ASEAN’s automotive industry gathers steam

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The automotive industry is every emerging economy’s shaft of opportunity and route for expansions. A key economic driver, the dynamics of the industry, in terms of supply and demand, are constantly shifting. Major automotive players and OEMs outside of the ASEAN have expanded into the region to benefit from its increasing significance, as both a market and a production hub, and thus diffusing the polarity within the industry when competing manufacturers become trade or project partners.

As a market, the ASEAN, with member states comprised of Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines, Singapore, Thailand and Vietnam, is home to 633 million people (according to 2015 data from the UN Population Division).

The seventh largest region in the world and third largest economy in Asia still has comparatively low vehicle penetration. Nevertheless, countries like Indonesia, Malaysia, Philippines and Vietnam offer the suitability as production hubs and as potential growth areas. On the other hand, countries like Cambodia, Laos and Myanmar are emerging as areas for growth and development.

Thailand experiences challenges

However, the situation in the ASEAN is not one smooth ride. According to automotive industry market intelligence firm LMC Automotive’s Director, Asia-Pacific, May Arthapan, “The weaknesses in the markets in Thailand and Indonesia have and will continue to put the pressure on the regional industry in ASEAN, which is expected to expand 4% in 2015 compared to an 8% CAGR between 2006 and 2014. However, growth is expected to rebound to 7-8% in the 2016-2017 time frame.”

Currently encountering lapses, Thailand, the largest automotive manufacturer in Southeast Asia also known as the Detroit of Asia, is favoured by manufacturers for its long established supply chain, and an export base for key top automobile makers. But it reported double-digit drop in sales and production in 2014, amidst political and economic dubiety. Early this year, it was reported to have posted an 11% year-to-year drop in domestic car sales from February – its 21st consecutive-month slump.

Arthapan went on to say that while light vehicle sales in Thailand have suffered from large declines since H2 2013, after the end of the first-car buyer rebates in December 2012 which pulled sales forward resulting in a sharp increase in volumes by 80% in 2012, the market is not as weak as the YoY changes suggest.

She adds, “2012 and 2013 were anomalies and should be seen in this light. If we discount the anomalous period of 2012 and 2013, it would show that the market has expanded by 12% in 2014 compared to 2011.”

Against the urged increase in government spending, Thailand is expected to make a rebound.

Indonesia offers huge potential

Hot on the heels of Thailand is Indonesia, which posted a production increase of 7% in 2014 to 1.3 million vehicles.

But all is not rosy. Says Arthapan, “The Indonesian market has been hit by rising fuel prices as the government stepped up the reduction of the decadesold fuel subsidies. High interest rates and weakened rupiah have also led to higher vehicle prices. However, the market had slowed down even before the fuel subsidies cuts partly due to the end of the commodity super cycle, and capital outflows triggered by the US Federal Reserve’s intention to lower taper quantitative easing.”

Nevertheless, the projected car ownership growth to 51% by 2020 is hoped will boost the industry further.

Arthapan says that the Indonesian market has vast potential over the long term given its large population.

“However, manufacturing is facing more challenges with the country struggling to achieve large-scale vehicle exports that are mainly limited by weak supplier industry, quality issues, low labour productivity and the lack of port infrastructure,” she adds.

Other ASEAN markets stay optimistic

On the other hand, the situation over in the Philippines and Vietnam are optimistic.

Vietnam’s automotive industry, which targets to produce some 220,000 units/year by 2020 to 1.5 million units by 2035, according to Vichai Jirathiyut, President of the Thailand Automotive Institute, will be benefitting from government support to buoy it up for the next two decades. Being a high growth market, with a population of 90 million, Vietnam extends opportunities to the likes of Thailand, and is seeking to augment its sales by increasing exports, as well as increase its distribution network and forays into local manufacturing.

Meanwhile, the Philippines, although still lagging behind the outputs of Thailand and Indonesia, inched up with 13,480 motor vehicles assembled in the January to February period this year. This is a slight increase from the 13,357 units output in the same period a year ago, according to data from the ASEAN Automotive Federation.

When LMC’s Arthapan is asked if there are any other countries emerging in terms of vehicle production and sales growth, she replied, “Not really, at least not in the foreseeable future. While vehicle affordability will continue to increase in ASEAN, the pace will not be extraordinarily fast as we expect disposable income will gradually rise but there will be no significant reduction in vehicle prices.”

As for free trade agreements (FTAs) that are expected to benefit the automotive industry in the ASEAN, Arthapan says. “While Vietnam’s provision on import tariffs will be scrapped come 2018, it would be no surprise if non-tariff barriers will remain significant, and be enforced, to protect the local manufacturing industry, in a similar approach to policy used in Malaysia.”

Fuel efficient cars

Fuel efficient or “green” cars have also changed the landscape of the ASEAN automotive industry, with sales fuelled by tax incentives for consumers.

Said LMC’s Managing Director Pete Kelly, “The impact has been more on segment shifts from larger, less fuelefficient vehicles to smaller, more efficient segments, and less so on expanding the market overall. This trend is more prominent in Thailand and Indonesia, in particular where the governments have been promoting the sales and production of fuel efficient vehicles by offering lower taxes for them; under the Eco-Car programmes in Thailand and Low Cost Green Car programme in Indonesia.”

Thailand’s Eco-Car programme, which was launched in 2007, recorded a 27% penetration in the market in 2014. Indonesia’s programme, meanwhile, has been reportedly averaging sales ranging from 10,000-15,000/month since its first launch in 2013.

Meanwhile, Malaysia, which has a high penetration rate of vehicle ownership per person at 1:12, is seeing demand for Energy Efficient Vehicles (EEVs). Other ASEAN countries are also treading closely with initiatives to produce hybrid vehicles, such as the e-Jeepney in the Philippines.

Kelly says that both consumer preferences and government policies are moving towards more fuelefficient vehicles, and also vehicles with lower emissions in the case of countries like Thailand that will implement a change of the excise taxes, which are now levied based on engine size to carbon dioxide come 2016.

Ready to take on China?

It is evident that the ASEAN is a lucrative investment destination, yet it is still in the periphery, if compared to India and China, especially the latter, which has made itself into a moat for opportunities for automotive players.

When asked if the ASEAN is capable of taking on or outdoing China’s production, Kelly says, “It will be hard to imagine ASEAN countries to be able to outdistance China’s manufacturing success, particularly its scale. Even in terms of the pace of future growth, it is not an easy benchmark to hit. None of the ASEAN countries can match the level of control the Chinese government has over its economy and industries and thus its ability to control expansion at a very rapid and sustained pace.”

Kelly says that while India comes near China in terms of the size of population, and Indonesia also has potential from its large population, bureaucracies make doing business more difficult in these countries and productivity is lower, both of which have resulted in progress being made at a slower pace compared to that in China.

“China is the exception, of course, and perhaps it is not reasonable to compare other developing industries to that.”

Yet, because the dynamics of the industry is always in motion, as mentioned earlier, the region may be poised for a lot more challenges as well as gains in the coming term.


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