South East Asian Automotive News

Focus: Corporate activity in the SE Asian auto industry

While there are some very substantial corporates listed on the various regional stock markets, the great majority of companies in the auto sector are privately held and many are domestic / foreign JVs.  Raising cash through primary or secondary offerings is virtually out of the question currently.  While there have been one or two successful issues on the bond market in late 1997 and early 1998 in other sectors, this avenue is also essentially closed.  Non-listed entities have traditionally relied on bank loans from both domestic and foreign sources.  This is the area where auto corporates have been greatest hit.  The financial crisis has caused a massive liquidity crunch, impacting both companies looking to fund their businesses and customers looking to finance the purchase of vehicles.  

Currently the only way that SE Asian companies are being recapitalized is through direct investment by foreign corporates, particularly the existing foreign JV partner.  This process is beginning to occur on an unprecedented scale.  The stimuli to this process are several: 

1) SE Asian Governments have realized that direct investment is virtually the only way of recapitalizing their corporates.  In Indonesia, Malaysia, Singapore and Thailand it is now possible for a foreign company to own 100% of a local manufacturing entity.

2) Banks are reviewing the creditworthiness of their loans.  In doing so they are increasingly wary of lending to the local parties of a JV and insist on guarantees from the foreign partner.  These guarantees will often be refused unless the foreign party gains something in exchange, such as equity.

3) The liquidity and credit crunch, allied with the fall in sales, has created such a shortage of working capital, that if a foreign party does not inject capital, then bankruptcy is the most probable alternative for distressed SE Asian companies. 

4) Local companies are beginning to seek more realistic values for their stakes. When the urgency of their position is coupled with the devaluation of the currencies, bargains for foreign parties can appear. 

5) Most local parties currently do not have sufficient funds to acquire other companies, at whatever price.  This presents significant opportunities for foreign firms, in particular those with existing stakes in SE Asian companies.

Such times of political uncertainty have not created ideal conditions for the implementation of ASEAN schemes such as AICO, which seeks to open up the ASEAN regional automotive market through an accelerated rate of tariff reductions. This scheme has notably failed to date, with an insignificant number of projects being approved since its establishment in November 1996.  Each member state has preferred to act in its own interests rather than those of the region.  With the ASEAN auto industry now in such a desperate condition, these are precisely the schemes that need to be addressed and implemented. Unfortunately, in the current environment this is unlikely to occur.