Why Vietnam Never Built a Car Industry — Until It Did

Vietnam did not build a car industry for thirty years because it did not need one badly enough, and then built the beginnings of one in under ten because its two largest private industrialists decided to. The story is usually told as a policy failure, and it partly is: localisation targets were set, missed and reset, tariffs protected assemblers without obliging them to invest, and the market stayed too small to support the component makers a real industry needs. But the more useful reading is about sequencing. Vietnam chose motorbikes, exports and foreign electronics investment first; cars came when incomes, trade agreements and private capital finally lined up. This article traces the missed targets, the tariff shock of 2018, the plants that followed and the questions that remain. It is part of the Vietnam Company Stories hub.

Why did Vietnam never build a car industry in the 1990s and 2000s?

Because it copied the tariff wall of Thailand and Malaysia without the market size that made those countries’ strategies work. Fewer than 100,000 cars a year were sold in Vietnam until 2009, and no component maker can justify a press line or an engine plant for that volume.

The first joint ventures were licensed in 1991 and 1992, Mekong Auto and Vietnam Motors Corporation, followed in 1995 and 1996 by Toyota, Ford, Mercedes-Benz, Isuzu, Mitsubishi and others, each with a state partner and each granted the right to assemble completely knocked-down kits behind import duties on finished cars that reached 100 percent or more. The bargain the government thought it was making was the one that had worked in Thailand: protect the market, oblige investors to localise, and watch a supplier base grow. The Automotive Industry Development Strategy of 2002 and the master plan of 2004 set local-content targets of 40 percent by 2005 and 60 percent by 2010 for passenger cars.

The bargain failed on volume. Thailand was selling half a million vehicles a year in the 1990s and a million by the mid-2000s; Vietnam sold 40,000 in 2000 and about 80,000 in 2005, split across a dozen assemblers and dozens of models. At those numbers a foreign assembler could earn a good return importing kits and adding tyres, batteries, seats and paint, and nothing more, because the tariff on the finished car was high enough to cover the inefficiency. Local content, measured honestly, stayed around 10 percent for cars and somewhat higher for trucks and buses. The targets were quietly abandoned, and the industry became a collection of profitable but shallow operations whose real business was distribution. Meanwhile the motorbike economy absorbed the country’s demand for personal transport and built the only deep vehicle supply chain Vietnam had.

How did the tax system keep the market small?

By stacking three levies on every car: an import duty, a special consumption tax of 35 to 150 percent scaled to engine size, and a registration fee of 10 to 12 percent, which together could double or triple the factory price. Cars were taxed as luxuries, and a luxury market cannot support mass production.

The special consumption tax is the instrument that mattered most. It applies to locally assembled and imported cars alike, on a base that includes the import duty, so the effect compounds; a mid-size petrol saloon in the 2010s carried a tax burden that made it two to three times its price in the United States. The government’s stated reasons were fiscal, since car taxes are easy to collect, and infrastructural, since the roads could not absorb a rapid shift from two wheels to four. The unstated reason was that a small market did not threaten any state interest, whereas cheap cars would have flooded cities the state was not ready to rebuild.

The consequence was a market of roughly 300,000 units by 2016 that was, by the standards of a country of 95 million people, tiny. Car ownership stood at around 20 to 30 per thousand people against roughly 250 in Thailand and 400 or more in Malaysia. Assemblers responded by concentrating on a few high-volume models, such as the Toyota Innova, Vios and Fortuner, and importing everything else. The market also became a rent-seeking arena: every few years a proposal to cut the consumption tax on small cars or to raise the tariff on imports set off lobbying by assemblers, importers and the Ministry of Finance, and the outcome was usually a compromise that changed little. The industry was stable, unambitious and small, and the numbers show it stayed that way for two decades.

What happened when ASEAN tariffs fell to zero in 2018?

The tariff wall vanished for cars built in Thailand and Indonesia with at least 40 percent regional content, and Vietnam had to decide whether to become an importer or offer real incentives for assembly. It chose both, in a muddle that briefly halted imports altogether.

Under the ASEAN Trade in Goods Agreement, Vietnam’s tariff on cars from member states fell in steps from 50 percent in 2015 to 30 percent in 2017 and zero on 1 January 2018. Toyota, Honda and Ford had all indicated that they would consider shifting models from Vietnamese assembly to imports from their much larger Thai and Indonesian plants, and several did: Honda moved the Civic and CR-V to imports, Toyota moved the Fortuner, and analysts expected a hollowing-out. The government’s answer, in the closing weeks of 2017, was two decrees. Decree 116 imposed new conditions on imported cars, including a vehicle type approval certificate from the exporting country and batch-by-batch emissions and safety testing, which importers could not immediately satisfy; imports of finished cars fell to almost nothing in the first quarter of 2018 before the paperwork caught up. Decree 125 cut the tariff on imported components to zero for assemblers that met minimum output and growth targets for a chosen model.

The combination was clumsy but it worked as industrial policy in a way the previous quarter-century had not. For the first time an assembler had to choose between committing to a volume model in Vietnam, with a tariff advantage on parts, and importing at a zero tariff but with a regulatory obstacle course. Thaco, which had already been investing in Chu Lai, doubled down on Mazda and Kia; Hyundai’s partner Thanh Cong expanded in Ninh Bình; Toyota kept the Vios and Innova at home. Imports from Thailand and Indonesia rose sharply once Decree 116 was digested, and by the early 2020s they accounted for a third or more of sales, but local assembly did not collapse. The share of locally assembled cars in total sales has hovered around 60 to 65 percent since, which is a considerably better outcome than the industry expected in 2017. Vietnam’s wider trade agreements, including EVFTA and CPTPP, added European and Japanese tariff cuts on longer schedules, which kept the pressure on.

How did VinFast and Thaco change the industry’s scale?

By building the first plants designed for volume rather than for tariff arbitrage, and by pulling suppliers in behind them. Thaco’s Chu Lai complex and VinFast’s Hải Phòng site together account for a large share of the country’s assembly capacity and most of its component investment since 2015.

Thaco, the Chu Lai assembler took the incremental route. Founder Trần Bá Dương built Chu Lai in Quảng Nam from 2003 onward as an integrated complex with its own port, stamping, welding and paint shops and a cluster of component plants making seats, wiring harnesses, glass, plastics and later engines under licence. Its Mazda plant, opened in 2018 with capacity of 100,000 units, was the first in Vietnam built to a modern global standard, and Thaco has used the Decree 125 incentives and its Kia and Mazda volumes to lift local content on several models to the 30 to 40 percent range, enough to qualify for ASEAN export under the 40 percent rule, which it has begun to do with buses and Kia models to Thailand, Myanmar and elsewhere.

VinFast took the leap. Its Hải Phòng plant, built in 21 months from 2017 with capacity nominally of 250,000 cars a year, includes body, paint, engine and assembly shops and a supplier park where partners such as Aapico, Lear and ZF set up alongside. VinFast’s petrol cars were built on licensed BMW platforms and its electric range is its own design, engineered largely in Germany, Australia and Vietnam, and the company has used a level of vertical integration, including its own battery pack assembly, that no foreign assembler in Vietnam ever contemplated. The losses have been enormous, but the plant, the engineers and the supplier park are now facts on the ground, and they changed what the government and foreign investors thought possible. Hyundai Thanh Cong, in Ninh Bình, took a middle path, expanding to two plants and about 180,000 units of capacity with Hyundai’s support and becoming, in several years, the largest brand by sales. Between them, these three now assemble the bulk of Vietnamese-built cars.

Why is the supplier base still so thin?

Because volume per model remained low, because the electronics-led foreign investment boom pulled Vietnamese engineering talent and industrial land toward Samsung and its peers rather than toward cars, and because the country never developed a domestic steel and metal-forming industry for automotive grades until recently.

The comparison with Thailand is the one the ministry uses. Thailand has more than 2,000 automotive suppliers, including around 700 first-tier firms, built over fifty years around Japanese assemblers producing two million vehicles a year, half of them for export. Vietnam has, depending on definition, a few hundred, and most are foreign-owned tier-one plants making wiring harnesses, seats and plastics for local assembly or for export to Japan. Domestic firms are concentrated in low-technology parts. The obstacles are familiar: no scale, no engineering base for precision machining, expensive capital, and a large gap in automotive-grade materials that only began to close when Hòa Phát and others started producing higher-grade steel.

The foreign investment boom also competed for the same resources. the China Plus One wave brought electronics, textiles and furniture factories that paid well for land in the same northern provinces where the car assemblers sat, and the best Vietnamese engineers went to Samsung, Foxconn or software exporters rather than to a car component plant. Automotive is capital-intensive, slow to reach profitability and cyclical, and against the alternatives on offer, few Vietnamese industrialists chose it; Thaco and VinFast are exceptions precisely because their founders had the capital and the patience to accept a long payback. The government’s Supporting Industries programme, with tax incentives and credit lines for component makers, has helped at the margin, but the honest assessment inside the ministry is that the supplier base will follow volume, and volume is only now arriving.

What are the Chinese entrants and the electric transition doing to the market?

They are resetting it. From 2023 onward BYD, Chery’s Omoda and Jaecoo, Geely, GAC, Wuling and Lynk & Co entered Vietnam, several with local assembly plans, and the government cut the special consumption tax and registration fee on electric cars, giving EVs a structural price advantage that has lifted their share of sales into double digits.

The EV incentives are substantial. From March 2022, battery-electric cars have paid a special consumption tax of 3 percent instead of the 15 to 150 percent that applies to petrol cars, with the rate scheduled to rise to 11 percent from March 2027, and the registration fee for EVs was waived entirely for three years and then set at half the normal rate, a concession extended into 2027. The policy was written with VinFast in mind and it has worked largely for VinFast, whose VF 3 city car and VF 5 became the best-selling models in the country in 2024 and 2025, helped by Xanh SM and other affiliated buyers. It also opened the door to Chinese electric brands, which have the cost base to profit from the same concessions.

The Chinese arrivals are the first new manufacturing investment wave since the 1990s. Chery formed a joint venture with the Vietnamese conglomerate Geleximco to build a plant in Thái Bình for Omoda and Jaecoo; Geely partnered with Tasco on another Thái Bình plant to assemble Lynk & Co and Geely models; BYD has imported from Thailand while weighing local assembly; Wuling’s tiny electric cars are assembled by TMT Motors in Hưng Yên; and Skoda, with Thanh Cong, opened a plant in Quảng Ninh in 2025. Not all of these will survive a market of half a million units; several are chasing the same small-SUV and city-EV segments, and Vietnamese buyers remain wary of Chinese brands and their residual values. But the entrants have brought price competition, forced the Japanese and Korean incumbents to introduce hybrids and to cut prices, and made local assembly the default for anyone who wants a long-term position, which is what thirty years of localisation policy failed to do.

What could go wrong with Vietnam’s car industry?

The main dangers are a tariff and content-rule squeeze that makes imports cheaper than assembly again, a policy reversal on EV incentives that strands investment, overcapacity as too many new plants chase a modest market, and the concentration of the whole story in two private founders. Each has precedent in the region.

The tariff squeeze is the most likely. As Thai and Indonesian plants add EV capacity with Chinese and Japanese partners, imports into Vietnam at zero duty will become cheaper and better, and Vietnam’s assemblers will need real cost advantages, not paperwork, to hold their share. The ministry has discussed a stricter reading of the ASEAN 40 percent rule and tighter enforcement of type approval, but Vietnam has also committed under its trade agreements to reduce non-tariff barriers, and it has less room to improvise than it had in 2017. The EV incentive step-down in 2027 is the second risk; if the special consumption tax rises to 11 percent and the registration fee returns to full rate while the entrants are still scaling, the market could stall, as Thailand’s did briefly when its subsidies were adjusted.

Overcapacity is real. Nominal assembly capacity in Vietnam now exceeds a million units against sales of around half that, and the new Chinese plants, if built as announced, will add more. Plants running at a third of capacity do not localise; they import kits and wait. Finally, the industry’s dependence on Trần Bá Dương and Phạm Nhật Vượng, two men in their sixties whose groups have other, larger businesses with their own stresses, is a form of key-person risk at the level of a national industry. Thaco is diversified and profitable and would survive a leadership change; VinFast’s position rests on its founder’s continued willingness to fund it, and a change of heart there would remove the country’s only home-grown brand and a large fraction of its EV volume.

What does Vietnam’s car industry mean for founders, investors and operators?

That protection without scale produces assembly without industry, that a genuine tariff shock can do more for localisation than two decades of targets, and that in Vietnam the decisive actors are private founders rather than ministries. For businesses in the sector, the practical implications follow from those three points.

For investors, the evidence favours the assemblers and suppliers tied to models with real volume and to owners with patient capital, and it counsels caution on any business whose economics depend on the current EV tax rates. Thaco’s route, licensed brands, integrated logistics and steady localisation, has produced profits; VinFast’s has produced a plant, a brand and a great deal of red ink, and its investment case rests on whether cost per car can fall faster than the subsidies. Suppliers with a foothold in the motorbike supply chain have a natural adjacency into cars and into the electric drivetrain, where much of the new value will sit.

For founders and operators, the lesson of thirty years is that Vietnamese industrial policy tends to state ambitious goals, under-deliver on the instruments and then respond decisively when an external deadline forces its hand; the ATIGA cliff of 2018 and the EV transition are two such deadlines, and there will be others, including the 2027 tax step-down and the next round of trade-agreement obligations. Businesses that plan for the deadline rather than the target, that build volume in a single model or component before spreading across many, and that assume a market of half a million to a million cars rather than the ten million a country this size might eventually buy, will be positioned for the industry Vietnam actually has. The country now makes cars; whether it becomes a car-making country, in the sense of engines, platforms and exports, is the question the next decade will answer.

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