By Elizabeth Leclaire
ASEAN countries have continued to gain economic footholds in the global market, particularly in the automotive industry. Automobile manufacturing and production has skyrocketed in recent years, most notably in Thailand, Indonesia, Vietnam, and Malaysia. Although these ASEAN nations have all focused on automotive industry development, the particular economic niches and consumer bases differ greatly between them. This article will outline the primary differences between the markets and their implications on foreign investors looking to invest in Southeast Asia.
Thailand has long been recognized as the primary manufacturer of automobiles among ASEAN countries and has recently gained traction in the automobile export industry. Thailand’s political unrest, infrastructural decay, and struggling middle class has caused Thai automobile industries to look toward exports in recent years in order to mitigate profit loss from decreasing domestic automobile sales.
Fortunately, Thailand’s environmentally conscious vehicles, dubbed “eco-cars”, have brought immense economic success to the nation’s automobile industry. The Federation of Thai Industries (FTI) predicts that 2.15 million “eco-cars” will be sold in 2015 alone, with 1.2 million sold as exports. The “eco-cars’” primary export destinations are Europe and Australia, which have increased their demand for the environmentally friendly car by 17.66 percent over the past year.
“Eco-car” production has been supported by Thailand’s Board of Investment (BOI) since 2007 and provides a multitude of opportunities for foreign investors in Thailand’s automobile manufacturing industry. The BOI ensures an eight year corporate income tax exemption for automobile companies investing 168 million US$ or more into environmentally conscious vehicles. Additionally, Thailand’s Seven Year Investment Promotion Strategy came into effect January 1st, 2015 in order to further incentivize foreign investment. Under these new policies, companies may import raw materials or machinery into Thailand free of charge and will receive 25 percent deduction of facility construction or installation costs.
While Thailand looks outward toward automobile exports, Indonesia’s domestic automobile market is anticipated to rise with the formation of its middle class. Currently, the majority of automobile purchases occur in Indonesia’s cities, where 26 percent of the population is middle class. The automobile consumer base is expected to grow rapidly, however, as Indonesia’s middle class is predicted to grow at an annual rate of ten million people for the following ten years, and car sales are expected to grow five percent by the end of 2015 alone.
Indonesia’s Low Cost Green Car (LCGC) has found economic success in the domestic market. LCGCs are relatively affordable for its consumer base, priced at 8,265 USD (IDR 100 million). In the next year, LCGC sales are predicted to increase half of a percentage faster than general automobile sales in Indonesia. LCGC production is regulated by the Indonesian government, which plans to reduce carbon emission due to transportation by 26 percent within the next five years. LCGCs have a required fuel consumption minimum of 20 kilometers per liter and 85 percent of LCGC parts must be domestically manufactured.
FDI into Indonesia’s booming LCGC manufacturing industry is relatively simple. Foreign investors must enter into a Limited Liability Component, which requires an Indonesian individual or entity shareholder as a member of the venture. After the foreign firm joins with an Indonesian shareholder, Limited Liability Component licenses are granted by the Indonesian Investment Coordinating Board, and the foreign company is permitted to operate in the country. Foreign firms may not own equity in the distribution of retail vehicles, but complete foreign ownership of automobile part and manufacturing is permitted.
Vietnam’s automobile manufacturing industry developed slower than its ASEAN neighbors but has witnessed exponential growth in recent years. The industry did not gain speed until 2000, but will remain ASEAN’s fastest growing automobile industry over the next 20 years, according to the Thailand Automotive Institute. The Vietnamese Ministry of Industry and Trade predicts that Vietnam will manufacture 200,000 vehicles within the next year and will grow annually at a rate of 4.4 percent.
Vietnam’s automobile industry currently relies heavily on automobile part exports to its neighboring countries. Indonesia purchased 43 percent of its automobile parts from Vietnam. Vietnam also provided Thailand and China with 53 percent and 61 percent of their imported automobile parts, respectively.
While automobile part production has been profitable for Vietnam, the nation is also looking to expand its automobile manufacturing industry. This year, Peugeot-Citroen and Dongfeng Motor Group have entered a joint venture for a new automobile assembly plant in Vietnam. The Vietnamese government aspires to increase Vietnam’s automobile purchases to 70,000 by 2020 and is therefore encouraging automobile manufacturing projects.
This spells good news for foreign companies. Vietnam has long been a prime location for foreign investment, as the country has significantly less FDI restrictions than most other surrounding nations. Ventures in the automobile industry are allowed to be 100 percent foreign owned and do not need a Vietnamese national as a director. Additionally, production costs are markedly lower than other Asian nations. In fact, establishing an automobile plant in Vietnam is 40 percent less expensive than establishing the same plant in China.
Malaysia is a crucial nation in ASEAN automobile manufacturing. Since the start of 2015 alone, Malaysian automobile manufacturers have produced a total of 163,697 vehicles with 151,593 of them as passenger cars. Malaysia’s automotive manufacturing landscape is sharply divided between domestically produced vehicles and its foreign company competitors. Automobile producers Proton and Perodua dominate Malaysia’s domestic companies, with 115,783 purchased Protons units and 195,579 purchased Perodua units last year.
Proton and Perodua have recently faced foreign competition, however, as Honda and Toyota have gained momentum in the Malaysian market and surpassed Proton sales this past April. Nevertheless, the Malaysian Automotive Institute predicts a 52 percent local preference for domestically manufactured automobiles by the end of 2015. Consumer preference is also likely to be subject to change as Malaysia’s new Goods and Service Tax (GST) begins to influence automobile prices.
The GST came into effect April 1 of this year, and be reflected as a six percent sales tax on the purchase of all automobiles. While Malaysia’s GST is still the lowest of all ASEAN nations, domestic and foreign automobile production preference may shift as consumers adjust to the new tax.
Malaysia’s National Automotive Policy has committed to incentivising the production of environmentally conscious automobiles. Energy efficient vehicles, regardless of investment amount or engine capacity, will now automatically receive grants, tax exemptions, and manufacturing licences.
ASEAN nations have continued to gain economic strength in the automotive manufacturing industry in the past decade. As the nations of South East Asia continue to compete for economic prominence, foreign investors are likely to witness greater opportunity to enter the ASEAN market. The automotive industry in ASEAN varies greatly, and it is pertinent that foreign companies consider which market will be most receptive to its services in order to achieve success in the industry.
Asia Briefing Ltd. is a subsidiary of Dezan Shira & Associates. Dezan Shira is a specialist foreign direct investment practice, providing corporate establishment, business advisory, tax advisory and compliance, accounting, payroll, due diligence and financial review services to multinationals investing in China, Hong Kong, India, Vietnam, Singapore and the rest of ASEAN. For further information, please email firstname.lastname@example.org or visit www.dezshira.com.
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