The leaders of the ten nations that make up the Association of South-east Asian Nations (ASEAN) last month signed an agreement which formally establishes the ASEAN Economic Community (AEC). It is scheduled to go into effect at the end of 2015.
The ten nations include Indonesia, Thailand, Malaysia, Philippines, Vietnam, Myanmar, Laos, Cambodia, Singapore and Brunei.
The AEC was first proposed in the early 2000s as a next step towards further integration of the main South-east Asian economies and was originally scheduled to be implemented in 2020. Member states decided to bring it forward five years to counter the rising economic dominance of China and India.
The agreement signed last month commits ASEAN member states to implement a programme of policies between 2016 and 2025 aimed at significantly improving social and economic integration in the region as well as boosting political and security collaboration.
Major steps towards regional economic integration were taken in the 1980s and 1990s, with agreements such as the Brand to Brand Complementation (BBC), the Common Effective Preferential Tariff (CEPT) agreement and ultimately the ASEAN Free Trade Agreement (AFTA). These were designed to encourage production complementation within the region and thus improve regional economies of scale and competitiveness.
The automotive industry has been one of the primary beneficiaries so far of these agreements, with manufacturers allowed to trade built-up vehicles and original equipment parts between key markets with zero import tariffs, as long as they had a minimum of 40% regional content.
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Ford and Mazda were among the first to adopt ASEAN regional sourcing strategies by consolidating regional production in Thailand. Major Japanese companies such as Toyota and Honda have for many years implemented regional product complimentary strategies.
There are significant differences in the region’s automotive markets, however, which so far have significantly limited opportunities to integrate the region’s markets further. Imports still account for a fraction of national sales in the region’s main markets.
National governments compete fiercely with each other for inward investment and keenly protect their respective local markets with local taxation strategies favouring local products.
Thailand clearly leads the region in terms of output and exports, a dominance that began some decades ago with the establishment of pickup trucks as the favoured national vehicle with preferential local excise tax rates.
Today Thailand is a major supplier of built-up pickup trucks to global markets and of passenger cars to other major ASEAN countries, the Middle-East and Oceania. In the first ten months of 2015, Thailand produced almost 1.6 million vehicles, of which over 1 million were exported – mostly to markets outside the ASEAN region. Very few vehicles, in comparison, were traded in the opposite direction.
Malaysia has national car policies in place that give preferential tax treatment to companies such as Proton and Perodua. Indonesia, a major manufacturer of MPVs, has local taxes which favour non-sedan 4×2 passenger vehicles. Here too, imports account for a small proportion of the local market, while most exports are mostly to markets outside the ASEAN region.
For the vehicle manufacturers at least, the advent of the AEC will likely be a non-event. The agreement is not expected to make a significant difference to their operations, at least in the short term. Tariff barriers among smaller, less developed economies in the region will be brought down over time and ultimately eliminated, with Thailand and to a lesser extent Indonesia gradually switching knocked-down (CKD) exports to built-up (CBU) vehicles.
No doubt, supporting industries such as dealer groups, aftermarket suppliers and service providers as well as marketing and adverstising companies will feel more emboldened to seek growth opportunities beyond national boundaries.
The automotive industry itself is more focused on developing Thailand and also Indonesia as low-cost global production bases. More so now in the wake of new trade agreements such as the Trans-Pacific Partnership (TPP), signed in October between 12 Pacific Rim countries including the USA, Japan and ten other Asian and South American countries.
Honda, for instance, has been vocal in its support for Thailand to join the TPP in order to expand the remit of its Thai operations. It is particularly keen to improve CBU access to some of the developing markets in South America.
Further collective pressure will likely come from industry bodies such as the Federation of Thai Industries’ Automotive Club, which is keen to embrace all emerging opportunities to export vehicles, including new-energy vehicles – a fat-growing global niche market.