Growing ASEAN automotive industry 2 comments

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Two pieces of recent news stand out in my mind in relation to the automotive industry. Firstly, there has been much furore recently in Malaysia over the issuance of APs to favoured individuals and implicating its Trade Minister Rafidah; allied to this are plans to end the special treatment of the national carmaker Proton and to develop several areas in North and Central Peninsular Malaysia as automotive hubs. Secondly, the US automotive sector continues to be in deep trouble, with Delphi filing for bankruptcy while General Motors reported huge losses due to high labour costs.

The former piece of news reflects the Malaysian realisation that the ASEAN automotive industry has strong potential, but the way to grab a piece of the pie is through foreign investment and not developing one's nationally subsidised vehicle. The latter reflects the high costs of production in Western countries, not least the ridiculous pay packages the powerful automotive unions negotiate (it was reported that retrenched GM workers were paid in full, as much as US$5K per month, for idling at home), which suggests the centre of gravity for car manufacturing must surely shift to economical Asia (which also happens to be the region with the fastest growing consumer demand).

Consider: ASEAN as a free trading bloc (under the AFTA agreement) is comparable to any other major economy in the world, even China or India, in terms of population (several hundred million, think it is 400M combined) and potential consumer demand growth. In terms of geography, it is well-placed for product distribution to other main demand centres in Asia. In terms of supply, it has already achieved critical manufacturing mass with Thailand's Rayong as the acknowledged regional hub for auto and auto-components manufacturing, and home to many global car manufacturers, such as Toyota, Ford and our familiar General Motors (profitable here, I believe); in addition to first-tier car assemblers, the automotive subsystems and automotive components industries in Southeast Asia have also developed as strong supporting acts.

This momentum looks set to continue; Japan is one of the major investors in the car manufacturing industry in ASEAN (particularly Thailand) through such heavyweights as Nissan, Honda, Toyota. It recently showed greater interest in expanding its car manufacturing in ASEAN, in view of the abovementioned factors and the fact that many Japanese companies now adopt a "China plus one" policy with regard to manufacturing; this is a long-term strategy to reduce manufacturing risk exposure to China due to political troubles. As governments in ASEAN become more receptive to foreign investment in the industry like Malaysia recently, the environment is likely to grow even more attractive to foreign carmakers.

Singapore, of course, is never slow to spot emerging regional opportunities. EDB is pushing for yet another "hub" in automotive operations, but come on, we have better chances in other areas. However, high value-add specialised components manufacturing are strengths of Singapore manufacturing, more specifically, Singapore's precision engineering industry. Companies like Innovalues Precision (precision parts), First Engineering and Sunningdale Tech(plastic parts), Jackspeed (automotive leather), Armstrong (rubber and foam components) are likely beneficiaries of increased investments in the automotive industry. In addition, increased consumer demand would probably provide tailwinds for companies like Jardine Cycle & Carriage (owner of Astra, Indonesia's largest car distributor) and Stamford Tyres (regional tyre distributor).

References:
(1) Business Times report: Plenty to Catch Up on in Malaysia's auto policy