Trade Pact Reshaping Playing Field in ASEAN Markets

Auto making and marketing are in a state of flux and ferment these days in Southeast Asia.

Shortages of parts imported from stricken plants in Japan may crimp output in the next few months but lost production may be recovered before the year is out. Longer term, other forces are reshaping regional production.

The unofficial rivalry between Thailand and Indonesia is heating up. Malaysia is likely to become less ingrown. And regional free trade is endangering the industry in the Philippines.

Annual light-vehicle sales in these four main markets of the 10-member Association of Southeast Asian Nations have been as hot as the tropical temperatures in this part of the world, up 36% to a record 2.23 million units in 2010, more than double the annual total a decade ago.

“The pace of expansion is likely to slow in comparison to the spectacular performance of the market last year,” predicts Ammar Master, an analyst with J.D. Power & Associates in Bangkok.

Yet, he expects continued economic growth, lower borrowing costs and new model introductions to drive volumes steadily higher and is forecasting a compound annual growth rate of about 6% in LV sales in the next five years to 3.14 million units in 2015.

Although the sales pie is growing ever bigger, several catalysts are changing the automotive industries in ASEAN’s four producing countries, and the slices will be cut differently in the future.

In January 2010, under terms of the ASEAN Free Trade Area (AFTA) agreement, tariffs were abolished on imports of vehicles made within the region. The big loser was the Philippines, where imports last year, most from Thailand, were 54% of total LV sales of 167,291 units, up from 50% the previous year.

Honda Brio latest entry in Thailand’s growing eco-car market.

“Eventually, most automotive production in the Philippines may be shut down. Production in Thailand could satisfy demand there and only a few domestic auto makers would be left,” concludes Hajime Yamamoto, a director of IHS Automotive in Bangkok.

Master agrees. “The AFTA agreement is influencing the strategy of vehicle makers in Southeast Asia,” he says. “It now makes better sense to expand production in larger markets and secure economies of scale, and Thailand and Indonesia will be the main beneficiaries.

“That’s why Nissan chose to produce the new compact Juke in Indonesia, where SUVs are popular and export the rest of production to other ASEAN markets.”

Ironically, Malaysia, the largest automotive market in ASEAN as recently as 1998, now is threatened by maturity.

“The Malaysian auto market is nearly saturated,” Yamamoto says.

Car ownership in this small, prosperous country of 28 million people already is one for every four people, much like that in developed countries. Sales increased 13% last year to a record 605,000 vehicles, but growth is slowing and the protectionist wall enjoyed by the two national car makers for decades is in jeopardy.

“Malaysia has submitted to the AFTA agreement and signed free-trade agreements with a number of other countries calling for lower import duties,” Master says. “The government doesn’t have much choice. It will be difficult to avoid liberalization of the domestic auto industry, although it will take awhile.”

Any significant loss of their special privileges, such as tax exemptions, subsidies and rebates, inevitably will shrink and eventually end the domination of the national car companies, which have had a tight hold on 60% or more of the domestic market for decades.

Industry experts believe Perusahaan Otomobil Kedua (Perodua), in a successful joint venture with Daihatsu, should be able to compete on an equal footing with foreign auto makers. However, they doubt Proton will fare well without a government crutch.

A government proposal to merge the national car companies is strongly opposed by Perodua and may not materialize. Yamamoto believes cooperation between them in areas such as purchasing is more likely to happen, but this may not be enough.

Proton is handicapped by outdated technology, overcapacity, lack of scale and a limited lineup and has been unable to find the foreign partner many analysts believe the company needs to thrive or even survive.

A fresh round of investment, possibly totaling more than $3.4 billion, now planned, under way or contemplated for ASEAN by auto makers, shows where interest is concentrated.

About $580 million may be spent in Malaysia, including $320 million planned by DRB-Hicom Volkswagen over the next few years, following a recent agreement to start local assembly of VW vehicles. Note, though, that 70% of the money for this project and most of the funding for three smaller programs will be provided by Malaysian investors.

Indonesia is hoping to receive more than $600 million, all foreign investment, including about $240 million from Daihatsu for a new 100,000-unit plant and $56.6 million to add capacity at its Sunter facility.

Nissan plans to spend $20 million expanding its Jawa Barat plant, and Volkswagen may build a new $140 million, 50,000-unit facility. General Motors may reopen its Jakarta plant, closed in 2005, which could cost $150 million, but no decision has been made.

The big money winner will be Thailand, where nearly two-thirds of the new investment, some $2.24 billion, may land.

The flow of foreign direct investment this year is expected to be as high as 400 billion baht ($14 billion), with automotive and parts being a key sector, led by No.1 investor Japan, Thai Board of Investments Secretary General Atchaka Sibunruang tells the Jakarta Post.

The major inputs are likely to include:

The Thai government’s ambitious eco-car program is a success, with five prominent auto makers signed on and upwards of a billion dollars invested or earmarked.

Nissan was first into production with the March in spring 2010. Sales of the Honda Brio will begin this May. Mitsubishi and Suzuki are expected to launch eco-cars in 2012, followed by a Toyota model in 2013.

Eco-cars are tapping into the new smaller-is-better trend in ASEAN.

“Small cars are taking a larger share of ASEAN markets,” reports Yamamoto. “For example, last year was the first time pickup trucks dropped below 50% of total sales in Thailand.”

Adds Master: “New-age buyers are opting for small cars because they are priced lower, more fuel efficient and environmentally friendly.”

What is not changing is the lock Japanese auto makers have had on ASEAN markets for many years, controlling about 90% of annual vehicle sales. That is not likely to be broken any time soon by competitors.

So far, Hyundai Group has focused on the U.S., India and China and paid relatively little attention to Southeast Asia. Ford and GM have been producing in ASEAN for many years, but their primary interest has been exports.

Chinese and Indian auto makers have begun to compete in the lower end of the market with low prices and limited impact. Chery and Zhejiang Geely have tried complete-knocked-down production in Indonesia without much success. India’s Tata expressed interested in making eco cars in Thailand but has not followed through.

Thailand has become the automotive powerhouse in the region, biggest of the ASEAN Big Four producers and long the first choice of most foreign auto makers seeking a base in Southeast Asia.

Among the attractions: an extensive supplier network and average wages for manufacturing workers of $245.50 per month compared with $412.50 in China, according to a 2009 International Labor Organization report.

Domestic sales soared 45.8% to a record 800,357 passenger cars and commercial vehicles in 2010 and are expected to rise at a more normal rate this year to 860,000 units. Exports last year were up 67.3% to 895,855, and industry experts are calling for an increase this year to 1 million.

Major producers, including Toyota, Isuzu, Mitsubishi, GM and Ford-Mazda, all have chosen Thailand as a major hub to produce 1-ton pickups for both domestic and export markets. The eco-car program is expected to add more export muscle, because participants must reach production of 100,000 units in the fifth year, far more than the domestic market can absorb.

And one important lead may change soon.

Gathering strength in the automotive sector is Indonesia, the most populous nation in the ASEAN region with 243 million people, compared with 66.4 million in Thailand, and size is beginning to tell economically as well.

Domestic sales of passenger cars and commercial vehicles in Indonesia were up 57.3% to 764,711 last year, and Gaikindo (Association of Indonesian Automotive Manufacturers) expects sales this year of 800,000 units, revised down from an earlier forecast of 850,000.

Master is encouraged by significant improvements in the country’s economic fundamentals, the recent increase in foreign direct investment and political stability, predicting “Indonesia will grow the fastest in the region and, by 2013, be the largest light-vehicle domestic market in ASEAN, while Thailand will remain the largest regional automotive producer.”

“We see that happening as well,” Yamamoto says.

The pertinent domestic sales of passenger and light-commercial vehicles projected by J.D. Power for 2013 are 978,000 for Indonesia and 961,000 for Thailand.

There is general consensus the AFTA agreement is a positive move, bringing economic integration of the 10 member nations closer, and there’s more talk now of greater cooperation and unity.

Yet, scant support has emerged for a more formal economic union, and political union is not viewed as even a remote possibility in the foreseeable future.