Downward trend or on the way up?

The less-than favourable state of the global automotive industry has been making the headlines lately. Not that the world is aiming for a car-less/vehicle-less society. It is just that the European economic crisis, slow recovery of the US economy and less bullish sectors in China and India are limiting the growth. But is it all doom and gloom, or will there be a resurgence, asks Angelica Buan.

Mixed bag in Western markets

When Detroit, the US and the world’s iconic Motor City, declared bankruptcy this year, it hit the sector hard, driving home the effect of decades of globalisation. The city lost its lustre due to its failure to compete with production sites in Japan, Asia, Russia and South America, with its decline adjudged as a capitalistic misstep.

While Detroit is still synonymous with automotive manufacturing in the US, with the top three US manufacturers (General Motors, Ford and Chrysler) headquartered there, the fact is that globally the industry has changed and evolved.

Detroit has, meanwhile, lost out on the revival of the automotive sector in the country, expected to hit a high in 2014 with new car sales to total 16.4 million, up from an estimated 15.5 million in 2013, according to research firm Edmunds.com.

Both Chrysler and GM reported higher sales of 15-22% in the third quarter, mainly supported by local buyers who are replacing ageing vehicles. This has helped offset weak European demand and a sharp slide from previously fast-growing emerging markets. But the 2014 sales picture isn’t entirely rosy for the industry. Even if new car sales grow at the 6% projected by Edmunds.com, it will be the slowest year-on-year growth since automotive sales bottomed out in 2009.

The US industry also contrasts with Europe and Japan, which are struggling with too much capacity, rising labour costs and shrinking domestic demands.

Though passenger car sales in the European Union (EU) increased 5.4% year-on-year in September to 1.2 million units, over the first nine months of the year, however, the market has declined 3.9%.

Generally, the outlook for much of the EU remains poor but with several of the larger Western European markets having posted strong improvements in sales in recent months, due to pent-up demand, this has driven the regional resurgence, says business analyst Business Monitor International (BMI). It expects many of these markets to bottom out in 2013, before posting modest sales increases in 2014.

Southeast Asia’s Detroit flounders

Meanwhile, in Thailand, known as Southeast Asia’s Detroit, the sector is also treading a rough path. The industry, which accounts for 12% of the country’s GDP, was down 10% year-on-year, according to the Federation of Thai Industries (FTI).

Domestic demand was supposed to have driven it up, but an incentive programme introduced last year for first-time car buyers has backfired. Research from IHS Global Automotive shows around 10% of the 1.2 million Thais who signed on to the scheme have either changed their minds or couldn’ t pay the monthly installments. As a result, Japanese automotive makers, who control 80% of the local market, reported a 30% drop in sales in the second quarter of 2013.

Car production in the country surged 70% in 2012 making up for the loss from the previous year’s flood-constrained output, according to the Paris-based International Organisation of Motor Vehicle Manufacturers. This year, it is expected to exceed 2.5 million vehicles, but with domestic demand falling, automotive makers will need to export to markets in Europe, Japan and other parts of Asia.

Undaunted by the failure of the tax scheme, the Thai government is pressing ahead with Phase 2 of a green car programme that offers tax breaks to manufacturers of environmentally-friendly and compact vehicles. Thailand’s Board of Investment, a government agency that promotes local and foreign investment, estimates that the country will produce 700,000 eco-cars by 2015. A majority are expected to find their way to neighbouring country Indonesia, which has a larger population but a smaller automotive production base.

Boost from Asian countries

I ndonesia is a wild card, with more investment flowing into its automotive sector than Thailand’s. The investment is expected to continue in the short term as Indonesia has a faster growing domestic market (car ownership stands at about 45 per 1,000 people), but Thailand will still remain a regional export powerhouse for Japanese car makers due to its competitive base structure, says a report by PwC Thailand.

Vehicle sales in Malaysia, which has its own vehicle production sector, grew 4% for the first six months of 2013, to 313,418 units, says BMI. But it adds that vehicle sales have slowed down considerably in the past few months, against tighter lending by financial institutions. Meanwhile, according to analysts, European and Chinese OEMs are considering setting up assembly and manufacturing plants in Malaysia. This may further boost exports and take the pressure off the domestic sales.

Meanwhile, South Korea’s automotive sector, which has been hit by strikes at the country’s top two car makers, Hyundai Motor and Kia Motors, is expected to bounce back.

In Myanmar, decades of isolation and crippling sanctions have resulted in its vehicle fleet being one of the oldest in the world. But GDP per capita incomes (slightly under US$1,000) are still considerably lower than other regional country peers and this will be a hindrance to mass market affordability for new cars, says BMI.

Neighbouring country Vietnam’s automotive industry foresees its losses with the imminent tax cut on imported vehicles, under the ASEAN Free Trade Agreement (AFTA) in 2018. Currently, completely built units are levied 60% import tax, but by 2018, the local industry will have to butt heads with imported vehicles that can come into the market on lower tariffs, while imported components will be subject to a 20% levy. Since Vietnam only produces 6 to 25% of these parts locally, it relies on imported components. As a measure to help the sector, the government plans to cross off import tax on overseas produced parts by 2015. Vietnam imported over 17,100 cars worth US$314 million in the first half of the year, according to customs data.

In the Philippines, the government is aiming to finalise a road map for the automotive industry, with the introduction of a new form of fiscal incentives for automotive firms with assembly operations in the country. Generally, the Philippines has lagged behind its peers in Southeast Asia in terms of both vehicle sales and production given the small market as well as the attractive incentives being offered by other countries in the region.

India and China on a joyride

The Society of Indian Automobile Manufacturers (SIAM) says that the Indian automotive industry suffered a drawback in the April-September period, compared to the same period in 2012. The weak rupee, higher inflation and less-available financing have taken toll on the industry. While sales of commercial/ passenger vehicles, trucks and buses dropped, the two-wheeler segment posted a small growth and this conflicting scenario explains why India’s overall domestic sales during April-September 2013 has grown marginally by 1.18%.

On the surface, it does seem as though the industry is finally getting some respite from depressed domestic demand with total vehicle exports (includes two and three-wheeler exports) in August rising to an all-time high 288,866 units, a gain of 24.9% year-on-year.

Car makers believe in the long term potential India has to offer, especially as an export hub for small cars. US car maker Ford recently forecast that by 2020, demand for small vehicles will account for more than 60% of global automotive sales and half of the volume will be in Asia Pacific and Africa. By 2018, Ford India will be able to export half the vehicles it makes in India, according to Dave Schoch, President of Ford Asia Pacific

Meanwhile, China has emerged as the world’s number one automotive market and will continue to ride the tide, says consultant PwC, adding that sales will nearly double by 2019, beefed up by domestic demand.

From January-August 2013, car sales growth slowed down in China, compared to the previous year, but overall still maintained double-digit growth, says the China Association for Automobile Manufacturers (CAAM). And even against the slower growth, domestic demand has upped, with vehicle sales growing 11% in August, compared to last year, while passenger car production jumped 13% to 1.39 million.

Future trends in the driving seat

Meanwhile, KPMG says future trend will be hybrids and internal combustion improvement. “E-mobility will continue to gain traction as a means to curb greenhouse gas emissions,” it says, adding, “Pure battery-driven cars could see the fall out against new propulsion technology, resulting in ebbing consumer demand through 2018.”

But Frost & Sullivan, in its 2013 Strategic Outlook of the Global Electric Vehicle Market report, counters this and says that this year, electric vehicles will see an increase of 50% in sales due to lower ownership cost. “By 2018, sales of electric vehicles will reach 2.7 million units as manufacturers start tapping private consumers and expand their market reach.”

The report says that prices of some electric vehicles dropped by as much as 18% from their 2012 price, as a means for manufacturers to remain competitive. Also, the 20-40% cheaper cost of lithium-ion batteries has enabled electric vehicle makers to lower their unit prices.

The Malaysian government has been promoting the country as a regional hub for hybrid vehicles and electric vehicles, and may have to continue to give full exemption of import duty and excise duty, which expires in December 2013. The exemptions have helped boost sales of hybrid vehicles, from 332 units in 2010 to 8,334 units in 2011, and increasing by 84% to 15,355 units in 2012, according to Frost & Sullivan.

Road to recovery through emerging markets

Automotive makers are pinning their hopes to rising demand in developing countries, according to KPMG’s 2013 Global Automotive Executive Survey.

Consultancy group, PwC Thailand, expects global light vehicle production to rise 2.3% to 81 million units this year and to exceed 101 million units by 2017, buoyed by growth in developing markets and despite global economic volatility. The developing Asia Pacific region will account for 62% of assembly growth from 2012 to 2017, driven by China, India and ASEAN.

The ASEAN automotive market is set to grow at a CAGR of 5.8% (2012-2019) to 4.71 million units in 2019, mainly driven by rapid market expansions in Indonesia and Thailand, according to market researcher Frost & Sullivan.

The low level of motorisation in the ASEAN offers strong growth potential for the automotive market, while the heavily-motorised regions of Western Europe and North America represent a saturated “replacement” market.

Indonesia is expected to emerge as the largest automotive market in in the ASEAN region by 2019, accounting for 2.3 million vehicles, driven by sustained economic growth in the country, growing middle classes with larger disposable incomes, increased investments in automotive sector and introduction of automotive regulations supporting market growth, says Frost & Sullivan.

Thus, with market demands expected to surge in China and other developing Asian countries, worldwide production of vehicles is set to expand from 25.5 million to 104.7 million in 2019, with additional production capacity to be built up in the fast-growing markets said PwC.

Hence, it may be the Asian and emerging countries’ potential as well as untapped markets to lead the way forward and provide a boost for growth of the automotive market.

(IMA)

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