Auto Firms Are Racing to Make Cars in Vietnam : Industry: Ford, Chrysler, Toyota and others could put as much as $650 million into assembly plants.

Lured by Vietnam’s robust economic growth, the world’s biggest auto makers are racing to assemble vehicles in what they hope will become Asia’s next booming car market.

Ford Motor Co. and Chrysler Corp. of the United States, Japan’s Toyota Motor Corp. and France’s PSA Peugeot Citroen are among the companies investing or applying to invest a total of more than $650 million in assembly plants. Japan’s Daihatsu Motor Co. and Suzuki Motor Corp. received project licenses in April, as did Germany’s Mercedes-Benz.

Four other joint ventures are already building Mazdas, BMWs and other vehicles from imported kits.

If all the proposed projects come to fruition, there will be 11 foreign joint ventures assembling more than 120,000 cars, trucks and buses annually by the year 2007.

All this activity is planned in a country where the average annual income of $129 won’t even buy a set of tires.

Vietnamese bought fewer than 5,000 new vehicles in 1994. The Ministry of Heavy Industry predicts annual demand will reach 40,000 new cars by the turn of the century--a big leap, but still far short of investors’ bullish expectations.

Some industry insiders worry about the expected oversupply.

“The Vietnamese government is issuing too many licenses for this small market,” said Naoki Tatebe, general director of the Mekong Corp., Vietnam’s first automotive joint venture. Mekong, 70% owned by Japanese and South Korean investors, has assembled four-wheel drive vehicles since 1992.

“One or two [licenses] is enough,” agreed Wann Lee, former general director of Vidamco, a rival venture partly owned by South Korea’s Daewoo Corp.

Some of the cars assembled in Vietnam will be sold to neighboring countries. Vidamco’s operating license requires it to export one-fifth of its output to earn hard currency, Lee said.

But foreign investors are counting on Vietnam’s 72 million people for most of their business. They base their hopes on an economy that has grown an average of 8.5% for each of the past three years, largely because of the government’s efforts to discard socialist central planning in favor of the free market. Hanoi’s economists expect growth to reach at least 9% this year.

The government, which sees kit assembly as a first step toward full-fledged domestic manufacturing, initially encouraged operations by setting tariffs as low as 20% on unassembled kits. At the same time, it levied tariffs of 200% on new imported passenger cars and 150% on new minivans.

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But not all policy has been supportive. The Trade Ministry shocked investors last month when it recommended limiting this year’s imports of car and minivan knockdown kits to 2,000. The quota met barely 5% of the combined annual capacity of the four working joint ventures.

One of the ventures, Vietnam Motors Corp., warned it would probably have to halt production. Vietnam Motors had planned to make 3,500 Mazdas, BMWs and South Korean Kias this year at its Hanoi plant. The ministry appears to have backed off from the proposal, but industry executives still do not know if they are free to import an unlimited number of kits. Ministry officials have yet to clarify the situation.

Alarm over the quota erupted as car companies were already fuming about the government’s removal this year of a ban on importing secondhand vehicles. Used cars, mostly Japanese and Korean, are popular alternatives to pricier new ones.

Executives doubt the government will stick to its plan to phase out the secondhand imports over the next few years.

“It’s just like a drug addict,” said Thomas Cook, Ford’s director of new business in Asia. “Once you start with used cars, you can’t stop.”

Hanoi lifted the ban as a way to supply buyers with more affordable cars and generate tariff revenues, said Nguyen Xuan Chuan, vice minister of heavy industry. Chuan acknowledged the imports will reduce sales of domestic assemblers, but urged foreign investors not to lose heart.

“I think the risk of not being in Vietnam forever is a bigger risk than facing secondhand cars,” he said.

Some investors warn that Vietnam, in its eagerness to attract so many big-name companies, will jeopardize the second step of its automotive strategy--localizing parts.

Vietnam must develop a car parts industry before it can move on to step three, making entire vehicles.

But with 11 different companies ordering small numbers of specialized components, Vietnamese parts makers will have trouble selling enough of any single item to make a profit, the investors say.