Business Development Asia LLC
South East Asian Automotive News
ISSUE 4, DECEMBER 1997
FOCUS:
Fast Moves in South East Asia
Trading will be difficult in the South East Asian auto industry for the next twelve months at least. This article examines the problems faced by Governments and the auto industry and aims to think ahead to how corporations may react to take maximum advantage of the situation.
Government
South East Asia is politically log-jammed. The Philippines is focusing on its elections in May 1998. The Democrats in Thailand are only just settling into power and, despite the closure of 56 finance houses, vested interests are likely to retain, to a large extent, their hydra-like hold on decision-making. In Indonesia, all eyes are focused on President Suharto's current illness and its impact upon the March 1998 elections. The Malaysian Deputy Prime Minister has expressed a willingness to make economic sacrifices but many observers expect policy to be implemented inconsistently. In brief, with the bright exception of Singapore, South East Asian currencies and stock markets will remain depressed in the next six months and major decisions will continue largely to be deferred rather than addressed directly. At a political macro-level therefore, little good news. However, crises breed opportunities. The current climate of devaluation and lack of liquidity means that, for local corporations, the only method of raising cash may be asset sales. Foreign companies will be able to acquire existing businesses with strong market share at fire sale prices over the next twelve months.
Thailand and Indonesia are both dropping their foreign ownership regulations. Foreign companies will soon be able to own 100% of local subsidiaries in both countries. This change of attitude has been brought about by necessity. Lobbying by joint venture companies in both countries was instrumental in effecting this change. Joint ventures are keen to relax the foreign ownership limits as the local party may have insufficient resources to inject equity capital into the venture, while the foreign party may be currently forbidden from doing so. Over the next twelve months we will expect to see a slew of joint ventures beginning to look and act more like foreign owned entities.
Auto Industry
Across the region, manufacturers have acted for the most part with prudence, closing down production where necessary and concentrating on rerouting output to more promising markets. These measures have helped, but inventories remain high and will do so for a few more months.
The key problem in South East Asia will remain over-capacity. Manufacturers will battle between trying to gain sufficient economies of scale to make cars efficiently, and trying to sell their product profitably domestically and in the export markets. The task now facing ASEAN auto manufacturers is to raise their productivity and quality to compete globally. They are currently some distance short of this goal. Their progress from here on will determine whether they remain locked into domestic markets or are able to transform themselves into global competitors with the resulting economies of scale. They are implementing the following strategies:
Many manufacturers have cut costs, and destocked by closing down production for a number of months. Toyota will reopen its Thai plants in the New Year but for the next twelve months most SE Asia plants will operate well below full capacity. The downturn has focused manufacturers' minds on achieving the twin goals of productivity and quality.
On the retail side, manufacturers are playing a more active role in governing their dealership structures. Most South East Asian countries suffer from an excess of retail outlets and a lack of distribution expertise. Ford and other manufacturers are rationalizing their structures, closing dealerships and laying down stricter working guidelines for the ones that remain.
Manufacturers are attempting to prop up sales by extending loan financing to dealerships. Isuzu's partnership with GS Capital in Thailand exemplifies this growing trend. The parties have established a joint venture, Auto Siam Leasing, in an effort to facilitate the purchase of automobiles. The region-wide liquidity crunch has dried out traditional sources of financing, leaving credit hard to come by and when available, only at punitive rates. By providing alternative sources of financing, the manufacturers hope to ensure the survival of their key dealership relationships. Some of these large dealership groups are likely to go bankrupt, but manufacturers will go to great lengths to avoid this, as dealership bankruptcies will disrupt their sales and service networks.
Conclusion
Fundamental problems remain in each country. The strongest players are now positioning themselves to address these problems quickly and effectively. South East Asia will need all of its pragmatism and entrepreneurial spirit to bounce back, but bounce back it will. There are bright patches even now, including a growth in exports within the region and further afield. The lifting of equity restrictions, the exchange rate devaluations and the liquidity crunch together suggest that farsighted operators will be able to thrive.
Business opportunities, including potential acquisitions and joint ventures, will become available in the next twelve months on terms which have seldom been seen previously and will not be likely to appear again.
Recent News: Malaysia, Thailand, Philippines, Singapore, Vietnam, Regional Focus: Fast Moves in South East Asia
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