South East Asian Automotive News

The auto retail sector has been hit hard by the Asian crisis from three distinct angles. First, the currency devaluations have made vehicles and auto components much more expensive. Secondly, the slowdown in the economies has caused potential buyers to defer their purchases. Thirdly, the banking crises in Indonesia, Malaysia and Thailand have led to a drastic reduction in the availability of credit, tighter regulation and, most importantly, to a sharp rise in interest rates. These have all combined to produce very poor auto sales. Malaysia’s February sales exemplify this, being the poorest monthly performance since 1989.

The recovery of the auto retail market depends on a number of factors, many of which are political and hence reflect each government’s ability and willingness to achieve fundamental reforms. These include banking reform, foreign investment, transparency and the linkages between politics and economics. These are macro-economic factors which all have bearing on credit rates and availability. Interest rates remain high throughout the region, with the exception of Singapore.

1998 demand is likely to be strongly down across the board on 1997’s figures, which were themselves substantially below those of 1996’s. This is not a encouraging thought to the auto dealers in the region who have borrowed heavily and invested substantially in dealerships in the belief that retail sales would continue their early 1990s growth. They are now severely exposed to high interest rates just as their sales and margins have been hardest hit. The situation is critical: many dealership groups are already technically bankrupt. This also places the distributors in a difficult position: in many cases they have spent decades carefully building up their networks.

The auto retail sector has been immensely profitable in parts of South East Asia over the past five years. These days are gone, but there is every likelihood that the auto retail sector will be profitable again within the next three years. The auto sector has been adapting and will have to adapt further. The following factors will lift the auto sector out of its current recession:

Manufacturers are increasingly assuming control of their own sales and marketing. This may be through actually taking over the distributorship or just by playing a more active role. In the long term this will lead to better planning, better standards of showrooms and service centres and a rationalization of the dealership networks. This will gradually lead to a concentration of players in the market.

To save their existing networks, some distributors have created their own credit lines to ensure that customers are able to continue to buy cars and hence keep the dealerships functioning. Isuzu and Ford in Thailand have both arranged their own credit lines for customers. Siam Motors Group and GE Capital have recently reached an agreement to provide leasing services to Nissan buyers.

Multi-franchising has historically been strongly resisted by distributors in South East Asia. While retailers have been permitted to set up different showrooms for different franchises, it has been only rarely that they have been allowed to do so on the same site. Economies of scale dictate that this will change, perhaps faster than expected. In Singapore there has been speculation that some of the smaller car retail groups will merge or be sold, such as the loss-making ST Auto and Intra-Motors.

Some sectors of the auto retail market have been so protected in South East Asia that many retail groups have dealt purely in new cars. This has left them painfully exposed to a downturn and heightened the awareness to the fact that new cars become essentially commodity items whereas used cars can carry much greater margins if retailed skillfully. Diversification will occur with companies focusing on subsidiary areas such as service, parts retailing and used car retailing in their search for profits.

Outside investors will play a role in changing this industry, but there are few big regional players and they have moved cautiously to date. First, the requisite links with the relevant manufacturers or distributors has narrowed the universe of investors and secondly, it is a buyers’ market and likely to remain that way for the rest of this year.