Strategies to steer through Southeast Asia’s promising automotive market November 2015 Riding Southeast Asia’s automotive highway In this paper 2 Southeast Asia’s motoring potential 3 An uneven road to growth 4 Dual carriageway – Regional manufacturing hub and local sales 7 Bumps in the road – Volatility and complexity 8 Navigating Growth Markets 9 Strategies to steer through complexity 15 Cambodia, Laos, Myanmar, Vietnam (CLMV) – The next automotive frontiers www.pwc.com/gmc Riding Southeast Asia’s automotive highway The region as a whole has low levels of car Following a few sluggish years, the global ownership and many first-time car buyers. It is automotive scene is starting to look up, most expected that many two-wheeler owners will notably marked by an increase in M&A activity eventually convert to four-wheeled vehicles, in 2014. According to PwC’s automotive analyst forming a large group of first-time buyers as group, Autofacts, global production is set to rise affluence grows. Many potential new drivers in the by 22.3m units between 2014 and 2021, at an region still own two-wheelers, with motorcycle annual compounded growth rate (CAGR) of 3.4%.1 penetration rates at over 80% in Indonesia, Whilst the BRIC markets have previously led global Thailand, Vietnam and Malaysia5. In a study growth, car sales have dipped 20% to date since conducted by the Pew Research Centre last year, December last year, due to slowing growth in China car owners accounted for less than 10% of the and declining sales in Russia and Brazil, while populations in Indonesia, the Philippines and newer growth markets take the lead. One of these Vietnam, compared with 51% in Thailand and 82% growth regions is Southeast Asia (SEA).2 in Malaysia.5 Enhancing this potential is the fact that many households which do own a car have Southeast Asia’s motoring potential more than one, and are repurchasing cars within a There are many reasons to remain optimistic shortened time frame. about the SEA automotive scene. The region has a Fig 1. Share of households that own a car (%) combined GDP of US$1.9 trillion, a population of over 600m and an average per capita income nearly South Korea 83% equal to China’s. Malaysia 82% Overall annual GDP growth is forecast at 5.4% Japan 81% from 2014 to 2018, according to the Organisation Thailand 51% for Economic Co-operation and Development 17% (OECD), supported by a large, growing middle China class, which is expected to more than double to India 6% 400m by 2020. Philippines 6% 4% The SEA automotive sector has grown at 11% CAGR Indonesia in the last 5 years to reach total sales of 3.2m Pakistan 3% units in 2014 according to the ASEAN Automotive Bangladesh 2% Federation3, and despite the economic slowdown, 2% Southeast Asian consumers continue to have Vietnam considerably high intent of purchasing new cars – Source: Pew Research Centre, 2014 68% in Thailand and 63% in Indonesia in the next two years.4 2 PwC An uneven road to growth In Indonesia, car sales have slipped by a relatively While SEA has enjoyed a period of strong growth, smaller margin of 2% from 2013 to 1.2m units in in recent years performance across the region has 20143, but continued to decline in first six months been uneven. Car sales have declined in Thailand of 2015, slipping 18.2% year-on-year to 525,458 and Indonesia while stagnating in Malaysia. units. Reduced fuel subsidies resulting in raised In contrast, the Philippines and Vietnam have fuel prices along with a depreciating rupiah have experienced continued growth since the Asian led to the poor sales performance. financial crisis. On the contrary, smaller markets like the Philippines Overall automotive sales in the ASEAN 7 countries and Vietnam have shown significant growth. (Indonesia, Malaysia, the Philippines, Thailand, Vietnam, Singapore and Brunei) have fallen by The automotive sector in the Philippines has 10%, from 3.5m units in 2013 to 3.2m units in benefited from rising per capita income and 2014. This decline can be attributed largely to competitive bank-lending rates. Motorisation rates domestic reasons, as well as global economic continue to remain on a steady course towards the instability surrounding the Euro zone and rising US next wave of growth, according to Ms Ma Fe Perez- interest rates. Agudo, president of the Association of Vehicle Importers and Distributors (AVID) and President The two biggest automotive markets in SEA - and CEO of Hyundai Asia Resources, Inc. (HARI) Thailand and Indonesia, saw vehicle sales decline in the Philippines. last year. In Thailand, new vehicle sales dropped by 33.7% to 881,832 units in 20143, marking two Total vehicle sales in the country reached 212,000 consecutive years of decline. units in 20143, and is forecast to hit 310,000 this year. In fact, car sales reached a record of 19,731 Several factors are likely to have contributed to units in March 2015 against last year’s 15,292 units Thailand’s weakened performance, starting with in the same month. However, some see this as a the first car buyer incentive scheme launched in rebound from the Asian financial crisis and expect 2012. The tax refunds for first-time car buyers that growth rates to level off eventually. Next year’s was intended to revive automotive manufacturing presidential election is expected to have a significant significantly increased demand that year, but cost impact on the industry and the country overall, as the country US$2.5bn and have left consumers observers wait to see if the new administration can defaulting on loans. Many who signed on to the sustain its current economic growth. scheme changed their minds or could not pay monthly instalments, resulting in their vehicles Vietnam has one of the fastest growing automotive being confiscated by finance companies and sold at sectors in SEA and is experiencing a sales boom. lower prices in the used-car market. This, together According to the ASEAN Automotive Federation, with high household debt, an unstable political total vehicle sales have climbed 35% over the past environment and security threats has diminished year to 133,588 units3, due to lower interest rates consumer confidence and spending. and inflation, coupled with increasing motorisation rates and soaring demand among increasingly affluent consumers. Riding Southeast Asia’s automotive highway 3 Dual carriageway – Regional Also, to compete more effectively, automakers manufacturing hub and local sales are now increasingly localising production of Despite this uneven performance, the region components, instead of just assembling vehicles remains attractive for growth, not only from local in the markets. Later in this paper, we will look sales to the 600m people in the region, but also as a at strategies for driving sales in these markets manufacturing hub for regional and global exports. and for optimising production capabilities for export within SEA or globally, to drive increased profitability. Fig 2. Overview of the SEA automotive industry SEA key indicators • Population: 619m • GDP per capita: US$3,695 • Vehicle Production: 3.88m units • Vehicle Sales: 3.14m units Laos • Population: 7m Myanmar • GDP per capita: US$1,666 Philippines • Population: 53m • Vehicle sales: 14,700 • GDP per capita: US$1,480 • Product Champion: Motorcycle • Population: 99m • Vehicle production: 4,325 (estimated) • GDP per capita: US$2,855 • Vehicle sales: 1,800 • Vehicle production: 60,000 • Product Champion: Motorcycle • Vehicle sales: 230,000 • Product Champion: Nil Thailand • Population: 68m • GDP per capita: US$6,022 Vietnam • Vehicle production: 1.8m • Population: 92m • Vehicle sales: 880,000 • GDP per capita: US$2,007 • Product Champion: 1-ton pick-up • Vehicle production: 40,000 • Vehicle sales: 130,000 • Product Champion: Motorcycle Cambodia • Population: 15m • GDP per capita: US$1,085 • Vehicle sales: 4,100 • Product Champion: Motorcycle Malaysia • Population: 30m • GDP per capita: US$10,934 • Vehicle production: 600,000 • Vehicle sales: 670,000 • Product Champion: Passenger car Indonesia • Population: 255m • GDP per capita: US$3,513 • Vehicle production: 1.3m • Vehicle sales: 1.21m • Product Champion: SUV, MPV, big trucks Source: BMI, OECD, OICA19, Thailand Automotive Institute All data quoted in the figure is based on 2014 statistics 4 PwC SEA’s automotive market is dominated by vehicles in Indonesia, Vietnam and Malaysia, foreign players, led by the Japanese, although and is now exploring the possibility of a new European, American and growth market players manufacturing base in Indonesia. are increasingly jumping on the bandwagon. Volkswagen (VW) for example, re-entered the As SEA’s leading manufacturing and assembly hub, Philippines market in 2013 and appointed Ayala Thailand has the most comprehensive auto parts Corporation as its distributor. Earlier this year, VW supplier base, attracting more and more automakers announced plans to invest US$200m in setting to set up R&D plants there. From being a large up a manufacturing facility for imported parts consumer market, the country has evolved into an assembly and production. Another relatively new export hub serving both the immediate region and entrant in SEA, Tata Motors, is looking to the beyond, including the Middle East, China, India, region to strengthen reviving sales after two years Europe and America. of consecutive decline. It entered the Philippine market last year, is currently aggressively expanding its distribution network for commercial Fig 3. Vehicle Sales Growth by Country (% chg y-o-y) Laos 21% Indonesia 18% China 16% Vietnam 16% Philippines 11% Brazil 8% India 7% UAE 7% Australia 5% Cambodia 5% Malaysia 4% Poland 4% Thailand 3% South Korea 3% Turkey 2% United Kingdom 0% United States 0% South Africa -1% Germany -1% Mexico -1% France -2% Italy -7% Singapore -14% -20% -10% 0% 10% 20% 30% Source: BMI Riding Southeast Asia’s automotive highway 5 Fig 4.