Vehicle sales in the developing markets of the Asia-Pacific region rose sharply last year, despite the increasingly uncertain global economy, political instability, and rising oil prices. Despite the negatives, low interest rates and government policies focusing on internal growth helped keep the economies of most Asian countries on track.  Overall, vehicle sales in the region grew by almost 22% last year top almost 7.8m units, with China once again being the main driving force behind regional growth. Nevertheless, barely a single automotive market in the region performed negatively last year. Tony Pugliese reports.

Growth in credit was key to last year's market growth, but in some markets government incentives also played their part, as did manufacturer initiatives such as discounting and new model activity. While the relative cost of entry into the vehicle market continues to fall throughout the Asian region, prices in most markets tend to be twice the levels of the west, mostly due to government taxation and supply chain inefficiencies. This remains a major impediment to entry for a significant tier of buyers. But with infrastructure struggling to keep up with the current pace of economic expansion, governments are not in a hurry to reduce the affordability threshold.

Is China's high growth rate sustainable?
In 2003, the key automotive growth markets in the region will be India, Thailand and once again China, although we are cautious about whether the current rate of growth in China's automotive market is sustainable - particularly for passenger cars. Having grown very substantially over the last two years, the market is expected to consolidate moderately this year. Commercial vehicle sales are expected to continue to grow, however, in line with ongoing growth in overall economic activity. Indonesia, Malaysia and South Korea are expected to be the worst performing in the region this year. A cycle of broader more sustainable growth is expected to start from 2004.

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China's 2002 growth was ahead of industry forecasts
New vehicle sales in China smashed through the 3m-unit mark last year, with the 38% volume rise way ahead of any industry forecasts. GDP growth in the world's most populous nation is said to have been in excess of 8% last year, with a moderation in the growth rate in the second-half of the year failing to materialise as had been broadly expected. The country is moving very fast towards fulfilling its vast economic potential, and this is encouraging further domestic and foreign investment. The economy appears to be locked in a perpetual growth cycle, with GDP growth fuelling additional investment and new investment fuelling GDP growth. The question in everyone's mind remains, how long can this last?

Most economists agree that GDP growth this year will likely be in the region of 7.5%, just short of last year's growth rate and more than enough to continue to attract new investment. It is estimated that China now accounts for 50% of emerging market FDI and around 85% of Asian emerging market FDI. Domestic demand is expanding very rapidly, with the rising middle-class population in the eastern cities and high government spending fuelling consumption. The ongoing investment means that there is a high level of new, quality employment being created. Economic development has been very uneven, however, with western regions not benefiting significantly from this modernisation.

The catalyst for this renewed cycle of stronger growth has come from China joining the World Trade Organisation in late 2001, which gives the country better access to world markets and provides to a certain degree a regulatory framework for domestic business. While exports have been rising sharply since WTO accession, most new investment for the moment has been earmarked to fulfil domestic demand. China's potential as a major force in world markets will come later. The risks to the growth cycle are high level of public and private debt, a potential slowdown in foreign and domestic direct investment, and any failure by the government to maintain infrastructure investments that would support future growth.

With the domestic vehicle market now well into uncharted territory, we remain cautious about the sustainability of the current growth rates. Overall vehicle sales rose by over 38% to almost 3.267m units last year, with passenger car sales outperforming but with the commercial vehicle sector growing by a highly respectable 27% nevertheless. Sales of imported cars jumped to 125,000 units as import tariffs were brought down. Overall, passenger car market growth in 2002 was over 61%, helped by a sharp drop in list prices, the availability of lower-cost models, credit growth becoming increasingly popular and more widely available, and the ranks of the middle-class population swelling rapidly.

In the case of the most popular brands, capacity constraints held back even greater volume growth and new investments in additional capacity have recently been announced. Although cars are not as cheap as in the west, they are getting cheaper and more affordable.

The huge wealth disparities in China mean that people of car-buying status represent a small fraction of the country's 1.3 billion population. Despite vast improvement in infrastructure, urban congestion and parking costs are becoming an increasing disincentive to car ownership, though one that is unlikely to affect car buying in the short term. While we remain cautious about the prospects for short-term vehicle market growth, fearing the market may be slightly ahead of itself, the medium and long-term prospects for sales are evident. Rising average incomes in a country of 1.3bn people can only mean a lot more cars.

South Korean economy and vehicle market strong in 2002
The South Korean government did a lot last year to help stimulate broad economic growth, and domestic vehicle sales in particular with tax incentives. Domestic consumer spending was also boosted by a sharp rise in household debt. GDP growth was in the region of 6% last year, but the short-term outlook is for a more moderate 4.5-5.0% growth. Banks are expected to reign in lending to reduce risk, business investment is unlikely to grow significantly and fuel prices raising inflationary concerns. Stronger growth is expected in 2004, which the export sector taking a lead.

We are also cautious about the short-term prospects for the vehicle market, which after a strong post-crisis recovery culminating in a 13% rise in sales, is likely to have exhausted the earlier pent-up replacement demand. The absence of last year's incentives means that a lot of buying was brought forward last year. For this year, we are anticipating contraction in demand of around 10% for passenger cars, before growth returns in 2004. The commercial vehicle market is expected to perform better.

Taiwanese recovery set to continue, underpinned by replacement demand
The Taiwanese economy looks set to continue its moderate recovery from its worst ever recession, with GDP growth of around 3.5% last year after a 2.1% contraction in 2001. The recent growth was helped by an increase in exports to China, which helped to offset weakness in other overseas markets. Domestic sentiment is improving, with consumers and businesses increasing optimistic that the worst of the current cycle is in the past. Government spending is expected to increase to help sustain the recent growth trend. But with ongoing weakness in most of its other export markets and high oil prices, most economists do not expect GDP growth this year to significantly exceed 2002 levels. Stronger growth is expected in 2004, however, with growth of at least 4.5%. This will be enough to trigger quite strong growth in vehicle sales in the medium term.

Last year, the vehicle market finally responded to the increasingly pent-up replacement demand on the island, with volumes rising by more than 13% compared with extremely depressed levels of 2002. With consumer and business confidence increasingly upbeat, further moderate growth in the short term is expected, before more solid growth takes place in 2004. Replacement demand remains strong, after several years in which the country's vehicle parc aged dramatically. Provided that the economic outlook does not deteriorate significantly, a sustainable recovery in vehicle market looks already underway.

Indian growth accelerated in 2002 H2
In the second half of 2002 growth in the Indian vehicle market has accelerated, with all vehicle segments performing positively. Stronger growth in the manufacturing, service and construction sectors are contributing strongly to growth in quality employment, and ultimately to higher demand for passenger cars and commercial vehicles. The agricultural sector, hit by prolonged droughts in certain regions last year, is expected to contribute negatively to GDP growth in the current fiscal year however.

Overall, GDP growth for the year ending in March 2003 is expected to be in the region of 5.5%, accelerating moderately to around 6% in the 2003-04 fiscal year and possibly higher if the agricultural sector turns positive. With 2004 being an election year, government spending is unlikely to be reduced, particularly as tax collection improves. Infrastructure investment, which has underpinned strong growth in the construction sector, is likely to continue. High fuel prices and weak export markets will remain the main negative factors in the short term, but any improvement will quickly have a positive effect on economic growth and GDP growth rates in excess of 6% are likely in the medium term. Later on, inflationary pressures are likely to lead to higher interest rates.

The increasingly positive economic outlook, combined with improved availability of credit and intensifying price competition among automakers, is expected to trigger another cycle of sustainable growth in India's car market. New model activity has intensified, and this has also provided an additional stimulus. Growth in the size of the middle-class population is expected to continue to drive new car demand, and growth in the used car market will help motorists move up from motorcycles. Our forecasts for passenger car sales may well prove conservative.

In terms of commercial vehicle sales, inter-city road infrastructure improvements have encouraged higher levels of inter-state trade, which in turn has encouraged growth in demand for commercial vehicles. Higher rates of growth in the manufacturing and construction sectors are also contributing to the renewed demand for trucks, and here too the market is expected to have entered a new cycle of growth. Overall, domestic demand for new passenger cars and commercial vehicles combined is expected to easily exceed 1m units by 2006.

ASEAN vehicle market up 15% in 2002
The ASEAN vehicle market put in a very good performance last year, with overall demand rising by almost 15% to close to 1.35m units. All major markets performed positively, despite the uncertain global economic and political environment, high oil prices and tension between some member states. Demand in the region has been supported by government incentives, low interest and falling vehicle prices. Only Singapore performed negatively, though this comes after a run of record sales.

For this year, some of the markets are expected to turn negative, as the benefits of incentives are reversed and as other negative factors start to take effect. Sales in Indonesia, Malaysia and Singapore are forecast to decline this year, with the more northern ASEAN markets performing much better. From 2004, more widespread market growth is forecast to take place.

Thailand to overtake Malaysia in 2003
Malaysia will once again lose its status as the ASEAN's largest vehicle market this year as demand in Thailand continues to recover. The Malaysian vehicle market has recovered fully from the 1998 regional crisis and even reached new record heights last year. Purchasing incentives offered to public sector employees by the government helped lift market volumes, as did improved lending and financing deals and record low interest rates. The purchasing incentives are thought to have triggered a spate of early buying, bringing sales forward into 2002.

For this year, we expect the Malaysian market to decline moderately, reflecting a generally sluggish economic environment with export markets under pressure and high fuel prices. An improvement in demand is expected in the final months of the year, and a positive trend is expected to resume in 2004. It is difficult to say how much will tariff-related price cuts become a factor in purchasing decisions. But with the government hinting that any reduction in import duties will be offset by the introduction of other taxes, prices are expected to remain high in Malaysia - more than twice the level in western countries.

The Thai economy and the vehicle market in particular continue to recover from the financial crisis which devastated the economies across the region in 1998. The Thaksin government, though criticised for its nationalistic rhetoric, has been successful in keeping the economy on its recovery course despite the weakening export demand. High levels of spending on populist policies, such as rural growth programmes have proved very popular and have bolstered consumer confidence. GDP growth is estimated to have been around 5% last year, much higher than many had feared. Low interest rates and improved access to finance have helped the domestic economy as a whole, and the vehicle market in particular.

New model activity, such as the import Toyota Soluna and Honda City replacements, and new pickup models, have helped drive the Thai vehicle market higher and this is expected to continue. There is a broad range of forecasts for the country's economic performance this year, but we believe growth will be similar or perhaps a bit lower than in 2002, at around 4.5-5.0%, due mainly to the prevailing strong domestic sentiment. Increased taxation, introduced to pay for the previous populist policies, and higher fuel prices could hold back activity and trigger higher inflation. So we remain cautiously optimistic about the prospects for the market in the short term.

In the face of problems, Indonesia has held up well
Indonesia's vehicle market has held up remarkably well, in spite of the destabilising factors such as regional unrest, the devastating Bali bomb and quarterly hikes in utility and fuel prices. Key to stability has been the Bank Indonesia's activity in the foreign exchange market, which has kept the rupiah stable against most currencies. The sale of assets seized by the government during the bank liquidity crisis is helping the government make ends meet. The export of crude oil is a major factor in the stability and development of the country's economy, though the benefits are invariably vastly diluted. Economic growth last year is estimated at 3.5%, well below the threshold needed to reduce poverty and increase employment, and little if any progress is expected to be made this year.

Vehicle sales increased marginally last year, from 299,000 in 2001 to almost 318,000 units, but the momentum in the market appears to have been exhausted with little in the way to stimulate demand. A negative year is expected in 2003, though the decline is expected to be moderate - with low interest rates and discounting providing some support. Overall, the industry will find it difficult to make significant headway in this market in the short term. Unemployment has continued to rise, reducing the pool of potential buyers in the market. Very little is taking place in the way of new business investment, either from foreign or domestic sources, and the legislative environment remains murky to put it politely. Many businesses have moved to other countries, particularly those operating in the garment and footwear sectors - many choosing the relative transparency of Vietnam and China.

The government is clearly struggling with developing a strategy for economic growth. Wealth disparities have continued to increase along with corruption, meaning that car buyers are often those who can afford several cars and are often constrained only by choice, while the vast majority of the population is struggling to cope with higher utility and domestic fuel charges, and often much worse. Overall, we expect the vehicle market will drift downward this year in the absence of anything significant that will stimulate demand. New model activity in 2004, particularly in the important utility vehicle product area, will help revive volumes.

Unrest in the Philippines
The unrest in the southern provinces of the Philippines continues, and this remains a drag on economic activity. Foreign direct investment, and investment of any kind for that matter, remains depressed. But after four years of economic stagnation and negative growth, the economy showed some sign of revival. Domestic consumption spearheaded the positive performance, with additional progress being made in the export sector. But this came at a price - a Ps213bn budget deficit. With government debt having shot up to 70% of GDP, the government's potential to stimulate the economy with populist expenditure will remain limited, despite its stated intention to spend on low cost housing and other infrastructure projects. Debt rescheduling will remain a key activity for the government.

The vehicle market showed some sign of revival last year, moderate as it was. Further moderate growth is expected this year, though mostly reflecting the increasingly pent-up replacement demand in the country. The vehicle fleet is ageing very fast. The government's decision to bring AUV and SUV taxation more in line with passenger car levels is expected to trigger a flurry of buying activity in the first several months of the year. Its decision to reduce taxation on the less polluting, smaller cars is also likely to stimulate car demand in the second half, which will help offset some of the second half decline in AUV/SUV sales. Overall, the market is expected to progress moderately this year. Stronger global economic growth in 2004 is likely to mean a period of higher GDP and ve2hicle market growth from next year.

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