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Describe the significance of, and developments in, the automotive industry in the market.
Vietnam’s automotive industry has seen significant growth in recent years, but is still relatively modest when compared to those of neighbouring countries. According to official figures published by the Vietnam Automobile Manufacturers’ Association, automotive sales in Vietnam have reached a level of approximately 250,000 vehicles per year. Although sales figures dipped in the first half of 2017, industry analysts expect automotive sales to continue to increase in the coming years as Vietnam’s young and growing middle class expands its appetite for cars. However, despite the increasing popularity and affordability of cars, for the time being Vietnam very much remains a country of motorbikes with approximately 45 million motorbikes on the roads and annual sales approaching 3 million.
Despite the increasing local demand for cars, Vietnam is largely an automobile-assembling, rather than automobile-producing, country. There are few local parts suppliers, meaning the vast majority of automobile parts used by in-country automobile manufacturers are imported. Imports of completely built units are also experiencing faster growth than domestically assembled units, and in recent years represented approximately 30 per cent of total sales within Vietnam. Although Vietnam’s tariff reduction commitments under the Association of Southeast Asian Nations Agreement on Trade in Goods will likely open the market further to lower-cost imports from regional car-producing countries such as Thailand, Malaysia and Indonesia, local real estate giant Vingroup JSC has announced plans to debut ‘Made in Vietnam’ cars under the ‘Vinfast’ brand by 2019.
What is the regulatory framework for manufacture and distribution of automobiles and automobile parts, such as vehicle-type approval process as well as vehicle registration and insurance requirements?
The Vietnamese automotive industry is regulated and supervised by both the Vietnam Register under the Ministry of Transport and the Ministry of Industry and Trade. The Ministry of Transport has oversight over technical and environmental standards of automobiles, while the Ministry of Industry and Trade is responsible for regulating imports of automobiles and automobile parts.
Local assemblers of ‘completely knocked down’ (CKD) vehicles (ie, those that are imported for assembly in Vietnam) must ensure that assembled units satisfy technical and environmental standards set by the Vietnam Ministry of Transport. For that purpose, Circular No. 30/2011/TT-BGTVT of the Ministry of Transport requires automotive designs to be appraised and approved (as evidenced by a certificate of design appraisal) and the final product to be tested for satisfaction of relevant technical standards (as evidenced by a certificate of quality technical safety and environmental protection) before being permitted into circulation. The final products are also subject to ongoing annual or irregular inspection by the Vietnam Register under the Ministry of Transport.
‘Completely built up’ (CBU) vehicles (ie, those that are imported fully assembled) must undergo a homologation process and receive a certificate of homologation issued by the Vietnam Register. Vehicles exempt from homologation requirements must obtain a notice of exemption from homologation also issued by the Vietnam Register. In order to be exempt from homologation requirements, a vehicle must satisfy each of the following conditions: (i) the vehicle is completely new; (ii) the vehicle was manufactured within three years prior to the date of import; and (iii) the vehicle was either examined in accordance with a treaty or agreement on mutual recognition of technological standards to which Vietnam is a signatory or was manufactured by a foreign vehicle manufacturer that has obtained ‘CoP’ (conformity of production) clearance from the Vietnam Register.
Decree 116/2017/ND-CP took effect from 1 January 2018 and requires automobile importers to obtain an automobile import licence from the Ministry of Industry and Trade. Decree 116 also imposes more rigorous quality inspection requirements and a list of business conditions regarding facilities, human resources, labour safety and hygiene, fire safety and environmental protection, among others. Automobile manufacturers and assemblers must obtain a certificate of compliance with these conditions from the Ministry of Industry and Trade, and have been given a grace period of 18 months from 17 October 2017 to comply with the conditions of new Decree 116.
Individual vehicle owners must register the vehicle with the competent Police Department and purchase and maintain automobile insurance throughout the period of use. Vehicle owners must also undergo periodic inspections and obtain an inspection certificate issued by the Vietnam Register.
Development, manufacture and supply
How do automotive companies operating in your country generally structure their development, manufacture and supply issues? What are the usual contractual arrangements?
Most foreign automobile manufacturers operate in Vietnam through manufacturing joint venture companies entered into with local (often state-owned) companies. Automobile parts are for the most part imported from outside Vietnam, although there is a small local supplier market as well.
How are vehicles usually distributed? Are there any special rules for importers, distributors, dealers (including dealer networks) or other distribution partners? How do automotive companies normally resolve restructuring or termination issues with their distribution partners?
Because the distribution sector is not completely open to foreign investors (in other words, foreign investors and certain foreign-invested companies established in Vietnam engaging in distribution activities are subject to legal requirements not applicable to purely domestic companies), foreign-invested manufacturing companies typically work with local distributor networks and agents to distribute fully assembled vehicles into the market. Local distributors and qualified importers also engage in import and distribution of CBU vehicles from outside Vietnam.
Decree 116/2017/ND-CP requires automobile importers to obtain an automobile import licence from the Ministry of Industry and Trade. One of the licensing conditions is that such importers have warranty and maintenance shops and are authorised by the relevant foreign automobile manufacturers to recall defective imports. Decree 116 also requires quality inspections to be conducted on every batch of newly imported cars.
Restructuring or termination issues with distributors are typically resolved in accordance with the relevant distribution or agency agreement between the manufacturer and the distributor. If the distributor relationship is structured as a principal-agent relationship, the Commercial Law of Vietnam provides for compensation upon termination equal to the average monthly remuneration of the distributor for each year of acting as agent for the manufacturer, unless otherwise expressly agreed by the parties. No compensation upon termination is payable in the case of a distribution agreement unless so agreed by the parties.
Mergers, acquisitions and joint ventures
Are there any particularities for M&A or JV transactions that companies should consider when preparing, negotiating or entering into a deal in the automotive industry?
Foreign investment activities in Vietnam, including M&A and JV transactions, are subject to completion of a licensing process that can be time-consuming and appear, at times, to be unpredictable and arbitrary. Acquisition of shares or other equity in an existing company is usually more straightforward than establishment of a new company, but in either event relevant licensing formalities must be complied with.
In order to establish a new company in Vietnam, a foreign investor must first obtain an ‘investment registration certificate’ (IRC) issued by the provincial Department of Planning and Investment or the management board of special zones (eg, an industrial zone, export-processing zone, high-tech zone or economic zone) where the new company will be located. Certain special or large-scale projects also require approval from the Prime Minister, National Assembly or local People’s Committee. After obtaining the IRC, a second licensing process must be undertaken to apply for an ‘enterprise registration certificate’ (ERC), which serves as the business licence of the company and signifies completion of its establishment.
An IRC is not required in the case of acquisition of shares or other equity in an existing company in Vietnam. However, consent from the provincial Department of Planning and Investment is required if the foreign investor is acquiring shares in a company which operates a ‘conditional’ business or the acquisition results in 51 per cent or more of charter capital of the target company being held by one or more foreign investors.
Some business sectors or activities are also restricted or subject to additional conditions if the company has foreign investment capital, so a potential foreign investor should carefully consider any impact the investment may have on the existing or contemplated operations of the target company.
Incentives and barriers to entry
Are there any incentives for investment in the automotive market? Are there barriers to entry into the market? What impact may new entrants into the market have on incumbents?
In February 2016, the Prime Minister issued Decision No. 229/QD-TTg specifying incentives relating to finance, trade promotion, land and taxation for the automotive industry. Accordingly, automotive companies engaged in the manufacture, purchase and use of certain types of ‘priority’ vehicles (eg, small vans used in agriculture with a capacity of 3 tonnes, medium- and short-distance passenger vehicles, cars with nine or fewer seats and cylinder capacity of 1500 cc and certain other specialised vehicles) will be entitled to certain incentives. Specific key incentives include:
- projects relating to auto parts production and car assembly of local companies are eligible for loans from the Vietnam Development Bank;
- companies that are part of a global supply chain for production of parts or vehicle exports are eligible for export credit from the Vietnam Development Bank;
- financial support is available from the government for government procurement, development investment credits and projects using priority vehicles;
- goods imported to create fixed assets for auto and auto parts production or assembly projects located in industrial zones, economic zones and high-tech zones enjoy preferential import tariffs;
- ‘most-favoured-nation’ import duties will be applied to priority and locally made vehicles;
- preferential corporate income tax rates will be set for projects relating to the manufacture of priority vehicles with a capacity of 50,000 units a year and manufacture of certain types of auto parts;
- auto parts production projects may enjoy certain land incentives (eg, exemption or reduction of land rent); and
- in addition to the aforementioned specific incentives, the government may provide support for large-scale automotive projects on a case-by-case basis.
Generally speaking, barriers to entry into the market are more commercial than legal. For example, Vietnam’s underdeveloped road infrastructure and cultural preference for motorbikes act as a check on the further development of the domestic automotive industry. Substantial taxes imposed on automobiles in Vietnam, including import taxes, value added taxes and special consumption taxes (which can be as high as 150 per cent and apply to both imported and locally produced vehicles), also make them unaffordable to the vast majority of the local population.
Product safety and liability
Safety and environmental
What are the most relevant automotive-related product compliance safety and environmental regulations, and how are they enforced? Are there specific rules for product recalls?
The most relevant automotive-related product compliance safety and environmental regulations are set out in Circular No. 30/2011/TT-BGTVT dated 15 April 2011 issued by the Ministry of Transport (governing the production of CKD vehicles), Circular No. 31/2011/TT-BGTVT dated 15 April 2011 issued by the Ministry of Transport (governing the import of CBU vehicles) and Circular No. 70/2015/TT-BGTVT dated 9 November 2015 (setting out duties applicable to car owners).
Non-compliance with these regulations can result in administrative penalties including monetary fines or revocation of relevant licenses and certificates. The Vietnam Register under the Ministry of Transport also has the power to inspect the quality and standards of domestic automobile manufacturers on a regular or irregular basis to ensure compliance with relevant regulations.
Specific rules apply to product recalls in the automotive industry. According to Circular No. 30/2011/TT-BGTVT, an automobile manufacturer must recall its products if they fail to comply with any applicable technical standards or cause (or may cause) danger to humans or property as a result of technical errors. The manufacturer must recall its products within five days of discovering the technical error and must notify the Vietnam Register in writing to propose a recall plan. Within five days from the date of receipt of such notification, the Vietnam Register must approve the plan (or suggest changes to it) and the manufacturer must recall its products in accordance with the approved plan. The manufacturer must also report the results of the recall plan to the Vietnam Register. Failure to comply with the regulations on product recalls may result in the manufacturer’s certificate of quality technical safety and environmental protection for the affected class of automobile to be suspended or withdrawn.
Product liability and recall
Describe the significance of product liability law, and any key issues specifically relevant to the automotive industry. How relevant are class actions or other consumer litigation in product liability, product recall cases, or other contexts relating to the automotive industry?
Both the Civil Code of Vietnam and the Law on Protection of Consumers’ Rights provide a basis for liability for damage caused by manufactured or imported products, including automobiles and automobile parts. The Civil Code sets out the broad principle that individuals or legal entities engaged in production or other business activities are liable for damage caused to consumers as a result of such individual or legal entity’s failure to ensure the quality of goods they manufacture or pass on to consumers. The Law on Protection of Consumers’ Rights addresses product liability more specifically and provides that manufacturers and importers (including organisations or individuals who affix a commercial name on the goods or use a trademark or commercial indication identifying such organisation or individual as the manufacturer or importer of such goods) shall be liable for any damage caused by defective products manufactured or imported by them. In addition, where the manufacturer or importer of a defective product is unable to be identified, the direct supplier of the defective goods shall be liable for damage suffered by consumers as a result of such defect.
Notwithstanding this basis for liability set out in the law, it has not yet been a common practice in Vietnam for consumers to bring claims for compensation (either individually or as a class) against manufacturers or importers of automobiles, automobile parts or other products for damages caused by defective products. One reason for this is the relatively poor reputation of Vietnam’s legal system, and in particular its courts, which are seen as more often than not time-consuming, costly, unpredictable and arbitrary in both proceedings and result.
What competition and antitrust issues are specific to, or particularly relevant for, the automotive industry? Is follow-on litigation significant in competition cases?
Vietnam’s Competition Law is aimed at preventing acts of unfair competition as well as acts that restrict competition to an unacceptable degree. Acts that can serve to restrict competition include those that reduce, distort or prevent competition in the market through economic concentration (eg, mergers, acquisitions or other types of business combination transactions), abuse of dominant market position or monopoly or agreements to restrict competition (eg, agreements to divide the market to minimise or eliminate competition). Acts of unfair competition are those that are contrary to general standards of business ethics and which cause or may cause damage to the interests of the state and/or to the legitimate rights and interests of other enterprises or consumers.
The Competition Law requires notification to the Vietnam Competition Authority (VCA) prior to completion of any merger, acquisition or other business combination transaction that will result in a combined market share of greater than 30 per cent, and prohibits any such transaction that would result in a combined market share of greater than 50 per cent. The VCA has not, however, historically taken an aggressive approach to enforcement of Competition Law provisions, and we are not aware of any cases in which the authorities have accused an automotive company of violating applicable Vietnamese competition or antitrust regulations.
Dispute resolution mechanisms
What kind of disputes have been experienced in the automotive industry, and how are they usually resolved? Are there any quick solutions along the supply chain available?
Because Vietnam’s court system is relatively unsophisticated and is perceived as being both arbitrary and unpredictable, most disputes in Vietnam are resolved outside of the formal legal system through commercial negotiations or amicable settlement of claims. This is particularly true in the case of product manufacturers or distributors who may be concerned that adverse news coverage or other publicity could negatively impact their brand in the eyes of consumers. Because most claims are handled outside of formal legal channels, and because Vietnam does not have a system of binding case law or other legal precedents, it is difficult to say with any degree of certainty what kinds of disputes have been experienced in the automotive industry. One can speculate, however, that disputes would be likely to arise from issues such as product liability and warranty periods.
When a dispute arises, the aggrieved party may seek one or more remedies including not only damages for loss but also interim or equitable remedies such as specific performance, temporary cessation of contractual performance or termination or rescission of contract. Injunctive relief may also be available upon petition to the competent court.
What is the process for dealing with distressed suppliers in the automotive industry?
The process for dealing with a distressed supplier will depend on the terms of the contract between the supplier and the manufacturer or customer, including any remedy provisions included therein. However, where a supplier is, or is at risk of becoming, insolvent, a manufacturer or other customer of the supplier may also petition a court to initiate bankruptcy proceedings and join the list of creditors seeking recovery.
Intellectual property disputes
Are intellectual property disputes significant in the automotive industry? If so, how effectively is industrial intellectual property protected? Are intellectual property disputes easily resolved?
The most significant disputes in the automobile industry in Vietnam relate to counterfeiting of automobile parts and fittings and domain name disputes.
As a member of the World Trade Organization, Vietnam has established a relatively comprehensive legal framework to register and protect intellectual property rights. In case of infringement or other violation of existing intellectual property rights in Vietnam, the owner of such rights may pursue relief through administrative, civil or, in some cases, criminal proceedings. In practice, administrative relief for infringement of intellectual property rights is more common (and easier to obtain) in Vietnam. However, although administrative relief is cost-effective to obtain and generally results in an immediate cessation of the infringement, it has proven to have a somewhat low deterrent effect overall. To date, civil and criminal causes of action have been limited to instances of deliberate counterfeiting.
Generally speaking, intellectual property disputes are not easily resolved due to the intangible nature of the assets and, particularly in the case of patents or industrial designs, the highly technical knowledge that is often in question. This is especially the case in Vietnam, where courts and enforcement agencies are neither sophisticated nor experienced in handling highly complex or technical disputes.
Trade unions and work councils
Are there specific employment issues that automotive companies should be aware of, such as with trade unions and works councils?
Vietnamese employment regulations are extremely ‘employee friendly’, and in disputes relating to employment, Vietnamese courts and other administrative authorities generally sympathise with employees over employers. Even in cases of clear wrongdoing, it is extremely difficult to terminate an employee without his or her consent and willingness to cooperate.
Companies are not obligated to establish a trade union for employees, but must recognise and support trade unions established by employees or, in absence of such an in-house trade union, the relevant district-level trade union.
Companies with 10 or more employees must enact and register with the authorities a written set of ‘internal labour rules’. An employee may only be disciplined in accordance with the internal labour rules enacted by the company or pursuant to the limited (and poorly defined) offences provided for in the Labour Code. The internal labour rules must be agreed with the company’s in-house trade union or, in its absence, the district-level trade union or a majority of company employees. The relevant trade union must also participate in cases in employee discipline or where changes are being made to the rights or responsibilities of company employees.
What are the most important legal developments relating to automotive technological and mobility advances?
Although Vietnam is not at the forefront of automotive technological and mobility advances, car-sharing applications such as Uber and Grab have experienced rapid growth in popularity since their relatively recent entry to the market. Legal regulations have not yet caught up to these developments as legislators and regulators struggle to understand the new business models and create an appropriate legal framework for services provided by platform companies engaged in the ‘sharing economy’. Vietnam’s largest taxi firm Vinasun is currently suing GrabTaxi Vietnam under Vietnam’s competition law for ‘unhealthy competition’, but both passengers and drivers continue to flock to ride-hailing firms due to widespread dissatisfaction over the service provided by traditional taxi companies.
Traditional transportation services such as taxi or car hire services are currently regulated by Decree No. 86/2014/ND-CP. The government is currently preparing a draft decree to replace Decree No. 86/2014/ND-CP with an aim to improve current regulations on transportation services as well as regulate the business activities of drivers who work in association with car-sharing companies such as Uber or Grab. There has been no indication to date as to the likely timeline for issuance of the new decree.
The first autonomous car in Vietnam was also introduced in 2017, using software developed by local company FPT Software. There are currently no regulations in place governing autonomous vehicles in Vietnam.