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Cablegate: Vietnam Auto Taxes Take Their Toll On Manufacturers

This record is a partial extract of the original cable. The full text of the original cable is not available.

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

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