Business Development Asia LLC
South East Asian Automotive News
ISSUE 2, AUGUST 1997
FOCUS:INVESTMENT DECISIONS IN ASEAN: THE IMPACT OF TARIFF DEREGULATION
Introduction
ASEAN is rapidly becoming an integrated, duty free market. AFTA tariff deregulations are starting to have a substantial impact on the location of industry in South East Asia. This loosening has allowed market forces to act more effectively resulting in the development of greater investment opportunities. How these changes will effect South East Asia must be understood prior to investing in the region.
The historical picture
Most ASEAN nations, with the notable exception of Singapore, have maintained high tariff barriers since the group's founding in 1967. International auto manufacturers have established assembly plants in the larger ASEAN nations such as Indonesia, Malaysia, the Philippines and Thailand to assemble vehicles from SKD or CKD kits. Local content requirements forced manufacturers to invest in auto components, but the size of the individual national markets and high tariffs resulted in mostly small-scale investment. Tariffs and duties are still the second largest cost component in the delivery of a finished motor vehicle after raw materials. This is going to change dramatically over the next five years.
Actual and expected production/Assembly of new motor vehicle
1994-2000
1994 1996 1998 2000 Indonesia 274 369 470 600 Malaysia 177 240 268 298 Philippines 78 102 124 156 Thailand 439 514 633 728 Total 968 1,225 1,495 1,782 % change - 26.5 22.0 19.1
Source: EIU 1996
AFTA - the timetable
The ASEAN Free Trade Area (AFTA) was set up in 1993 to create a dynamic regional economy and realize the region's latent economy of scale. The core of AFTA is a scheme of Common Effective Preferential Tariffs (CEPT) which provides a timetable for tariff reduction through to 2003 when goods will be freely traded within ASEAN at a maximum rate of 5%. This applies only to all tariffs for goods traded within member countries, but not for goods imported from outside ASEAN. The timetable is identical for all ASEAN states except for the recent joiners; Vietnam in 1996 and Laos and Myanmar this year. They are allowed a more lenient set of deadlines. The notes below relate to the long-standing member states. The most important deadlines over the next five years are:-
The CEPT tariff regulations cover all products which have a minimum of 40% ASEAN content. This allows international groups to locate some of their manufacturing processes in ASEAN in order to achieve the 40% ASEAN content requirement and therefore qualify to trade throughout ASEAN at the AFTA tariff rates.
- From January 1998, all CEPT tariffs between ASEAN countries must be below 20%.
- From January 2000, all local content rules must be abolished under GATT / WTO regulations.
- From January 2003, all CEPT tariffs between ASEAN nations must be below 5%.
Temporary Exclusion Lists (TELs)
The auto industry is one of the most politically sensitive in ASEAN, and this has led to special exceptions being made. Each country was permitted in 1993 to set up a Temporary Exclusion List (TEL) which allowed it to protect its most sensitive products, such as auto parts, through maintaining higher tariffs through to January 1stt, 2000. Below is the TEL timetable:-
AICO - the fast track
- TELs were set up in 1995.
- All TEL products must be transferred to the CEPT inclusion schedule in five sets starting on January 1st, 1995 and ending on January 1st, 2000.
- As of January 1st, 2000, all auto components must be at a maximum of 20%, with no exceptions and the TELs cease to exist.
The ASEAN Industrial Co-Operation scheme is specifically designed as a way for companies to benefit from the full CEPT rates of 0-5% immediately. AICO was officially launched on November 1st, 1996. The following regulations must be met before an AICO scheme is approved:-
Therefore, if an alliance is set up between two companies, one in Indonesia and one in Thailand which meets the above requirements, then AICO products can be traded between AICO partners with a maximum tariff rate of 5%, additionally, all products are also automatically accredited as local content. As one can see from the preceding notes, a number of companies are already benefiting from this scheme.
- Two companies must be involved in an AICO arrangement.
- Two countries must be involved in an AICO arrangement.
- Each participant must be 30% owned by a domestic party.
- AICO products must have a minimum of 40% ASEAN content.
Impact on investment decisions
The AFTA rules have already impacted US, EU and Japanese investment in the region. This process will accelerate:-
- The auto components industry will consolidate, with most plants being sited close to the largest regional auto manufacturing plants. The industrial parks on Thailand's Eastern Seaboard are a good example of this.
- Economies of scale will be realized with factories being built for export on regional and global levels, as well as to supply the domestic market. Honda has already applied this principle by appointing Thailand as one of its three key manufacturing centres ex-Japan.
- Uncompetitive national assemblers will either develop into fully fledged auto manufacturing plants or will close. Likewise, the national car projects of Malaysia and Indonesia will no longer be protected by beneficial tariffs and regulations.
- By 2003, CBU vehicles can be traded within ASEAN with a maximum tariff of 5%, providing they are assembled within the 40% ASEAN content rules.
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