At the end of March this year, the German carmaker submitted its application to participate in Thailand’s second Eco Car project, which provides tax benefits after participants meet specific criteria on investment, vehicle fuel efficiency and production quota. There are also reports VW is keen on investing in a manufacturing facility in Indonesia. In Malaysia, it partnered DRB-Hicom (owners of Proton) in December 2010 for local assembly of the Passat, Polo and Jetta.
Southeast Asia has long been on VW’s radar; it had begun negotiations in 2004 with the then Malaysian Government-owned Proton. Back then (in the pre-AFTA environment), the strategy was to enter the region’s biggest passenger car market. After negotiations with Proton failed, VW began selling imported models in 2007.
Six years ahead, and VW is among the smallest players in the region. It achieved a volume of less than 12,000 units in ASEAN-4 (Thailand, Indonesia, Malaysia and the Philippines) last year. This is in stark difference to its performance in China, where VW was the largest player with 11 per cent share of the total light vehicle market with a tally of 2.3 million units. In India too, the company has done far better with two per cent market share with sales of 58,000 units in 2013.
The ASEAN environment has also changed after the implementation of the ASEAN Free Trade Area (AFTA) agreement, and perhaps having a CKD assembly operation in just Malaysia no longer makes sense. Clearly, a manufacturing operation in at least one of the two biggest markets – Indonesia and Thailand – is imperative if VW wants to capture a much larger ASEAN pie.
Most OEMs have adopted a two-pronged ASEAN strategy, focusing on operations in Thailand and Indonesia. The established assembly in Malaysia is being continued mainly to meet local demand, while the Philippines has given way as an import market. It is not clear if VW will follow a similar path, but that would be the logical step.
Clearly, VW would need to make long-term bets.
Notwithstanding the current political crisis in Thailand, it has long-term growth potential with annual light vehicle sales projected to stay above one million units from 2015 onwards. A pro-business environment and a well-established automotive ecosystem are the other benefits to set up an operation in Thailand.
The kingdom can also be used as an export base, as a majority of the OEMs have done already. It is also important to note here that exports have been a critical part of the plans of the first Eco Car program participants. Therefore, VW too would need to adopt a similar strategy although it also means this production for exports would have to be shifted from another market.
Meanwhile, Indonesia is set to become ASEAN’s biggest light vehicle market this year. Annual sales are projected to rise continuously to touch 1.8 million units by 2020. Therefore, it becomes important to be present in ASEAN’s largest market.
No doubt, there are also risks as in any market. Thailand’s political crisis could prolong for an extended period and have a more profound impact on the economy and vehicle sales. In Indonesia, the gradual removal of fuel subsidies could equally hurt demand. VW’s decision is not going to be an easy one.
(The writer is Senior Market Analyst (ASEAN & India), LMC Automotive)