The growing Asian automotive market

The growing Asian automotive market

Global markets are increasingly seeing strategic shifts in the auto industry dictated by local politics, unstable economies, high import taxes and other protectionist policies. But such volatile fluctuations are not always bad news. Many markets are benefiting from a new willingness on the part of local governments to engage in regional and international trade pacts. Such trends have left a mark on Asia, the world's No.1 automotive growth market, where domestic car-makers are often subjected to unpredictable outside forces. While some markets continue to suffer economic woes, others, such as the Association of Southeast Asian Nations (ASEAN) region, are becoming more unified through trade pacts. China has taken the boldest step, becoming fully integrated into the global economy through its membership in the World Trade Organization. Japan, the world's second-largest auto market, is perhaps the worst off of the industrialized nations. The domestic auto industry has languished against a backdrop of recession and political upheaval. Japanese Prime Minister Junichiro Koizumi has fired his entire cabinet under criticism that he had failed to fix the economy. Such moves have done little to inspire consumer confidence. Domestic auto sales, already depressed for several years, remain flat, but the larger auto-makers have seen gains. Much of their strength is due to success in the U.S. and strong inroads in Europe, thereby ensuring profits for the three big Japanese auto-makers  — Toyota Motor Corp., Honda Motor Co. Ltd. and Nissan Motor Co. Ltd. — in spite of the long-suffering home market. Toyota's domestic sales were up 5.8% and Honda sales rose 11.2% year-on-year through August, while Nissan remained flat. Mitsubishi Motors Corp. slid 38.8% in the period; Mazda Motor Corp. fell 14.9%. Japanese auto-makers, soured by their home market and seeking greener pastures, will raise production outside of Japan by 3.6 million units by 2007, according to forecasts made by Ashvin Chotai of DRI-WEFA Inc. As a result, North America will benefit, as will the ASEAN region.

Thanks to the ASEAN Free Trade Agreement (AFTA), car makers are flocking to the four main markets: Thailand, Malaysia, Indonesia and the Philippines. The trade pact, which takes effect in January, cuts tariffs to less than 5%. (Malaysia is holding off implementation of the reductions for two years to give It’s national auto-maker Proton equal footing.) Forecasts point to the region as one of the world's fastest growing auto markets, spurring auto-makers to increase their investments. ASEAN plants are increasingly being used as an export base to other Asian markets and to Europe, thus shielding car manufacturers from local market volatility. Toyota has shifted production of its Hilux pickup truck from Japan to Thailand, while Honda has made ASEAN central to its new global push, establishing transmission operations in Indonesia and committing more resources to another transmission plant in the Philippines. About 30% will be exported to Europe. Honda has built a new plant in Malaysia, completed in 2003, as part of a plan to grow global sales to 20 million annually, largely through expansion in Asia. Honda’s new $45m plant should provide competition for Proton. Malaysian Prime Minister Tun Dr. Mahathir Mohamad welcomed the launch of Honda’s Motor production facilities in Malaysia, which is situated in Malacca, but was worried about the competition offered to the national car-marker Proton. The vote of confidence by Japan’s number two carmaker came as Malaysia struggled to maintain foreign direct investment (FDI) flows, which dropped 41 percent in 2002 on the year to 11.2 bn ringgit ($2.9 bn).

The 170m-ringgit plant has the initial capacity to produce 20,000 units per year for the domestic market. But what may help FDI flows may not be so good for Proton, which won a controversial two-year delay to opt out until 2005 from car import tariff cuts agreed by Asean. Mahathir told reporters, after the official opening of the Honda plant in the southwestern state of Malacca, that there were pros and cons of opening up, saying that Malaysia has problems with It’s own national car which none of the other (Asean) countries have. He added that Malaysia had It’s own plant and that theirs was a high-cost car because the volume was not big and that they did not have their own research and development (R&D). He said that Malaysia would need the level of competency by 2005. 

Foreign car manufacturers and Malaysia’s Asean partners have bridled at the waiver, which Mahathir said was essential to allow Proton time to prepare for liberalisation.

Malaysia has the region’s largest auto market and closely guards its national car industry, slapping duties as high as 300 percent on imported vehicles. It’s new vehicle sales jumped nearly 10 percent to a record 434,954 units in 2002, driven by low interest rates and the launch of new models, though growth may splutter as buyers wait for prices to fall once the waiver expires. Whether that happens depends on yet-to-be revealed government plans to replace car tariffs with excise duties which Mahathir said would keep car prices at current levels after 2005. Industry analysts have predicted that Proton, Malaysia’s biggest-selling car with a 60 percent share of the market, would have a hard time competing against tariff-free Asean imports. Top global carmakers such as General Motors, Ford, BMW and Daimler Chrysler have set up base in Thailand to take advantage of the Malaysian market after 2005. Under AFTA, cars made by non-Asean producers must have local content of only 40 percent to enjoy preferential import duties.

Honda’s new factory in Malaysia will act as an important focal point for Honda in Asean. According to Katsuro Suzuki, senior managing director of Honda Motor, Honda is increasingly recognising the Asean market potential, with Honda officials adding that the company plans to double the new plant’s capacity to 40,000 units for exports to other Asean countries when Malaysia’s opt out expires. Honda Motor has a 51 percent stake in the Malaysian unit, while local firms DRB-Hicom and Oriental Holdings own 34 percent and 15 percent respectively.

Thailand has long attracted auto-makers, while Malaysia and Indonesia have frightened off many investors due to political instability. In the post-AFTA economy, the Philippines stands to gain the most due to the fact that Ford Motor Co. has increased investment there as a future auto-making hub for ASEAN, while Toyota recently announced plans to build a plant for its Asian Utility Vehicle.

The Philippines government has been coaxing along its auto industry through a strategy of market expansion and product diversification, recently urging parts makers to begin exports to the European Union. Such cooperation from governments is leading some analysts to argue that ASEAN may eclipse China on the global automotive front. ASEAN, like China, offers cheap labor and a central Asian location but traditionally has been more cooperative and doesn't require domestic partners. China, however, does not need to worry, as the country has been flooded with activity, seeing early results of its WTO membership. The major Chinese domestics are now reaping the rewards of operating on a global playing field, as the country braces for a much anticipated industry consolidation.

According to DRI-WEFA, 45% of forecasted production growth in Asia over the next 10 years will be in China, as will 40% of total sales growth, which would put China ahead of South Korea in global sales and on the brink of surpassing Japan. General Motors Corp. is particularly bullish on China, since more of its vehicles have sold there in September than in Germany, the world's third-largest vehicle market. Paul D. Ballew, General Motors executive director-global market and industry analysis, predicts that China will see a volume of 5 million to 6 million units annually by the end of the decade.

Honda, for instance, has revealed plans for a second plant in Guangzhou to produce subcompact cars for export. Some view the move as a way to secure approval for a larger plant, targeting both domestic and export production. Honda, one of the few auto makers in China operating above break-even, already has more than doubled initial capacity at its first plant, which produces the Accord and Odyssey models with Guangzhou Automotive Group and Dongfeng Motor Corp. Toyota has linked with China’s no.1 auto maker First Auto Works to begin production of it’s Daihatsu minicars and Toyota SUVs. Toyota, which also builds a subcompact, has a sales and production target of 300,000 to 400,000 units annually by 2010. Nissan plans to expand a truck-making venture with Dongfeng, and Hyundai Motor Co. Ltd. is teaming with Beijing Automotive Industry Corp. to build up to 500,000 cars by 2010. In all, 26 foreign auto-makers have been licensed to produce vehicles in China. Total vehicle sales are forecast to rise 20% year-on-year to 2.95 million, while passenger car sales will comprise 1,070,000 of the total — up 30%. More than a third of car sales are to private owners, indicating the beginnings of China's middle class.

VOLVO Car Malaysia Sdn Bhd is expecting 25% to 30% growth for Volvo passenger cars in 2003-2004 based on the present economic situation as well as the launch of its customer-friendly “Care by Volvo” campaign. The campaign, rolled out recently worldwide and for the first time in the region in Malaysia, will focus on three key points at this stage – assistance for owners in case of breakdowns, a three-year warranty for all cars registered from Jan 14, 2003 and price discounts on almost 500 spare parts with savings averaging 30%. According to Volvo Car Malaysia Marketing Director Pang Cheong Yan, Volvo expects the campaign to have an impact on sales in the current competitive environment, but more than that, this campaign is for the long-term, to improve desirability and being new, only expects an impact on the bottom line at a later date. Volvo cars are segmented in direct competition with luxury car marques Mercedes-Benz, BMW and Audi, and are ranked third in market share after Mercedes-Benz and BMW. Pang said that this campaign was the result of efforts to bring all aspects of the brand's customer care attitudes and focus under a single umbrella, adding that it was about building a relationship with Volvo's present and potential customers. The programme, available in peninsular Malaysia, Singapore and Thailand for now, comes in two forms: the gold and silver packages. The gold package is provided free to new Volvo car buyers while owners of Volvo cars less than five years old can also join as gold or silver members. With the gold package, members get three years warranty as well as discount on parts. For road assistance though, Volvo owners can expect a level of service that involves the company taking the initiative to ensure the stranded motorist arrives at his or her destination and returning the repaired vehicle at a destination of choice. This extends to flying the motorist to the final destination or putting them up at a hotel if the repairs take overnight to complete and finally sending the car to any destination requested. Volvo Cars Malaysia, owned by the Ford Motor Co through Volvo's parent company, sees Malaysia as a strategic and important market and intends to use the campaign to build a long-term relationship with customers, with Volvo's 100% ownership of its assembly plant as a long-term commitment. Pang said that this was only the first stage of the campaign, and the company, which intends to highlight it via print advertisements and direct marketing efforts, added that Volvo’s vision is to be the world's most desired and successful premium car brand. 

As regional markets in Asia begin to recover, the BMW brand consolidates at last.

A year ago, Luder Paysen, BMW Group's vastly experienced director of overseas sales, used some strong words to encourage on-time implementation of the AFTA 9the ASEAN Free Trade Area. He cautioned that any delay in making a common market a reality would undermine economic progress and discourage BMW from adding to its investment in production capacity in Thailand. Regional sales continue to recover and, although planned expansion of the Thai factory, due to begin production in March, still depends on increased trade liberalization under the ASEAN Free Trade Agreement (AFTA), it is not the only regional project BMW has its eye on. Paysen recently told AutoAsia in Singapore that the economic problems have created difficulties for ASEAN countries and they may want to maintain protective measures for a while longer. If AFTA is delayed, it would have implications for additional investments in Thailand but he also forecast rapid increase in demand for BMW cars there, so even if AFTA took a while longer, the domestic market should be able to soak up all the production. Paysen contended that the Thai facility, designed to be easily and rapidly expanded, puts BMW in a good position to move fast when AFTA comes into effect. In the meantime, the company would continue to use third party capacity at four CKD factories in South East Asia. The man in charge of the US$25 million Thai plant, Jesus Cordoba, said that there were no plans to export any of the 10,000 units pencilled for production over the next 12 months. He was confident the new 3-series would go down well and give BMW a significantly greater share of the luxury segment than the 33.76% it achieved in 1999. But the 3-Series would not be the only model to be produced in the first phase. BMW also finalized studies on a second model to be put on the line before the end of 2000. With local assembly of the Land Rover Discovery II turbodiesel having started in Malaysia in September 1999, it was widely rumored that Thailand would make a petrol version of the same sport-utility. Cordoba notes that other models, including the Land Rover Freelander and Rover 75 were also in the frame. Within the past 12 months, BMW finally unified its five brands under the 'BMW Group' umbrella. This complex integration began, naturally enough, in Europe but has now rapidly taken shape in Asia too. Paysen liked the consolidation because he could present the BMW Group as a full line manufacturer turning out just about every conceivable type of private passenger car, from a basic Mini to a Rolls-Royce. According to Paysen the brands would continue to be strong and independent, but the process would open the door to synergy savings behind the scenes and shared dealerships making sense in many cases in Asia. A global concept called the 'Group Solus' has been introduced for Asian retail channels allowing dealers to offer all the brands in the BMW Group and consolidate after-sales support. The integration process, Paysen added, was not as difficult as it seemed. He said that they were fortunate that 10 of the 17 importers they had in Asia already handled most of the BMW Group brands. In Malaysia, for example, the Land Rover and BMW franchises have been held by different subsidiaries of the Tractors Malaysia group since the late 1980s. Land Rover sales operations have been integrated with those of Auto Bavaria, the BMW sales unit, although Land Rover Malaysia will continue to handle government sales. But BMW has taken on board the lesson that they have to act locally in diverse Asian markets and where there happens to be very strong dealers for each brand, dualling would not be mandatory. He said that there was flexibility in the Group Solus concept but expected to implement it in most of their Asian markets. 

The integration process in Japan has been quite sensitive, for Rover, nurtured through to success by Peter Woods, has had a strong presence on its own account. Ottmar Sensfuss, senior director of the marketing group of BMW Japan, explained the situation to the Rover Japan staff and offered voluntary separation benefits. About one-third of them accepted the offer by the time they made the transition in October 1999. But Group Solus would take a while to be fully implemented in Japan because they have to carefully review each dealer's situation. Paysen was pleased with the progress in what was BMW's highest volume Asian market. He actually expected more resistance to his plan. Not so long ago, voluntary separation would not have been acceptable in view of the country's 'life-time employment' promise. Sensfuss was optimistic about the outlook for Japan in 2001 as indicators suggested a 2.1% increase in passenger car sales. To maximize sales in a highly competitive environment, the company introduced the Z8, 3-Series cabriolet, X5 and Land Rover Freelander during that year. 

In both South Korea and China, BMW expected limitations to persist as a result of government policies and non- tariff barriers. BMW Korea president Karsten Engel regarded his market as comparable to Japan a couple of decades ago, when selling imported cars was equally difficult. He believed that change was coming but it would still take time. The mind-set of the Korean customers was still somewhat resistant to ownership of foreign cars and the market was still the most protected in the world. BMW captured a 40% share of the tiny imported car market import cars sold but Engel was less than pleased by this dominance. He remarked that it was not good because it meant that other imported makes were not active enough and therefore, did not have enough companies to exert influence on policy makers. Engel felt that much could be done by the Korean president, Kim Dae-jung, who was a strong proponent of economic reform and liberalization, hoping specifically for positive statements when Kim opened the Korean Import Car Motorshow in May. Change could be accelerated if either General Motors or Ford acquired cash-strapped Daewoo Motor. Engel believed that when the fate of more than 50,000 Korean workers was at stake, a more liberal, pro-foreign automotive policy would fall into place quickly. BMW hadn't made much progress in China despite on-going talks to establish a production base there. Paysen confirmed that the company was still eager to have a local assembly plant but could not invest unless Beijing's policies on local content and ownership changed, and that did not seem very likely. He predicted that China's entry into the WTO would bring change and bring down some of the import duties. But he suspected other measures, which would limit the sale of imported cars. In the long-term, the only way for BMW to sell more cars in China would be to build them there. 

Paysen is convinced that the Asian market is waking up from its slumber of the last two years, expecting the region to give BMW its fastest sales growth worldwide. Having spent last year consolidating its 'hardware', the company plans to focus on customer care this year. In Taiwan, Hong Kong and Singapore, where only completely built-up units are sold, the company is now offering its 'BMW Individual' program, which allows customers to be more selective in ordering up colors and equipment. He believes that this kind of customized service is the way ahead for BMW in Asia.