Automotive analysts are intrigued as to where the industry fits in the recent bold trade agreement between China and the 10-member Association of Southeast Asian Nations that took effect Jan. 1.

The short answer is, not at all – yet.

The complex new pact, described by some as the last step in a multi-phase move toward global free trade that began in 2001, is the largest in the world in terms of population affected: about 1.9 billion people.

Participants aim to lower tariffs to zero on some 7,000 different products when the deal is fully implemented by 2015, but each country involved has the right to exclude and protect hundreds of products for which existing tariffs will remain in effect until 2020 or longer. Duties differ by country.

“ASEAN’s automotive industry has been placed on the highly sensitive list by each of the four vehicle producing countries – Thailand, Malaysia, Indonesia and the Philippines – to protect them,” says John Bonnell, a senior analyst with J.D. Power Forecasting. “These industries have not been touched and will not be touched any time soon.”

China, in turn, has listed cars, trucks, buses and automotive parts as too sensitive to be left unprotected.

Says Will Angove, president of PT Ford Motor Indonesia: “The auto industry and government in Indonesia worked hand-in-hand to develop the agreement, and duties (of) 40% on completely built-up units and 15% on complete knocked-down units will not change. Indonesians want more time for local auto makers to grow stronger before they open the market to China.”

China has become the third-biggest trading partner of the ASEAN nations, after Japan and the European Union. The stakes are large and becoming larger.

“In the past 10 years, China-ASEAN trade grew 25% annually to $231 billion in 2008, 9% of China’s total trade,” says Tomoo Marukawa, a professor and China expert at Tokyo University. “It has been beneficial for both sides, and I expect it will grow at a similar pace in the coming 10 years.”

The need for continued tariff protection for sensitive products in an FTA is understandable in the case of an uneven match-up.

China has a population of 1.3 billion, gross domestic product of more than $4.3 trillion and vehicle sales last year of 13.6 million units, compared with ASEAN’s 583 million people, $1.5 trillion GDP and annual vehicle sales still less than 2 million vehicles.

Even so, political leaders on both sides of the agreement are enthusiastic. ASEAN has raw materials such as oil, natural gas and coal needed by China, which in turn represents a vast and attractive market for what the 10-membercountry ASEAN produces.

“When China grows, ASEAN has to ensure that we are on the supply line toward that growth,” ASEAN Secretary General Surin Pitsuwan says.

Says Zhang Quanyi, associate professor at Zhejiang Wanli University: “China’s economic success is certainly appealing to (ASEAN countries), all of which hope to boost their own economic growth through inter-action with the region’s hottest economy.”

Yet, there are risks, especially for ASEAN.

“Both sides will benefit, but the free-trade agreement is one-sided in favor of China,” says Christoph Domke, a senior analyst with IHS Global Insight. “The Chinese will gain access to huge natural resources and come into ASEAN markets with cheap products at low prices.

“Over the long term, some ASEAN-made products will be squeezed out and disappear,” he predicts.

“Everyone in Southeast Asia is keenly aware of the rise of China and wary of the potential for the giant in the north to overwhelm companies operating in the region,” adds Bonnell.

Auto makers are en garde, even though China’s automotive footprint in ASEAN markets is currently insignificant and only faintly visible in Indonesia, the largest country in the region.

Angove says Geely Automobile Holdings Ltd. has a low-volume CKD operation, assembling less than 50 small cars per month. Chery Automobile Co. Ltd. has a similar operation, with sales of 576 units in 2008 and 240 in 2009.

“The take-up rate has been very low,” he says. “Indonesians are cautious about the quality, aftermarket support and resale value of Chinese vehicles. Their total impact here at this stage is really quite light.”

Adds Marukawa: “Both Chery and Geely planned to establish production in Malaysia, but both of them failed.”

The biggest hurdle to Chinese penetration of ASEAN auto markets has not been tariffs but entrenched Japanese auto makers, with about 90% of total vehicle sales annually.

“From an automotive perspective, China must be careful,” Bonnell says. “Southeast Asia has been Japanese turf for over 30 years. Japanese auto makers have invested billions of dollars in the region and will fight hard to protect it.”

Under a separate, Japan-ASEAN FTA signed in March 2008, Japanese car companies doing business in the region enjoy preferential treatment. A variety of cars and auto parts are exempt from import duties in most or all of the four vehicle-producing countries.

“Once Chinese auto makers have the right products and good quality and technology, they can match the Japanese competition, but it will take a while,” Domke says. “Look at what Hyundai (Motor Co. Ltd.) and Kia (Motors Corp.) have done in recent years. (They are) very strong and aggressive, doing significantly well in most world markets.”

Last year, an agreement was reached on tariff-free trade between all 10 ASEAN countries that finally have begun to see the advantages of developing a single market and production base into a united front.

“More and more automotive investment is going into China and India, and this sent a clear message that ASEAN needs to act like a single country, providing economies of scale to compete for those investment dollars,” Angove says.

Industry analysts foresee China’s automotive interest in the ASEAN region increasing substantially, but there is no consensus about how long it will take.

“It’s only a matter of time before China wants a greater automotive presence here,” says Angove, who expects Jakarta will offer concessions in a few years to attract more Chinese CKD operations.

“Never underestimate China’s determination to establish their products in every Indonesian market. I am sure the Chinese will have a stronger automotive presence in Indonesia in the next five to 10 years.”

Marukawa expects “further negotiations to liberalize trade will start before 2020" in the automotive sector.

“It will likely be another 10 years before Chinese auto producers make a significant entry, and 15 or 20 years before they have any sales volume,” says Domke. “They will probably choose Indonesia as their entry point, considering its population, economic growth rate, vehicle ownership and market potential.”

Says Bonnell: “It will take more than a decade for the new free-trade agreement to impact the automotive industry, as most countries will include it on the sensitive list through 2020, and healthy caution is called for. Many ASEAN nations are uneasy and will be careful. Non-tariff barriers may proliferate.”

Auto markets were not the main motive for ASEAN members and China to seek an FTA, and China undoubtedly will continue to pursue broader ambitions.

“The new free-trade agreement is very important for China and ASEAN, but we will see further Chinese agreements with other countries in the future,” Domke says

“China has continued its rapid economic rise, despite the global economic crisis and has seen its political and diplomatic influence surge consequently,” Rodolfo C. Severino, head of the ASEAN Studies Center at the Institute of Southeast Asian Studies and a former secretary general of ASEAN, writes in a recent article.

“These have enlarged the potential for China’s dominance of East Asia,” he says.