Southeast Asia's 2-speed auto industry leaves some behind
Nikkei staff writers MANABU ITO in Hanoi, MINORU SATAKE in Manila, WATARU YOSHIDA in Singapore and JUN ENDO in Tokyo
In central Vietnam, the steel skeleton of what was supposed to have been the country's first engine factory stands forlorn on an empty lot in the Chu Lai economic zone.
Hyundai Motor of South Korea told local partner Truong Hai Auto in January that it wanted to pull out of their contract, citing the Vietnamese company's financial difficulty. This sent Truong Hai, Vietnam's biggest carmaker, and the Vietnamese government, which had set great store by the venture, scrambling back to the drawing board.
"It was an important project for our country," said a frustrated manager at Truong Hai.
Automobile production is taking two paths in Southeast Asia. Output in the region's five leading economies grew from 2.12 million vehicles in 2009 to 4.44 million last year. While production doubled in Thailand and Indonesia, it stayed flat at around 100,000 in Vietnam and the Philippines.
Overrun by imported cars
Vietnam has tried to attract investment in its auto industry while keeping it protected with a steep duty on imported cars. But time is running out. Following the creation of the Association of Southeast Asian Nations' economic community next year, Vietnam's 50% tariff will drop to zero in 2018. This will further empower already-competitive exporters in the region.
The Vietnamese auto industry faces an existential threat, a local business newspaper headline warned recently. Foreign carmakers are holding off on new investment in the country.
Honda "may very well shrink local production and increase imports," said a senior official at its local unit.
Toyota Motor Vietnam President Yoshihisa Maruta says the local automotive industry could see a spate of production cutbacks or withdrawals.
The Philippines is already being overrun by imported cars. It was an original member of the ASEAN Free Trade Area, a forerunner of the economic community, which eliminated regional tariffs on most goods in 2010.
Sales of new cars and trucks in the Philippines grew 15% to a record-high 212,000 units last year, with imports making up more than 60% of the total. The country's auto imports have risen tenfold over the past five years.
Honda stopped assembling Civic sedans in the Philippines in 2012, switching to imports from Thailand. Ford has decided to pull out of the country. The government thus breathed a sigh of relief when Mitsubishi Motors said Monday that it has bought a local plant from the U.S. automaker. For its part, Nissan will think about local production only when the market reaches an annual 500,000 units, says Vice Chairman Toshiyuki Shiga. Vietnam sees the state of Philippine car production today as a grim foreshadowing of its own future.
Meanwhile, automaking in Thailand and Indonesia has enjoyed the benefits of free trade. Starting in 2001, Thailand phased out tariffs on imported cars from elsewhere in the region in a bid to become "the Detroit of Asia." Its automotive industry, including 2,000 parts manufacturers, employs more than 500,000 -- around 70% as many as Japan's. Nearly half of the 2.45 million vehicles made in Thailand last year were exported. Honda will start up a new factory for compact cars there next year.
Fearful of putting all their eggs in one basket, automakers have been investing in neighboring Indonesia, too. The past year has brought a wave of new capacity, with Toyota, Honda and General Motors opening new factories. Indonesian car output topped 1.2 million vehicles in 2013. Toyota began exporting from Indonesia to Singapore and other countries last December, adding Philippines to the list in February.
Cultivating domestic manufacturing
As the ASEAN economic community nears, automakers will continue to search for the best distribution of production in the region.
For governments, this will entail balancing free trade with the development of domestic manufacturing. With its great potential for employment, automaking is the kind of industry that all Southeast Asian countries want to cultivate. The Philippines is readying subsidies and other measures to help it grow. Vietnam is weighing tax breaks for domestic cars as part of efforts to protect local production.
At 30%, Malaysia's duty on imported cars from outside the region is lower than Vietnam's. But automobiles are also subject to an excise tax on luxury goods. Rates range from 60% to 105%, depending on engine displacement, and presumably decrease according to the proportion of locally made parts, among other criteria. The tax essentially favors domestic vehicles, helping to sustain local champion Proton's 60%-plus market share.
Malaysia's government intends to continue to protect domestic auto production. Ensuring the fairness of such measures remains a challenge. But the emergence of wide disparities in industrial concentration in the community could prove a source of instability in itself.