OEM Archives

11/01/2017by EOS Intelligence EOS Intelligence No Comments

Affordable Auto Financing – The Key to New Passenger Vehicle Sales in Nigeria

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Since the announcement of the National Automotive Industry Plan in 2013, the Nigerian automotive industry has witnessed an increased interest from several global automakers. As a result of the Plan as well as recent reforms made by the Nigerian government, PwC predicts Nigeria has a chance of becoming Africa’s auto manufacturing hub by 2050. However, the passenger vehicles market in Nigeria remains heavily dominated by imported second-hand cars, mainly due to the various industry challenges, including lack of access to auto financing. Could affordable auto financing schemes drive growth in Nigeria’s new passenger vehicles market?

This post formed a mainstay of a broader coverage article titled
‘Affordable auto financing essential for OEM success in Africa’, contributed by EOS Intelligence to ‘Guide to the automotive world in 2017’, Automotive World’s annual publication covering a gamut of articles by leading global automotive industry analysts and consultants. The report was published in January 2015.

Nigeria’s new passenger vehicle sales are far behind sales in countries such as Egypt, Algeria, and Morocco, despite the fact that Nigeria is the most populous country in Africa. With a giant share of nearly 80%, Tokunbo vehicles (local name for imported used vehicles) heavily dominate the Nigerian passenger vehicles market.

Although there is a plethora of industry challenges that range from lack of cohesive government policies to poor infrastructure, one of the major growth constraints at present is the lack of affordable auto financing. Due to the limited accessibility and expensive financing options, new vehicles remain out of the reach for most Nigerians.

Currently, the cost of auto financing in Nigeria is exorbitant. Amid current economic environment and credit criteria, only a small segment of the population can obtain auto loans. Therefore, most Nigerians either buy used cars or save money over period of time to buy new vehicle for cash, stalling the new vehicle sales – retail customers accounted for less than one-third of all new cars sold in 2015.

This shows how lack of financing options is holding growth in a market segment with the highest growth potential. According to Lagos Business School’s research, an affordable vehicle finance scheme could boost Nigeria’s annual new vehicles sales to one million from 56,000 units at present.

EOS Perspective

Although the National Automotive Industry Plan and recent government reforms managed to attract some FDI in recent years, the Nigerian passenger vehicles industry still remains heavily reliant on imported used cars. As the government plans to curb the country’s auto imports, as a first step, the industry stakeholders should plan policies that can make new vehicle ownership more attractive to mass consumers.

The current credit facilities offered by banks are unattractive to many consumers due to cost and credit terms. In order to fuel growth in local vehicle manufacturing and new vehicle sales, the industry, along with the help of CBN, should develop more affordable vehicle credit purchase schemes targeted at the mass middle class population.

Further, as majority of consumers simply have little or no credit history, the current lending models are not going take the industry growth any further. By leveraging on alternative credit data such as payment data from utility and telecom companies, lenders should look beyond credit scores to segment a new customer base of creditworthy consumers.

For vehicle manufacturers and dealers, there is a tremendous opportunity to move up the value chain by setting up in-house financing with the help of the right partners. By offering innovative auto finance solutions, they can push the demand for new vehicles, especially among millennial and emerging middle class first-time buyers.

Whether Nigeria is capable of becoming the next auto manufacturing hub for Africa, only time will tell, but with better financing options, it can surely boost new car sales and help the local automotive industry to progress.

29/03/2016by EOS Intelligence EOS Intelligence No Comments

Driving Growth in Kazakh and Uzbek Passenger Vehicles Markets

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The past two years have brought a mixed bag of experience for both Kazakh and Uzbek automotive industries. Passenger vehicles sales volumes witnessed growth, however at a varied rate, affected by internal as well as external macroeconomic disruptions and regional developments. Amid these conditions, 2016 is likely to be an uncertain year for the automotive industries in both countries. Although growth is likely to be challenging, by re-thinking its current focus along with the help of the right government policies, growth prospects over the long term are promising.

While the Kazakh and Uzbek economic and automotive industries scenarios differ to quite an extent, and both countries have witnessed a varied growth in recent years, their macroeconomic and sector dynamics have continued to remain under a strong impact of the global slump in oil prices, volatile economic and political environment in neighboring regions, as well as currency devaluations. While Kazakhstan automotive industry, with sales volume CAGR of 67.8% during 2010-2014, was one of the fastest growing auto markets worldwide, the country’s GDP was witnessing a fluctuating y-o-y growth ranging from 7.5% in 2011 to 4.4% in 2014. At the same time, while Uzbek’s economy posted strong and steady GDP growth at around 8% annually between 2011 and 2014, its car sales volume grew at a mere CAGR of 1.4% during 2010-2014.

Uzbekistan’s automotive industry is currently around twice the size of the industry in Kazakhstan, however its sales volume growth has recently stalled putting a question mark on Uzbek industry future growth dynamics. Kazakhstan might soon be seen to be catching up, with more than healthy sales volume growth rate, much of it supported by recent government reforms to boost local production and sales.

EOS Perspective

With Russia’s economy still struggling to recover amid Western sanctions, banking on vehicle exports is unlikely to take Kazakhstan and Uzbekistan any further. Passenger vehicles sales and production figures in most likelihood will continue to be impacted by internal as well as external macro-economic factors in 2016. In order to grow in the current environment, OEMs will have to look beyond their status-quo. Automakers will have to start focusing on domestic markets, which are still underserved with rapidly increasing demand for new cars.

The governments will have to work together with industry participants to create consistent as well as comprehensive industry policies that can attract more investments and stimulate growth. Measures such as financial incentives, special land allotment, creating SEZs, and various other schemes can significantly boost investor (both local and foreign) confidence. At the same time, reforms such as increasing local content requirement will drive more local producers to enter the industry. This might be a great help to the overall vehicle manufacturing and auto components industry in its development and growth trajectory.

With automakers trying to scale down their operations in Russia and Ukraine, growth opportunities are ripe for region’s manufacturers to capture and fill the market gaps in neighboring regions such as EEU and CIS. By leveraging their strategic location and proximity to European, CIS, and Asian markets, Uzbekistan and Kazakhstan could potentially attempt to reinvent themselves as the region’s next automotive export hub.

11/02/2016by EOS Intelligence EOS Intelligence No Comments

OEM Suppliers – Perfecting the Balancing Act

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Suppliers to the automotive industry (OEM suppliers) have witnessed strong and steady growth over the past few years. Owing largely to the recovery in the global automotive market coupled with high-capacity utilization at their production facilities, OEM suppliers have performed better as compared with their OEM customers, especially in terms of profitability. However, the golden period is expected to expire in the coming year. With automobile sales not rising at a similar pace as before (especially in developed markets), and growing pressure on OEMs’ margins, OEMs have been undertaking massive cost cutting programs. This in turn is putting pressure on OEM suppliers to reduce prices. Additionally, OEM suppliers are facing rising expectations from OEMs to be located close to the OEMs’ facilities, especially in emerging markets.

As the automotive industry is seeing a shaving off of sales and profits, it is increasingly exerting pressure on its suppliers. OEM suppliers are facing increased pressure from OEMs to have an increased global presence (closer to the OEMs’ own assembly lines). While this means expanding operations and investments, OEM suppliers also need to keep costs low to be competitive and meet OEMs cost reduction programs. Thus, OEM suppliers need to balance both these approaches to remain competitive.

EOS Perspective

While the strategy for cutting costs and location proximity largely remain mutually exclusive, suppliers that best manage to meet their clients’ expectations have a chance to shine. They can look at innovative strategies such as locating themselves in a third region (that offers proximity to the clients site as well as offers low costs) to best balance client demands. But most importantly, suppliers need to device an optimal manufacturing network keeping in mind all aspects and overall cost/location benefits. Suppliers that manage to come up with innovative solutions to handle complex client requirements, are well likely to come out as industry winners during time when the industry maybe entering a crunch phase again.

22/01/2016by EOS Intelligence EOS Intelligence No Comments

China in 2016 – Time to Broaden the CV Horizon

The article was first published in Automotive World’s Guide to the automotive world in 2016.

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Whatever the current state of affairs in China, let’s be clear that the decline in commercial vehicle production and sales numbers is merely a speed bump and not a meltdown.

China still offers significant benefits in terms of continued internal investment in infrastructure and development, above average industry and trade sentiments, and GDP growth that is higher than in most other economies globally. Besides, as China moves towards a more consumer-oriented economy, the demand for goods and services locally will become the engine of automotive growth. Beyond China, there is a need for OEMs to look at other avenues of growth, be it export-driven or geographical expansion of production base.

In November 2014, as we were penning down our thoughts on how China’s automotive market is likely to shape up in 2015, we were concerned about market growth rates, anti-trust fines, role of local OEMs, and how China will sustain its dominance in the global auto market. As we progressed through 2015, everyone – OEMs, government, consumers, analysts – focused only on one aspect – China’s economic slowdown. Unfortunately, numbers validate that fear as we go into 2016.

While the story of passenger vehicles was more positive, with production and sales growing by 2.2% and 3.9% year-on-year, respectively, during the first 10 months of 2015, the production and sales of commercial vehicles during January-October 2015 declined by 11.3% and 10.6% year-on-year, respectively (as stated by China Association of Automobile Manufacturers). Figures for trucks were down 12.7% (production) and 11.9% (sales). There was some positive momentum in October, but not enough to make much impact on overall slowdown.

Will 2016 be any different for China’s CV market prospects? Unlikely. At best, the double-digit decline in production and sales that was seen in 2015 might come down to single-digit figures on a year-on-year basis, and we might see the market consolidating its position as the world’s CV factory. Growth apart, the bigger issue will be how OEMs manage inventory and production lines in 2016, and how OEMs restructure their operations to mitigate further risks of China’s slowdown.

EXPORT

Could exports be a way out for CV OEMs, to avoid getting slammed by China’s economic slowdown? Perhaps. 2016 might just be the year that OEMs with production base in China look at China as a serious export hub for the Southeast Asian region.

With several large scale infrastructure projects underway in the Southeast Asian region, the demand for CV, especially trucks is likely to be significant. Indonesia is a great example of how China could benefit from being an export hub of CVs. The country aims to complete over 300 major infrastructure projects including ports, railways and highways by 2025, and is likely to see a substantial demand for transport and construction vehicles. Similarly, the ambitious One Belt, One Road project and the establishment of the Asian Infrastructure Investment Bank (which aims to fund infrastructure construction in the region) are likely to provide a lucrative platform for China-based CV manufacturers to cater to the growing need for various commercial vehicles in the region. Vietnam, The Philippines, and Myanmar are not far away in terms of their infrastructure investment hunger, and have over the years displayed significant need for trucks, construction vehicles, and vehicles for public transportation.

Neighbouring India presents a very interesting opportunity as well. With the new government’s focus on infrastructure development, there is space for China-based CV OEMs to make their mark. Beiqi Foton and BeiBen are actively exploring this opportunity, in spite of severe competitive threat from Indian OEM powerhouses Tata, Mahindra & Mahindra, among others.

2016 might just be the right time to explore these opportunities and take the leap of faith. Those CV OEMs which are able to see the long-term benefits of expanding in this region, are likely to gain immensely.

EXPAND

Another area of interest in 2016, specifically for Chinese CV OEMs, might be looking at setting up production units in South America and Africa, with OEMs unlikely to invest further in their China operations to add capacity at this stage of excess inventory. Africa and South America have been steady partners over the last several years, accounting for over 50% of China’s CV exports.

A renewed look at prospects in South America (Brazil as a possible export hub to both South and Central America) and Africa with its growing appetite for infrastructure development, an area that China also has deep interests in, could provide an avenue of growth for Chinese OEMs given the strained economic conditions locally. These initiatives, however, should not be knee-jerk reactions to current issues with slowdown, but must be looked at from strategic long-term perspective.

ENERGISE

Back home, one wonders how the CV market will restructure itself. Local CV OEMs are clearly dominant, with few foreign OEMs managing to make their presence felt in the market. Various JVs in recent times have somewhat changed this picture, but the CV market is still quite fragmented. While there are a few specialised large OEMs operating across the value chain, one wonders if it is not the right time for further consolidation. There are a large number of small vulnerable manufacturers operating in the CV space, and perhaps some form of consolidation will help strengthen market dynamics.

The other aspect to consider, thanks to the imposition of stringent emissions standards, is how China’s CV market is slowly moving from price-focused purchase to product-focused purchase behaviour – 2016 might just be the starting point of China’s westernisation of CV market.

As we stand at the doors of 2016, it seems that OEMs have not one but several ways out of this slowdown. The question is if they have the risk appetite to make most of this downturn by expanding their presence beyond China – in both sales and production terms.

08/07/2015by EOS Intelligence EOS Intelligence No Comments

North Africa: Is It The Next Frontier Market For Automotive Manufacturing?

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The article was also published in Automotive World’s Q2 2015 Megatrends Magazine

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Rapid urbanization, growing consumer base with rising disposable income, significant infrastructure investments, and proximity to the EU are some of the key reasons why automotive companies are increasingly attracted towards the North African markets. In spite of the impact of political upheavals on the region’s economy in recent times, the value proposition for global auto manufacturers remains strong.

The North African markets of Algeria, Egypt, Morocco, and Tunisia have attracted the eyes of multinational automakers in the last few years, thanks to rapid urbanization, rising disposable incomes, and continuous investments in infrastructure. In recent years, several automotive companies have assessed and entered these markets due to its favorable demographics.

North Africa’s market attractiveness relative to other regions has improved dramatically over the past years. According to E&Y’s Africa Attractiveness Survey of 2014, nearly three out of four respondents believed that Africa’s attractiveness will improve further over the next three years. Morocco and Egypt were seen as the two most attractive countries in North Africa by 55% of the respondents.

Despite several political and economic challenges, there is growing consensus that the region’s growth curve is on an upward trajectory, aptly supported by improvements in the EU economies, steadier inflation rates, and policy reforms undertaken by individual governments to harness growth.

While the FDI inflow statistics shows a different picture, the trend is expected to change as investors have been encouraged by the gradually restored political stability in these countries, as well as recent government initiatives to create business friendly regulatory frameworks.

What’s attracting automakers to North Africa?

In the North African region, Algeria, Egypt, Morocco, and Tunisia together accounted for a giant share of over 90% of the total new passenger car sales in 2014, as per statistics from International Organization of Motor Vehicle Manufacturers.

These four countries represent approximately 42% of the total African passenger cars market. After witnessing a steep decline in 2013 due to the weak external demand as well as the region’s volatile political environment, new car sales figures picked up in 2014. With the region’s growth back on track, rising investors’ confidence, and uptick in tourism, these sales figures are projected to increase in the next coming years.

For global OEMs, lower labor costs, proximity to Europe, expanding port facilities, various financial incentives, and increasing network of auto parts suppliers and subcontractors are making the region’s value proposition stronger.

North Africa’s strategic geographic location and its skilled labor force at competitive wages, has provided a perfect solution for vehicle manufacturers, allowing easy exports in order to cater to the needs of the European automotive industry. Besides, the region also serves as a gateway to the rapidly growing African and Middle-eastern automotive markets.

The region’s favorable demographics – a young and rapidly growing population, increased urbanization, and rising income levels are attracting many global automotive players. Consumers today in North Africa are more brand-conscious and technologically savvy. Forecasts from the OPEC suggest that car ownership in the Middle-East and Africa will nearly triple to 66 million by 2035, compared to 23 million in 2010, making it among the fastest growing markets in the world over the next few decades.

Individual governments have also played a vital role in the industry’s growth story by creating a favorable investment regulatory framework. Despite economic pressures and tight budgets, governments in these countries have continued to make significant investments towards infrastructure across ports, roads and railway networks. In addition, a range of financial incentives are offered to foreign investors in the auto industry. This includes free trade zones, multiple tax incentives, special land allotment, and partial contribution towards infrastructure expenses for auto industry projects. Further, the government has also invested towards training programs to build a skilled labor force that can fulfill the demands of the growing auto industry.

North Africa’s Big 4 Markets – Morocco, Algeria, Egypt and Tunisia

Morocco has aggressively marketed itself as the new regional automotive hub for global automotive players. According to a 2013 report by PricewaterhouseCoopers, the Kingdom will be the 19th-largest vehicle producer in the world by 2017. Renault, Delphi, Lear, Leoni, Yazaki, Faurecia, Sumitomo, and Hirschmann Automotive are some examples of key investment projects in recent years. These companies are not just providing employment, but, are also supporting a thriving automotive SME sector.

Renault’s operations in Morocco have provided a major boost to its automotive industry, as more than 40% of the parts are sourced locally. Renault aims to further expand its production capacity in Morocco and is also considering setting up an engine production plant to serve the two production plants. This represents large scale potential opportunities for auto parts manufacturers and suppliers. In October 2014, the Moroccan government announced the signing of five MoU deals with leading manufacturers of automotive wiring, vehicles interior & seats, metal stamping, and batteries.

As demand from both local as well as export markets grows, the industry is going to witness higher investment growth in the near future. Further, car makers that enter the Moroccan markets are also able to leverage on the pool of skilled labor and network of more than 40 Tier-1 suppliers.

Algeria’s automotive industry relies heavily on imports from Europe and China, importing approximately 75,000 cars annually. The age of current passenger vehicles plying on Algerian roads and low ownership rates present a significant potential for passenger car manufacturers. The Algerian government has played its part by promoting investments, and creating a business-friendly environment for the auto sector.

Mercedes Benz recently announced that it aims to transfer its investments from Egypt to Algeria in 2015 in order to take the advantage of benefits and facilities provided by Algerian government to foreign automakers. Renault’s production unit that became operational in 2014 has facilitated the development of local subcontracting and network of suppliers to create a local automotive industry. In order to meet the growing demand, Renault plans to triple its production output to 75,000 units by 2019, and has also committed to increase the level of local content.

With an increased interest of OEMs in the Algeria story, several opportunities will arise for suppliers of auto spare parts, plastic injection, paint as well as bodywork facilities.

In spite of being one of the smaller countries in the region, the automotive industry in Tunisia boasts of more than 80 companies, employing over 60,000 people, with a turnover of TND 2 billion (US$ 1.02bn) in 2013. The recent MoU signed with Iran for co-operation in car manufacturing will also help the Tunisian automotive industry grow further in the next few years.

Tunisia has a robust network of suppliers in the automobile wiring sector, and an abundant pool of skilled engineers and technicians at its disposal. The bigger benefit is the fact that the cost of hiring such talent is not only one-third the cost of that in the EU, but is also lower than its North African peers. Investment in manufacturing automotive components for exports is a priority sector for the government and in order to attract more investments, the government offers fully integrated sites with industrial, logistics, and infrastructure support to companies seeking to establish their manufacturing operations in Tunisia. There are plenty of opportunities for companies that manufacture automotive electronic, mechanical, and plastic components dedicated for exports to European and African markets.

New passenger cars sales in Egypt posted a solid growth of nearly 25% in 2014. With ongoing government plans to develop and encourage investment in the sector, and the improving tourism industry, new car sales are expected to grow further beyond 2015.

Nissan motors in October 2014 announced that it will invest an additional US$60 million towards expanding its assembly operations in Egypt. The government is also encouraging a vehicle production joint venture between domestic firm Nasr Automotive Manufacturing and Russia’s AvtoVAZ. The deal will not only give automotive production industry a major boost, but, it will also create opportunities for auto parts manufacturers and suppliers. For example, tire market Pirelli signed a MoU to invest US$107 million over a three year period to increase the production capacity in order to meet the growing demand.

Egypt is well poised to see a stronger automotive growth, driven also by very favorable demographics and proximity to the Middle-east.

A Final Word – Immense Scope, Manageable Challenges

OEMs must accept that North Africa will be unable to match the potential of the BRICS, MIST or ASEAN countries; however, given the region’s positive economic growth trend and rising investor confidence, the outlook for automotive industry is upbeat.

Various initiatives taken by individual governments have provided a boost to the automotive industry, and continue to attract global OEMs to establish local presence for both regional and export markets. Region’s favorable demographics, strategic location and competitive wages not only make it an attractive hub for auto exports, but, also a lucrative market for auto manufacturers which seek to tap the potential of African passenger cars markets.

There are a few challenges, political and economic, that need to be managed, in order to encourage OEMs to set up shop in North Africa. On the economic front, it would be imperative to demonstrate an investor-friendly regulatory environment, as well as the willingness to provide tax breaks and similar financial incentives to OEMs to establish production base and export hubs. While on the political front, ensuring stability and managing issues surrounding external factors such as ISIS will be critical to convince automotive companies to invest both monetary and technological resources in the region.

At this point in time, given the political, economic and social dynamics of the North African region, the scope for growth of the automotive sector is immense.

26/03/2013by EOS Intelligence EOS Intelligence No Comments

Turkey – When Being ‘The Gateway to Europe’ Wasn’t Good Enough

As with several emerging markets, Turkey’s automotive market slowed down in 2012. The ongoing crisis in Europe limited export opportunities (declined by 8% y-o-y) while domestic economic woes drove vehicles sales down (by 10% y-o-y). Although this came as a setback to the industry, which recorded strong growth during 2009-2011, the industry has bounced back as sales rebounded in the first two months of 2013.

In the last few years, Turkey, to the surprise of many industry experts, has emerged as an attractive automotive production destination. Several international OEMs, such as Ford, Hyundai, Toyota, Renault and Fiat, have set up production units in Turkey, largely to cater to growing domestic demand and as an export hub to Europe. At the same time, leading automotive OEM, Volkswagen, which has a significant presence in Turkey, remains an exception – Volkswagen does not have any plans to establish production capability in Turkey, and this has led Turkey’s Economy Minister to threaten the company with a 10% tax on the company’s imports.

The emergence of Turkey as an automotive production hub has primarily been driven by government incentives and subsidies to this sector. At the turn of 2013, the Turkish government announced incentives to encourage investment in the automotive industry as it targets USD75 billion in automotive exports over the next decade. Salient features of the incentives are as follows:

The investment scheme is an extension of a programme launched in 2009 and will offer tax breaks of up to 60% for new investments, up from 30% in 2012
Projects eligible under the latest revision include vehicle investments of more than USD170 million, engine investments of more than USD43 million and spare parts projects of more than USD11.3 million
Incentives in the lowest band include VAT and customs rebates, employee cost contributions and subsidies on land purchases

Turkey’s path to success as a preferred destination for manufacturing and as a growing automotive market has not been easy. There are several challenges facing the industry that have the potential to severely impact growth and expansion of the sector.

The Challenges

Overdependence on Europe for Exports – In 2012, Europe accounted for 70% of Turkey’s automotive exports and the country suffered in 2012 due to weak demand from the continent. As an immediate step to curb the impact of the ongoing Euro crisis, automotive OEMs are expected to shift focus towards the Middle East and North Africa to reduce its dependence on the unstable European markets.
High Taxation – Special consumption tax and VAT raise the domestic purchase price of a vehicle in Turkey to 60-100% of the pre-tax price. For instance, the price of a Ford Focus 1.6 Trend without tax is EUR15,259 in Germany whereas the same vehicle costs EUR11,000 in Turkey. While the German government imposes a 16% tax, making the final price of the car EUR17,700, the Turkish government imposes a tax of 64.6% making the price EUR18,132. In this context, if Turkey becomes a full member of the EU, it will acquire a larger share of the European market because of lower price before taxation. Turkey also has a higher tax on luxury cars compared with the EU while tax on gas is also one of the highest in the world.
Resistance from Labour Unions in the EU – Labour unions in EU are against the transfer of automotive production to Turkey while some car producers prefer to move to other emerging economies such as China and India which have experienced rapid growth in productivity.

While automotive OEMs face several constraints in the Turkish market, the opportunities seem to outweigh the challenges. Using Turkey as a production hub to cater to regions beyond Europe, such as Middle-East and North Africa is a potentially significant opportunity for automotive OEMs. At the same time, booming domestic demand should continue driving growth of players such as Volkswagen, General Motors, Ford, Hyundai, Renault and Fiat.

Even though 2012 temporarily put the brakes on rapid expansion, the Turkish automotive industry is expected to remain an attractive destination for manufacturing and a promising market for sales.
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Part I of the series – Mexico – The Next Automotive Production Powerhouse?
Part II of the series – Indonesia – Is The Consecutive Years Of Record Sales For Real Or Is It The Storm Before The Lull?
Part III of the series – South Korea – At the Crossroads!

08/03/2013by EOS Intelligence EOS Intelligence No Comments

South Korea – At the Crossroads!

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South Korea is the world’s fifth largest automobile manufacturer, behind China, Japan, the US and Germany. Automobile sales in South Korea breached the 8 million units mark for the first time in its history in 2012. The surge was mainly on account of strong overseas demand for locally-made models – exports accounted for 82% of these sales while domestic sales (accounting for the remaining 18%) actually contracted 4.2% to 1.4 million units in 2012.

Contracting domestic demand for local companies is mainly due to lack of real income growth, increased debt repayment burden and slump in the housing market in Seoul Special City (houses are often bought in South Korea for investment purposes). Meanwhile, overseas sales, cars exported from South Korea and vehicles assembled in overseas plants, expanded 7.9% to 6.8 million units in the same year.

The South Korean market is dominated by Hyundai Kia Automotive Group which accounted for 82% of domestic sales and 81% of exports in 2012. GM Korea, Renault Samsung and Ssangyong (acquired by Indian company Mahindra and Mahindra in 2011) account for 10% of the domestic sales while rest of the market is catered to by imports. BMW, Daimler (Mercedez-Benz), VW, Audi, Toyota, Chrsyler and Ford are the leading importers.

Free Trade Agreements

South Korea has aggressively pursued FTAs, with the provisional enforcement of an FTA with the EU from July 2011 and the full enforcement of an FTA with the US from March 2012. In the automotive industry, tariffs on parts and components were abolished as soon as the agreements came into force, whereas tariffs on vehicles will be abolished between South Korea and the EU over a three-to-five-year period and those with the US in the fifth year after enforcement of the agreement.

As a result of the FTA, exports to the EU sky-rocketed and the double-digit growth trend continued until March 2012. However, as the EU economy weakened, exports declined and returned to pre-FTA levels. In case of the US, exports surged around the time of the enforcement of the FTA in March, even though the tariffs on vehicles are yet to be scaled down. This phenomenon was labelled as ‘announcement effect’.

An interesting trend that has emerged is that whereas the domestic sales of South Korean cars declined by about 6.3% in 2012, domestic sales of imported cars increased by 24.6% in the same year. Moreover, for the first time, imports accounted for 10% of domestic sales, which is in sharp contrast to the 2% share about a decade back. European automotive OEMs have benefitted the most from this surge in demand for vehicles. This increased market share for European vehicles is mainly due to the fall in prices; as part of FTA between South Korea and the EU, the tariffs on large vehicles reduced from 8% to 5.6%.

Thus it can be said that while the enforcement of FTAs has been effective in boosting exports, it has brought about structural changes in South Korea’s domestic market.

Labour Strife

After an almost 4-year gap, strikes by the labor union returned to plague automotive manufacturing in South Korea in the summer of 2012. The industrial action, which also hit car parts manufacturers and some other industries, revived memories of the days when strikes were chronic in South Korea. Workers went on strike in 21 of the first 22 years since the unions’ formation in 1987; however, unions’ political influence has dimmed in recent years with declining memberships.

Hyundai, Kia and GM Korea were affected by the strikes and suffered record losses – Hyundai alone is estimated to have lost more than USD 1 billion. The main points of contention were the abolition of graveyard shift, wage increase and to confirming of permanent positions to the high proportion of contract workers. Although the companies agreed to most of the demands of regular workers, discussions with contract workers are still ongoing.

To offset the loss suffered from such strikes, OEMs are diversifying their production bases. Hyundai for one has moved to reduce the dependence on domestic manufacturing plants by expanding production in the US, China, India, Brazil and Turkey during the last decade. South Korean plants accounted for 46% of Hyundai’s capacity in 2011, down from 60% in 2008, when the last strike took place and 93% in 2000. Although another objective for establishing a global production network is to make inroads into the global markets.

Another consequence of strikes is that production costs are expected to shoot up, mainly on account of increased wages and also due to the additional investments that the OEMs will now have to undertake to make up for the reduced working hours per day; along with the abolition of the graveyard shift, another demand of the workers was to reduce the number of hours being worked in the two shifts from 20 to 17 hours.

Currency Uncertainties

The Won has been strengthening against the Yen and the US dollar since mid-2012, increasing production costs while adding to currency conversion losses, as sales in foreign markets translate into fewer Won. This has significantly eroded South Korean automotive OEMs competitiveness; companies such as Hyundai and Kia have consequently ceded market share to Japanese OEMs which are enjoying resurgence on the back of a brightening export outlook.

The Yen is also on a two-year low against the US dollar while the Won was at the highest level against the dollar since August 2011 in January 2013. Toyota can now in principle offer a discount of more than 10% to its US customers whereas South Korea’s Hyundai Motor has to raise the dollar price by over 5% to keep up with the Won.

A December report by the Korean Automotive Research Institute (KARI) states that South Korean export would shrink by 1.2% annually for every 1% drop in the Yen against the Won.

Over the years, the strategy of the South Korean Automotive OEMs has revolved around exports and the companies have established global production network to cater to geographies around the world. However, the recent upheaval in the foreign exchange markets have raised serious doubts about the company’s short-medium term prospects.

With increasing competition from global OEMs both in the domestic and global markets (resulting from FTAs) and currency uncertainties nullifying cost advantages that the Korean car makers have traditionally relied on, it is perhaps time for country’s OEMs to shift focus from quantity to quality – stressing superior design and engineering over sales growth.

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In our fourth discussion in this series, we understand the automotive market dynamics of Turkey. Its proximity to Europe and cultural affinity to Asia has seen a growing presence of both European and Asian OEMs. Is Turkey a long-term growth market for automotive OEMs, or is the market as developed as most western countries?

22/02/2013by EOS Intelligence EOS Intelligence No Comments

Indonesia – Is The Consecutive Years Of Record Sales For Real Or Is It The Storm Before The Lull?

Part II of our Automotive MIST series brings us to Asia – Indonesia, now the second largest South-east Asian automotive market.

Indonesia, South-east Asia’s biggest economy, is now set to become the region’s largest automotive market as well. While Indonesia sold more vehicles than Thailand for the first time in 2011, the land of white elephants made a strong recovery in 2012 and regained its status as the biggest automotive market in the region. This, however, wasn’t enough to take the sheen off the performance of Indonesia’s automotive market in 2012. The country crossed the 1 million mark (vehicles sold in a calendar year) for the first time, surpassing expectations and beating all forecasts. This is the third consecutive year of record sales and represents something of a gold rush for automotive OEMs.

Indonesia achieved GDP growth of 6.2% in 2012 only slightly lower than the 6.5% it clocked in 2011. Over the past decade, its GDP growth has averaged 5.7%, highlighting a positive domestic economic environment. Rising average income levels has created a burgeoning middle class (half of its population of 240 million). Low borrowing costs, rising purchasing power, cheap subsidized fuel, reduced inflation and currency stability have positively influenced the automotive sector. Huge construction projects and mining investment drove the demand for commercial vehicles.

It is no surprise, then, that car-makers are lining up to increase output, with both incumbents and new entrants making large investments to improve their production capacity in the country. The market is currently dominated by Japanese OEMs, with a share of almost 90%. Toyota (along with its affiliate Daihatsu) accounts for almost half of domestic sales, while Mitsubishi, Suzuki, Honda and Nissan are the other important players (in that order).

The Japanese automotive OEMs are on a massive expansion drive in Indonesia – major automotive OEMs and over 50 automotive component makers from Japan committed an investment of about USD 2.4 billion in 2012 to boost production capacity. Car production is expected to increasefrom 900,000 units in 2012 to 1.5 million units in 2015.

Toyota Motor Manufacturing Indonesia (TMMI) is building two manufacturing plants at a combined cost of USD 534.4 million to double its annual production capacity to 240,000 units.
Suzuki Indomobil Motor, a joint venture between Suzuki Motor and Indomobil Sukses Internasional plans to spend USD 782.6 million to double its annual production capacity to 200,000 units.
Nissan Motor plans to invest USD 400 million to increase production capacity from 150,000 to 250,000.
Honda Motor is building an automotive plant that would triple its production capacity to 180,000 per year. The plant is expected to be operational by 2014 and create 2,000-5,000 jobs.
Astra Daihatsu Motor, a joint venture between Daihatsu Motor and Astra International is spending USD 233.1 million to boost capacity from 330,000 to 430,000 units.
Isuzu Astra Motor Indonesia (joint venture of Isuzu Motors and Astra International) and Krama Yudha Tiga Berlian Motors (subsidiary of Mitsubishi Motors) are investing USD 111.1 million and USD 27.8 million, respectively to expand their production capacities.

Other fringe players such as GM, Ford and BMW are also expanding their presence while Tata Motors also recently entered the market.

In August 2011, GM announced that it would be resuming operations at its plant in West Java which has been shut since 2005. The company is investing USD 150 million and the plant is expected to be operational by this year.
BMW also recently doubled its production capacity through an investment of USD 11.15 million.

The next step up for Indonesia is to come out of Thailand’s shadow and establish itself as an export hub. In 2012, exports accounted for 45% of Thailand’s automotive industry while the corresponding figure was only 16% for Indonesia. After the floods in Thailand in 2011, automotive OEMs are keen on diversifying production and Indonesia has emerged as the manufacturing hub at about the right time for them. Consequently, OEMs have committed over USD 2 billion to expand their production capacities in Indonesia.

Underlying Growth Potential

Vehicle ownership levels in Indonesia are very low at 32 per 1,000 people, compared to 123 cars per 1,000 people in Thailand, 300 cars per 1,000 people in Malaysia and around 460 cars per 1,000 people in developed countries. Hypothetically, to reach the same penetration rate as its neighbouring countries, Indonesia would require additional 108 million cars on the road. Given that Indonesia is the fourth most populous country in the world, the potential is obvious and these statistics fuel belief that despite the record sales, there is significant scope for continued rise in sales. Industry experts forecast annual sales of 2 million cars by the end of the decade and by then the country would have long since overtaken Thailand as the region’s biggest automotive market.
In 2013, the Indonesian government announced the ‘Low Carbon Emission (LEC)’ program to spur the development of eco-friendly vehicles to include hybrid cars, electric cars and ‘Low Cost Green Cars (LCGC)’ – vehicles with efficient fuel consumption. With the automotive industry ready to commit USD 4.5 billion on the project, Indonesia has the potential to be a major player in the LCGC market if the government goes ahead with its promise to provide tax incentives and other support for the production of these LEC vehicles. The project will completely change Indonesia’s position in the global automotive industry and may also transform the landscape of the domestic industry by boosting car sales in the long term. With bigger volumes generated from LCGC program, manufacturers operating in Indonesia could also catch up with Thailand by exporting to new markets, particularly other developing economies.
Over the years, automobile manufacturers have been notorious for their penchant to establish production set-ups close to component suppliers – to the extent possible. Indonesia has now reached a stage where it has a substantial base of local component suppliers, making the country an even more attractive destination for vehicle production, and with OEMs now planning production expansion in the country, this should further stimulate growth of the components industry.

The Challenges

The success story is not without its woes though. The economic meltdown in Europe and critical challenges in the domestic market will potentially slow down growth if not addressed timely and properly.

Fuel Subsidy – The Indonesian government wants to reduce the fuel subsidy to free up funds to invest in the development of the country’s infrastructure. The government had planned to increase the fuel prices but the proposal was shot down by the parliament in March 2012. The price increase is, however, inevitable and once the proposal does go through, it increases the total cost of vehicle ownership and maintenance, thereby reducing purchasing power of vehicle buyers. (Read our Perspectives on India’s fuel subsidy struggles: India – Reducing Reliance on Diesel)
Enforcement of Minimum Down-payment – To prevent the risk of a ‘car loan bubble’ the government reduced the Loan-to-value ratio (LTV) to 70% when borrowing from banks to buy cars – essentially forcing buyers to pay more down-payment than before. Loans account for 70% of all new car purchases in Indonesia and although it did not affect vehicle sale in 2012 it is expected to have an impact on sales in 2013.
Dependence on Japanese OEMs – With Japanese OEMs accounting for almost 90% of the Indonesian automotive market, Indonesia is overly reliant on Japan. This became evident during the 2011 earthquake in Japan, when disruptions in supply chain were felt across ASEAN, including Indonesia. Although automotive sales in Indonesia did witness impressive growth, such dependence acts as a hindrance and might hold the country’s automotive industry back from fulfilling its potential in the long run.

So, is the upswing in the Indonesian automotive market for real or is it tempting to deceive again? After sticking with the country as other companies bailed out during one of its periodic meltdowns, Japanese auto OEMs are now benefiting from the consecutive years of record vehicle sales in Indonesia. And the extremely low vehicle penetration rate highlights the huge underlying potential. However, critical challenges remain and the country must tackle them effectively if it wants to become the preferred manufacturing hub in the ASEAN region.

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We study the South Korean automotive market in our next discussion. Being the most developed automotive sector amongst the MIST countries, we try and understand the underlying growth potential in this Asian giant and evaluate the challenges faced by OEMs and component suppliers.

Mexico – The Next Automotive Production Powerhouse? – read the first part of our MIST series.

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