ASIA IN DEPTH
A rising middle class and growing economies have driven tremendous growth in the Asian auto industry in the last 10 years. Vehicle sales in Asia Pacific reached 30 million units in 2011, with sales growing nearly 13% annually between 2000 and 2011.
These figures are even more impressive when compared to negative growth in North America and just 1% growth per year in Europe.
The rising trend of auto sales in Asia will continue for at least the next eight to 10 years on the back of this expanding middle class. Potential car buyers in most countries in Asia — here defined as the number of households with annual disposable income over $10,000 — are forecast to grow at a more than 5% annual rate between 2012 and 2020.
In Asia, countries that will enjoy a double-digit compound annual growth rate (CAGR) in the number of potential car buyers are China, India, Indonesia, and Vietnam. By way of contrast, annual growth rates for developed countries are projected to grow slightly less than 2% during the same period.
In addition, current low levels of car ownership per capita indicate a high potential for growth in demand for vehicles in China, India, Indonesia, and the CLMV countries (Cambodia, Laos, Myanmar, Vietnam).
Despite historically high growth in auto sales in Asia, there is still room for further expansion. China, with the world’s highest number of vehicle sales (18.5 million units in 2011) has a passenger car to population ratio of just 56, even lower than that of Thailand (at 63) with an economic growth rate half of China’s.
Given ratios above 250 in the developed countries in Asia, e.g. Taiwan, South Korea, Japan, Brunei and Malaysia, car sales in the Asian developing countries have substantial room for further growth. In 2011, the ratio of passenger cars to thousand population was 40 in Indonesia, 16 in India, 9 in the Philippines, and 13 on average in the CLMV countries.
There is broad passenger car segmentation among Asian countries, and the trend is changing due to different factors. Environmentally concerned consumers are driving hybrid and electric auto sales in Japan. In May 2012, 19.7% of the new cars sold in Japan were hybrid cars — representing a leap of 11 percentage points compared to the previous year.
An increase in image-conscious buyers has led to a hike in vehicle imports in South Korea on the back of reduced prices thanks to a free trade agreement with the US and the EU. While sales of domestic cars showed signs of decline for the first time since 2008, the share of new imported vehicles rose to 9.5% in 2012 compared with less than 3% before 2004.
Malaysia is welcoming more global brands after uncompetitive local brands have long owned a large market share of vehicle sales. Indonesia prefers multi-purpose vehicles (MPV), which enjoy as much as a 70% market share. In Thailand, government tax rebates for first-time car buyers generated massive growth in small- and eco- car sales last year.
While the bright outlook for demand is clear, the players on the production side are also changing. There are three trends in Asia to point out here:
First, the major players, i.e. Japanese automakers, have a clear direction to focus on next-generation vehicles, including hybrids, plug-in hybrids, electric vehicles, and fuel-cell powered vehicles, along with changes in domestic demand. While production of passenger cars in Japan has gradually declined by 1% annually since 2005, that of next-generation vehicles — i.e. hybrid, plug-in hybrid, electric, and fuel-cell powered vehicles — is set to move from a 20% market share today to around 40% by 2030.
Second, increasingly intense competition in the Asian auto industry is expected, as there are now more players. China and Cambodia are newcomers that have originated their own brands. Cambodia is only at the infant stage in launching its locally designed and assembled electric-powered car last year. At least three companies in China — Changan, SAIC, and Dongfeng — have enjoyed a CAGR above 15% in the past five years.
Finally, Asian automobile brand owners are expanding overseas production. Massive investment by Japanese auto makers is evident in Asia countries with low car ownership ratios, ranging from China, Indonesia, and Thailand, to India.
Despite a high car ownership ratio in Malaysia, Japanese automakers foresee potential demand for hybrid and electric cars, and Honda has announced production plans for its Jazz Hybrid in its Melaka plant. In 2011, overseas production by Japanese carmakers contributed to a 61% share of total global production, jumping from a 48% share in 2004.
Likewise, Hyundai and Kia of South Korea produced slightly more than half of their cars overseas in 2012, compared to just 15% in 2004. Tata of India is following the same path. Chinese brands are also heading outbound, not only for export markets sales but also to expand overseas production. The Chinese automotive firm SAIC is planning to produce cars in eastern Thailand.
What about Thailand? As a major production base in Asia, the country is likely to benefit from this trend, as is Indonesia. Foreign direct investment (FDI) in Thailand for the first 11 months last year recorded almost 100% growth, amounting to 434 billion baht (US$14 billion), 66% from Japanese firms that heavily invest in the auto industry.
While a stronger Japanese yen partly contributed to funds pouring out of Japan, surging domestic demand for small and eco-cars in Thailand is obviously a key driver. This implies a need for a stronger supply network, but also increased competition among auto parts producers.
In 2012, Indonesia welcomed approximately $20 billion in FDI, and this figure will continue to grow. Toyota, currently enjoying a 60% market share in Indonesia, plans to invest a further $1.7 billion over the next five years. Despite a poor infrastructure, domestic demand for cars from an increasingly affluent population in Indonesia is attractive. As many as 6 million more units would be required just to equal Thailand’s car ownership ratio.
In addition to its large pool of auto parts suppliers, shared borders with CLMV countries are another advantage for the Thai auto industry and will support its likely strong growth under the Asean Economic Community (AEC). The AEC will make Asean a single market with a 0% tariff rate, eliminate non-tariff barriers, and facilitate custom procedures and transport infrastructure.
As the need for marine transport is still an obstacle to Indonesian competitiveness, facilitated land transport under the AEC would be beneficial to auto and auto parts makers in Thailand in growing CLMV markets. Myanmar, for example, with a population of 60 million people, has experienced almost 20% annual growth in registered vehicles over the last 10 years, and will incrementally liberalise its car import policy.
Hybrid and electric cars should be our next focus. The world is not running out of oil and gas, but it is running out of time, taking into account global warming issues. While conventional gas reserves declined to 21 trillion cubic metres (tcm) in North America, Central Asia, China, and the Asia-Pacific region, shale gas has added around 280 tcm to fuel reserves.
Therefore, environmental issues, e.g. an increase in temperature globally, recently have become more influential factors in automotive technological development, especially for parent companies of the auto industry in Thailand. Thus, it is important that Thai businesses prepare for such a direction.
While untapped demand is huge in Asia, its auto industry is changing in response to various demands on the back of technological advances. Without our own brand, remaining competitive in terms of production efficiency under the changing circumstances will be a key determinant for the entire Thai auto industry in the future.
Thailand can no longer rely on low labour costs, but must upgrade technology, develop R&D activities, and enhance the skills and capabilities of its labour force.
EIC, a unit of Siam Commercial Bank Public Company Limited, offers in-depth macroeconomic outlook and sectoral impact analyses. For more information, please visit www.scbeic.com or contact firstname.lastname@example.org