While the domestic auto industry is already facing fierce competition from car imports, mostly from Thailand and Indonesia, other ASEAN economies are emerging threats, the Ministry of Industry and Trade said in a recent report to the National Assembly.

From January to September, sales of imported cars rose 150 percent year-on-year to nearly 93,600, while that of locally-assembled vehicles dropped 13 percent to 136,800 units, according to the Vietnam Automobile Manufacturers’ Association (VAMA).

"Auto imports will continue to rise because of surging domestic demand, severely affecting domestic auto manufacturing and our trade balance," the ministry reported.

As Vietnam has scrapped imports tariffs on cars made in ASEAN countries with a localization rate of at least 40 percent since last year, the domestic market will have to deal with additional competition from Laos, Cambodia and Myanmar.

Vietnam’s car businesses have only participated in low-value segment of the supply chain and has not mastered core technology in producing engines and transmission systems, it noted further.

The lack of material suppliers and large-scale parts producers leads to higher prices compared to imported cars, the ministry added.

Cars with nine seaters or under have a localization rate of only 7-10 percent, compared to a 60 percent target that had been set for 2010. In ASEAN countries, the rate is around 65-70 percent, and in Thailand it is 80 percent.

"Without a solution to increase localization rate, domestic manufacturers will face challenges in competing with the region." 

Policies related to the auto industry are slow in coming, compared to other countries in the region, and Vietnam loses opportunities to attract investment as a result. The policies are also not stable and synchronized, therefore the industry is yet to make a breakthrough, it said.

With rising competition from ASEAN and the E.U. because of trade pacts that Vietnam has signed, the ministry is considering scrapping special consumption tax on auto parts produced locally for 5-10 years.

It also suggested tax incentives for electric cars, for both manufacturers and buyers.

There are about 40 auto businesses in the country with the capacity of assembling and producing 680,000 vehicles a year. Production of 9-seater or under cars is growing by 20-30 percent annually.

The trade ministry forecasts that Vietnam will surpass the Philippines in manufacturing and sales figures next year.