New ASEAN Free-trade Agreement to Spark Regional Auto and Parts Trade

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Forming the ASEAN (Association of Southeast Asian Nations) trading bloc in the beginning of this year has also created a favorable environment for auto and parts business in this region, especially beneficial to China-based automakers aggressively trying to promote sales offshore.

Though China rolled out a record high of 13.79 million vehicles in 2009, its auto export plunged 46% at the same time, likely hit by the global downturn, with such export accounting for only 2.6% of China's auto production, contrasting the nation's booming domestic car market. One TV report says that some 1,500 new cars hit the roads of Beijing daily.

Besides weighing if carmakers in China are overproducing, the Beijing authority is also prioritizing to help automakers promote exports, which mainly head to the Middle East, Africa, and Russia. So the ASEAN free trade bloc timely offers another channel of distribution for Chinese carmakers.

Starting from January, China and six ASEAN member countries (Thailand, Malaysia, Indonesia, the Philippines, Singapore, and Brunei) are paying only roughly 0.1 to 0.6% for trading autos and parts, with the other four ASEAN members of Vietnam, Myanmar, Cambodia, and Laos to follow suit by 2015.

Wasting No Time

The Geely Holding Group has wasted no time tapping the potential of the newly-formed free trade bloc: In early January, Geely announced a new plan to partner with Taiwan's Yulon Motor to produce Panda sedans exclusively targeting the Southeast Asian market. “It's the first step that we are taking in response to the newly-formed ASEAN trade bloc,” says Geely Vice Chairman Q.L. Liu.

Geely and Yulon inked a memorandum of understanding (MOU) in 2009 to have the Taiwanese carmaker assemble Pandas in Taiwan using most parts from Geely's Hanzhou auto parts plant. With the Panda to be formally launched in Taiwan this year, its makers now see a much larger market in Southeast Asia.

While benefiting members, the new ASEAN free trade agreement also works against non-members: Taiwan, for example, has been exporting increasingly less auto parts to Southeast Asia in recent years, which may decline even more. To minimize the downside of non-membership, Taiwan has to build partnership with China or ASEAN members, one way of which is for Taiwan's automakers to accelerate direct investments there.

Primary Goals

The ASEAN free trade agreement signed in January 1992 states two primary goals: to “increase ASEAN's competitive edge as a production base in the world market through the elimination, within ASEAN, of tariffs and non-tariffs barriers,” and to “attract more foreign direct investments to the ASEAN.”

“The liberalization of the auto and parts trade will not only help ASEAN manufacturers, but will also draw investment into the region,” says Adisak Rohitasune, vice chairman of the Federation of Thai Industries and vice president of Asian Honda Motor, adding, “It will induce companies to source raw materials and parts within this area, and expand the automobile market across the region.”

How to take advantage of the free trade bloc hinges on corporate policies. Honda, for example, runs assembly plants in several ASEAN countries and has been utilizing the AICO (ASEAN Industrial Cooperation) scheme to effectively lower cost of purchasing parts. “This has helped strengthen our manufacturing in each country and raised the level of competitiveness,” says Honda's regional chief executive.

First established in 1967 as a geo-political and economic organization, the ASEAN now consists of 10 members. In August 2007, the ASEAN stated its aim to complete all its free trade agreements with China, Japan, South Korea, India, Australia and New Zealand by 2013, achieving its goal of developing the ASEAN Economic Community by 2015.

Reducing tariffs within ASEAN is in line with erasing trade barriers to make free trade a reality, which will also attract investment to the region, a significant accomplishment considering that Asia is often reported to be a main economic driver of the next century, and China to be the world's bigger consumer of luxury goods by 2015.

Regional Auto Industry

Statistics show that the combined ASEAN auto sales reached 1.8 million vehicles in 2009, which is remarkable considering that GM, Chrysler, Opel, Fiat, Saab and even Japanese carmakers all seeing sales tumble, with some of the giants and long-time icons needing official bailouts, have had to file for bankruptcy or be taken over.

Currently the largest auto market in ASEAN, Thailand is also the world's second- largest pick-up market, only trailing the U.S. Thailand's strong domestic demand is at least partially attributable to the tax break from 35% to 30% given 2,000-cc-or-less models, estimated to be about 70% of cars there. Such tax breaks equal price reductions on cars of between 14,000 baht (US$350) and 100,000 baht (US$2,500).

Since the mid-2000s, Nissan has targeted Thailand as its major export destination in Southeast Asia, aiming to ship 40,000-50,000 vehicles annually.

Thailand also focuses on shipping auto parts to Indonesia, Malaysia, and the Philippines.

The Filipino auto market is also dominated by Japanese carmakers which control 80% of such market, where passenger cars account for 55% and commercial vehicles 45%.

Membership requirement

In the Philippines, carmakers must be recognized as member of the Motor Vehicle Development Programs (MVDP) to qualify to produce either passenger or commercial vehicles. To participate in the program, carmakers must meet certain requirements as using a minimum of 40% local parts and meeting foreign exchange requirements to import components.

The Philippines set up the MVDP in 1987 with the mission to foster the development of the local auto components industry. At the time, three Japanese carmakers were the only ones in the nation. In 1995, the Filipino auto sector opened its doors to imports and foreign investments. As a founding member of the ASEAN, the Philippines will see further market liberalization with the new ASEAN free trade agreement.

Malaysia is the only ASEAN member with an indigenous car brand—Proton—that has dominated 90% of the domestic auto market, with such monopoly likely to gradually diminish in the wake of the ASEAN free trade bloc.

Vietnam is another ASEAN member with a major auto market and a popular investment destination for foreign automakers. With 86 millions people, Vietnam has nearly one million vehicles of all kinds and approximately 26 million PTWs on the roads. Vietnamese auto sales remained stable during the past two years, with sales of bus, truck and special-purpose vehicles growing remarkably due to growing demand for mass transit.

Major Concerns

The ASEAN free trade agreement, despite its overt benefits, worries makers of autos and parts that operate at relatively higher costs. Indonesian officials once reportedly wrote the ASEAN secretariat to postpone tariff-elimination on concerns that China-made products, produced at relatively lower cost due to economy-of-scale and lower labor cost, may threaten operations of local manufacturers in this region.

The ASEAN free trade bloc, however, continues forming on schedule under its principle to pursue maximized interest for the region, with each country to benefit by tapping advantages of individual specializations.

In contrast, the motorcycle industry in this region is much more self-reliant, and hence wouldn't benefit significantly from freer trade among ASEAN members.