Vehicle sales in Asia's developing markets, excluding Japan that is, fell just short of 3.6m units in the first half of 2002 - almost 17% higher than in the same period of the previous year. China's fast expanding economy is the main reason for the massive jump in the region's first half vehicle sales, as it continues to accelerate faster than anyone could have imagined towards fulfilling its vast internal market potential. But there is scarcely a single market in Asia that reported negative data for the six-month period.

Markets bucking economic trends

The resilience of many of these markets comes against a backdrop of below trend economic growth for most of Asia's tiger economies. Most economies remain heavily exposed to weakness in overseas demand, and are increasingly in competition with China for export sales. China continues to attract the lion's share of foreign direct investment. Most other governments have shifted their focus on stimulating domestic consumption, something they can ill-afford to do for long.

For this reason, my expectations for growth in the second half on the year are conservative. For the full year, I expect vehicle sales in the region will fall just short of 6.8m units - but nevertheless 9% higher than last year. It is true that Asia is in much better shape than it was in 1997 - just before the Asian economic crisis, and that the trade dynamics are shifting rapidly. As well as a formidable competitor, China is fast becoming a major importer of goods from Asia - albeit mostly unfinished goods. But there are increasing signs that current rates of growth may not be sustainable in the short term, as recent consumer confidence figures are beginning to suggest. A further decline in US GDP would inevitably have a major impact on most Asian economies, a message that governments appear loath to pass on.

But vehicle sales growth set to slow

Over the next twelve months, growth in vehicle sales is likely to slow considerably. Much of the pent-up replacement demand of the previous years appears to have been fulfilled, making markets more vulnerable to changes in consumer sentiment. Unemployment has not fallen considerably in many developing nations since the Asia economic crisis, and with little in the way of fixed investment (apart from China), this is unlikely to change anytime soon. Consequently, the number of people able to afford cars in most markets is growing very slowly, and in many cases only because borrowing is getting cheaper.

Provided that the global economy does not spiral into a deep recession, Asia's developing economies are likely to muddle through the current weakness, but growth in regional vehicle market is likely to slow down significantly from here. Undoubtedly the hardest to predict of all Asian vehicle markets is China, which has seen massive growth in vehicle sales over the last few years with little sign of letting up and new capacity continues to come on stream. The question is, how long can this last?

China is fast fulfilling its potential of becoming the economic and industrial powerhouse of Asia, with official figures showing 7.8% GDP growth for the first half of 2002. A sharp increase in government spending, of 24.5%, has put the economy firmly on the path of surpassing the government's target of 7% annual growth for yet another year. Fixed investment rose by 21.5% during the first half, while investment from abroad rose by 18.7%. Most analysts are expecting the government to report full-year growth of at least 7.4% this year, with government spending growth weakening in the second half.

China's success in ensuring high levels of GDP growth, and its recent membership to the World Trade Organisation has helped it attract the lion share of foreign direct investment into Asia - undoubtedly at the expense of its smaller neighbours. With better access to foreign markets for its goods, its improving regulatory and investment climate and fast growing domestic demand, it is likely to remain a priority investment location. The main question remains how long can China maintain this economic outperformance? For 2003, the consensus among economic forecasters is for 7.7% growth, helped by a sharp rise in exports as new and more modern industrial capacity continues to come on stream.

We're cautious on China's prospects

With the domestic vehicle market now well into uncharted territory, we remain cautious about the sustainability of the current growth rates. Vehicle sales overall rose by 32% to 1.531m units in the first half, and passenger car sales by 39% to just below 500,000 units. The market has benefited from growth in credit purchasing, better finance packages offered by companies, better distribution reach by car companies, vastly improved product offer and lower prices. Private buyers are now estimated to make up at least two-thirds of the light vehicle market, double the ratio only a few years ago. Most of the growth has come from the fast-developing industrialised eastern seaboard regions, and the urban centres in particular.

With price deflation now starting to abate, many of the buyers that have held out for better bargains are coming into the car market. This is what we have seen in the last year or so. With huge wealth disparities in the country, people of car-buying status represent a fraction of the country's 1.3bn population. Despite vast improvement in infrastructure, urban congestion and parking costs are becoming an increasing car ownership disincentive. While the high rates of vehicle market growth of the last few years have taken most in the industry by surprise, we expect the market will need to pause for breath in the short term.

Korean worries centred on economy

South Korea, which has developing Asia's second largest national vehicle market after China, has recovered impressively from the Asian financial crisis.  But it is far from certain that the economy is on the path to a sustainable recovery. Fixed investment remains stagnant. Domestic consumption grew by 7.7% in the second quarter of 2002, after 8.4% growth in the first, and there is a worry that consumer confidence will continue to weaken in the second half of 2002. Interest rates were also hiked in May, though from a historic low.

GDP growth, at 6.1% year-on-year in the first half, accelerated in the second quarter to 6.3% as export sales recovered thanks mostly to higher semiconductor prices. But doubt remains about whether this positive trend can be maintained in view of weakening export demand. Most analysts expect full year GDP growth to come in at about 6% in 2002, though there is significant potential for the economy to undershoot these targets.

The domestic vehicle market itself expanded by 4.5% in the first half of 2002 to 738,955 units, helped by tax incentives which expired in June. Fairer taxation helped import sales rise to 13,318 units, from 8,319 units a year earlier. The second half of the year is likely to show little or no growth, as economic uncertainty globally continues to slow domestic spending growth. A stronger growth trend is unlikely to materialise until 2004, when greater competition and more new model activity emerges from GM-Daewoo.

Taiwan is coming back

In Taiwan, we are moderately upbeat about the short-term prospects for the vehicle market. The economy itself is beginning to recover from one of its worst recessions in history, and the unemployment rate is finally showing signs of improving. Electronics exports helped drive second-quarter GDP growth to just below 4%, after slower growth in the first. China, one of the world's fastest-growing economies this year, has emerged as the island's largest export market in recent months. A reduction in the island's dependence on exports to the USA is particularly encouraging, given the weak economic outlook for the world's largest economy.

Taiwan's vehicle market has been the region's worst performer since the 1997-98 Asian economic crisis. The country's vehicle parc continues to age, which has resulted in considerable pent-up replacement demand. Any sign that the current economic recovery can be sustained, and any improvement in the long-term employment outlook, is likely to bring significant volume benefits to the new vehicle market. We believe that a cyclical recovery in new vehicle sales is long overdue, and that the patchy first-half economic growth will broaden in the second half. Provided that the global economic outlook does not deteriorate significantly from current levels, Taiwan's vehicle industry is likely to benefit from several years of reasonable growth from this year - helped also by ongoing liberalisation of the market.

India's market moving up

Like Taiwan, the Indian vehicle market too has shown little sign of growth over the last few years, mirroring the country's lacklustre economic performance. There are signs that economic growth is picking up, from 4% in the fiscal year ending in March 2001 to 5.4% in the year to March 2002. GDP growth in the final quarter of the year was 6.4%, and 6.2% in the previous quarter, helped mainly by a sharp jump in agricultural output. There are signs that manufacturing is also beginning to recover, and that economic growth is becoming more encompassing.

A growth rate of around 6% is being touted by analysts for the current fiscal year - enough to improve average incomes and stimulate domestic consumption. This rate of growth is still some way from the government's target of 8% annual GDP growth by mid-decade, however, and significant economic reform implementation and privatisation progress will be essential if it is to meet this target. Nevertheless, if the levels of economic growth seen in the last few quarters continue, it will be enough to move the vehicle market moderately higher in the short-term.

ASEAN performing better than expected

Most ASEAN vehicle markets have performed much better than expected in the first half of the year, with the six largest markets combined approaching pre-Asia crisis levels. Scope for further sharp volume rises overall will be limited in the short term, though markets such as the Philippines and Thailand, which are still way below their pre-crisis peaks, are expected to outperform over the next few years.

Malaysia, currently the largest ASEAN vehicle market, is proving to be particularly resilient to the sharp decline in global demand for electronics. With GDP growth expected to come in at around 4.0% this year, economy progress continues to be made in spite of the global turmoil. The passenger car market itself has benefited from purchasing incentives offered by the government to its employees over the last 12 months and generally improved lending/finance deals. Further economic growth in 2003 should drive demand moderately higher.

While the Thai vehicle market remains well below its 1996 peak of 580,000 units, the market has been put in some strong gains in the last few years. Moderate economic growth, expected at around 3.5% in 2002, has been helped by government incentives offered to farmers and rural communities. This has benefited the pick-up truck segment in particular, making Thailand South-East Asia's strongest growing vehicle market so far this year.  The economy remains vulnerable to falling export demand, though so far overseas sales have held up reasonably well thanks to higher levels of trade with China. The government has little scope to provide further stimulus to the domestic economy, however. While we expect the vehicle market to continue to improve, we expect only moderate growth in the short term.

Indonesia's vehicle market has held up remarkably well, helped by lower interest rates and a generally more stable political environment since the beginning of the year. The rupiah has also strengthened since the beginning of the year, giving carmakers added pricing flexibility. Economic growth remains moderate, however, with full year GDP growth unlikely to exceed 3.5% - driven predominantly by strong domestic consumption. Unemployment is showing no sign of falling, and fixed investment is clearly lacking. The country's huge foreign debt leaves the government with little scope to drive economic growth with higher expenditure. Foreign direct investment is unlikely to pick up significantly as long as doubt remains regarding the transparency of government institutions. In the very short term, we expect the vehicle market to retreat moderately, but further growth is likely from the second half of 2003, with export growth giving the economy an added lift and key new product activity increases buying interest.

The Philippines has been dogged by political instability for some time and like most other south-east Asian nations - shunned by foreign investors. Consequently, the economy has been drifting since the Asian economic crisis, with levels of GDP growth around 3.0-3.5%. The government is struggling to make ends meet, and is likely to vastly overshoot its budget deficit targets for this year. The vehicle market has remained depressed, but we believe that a cyclical recovery is beginning to take shape. Replacement demand is strong, and the market will eventually benefit from lower taxation.