Namrita Chow discovers that the Asean states are investing in the car business to the benefit of local and international OEMs. However, the logistics support structure is still fragmented and outdated, and they are competing with the manufacturing expert - China

Often overshadowed by their strong neighbour, countries in Southeast Asia have watched as China’s automotive industry has grown and grown. But the Association of South East Asian Nations (Asean) is now implementing favourable policies attracting many automotive manufacturers and suppliers to strengthen their presence in the region.

Take Ford and Nissan, for example. Ford has announced it will build a $450m plant in Thailand, which will be ready by 2012. Nissan has said it will invest $20m to expand capacity at its plant in Indonesia by 2013.

The main four markets in the Asean region are Thailand, Indonesia, Malaysia and the Philippines. From January to June this year sales have been skyrocketing, despite political unrest in Thailand. Passenger vehicle sales in the main four markets jumped to 626,000 units, up 43%, while light commercial vehicles rose to 229,000, up 53%, according to research by JD Power.

The Asean region spans over an area of 4.46m km2 with a population of 580m people, which is around 8.7% of the total global population.

In 2009, its combined nominal GDP grew to more than $1.5 trillion. If the Asean region was a single country, it would rank as the ninth largest economy in the world in terms of nominal gross domestic product.

The Asean–India Free Trade Area (AIFTA) also came into effect in January 2010.

With China and India effectively getting special treatment, the Asean region’s expected growth is high. China’s population of 1.3 billion and India’s 1.1 billion both offer Asean economies huge markets.

Favourable tariffs

The sheer size and population is incentive enough for carmakers to set up and strengthen their production in the region. But policies are also helping sway companies in favour of certain Asean nations. The Asean Free Trade Agreement (AFTA) grants 0-5% tariffs on trade between Asean nations known as the Common Effective Preferential Tariff (CEPT). And AFTA has also implemented special trade agreements between China, South Korea and Australia.

The Asean–China Free Trade Area (ACFTA) was implemented January 2010. Asean members, Brunei, Indonesia, Malaysia, the Philippines, Singapore and Thailand have slashed the average tariff on Chinese goods from 12.8% to 0.6%. The average tariff on goods from Asean countries to China is cut down to 0.1% from 9.8%.

By 2015 the policy of zero-tariff rate for 90% of Chinese goods is expected to extend to the four new Asean members, Cambodia, Laos, Myanmar and Vietnam.

Asean verses China as production base?

The question is whether companies expanding in the Asean region are choosing this region over China. Wages in China are rising fast as workers have begun to demand more. And distances between countries in Southeast Asia are close to China, meaning exports to there would be fast and feasible. China still has the largest automotive industry, and has been growing fast this year (though the rate of growth is slowing).

“I think that the factors governing the Asean and China markets are unique in their own ways and quite different from each other. Therefore, it is unlikely that suppliers will choose one over the other as a production base,” says Ammar Master, from JD Power. “Strong domestic sales in China will continue to motivate suppliers to set up production there to meet the growing local demand for vehicles in China. Wages in China are increasing, but the labour costs in the Asean region are not all that cheap either.”

Wages at plants in China have been shaken up this year with industrial disputes at plants. As a result, many supplier plants already have seen a quick jump in wages–so will tier one suppliers and carmakers shift next door to Asean nations in favour of cheaper labour?

“China wage increases haven’t dramatically affected auto production yet,” says Stephen Dyer of AT Kearney China. “For some very low technology, value-added components, such as castings and fabrications for construction equipment, Indonesia and Vietnam have begun to come up in conversations. Passenger vehicle makers have not used these bases much yet,” says Dyer.

But Bill Russo, of Beijing-based Synergistics (auto consultancy), sees shifts developing in passenger car production as well.

“Absolutely,” says Russo. “As an example, Honda is actually considering shifting production from China to Vietnam to take advantage of cheap labour costs and preferential investment policies in the country. Honda opened its first car plant in Vietnam in 2005. The $60m factory in the northern province of Vinh Phuc has an output of 10,000 units per year.”

Also Toyota, the world’s biggest carmaker, may move production of some cars to Thailand, reducing its reliance on Japanese factories.”

But, says Russo: “The economy of China remains in a ‘sweet spot’ and the country will continue to be the most popular hub for foreign manufacturers because of its superior infrastructure and market size.”

New vehicle port links China to Asean

New ports have been opened up to facilitate vehicle movements between China and Asean nations and vice-versa.

China’s Qinzhou Port opens up a new route for quicker vehicle imports and exports to and from Asean countries. It is located along the coast in the south of Guangxi Province, facing Beibu Gulf and bordering Vietnam on the southwest.

Owen Xie, of NYK Logistics China says, “The infrastructure along the coastal areas of Shanghai, Dalian, Tianjin and Guangzhou are good, and these four ‘open ports’ have been designated for importing cars.” The new fifth port in Qinzhou in Guangxi Province opened for vehicle imports in January 2010, and is located in the Asean economic development zone.

“That’s why opening Qinzhou port was announced earlier this year as it makes smooth cargo trading,” says Xie. With tariffs reduced between Asean countries and China–vehicle imports via Qinzhou Port will be cost effective, encouraging vehicle production in Asean countries.

Suppliers explore Vietnam

Carrie Zhang from Delphi reveals that she has been asked to begin evaluating costs of moving goods in countries such as Vietnam. Although still at a nascent stage, tier suppliers are taking note and in the future, supply-chain dynamics may change. “Vietnam is very hot at the moment,” she says.

“We always look at opportunities to suit our customers’ needs and market situation. Visteon already has a very extended footprint in Asia Pacific,” says Arthur Zhou. “In Thailand specifically, we have been operating since 1996.”

But all major tier one suppliers are already in Thailand. Despite the political unrest, Thailand is still considered well developed, says Carrie Zhang.

Malaysia is also considered a safe bet, with local production for the domestic market. Singapore continues to be a hub for service providers as an easy place from which to manage regional affairs.

But the focus is now on Vietnam with its cheap labour and proximity to key markets. But the country has poor infrastructure and a fragmented logistics landscape, with many small LSPs but few large developed ones. Besides the infrastructure, outdated business policies often mean logistics services are carried out in-house.

“Vietnam is likely to be the next growth market in Asean, although it is still at a nascent stage,” says JD Powers’ Master. “The automotive industry in Thailand is certainly far ahead of Vietnam or Cambodia, and it will take very many years before these two markets reach Thailand’s level.”

2010 marks a new focus on Vietnam. A question is whether Vietnam’s government will follow the example of other developing markets and push new incentives to allow foreign players in to the market.

In July 2009 an updated master plan for Vietnam’s seaports was drawn up. Under this plan, new ports, better facilities and connectivity amongst Vietnam’s river system have been planned. With a total investment of $56 billion, the country expects major improvements by 2020. This includes developing international gateway ports at Hai Phong, Ba Ria– Vung Tao for vessels up to 100,000DWT and container vessels of 8000 TEU; and at Van Phong International Transhipment terminal for container vessels up to 15,000 TEU.

Vietnam’s ten year, Socio-Economic Development Strategy (SEDS) for 2011–2020 will accelerate development in the nation across all industries.

Air expansion is also being pushed in Vietnam. The country has 20 airports, but in 2008 only five were international. Last year the government approved international status for Cam Ranh Airport. By 2020 this airport will handle 100,000 tonnes of cargo and 5.5m passengers. This will be ramped up to 200,000 tonnes by 2030 and 8m passengers. Other airports that are to be expanded include aviation industry centres located in three regions, near Noi Bai Airport in Ha Noi, near Da Nang and Chu Lai airports in the central region, and near Long Thanh Airport in the south.

By 2020 Vietnam will have a total of 26 airports, of which 10 will be international airports.

But roads in the country are poor. Transporting goods across the nation is still risky, with potholes not just in roads but in monitoring systems as well. But major highways linking Vietnam with other neighbouring nations are being strengthened and developed, including the Kunming- Haiphong corridor.

Vietnam Railway Corp, the state-owned railway, is also in the throes of expansion across the country. VRC plans to construct the nation’s first 880km express railway route between 2010 and 2015, which will include links between Hanoi-Vinh, HCMC-Nha Trang, HCMC-Vung Tau City and Hanoi-Haiphong. Vietnam is certainly one country to watch.

Easy credit fuels growth

Many Asean member countries have reduced interest rates to attract more people to use credit. In Indonesia, low interest rates are mobilising sales–an important factor in a country where the majority of purchases are made using credit schemes. Malaysia also has low interest rates of around 2.5%. Overall, JD Power forecasts light vehicle sales in the main Asean markets to reach 1.9m units this year–that’s a momentous 18% jump over sales in 2009.

The main automotive players in the Asean area tend to be Japanese. Toyota has sold 284,404 units between January and June in the Asean area, with a major chunk of those sales coming from Thailand, where it sold 25,353 units in the month of May alone, and a whopping total of 117,680 units in the first five months of this year.

Toyota’s second strongest market is Indonesia, where sales topped 108,747 units between January and June, with 19,905 units in May alone. Overall Toyota sales are up 55% compared to last year in the Asean region.

Honda is the second strongest player in the region selling 87,470 units in the first five months of 2010, up 25% from last year. However Malaysian carmaker Perusahaan Otomobil Kedua Sendirian Berhad–aka Perodua–is next with sales of 78,682 units–all sold in Malaysia between January and June.

American carmakers are considerably weaker in the region. Ford and General Motors’ Chevrolet have sold around 10,000 units in the same time period.

The movers are South Korean carmakers Hyundai and Kia, whose sales are rising fast this year. Hyundai has sold 14,866 units (up 61%) and Kia has sold 7,605 units (up 65%) between January and June this year.

In light of several policies and closer integration among Asean nations, carmakers and suppliers are re-analysing their options. The Asean free trade agreements have influenced the dynamics of the game, says Ammar Master at JD Power. The challenge is finding the perfect trade-off between the types of vehicles in demand, the supply of components and the complex logistics management issues.