Business Development Asia LLC
South East Asian Automotive News
ISSUE 5, FEBRUARY 1998FOCUS:
Acceptance and understanding are dawning across most of South East Asia. As the first moves toward recovery are being taken, it is worth taking a step back and looking at the region as a whole. This is necessary to understand how the auto industry in Asia and ASEAN will fare in the long term.
Asia, excluding Japan, comprised 11% of global vehicle demand, or 5.7 million vehicles in pre-crisis 1996. The 1997 turmoil predominantly hit ASEAN and South Korea, but this has caused the global auto industry to initiate a wide-scale review of its position in Asia, now and in the future.
Despite the APEC and WTO agreements, Asia can still be viewed as four distinct markets: India, China, South Korea and ASEAN. Each of these blocs currently maintains high external tariffs and inter-regional trade is limited when considered on a global scale. Assuming that the trend toward freer trade continues, within twenty years negligible tariff barriers will exist between all major trading nations, including those in Asia. This is mandated in APEC, but is also a probable scenario for the great majority of world trade. This twenty year timescale may even prove overly pessimistic, particularly if the progress made in deregulation over the last five years continues at the same pace.
If this assumption is correct, a few global sites will evolve with highly developed supplier networks as global export bases. These sites will differentiate themselves by platform. The economies of scale entailed in this scenario suggests that small-scale competitors and national assembly plants will gradually drop out of the market through consolidation or failure. This will be a slow process, with political pressures and inertia acting as brakes on this rationalization It is important to attempt to forecast where these sites will develop, as this will have great impact on investment decisions. The hunt for export markets will force a drive towards productivity and quality across Asia as more developed markets such as Europe offer the sales potential over the short term that Asia lacks.
The inherent economies of scale of India's and China's markets would logically place them as front runners to become global export bases. Their auto industries are developing domestically and may eventually make sufficient advances in quality and productivity to act also as export bases. However, the auto industries in both countries are comparatively undeveloped and have only been attracting manufacturers for the last ten to fifteen years. Frustrations in both countries, typified by the problems faced by Peugeot in China and Suzuki in India, have made manufacturers more cautious. These countries may become global export bases, but probably not for another five to ten years. In terms of platform development and hence export potential, China would be most suited to export commercial vehicle and India best suited to export small cars.
South Korea has the most developed, and arguably the most isolated, auto industry in Asia excluding Japan. Korea in the short term faces a period of great consolidation and rationalization from which probably only two manufacturers will emerge. In the future these might consolidate down to one. Korea has a number of problems including harsh foreign ownership regulations, a high cost base and a strongly unionized workforce. All these barriers may be reduced by the current crisis and the possible reunification with the North. Korea's strength lies in passenger cars and it is likely to remain a substantial global exporter for many years to come.
The ASEAN auto market will start to recover by 1999 and by January 2003, CBU exports will be tradable throughout ASEAN at a maximum of 5% duty. Auto investments need to be considered over this timescale and if the above scenario is correct, then the outlook is good for investment. Despite the current political muddle there are some encouraging signs, including the approval of the first AICO scheme, for Volvo, which allows for an accelerated reduction of tariffs on components on a case-by-case basis. Thailand is a key market because the Japanese have been energetically investing in its auto industry for over thirty years. Isuzu, Honda, Mitsubishi, Nissan and Toyota all have decided that Thailand will be one of their principal production bases for pick-up trucks globally. This fact alone will make investment in Thailand a good decision for related parts companies. By 2000, almost no pick-up trucks will be manufactured in Japan, while Thailand will be the center for the pick-up platform in Asia.
Malaysia has an outside chance of developing into a passenger car export base. Prior to the crisis, Proton was planning to increase capacity to 500,000 units per annum. This scale has been postponed, perhaps permanently. It is difficult to overestimate the national pride invested in the car and this is perhaps the dominant factor when considering alternatives. The relationship with Mitsubishi has continued to be frustrating for the Malaysians, and even the rumored discussions with GM perhaps give rise to more questions than answers. If GM were to take a stake in Proton, the ongoing relationship with Mitsubishi would still need to be resolved as would the lack of component compatibility between US and Japanese-based models. However, even if GM proves not to be the ideal suitor, a relationship with a foreign carmaker remains the most probable outcome for Proton.
The auto market in Asia changes fast, and nowhere more so than Indonesia. The privileges awarded two years ago to Tommy Suharto's venture with Kia, the Timor, have been rescinded. This action has served to keep Indonesia's auto industry in a state of suspension. The nexus of political and economic influences associated with Suharto family continues to create extreme uncertainty. This period of inertia has left Indonesia with a lot of ground to make up. Increasingly, Indonesia in the long term looks to be more of a market than a production base.
This editorial has taken a view of opportunities in Asia and where ASEAN fits into such a scenario. One fact is that Thailand will be the pick-up production center for Asia. Beyond that, this editorial suggests that passenger cars are likely to continue to be exported from Korea and increasingly from India. China may develop into a production base for commercial vehicles. This is an overview, but serves to highlight the current and future effects of globalization and hence consolidation of the auto industry in Asia.
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