The Future of Automotive in The AEC Era
About a decade ago, ASEAN started emerging as an attractive hub for automotive manufacturing. Lower production and transportation costs have motivated most auto makers to move their factories to ASEAN.
Total production in this region is expected to grow at 8% Compound Annual Growth Rate (CAGR) to a total of 7.05 million units by 2019 (Frost and Sullivan). Present-day, Toyota is the largest car manufacturer in this region with market share of 12.9% in volume.
The coming of the AEC era will change the face of automotive industry as we know it. We will see inter-country tariffs eliminated hence, we can predict that in AEC era, auto-makers will concentrate their investment in a few countries and export cars from these few countries to meet demand of the whole South East Asian region.
This will allow auto-makers to afford lower cost of production from economies of scale. Therefore, it is critical that we analyze which countries are most likely to be the automotive production hub in the AEC era.
We will focus on manufacturing based countries such as Thailand, Indonesia, Malaysia, Philippines and Vietnam. The attractiveness of the production base depends on factors such as production capacity, government scheme, labour availability and current export volume.
The popularity of Thailand as an automotive hub arises from it’s strategic location, being the gateway to all of Asia. It’s key success factors are low cost production, transportation and labour costs.(Business Monitor International, 2014)
Giving it the name, “Detroit of Asia”.
According to the Federation of Thai Industries, car production for the first 10 months of 2013 came in at 2.12 million units, an increase of 7.1% year on year (yoy). It is the largest production base in the region due to consistent economic and industrial growth in 2014.
The automotive sector is vital to Thailand’s economy, being the second largest export industry after computer parts and components.
It’s attractiveness as a production base arises from government allowing 100% FDI ownership in this industry (Bangkok Post, 2010).
Hence making it popular for Japanese giants. The country has business friendly government, strong supplier presence for automotive parts, and efficient infrastructure creating a preferred automotive ecosystem for Japanese car manufacturers.
Since more than a decade ago, the policies on automotive industry set by the government has been consistent with making it an automotive hub for passenger cars by promoting its manufacturing and export. The government fostered hub, creates an environment where auto part makers and suppliers are located within close proximity to production sites creating clusters, allowing enhanced communication and improved flow of goods. Further, Thailand’s long experience in automotive manufacturing has equipped the country skilled labour allowing it to manufacture high quality automotive parts, being ranked as one of the best suppliers for automotive parts in ASEAN region.
Today, the passenger car market is dominated by key Japanese players such as Toyota, Honda and Nissan which accounts for a total of 72% of the market share by end of 2013 (BOI, 2014). In the first phase of the eco-scheme, automakers for eco cars manufacturers get to enjoy exemptions from corporate tax and machine import duties as well as get 90% reduction in import tax for raw materials and finished parts. Nissan, Mitsubishi, Honda and Toyota took part in the first scheme.
The second eco-car scheme which came about March this year had attracted additional members including but not limited to Ford. In this scheme, they enjoy benefits such as exporting car tax-free to Indonesia and using Thailand as a low cost production base to export to other parts of South East Asia including Europe and U.S.(BOI, 2014)
The government gives permission to bring in foreign experts and technicians ensuring a lenient visa process for foreign expat employees. Further, there are no restrictions on export, local content and location requirements.
Apart from being production base for passenger or eco-cars to cater to local demand,
Thailand’s automotive export accounts for 50% of the manufactured volume with value of 800 million THB (26.7 billion USD).
Although Thailand had experienced weak demand in some export markets in the recent year, automotive manufacturers are shielded from this decline due to their well-diversified export locations. For instance, Mazda is using Thailand as a production base for cars to be exported to US since 2013. Therefore, showcasing Thailand as a potential global automotive export hub.
Besides Thailand, Indonesia is the most attractive automotive production base and
Indonesia has potential to be the next “Detroit of Asia”.
Although a late mover, it became an appealing hub for automotive manufacturing due to recent removal of foreign ownership restrictions and decreased import restrictions on auto parts. The market size for car production is much smaller than in Thailand but it’s passenger car production grew rapidly in the past year at 13.4% in 2013 to over 1.2 million units. (Business Monitor International, 2014).
The current hype in visioning Indonesia as the next automotive base is it’s rapidly growing domestic demand and low skilled labour wages in comparison to Thailand and Malaysia. Key drivers for the fast growing demand of passenger cars in Indonesia arises from large population of 240 million, increasing number of middle-class drivers, rising per capita income levels and most importantly, it’s poor public transportation system. This calls for a need for the middle class to invest in their own form of transportation. Therefore, Indonesia has the fastest growing domestic demand for passenger cars in South East Asia.
Today, large Japanese passenger car manufacturers located in Indonesia are Honda, Daihatsu and Toyota. The Indonesian Government has introduced the Low Cost Green Car (LCGC) scheme attract big automotive players and to increase their production for domestic and export market. The LCGC scheme promotes the production of small, cheap, fuel efficient and low emission cars which is similar to the eco-car concept in Thailand. The scheme was introduced in 2013 and the regulation states that passenger cars manufactured complying with this scheme will enjoy 25% tax cut if they run 20 km on a single litre of fuel, 50% tax cut for 28 km per litre and 100% tax cut if they manage more than that.
It is expected for dominant players such as Toyota and Daihatsu to have first-mover advantage as they already have models waiting to be released for this scheme. Tata Motors and Mazda have also announced that it plans to use Indonesia as an export hub for their cars. Due to motivation from LCGC scheme, passenger car production exceeded domestic sales for the first time in five years. The government has encouraged export of these cars to other parts of South East Asia but it has lesser appeal as a passenger car manufacturer and exporter in comparison to Thailand. This is because of less aggressive policies and it lacks supply chain investments for automotive. Although export of automobiles reached 200,000 in 2012 and is expected to be 30% of cars manufactured, Indonesia needs to develop it’s supply chain for automotive fast.
Although an exporting country having sold to more than 30 other countries, it’s biggest deficiency for automotive export is still it’s underdeveloped port infrastructure. Despite inadequate facilities for export of passenger cars, there are still some examples of export from Indonesia where Toyota Motor began exporting cars to Philippines and Middle East. However, Indonesia is not capable of exporting large volume and benefiting from cheap manufacturing and labour costs afforded from economies of scale. In comparison with Thailand, it will still be lagging behind in export of passenger cars.
The rapid surge in domestic demand for passenger cars in Indonesia will make up for the lack in export and make it appealing for a car manufacturing base.
In the short-term it is doubtful that Indonesia could attain the leading position for automotive manufacturing in ASEAN. The biggest short-term obstacle is it’s deficient car export infrastructure. Nonetheless, if Indonesia rapidly develops its export infrastructure, it has great potential to be the next “Detroit of Asia” surpassing Thailand.
The market size on car manufacturing is small compared to regional neighbours such as Thailand and Indonesia. Passenger car manufacturing in Malaysia showed a growth of 6.7% to 543,892 units in 2014. Although Malaysia has shown an interest in automotive industry before competing countries, its protective mechanism for it’s local automotive companies such as Proton and Peradua has caused it to lag behind in production volume and export volume.
Proton and Peradua have long enjoyed preferential treatment from the government due to high tariff on imported cars.
This prevented Proton from improving it’s technology hence, lagging behind international competitors. Till today, Malaysia’s production volume has not increased beyond it’s market demand and imports have had to satisfy much of their local demand for passenger cars.
The National Automotive Policy 2014 (NAP 2014) by the Government aims for Malaysia to be the hub for energy efficient vehicle (EEV) hence, local production of both hybrids and electric vehicles are encouraged. A first scheme targeted at both foreign and local automotive companies, it is the first clear step the Malaysian Government is taking to liberalize the automotive industry. Japanese automakers such as Toyota is expanding it’s operations to launch a third plant in Malaysia and is a joint venture with Japan Toyota and Malaysia Toyota. They will assemble and manufacture in Malaysia.
The NAP scheme and Malaysian skilled labour in automotive is expected to make it an attractive base for green vehicle production in the country. The scheme allows tax exemption for local and foreign companies alike for all locally assembled hybrids till end of 2015 and for locally assembled electric cars till end of 2017.
The government aims to achieve annual exports in excess of 250,000 cars by 2020 with the introduction of this scheme.
The intention is to boost the country’s position as an export hub with NAP policy, as the Malaysian government have gauged that there is more benefit to be realized from locally manufactured cars rather than import expensive cars from neighboring countries to satisfy the demand.
It was only a matter of time before the government had to liberalize it’s automotive industry and allow Proton and Peradua to compete with international competitors. With the NAP scheme in place, Malaysia car production is expected to grow faster than domestic sales by 2018. Therefore, export from Malaysia is not going to be limited to Malaysian passenger car brands but international competitors as well.
Philippines is a “laggard” among 5 car manufacturing ASEAN peers with Vietnam following closely behind. Passenger car production capacity was at 46,390 units with growth at 1.4% (year on year). Nevertheless, the untapped potential from low penetration in car ownership and increase in number of middle class spenders means there will be growth in domestic demand for cars for at least a few years.
A country with the second highest energy cost in the world and with FDI foreign ownership limited to 40%, it has attracted smaller percentage of manufacturing intensive businesses in comparison to its peers. Despite many discouraging factors for foreign investment, the Japanese automotive giants in Philippines are there to stay due to surging domestic demand for cars and because of the FTA agreement with Japan.
The key reason for Philippines falling behind it’s peers is the lack of national policies for the automotive sector.
ASEAN car manufacturers such as Thailand, Indonesia and Malaysia already have well-established national policies to incentivize car production but Philippines has yet to set such policies. Although there have been updates that the government is going to issue strategic policies to increase Philippines competitiveness on being an automotive hub, the issuance of the policy has been delayed. For this reason, there is still potential for Japanese investors to increase production bases but they are waiting for a clear industry policy to boost their confidence and increase production capacity in Philippines.
Regardless, the news update on such policy issuance in the near future has lead Toyota and Mitsubishi to set up bases for automotive parts and assembly in Philippines. This shows that there is potential for Philippines to at least be a production base to cater to the local demand. As for being an exporting country for cars and parts, Philippines has too much catching up to do. In fact, it’s domestic demand is still being catered to by import of cars and parts from Thailand and Indonesia.
Vietnam automotive production is very much at the infant stage with 5,870 units in 2013, a 40.7% growth from last year. Similar to Philippines, the attractiveness of locating automotive production base in Vietnam arises from less penetration in vehicle ownership. The country with fast growing middle and affluent class in ASEAN, the population of these potential consumers for the automotive Industry is expected to rise from 12 million to 33 million between 2012 to 2020. Moreover, with 50% VAT reduction on passenger cars, there is a boost in sales in 2014 in spite of the decrease in GDP growth this year.
Despite Vietnam’s attractiveness in many industries due to it’s cheap but skilled labour, there is lack of incentives for automakers to locate production base in Vietnam due to several critical factors. Firstly, the domestic supplier industry for automotive parts is not at all developed. Secondly, automakers are required to import very expensive parts due to high import tariffs on automotive parts to support assembly of passenger cars. Thirdly, while all neighbouring countries have already had their passenger car incentive scheme,
Vietnam has yet to have a national scheme to incentivize manufacturing of automotive.
Lastly, the most important is investment policy whereby Vietnamese government should offer incentive such as tax breaks for automotive manufacturers to attract FDI into the country. While there is a range of incentives that Vietnam must work on to promote automotive companies to set up production base in Vietnam,
Vietnam has to cut bureaucracies in doing business.
Hyundai Motor has stopped the construction of manufacturing factory as the government has yet to give license for Euro 2 and 3 engine production which has taken an unnecessarily long amount of time. Vietnam has yet to work on being a production base for cars hence, it is not capable of being an exporting country for cars for at least a few years.
The arrival in AEC will certainly cause drastic changes to many industries in member countries due to free flow of goods and services. Particularly in automotive industry, car manufacturing base will be concentrated in few countries with the most potential and lowest cost of production. Illustrated in Figure 3, in comparison to all countries, Thailand’s passenger car production output is more than half of the whole ASEAN output. Although Indonesia is the second highest car manufacturing country, it manufactures half of what Thailand manufactures.
Illustrated in Figure 5 is the analysis and comparison of all countries on critical factors required to be the no.1 automotive hub in ASEAN. In this study, all factors are assumed to have an equal contribution to making a country the no.1 automotive hub.
Thailand currently has the upper hand in being an automotive hub for passenger cars with highest overall score. It continues to retain a competitive position by balancing local sales and export. On the contrary, Indonesia secures second position and follows Thailand closely but falls short in export of passenger cars because of its underdeveloped port for export. It concentrates on local driven sales and inflow of foreign investment in automotive industry. Therefore, it is highly appealing for Japanese automotive to locate their manufacturing base.
On the other hand, Malaysia is ranked as the third most appealing for automotive. It has been lagging behind because of the delay in liberalizing it’s automotive industry due to its attempt in protecting it’s national car brands Peradua and Proton. Next is Philippines which is playing catch up on automotive industry. The disadvantages for Philippines as an automotive manufacturing hub are high electricity costs, lack of an attractive government scheme for car makers. and it’s 40 percentage ownership allowance for foreign direct investment also decreases it’s attractiveness for foreign car makers. Despite, being known for it’s workmanship, Vietnam is not appealing as an automotive hub. It’s production capacity is very much at the infant stage and it does not have automotive parts supply network for automotive car makers. Equally important, it is not appealing as an automotive assembly hub due to it’s high import tariffs. Currently there are no support systems and government schemes in place to promote Vietnam as an automotive hub. Overall, the leading AEC country for automotive manufacturing and export is Thailand.
Thailand secures a number one position with Indonesia following closely behind.
It is expected that these two countries will be the automotive hub in the AEC era. However we expect to see Indonesia continue to fall short in export in comparison to Thailand in the short-term. This is because of it’s underdeveloped export infrastructure.
This is because it has low cost of production and lower defect to total production ratio than Thailand. For Thailand to continue securing it’s number one position as an automotive hub in the long-term, it has to continue to be aggressive and consistent in government policies like in the past.
“DETROIT OF ASIA"?
Thailand must continue to be aggressive in factors such as investing in production capacity expansions, schemes to promote export and local demand, development of skilled force for automotive and parts, and continuous development on automotive component industry. Furthermore, to get ahead Thailand must also start investing in R&D to adopt technology in manufacturing in order to manufacture innovative cars and differentiate itself. In terms of strategy,
Thailand cannot sustain competitive advantage in the long-term future in terms of economies of scale
This is because it has higher cost of production than Indonesia. it is recommended to compete by being first mover with highest production capacity and it has to develop itself to compete by differentiation strategy.
Therefore, the key success factor for Thailand to continue being “Detroit of Asia” is to be the country with the highest production capacity, export capacity and differentiation strategy by adopting latest technology and innovation in automotive manufacturing.
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