Asia to eclipse Europe?
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If these projections prove to be correct, then developing Asia will become a larger market for Honda’s cars than Europe. The major source of growth will be China, where a new plant is likely to be built by 2004 to produce its next “Asia Car”, based on the Fit platform. The roll out of the new Asia Car, starting in Thailand later this year, will mark the beginning of a new period of growth for Honda in Asia. It will also mark the beginning of the integration of Honda’s vehicle assembly operations in the ASEAN, under the ASEAN Free Trade Agreement.
Over the last few years, Honda has moved quickly to increase control over its manufacturing and distribution operations across the region. Two new plants are under construction in the ASEAN region, one in Malaysia and one in Indonesia. It has also just bought a plant in Taiwan, after it fell out with its local partner San Yang over equity ownership. Honda production in Taiwan is expected to restart at the end of this year or early next year. From next year, Honda will be much better positioned to take advantage of the region’s growth.
China is a major Honda growth pole
Since it entered the market back in 1998, by taking over Peugeot’s share of an assembly plant in Guangzhou, China has become Honda’s main focus of expansion in Asia. Honda now has a 50% stake in the Guangzhou-Honda joint venture plant, which began making the Accord in 1998. Around 50,000 Accords were sold in China last year, and this year the target is for around 80,000-90,000 units Honda sales, helped by the arrival of the Odyssey MPV to its range. This makes China its biggest market in the region by far, excluding Japan. The plan is to double sales by 2004 to around 150,000 units, by expanding the dealer network and by adding a third model.
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By GlobalDataThe talk is that Honda wants to build a second plant in the country, but this may be done under a separate joint venture company in which Honda would take a much larger equity stake. The plant would produce a Fit-based model, probably very similar to the model that will be produced in Thailand from this year. This would extend Honda’s presence in the larger volume segments, and take on traditional market leaders such as Shanghai-VW.
China is to remain one of Honda’s main areas of focus in the region, due not only to the growth potential of its domestic vehicle market, but also because China has the potential to become a very profitable export base for Honda due to its low costs. Quality problems will need to be addressed, however, similarly to other countries in developing Asia, but the potential volume scale is significant. The other main concern is equity control –Honda is unlikely to export from companies in which it does not own most of the equity.
Honda’s new ‘Asia Car’ is for India too
In India, the Honda-Siel joint venture began production of the City model at the end of 1999, and sells around 10,000 units per year. The car will likely be replaced towards the end of 2003, with the new Fit-based model. This should be cheaper to make than the current model, as most of the parts will be made outside Japan. With only a single model line, Honda is missing out on the growth potential that this market offers. But once the economic (and political) climate improves, the model range is likely to be expanded.
New setup for Taiwan
In Taiwan, Honda had a major set back when its relationship with its local assembler and distributor, Sang Yang Motor, went sour over equity ownership. Honda had wanted to gain greater control over its operations, while Sang Yang was reluctant to take a back seat in the country’s automotive industry. Sang Yang is scheduled to cease Honda production at the end of June, and will start assembling Hyundai cars from September. Honda has responded very quickly to this setback, but will face a sharp drop in volume sales for yet another year. Volumes have fallen from over 30,000 units in 1998 to around 13,000 units last year, mostly due to the depressed local market conditions but also due to significant under-performance as the rift with Sang Yang increased.
A new wholly-owned subsidiary company has been set up, called Honda Motor Taiwan, with initial working capital of NT$170m and with responsibility for import and distribution. Earlier this month, HMT acquired the Ta Ching car assembly plant, which until very recently was making the Subaru Impreza model in very low volumes. The $80m price tag was a high price to pay for a plant with 30,000 units of capacity, but Honda needed to solve this problem very quickly in order to minimise disruption to its dealer/sales network. It is likely to move equally as fast in converting the plant to Honda assembly. The Ta Ching plant is likely to restart production by the end of 2002 or early 2003, and produce the Civic, the Stream derivative and the Accord models.
AFTA prompts ASEAN restructuring
In the ASEAN, Honda is currently restructuring its manufacturing base in preparation of the regional tariff reductions under the ASEAN Free Trade Area agreement (AFTA), which are scheduled to be reduced to a maximum of 5% from next year. It has taken control of its local subsidiaries over the last few years and is currently building two new assembly plants, one in Malaysia and one in Indonesia. There are no plans as yet to add capacity in Thailand – which already has Honda’s largest ASEAN plant.
With no vehicle assembly capacity investments earmarked for the Philippines,
“the future of Honda automobile assembly in {the Philippines} remains very uncertain” |
These new investments will give the company around 160,000 units of high-quality annual assembly capacity, some of which will be earmarked for export to markets outside the region in the short-to-medium term. There will also be less production duplication, as trade complementation strategies are implemented between Indonesia, Thailand and the Philippines. As vehicle demand continues to recover, new capacity will likely be added later in the decade.
The Thai plant could develop a permanent role as an exporter of vehicles to markets outside the regional free trade zone, including Australia and New Zealand, and even back to Japan, but it will face stiff competition from other low-cost operations in the region – particularly from China. In the meantime, one of the key focuses of Honda’s strategy for the region will be to reduce its dependence on component imports from Japan to a few hi-tech items, and bring local content to close to 100%. This should help Honda improve its competitiveness in the local markets, and pave the way for a more international role for its ASEAN operations.
Taking control of operations in Thailand too
In Thailand, Honda recently took control of its local operations with the establishment of Honda Automobile (Thailand) Co Ltd in 1999, which brought together the previous manufacturing joint venture (Honda Cars Manufacturing Thailand) and the sales/distribution operations. Honda Motor has a 76% stake in the merged company, while Asian Honda Motor has over 15% of the equity and local investors own the remainder. Asian Honda Motor is a wholly owned Honda subsidiary which overlooks the development of Honda’s operations in the ASEAN region. Honda Automobile (Thailand) produced around 38,000 vehicles last year, of which around 33,000 were sold in the local market. The target for this year is to make 53,000 vehicles, including 45,000 for the domestic market and 8,000 for export. A second-shift has been added for the first time since the plant was opened in 1996.
Production is now concentrated at the Ayutthaya plant, located on the eastern seaboard and completed in 1996. It produces the Civic, City, CR-V and Accord models and has a production capacity of 80,000 units – Honda’s largest ASEAN plant. A third shift would bring this capacity to 120,000 units per year. Preparations are being made to begin production of the replacement for the City model, which was originally launched in 1996 as Honda’s Asia Car. The Asian crisis of 1997/98 and its high cost relative to the Soluna meant that the model was never to reach its full potential.
The new model will be based on the Fit platform and has been under development in Japan for some time. Production is expected to start in September, and will be launched in the marketplace later in 2003. It is expected to be exported throughout the region next year, and will replace local assembly in Indonesia. Versions of the model will also be exported back to Japan in the short-term, while capacity remains tight at the home-plant. Honda is expecting costs to be much lower this time, as it ramps up local (regional) content to close to 100%, compared with around 70% for the outgoing model.
Honda’s Thai operations are expected to retain their status as manufacturing “hub” for the ASEAN region. As Honda’s regional strategy is implemented in line with the AFTA agreement, the plant is eventually expected to concentrate on the Civic and City replacement. While Malaysia remains a closed market, Accord production will also continue in Thailand. It is less clear whether the CR-V model will continue to be produced in Thailand, or centralised in Indonesia and produced alongside the Honda Stream. Both models are based on re-engineered Civic platforms.
New plant for Indonesia
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In Indonesia, Honda controls its local manufacturing unit, PT Honda Prospect Motor, and is currently building a new 40,000 plant in Karawang, around 70km east of Jakarta. The current plant in Jakarta will be shut down next spring, when the new plant becomes operational, and production will focus on the Stream, which is selling well at the moment and is on course to exceed 4,000 unit sales this year. In the first four months of 2002, the Stream was by far Honda’s best-selling car model with sales of around 1,100 units. Only around 440 City models were sold in the same period, along with 260 Civics, 428 Accords and 472 CR-Vs. The Stream will be exported to Thailand and the Philippines, as part of its ASEAN complementation strategy. As mentioned above, it remains unclear whether production of the CR-V will be concentrated in Thailand, or Indonesia. But for the Civic and Accord models, Honda will be relying on Thai production.
Disputes with local partners in Malaysia
In Malaysia, where it sold around 5,000 vehicles last year, Honda has also had to sure up its operations after disputes with its local partners. Its best-selling cars are the City and the Accord, but the company is facing increased competition from new entrants such as Hyundai-Kia as well as the usual difficulties that come with operating in a virtually closed market. In 2000, it established DRB-Oriental-Honda, a three-way joint venture to produce and distribute vehicles in which it has a 49% stake. DRB controls 36% of the equity and Oriental Holdings 15%. As in Taiwan, the current Honda plant is switching over to Hyundai production. Capitalised at M$171m, the new company immediately signed off a $45m investment in a new 20,000-unit assembly plant, which is due to come on stream in 2003. The plant is likely to assemble the same range of models – at least until Malaysia’s position in relation to the ASEAN Free Trade Agreement changes. In the event of Malaysia playing a full role in AFTA, then the plant will likely to be switched to Accord assembly only. This is Honda’s best-selling car in this market and the plant will likely be exported to other markets in the region.
