price in Vietnam ($)

Price in the US ($)

Change (%)


Corolla 1.8




Daimler Benz

Mercedes R 300L










Camry 3.5





Camry 2.5




Table 11: Current New imported cars prices in Vietnam and the US

Brand name


Price in Vietnam ($)

Price in the US ($)

Change (%)


Hilux 3.0





3 series





5 series









These preferential treatments for local enterprises were one way to increase competitive advantage with regards to price. However, then a long time, the automobile's price was still two or three much higher than in other countries and did not any improvement. Therefore, to force indirectly to the local manufactures decreasing price of cars, in November, 2005 the government decided to reduce the import tax rate at 90%, decreasing 10%. After a few months, in January 2007, the number 80% became an official import tax on the imported CBU automobile. Also, in 2007 the tariff rate had been consecutively reduced for three times from 90% to 60%.

With a significant decreasing to 40% leaded to the dramatic increasing imported cars in terms of the volume and the value as well. According to the General Statistic Office (GSO), the volume of new cars increased 28.000 units and the value went up to 523 $ US million in 2007, increasing 245% compared to 2006. However, there was a problem from a weak infrastructure system which was not enough conditions to apply requirements when a gradual development of the number of circulation of vehicles. To reduce pressure on transportation according to desire of the government, the import tariff rate was modified to 70% in March 2008, up to 83% in April 2008 and kept stable up until now.

According to the interview participants, the current import tariff duty on the CBU imported into Vietnam is high, 89 per cent interviewees agree this evaluation and only 11 per cent of respondents suppose that it is acceptable. Thus, not surprisingly, there is absolutely agreement as confirming that high import tariff rate is one of the main reasons why the price of cars in Vietnam is much higher than other nation, evenly to 2, 3 times.

Table 12: Evaluation about the current import tariff rate







Figure 8: The sales of VAMA members in 2007, 2008 and 2009

Source: Vietnam Automobile Manufactures' Association (VAMA)

Figure 8 shows that the trend of the sales of the members in the Vietnam automobile manufactures association (VAMA) in 2007, 2008 and 2009, besides the fluctuation in each year.

First of all, the volume and the value of the later year are higher than the previous year. This is a positive result and a quite bright picture for the Vietnam automobile industry. The industry shows a strong volume growth trend.

Secondly, there is a general trend in the sales of all members through these years. The sale of February is always the lowest point, whereas it is the highest in December. The reason for this cycle is February is the TET month. Tet refers to Vietnamese Lunar New Year. It also is the most important festival and longest time off in a year in Vietnam. December seems like a consumption month that is habit consumption of Vietnamese consumers due to they want buy new things to have many lucks in the next year, the new year will be better than the old one. Because of Tet vacation and other factors, car sales in Vietnam show a seasonal cycle.

In three lines which express situations in the sales of each month, the sales volume of cars for the years 2008 and 2009 fluctuate dramatically. One of the main reasons for these abnormal changes is modifying of the import tariff rate. Although import tariff was imposed on imported cars, so these changing have influences on the price of foreign cars entering into Vietnam market. Thus, they have indirect effects on the sales of local manufactures.

2007 is a year which remarks an important point in imported car sector with three times reducing import tariff rate from 90% to 60%. As a result, the price of car decreased sharply, so the number of imported cars increases.

Although the year 2008 was a difficult time due to economy crisis, the value of imported new car into Vietnam recorded a good result with 50.400 units valued approximately one US billion. According to asserting of many automakers, in the new imported cars section the year 2008 has the most fluctuations. Specially, in the mid year the volume increases strongly. Due to a given increasing import tariff rate planning, many importers decided to change their import planning to prevent high rate imposed in the next time, also, many consumers gave decisions more quickly to have imported cars before the tariff rate increases from 70% in March to 83% in April. Since then to the end of year, the picture of imported cars sector becomes grey, all purchasing operations are less. Similarly, the domestic manufactures has the same context with the import sector. The automobile market seems to be freezing, the main reason is due to significant rises of the range taxes imposed a car such as imported duty on new cars, used cars and components and registration fee. These effects from tariff policies make the car price added much more. Therefore, it forces all of auto agencies implementing a chain of sales and promotional programs to stimulate demand. Thus the number of imported cars reaches upper 20.000 units, the highest point in the year.

V.II The effective rate of protection

The rate of effective protection is a useful technique to assert the degree of protection actually provide to domestic processing of the import-competing productions. The rate of effective protection derived from "imposing a lower tariff rate on the importation of inputs than on the importation of the final commodity produced with the imported input" (Salvatore 2007, p257). The aim of this tariff structure is to encourage domestic processing and employment.

This measure is calculated on the amount of domestic value added, that produces in the nation.

The formula is utilized to calculate the effective rate of protection:





Where: g: the rate of effective protection to producers of the final commodity.

t: the nominal tariff rate on consumers of the final commodity.

ai: the ratio of the cost of the imported input to the price of the final commodity in the absence of tariffs.

ti: the nominal tariff rate on the imported input.

On the one hand the nominal tariff attracts more attention of customers because it indicates how much they have to pay. On the other hand, the effective rate of protection is more important to producers because it expresses how much the degree of protection provided.

According to the report of the Ministry of Finance in 2008, that surveyed 6 manufactures namely Ford, Toyota, Suzuki, GM Daewoo, Honda and VinaStar, the cost for parts and components imported accounted for nearly 67 per cent in total cost. Based on the above formula, the effective rate of protection of the automotive industry in Vietnam is approximate 190 percent with the tariff rate for components imported is in a range of 15-20 per cent and the nominal tariff on a CBU is 83 per cent. Actually, the domestic producers receive a high protection from the government to have more opportunities developing the industry.

In comparison with Thailand and Malaysia, Vietnam has the highest the rate of effective protection. The rates were 64.8% and 57.1% in Thailand and Malaysia, respectively in 2005. While it was nearly 190% in 2008, three times compared to Thailand and four time compared to Malaysia.

That explains why the local manufactures always have intensive care and aggressive reactions when the government has any changes in terms of tariff policy. However, it is also cause of high price domestic cars in Vietnam. Although the main purpose of policymakers was to stimulate the industry in its early stage when there were many developed auto foreign industries existing in the market, the domestic producers seem to "rely on" the State for support to make their own profits instead of improving their capabilities. It can be said that the result from high protection of the government was happened not as expected. That is reason why Vietnam's automotive industry still stops at the first stage of simply assembling.

Figure 9: The sale of local enterprises and the volume of imported cars in 2005-2009

Source: Vietnam Automobile Manufactures' Association (VAMA)

From 2005 to 2009 the Vietnamese automobile industry proves potential development itself. Nevertheless, the tariff policy fluctuates significantly in the 5 years, the sale of both imported cars and produced and assembled cars in Vietnam had increase dramatically. The import tariff rate affects strongly to the price of car in Vietnam especial the importation of car, but it did not really much impact on the quantity of this commodity. In particular, when the import tax rate increased from 70 per cent to 80 per cent in 2008, the volume of imported cars rose approximately 37 per cent. This fact seems to wrong with the demand and supply framework which state that as the price increases the quantity of a commodity decreases. This behavior can be partly explained by rising incomes in Vietnam. More people have enough money to buy a car every year

It can be seen from those results of the survey. Most respondents believe that the degree of effect on car sales from import tariff is little.

Figure 10: The degree of impact of import tariff duty on car sales in Vietnam

This phenomenon can be explained by a large demand exceeding supply's ability. That is the reason why the price of domestic cars is much higher than other countries, but they are still accepted by customers. Evenly, in Vietnam some period of time, buyers have to book early in several months to own a car. Once it confirms that the automotive sector in Vietnam has many rooms for development. However, the role of imposing import tariff in specific case Vietnam is not really effective.

On the result of the survey, there are completely different answers in two questions, though both of them got a consensus of all participants. This is appreciated of imposing high import tariff duty on CBU in the early stage, but it seems to be not suitable when the Vietnamese automotive industry has for more than twenty years existing and developing.

Table 13: Evaluation the appreciation of applying high import tariff rate

Period of time



In early stage




VI.3 Impact the Vietnamese automobile industry when the tariff comes down to zero in 2018.

Integrating into the international economy is a global trend. This phenomenon reflects all nations are closer to free trade to "maximize world output and benefit" (Salvatore, 2007). Thus being a member of the WTO and ASEAN is a good change for promoting the growth speed of the Vietnamese auto industry. Actually, this sector in many nations gains successfully throughout free trade. The classic example is Thailand which considers the economic integration of ASEAN is one of comparative advantages. With low tariff rates throughout the region, many investors decide on it for choosing this place to set up their operations. In fact, Thailand is the world's second biggest market for one - ton pickup truck and the largest producer in the ASEAN. From these successes of Thailand, may Vietnam achieve good results from free trade like this neighbor country?

The Doctor Phan Minh Ngoc, Kyushu (Japan) stated that: The automobile industry is the most protection sector in Vietnam, this leads to slowly develop of the industry. Actually, this statement can be proved through chances of tariff policies imposed up till recently. Moreover, one of the most effective measures to protect the domestic market is applying import tariffs. As demonstrated above, the current tax rate on new imported cars to Vietnam is 83 percent. It is really a quite high rate when period implementing global commitments is getting closer. According to the integrating the World Trade Organization (WTO) commitments, Vietnam has to reduce import tariffs for most goods categories including new automobiles that will drop to 70 percent in 2014 and 47 percent in 2017. Meanwhile, in 2018, the import duties for all ASEAN members go down to 0 and 5 percent according to the AFTA commitments.

The agreement "provides for regional tariff reductions, elimination of non tariff barriers, harmonized customs nomenclature, intra- regional liberation of trade in services, and regional IPR cooperation" ( ASEAN Automotive Market - ITA).

Obviously, integration global economy is indispensable trend of all countries in the world. Benefits and opportunities create from liberalization signings among nations can not be denied. Thus, integrating into the WTO and the ASEAN markets is really a great opportunity for the development of Vietnam economy in general, also the auto industry in particular. However, in terms of the Vietnam's automobile sector, these integrations are really opportunities or challenges, now. The period of time to implementing these commitments is getting closer, there is raise a question: Can the industry survive within the next eight years? How will the Vietnamese automobile industry be in future?

In order to assert the ability survival of this industry and the future of the Vietnamese in the next 8 years, the study investigates the lessons from Thai and Malaysian automobile industries which are both ASEAN nations.

Based on the literature review, it can be realized that import tariff plays a crucial role in all four countries, special in the early time. Both of them used high end product tariff and lower tariff for parts and components to favor domestic produced and assembled operations. Vietnam had the same the import duty structure as establishing the industry. However, in fact, the results and effect of this structure on three industries were not the same.

The aim of imposing high tariff was to encourage more foreign and domestic manufactures set up their assembly plants instead of import to distribute in domestic market. A "cascading" tariff structure from higher tariff rate on the completed built automotive than tariffs on auto parts and components cause existing of the rate of effective protection for domestic manufactures. Among three countries, Vietnam has the highest rate in approximately 190% in 2008, in which the rate in Thailand and Malaysia were 64.8% and 57.1% respectively in 2005. It means that the auto domestic manufactures in Vietnam have the highest protection from its government to overcome difficult time of development. However, the high protection in Vietnam was made the domestic enterprises operated ineffectively. They depend completely on supports from the government to dominate the market based on an advantage in terms of price. High cost parts and high tariffs are reasons why the price in Vietnam is much higher than other countries to 2, 3 times evenly the industry prevailing more than 20 years (Ohno 2006). Vietnam is one of countries having the lowest income per capita but it is one of countries having the highest car price in the world. In order to explain this phenomenon, many economists supposed that one of these reasons of this ineffective operation is alliance of the domestic enterprises to push the price of cars higher to make profits. While other countries such as in Thailand and Malaysia, they have to compete with each others to penetrate and get market share.

Clearly, when tariffs go down to 0 percent in 2018, the price of imported cars drop dramatically compared with the current condition and domestic cars. Therefore the reason for high price car in Vietnam is only high cost parts and components. As mention above, the cause of high cost parts are the market size and the underdeveloped supporting industries. In comparison with Thailand and Malaysia, it can not deny that one of main factors help these countries have successful supporting industries is the size of its market. Small market is disadvantage not only for supporting industries and automotive assembling and producing industry.

From the current of Vietnam's automotive industry, the industry will be faced more challenges than opportunities from free trade in the region and the world in the next future. The high cost parts will remain the expense for final product higher than other countries. As a result, the auto companies in Vietnam may stop their producing and assembling operations and transform into importing car to distribution in the market. If there is no change, the Vietnamese auto industry will be minimized and the Vietnam auto companies are just representative for sale of foreign manufactures.