For the countries of south east Asia, achieving progress on intra-regional trade liberalisation has been a slow process and at times a politically difficult one. For investors in the region’s automotive industry, there is a feeling that the lack of progress is impairing sensible development, forcing manufacturers to have fragmented operations and run plants below the most efficient volume levels. The economic crisis of recent times has diverted attention from the trade liberalisation issue, but this year has brought renewed sign of progress – albeit slow. Tony Pugliese reports.  



On January 1st, the Asean trade block made another small step towards trade liberalisation with further implementation of the ASEAN Free Trade Agreement. It was Indonesia this time to take the lead, with tariffs on all ASEAN-made automotive products, including CBUs, now reduced to between 0-5% as part of the fast-track approach. Thailand chose not to adopt the fast-track approach, leaving tariffs at 15% for CBU vehicles until the end of the year, and likewise the Philippines will keep its 15-20% CBU tariff rate until January 2003. Both are committed to reducing tariffs to 5% or lower from the beginning of 2003.


An unnamed Japanese car manufacturer, thought to be Toyota, tested the new tariff regime this month and confirmed that the lowered tariff rates have indeed been implemented. Only Malaysia among the big ASEAN four auto-producing nations remains isolated. Having failed to open up its own markets to competition in order to protect its national car producer Proton from outside competition, it has lost trade block privileges and its automotive exports to other ASEAN member states remain subject to MFN-level tariffs.


These latest developments do indicate that progress is being made in developing free trade in the ASEAN block, and that except for Malaysia the AFTA agreement is indeed on track. Nevertheless,







“..it is becoming increasingly apparent that ASEAN is failing to keep up with broader regional automotive industry developments.. “


it is becoming increasingly apparent that ASEAN is failing to keep up with broader regional automotive industry developments and seems to be losing out on quality, long-term investment. Governments and policy-makers have focused too long on whether they will be able to compete with their fellow trade block members, rather than looking at the long-term, big picture. They appear to be oblivious to the fact that vehicle manufacturers themselves need to have complimentary operations in all major markets, if only for logistical purposes and for reducing currency risk. Of course, there are other reasons.


What seems to have been overlooked by ASEAN state policy-makers for too long is the competition potential from other countries in the region. China, in particular, represents a major threat to the ASEAN’s potential to become a significant force in the region’s automotive industry. Overall, China is estimated to have accounted for around 80% of the inward investment into East Asia last year, attracting investments of around US$45bn. This is helping not only to power its domestic economy, but also its future potential as an exporter.


China’s internal market has continued to grow, and vehicle manufacturers are enjoying fast improving economies of scale. At 2.3m units, China’s internal automotive market was twice the size of the combined ASEAN market last year. Now that China has successfully joined the WTO, vehicle manufacturers will increasingly explore export opportunities.







Volkswagen, for example, has long chosen China as a regional production base over all other countries..”


Volkswagen, for example, has long chosen China as a regional production base over all other countries, and China’s entry into the WTO will be seen as an opportunity to develop export markets.


US and European companies are asking themselves whether an integrated ASEAN, particularly without Malaysia’s participation, can offer economies of scale adequate enough to allow them to run efficient vehicle production operations. This point is being laboured increasingly as sales growth in the ASEAN region continues to flag. Very few model lines in the ASEAN region enjoy output volumes of over 100,000 units, and even these rely on exports to markets outside the ASEAN. There is also concern that diverging national tax regimes will reduce the benefits of lower internal tariffs and maintain fragmentation within the regional market.


General Motors believes that the ASEAN should allow other nations, such as neighbouring Australia and New Zealand, free trade privileges in the automotive sector. In a conversation with Just-Auto late last year, Rudy Schlais, head of GM Asia-Pacific, argued that with the euro expected to appreciate significantly against the Australian dollar in the medium term, it will need to look for alternative sources of product to supply the Australian market. He would like to see the ASEAN play a bigger role in reducing the Australian market’s dependence on Europe.


Other US and European vehicle manufacturers are likely to find themselves in the same situation if these currency projections prove to be accurate. Most have small assembly operations in the region, and are prepared to make significant investment provided that the volume opportunities are available. Malaysia’s reluctance to move ahead with AFTA is one of the main sources of uncertainty in the region.


Australia, which has MFN import tariffs of around 15% on CBUs, has indicated that it wants closer trade relations with the ASEAN trade block. Most ASEAN members seem less happy to allow Australia special privileges other than those allowed by its MFN status. But with a vehicle market of over 700,000 units last year, Australia could more than compensate for Malaysia’s reluctance to open its market. Australia only produces a handful of car models, and these would not pose a major import threat to the ASEAN. Free automotive trade with Australia could provide a catalyst for a new wave of investment in South-East Asia.