Reliance on New Market Economies a Cautionary Tale

Global automakers once coddled emerging economies like shiny pennies, looking to them to offset the cyclical highs and lows of vehicle sales and production in their home markets – providing the yin to every yang, if you will.

But it’s no longer enough for a global village to build a car industry. What’s needed almost everywhere you look these days are responsible governments that value and support their domestic automakers. And that, folks, is getting harder to find.

Take the vaunted Asia-Pacific region as one example of the good, the bad and the ugly. First stop: India.

On a trip to inspect a U.S. automotive supplier’s new components’ plant near Delhi some years ago, I recall our local travel guide explaining how the country’s caste system was more complex than outsiders realized.

Indian society traditionally was divided into four castes, from the ranking Brahmins (priests and teachers) to Kshatriyas (warriors and rulers) to Vaishyas (merchants) and Shudras (laborers). Below them were the lowly Dalits, commonly called the untouchables.

But new metrics had created multiple layers in India’s social hierarchy, especially among the lower ranks, the guide said, depending not only on one’s cultural background but also his job and education – from say policeman to bus driver and street vender.

That makes the recent election of India’s new Prime Minister Narendra Modi, the son of a lower-caste tea-seller from Ghazipur, Uttar Pradesh, all the more remarkable.

Modi, who is 63 and was sworn in on May 26, and his Bharatiya Janata Party rolled over the incumbent alliance lead by the Congress Party, capturing 281 of 543 seats in the lower house of Parliament and giving India a clear majority rule after decades of loosely tied coalitions.

The hope is that Modi’s uncommon rise will serve him well in helping the world’s 10^th-largest economy regain its place among new-market economies.

Once mentioned in the same rarified breath as China, especially when it came to two country’s emerging auto industries, India’s two ruling administrations over the last 10 years have brought the country’s once-promising economy to its knees.

Building and selling cars in India today means struggling with high unemployment, soaring inflation, climbing interest rates, onerous taxes and unstable fuel prices.

Automakers, whose sales continue to tumble amid falling consumer confidence, now look for a reversal of fortune in the belief Modi’s new government will put an end to policies that have stifled the industry, writes WardsAuto correspondent Sudhakar Shah.

Tata, the leading domestic car maker by revenue and owner of Jaguar Land Rover, for example, recently reported a 38% drop in domestic passenger-vehicle sales for the last fiscal year.

And the beat goes on, with industrywide auto sales for the first four months of 2014 down 10.7% to just over 1 million units from prior-year, WardsAuto data shows.

Clearly, there is much for the new government to do to right the economy and save its auto industry. But India is not the only emerging auto market to suffer from the whims of government policy in recent times.

Thailand Another Not-So-Hot Spot

Political unrest in Thailand, Southeast Asia’s second-largest economy, led to an army-imposed state of martial law followed by a full-blooded coup in May in an attempt to thwart a populist movement that has won every national election since 2001.

Gen. Prayuth Chan-ocha, head of the National Council for Peace and Order, says a general election will not be held for at least a year until national reforms are completed.

The coup is seen as a victory for elites but has a number of global automakers building cars in the country alarmed by the dark clouds on the horizon, prompting organizers of the Bangkok International Auto Salon, scheduled to be held June 19-29, to postpone the show indefinitely.

About 1 million people visited the event last year when 2,000 vehicles and 300 booths were on offer, writes Alan Harman in a story for WardsAuto.

Leading tuners and accessory companies from Thailand as well as Japan, China, Taiwan and Malaysia were to have exhibited more than 1,000 items this year, including an array of custom cars from Japan, most of them prize-winners from the Tokyo auto show.

Among the automakers booked to exhibit were Toyota, Honda, Mazda, Mitsubishi, Nissan, Suzuki, Isuzu, Subaru, BMW, Mini, Mercedes-Benz, Ferrari, Lamborghini and Lotus.

Honda now is considering whether to scrub a second Thai assembly plant that was to launch output next April. Toyota, which has three factories in the country, is mulling an expansion of its production capacity in Indonesia amid the continuing political uncertainty.

Such corporate caution is bad news for the Thai economy as more and more Japanese firms look to Southeast Asia to shift their operations away from their home country to avoid high wages and an overvalued yen and also to mitigate the effects of natural disasters in the supply chain.

Indonesia and Malaysia both have thriving markets that would welcome companies looking to manufacture goods in the region, especially passenger vehicles.

‛Grubby Rent-Seekers’

But perhaps the best example of government driving its auto industry over the cliff is Australia, whose new Prime Minister Tony Abbot took less than a year to push General Motors and Toyota out of the country. The two companies will close their plants by 2017. Ford, the third manufacturer, earlier announced it was leaving.

GM has been represented by the Holden brand in Australia since 1948, Ford Australia was founded in Geelong, Victoria, in 1925 and Toyota’s presence dates back to 1958.

“You can’t describe international companies and their senior executives as grubby rent-seekers and not expect a reaction,” former Industry Minister Kim Carr tells a local magazine. “The car companies knew they weren’t welcome here,” he says in rebuttal to the government’s portrayal of GM and Toyota as villains.

If the new government had been serious about keeping the auto industry, the announcement that it was going to take A$500 million ($469 million) out of the country’s co-invest program should have been discussed privately, he says in a WardsAuto story.

“They should have gone to Detroit and Nagoya and talked to the principals about their new co-investment plans,” Carr adds. “If I was still the industry minister, we would still have a vibrant and exciting car industry in Australia, beyond 2017.”

Australia’s light-vehicle sales through May totaled 429,999 units, down 2.9% from year-ago.

The auto industry currently employs 45,000 workers directly and more than 100,000 workers indirectly, according to the Federal Chamber of Automotive Industries, all of whom pump their earnings back into the economy.

Go figure.