Automotive and EV Supporting Industries: Localisation Rates and Incentives for Tier-1 and Tier-2 FDI Component Suppliers

As car makers and electric vehicle manufacturers expand output in Vietnam, the question reaching lawyers is no longer whether to enter, but at which position in the supply chain, so that the localisation rate demanded by the customer is met while incentives are secured and not clawed back later. The localisation rate in Vietnam’s automotive sector is a concept with its own history of state management, different from local content commitments under trade agreements, and tier-1 and tier-2 FDI component suppliers need to separate these two rule layers clearly before signing long-term supply contracts with vehicle makers.

What the localisation rate means in automotive sector management

For many years the localisation rate of domestically produced and assembled cars served as a basis for tax policy and sector development policy, determined by the value of domestically produced components over total vehicle value, using component catalogues and conversion methods issued by the managing authority. Enterprises should understand that this method measures at the level of the assembler’s vehicle, not at the level of each supplier: a tier-1 supplier selling an assembly to a vehicle maker contributes to the vehicle’s rate at the recorded component value, even if that assembly still contains imported tier-2 parts. When negotiating contracts, a supplier should therefore ask the vehicle maker to confirm how its component value will be recorded in the localisation file, to avoid a case where goods are delivered but the recorded contribution falls short of expectations because of component code classification.

The second rule layer is rules of origin under free trade agreements such as ATIGA, the EVFTA and the CPTPP, which decide whether exported components or vehicles receive preferential tariffs. Regional value content under an agreement follows its own formula, with product-specific rules and cumulation of materials from member countries. One component can count as localised under the domestic sector method yet fail preferential origin on export, and vice versa. A supplier serving both the domestic market and export must run both calculations in parallel on the same cost structure and feed the results into make-or-buy decisions for each tier-2 part.

Supporting industry incentives: the Decree 205/2025 framework

Supporting industry development policy was substantially amended by Decree 205/2025/ND-CP of 14 July 2025, effective 1 September 2025, amending Decree 111/2015/ND-CP. Under the new framework, projects producing supporting-industry products on the priority development list can access support covering part of research and development costs, technology transfer, workforce training, market promotion and investment credit on better-than-commercial terms, with many support items falling in a range of 50 to 70 percent of eligible costs depending on type. Automotive and EV components are in the priority group, but the enterprise must complete incentive confirmation procedures and obtain approval for the specific project or programme before support arises; there is no mechanism that automatically refunds money against cost invoices.

Alongside programme-based support, a supplier may still enjoy corporate income tax incentives and land rent incentives under investment and tax law if the project meets sector and location conditions. When stacking the two incentive layers, note the non-duplication principle for the same cost item: a cost already partly funded from the state budget cannot be counted again into the base of another incentive where the sector rules so provide. The supplier’s finance team should keep a separate tracking table for each support item from the filing stage, because at finalisation and post-incentive inspection the authorities will reconcile exactly that table against actual spending documents.

Tier-1 and tier-2 suppliers: real conditions beyond the legal texts

Beyond legal conditions, a supplier seeking entry into a vehicle maker’s chain in Vietnam must pass that maker’s supplier approval process: IATF 16949 automotive quality management certification, on-site process capability assessment, sample testing and small-volume trial runs before an official supplier code is issued. The cycle often takes many months and the vehicle maker retains rights to unannounced audits throughout the supply period. For a tier-2 supplier selling to tier 1, quality requirements flow down through the tier-1 contract, together with lot traceability clauses and chain liability for compensation when a component defect causes a vehicle recall; that clause deserves close legal review because chain compensation values can far exceed the direct supply contract value.

Labour and environmental factors also form part of chain entry conditions: major vehicle makers apply supplier codes of conduct on occupational safety, wages, working hours and management of chemicals and waste. Stamping, casting and plating plants for components belong to environmentally sensitive sectors and must complete an environmental impact assessment or environmental permit depending on scale, which is often what makes satellite projects slower than the main project. A mid-sized tier-2 enterprise should consider locating inside an industrial park that already has compliant centralised wastewater treatment and suitable registered sectors on the park’s investment certificate, rather than developing a standalone site and facing supplementary appraisal.

Deepening localisation: from assembly of kits to making core parts

The common strategy of FDI suppliers proceeds in three steps. The first step imports assemblies and performs final finishing in Vietnam to win a supplier code, revenue and customer relationships. The second step localises plastic, rubber, stamped and machined parts where domestic tier-2 suppliers are capable, gradually raising the recorded domestic value. Only the third step brings core processes such as precision moulds, surface treatment and metrology to Vietnam, tied to long-term volume commitments from the vehicle maker. Each step means an investment project adjustment, re-registration of the incentivised product list and a renegotiation of supply prices, so the framework contract with the vehicle maker needs a price adjustment mechanism following the agreed localisation roadmap, with a clause sharing the benefit when localisation cuts costs instead of letting one side keep all of it.

Frequently Asked Questions

How is the localisation rate in automotive and EV supporting industries regulated?

The localisation rate is determined at the level of the domestically produced and assembled vehicle, by the value of domestically produced components over total vehicle value and the component catalogue issued by the managing authority; a supplier contributes to that rate at the component value recorded by the vehicle maker. This concept differs from rules of origin under free trade agreements, which decide tariff preferences on export through regional value content and product-specific rules, so an enterprise serving both markets must run both calculations in parallel.

What incentives do automotive and EV component suppliers enjoy?

Under Decree 205/2025/ND-CP effective 1 September 2025 amending Decree 111/2015/ND-CP, projects producing supporting-industry products on the priority list receive support for part of research and development, technology transfer, training and market promotion costs and investment credit, with many items in a 50–70% range of eligible costs, after incentive confirmation and specific approval. Enterprises may additionally enjoy corporate income tax and land rent incentives under sector and location conditions in investment and tax law.

What conditions must an FDI enterprise manufacturing components in Vietnam satisfy?

An enterprise must satisfy both legal conditions on project registration and priority product lists and the supply chain’s practical conditions: IATF 16949 certification, passing the vehicle maker’s supplier assessment and trial runs, environmental files appropriate to scale, and compliance with supplier codes of conduct on labour, safety and chemicals. The contract should settle how the maker records the localisation value of the components, lot traceability clauses and a cap on chain compensation liability in recall events.