Asia/Pacific is on fire: despite high risks, automakers scramble

The world's major automakers continue to woo the untapped Asia/Pacific region, hoping to reap the whirlwind of tremendous economic growth expected there in the 21st Century. The potential is enormous, but so is the financial risk.

Stretching is size from Turkey to Japan, including the Middle East, Australia, China and the Indian subcontinent, the area contains some of the richest and poorest nations in the world and is home to 60% of the world's population. Forecasters say population growth will increase by 959 million, or 28%, over the next 20 years to 4.3 billion.

Automobile sales volumes are predicted to more than double to 32.8 million units, and possibly 51 million units, by 2015. One study on India, alone, shows that country is capable of selling nearly 900,000 cars per year by the turn of the century. Prognosticators say Asia/Pacific eventually will be the largest vehicle-producing region in the world.

But doing business in undeveloped countries is not for the faint of heart. Foreign automakers are running into some daunting roadblocks - among them language, culture, politics, business practices, smuggling and favoritism. The result is a dizzying array of joint ventures that are creating some interesting bedfellows.

Ford Motor Co., for example, owns 30% of a Malaysian company that assembles. General Motors Corp.'s JV with a British company ships Rodeo sport/utility components to Thailand for final assembly, using Opel engines. Honda Motor Co. sells Chrysler Jeeps in Japan. South Korea's Daewoo Group supplies parts to Nissan Diesel. India's Premier Automobiles Ltd. builds Fiat Unos.

Still to come is Egypt's Arab American Venture with Chrysler Corp., which plans to build Peugeot 405 models. GM's partnership with an Indonesia company expects to build Opel cars and Chevrolet pickups beginning next year, while GM's potential partnership with Shanghai Automotive Industry Corp. is slated to begin building Buicks in 1999. Chrysler, which recently unveiled its china Concept Car, is working on a deal to set up a major distribution center in Taiwan.

That's only the tip of the interrelationship iceberg. There are hundreds more of global pairings. No country is more sought after, however, than China, home to 20% of the world's population - 1.2 billion inhabitants in 1995 and only 1% of its cars. The Chinese government pledges that automotive will remain one of the pillar industries designated to develop China's economy.

Currently, U.S. companies account for 10% of the automotive business in China and there's more to come. Automotive suppliers increasingly are following the Big Three into Asia. In October alone, Johnson Controls Inc. and Lear Corp., industry leaders in automotive interiors, announced separate JVs in China. Tenneco Automotive made eight acquisitions and entered into four JVs in eight countries this year, including Australia, India and China.

For all of its promise, China's love affair with the auto industry has hit a bumpy patch. Uncertain regulations, punitive taxes, a lingering credit freeze on consumer loans, and a gray market that smuggles in twice as many cars as are imported, has car manufacturers operating at about half capacity while stockpiles of unsold vehicles fill their lots.

Volkswagen Asia-Pacific, which, with its local partners, manufactures more than half of China's cars, has scaled back production to less than half at its Jetta plant in Changchun province.

Foreign companies trying to gain a foothold find themselves mired in a bureaucratic quagmire of central government versus regional government protectionism because most Chinese enterprises are state-owned. "The rules are constantly shifting and changing," says Chrysler President Robert A. Lutz, whose company is taking a more cautious approach to China.

Pragmatists like Ford Chairman and Chief Executive Alex Trotman say the long-term view is key. Mr. Trotman says it will take decades for Ford to make money in China.

Rudy Schlais Jr., president of GM China, agrees. "When you project the direction of this industry out 20, 30 or 50 years, China will emerge as one of the leading countries in world automotive production" he says.

Other Asia/Pacific countries pose worries, as well. Indonesia's insistence on granting its national car project a break on taxes and tariffs has foreign automakers crying "foul." Australia's scheme, providing Australian exporters with tax credits that are used to offset import duties, has GM-Holden's Automotive threatening to phase out its $316-million second car line. Vietnam's potential market overcrowding convinced Chrysler to shelve plans for vehicle production there.

That said, the economic gains to seductive to drive industry suitors away for very long. Asia/Pacific isn't just hot - it's on fire.