The Asian automobile industry
has been through turmoil in recent years. Economic crisis caused vehicle demand
to crash in many markets. Now the regional economy and automotive demands are recovering.
This review from Standard & Poors analyses the key issues affecting the region’s automobile
industry…
ECONOMIC OVERVIEW
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It is over three years since
the commencement of a series of currency devaluations that were to eventually
throw the entire region into the worst recession since World War II. Whilst,
the speed at which the currency crisis and the subsequent recession spread through
ASEAN countries and Korea was very rapid, the pace of the recovery in 1999 was
varied. For example, real GDP growth in Korea that had shrunk by 6.7% in 1998,
expanded by 10.7% in 1999, while in Thailand GDP growth in 1999 was 4.5% compared
to a decline of 10% in 1998. After plunging by 13.2% in 1998, the Indonesian
economy stagnated in 1999.
Exhibit 1: Real GDP Growth
in Selected Asian Countries
The outlook in early 2000
appeared to be positive with every sign that the recovery which had been initiated
by exports and government spending would be supported by rising intra-regional
exports, a boost in domestic consumption as well as a recovery in foreign direct
investment. Currencies had begun to regain their strength while huge current
account deficits were being turned into substantial surpluses.

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By GlobalDataDoubts about the sustainability
of the recovery
By the middle of 2000, doubts
are beginning to reappear about the sustainability of the recovery. On the one
hand, economic indicators continue to show improvements over the corresponding
period in 1999. However, there have been few meaningful attempts to tackle the
question of non-performing loans and the faster than expected recovery in 1999
has reduced the commitment to structural reforms. The region’s currencies and
stock markets, reflecting worries over further interest rate increases and a
possible slowdown in the US economy have been weakening in recent months and
there is an upward pressure on interest rates. The expected slowdown in the
global economy threatens to have an adverse impact on exports, the key engine
for growth during 1999.
In 2000 and 2001, governments
in many Asian countries will increasingly be facing the choice between defending
their currencies or maintaining the growth momentum. Weaker currencies will
put renewed pressure on government and corporate finance as debt-servicing costs
will rise. This choice will play a crucial role in determining the medium term
outlook for the respective economies.
Political uncertainties
and lack of progress with restructuring
Whilst the chances of an
escalation in tensions between China and Taiwan have diminished considerably
since Taiwan’s new president, Chen Shui-bian, adopted a conciliatory stance
at his May inauguration, the political environment in several Asian countries
is adding to the economic uncertainties. The political situation in Indonesia
continues to be volatile while government attempts at initiating economic restructuring
remain futile. The risks of a break-up of the country are rising as provinces
continue to demand autonomy and the government is making little progress at
controlling unrest. The rupiah has come under a lot of pressure in the last
few months. The state of government finances remains in a perilous state and
there has been little progress with reforms.
In Thailand, the problems
of non-performing loans remains and represent a major obstacle in encouraging
new lending and acceleration in growth. There is also likely to be little progress
ahead of the general elections, due in November 2000. Lack of confidence in
the Estrada government continues to put a cloud over political and economic
environment in the Philippines. Insider trading scandals and rumours about a
possible coup have added to the gloom while the peso slide in May is beginning
to be cause for concern. The recovery remains fragile and has not been helped
by fighting between government troops and muslim rebels, floods and a volcanic
eruption.
South Korea’s long-term
outlook depends critically on the shape of its corporate sector. The large conglomerates,
the chaebols, who have traditionally been the pillars of exports and industrial
growth still carry a large debt burden and are extended across many diverse
businesses. Official pressure on the chaebols to disinvest from non-core businesses
has only met partial success.
In China, the key challenges
involve an immense and highly inefficient state-owned sector, an ineffective
tax-collection system, and a banking sector that is plagued by a multitude of
bad loans. To make matters worse, these problems are tightly entangled, reinforcing
each other and acting like a straightjacket on the economy. After China’s entry
into the WTO, we expect an acceleration in reforms and whilst this will cause
China’s growth to slow in 2000 and 2001, it will put the economy on a sounder
footing. Hence, growth will pick up after 2001.
India has been fairly well
sheltered from the economic “roller coaster” which the rest of Asia
has been on during the last few years. The outlook is relatively bright with
healthy consumer demand, a booming IT sector and greater confidence in the government’s
ability to kick-start the reform process. The biggest structural issue is the
size of the fiscal deficit. Political resistance, both from within and outside
the ruling coalition, impedes meaningful cutbacks in subsidies of food, fertiliser,
and electricity, whereas privatisation will also be contentious.
Japan continues to struggle
with structural deficiencies
The Japanese economy is
expected to remain below trend growth over the medium term, as policymakers
struggle with the country’s structural deficiencies. Successive government stimulus
packages from the 1990s have increased the national debt without triggering
a lasting recovery. The government was able to stabilise the financial sector
last year, but real structural change such as opening up regulated markets to
competition from outside Japan, decreasing the size and complexity of the Japanese
bureaucracy, and liberalising the financial sector have been slow to arrive.
These changes are critical for boosting the productivity of the country’s non-tradable
sectors. Without significant structural changes, Japan will be unable to boost
growth, and will muddle through the next decade at below-average growth rates.
VEHICLE DEMAND TRENDS
In 1998, total vehicle demand
had declined by 2.44m units (18.3%) to 10.9m units. The recovery in 1999 was
very impressive. With total vehicle demand rising by 9.5% to 11.9m units, over
1m units in sales have been recouped. Whilst the region’s largest market, Japan,
continued to stagnate during 1999, the most impressive recovery was seen in
Korea, with sales rising by 493,000 units and production by 888,000 units. Thailand
and Malaysia led the recovery in the ASEAN region, India registered impressive
gains and demand in China held up well, despite an economic slowdown and lower
confidence.
Exhibit 2: Expected Growth
in Vehicle Demand in 2000 in relation to 1999
In the first half of 2000,
the recovery continues and we are projecting total vehicle demand in Asia to
reach 12.7m units in 2000, a growth of 850,000 units or 7.2% units from 1999
levels. The recovery in 2000 is fairly broad based with all countries contributing
to the regional growth in vehicle demand. The most impressive recovery is being
seen in Indonesia where demand surged by 455% in the first half of 2000, despite
the uncertain political situation.
In 2010, Asia will account
for 30% of global sales
As illustrated in Exhibit
3, in 1999, Asia (including Japan) accounted for 22% of global sales (excluding
Africa and Middle East). Japan accounted for half of the total Asian demand.
In the next decade, vehicle demand in Asia (excluding Japan) is expected to
increase at a compound average annual rate of 8.3% to reach 14.8m units in 2010.
By 2010, we expect Asia (excluding Japan) to account for 20% of global (excluding
Africa and Middle East) demand. Including Japan, Asia’s share of global sales
is expected to be 30% in 2010.
Exhibit 3: Asia (excluding
Japan) will account for 20% of Global Vehicle Sales by 2010
1999: Sales by Region (excluding Middle East and Africa)
2010: Sales by Region (excluding Middle East and Africa)
Japan’s role in Asia is
reducing and in 1999, non-Japanese vehicle demand exceeded Japanese demand.
By 2005, sales in non-Japanese Asia are expected to be 9.9m units compared to
Japanese demand of 6.9m units. By 2010, two-thirds of all vehicle sales in Asia
will be outside Japan.
DEMAND TRENDS – A REGIONAL
ROUND-UP
Recovery in Japan commences
In Japan, after a 12.6%
decline in vehicle sales in 1998, overall vehicle demand steadied in 1999. A
total of 5.86m vehicles were sold, a marginal decline of 0.31% from 1998. The
main driving force in the domestic market has been mini-vehicles, with both
the passenger car and the commercial vehicle derivatives growing very strongly.
The popularity of mini-cars has continued in 2000. However, the success of Toyota’s
NBC family of models is encouraging other OEMs to launch new B segment products
and this will impact sales of A segment cars in the medium term. In the short
term, however, new B segment models such as the Vitz, Platz and Bb are also
impacting sales of C segment models.
Our forecast for the whole
vehicle market for 2000 remains unchanged from the March 2000 report. However,
our forecast for car demand has been revised upwards while the demand forecast
for LCV has been revised downwards. We are projecting an increase in total sales
of 3.2% in 2000 and the growth should continue into 2001, with the pick-up in
commercial vehicle demand contributing significantly.
Exhibit 4: Vehicle Demand
Overview – All Asia 1999, 2005 and 2010 (000 units)
Country | CAR | LCV |
HCV | ALL VEHICLES |
||||||||
1999 | 2005 | 2010 | 1999 | 2005 | 2010 | 1999 | 2005 | 2010 | 1999 | 2005 | 2010 | |
Japan | 4133 | 4705 | 4792 | 1629 | 1980 | 2067 | 100 | 131 | 141 | 5861 | 6816 | 7000 |
Korea | 703 | 823 | 1095 | 544 | 1067 | 1478 | 28 | 58 | 77 | 1275 | 1948 | 2650 |
China | 611 | 1444 | 2402 | 1038 | 1387 | 1745 | 277 | 406 | 527 | 1925 | 3238 | 4673 |
India | 482 | 874 | 1284 | 243 | 431 | 714 | 105 | 127 | 211 | 830 | 1432 | 2209 |
Thailand | 67 | 233 | 494 | 146 | 431 | 713 | 5 | 23 | 45 | 218 | 687 | 1253 |
Taiwan | 296 | 382 | 426 | 117 | 167 | 199 | 10 | 11 | 12 | 423 | 560 | 638 |
Malaysia | 240 | 386 | 580 | 47 | 106 | 150 | 2 | 12 | 17 | 289 | 504 | 747 |
Indonesia | 11 | 97 | 170 | 74 | 298 | 466 | 9 | 43 | 60 | 94 | 439 | 696 |
Philippines | 27 | 115 | 264 | 45 | 123 | 260 | 2 | 6 | 9 | 74 | 244 | 533 |
Pakistan | 45 | 64 | 73 | 20 | 30 | 35 | 3 | 4 | 5 | 67 | 99 | 114 |
Australia | 548 | 595 | 693 | 227 | 291 | 345 | 12 | 13 | 14 | 787 | 898 | 1051 |
OTHERS | 71 | 95 | 116 | 23 | 38 | 51 | 8 | 15 | 19 | 102 | 148 | 186 |
Grand Total | 7232 | 9814 | 12389 | 4152 | 6351 | 8223 | 561 | 849 | 1138 | 11944 | 17014 | 21750 |
Others include Vietnam,
Singapore, Hong Kong, Bangladesh, and Sri Lanka
MPVs and SUVs continue
to sell well
The popularity of car-based
recreational vehicles (MPVs and 4X4s) continues. This segment of the passenger
market grew by 17% to 473,000 units in 1999 and is expected to rise by over
32% in 2000.
Toyota, Honda, Mitsubishi
and Mazda have been exploiting the MPV boom this year by launching new models.
The NBC platform based Fun Cargo is selling well and Toyota will launch the
Corolla MPV in the second half of this year to consolidate its position. The
Odyssey underwent a full facelift in December 1999 and has been selling very
well. The model overtook Toyota’s best selling subcompact Vitz in June and created
a monthly sales record for Honda at 14,600 units. In addition to Odyssey, Honda
is also planning to launch the Civic MPV in 2000. Mitsubishi, which launched
the Dion in January has clawed back the market share lost by the Chariot. In
the SUV segment, Toyota is planning to launch the new RAV-4 on a new platform.
The Mazda Tribute and Mitsubishi SUW-M are also scheduled to be launched in
the second half of 2000.
Recreational vehicles
lead the boom in Korea … slowdown expected
In Korea, in 1999, total
vehicle demand had grown by 63% from the low levels of 1998 to 1.27m vehicles
– including 703,000 passenger cars, 544,000 LCVs and 28,500 HCVs. In the first
five months of 2000, the vehicle market continued to perform well, with domestic
sales growing by 33% over the same period in 1999. Although economic fundamentals
remain sound, we are expecting a slowdown in the rate of growth of vehicle demand.
Pent-up demand has been largely satisfied and the impact of new models released
in 1999 and early 2000 will gradually diminish. Our forecast for total vehicle
demand for 2000 has been kept largely unchanged, however, we have lowered our
forecast for passenger cars and raised our forecast for recreational vehicles,
many of which are classified as LCVs in our forecasts. We are forecasting the
overall vehicle market to grow by just under 10% to 1.4m units in 2000, including
686,000 passenger cars, 678,000 LCVs and 36,000 HCVs.
Recreational vehicles will
continue to be the most popular segment in the domestic market. Demand for recreational
vehicles has been fuelled by a string of new models and received a further boost
following the launch of the Hyundai Trajet in late 1999 and the Daewoo Rezzo
in early 2000. For the whole of 2000, we are projecting an increase in demand
for RVs of 56% to over 326,000 units, including 204,000 MPVs and 122,000 4X4
vehicles.
For 2005, our forecasts
remain almost unchanged and we are forecasting a total vehicle demand of 1.95m
units. However, the demand forecast for passenger cars has been revised downwards
from 1.07m in our March 2000 forecast to 823,000 units, while there is a corresponding
increase in our forecast for MPVs and 4X4 which are classified as LCVs. Total
vehicle demand had peaked at 1.652m units in 1996, and our latest projections
indicate that this level will be exceeded by 2003.
In the short term, while
the new owners of both Daewoo and Samsung work on strategic options and new
product and production strategies, the dominance of Hyundai/Kia is set to continue.
In China – more positive
outlook for passenger car demand in the medium term
In China, WTO entry
will speed up reforms, but in the short term it is putting pressure on SOEs
to become more market-orientated and financially accountable. The resulting
impact on unemployment and job security is hurting business and consumer confidence,
and this is dampening vehicle demand. However, our medium and long-term forecasts
have been upgraded to reflect the more positive outlook for vehicle demand after
China’s WTO entry. This upward revision is mainly in the passenger car sector.
The increased purchasing power coupled with greater product availability and
more widespread availability of credit should allow private demand for cars
to take off quicker and sooner.
In the first four months
of 2000, vehicle sales have been stronger than expected, fuelled by buoyant
demand for commercial vehicles. For 2000, we are projecting vehicle sales to
reach 2.1m units, 80,000 units higher than our March 2000 forecast. Passenger
car sales are expected to reach 656,000 units, including 621,000 units of domestically
built cars. Our forecast for the total the LCV market has been revised upwards
to 1.2m units. Mini and light buses have been the high growth segments in the
first quarter of 2000. In the heavy vehicle market, we expect total demand of
292,000 HCVs, consisting of 169,500 medium trucks, 70,700 heavy trucks and 41,000
buses. Demand for heavy trucks continues to surge while demand for medium trucks
stagnates.
There is little doubt that
the evolution of car demand from individuals will be the major growth area in
the next decade and beyond. All OEMs are preparing to take advantage of this
expected growth. VW plans to launch the Polo and possibly the sub-Lupo, while
the model chosen by Toyota is Vitz/Platz at Tianjin. The Wagon R will be produced
at a joint venture between Changhe and Suzuki while Yueda-Kia has commenced
production of the Pride. GM is seeking a partner and government approval to
build the Corsa, while Fiat is planning to produce the Palio at Yuejin. Honda,
following the success of the Accord will most likely launch its World Basic
Car.
Following the launch of
the new Audi A6 this year, sales of the Buick are under pressure but Honda continues
to perform well and its sales are rising with increases in production capacity.
India – after strong
growth in 1999, signs of a slowdown?
In India, after strong increases
in 1999, vehicle demand continued to grow strongly in the first four months
of 2000. However, towards the end of the second quarter, signs of a slowdown
were much in evidence. Part of the strength in late 1999 and early 2000 has
been due to consumers bringing forward purchase decisions in anticipation of
price increases following the expected harmonisation of the sales tax. Into
2000, while the fundamentals for vehicle demand remain positive, we believe
that it will be difficult for the market to repeat the strong growth performance
of 1999. Pent-up demand, which was a big factor in 1999, appears to have been
satisfied. In addition, price increases to compensate for higher state sales
tax, emission-related technology and yen appreciation will dampen demand during
2000.
Our forecast for 2000 has
been reduced from 947,000 units in our March 2000 report to 925,000 units. The
downturn in the medium and heavy truck market is now expected to occur slightly
earlier than expected and we have also downgraded our forecasts for 4X4, MPVs
and LCV by 11,000 units. Our forecast for the passenger car market has been
increased slightly to 557,000 units. Our forecast for total vehicle demand for
2005, remains virtually unchanged at 1.43m units.
Key Developments so far
in 2000
1. In Japan, signs of
recovery in the domestic market in April.
- Exports ( esp. to North
America ) continue to support production. - Strong performance from
Toyota’s NBC ( Vitz/Platz ) based models.
2.In Korea, the
recovery continued in the first quarter.
- Recreational vehicles
and upper-medium strongest performers. - Strikes disrupted production
in April.
3.In China, car demand
sluggish but LCV demand strong.
- New model launches include
Audi A6 and VW Passat. - LCV market strong – thanks
to new model launches.
4In India, boom continued
in 1Q, but now signs of a slow down.
- Improving economic fundamental
and higher confidence. - A large number of product
launches.
5.Thailand and Malaysia
continue to lead the recovery in ASEAN
Standard & Poors DRI
ASEAN – Demand surges
in Indonesia, recovery continues in Thailand and Malaysia
In Thailand, the
recovery in vehicle demand, which started in the second half of 1999, continues
into 2000. In the first half of 2000 vehicle demand increased by 43% or 37,000
units over the same period in 1999. For the whole of 2000, we are projecting
total vehicle demand of just over 271,000 units, an increase of 24% over the
1999 level of 218,200 units, but 24,000 units lower than our March 2000 forecast.
Passenger car demand is expected to increase to 87,900 units, around 5,000 units
higher than our March 2000 forecast, while our demand forecast for LCVs has
been revised downwards from 204,300 units in the last report to 177,000 units.
Lower confidence, especially in the rural sector and price increases in April
have dampened demand. For 2005, our forecast for the passenger car market remains
virtually unchanged from the March 2000 report but our forecast for the LCV
market has been reduced by 41,000 units, from 472,000 units in the March 2000
report to 431,000 units.
The recovery in the Malaysian
vehicle market continued in the first five months of 2000, supported by a strong
economy and low interest rates. Pent-up demand continues to be a key factor
in the vehicle market during 2000 but the market should return to normal levels
of growth after next year.
Our forecasts for the passenger
car and light commercial vehicle markets for 2000 remain virtually unchanged
but demand for heavy vehicles has been lagging behind and we have had to lower
our projections for this year. We are expecting total vehicle demand to grow
by 19% to just over 343,000 units. This compares with our March 2000 forecast
of nearly 350,000 units.
Foreign OEMs continue to
complain about the level of taxation, both for kit and CBU imports. In the medium
term, prospects for relaxation appear dim. As Proton and Perodua appear capable
of meeting market demand, the impact of high taxation on overall market growth
is not significant. However, lower taxes for other manufacturers would lead
to changes in segmentation and market share profile.
In Indonesia, the
recovery in vehicle sales in the first half of 2000 has been very impressive.
Total vehicle sales rose by 455% in the first half of 2000 to just below 127,000
units from under 23,000 units in the same period in 1999. Pent-up demand has
been main driving force in a market that had slumped by 85% in 1998 and had
begun to turn around in the second half of 1999. For the whole of 2000, we are
projecting total vehicle demand of 218,000 vehicles, an increase of 132% over
the 1999 level of 94,000 units. LCVs continue to constitute the largest and
most important segment of Indonesia’s vehicle market. Our revised projection
for the LCV market in 2000 is 166,500 units, including 32,800 4X4s. Demand for
heavy vehicles is expected to rise from 9,200 units in 1999 to 16,000 units
in 2000.
In the medium term, much
will depend on the political situation. Per capita GDP will not reach pre-crisis
levels until 2003 and debt restructuring in the financial sector is essential
before meaningful credit-fuelled growth can occur. Our forecasts for 2001 and
2005 have been revised upwards to reflect stronger than expected sales in the
first half of 2000. Total vehicle sales are expected to rise to 267,000 units
in 2001 and 439,000 in 2005.
In the Philippines,
vehicle demand has been slow to recover but in the first six months of 2000,
it rose by 19%. Our forecast for the total vehicle demand for 2000 is 91,200
units, only 1,000 units lower than our March 2000 forecast. Passenger car demand
is expected to post an increase of 26% or 7,000 units to 33,800 units. This
compares with our March 2000 forecast of 36,400 units. Our forecast of 54,700
units for the LCV market is little changed from our March 2000 forecast of 53,100
units. While the recovery is still expected to gather momentum in late 2000
/early 2001, we have decided to cut growth levels for the next few years. The
net result is that our forecast for 2005 is now 48,200 units lower than our
March 2000 forecast. Demand is only expected to approach the pre-crisis peak
level of 162,200 units in 2003.
Recreational vehicles
remain popular in Taiwan … Australian sales drop ahead of GST introduction
in July
In Taiwan, political
uncertainties and fragile consumer confidence before and after the presidential
elections in March did dampen vehicle demand, but on the whole vehicle demand
appears to have been following normal seasonal variations during the first five
months of 2000. For 2000, total vehicle demand is expected to increase by 5.4%
to nearly 445,300 units. Demand for RVs continues to be buoyant and is the main
reason for the growth in LCV demand of over 11,000 units for the year. Our forecast
for 2005 remains unchanged and total vehicle demand is expected to reach 560,000
units. The LCV market will continue to witness higher growth rates than the
car market. By 2005, we expect LCV (including 4X4 and MPV) demand to grow to
167,000 units, or 30% of the total vehicle market.
In Australia, vehicle
sales experienced a sharp drop in April and June before the introduction of
the GST (General Sales Tax). The slump brought total vehicle demand in the first
half of 2000 to 350,000 units, down by more than 11% over the same period in
1999. The introduction of GST in July, which should result in lower vehicle
prices and less confusion amongst potential buyers, should lead to a recovery
in the second half of the year. We are expecting total vehicle sales to reach
785,000 units for the whole year, including 540,000 passenger cars, 232,000
LCVs and 12,500 heavy vehicles. Total vehicle demand is expected to rise by
3.1% in 2001. Our forecast for 2005 has been revised downwards by around 13,000
units and total vehicle demand is expected to be just under 900,000 units.
PRODUCTION TRENDS AND
INDUSTRY STRUCTURE
In 1998 total vehicle production
in Asia (including Japan) dropped to 15.54 m units from 18.2m units in 1997
– a fall of 14%. Japanese production declined by 8.4% while Asian production
(excluding Japan) slumped by 24%. In 1999, all Asia production rose by 9.2%
to reach almost 17m units and in 2000 it is already expected to be above the
pre-crisis peak of 18.2m units reached in 1997.
Excluding Japan, Asian production
is expected to rise by 14% in 2000. With Japanese production in a long-term
decline and strong growth in the rest of Asia, we expect vehicle production
in non-Japanese Asia to exceed production in Japan from 2003 (see Exhibit 5
below).
Japanese production will rise above 10m units in 2000, but declines in the long
term
In Japan, vehicle production
is expected to rise by 3.4% to 10.2m units in 2000, spurred on by robust exports.
In 2001, production will fall again, though marginally, when exports decline.
We expect the production level to stay at around the 10m mark until 2005.
Exhibit
5: Outlook for Production
The increased output in passenger
cars was largely due to strong exports to Asia and North America. In 2000, the
buoyant demand from North America and Asia continues to be the major force for
the export growth, while a recovery from Africa, the Middle East and Latin America
will provide some support. On the downside, the strong yen will act as a constraint.
Exhibit 6: Passenger Car
Production Growth in 1999, 2000 and 2001
Exhibit 7: Outlook for LCV
Production Growth in 1999,2000 and 2001
The increase in transplant
production is a long-term trend and it will put a ceiling on exports and domestic
production levels. Toyota led the gains in production in the first half of 2000,
thanks to strong demand for the NBC family models, the new Estima and the Crown.
Honda’s production was boosted by strong performance of the new Odyssey while
strong demand for Mazda MPVs in Japan and the US (where production was cut)
boosted Mazda’s domestic production. Mini-vehicle manufacturers all registered
drops in production, while Nissan continues to suffer from a lack of new models.
Korea production expected
to be 3.1m units in 2000
In Korea, after an astonishing
performance in 1999, vehicle production continues to surge in 2000. Total vehicle
production in 1999 surpassed 1997’s pre-crisis output record, and capacity utilisation
improved dramatically.
Buoyant domestic sales,
especially in the RV sector, have been the chief factor behind the surge in
vehicle production, while strong export performance, especially in North America,
provided a further boost. All OEMs delivered an impressive result and even the
ailing Daewoo performed well in the export markets, especially in North America.
The strength of Japanese yen has helped improve the cost competitiveness of
Korean vehicles in export markets but the won has begun to appreciate in recent
months and if this trend continues, growth could slow down. For 2000, total
vehicle production is expected to reach 3.1m units and we are projecting production
of 3.9m units by 2005. Exports and production will also drop considerably if
Hyundai starts production in Europe and North America.
Beginning of Resistance
to AFTA?
DRI has previously highlighted
the problems that the automotive industry would face if the terms of AFTA were
implemented in full. Malaysia has an extremely protected automotive industry,
with import duty on CBU cars running at 140-300%. The government has come under
a great deal of internal pressure not to allow ASEAN imports tariff-free admission
to the Malaysian automotive market, and the economic crisis has provided an
excuse for continuing to protect the industry.
In May 2000 the Malaysian government announced that the current tariff protection
for the country’s automotive industry will be extended to January 2005, two
years after the original deadline laid down by the ASEAN Free Trade Agreement
(AFTA). This delay is designed to give domestic manufacturers, Proton and Perodua
and local suppliers the chance to become more competitive as they recover from
the effects of the 1997/1998 economic crisis.
In Indonesia, the industry
has also called on the government to delay the implementation of AFTA to give
the local automotive industry more time to recover from the recession and improve
competitiveness. There have been proposals to defer entry until 2005, as is
the case with Malaysia. The difference between Indonesia and Malaysia is that
the government in Indonesia is under IMF supervision and has limited room to
manoeuvre while it attempts to address economic and political problems. It is
also less committed to preserving a domestic automotive industry.
In a way, AFTA, as applied
to the automotive industry, stands a much better chance of functioning positively,
if there was a greater balance between the individual countries. The fact that
Thailand dominates the automotive industry of the ASEAN region can be regarded
as a major obstacle in the full-scale implementation of AFTA.
Thailand, has already become
the global hub for the production of compact pick-up trucks and it has the most
to gain from AFTA. In the context of ASEAN, Malaysia is a significant market
and while Malaysia procrastinates over AFTA implementation, it is clear that
protection offered to national manufacturers will gradually reduce and that
this market cannot be ignored in any post-AFTA strategy. The role of Malaysia
in the post-AFTA strategies of OEMs will depend on the future of Proton and
Perodua. At present, the plants of the two national manufacturers enjoy the
best scale economies in the region in the passenger car segment. The country
has the potential to become a significant production centre for passenger cars.
Indonesia’s large population
and long term potential will act as incentives for OEMs to maintain a strong
manufacturing presence in the country but significant investments will become
harder to justify if the gap in competitiveness with Thailand widens further
in the post-AFTA era. Indonesia has achieved some scale economies in the production
of Asia Utility Vehicles such as the Toyota Kijang, the Isuzu Panther and the
Mitsubishi Kuda and has the potential to produce this class of vehicles for
all of ASEAN.
The AFTA scheme puts a major
question mark over the vehicle assembly sector in countries such as the Philippines,
which has neither the large domestic market, nor the competitiveness to be an
attractive location for vehicle production. Post-AFTA, current indications are
that there is a real possibility that other manufacturers will scale down their
vehicle assembly operations in the country and focus on the production of components.
In this respect, the OEMs’ strategies for the production of the AUVs and the
best selling cars will be crucial. AUVs such as Toyota’s Tamaraw /Revo, Mitsubishi’s
Freeca and Isuzu’s Highlander together with the three best selling models (the
Toyota Corolla, the Honda Civic and the Honda City), account for over half the
production of the Philippine industry. The future of the industry is highly
dependent on the production strategy for these models.
In our detailed forecasts,
we are not assuming significant trade of CBU vehicles within the ASEAN before
2003/2004. In the case of Malaysia, we believe that it will be around 2006/2007
before import penetration rises in a meaningful manner.
Manufacturer strategies
and roles of individual countries post-AFTA
Whilst there are considerable
uncertainties regarding the timing and nature of AFTA agreement as far the automotive
industry is concerned, AFTA is a major factor in formulating product and production
strategies for next generation products for the ASEAN market.
The strategies of some new
investors in ASEAN, such as BMW are highly dependent on the implementation of
AFTA. Without AFTA, these operations will struggle to achieve critical mass.
Component suppliers whose product range and production operations cannot utilise
AICO are also eager for progress with AFTA.
The full implementation of AFTA/CEPT should result in an increase in trade of
built up vehicles as well as components between member states. This will enable
manufacturers to exploit scale economies by concentrating production in a smaller
number of locations. In theory, this gives manufacturers the freedom to shut
down plants and exit from countries which are uncompetitive by regional standards.
Complementation schemes
the solution in the medium term
As we have been indicating
in our previous reports, in the majority of cases, we expect OEMs to adopt more
flexible strategies for the ASEAN region and also be sensitive to the impact
of their investments on local economies. A complementation scheme ensures that
automotive trade between individual AFTA members does not become too unbalanced.
The Japanese OEMs, particularly
Toyota, Honda and Mitsubishi already have complementation schemes in place.
Post-AFTA product strategies will extend the concept of complementation to CBU
vehicles. In this respect, the role of each ASEAN country in the production
strategy of each manufacturer will become clear when decisions on the next generation
products are made. These decisions are beginning to be made.
Next generation products
will be assembled at a single location in ASEAN
Toyota’s plans to produce
the Vitz/Platz and Honda’s plans to make its WBC (MK/Logo) in Thailand implicitly
assumes the implementation of AFTA. We don’t believe that Vitz/Platz will be
made at other Toyota plants in the ASEAN region, unless there are further hiccups
with AFTA. Instead Toyota plans to move production of the Soluna to Indonesia.
We are assuming that Indonesia will export the Soluna to other ASEAN countries
from 2003/2004 onwards.
Post-AFTA, Honda will concentrate
most production of the WBC in Thailand, but CKD assembly in Malaysia and Indonesia
cannot be ruled out if there are further delays with AFTA.
Ford/Mazda has AICO approval
for export of Laser kits and components from the Philippines to Thailand and
imports of Ranger kits and components from Thailand to the Philippines. With
Thailand already the global centre for the production of pick-ups, we believe
that the Philippines will evolve into the main ASEAN production centre for the
Laser, supplying kits and key components to Ford’s other ASEAN operations. Engines
are already being exported from the Philippines to Thailand. Post-AFTA, CKD
assembly of the Ranger in the Philippines and the Laser in Thailand would be
unnecessary.
In India, the pressure
on Maruti continues to mount – Government stake in Maruti for sale?
Maruti’s dominant role has
come under threat since the launch of Hyundai’s Santro, Daewoo Matiz and Telco’s
Indica. As sales growth slows down in 2000, competition is intensifying and
weakness in Maruti’s older product line-up is becoming more transparent. The
pressure on Maruti to accelerate new model launches is increasing. Cannibalisation
and profitability are major concerns in formulating a new product strategy.
Any new model launch will cannibalise sales of existing models and in the case
of the Maruti 800 the profit implications are significant. The cost advantage
enjoyed by Maruti’s flagship 800 is largely because of its high local content
and minimal depreciation load. Maruti will not have this advantage with a replacement.
This partially explains the delays in the launch of the Alto that is seen as
a long-term replacement for the Alto.
The poor performance of Maruti has led to calls for the government to sell its
stake. Suzuki would have the first right of refusal but there are now indications
that Suzuki may not be as enthusiastic as it has been in the past. If Suzuki
did not buy the stake, the shares would be offered through a global tender.
While Maruti remains the largest vehicle assembler in India, its position has
weakened considerably in the last year and the company is a much less attractive
proposition than it was a couple of years ago. Maruti relies on Suzuki technology
and would be a less attractive proposition for most other OEMs.
Will GM show an interest
in Maruti?
Whilst the scale of GM’s
operations in India have been modest, GM’s expected acquisition of Daewoo would
have boosted the company’s presence in India. With GM almost certain to miss
out on acquiring Daewoo, it will have to put more and more emphasis on its ties
with Suzuki for its Asian strategy. Acquiring the Indian government’s stake
in Maruti will almost become a necessity if GM is not to fall too far behind
Ford and Hyundai. Joint ownership of Maruti by GM and Suzuki appears to be the
most likely outcome. Much, of course, will depend on the valuation of the company.
More flexibility in government
attitude towards new model launches in China ?
Recently, the EU’s agreement
with China about its WTO entry addressed two major areas which concern the automotive
industry: investor relations and new model launches. Currently, Chinese regulations
prohibit foreign companies from owning more than 50% in engine joint venture
projects and foreign joint ventures are not allowed to add new models without
obtaining government approval. The general understanding is that a second model
could only be added only when production of the first model had reached 150,000
units. Loopholes do exist and several projects have received approvals at a
provincial level as the vehicles have been classified as commercial vehicles
and or involve an initial investment of
Following the agreement
between the EU and China, foreign investors will be allowed to have a majority
share in engine joint ventures and foreign funded ventures can change the production
mix without seeking government approval. In addition, the power of local governments
to approve automotive investments has been raised from US$30m to US$150m after
China’s entry into the WTO.
Vehicle manufacturers’ product
strategies have been restricted by the government authorisation process, and
so the success or otherwise of the project is often determined by historical
performance in China and relations with the government.
With China’s entry into
the WTO a mere formality, it is only a matter of time before the central government
formally lifts restrictions on new model launches. Commercial considerations
will drive OEMs’ product strategies and there will be less bureaucratic obstacles.
This will lead to further intensification of competition and greater consumer
choice.
Korean industry under
control of International OEMs?
The changes in ownership
of the Korean automotive industry have certainly been more dramatic than could
have been imagined before the Asian crisis. With Renault having taken control
of Samsung, Ford close to winning control of Daewoo and Hyundai forming closer
ties with DaimlerChrysler/ Mitsubishi, it will not be long before the entire
industry becomes much more closely integrated into the global strategies of
Renault/ Nissan, Ford, DaimlerChrylser/ Mitsubishi.
After Japan, Korea is the
second largest market and vehicle production location in Asia and it will be
interesting to see the impact of recent M&A activity on Korea’s automotive
industry. Will international OEMs improve Korea’s position as a major vehicle
design/ production location or will Korea become merely an assembly location,
with major platform design work being undertaken in the home locations of the
international OEMs?
Apart from wanting to gain
a foothold in Korea, the strategies of international OEMs with regards to Korea
appears to be at a fairly early stage. In the coming months, Renault/ Nissan
and Ford (assuming there are no last minute developments with the Daewoo purchase)
will no doubt provide further clues with regards to the respective roles of
Samsung and Daewoo. What is clear is that the “modus operandi” of
the Korean automotive industry will change significantly. The needs of Korea
Inc are likely to be subservient to the strategies of the global OEMs. Investments
in Korea and abroad are likely to be made more on the basis of commercial considerations
and less on the basis of the ambitious desire to turn Korean OEMs into major
forces in the global industry.
Integrating Daewoo into
Ford will be more complex
After winning exclusive
negotiating rights to purchase Daewoo, Ford is currently in the process of conducting
due diligence and submitting a final proposal for the acquisition. Integrating
Daewoo into Ford, Mazda, Volvo will be more complex task. Whilst Daewoo will
provide Ford with a strong sales and manufacturing presence in Korea and some
Eastern European countries, identifying a clear role for Daewoo in the product
and production strategy of the Ford group of companies is less clear.
The immediate challenge
for Ford will be to put Daewoo on a sounder financial footing and restore confidence
in the brand and the company. Gaining market share in Korea is likely to be
a major priority. The next challenge will be to improve the competitiveness
of Daewoo’s product portfolio. Daewoo’s own product development infrastructure
is fairly young and has relied heavily on design houses. In the short term,
Ford is likely to provide the technical resources to upgrade current generation
Daewoo models. Ford and Mazda have struggled to compete in the small car segment
in Asia and Daewoo’s Matiz will provide the group with a strong presence in
this segment. Ford could eventually adopt re-badging strategy with the Matiz,
in a similar manner as its practice of re-badging the Kia Pride and Avella.
Daewoo’s long-term role
will become clearer with next generation products. Daewoo models will no doubt
share the same platform as Ford and Mazda models. For example, the next generation
Lanos could share the platform with the Familia or Focus. In this respect, there
are already concerns in Japan that Mazda’s role within Ford will diminish following
Ford’s likely purchase of Daewoo.
Asian market shares –
Revisited
In our previous reports,
we discussed the ambitions of international OEMs for Asia. With the recovery
in Asia, almost all Western OEMs intend to increase their presence in the region,
while Japanese OEMs are busy injecting fresh capital into the Asian operations
and integrating them into their global strategies. At boardroom level, Western
OEMs have set ambitious objectives to increase their market shares in Asia.
Recently the issue of Asian
market shares has attracted a lot of publicity, and our latest assessment is
summarised in Exhibit 8. This assessment includes all vehicles (including passenger
cars, LCVs and heavy vehicles) and is based on a “bottom-up analysis”
– meaning that it is based on forecast market shares and sales volumes for each
vehicle model in each Asian country. Note that our sales forecasts take into
account factors such demand potential for each vehicle type in each country,
competitiveness of each model, and incorporate OEM plans for introducing new
models.
As can be seen from Exhibit
8, definitions are important when comparing OEMs’ claims with the data presented.
In looking at Asian market shares, there is a lot of difference between Asia
including Japan and Asia excluding Japan.
Exhibit 8: Market Share
Outlook in Asia (All Vehicles)
Market Share Outlook (Asia including Japan) |
Market Share Outlook (Asia excluding Japan) |
||||||
1999 | 2005 | 2010 | 1999 | 2005 | 2010 | ||
TOYOTA | 23.4% | 20.9% | 19.2% | HYUNDAI | 17.4% | 15.8% | 14.9% |
SUZUKI | 11.1% | 9.2% | 8.3% | SUZUKI | 11.6% | 9.4% | 8.0% |
HYUNDAI | 8.8% | 10.0% | 10.5% | FORD/MAZDA/DAEWOO | 11.1% | 12.1% | 12.6% |
RENAULT/NISSAN | 8.2% | 7.8% | 7.2% | TOYOTA | 10.1% | 11.2% | 11.5% |
MITSUBISHI | 7.7% | 7.6% | 7.1% | GM/ISUZU | 6.8% | 8.1% | 8.4% |
HONDA | 7.1% | 7.6% | 7.2% | DAIMCHRYSMITSU | 6.3% | 6.9% | 7.1% |
FORD/MAZDA DAEWOO | 5.0% | 5.6% | 5.6% | VW GROUP | 5.5% | 5.6% | 5.7% |
GM/ISUZU | 4.4% | 5.7% | 6.6% | FAW | 3.5% | 2.9% | 2.5% |
DAEWOO | 3.4% | 4.1% | 4.5% | RENAULT / NISSAN | 3.0% | 4.0% | 4.3% |
VW GROUP | 3.3% | 3.7% | 4.2% | DONGFENG | 2.9% | 2.2% | 2.0% |
FUJI HEAVY | 2.8% | 2.1% | 1.7% | TELCO | 2.8% | 2.6% | 2.6% |
FAW | 1.8% | 1.4% | 1.2% | PROTON | 2.6% | 2.3% | 2.3% |
DONGFENG | 1.5% | 1.3% | 1.3% | HONDA | 2.3% | 3.6% | 4.2% |
TELCO | 1.4% | 1.5% | 1.8% | FIAT GROUP | 1.4% | 1.6% | 2.1% |
PROTON | 1.3% | 1.4% | 1.6% | PERODUA | 1.4% | 1.2% | 1.2% |
DAIMLERCHRYSLER | 0.9% | 1.2% | 1.5% | OTHERS | 11.4% | 10.5% | 10.6% |
OTHERS | 8.0% | 8.9% | 10.4% | ||||
TOTAL | 100% | 100% | 100% | TOTAL | 100% | 100% | 100% |
For Asia including Japan,
Toyota (including its affiliates Daihatsu and Hino) accounted for 23.4% of vehicles
sold in 1999. Its market share will, inevitably, drop but its top position appears
safe. Suzuki and Hyundai are both a long way behind in second and third place
respectively. Suzuki’s position is largely due to the popularity of the Alto
and Carry based vehicles in China, India and Indonesia. In Asia excluding Japan,
Hyundai has become the most significant player, thanks to the dominating effect
of Korea and the acquisition of the Kia. However, its lack of geographic diversity
in Asia makes it highly vulnerable to the Korean market.
Of the Western OEMs, Ford
has the strongest position in Asia, thanks to its ownership of Mazda. Its expected
acquisition of Daewoo will put in third place in Asia (excluding Japan) but
it has only a 5.0% market share in Asia (including Japan). GM/Isuzu currently
has 4.4% market share. GM has also formed an alliance with Fuji and strengthened
its links with Suzuki, and it is easy to see how the enlarged GM/Isuzu/Suzuki/Fuji
Group could become a formidable player in Asia.
Exhibit 9: Light Vehicle
Production Summary 1999 (000) – Asia
Exhibit 10: Light Vehicle
Production Summary 2005 (000s)-Asia
Ashvin Chotai.
Head: Asian Automotive Analysis
Global Automotive Group
Research Services
Standard and Poor’s
Tel: + 44 (0) 20 8545 6240
email: ashvin_chotai@standardandpoors.com