Global Politics Shift Auto Industry Focus

ASIA: The World's No. 1 Growth Market

Global markets increasingly are seeing strategic shifts in the auto industry dictated by local politics, unstable economies, high import taxes and other protectionist policies.

But such volatile fluctuations don't always spell bad news. Many markets are benefiting from a new willingness on the part of local governments to engage in regional and international trade pacts.

Such trends have left a mark on Asia, the world's No.1 automotive growth market, where domestic car makers often are subject to unpredictable outside forces.

While some markets continue to suffer economic woes, others, such as the Assn. of Southeast Asian Nations (ASEAN) region, are becoming more unified through trade pacts. China has taken the boldest step, becoming fully integrated into the global economy through its membership in the World Trade Organization.

Japan, the world's second-largest auto market, perhaps is the worst off of the industrialized nations. The domestic auto industry has languished against a backdrop of recession and political upheaval.

Prime Minister Junichiro Koizumi in September fired his entire cabinet under criticism that he has failed to fix the economy. Such moves have done little to inspire consumer confidence. Domestic auto sales, already depressed for several years, remain flat, but the larger auto makers have seen gains.

Much of their strength is due to success in the U.S. and strong inroads in Europe, thereby ensuring profits for the Japanese Big Three — Toyota Motor Corp., Honda Motor Co. Ltd. and Nissan Motor Co. Ltd. — in spite of the long-suffering home market.

Toyota's domestic sales were up 5.8% and Honda sales rose 11.2% year-on-year through August, while Nissan remained flat. Mitsubishi Motors Corp. slid 38.8% in the period; Mazda Motor Corp. fell 14.9%.

Japanese auto makers, soured by their home market and seeking greener pastures, will raise production outside of Japan by 3.6 million units by 2007, forecasts Ashvin Chotai of DRI-WEFA Inc. North America will benefit, as will the ASEAN region.

Thanks to the ASEAN Free Trade Agreement (AFTA), car makers are flocking to four main markets: Thailand, Malaysia, Indonesia and the Philippines.

The trade pact takes effect in January, when the region cuts tariffs to less than 5%. (Malaysia is holding off implementation of the reductions for two years to give national auto maker Proton equal footing.)

Forecasts point to the region as one of the world's fastest growing auto markets, spurring auto makers there to up their investments. ASEAN plants increasingly are being used as an export base to other Asian markets and to Europe — thus shielding car manufacturers from local market volatility.

Toyota this year shifted production of its Hilux pickup from Japan to Thailand. And Honda has made ASEAN central to its new global push, establishing transmission operations in Indonesia and committing more resources to another transmission plant in the Philippines. About 30% will be exported to Europe.

Honda is putting a new plant into Malaysia, as well — all part of a plan to grow global sales to 20 million annually, largely through expansion in Asia. DRI-WEFA's Chotai, however, cautions Honda against overexposure to ASEAN relative to the rest of the continent.

Thailand long has attracted auto makers, while Malaysia and Indonesia have frightened off many investors due to political instability. In the post-AFTA economy, the Philippines stand to gain the most. Ford Motor Co. has increased investment there as a future auto-making hub for ASEAN, while Toyota recently announced plans to build a plant for its Asian Utility Vehicle.

The Philippines government has been coaxing along its auto industry through a strategy of market expansion and product diversification, recently urging parts makers to begin exports to the European Union.

Such cooperation from governments is leading some analysts to argue that ASEAN may eclipse China on the global automotive front. ASEAN, like China, offers cheap labor and a central Asian location but traditionally has been more cooperative and doesn't require domestic partners.

China need not worry. The country in the last year has been flooded with activity, seeing early results of its WTO membership. The major Chinese domestics now are reaping the rewards of operating on a global playing field, as the country braces for a much-anticipated industry consolidation.

DRI-WEFA says that 45% of forecasted production growth in Asia over the next 10 years will be in China, as will 40% of total sales growth — which would put China ahead of South Korea in global sales and on the brink of surpassing Japan.

General Motors Corp. is particularly bullish on China; more of its vehicles sold there in September than in Germany, the world's third-largest vehicle market. Paul D. Ballew, GM executive director-global market and industry analysis, predicts China will see volume of 5 million to 6 million units annually by the end of the decade.

Moreover, the fear that WTO membership — which stipulates grand reductions in trade barriers — would turn China into an import market, putting the domestics out of business, has not been realized.

If anything, it has allowed the opposite. Honda, for instance, this year revealed plans for a second plant in Guangzhou to produce subcompact cars for export. Some view the move as a way to secure approval for a larger plant, targeting both domestic and export production.

Honda, one of the few auto makers in China operating above break-even, already has more than doubled initial capacity at its first plant, which produces the Accord and Odyssey with Guangzhou Automotive Group and Dongfeng Motor Corp.

Toyota has linked with No.1 Chinese auto maker First Auto Works to begin production of Daihatsu minicars and Toyota SUVs. Toyota, which also builds a subcompact, has a sales and production target of 300,000 to 400,000 units annually by 2010.

Nissan plans to expand a truck-making venture with Dongfeng, and Hyundai Motor Co. Ltd. is teaming with Beijing Automotive Industry Corp. to build up to 500,000 cars by 2010. In all, 26 foreign auto makers have been licensed to produce vehicles in China.

Total vehicle sales are forecast to rise 20% year-on-year to 2.95 million, while passenger car sales will comprise 1,070,000 of the total — up 30%. More than a third of car sales are to private owners, indicating the beginnings of China's middle class.
— Katherine Zachary

Europe: On Steady Course as Industry Prepares for Shake-Up

Politics caused Europe's auto industry to undergo a dramatic turn of events in 2002. With the European Union taking the wheel, auto makers now are preparing to accept new provisions that will forever change the industry.

The new rules come at a time when overall sales are in a 4.3% decline for the year's first eight months, on par with revised industry forecasts by the European auto trade association, ACEA.

While the International Monetary Fund's (IMF) World Economic Outlook forecasts the European Union's real gross domestic product to decline to 1.1% for all of 2002, it is expected to rise to 2.3% in 2003. Overall unemployment is expected to end 2002 at 7.7% but decline to 7.6% in 2003.

However, a ripple effect from declining U.S. equity markets and the possibility that strong housing markets in the U.K. and other European countries could weaken remain a threat. Germany, the EU region's largest economy, is expected to remain particularly weak.

The country's largest auto maker, Volkswagen AG, reportedly expects full-year deliveries to fall to 4.9 million units from 5.08 million last year, with initial expectations for 2003 volumes to reach “around 5 million” units.

Italy also is reeling, with auto sales down about 11% in October. Fiat Auto SpA asked the Italian government to grant it “crisis status” to provide government layoff benefits to 8,100 Fiat employees. These are in addition to 3,000 layoffs previously announced this year.

The auto maker is expected to report losses of E1.2 billion ($1.18 billion) this year, with plans to break even in 2004. Yet, Fiat remains committed to investing E2.5 billion ($2.46 billion) on product development and another E150 million ($148 million) annually to revamp sales and distribution.

While the EU economy remains in turmoil, the European Commission continues to flex its muscle in a strong show that it will initiate policies that may go against the industry's liking. Indeed, it likely will nix any attempt by the Italian government to provide Fiat long-term financial aid.

The EC says it is trying to level the playing field between member countries investment incentives to auto makers, noting it plans to scrutinize any that place other EU countries at a disadvantage.

Earlier this year, the EC adopted new rules that make it easier for European auto dealers to establish multi-brand dealerships and sell their vehicles throughout the EU.

The rules, which take full effect in September 2005, also make it easier to obtain repair services at non-dealer locations. The rules are a result of attempts by the EC to remove a long-standing “block exemption” clause that enabled auto makers to dictate where dealerships could be located and limit the number of brands a dealer could sell.

The exemptions also prohibited the sale of vehicles outside the home country of each dealer.

The EC hopes the new rules will help harmonize vehicle pricing throughout Europe, while enabling consumers to obtain the best price for their vehicle.

The ACEA says that although the industry welcomes the new rules and the timetable under which they will be implemented, it will be negatively impacted.

“Some of the provisions of the new regulations are raising a number of concerns in the automotive sector,” the group says in a prepared statement. “We regret that these final concerns have not been entirely addressed in the final text adopted by the European Commission.”

Maria Joao Gomes-deputy director, International Investment Div., Investimento, Comercio e Turismo Portugal (Icep), tells Ward's the European Union is becoming less competitive for big auto production operations.

“There is more and more of a trend in the European Union to being less supportive to the auto industry and that will impact the competitiveness of (the region),” she says. “I don't foresee very big investment projects (from the auto industry) in the next few years for Europe.”

However, Gomes says non-EU countries, such as the Czech Republic, Poland and Slovakia, will benefit from the EU's restrictive incentive policies because they are able to provide lucrative incentives prohibited under EU policies.

After losing the political war on many fronts, auto makers are fighting back. At September's Paris auto show, the region's auto executives held their first joint meeting on how to combat further EU regulatory moves.

It's a bold concept, but one many believe the industry must rally around to get the attention of those deciding on policies that could steer the automotive business down the wrong road.
— Kevin Kelly

Brazil: Looks to Trade Pacts for Relief

With Brazil's currency — the real — plunging 30%, mixed with worries over the upcoming presidential election and major trade partner Argentina's tattered economy, boosting exports spelled the only relief for Brazilian auto makers this year.

GM do Brasil Ltda. led the way with its 2-year campaign to convince the Brazilian government to reduce the tax on midsize cars with engines bigger than 1L.

The auto maker long had complained there was no market abroad for the compact 1L car — which annually accounts for 70% of Brazil's new car sales thanks to generous tax incentives — and that the entry-level cars lowered profitability.

Prompted by the country's uncertain times and pressured by the auto manufacturers' group, Anfavea, the government in July changed its policy and began granting tax discounts on cars with larger engines.

By August, GM was projecting 35% of its production in Brazil would be exported within two years, compared with the current 25%. The main target is Canada, which could become its second-largest export market. The first vehicle under discussion with Canada is the Meriva microvan, launched in Brazil in August.

Currently, the largest market for GM's Brazilian vehicles is China, followed by Venezuela and Mexico. Total exports this year are expected to reach $1 billion, says Jose Carlos Pinheiro Neto, GM do Brasil's vice president.

Canada buys 1.6 million vehicles annually and may import at least 25,000 Merivas beginning in 2003. The deal reportedly would mark the first time GM Brazil has exported fully assembled cars to Canada on a large scale.

GM also is negotiating to increase exports to Mexico, including the Meriva. GM do Brasil President Walter Wieland reportedly says the auto maker plans to renegotiate export quotas to Mexico even before a new trade agreement between the two countries takes effect.

Under the new accord, 120,000 cars from Brazil would be exported to Mexico. GM, Brazil's third-largest auto maker, has the right to export 23% of that volume.

Other car makers are bumping up plans for exports, as well. Ford Brasil Ltda., which saw a record number of exports in July worth $46 million, says it plans to export 50,000 vehicles annually to Mexico from its new factory in Camacari, Bahia.

Volkswagen do Brasil Ltda., the country's largest exporter, has begun supplying Golf and Audi cars to North America from its Parana plant. “We are negotiating with markets we would have thought unimaginable a few years ago,” says Leonardo Soloaga, export manager for VW.

South Africa and the Middle East also are on the list as probable clients. Additionally, VW plans to build a car in Brazil for the European market.

Parts makers also are trying to save their investments by exporting more, says Paulo Butori, head of Brazil's National Assn. of Car Parts Manufacturers. In the last five years, suppliers have invested $20 million in the automotive segment.

Brazil's auto makers in the first seven months exported $2.16 billion in cars, but that still was down 13.5% from the year-ago period. However, Anfavea now forecasts exports to total $4.5 billion, a 10% rise over the previous year.

The Brazilian government has its own ideas for boosting its auto industry. One scheme is to jointly develop with China an automobile manufacturing industry targeting the needs of developing countries.

Brazil wants to use the advantages of China's recent WTO entry to combine the strength of the two countries' domestic auto industries to create a niche industry aimed at the developing world.

Brazil also is negotiating with India and China to reduce tariffs on cars and car parts as part of a general discussion on increasing trade.

Separately, Brazil planned to sign a joint venture agreement with the Ballard Power Systems Inc., DaimlerChrysler AG and Ford to produce the world's first ethanol fuel cell vehicle within five years. Cane-based ethanol fuel technology would help both Brazil and China boost their sugar production and increase its price on the world market.

The International Monetary Fund, meanwhile, agreed to provide a $30 billion rescue package aimed at restoring investor confidence in Brazil. In particular, it wants to forestall a possible default of Brazil's $264 billion public debt — representing 58% of the country's gross domestic product.

And the Bush Admin. finally has moved on several fronts to reassure Latin America it indeed is the foreign-policy priority Bush claimed it was during his presidential campaign.

In August, the U.S. president signed a major trade bill that reportedly will be used to negotiate the long-sought Free Trade Agreement of the Americas, which will encompass more than 34 nations. The bill extends trade benefits to the Andean nations and opens the way for a free-trade deal with Chile.
— Barbara McClellan