Why Asean could be the next big thing for carmakers

The global automotive scene is starting to look up following a few sluggish years. While the BRIC markets had previously led growth, car sales have dipped due to the slowdown in China as well as declining sales in Russia and Brazil. It is only now that India is gradually getting back on track.

Automakers are constantly looking at new emerging markets and one of them with reasonably bright prospects is South-east Asia, or Asean, essentially comprising Malaysia, Indonesia, Cambodia, Thailand, Vietnam, the Philippines, Laos and Myanmar. This region has a population of 619 million, a GDP per capita of US $3,700 and around three million vehicles sold annually.

Overall GDP growth is forecast at 5.4 per cent from 2014 to 2018, according to the Organisation for Economic Cooperation and Development. This is based on a large growing middle class that is expected to be more than double to 400 million by 2020.

Asean’s automotive sector has grown at 11 per cent CAGR in the last five years and customers continue to have a considerably high intent (68 per cent in Thailand and 63 per cent in Indonesia) in buying a new car .

The region has low levels of car ownership and many two-wheeler owners are expected to graduate to cars A large number of Asean residents are two-wheeler riders with motorcycle penetration rates at over 80 per cent in Indonesia, Thailand, Vietnam and Malaysia.

The region has seen uneven growth. Car sales have fallen in Thailand and Indonesia while stagnating in Malaysia. In contrast, the Philippines and Vietnam have experienced continued growth since the Asian financial crisis.

Several factors may have contributed to Thailand’s weakened performance, starting with the first car buyer incentive scheme launched in 2012.

Tax refunds for first time car buyers, which were intended to revive automotive manufacturing, significantly increased demand that year but cost the country the US $2.5 billion. In addition, it led to consumers defaulting on loans. This, together with high household debt and an unstable political environment, affected consumer confidence.

In Indonesia, car sales have slipped on account of reduction in fuel subsidies and depreciating currency. On the other hand, smaller markets such as the Philippines and Vietnam have shown significant growth. The automotive sector in the Philippines has benefited from rising per capita income and competitive bank lending rates. Vietnam has one of the fastest growing automotive sectors in Asean and is experiencing a sales boom. Lower interest rates coupled with soaring demand among increasingly affluent buyers is playing a big role here.

Another factor in Asean’s favour lies in its role as a manufacturing hub for regional and global exports. The region’s automotive market is dominated by Japanese even while European and American manufacturers are jumping on the bandwagon.

Thailand has the most comprehensive auto parts supplier base attracting more carmakers to set up plants. It has evolved into an export hub serving both the immediate region and beyond including the Middle-East, China, India, Europe and the US. Around 60 per cent of vehicles manufactured in the country are exported. Indonesia continues to challenge Thailand’s position as a production and export hub following significant expansion plans by many carmakers. This is also happening due to the volatile political environment in Thailand which had impacted its attractiveness for foreign investment.

The auto sector growth in the Philippines is tied closely to its rising domestic demand (as in the case of Indonesia) and is now at an inflection point.

Infrastructure remains a major obstacle to economic progress in Asean with the growth in vehicle ownership ahead of road development.

Versatility in strategy is required to steer through the complexity in this region which means differentiating products through customisation and innovation. Affordable luxury is the ‘in’ thing combining a status symbol desire with affordability.

In addition, employee development, talent retention and leverage of local expertise are critical HR issues. PwC Autofacts projects assembly volumes to grow from four million units to around 6.2 million units by 2021.

The writer is Partner, Price Waterhouse