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More automakers are moving into Asean to take advantage of regional integration and challenge Japanese dominance

Workers assemble a Honda Mobilio multi-purpose vehicle at the PT Honda Prospect Motor factory in Karawang, Indonesia.
Workers assemble a Honda Mobilio multi-purpose vehicle at the PT Honda Prospect Motor factory in Karawang, Indonesia.

The growing attractiveness of Southeast Asia as an investment destination for automobile producers is creating a crowded field in which some relative newcomers could challenge the dominance of Japanese automakers in the region.

Although it may take time, Ipsos Business Consulting believes Japanese producers will face increasing competition from the likes of General Motors (GM), despite its recent setbacks, and new faces including Volkswagen.

Volkswagen is planning its first factory in Thailand where manufacturers are gearing up to make more eco-cars, after the German automaker started to assemble its own vehicles in Indonesia in late 2013. India's Tata Motors is also establishing a manufacturing and distribution base for Southeast Asia in Indonesia.

In Malaysia, Great Wall Motor Co Ltd (GWM), China's biggest maker of sport utility vehicles (SUVs) and pickup trucks, has partnered with Go Automobile Manufacturing Sdn Bhd to invest 2 billion ringgit to assemble energy-efficient vehicles in Kedah state.

"Volkswagen has begun to take more concrete steps to enhance its profile in the Asean market with new product launches.  Earlier, the automaker seemed to focus on exporting to Australia and South Africa," said Chukiat Wongtaveerat, consulting manager at the Thai unit of Ipsos.

At the same time, Sweden-based Volvo has completed a 5-billion-baht investment in Thailand, where its Asean headquarters is located, including 2 billion baht to expand its assembly plant in Samut Prakan and another 3 billion to upgrade its dealership network to serve the Asean Economic Community.

Mr Chukiat said all carmakers should benefit from the freer flow of goods in the integrated AEC, among them the Malaysian national cars Proton and Perodua, which have struggled for years to find markets beyond their home base. Malaysia has also attracted investments in electric vehicles that could be exported to other Asean countries.

"By 2016-17, we expect that Japanese automakers such as Toyota will seriously feel this challenge, as Ford and Chevrolet have yet to make this happen due to problems with their networks," he said.

Strong branding, after-sale services and parts supply networks built up over five decades have given Japanese manufacturers an advantage in both Thailand and Indonesia. In Thailand, Toyota held nearly 34% of the market in 2013 followed by 16% for Honda and 15.6% for Isuzu. Toyota has 35% of the Indonesian market with Daihatsu and Suzuki holding 14% each. In Malaysia, Perodua and Proton control more than 50%, helped by strong government support.

Piengjai Kaewsuwan, president of the Asean Automotive Federation (AAF), said that despite increasing challenges, it is quite difficult for other competitors to beat Japanese automakers in the Asean market.

Tata Motors, for instance, has tried very hard to gain a foothold with gas-powered pickups in Thailand, where commercial vehicles and pickup trucks have a significant share, she said.

As well, GM and Ford have been in Thailand for nearly 15 years but have not been able to significantly challenge Japanese brands, said Ms Piengjai, who is also vice-president for government relations at Nissan Motor (Thailand) Co Ltd.

"When individual Thais think of buying a car, the first thing comes to mind is the brand, then price and service if any accident occurs. I think Japanese brands have done well in these areas," she said.

RISING STARS

Currently, the top three automotive markets in Asean are Thailand, Malaysia and Indonesia. While Malaysia has mainly focused on its national cars, Mr Chukiat said production and sales in Indonesia are dominated by multi-purpose vehicles (MPVs).

However, he and other industry executives including Ms Piengjai agree that it will take at least five years for Indonesia to topple Thailand given the weakness in terms of parts supplies and infrastructure.

Currently, Indonesia produces about 1.3 million vehicles a year and it will take three to four years to double the capacity to be on par with that of Thailand, Mr Chukiat said.

"[But] the domestic market of Indonesia is huge while the government has clear strategies to promote the automotive industry. I think that by 2020, Indonesia have the capacity to surpass Thailand as the regional hub," he said.

Ms Piengjai said vehicles made Indonesia were still based on the Euro 2 emissions standard, compared with Euro 4 in Thailand and most developed markets globally.

"It's true that Indonesia can rely on the technologies of the automakers investing there but the quality of fuel and other supporting industries will be the key," she said. "It will take some time for the Indonesian industry to develop its capacity further in this aspect."

Income per capita of Indonesian consumers is still lower than in Thailand, while automakers still need to import parts from Thailand for assembly in Indonesia, she added.

"Infrastructure, mainly roads and logistics networks, in Indonesia are disadvantaged when compared to Thailand. Automakers use Thailand as their production base because they can export easily from Thailand but not from Indonesia."

Mr Chukiat said Myanmar also held promise given strong economic growth of more than 7%. While the AEC will support expanded manufacturing capability in the Philippines as well as domestic car sales as competition intensifies.

"Because Myanmar is a newly opened and emerging market, the AEC will attract a lot of automotive brands such as Toyota. However, it will begin with an assembly plant and take time for the country to become a production hub," he said.

Cambodia, meanwhile, is making its own electric car, the Angkor EV 2014, though the market is tiny and purchasing power low. Vietnam, meanwhile, has yet to reach its potential despite a population exceeding 90 million, because of inconsistent government policy.

"Due to its inability to manufacture automotive parts on its own, lots of the world's leading automotive groups have threatened to leave Vietnam because of the country's weak supporting industries," said Mr Chukiat.

According to the AAF, the region's vehicle production totalled 3.98 million units in 2014, down 10.2% from nearly 4.44 million in 2013. Production in Thailand fell 23.5%, was relatively unchanged in Malaysia but grew considerably in Indonesia, the Philippines and Vietnam.

Asean sales also fell 10.1% to 3.13 million last year from 3.55 million in 2013 with Thailand sales falling 33.7%. Sales were flat in Malaysia and Indonesia but rose in Vietnam, the Philippines and Singapore.

PROMISING FUTURE

Experts see a brighter prospect for the industry this year, thanks to the rising middle class and strong domestic demand in Indonesia, a more stable political situation in Thailand and the expected recovery of the global economy

"The Asean light vehicle market is likely to rebound to 4.3 million units on the back of a recovery in the Thai market and continued momentum of exports," said Jessada Thongpak, senior analyst at IHS Automotive, a specialist in Asean light vehicle production.

Thailand will remain the region's largest production hub given its high quality and diversified capability, while Indonesia will continue to be the largest and fastest-growing market for sales.

By 2020, IHS forecasts Asean's production of light vehicles will reach 5.77 million units, led by Thailand at 3.12 million, Indonesia (1.72 million), Malaysia (716,000), Vietnam (115,000), and the Philippines (100,000).

Although total sales in Indonesia slipped 1.8% from 2013 to 1.2 million units last year, the country overtook Thailand as the largest vehicle market in Asean.

"Indonesia has a huge market for cars due to its population and the rising middle class," said Mr Jessada. "Most Indonesians want to buy MPVs and LCGCs so the production portfolio there is still limited there but sales growth is for the long term and sustainable."

The surge of investment in low-cost green cars (LCGCs) and multi-purpose vehicles (MPVs) in Indonesia through new plants helped double capacity in just two years, to nearly 2 million units in 2014.

The government introduced the LCGC programme, the local equivalent of the eco-car, in September 2013 with tax incentives to antomakers that meet fuel-efficiency requirements.

"LCGCs and MPVs will continue to drive positive output in Indonesia," said Mr Jessada. "The strategy for automakers in Indonesia is to produce vehicles mainly for the domestic market."

He expects the demand for LCGCs in Indonesia to increase further this year as they are not subject to any excise tax. Last year the country produced almost 200,000 units of the small cars.

May Arthapan, director of LMC Automotive, agreed that the Indonesian market still had huge potential for growth given the improving economy, low car ownership and rising income per capita.

Motor vehicle ownership in Indonesia, according to the World Bank, is 69 in 1,000 people, compared with 172 in Thailand, 151 in Singapore, and 378 in Malaysia.

Frost & Sullivan projects Indonesian vehicle sales to reach 1.27 million units this year, up 5%.

IHS's Mr Jessada said that as the Indonesian industry had expanded rapidly over the past five years, its production cost had become competitive with greater localisation and higher quality of labour.

"Automakers in Indonesia can utilise capacity for exports, especially for the passenger cars to emerging markets and light commercial trucks to other markets," he said.

Still, there are several limitations when it comes to large-scale exports, notably low-quality products due to poor infrastructure development.

"Infrastructure in Indonesia is not as well established as in Thailand and the country needs much more time to develop. It will not happen overnight as seen in China," said Ms May.

For the industry in Asean to expand further more collaborative efforts are needed among member states, believes George Svigos, GM's director of corporate affairs.

"It is important to look at Asean as a region, rather than focus on any individual country. It's important that Asean members continue to look at ways to facilitate the intra-regional automotive trade to give the industry scale required to compete globally," he said.

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