Business Development Asia LLC

South East Asian Automotive News

ISSUE 3, OCTOBER 1997



FOCUS:The impact of South East Asia's financial turmoil on the auto and auto components industry



In the past three months, South East Asia has seen currencies devalue by 40%, rock-bottom stock markets and a US$17bn IMF loan package to Thailand. In addition, serious flaws have been exposed in both the banking and political systems in several key countries. Thailand has been the focus of the crisis. Malaysia's problems are on a smaller scale but have not been handled well by its political leaders. Indonesia, by contrast, has handled the situation relatively effectively, winning accolades from many quarters.

Crisis unfolding

Thailand best exemplifies the economic turmoil facing the region. Starting in 1996, the economy was hit by slowing exports and a growing current account deficit, both financed by largely unhedged foreign debt. Interest rates were raised to defend the baht which in turn hurt borrowers in the economy, particularly in the property sector. An over-supply of property, inefficient banks, slow export growth and the use of high interest rates in defense of the Baht led to many of these loans defaulting.

As in much of Asia, the same large industrial groups who owned the manufacturing and property companies also owned the banks which had lent the funds. Instead of allowing the banks to become insolvent, the Government considered it a necessity to support them and spent US$19bn (more than 10% of Thailand's GDP) trying to bail out the 91 finance companies. Thailand's foreign exchange reserves were depleted to such an extent that the Baht could not hold its value against the dollar and hence was forced to devalue. On July 28th, Thailand formally asked for support from the IMF and was forced to announce a series of tight fiscal measures including the closure of 58 of the finance houses.

Impact on the auto sector

The auto sector is often one of the first industries to be hit in a downturn. Thailand was no exception. There is currently a major liquidity crunch in Thailand: the great majority of the finance companies are either already closed or under severe pressure. Interest rates for auto loans now average 11-13%, and auto repossessions are now becoming widespread. Auto sales in Thailand are expected to fall by 25-30% this year to 400,000 -460,000 units. BDA's analyses predict that 1998's sales will be lower, perhaps 360,000 units. Malaysia and Indonesia should exceed 1996's sales this year, Indonesia by a margin of 25-30%.

Actions taken

As the articles in this newsletter attest, the auto industry has been quicker to tighten its belt than the region's Governments. Some companies have frozen production and started to lay-off staff. The much-heralded Ford and GM plants are not yet operational and therefore the situation has had comparatively little impact upon them. They plan to start production in Thailand in May 1998 and February 1999 respectively.

The most positive impact, which mirrors Mexico's experience in 1995, has been the increased focus on exports. Exports of auto vehicles and parts from Thailand jumped 140% to Bht48bn (US$1.3bn) year-on-year for the period January - July 1997. Mitsubishi and Toyota are leading the way by using Thailand as a low-cost base for export to ASEAN, the Middle East and Europe. Ford and GM also have ambitious export plans for the future.

Opportunities and dangers

The extent of economic problems has now been recognized and the IMF has prescribed a series of tight fiscal measures to remedy them. It is not yet clear if Thailand and the region will muster sufficient political will to take the necessary steps. There are some encouraging signs. Malaysia and Indonesia have both postponed a number of infrastructure "mega-projects." Thailand passed a new constitution on September 26th, designed to limit the buying of influence in politics. BDA expects GDP growth rates in 1998 to be 3% for Thailand, and over 6% for both Malaysia and Indonesia.

South East Asia is now a buyer's market and this window of opportunity will exist for the next twelve months. This is a good time to explore opportunities for the following reasons:

  1. The Thai auto industry will remain the principal auto centre in ASEAN and the turmoil may even accelerate this fact by forcing the auto manufacturers already in Thailand to focus on developing their export channels.
  2. Businesses are in weaker financial health than previously. The terms of potential deals should therefore be much improved.
  3. The devaluation of the Baht, the Peso, the Ringgit and the Rupiah means that listed and unlisted companies should be much cheaper in dollar terms. In Thailand the Baht has devalued 40%.
  4. The impact on each individual company will be hard to gauge due to the dearth of accurate, published financial information. Therefore, groups looking to enter the market should inform local companies of their interest in a sector or product, maintain a systematic selection process and be sufficiently decisive and organized to move when opportunities arise.



Recent News:

Indonesia, Thailand, Philippines, Singapore, Regional

Business Development Asia LLC, The Economist Building,
111 West 57th Street, Suite 405, New York, NY 10019
Tel (212) 265 5300 Fax (212) 265 4300 E-mail bdallc@aol.com
A limited liability company incorporated in the State of Delaware
Home | Introduction | Services | Skills | Management | Contact | Newsletters