The auto industry in south east Asia in 1992 was a different world. This article looks at government policies and tariffs, increasingly leading to failing domestic car-makers. Intriguingly, when investment from international car makers remained scarce, China was not even on the horizon. This originally appeared in Asian Business.
Last year, 1992, just under 11.5 million new cars were sold in Asia. That’s slightly less than a quarter of worldwide sales in a region that has just under half of the world’s population. There is plenty of room for growth.
Unless US and European automobile manufacturers make more of an effort to carve out their niche across Asia, and soon, Japanese companies will ensure their dominance of yet another growing market. And for many US car makers, their outlook is bleak.
But it won’t be easy, even for the savvy Japanese. Asian tariff barriers, restrictions and local content rules are all changing; and nascent domestic auto industries and joint ventures are being hurt by the lack of economies of scale. The approach will have to be cautious.
Last year saw the worldwide production of cars, trucks and buses level out at about 48 million vehicles. A good 90% of those are sold in America, Western Europe and Japan but many analysts think these markets are becoming ‘full’. There are concerns that congestion and environmental worries may even cause them to shrink further.
Estimates are that in the future most car-makers will be lucky to see their markets grow at even 2% a year. Combine that figure with the fact that many manufacturers already had unused manufacturing capacity when markets were growing at 5% a year and it’s easy to see why the credit rating agency, Moody’s, has concluded that car-makers’ debt will remain high.
Changing protectionism and lowering tariffs
The figures are also one major reason America’s ‘Big 3’ – Chrysler, Ford and General Motors – have been so keen to crack the Japanese component market. It also means that all car manufacturers including the Japanese (who are battling with an unprecedented recession at home) are looking elsewhere to sell cars.
Most countries in Asia have long maintained high tariffs against imported vehicles in an attempt to build up their own car industries. Thailand, Malaysia, South Korea, Taiwan, Indonesia and the Philippines have all taken this line. Some, notably Malaysia and South Korea, have been more successful than others but in every case the price has been paid by the man on the street.
Now, however, a lot of these tariffs are being lowered, while some other non-tariff barriers are being raised. The Asian automobile industry is in flux and it is debatable whether some of the indigenous auto industries will survive. Additionally, a major issue is the degree to which foreign manufacturers will switch from selling their own products to investing in Asia’s domestic car industries. For that matter, will Asia’s domestic manufacturers sit meekly by while governments move to take away the protection against foreigners they have so long enjoyed?
Thailand abandons protectionism
Thailand is fairly typical of the regional trend. When the Thai Board of Investment (Bol) was created 30 years ago, it decided to protect the domestic car industry from overseas competition and promote component manufacturing. Tariffs went up, restrictions went on and locally assembled vehicles were required to have a high content of domestically manufactured components. The result was that prices of cars in Thailand soared to among the most expensive in the world.
By the end of the 1970s imports of foreign-built cars were banned. Subsequently, cars with engine capacities larger than 2.3 litres were allowed in, but burdened with duties of 300%.
Last year the interim government of prime minister Anand Panyarachun put the brakes on Thailand’s accelerating car import tariffs. The government removed all restrictions on imports and slashed the duty. The tariff on imported cars over 2,300cc fell to 100%, while smaller cars could be brought in with duty of 60% and completely knocked down (CKD) versions at just 20%.
The idea, Anand said, was to stimulate the local car assembly industry to produce cars of higher quality that could compete on a global scale and therefore be exported. The moves may eventually have this effect but they initially caused consternation among Thai car assembly companies and parts manufacturers, with many recording huge losses.
Failure of protectionism – case study, Indonesia
Other Asian countries have begun to make similar moves. Since March, Indonesia’s Industry Ministry has been making local makers nervous by promising to relax import restrictions and take steps to overcome inefficiencies and low production levels. And the government was still promising deregulation in Indonesia’s auto industry next year.
It came as something of a surprise, therefore, when General Motors announced in November (before anyone knew what the deregulation package would include) that it was forming a joint venture to manufacture and assemble cars at a new factory near Jakarta.
Despite GM’s investment, the Indonesian car industry is a good example of how protectionism doesn’t work. With its population of 191 million, the country has one of the few home markets in Asia capable of achieving economies of scale through domestic sales. But it has not done so.
Indonesia’s car industry has an over-capacity of some 40,000 vehicles per year. Its components industry, 23 years after protectionism was introduced, still manages to provide only 20% of the components needed. The components it does produce are mostly low value-added pieces such as nuts and bolts.
Exports of Indonesian vehicles bring in US$50 million a year but that’s a drop in the bucket compared with the US$1.2 billion invoice for component imports. With the government levying 100% duty on component and car imports, buying a car in Indonesia is four times as expensive as buying the same car in Europe or Japan.
According to Ron Gilchrist, who is in charge of the Asian operations of General Motors (GM), there has to be a shake-out in Asia’s domestic auto industries. “Their markets are too small to allow them to compete internationally. Big car companies do their best to create economies of scale and these [Asian] car firms simply don’t have them.” He adds that while it is normal for a country to loosen restrictions on imports as an industry matures, many local auto-makers simply have not matured.
While some actual manufacturing does take place, the region’s automotive industry is involved primarily in the assembly of CKDs and providing components. That makes the local companies dependent on foreign design and technology. The fault lies by no means entirely with the Asian auto-makers; technology transfer has been slow and the big international players have been criticised for making little effort to speed things up.
But here again, the international players cannot be saddled with all the blame. Until very recently the haphazard tariffs on imported cars and CKDS, the relatively small markets and problems with joint ventures, have discouraged many car firms from investing. Long term financial viability has been just too hard to assess as has intellectual property protection.
One class of investors is an exception – the Japanese. Japanese auto companies have established a firm base in the region by direct investment in local firms. In Thailand, for example, most of the foreign partners are Japanese and assembly is still the mainstay. Currently, Toyota, Isuzu, Nissan, Mitsubishi and Mazda hold about 85% of the car and commercial vehicle markets, though the tariff reforms may eventually eat into that percentage.
In Malaysia, too, the assembly firms are almost entirely dependent on foreign design and know-how. Again, the Japanese dominate, in particular, Mitsubishi with its hefty stake in Proton, the state-owned car-maker. Proton’s car, the Saga, holds 70% of the Malaysian market in the 1,300 to 1,50Occ range and it has had some success in exports to the UK, but economies of scale are still elusive.
Taiwan’s car market anomaly
One of the few exceptions to the Japanese domination of Asian vehicle manufacture has been Ford’s success in Taiwan. The Taiwan market itself is something of an anomaly compared with the others. During the second half of the 1980s it was a highly protected market. But it was also a rich one. Such was the growth that demand outstripped assembly capacity and, due at least in part to US government pressure, tariffs were lowered. At present there is a 30% import duty, harbour-fee and commodity tax levied, depending upon the model.
Taiwan also has a local content regulation – 50% of components must be sourced locally for a car to qualify as locally made but, as in Indonesia, the components are generally low-tech. Local manufacturers recently called upon Japanese companies in both Taiwan and Japan to buy more of their components. Taiwan spends US$486 million on foreign components, with more than half of that sum going to Japan.
Japanese manufacturers have long complained about the quality of non-Japanese components. Bill Botwick, general manager of General Motors in Taiwan, which is in the process of setting up an assembly agreement for the international giant’s European Astra car range, disagrees. “It’s too much of a generalisation about the components industry. Some manufacturers here [are] competitive worldwide in price and quality, and we hope to use them elsewhere in the world. Others aren’t.”
Gilchrist says the same about Malaysia. “They have a very good electronic components industry. We already source about US$100 million worth of goods from them.”
But this is still a relatively low-level use of the manufacturing base in Asia, and it seems unlikely to grow. Few cars assembled in the region ever make it into export markets – even those made by Japanese overseas ventures. Malaysia’s Proton Saga and the South Korean-built Kia Pride, which is a modified Mazda 121 built for export to Japan, are the major exceptions.
Even in South Korea, where the auto industry has had success exporting, there have been problems. The Korean car industry is one of the most highly protected in the region and yet this year it has faced major problems with over-capacity and failing domestic sales. And while it exported 111,000 cars last year it only imported 2,000 – figures that aren’t winning it any friends among its trading partners.
“When the Koreans need to expand their markets they can only do it by exports,” says Jan Holmberg, deputy Asian regional director for Sweden’s Saab. “Then [countries such as Korea] will have to [make a] deal to lower tariffs and allow imports.”
For Asia’s domestic industries to survive they need economies of scale and those can only be found in international markets. But, says GM’s Gilchrist, “Opportunities will always be limited, they can’t open the doors [to their domestic markets] completely or they’ll destroy what they have achieved.”
Certainly, that is one reason Indonesia has been taking so long in implementing its intended liberalisation. The government has also made a promise – almost impossible to keep – that no jobs will be lost at home.
What’s down the road?
More foreign cars will be directly imported. Through conscious attempts to make local industries more competitive, as in Thailand or through pressures brought to bear by trading partners, as in Taiwan and South Korea, tariffs are coming down.
There will be more joint ventures in auto assembly. Many of the world’s major car-makers have licensed Asian companies to assemble their vehicles, but few invest directly. In Taiwan, for example, Ford, Toyota, Nissan and Volkswagen have invested money. But General Motors, Citroen, Peugeot and Renault, who sell vehicles for assembly in the country, have no investment there. Similarly, in Malaysia, only Mitsubishi and Nissan have financial interests in the car companies, although Ford, Land Rover, Mercedes, BMW and a number of others are assembled in the country.
Saab’s Holmberg thinks the reason US and European auto makers have been slower than the Japanese to invest directly in Asia is that the Japanese regard the region as their home market while the Westerners don’t. He also thinks US and European firms aren’t patient enough. “They have a habit of putting in a general manager for two years and just when he’s ready he gets brought home. [But] it’s a tough market in Asia and it takes a long time to learn how to do business.”
Problems with partnerships in Asia
Overall most car-makers seem to feel that manufacturing in Asia will remain unviable. Joint ventures in the industry, including those involving Japanese companies, have often been unprofitable and troublesome for the foreign partner.
In South Korea, for example, General Motors’ joint venture with Daewoo is coming to a sticky end. While Gilchrist admits that something went wrong he will not elaborate. Industry watchers say it was the result of a unilateral decision by Daewoo to increase output while still having a large stock of unsold cars. GM was not consulted and Daewoo would not back down. In the last few months Daewoo has had to face reality and cut output by 40%.
In Malaysia, too, Japan’s Daihatsu was set to be a partner in Malaysia’s second national car project. Since the planned car was to use Daihatsu technology and design, the company wanted a controlling stake in the venture. The Malaysian government and its partners disagreed. The argument continues.
Financial return remains the prime reason for the big car-makers’ reluctance to invest in Asia. With tariffs and local content rules still being in flux few manufacturers are willing to spend the money to manufacture, rather than merely assemble, cars in Asia.
GM, for example, spent more than US$1 billion on modernising four plants in the US and Europe in the 1980s. Why would any corporation with skilled workers and a huge investment in existing modern plants move to smaller markets with lower technological skills?
Just about the only scenario that might change this picture of Asia as little more than a screwdriver plant for the world’s major car-makers is the proposed ASEAN Free Trade Area (AFTA). A single market in the region would provide the necessary economies of scale. In theory there is already a ‘Brand-to-Brand Complementation’ (BBC) agreement which allows ASEAN members to trade goods from particular industrial areas at preferential rates. The agreement includes car components. But while the agreement is already having some minor impact in the region, it does not cover completely built-up cars.
The nature of protectionism in ASEAN countries is erratic. Without some form of ASEAN free trade agreement there is little hope of major foreign investment in manufacturing, even from the Japanese. Indeed, although Daihatsu is still negotiating over the new Malaysian project; although Honda has committed US$38 million to a new project in the Philippines; and although Toyota has bought into Astra (its Indonesian partner) there is a big question mark over how much further the Japanese will be willing to extend their car business into difficult countries.
Japanese auto makers have always depended on their home market to provide a solid foundation for their business. Now recession has hit that market and some Japanese firms are overstretched. Their main secondary markets, the US and Europe, are equally unhealthy. It will take a force of will and an extremely long view of business for Japanese car-makers to maintain their investments in Asia over the next few years.
But it is precisely the long view that is the most tempting. Asia is the world’s next largely untapped auto market. Manufacturers, no matter how they work out their approach, will not be able to ignore it.