The economic meltdown of 1997-1998 is history, and recovery in the region is well under way. After slumping to 479,000 in 1998, vehicle sales reached a peak of 1.47 million units in 2003. The market jumped 22% the next year to 1.79 million vehicles and is expected to rise again this year to 1.89 million, en route to the 2.3 million sales forecast for 2010.

Against this backdrop, the flurry of free-trade agreement (FTA) talks from India and China to Australia and Thailand appears to be setting up a race between Japan and the U.S.

Each spent the better part of the year in negotiations with various members of the 10-country Association of Southeast Asian Nations (ASEAN) trade alliance. Of these, the key car-producing players are Thailand, Malaysia and Indonesia.

Thailand is the largest vehicle market, with production concentrated on pickup trucks. The country is in line to receive fresh auto industry investment totaling $2.2 billion.

This includes Toyota Motor Corp. ($700 million), Ford Motor Co./Mazda Motor Corp. ($540 million), Mitsubishi Motors Corp. ($475 million planned), Isuzu Motors Ltd. ($400 million) and supplier Denso Corp. ($100 million).

Malaysia, the region's second-largest car producer, which still enjoys special ASEAN tariff exemptions in order to protect its two national car companies, quickly is emerging from Thailand's shadow.

The country is home to four passenger- and commercial vehicle manufacturers, including national car companies Proton Holdings Bhd and Perusahaan Otomobil Kedua Sdn Bhd (Perodua).

There is one motorcycle manufacturer, nine vehicle assemblers and nine motorcycle assemblers. Additionally, there are 343 components and parts manufacturers, of which 23 have Tier 1 status.

Last year, Malaysia was ASEAN's largest producer of passenger cars, accounting for 24.4% of total production and the third-largest commercial-vehicle producer, responsible for 11% of total output.

Underpinning this high production capacity is the substantial investment of about 11.2 billion ringgit ($2.97 billion) spent by manufacturers and assemblers. Automotive components and parts makers have invested more than MR8.2 billion ($2.17 billion).

The government announced in October plans to make the country a Southeast Asian hub for car production and is seeking foreign investment in the sector through incentives such as soft loans and grants. (See related story: Malaysia Changes Tax Structure as Part of New Auto Policy)

It also is in negotiations with Volkswagen AG for an equity deal with Proton and is in FTA discussions with the U.S. Japan and Australia. The U.S. concluded its third bilateral trade meeting with Malaysian officials in October.

It could be argued the U.S. is working feverishly to cut free-trade deals before the country's Trade Promotion Authority, signed by President Bush in 2002, expires in June 2007.

But the overwhelming motivation drawing both the U.S. and Japan to ASEAN is a counter strategy to the looming threat from regional powerhouses China and India. Global challenges such as skyrocketing oil, steel and other commodity prices temper the need to move fast, as well.

Japan stirred controversy over its vehicle-tariffs negotiations with Thailand that saw the Thai government in late summer make major concessions on automotive and steel sectors, including tariff cuts on luxury cars and auto parts over the next several years.

The tentative deal calls for tariffs on passenger cars with large engines to be reduced to 60% from 80% by 2009, when the two countries resume talks. The agreement gives Japan a competitive edge in the luxury segment over U.S. and European auto makers.

Lexus had competitive edge over Mercedes in Thailand.

Should the proposed FTA be approved, Toyota, for instance, will be able to export Lexus vehicles to Thailand duty-free, effectively cutting current prices by more than half.

Angered by the deal, European auto makers are threatening to pull out of Thailand, warning the pact threatens to undermine millions of dollars of investment they have made over the last decade. In jeopardy are the sales of cars assembled by BMW AG, DaimlerChrysler AG, PSA Peugeot Citroen, Volkswagen and Volvo Cars.

Still, European vehicle sales in Thailand in 2004 accounted for just 10,554 units out of a total of 626,026 deliveries. Thailand more easily was swayed by Japanese auto makers' threats to pull plans for 41 billion baht ($1 billion) in investment unless the tariffs were reduced.

Auto parts imported from Japan also will see tariffs cut in stages, to zero by 2011 from the present 10% to 40%. Tariffs on auto parts deemed sensitive by Thai authorities will not be eliminated until later.

Thai auto-parts suppliers complain the trade deal ultimately will hurt small domestic producers. And non-Japanese auto makers and suppliers say it potentially undermines Thailand's efforts to become the “Detroit of Asia,” often bragged about.

Ford Motor of Thailand President John Felice was quoted saying the auto maker has spent $1 billion in Thailand since 1997, with the goal of making the country its Asian manufacturing platform. But it could reconsider future investment plans if benefits to local car producers decline because of the FTA

Thailand, which also has partial FTAs with China and India and currently is negotiating with the U.S., Laos, Peru, Bahrain, Pakistan and Australia, is just one example of a smorgasbord of free-trade deals dotting the region's landscape.

ASEAN economic ministers concluded at their 37th annual meeting in October that the need for an economic bloc is greater than ever. They want to remove any remaining impediments to trade between the member nations under the ASEAN Free-Trade Area agreement and strengthen export opportunities through bi-lateral trade discussions.

ASEAN is the third-largest overseas market for U.S. exports, with overall 2-way trade totaling $136 billion in 2004. Member countries include Brunei, Indonesia, Singapore, Malaysia, the Philippines, Thailand, Laos, Cambodia, Vietnam and Myanmar, for a combined population of about 500 million and a combined gross domestic product of $682 billion.

While ASEAN has rejected establishing a super-national governmental structure comparable to the European Union, there is talk of a single currency – similar to the euro – that would consolidate the region's economy as a single, attractive entity. So far, nothing has come of the idea.

A potential trade alliance joining ASEAN with China, Japan and South Korea – dubbed ASEAN+3 – appears to offer more promise. However, it has seen limited progress since 2004, when ASEAN followed an agreement with China to cut tariffs with plans for a similar large-scale agreement with Japan and India.

While talks reportedly are stalled with Japan and sluggish with India, discussions with China and South Korea are said to be making progress.

Regardless of the short-term outcome, ASEAN clearly is a force to be reckoned with.

“If you look at ASEAN as one market, it is already the third-largest in Asia after Japan and China and contains three of the world's top emerging markets,” says William Botwick, General Motors Corp.'s executive director-ASEAN operations. “We have to be there.”

– with Mack Chrysler in Thailand and Alan Harman in Australia

bmcclellan@primediabusiness.com