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Business

Southeast Asia's auto industry taking two different roads

HANOI/MANILA -- 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.

The steel skeleton of what was supposed to have been Vientam's first engine factory stands forlorn on an empty lot. Hyundai Motor is canceling the contract to build the factory with a local partner.

     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 difficulties. 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.

     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 Motor "may very well shrink local production and increase imports," said a senior official at its local unit.

     The Philippines is already being overrun by imported cars. It was an original member of the Asean Free Trade Area, a forerunner of the planned 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 Motor has decided to pull out of the country. The government thus breathed a sigh of relief when Mitsubishi Motors said on March 31 that it has bought a local plant from the U.S. automaker. Vietnam sees the state of Philippine car production today as a grim foreshadowing of its own future.

Honda's factory in Thailand, where the automaker will start up a new plant for compact cars next year.

A new Detroit

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 people -- 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 Motor, Honda and General Motors opening new factories there. 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.

Spreading the wealth

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 economic community could prove a source of instability in itself.

WATARU YOSHIDA in Singapore and JUN ENDO in Tokyo contributed to this article.

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