According to a Reuters report, Vietnam has abruptly raised tariffs on vehicle components, shaking the confidence of foreign investors for the second time in three months.

Reuters said that, under a December 4 decision revealed only this week, tariffs on parts for the small but rapidly growing car-making sector will at least double, and in some cases almost quadruple, from the beginning of 2003.

The news came only a week or so after the Vietnam Investment Review, citing the Ministry of Industry, reported that a localisation programme for vehicle parts manufacturing was to be submitted to the government followed by the establishment of a national committee chaired by a deputy prime minister.

That report noted that Nguyen Xuan Chuan, vice minister of Industry, had said at the end of November that local factories producing localised vehicle parts would be supported in terms of equipment and given tax breaks on imported materials.

According to Wednesday’s Reuters report, limits on the importation of motorcyle components, suddenly imposed in September, led to the suspension of some manufacturing at foreign-owned factories in Vietnam until the curbs were eased two months later.

"This was unexpected," one Hanoi-based trade expert told Reuters after the latest government intervention was revealed. "This kind of government decision-making process is making the Vietnam environment totally unpredictable."

Reuters said that Vietnam’s Ministry of Finance gave no reason for its tariff hike, which covered cars, buses and trucks.

But, Reuters noted, any reduction in vehicle component imports offers the government a chance to reduce Vietnam's billowing annual trade deficit of $US2 billion, about 7% of gross domestic product.

According to Reuters, the ministry said the decision had been made at the direction of Prime Minister Phan Van Khai.

Industry players told Reuters that the move would substantially increase costs for the 11 car assemblers, which are owned or part-owned by foreign companies and which import many components. It would also reverse break-even results recently achieved by some firms.

Reuters said that, among the foreign players, Toyota has the biggest Vietnam market share, at 26%, with Vietnam Daewoo Motor Co (Vidamco) at 15%, Ford at around 14% and DaimlerChrysler at 10%.

According to Reuters, the Vietnam Automobile Manufacturers Association told the prime minister in a December 17 letter that the tariff hike would raise retail prices by at least 15% in 2003 and by 35% in 2004 and added that some firms would have to shut plants.

Reuters said Vietnam imposes different tariffs on different vehicles but the tariff on parts for a five-seat car, for example, would double on January 1 to 40%.

Vietnam has no home-grown car and sales are modest for its 80 million population, Reuters said, with August sales of just 2,163 units, though that was up 21.2% over the same month last year.

In contrast, some 10 million motorcycles are in use, Reuters noted.

Reuters said about 26,000 cars are expected to be sold this year in Vietnam with most assembled in local factories from imported complete-knock-down (CKD) kits.

While the scale and impact of the car tariff rise is limited by the sector's size, the real importance of the move may be the message it seems to convey: policy can be unpredictable, Reuters said.

Yuichi Bamba, director of JETRO in Hanoi, a Japanese government agency that promotes trade and investment, told Reuters the move would reduce the business opportunities in the sector.

Kim Jung In, acting deputy chairman of the vehicle group and Vietnam general director of General Motors’ Korean unit Daewoo, told Reuters: "I think we will have to let them (the government) understand the impact on the industry."

Daewoo expects $70 million in Vietnam revenues this year, Reuters added.

There was no immediate response from the government to questions from Reuters about the decision.

Reuters noted that, when the Vietnamese government imposed limits on motorcyle parts, three of the biggest foreign motorbike assemblers - Honda, Suzuki and Yamaha - stopped or nearly stopped output.

Vietnam relaxed the curbs about two months later but not before they had triggered a diplomatic row with Japan, the country's biggest provider of official development aid, Reuters added.

Reuters said that Japanese participants at meetings of investors and aid donors last week said the motorcyle policy had blemished Vietnam's record on foreign investment.

According to Reuters, Vietnam relies on aid for infrastructure projects, poverty alleviation and rural and social development despite economic growth of 7% a year.

The country is also fighting to lure foreign direct investment, which is being siphoned off by much larger neighbour China, Reuters noted.