Automobile Industry
Automobile Industry
Automobile Industry
. Diagram1 provides a
snapshot view of this.
World automotive industry, in its early stages of development, was concentrated
mainly in hands of developed countries like U.S., J apan etc. But as automobile industry
become more and more standardized, the production base of most of auto-giant
companies was shifted from the developed countries to developing countries.
Standardization makes production more profitable in developing countries due to low
cost of labor. Thats why countries like Thailand, China today are the main production
base for many multinational automobile companies, and that explain why this study is
concentrated only on selected countries in Asia. Table 1 below compares basic features of
automobile industry in three major markets in the world.
Table 1: Comparison of Basic Features in Three Major Automobile Market
Characteristics US Market European Market East and South East Asian
Market
Contribution to Motor vehicle The automotive industry represents In Japan industry represents 13 %
*
http://www.loc.gov/rr/business/BERA/issue2/industry.html
.
In Asia-Pacific region, the growth of component manufacturers has taken a
different route. Most of the J apanese producers followed a tight relationship with their
suppliers (independent or quasi-independent). The existence of the keiretsu system
(business affiliation) in J apan greatly facilitated such an arrangement. But other
manufacturers especially Korean, Chinese and Indian gave lot of importance on price and
quality while buying from number of trusted suppliers. As a result of this indigenous
auto-component sectors are thriving in many Asian countries though some MNCs are
also present.
II.II.III Pricing:
Pricing of automobiles is a complex issue as it is dependant on fixed cost,
economies of scale, technology and other aspects. Competition and consumer demand
also play important role in this. Currently, most of the automobiles companies consider
price reduction as major strategic move for survival. For price reduction, companies need
to take series of decisions at every stage of production and selling; starting from
managing factors of production and supply chain to negotiation with dealers. Price is one
of the factors that influences sales variability of products and services significantly.
Companies require appropriate policies to be played intelligently for managing the series
of decisions. Interestingly, reducing prices does not always generate profits. It should be
in combination of other decisions regarding maintaining quality and marketing of the
product. One undesired consequences of considering price reduction as the main means
of obtaining customers, is attracting disloyal customers, who are attracted by the offer but
do not see any other value in the company. Their life-cycle in the end is short, and they
receive a much greater return from the company than the company can even make up the
cost for obtaining them.
For example, Autoliv Inc., formed by the merger of the Swedish company, Autoliv AB, and the
Automotive Safety Products Group of the United States company Morton International
13
Many companies take strategy of different pricing policies for different product
segments of the considering the expected value to the customers through the offered
products. Companies develop innovative strategies to maximise profits without hurting
customers. Pricing is adjusted to the qualities, purchase volume, development potential,
loyalty and profitability factors.
As the fixed cost is very high, companies look for different models from same platforms
and decide about the total output of each model. The wide range of outputs along with the
degree of economies of scale drive down the average cost of production. If the auto
makers are basing price on average costs, expected deviations in output in the short run
(between model years) could significantly affect prices without any change in factor
costs. Moreover, higher the fixed costs as a proportion of total costs, the more sensitive is
short run marginal cost to changes in the costs of the of variable factors of production
(for example sudden rise in prices of steel or rubber). Thus the low proportion of the
variable costs in the auto industry would make short run marginal costs especially
sensitive to variable factor price changes. If firms are short-run profit maximizers, prices
should respond positively to changes in variable factor costs (Hoffer, et al. 1976).
Box2: Rising Factor Prices hit Indian Automobile Industry
With rising freight charges and hardening prices of steel, rubber and aluminum putting pressure on margins, Maruti
Udyog Ltd on Wednesday announced that it will hike the price tags of all its cars by this month-end. While Hyundai
has already hiked prices earlier this month, other manufacturers like General Motors and Ford are expected to follow
suit by July-end. This fresh hike the second this year coupled with rising interest rates and increased state levies
like Road Tax and Sales Tax would neutralize the 8% excise duty benefits offered by the government in the 2006-07
fiscal.
Source: Times of India, 19
th
July 2006
In most of the countries, automobile sector is identified to have monopolistic
market (in some countries it is oligopolistic) structure where many players compete for
market share with significant amount of product diversification. As a result of this, in the
long run, most of the players earn zero normal profit and in the short run super-normal
profit. Hence, competition in the short run is intense particularly when product life-cycle
is very short. Moreover, within segment the nature of competition sometimes is
oligopolistic as the number of models under one segment may be limited in a model year.
Dominant firm sometimes take a strategy of limit pricing setting it below monopoly
prices while bringing a new model to bloc entry of other firms in that category. However,
after sometimes, it raises prices and allows entry in the usual fashion and convert the
competition towards non-price variables. If non-price attributes involve slower responses
by the other players e.g., due to product development lags, the dominant firm is likely to
prefer to manipulate these characteristics in order to maximize profitability. According to
(Kwoka, 1984), when a dominant firm or core begins with a substantial advantage over
the fringe, we would expect an initial effort to drive the fringe down in size through
strategic product policy, followed by product alterations which increase profitability
while permitting some entry. According to Copeland et al. al.(2005) companies develop
only one vintage of a product at a time and accumulate inventories and consequently sell
multiple vintages of the same product simultaneously. The profit maximizing pricing and
production strategies under a build-to-stock inventory policy lead to declining prices and
rise in sales (and fall there after) and similarly, inventory stocks get built up initially and
then gradually get depleted. A significant portion of the price decline is driven by
14
inventory control considerations, as opposed to decreasing demand. Hence, along with
limit pricing strategy, inventory control plays an important role in maximizing profit of
the automobile companies.
There has been evidence of collusive pricing also. The price disclosure law in the
USA made major players to come together and which created a collusion among
themselves regarding equalization of quality adjusted prices. The law has inhibited
players to provide price discounts (Boyle & Hogarty, 1975). Sudhir (2001) uses the
ability-motivation theories and argues that in markets with high concentration and stable
environment cooperative behaviors among producers are sustainable and therefore
provide firms with the ability to cooperate. He also argues that in a market where firms
current customers tend to be loyal, they have the motivation to compete aggressively for
new customers. Firms do so as they believe about the positive benefits of loyalty from the
customer base in the long run. As consumer loyalty in the market increases, the gains
from increasing market share by aggressive competitive behavior are more than offset by
losses in profit margins. Firms therefore have the motivation to price cooperatively.
In the USA, earlier GM used to announce price in late summer and Chrysler and
Ford would follow suit. However, foreign competition and erosion of domestic
concentration has changed price uniformity. Prices are now continually altered
throughout year. In general, price variation is subject to mark-ups, costs and also imports
duties and other trade barriers (Goldberg and Verboven, 1998).
II.II.IV International Trade:
The dynamics of international trade in automobile sector attracted attention of
economists and policy makers to formulate trade strategy. International trade of
automobiles has been influenced both by liberalization as well as protectionism. In the
1970s and 1980s, the U.S. auto industry faced its first major challenge from foreign
competition as J apanese automakers aggressively entered the American market. The
decline of automobile sector in USA and rising J apanese imports led to protectionism in
USA through imposition of quota. This led to voluntary export restraints (VER) from
J apan anticipating further restriction. J apan continued with VER even after the relaxation
of quantitative restrictions by the USA government in 1985. In the post oil crisis period,
J apanese fuel efficient cars were high in demand in USA (Finan, & Rappoport (1982).
Also, reluctance of the Big Three in the USA to produce smaller cars led to increase in
import demand from J apan
**
. Apart from this, the annual import limit had the perverse
effect of encouraging J apanese car companies to change the product mix of vehicles they
shipped to the USA, sending more upscale models, where the profits were greatest, and
fewer smaller, cheaper cars. In the early 1980s estimates say that the quota was
transferring US$5 billion a year in additional profits to J apanese automakers, who could
**
This was due to constrained small car production capacity by the US players in short run.
15
sell their quota-limited cars at a premium
and the nature of segmentation does not match with the types of production data.
Hence, the analysis of trade data could not be linked with the production data.
The trade analysis is done considering these 6-digit codes. These codes constitute all
the components of vehicles and vehicles as a whole. Codes are segmented into 7 sub-
groups viz. Rubber and Glass component, Iron and Steel component, Engines and parts,
Auto component I, Auto component II, Auto component III and Vehicles. Auto
component I, consists of pulleys, gaskets, screws, electrical fittings, Auto component II
contains body components, bumpers, brakes, clutches, safety component and Auto
component III includes seats, indicators, bicycle and motor cycle components, etc. The
trends of international trade related to these sub groups are analyzed to understand their
pattern. First, six sub-groups are mainly components and among these first three are
critical and major components for any vehicle. Auto-components (I-III) are mainly small
components and accessories. The aggregated trade dynamics are analyzed to understand
the nature and technical standards of the automobile industry of those selected countries.
Also, major export destination and import sourcing countries for each group will be
analyzed to evaluate the change in trading partners. All the export-import data of all the
countries are taken from World Trade Integrated Solutions (WITS).
Table 3: Understanding HS Code of Automobile Industry
Segmentation of HS Code (82 codes at 6-digit level)
GR-I
Rubber and Glass component
GR-II
Iron and Steel component
GR-III
Engines and its parts
GR-IV
Auto-component-I
GR-V
Auto-component-II
GR-VI
Auto-component-III
GR-VII
Vehicles
Detailed Group wise HS codes are given in the appendix.
The study follows 82 codes as per Automotive Component Manufacturers Association (ACMA), India.
18
IV. Brief Review of Automobile Industry Growth in Selected
Countries
IV.I China:
China today, is one of the most important automobile markets in Asia. From the
beginning, China's automobile industry continues to grow rapidly. The automobile
industry in China is composed of 120 vehicle manufacturers 9currently getting
consolidated), employing nearly 2 million workers.
In early days, there was a debate on whether automotive industry should be
controlled by public enterprises or automotive industry should be restricted in the hand of
private sectors. This debate has ended with the solution of joint venture. That is why
today most of the Chinese automobile company runs in the hands of both public and
private enterprises. FDI is also a major factor of the development of Chinese automotive
industry. During the 1990s, China received more foreign investment than any other
developing country as investors sought to reap some of the gains of Chinas fast-growing
economy. Much of this foreign investment in China was in the automobile industry. By
2001, more than 800 Chinese companies in vehicle-related industries (including
component manufacturers) had received FDI and the total agreed investment was valued
at $233 billion with actual registered capital of $12 billion.
Despite China's growing auto industry, productivity lags behind the other Asian
competitors, and industry lacks the ability to conduct research and development, relying
on its foreign partners to develop new vehicles. Although Chinese automakers are
presently creating new and more trade friendly policies and methods through foreign
joint-ventures, but China's automotive industry still remains underdeveloped both
technically and managerially. These conditions present a significant challenge for China's
automotive industry, and it is expected to take a considerable amount of time before
China becomes a global competitor in the automotive market.
IV.II India:
India is also an emerging market for worldwide auto-giants. Due to low cost of
labor many multinational companies are investing in India. Its automotive industry has
grown very rapidly from the middle of 1990s. Recently, there are two big investments
expected to boost the sector further, one is from Maruti and the other is from Honda Siel.
Tatas proposed investment to manufacture cheap car is also expected to boost the
industry.
India is the second most populated country in the World, and the growth rate of
Indian economy is very high, which indicates the presence of huge demand in different
industrial sectors. Automobile industry is not the exception in this regard. Indian
automobile sector has huge demands from its own country. This demand also attracts the
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giant automobile suppliers through out the world to come and invest in the Indian
automotive industry.
Due to the contribution of many different factors like sales incentives,
introduction of new models as well as variants coupled with easy availability of low cost
finance with comfortable repayment options, demand and sales of automobiles are rising
continuously.
Government has also contributed in this growth by liberalizing the norms for
foreign investment and import of technology and that appears to have benefited the
automobile sector. The production of total vehicles increased from 4.2 million in 1998-
99 to 7.3 million in 2003-04. It is likely that the production of such vehicles will exceed
10 million in the next few years.
The increase in the exports of automobile sector is also due to the adaptation of
international standards. After a temporary slump during 1998- 99 and 1999-00, such
exports registered robust growth rates in last few years. Investment is also a major factor
for this growth of Indian automotive industry, with investment exceeding US$ 11.11
billion, the turnover of the automobile industry exceeded US$ 13.22 billion in 2002-03.
The turnover has increased to US$ 18.5 billion by the end of 2004-05. Recently in 2006,
Maruti invested US$ 0.67 billion and Honda invested US$ 0.2 billion on small cars. It is
expected that by the year 2016, the turnover of the Indian automobile sector could grow
to $145 billion. Today, this sector has emerged as a sunrise sector. However, the
overcapacity problem is haunting many of the players as demand may not go up
significantly. Hence, many players are looking for an external market for Indian
automobiles. The prospect of component industry is quite positive. The leading local
firms have established over 200 technical cooperation agreements with foreign firms to
be able to reach international standards in cost and manufacturing.
IV.IV Indonesia:
Although the development and the markets of Indonesian automotive industry is
not as drastic as compared to the other three countries discussed above, but Indonesia's
automotive industry is currently growing steadily.
Many factors, like easily obtainable credit and low interest rates, coupled with a
strong increase in consumer lending by banks and an abundance of new, low-priced
models assembled locally, have fueled a car boom in Indonesia.
Under AFTA, tariffs were cut, including those on cars, which brought new
opportunities to Indonesia to export vehicles to ASEAN members. Since, 2000, through
liberalization programmes, tariffs have been brought down, component industry has been
further strengthened. However, as the entire region is gearing up with the automobile
sector Indonesia will face stiff competition in South East region.
20
Shortcomings like, poor infrastructure, legal uncertainty and a lack of tax
incentives have been blamed for declining foreign investment in the sector, but still it
remains a key pillar of the economy with investments raising more than US$7 billion and
generating employment of over 300,000. The economy expanded by 5.1% in 2005,
mainly spurred by consumption, and is expected to continue on track, spurring hopes of
continued demand for cars
.
IV.III Thailand:
Thailands automotive industry is the South East Asias largest and most
advanced automotive industry. Thailand's automotive industry is well on the way to
solidifying its status as the Detroit of Asia. It is already the ASEAN's largest automotive
market and assembler and world's second largest pick-up truck market after the U.S.A.
Although for Thailand, most of the export growth has come from Europe,
Australia and the Middle East, ASEAN are becoming major markets. With a population
of approximately 550 million and 2003, production totaling 1.3 million vehicles, industry
sources predict that an integrated ASEAN auto market could become the world's fifth
largest in 2005. The Thai-Australian Free Trade Agreement (2005) is expected to raise
automotive trade with Australia.
Thailands rising status in automotive industry may also boost up due to many
new ventures in the country such as by the Tata Industries, the major Indian Auto
producer. Tata Motors is in the process of setting up a pick-up truck manufacturing plant
in Thailand, from where it could access the ASEAN and the Chinese markets through the
Free Trade Area (FTA) treaties. The entry of Tatas into Thailand would pave the way for
other Indian auto players also to explore manufacturing opportunities in this country.
Thailand Automotive Industry (TAI) has developed an 8.7 billion baht (US $
217.5 million) plan to further develop the sector. This plan includes human resource
development program, automotive experts dispatching program to establish clusters and
upgrade auto parts manufacturing technology, generation of fund for the establishment of
research and development centers, development of information center to analyze industry
data and automobile export promotion center.
V. Production and Market Structure:
In this section we have addressed the production and the market structure of the
selected four countries. In this process, we have analyzed the structure and organization
of major companies of each of these countries, along with the market shares held by these
(Source: http://www.atimes.com/atimes/Southeast_Asia/GG01Ae01.html)
21
companies. Finally, we have discussed the overall production structure and the nature of
demand in the market. A brief description of governments policy towards promoting
automobile sector is given as reference to changing features of automobile industries of
these countries.
V.I: China
Historically, Chinese automobile industry has been highly fragmented. The
industry is made up of 120 complete vehicle manufacturers, 780 refitted and special-
purpose vehicle manufacturers, and over 1,800 auto parts and components enterprises,
149 of which are joint ventures (Veloso & Kumar 2002). Changchun First Automobile
Works (FAW group), Dong Feng Motor Corporation (DMC), Shanghai Automobile, etc
are major domestic players. The Chinese government gives high priority to developing a
competitive indigenous auto industry. China maintained high tariff wall to protect
domestic automobile sector. In 2000, average tariff on vehicles were more than 40%.
Automobile policy allowed joint ventures (J Vs) with MNCs. Generally J Vs were limited
to single product line. Local content regulations require at least 40 percent local content
for sedans and 50 percent for commercial vehicles (Veloso & Kumar 2002). Moreover,
sedan manufacturers must use 60 percent local content in the second year and 80 percent
in the third year. In addition, joint ventures are also pressed to accept parts produced by
subsidiaries of their partners. Quite interestingly, today China has a strong component
manufacturing sector and tariffs on components have come down significantly.
During the Tenth Plan (2001-2005) government wanted some amount of
consolidation to tackle the problem of growing overcapacity in the industry. The state
decided not to establish new sedan-manufacturing facilities. Instead, government aimed
to concentrate gradually on developing three major auto groups, FAW, Shanghai, and
DMC through J Vs with MNCs.
Having experienced a "Golden Period" in 2005, the Chinese automobile market
has been influenced by revitalized industrial policies in 2006, which include the
adjustments in automobile customs, petroleum price and excise, the "three guarantees"
policy (provisions on maintenance, replacement & return of private auto) and incentive
policies on the development of economical cars proclaimed by the National Development
and Reform Commission. As a result, in 2006, the production and sale of automobiles
were 3.63 million units and 3.53 million, up by 28.94% and 26.71% than 2005 separately.
The output and sales of passenger vehicles have been 2.60 million units and 2.51 million
units separately, up by 40.30% and 36.53% than 2005; the output and sales of business
vehicle have been 1.03 million units and 1.02 million units respectively, up by 7.16% and
7.71% than 2005
***
. China's car consumption showed a CAGR of 54.42% from 2001 to
2005
http://www.chinaccm.com/4S/4S11/4S1101/news/20070504/094559.asp
22
automobile, Ford, Honda etc. have their production base in China. The whole automobile
industry is speeding up to reorganize the investment. The large state-owned enterprises
and MNCs are playing pivotal roles in the process of reorganizations.
Table 4: Reorganisation of Chinese Automobile Companies
Oct 2002 Shanghai Automobile declared to acquire 10% shares of GM Daewoo with USD 59.7 million.
Feb 2004 Shenyang Jinbei GM was jointly reorganized by Shanghai Auto, GM and Shanghai GM. Shanghai
Auto and GM (China) separately acquired 25% of the shares, while Shanghai GM held 50% of the
shares to form the third whole-car production base.
Oct 2004 Changan Automobile Co., Ltd. and Jianglin Group separately invested RMB 50 million to establish the
Jiangling Holding Co Ltd. On Dec, 6, Changan Automobile and Jianglin Group separately input RMB
450 million to enhance the capital capacity of Jiangling Holding,Co, Ltd. And equally 50% of the shares
were held separately.
Mar 2005 Dongfeng Motor spent RMB 352 million to acquire 51% of the shares of Zhengzhou Nissan. Dongfeng
Motor is a joint venture founded by Nissan and Dongfeng Motor, each holding 50% of the shares,
which is the largest investment project of Nissan all over the world.
July 2005 Nanjing Motor Group acquired MG Rover with over 50 million pounds, and then began to make full use
of the tangible assets to launch cars of its own brand one year later on this platform.
Aug 2005 Weichai Power spent RMB 1.023 billion and became the largest shareholder by acquiring 28.12% of
the total stock of Torch Automobile Group Co., Ltd, which is the most and largest eye-catching open
tendering case. Weichai Power then follows the trend to integrate the advantageous capital from the
affiliated companies of Torch such as Shanxi Automobile Group and Fast Gear
http://www.researchandmarkets.com/reports/357271/china_automotive_industry_report_merger_and.htm
Despite having lot of J Vs, Chinese automobile industry lack capabilities
technically and managerially. Therefore, making it internationally competitive will be a
major challenge. The labor productivity in Chinese automobile industry is much less than
that of J apan. They also do not spend much on R&D. Only in recent times, China has
started spending on product development through its J V partners. Nevertheless, any
results are still far in the future.
V.II: India
In India, automobile market is mainly dominated by J apanese and Indian
manufacturers; also some other multinational companies are currently investing in India.
The major foreign automobile manufacturers in India are Honda, Toyota, Ford, Fiat,
Daimler Chrysler, etc. The major Indian players are Marutyi Udyog, TATA motors,
Hindustan motors, etc. Automobile production in India rose substantially in last five
years. 77% of market share is captured by two wheelers. Passenger and commercial
vehicles capture around 19% market share (SIAM statistics for 2006-07). In China, J Vs
have given preferences for development of automobile sector. On the contrary, in India
government made an attempt to develop automobile sector through domestic private
sector before the liberalization. As a result of this, important Indian players have
diversified ownership structures (see Diagram 3) where promoters, banks and financial
institutions own significant shares of the companies. Maruti was developed as a
subsidiary of Suzuki. Today, government owns around 10.27% and Suzuki Motors
around 54% of total shares. In case of Tata Motors, Indian corporate bodies own
23
significant shares (33%) and only around 7% comes from FDI. In both the companies, FII
owns limited number of shares. In case of Hindustan motors, promoters own around 29%,
financial institutions 11% and individuals around 31%
.
Table 5: Automobile Production of India (in nos.)
Category 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 CAGR
Passenger Cars 49273 70263 125320 160670 169990 192745 31.36
Utility Vehicles 3077 1177 3049 4505 4489 4403 7.43
MPVs 815 565 922 1227 1093 1330 10.29
Total Passenger
Vehicles 53165 72005 129291 166402 175572 198478 30.14
M&HCVs 4824 5638 8188 13474 14078 18838 31.32
LCVs 7046 6617 9244 16466 26522 30928 34.43
Total Commercial
Vehicles 11870 12255 17432 29940 40600 49766 33.20
Three Wheelers 15462 43366 68144 66795 76881 143896 56.23
Scooters 28332 32566 53687 60699 83934 35685 4.72
Motorcycles 56880 123725 187287 277123 386054 545887 57.19
Mopeds 18971 23391 24078 28585 43181 37566 14.64
Total Two
Wheelers 104183 179682 265052 366407 513169 619138 42.82
Grand Total 184680 307308 479919 629544 806222 1011278 40.50
Source: Society of Indian Automobile Industry (SIAM) website www.siamindia.com
Table 5 explains the segment wise production of vehicles. Between 2002 and
2004 there has been major jump in production in almost all segments. During the period
2000-01 to 2006-07, average growth of vehicle production was around 40%. The
majority of this growth has come from the growth of motorcycles and three wheelers.
However, the growth of scooter has been only 4.72%. Passenger vehicles grew by 30% in
last six years. Despite the speculations of slow growth from different quarters due to
unprecedented rise in input prices, the growth of passenger vehicles has been quite
impressive in last two years. In 2004-05, installed capacity for four wheelers was 1.72
million and for two and three wheelers it was 9.13 million.
In India, domestic producers initially concentrated on producing small and basic
models under a protective environment. Most of the foreign players in India have focused
on mid-range market (with exceptions such as Hyundais Santro) with the models which
have been successful in other countries. Many MNCs took up a cautious approach till the
time Indian consumers are ready for big cars. It has been gradual but very steady
approach. However, like Chinese market, Indian automobile sector also experienced
surge of investment which led to overcapacity problem. Some companies changed their
strategy and started exporting to tackle the demand related issue. The overall automotive
Components sector is highly fragmented and has important quality problems. Over 300
small and medium companies service directly more than 20 companies assembling
vehicles in the country, with as much as 5,000 other micro firms working for the first tier
suppliers and for the replacement market. Mostly due to regulation, component import
Source: http://www.siamindia.com/scripts/installed-capacities.aspx
24
dependence is also small, with 87 percent of the domestic demand satisfied by local
firms. Despite these levels of localization, the industry is quite small by international
standards (Veloso & Kumar 2002). Indian auto producers are capable of exploiting the
cost advantage due to cheap labour and sufficient amount of localization but they are
unable to do so due to small demand and low level of productivity.
Diagram3: Share Holding Pattern in Maruti and Tata Motors
Share Holding Pattern of maruti Udyog (2005)
22.39%
4.23%
72.49%
0.89%
MF/FII/BANKS Public Promoters Others
Share Holding Pattern of TATA Motors
35.26%
12.38%
32%
20.00%
MF/FII/BANKS Public Promoters Others
Source: Company websites
V.IV: Indonesia
Indonesia is now the third-largest car market in Southeast Asia after Thailand,
where an estimated 620,000 cars were sold, and Malaysia, with some 485,000 cars sold in
2005. Figures from Gaikindo (the Association of Indonesian Automotive Manufacturers)
show that around 483,000 cars were sold in 2004, up 36% on 2003, with sales growing at
a pace second only to China. Increased demand could see sales reach 1.3 million cars a
year by 2010. The homegrown automotive giant, publicly listed PT Astra International, is
42% owned by Singapore's J ardine Cycle and Carriage. Astra last year increased its
market share to 45% from 41.5% in 2003. The company sold cars in the domestic as well
as external market. International players control 90% of the market, with the rest shared
by the US, European and Korean imports, the majority from Europe. Like several other
regional markets, J apanese manufacturers have the lion's share of sales. It is estimated
that over 80% of all new passenger car and commercial vehicle sales in Indonesia are
claimed by Toyota, Mitsubishi, Isuzu, Suzuki and Daihatsu. As passenger car ownership
has been discouraged through progressive taxes, and because utility vehicles are well
suited to local usage patterns, approximately 80% of the market is made up of
commercial vehicles and MPVs. Car manufacturers across the globe are competing in
Indonesia, but domestic manufacturers are little more than assemblers for foreign car
makers. The major assembler is P.T. Astra International, whose subsidiaries build cars
and trucks for Toyota, Daihatsu and Isuzu, and motorcycles for Honda. Other major
assemblers in the country include the Indomobil Group and the P.T. Krama Yudha
Group.
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Large number of assemblers in Indonesia producing for a relatively small market,
a proliferation of various makes and models, market fragmentation, and a lack of
standardization, have prevented automobile assemblers from achieving economies of
scale
****
. Moreover, to achieve minimum efficient scale the industry requires huge capital
investment. This was done mainly by MNCs who took the advantage of vertically
integrated global production system and reduced the cost part significantly. The industry
was highly regulated in 1970s and there was ban on importing CBUs. Domestic
investments were encouraged through J Vs for assembling and distribution activities.
High import duties were introduced for not using domestic components
. The
restrictive policies pushed automotive producers to assign a domestic company as a sole
agent for importing cars in a CKD forms. In 1970s, there were more than 22 assemblers
producing more than 20 brands, with more than 50 models. However, since these sole
agents and assemblers were originated from trading companies that generally have
limited knowledge of car production and little motivation to develop the industry, there
was no significant improvement attained in this industry (Aswicahyono, et. al, 1999). The
protective policies helped domestic component sector to grow.
Table 7: Production (in numbers) of Vehicles in Indonesia (2006)
Passenger Cars
Sedan Type 2008
Mpv 4x2 Type 203676
Suv 4x4 Type 637
Subtotal 206321
Commercial Vehicles
Bus 1254
Pick Up / Truck 88433
Double Cabin 4x2 / 4x4 0
Subtotal 89687
Grand Total 296008
Source: www.Gaikindo.org
In 1990s, government provided incentives to automobile producers for using
domestic component and reduced import duties in the ancillary sector. The higher the
level of local content achieved, the lower import duty would be applied for the remaining
components that have to be imported
In 1993, the government replaced the Deletion Program with the Incentive Program, known as the 1993
Automotive Policy Package. Automobile manufacturers were allowed to choose the components that would
use local products and were granted discounts on import duties, even total exemption, according to the
vehicles level of local content.
26
development of national car with stringent conditions on local content requirement and
tax incentives for that. The idea was challenged in WTO and following the
recommendation of the Dispute Settlement Body the policy was discontinued in 2000.
Also following the advice from IMF in the post-financial crisis period, Indonesia had to
liberalise the economy including automobile sector. Also, under AFTA, Indonesia put
several automotive products under Temporary exclusion List (TEL) which was
transferred to Inclusion List (IL) and tariffs were brought down to 20% initially and then
gradually to below 5%. The series of policy change due to internal as well as external
pressure led to a paradigm shift for automobile industry. The 1999 Automotive Policy
Package brought a new dimension in the automobile industry of Indonesia, which aimed
at stimulating the export of automotive products, driving the post-crisis domestic market
and strengthening the sectors structure by developing the parts manufacturing industry.
The Incentive Program was removed and import duties were lowered by more than half
on average.
Indonesian automobile industry (especially passenger cars segment) as a result of
interplay between demand factors and policy factors suffered from extreme fragmentation
with lot of brands and models. However, volume of sales of each model has always been
very low. As local content rule had some relaxation for passenger vehicles, each
company imported advanced components and changed models quite fast to compete
aggressively in relatively smaller domestic market. In commercial vehicle segment,
number of brands is less. The fragmented market structure of the sectors prevents the
automobile and component makers to achieve sufficient economies of scale. As the
domestic market for the sector is highly protected, selling the products in the domestic
market has been more profitable than exporting them. MNCs took the advantage of this
protected market to increase their profitability. As a result of the policy, domestic
component market got developed only for basic ancillaries. Most of the components
which have high technology contents and require precision in their production are
imported. Today, Indonesian domestic component manufacturers are concentrating on
low value, relatively simple and labour/natural resource intensive components such as
tires, electrical equipment, and wires and conductors. Of late, Indonesia is making a room
for export oriented automobile industry and some investment is expected in that
direction. Nissan, Mazda, etc have been contemplating large investment to increase their
production base in Indonesia
V.III: Thailand
Thailand is already the world's second largest pick-up truck market after the U.S.
and ASEAN's largest automotive market and assembler. Today all leading J apanese car
producers as well as BMW, Mercedes Benz, General Motors, Ford, Volvo and Peugeot
assemble cars in Thailand along with their legions of suppliers. Thailand has become the
main production base for auto exports in South East Asia. The biggest foreign producer
located in Thailand is Toyota with a total production of more than 300,000 cars a year
and the number is increasing. General Motors (GM), although a much smaller player in
27
Thailand than Toyota, is also increasing production. Among the other big auto companies
located in Thailand are Nissan, Isuzu, Auto Alliance, Mitsubishi and Honda etc. In recent
years, Daimler Chrysler (Mercedes-Benz) and BMW have also increased their
investments to gain complete control on local manufacturing and marketing operations.
The revival of the industry in post-financial crisis period is noteworthy. Soon after
the crisis, when demand came down significantly, local manufacturers got integrated with
large foreign players. As a result, J Vs became popular choice for many Thai players.
Toyota and Isuzu are market leader claiming a combined 65% of the total vehicle
market. Isuzu and Toyota also dominate the one-ton pickup market with more than 72%
of the pickup market between them. The rest is divided up between Mitsubishi, Nissan,
Chevrolet, Ford and Mazda. Sales of passenger cars, which are increasingly becoming
diesel powered because of petrol price increases, are dominated by Toyota, which took
more than 51% of the segment. Honda is second in this segment with a 25.9% share.
Segment wise sales from different companies are given in Table6. Post Implementation
period of AFTA is expected to create a good export market for Thai automobile industry.
Table 6: Market Share (monthly) of Various Automobile Companies in Thailand (in Numbers)
Segments Companies May 2007 May 2006
Share
( May 2007)
Toyota 23,082 25,585 44.90%
Honda 6,605 5,888 12.90%
Isuzu 9,985 11,710 19.40%
Nissan 3,723 3,005 7.20%
Mitsubishi 2,309 2,190 4.50%
Total sales
volume for all
categories
Total 51,364 55,700 100.00%
Toyota 8,811 8,755 53.70%
Honda 5,429 5,850 33.10%
Chevrolet 624 281 3.80%
Nissan 331 504 2.00%
Mitsubishi 288 413 1.80%
Sales volume of
saloon cars
Total 16,422 17,227 100.00%
Isuzu 9,985 11,710 28.60%
Toyota 14,271 16,830 40.80%
Nissan 3,392 2,501 9.70%
Mitsubishi 2,021 1,777 5.80%
Ford 1,174 1,494 3.40%
Honda 1,176 38 3.40%
Sales volume of
commercial
vehicles
Total 34,942 38,473 100.00%
Isuzu 9,172 10,808 30.10%
Toyota 13,204 16,038 43.40%
Nissan 3,191 2,369 10.50%
Mitsubishi 1,833 1,589 6.00%
Ford 1,134 1,448 3.70%
Sales volume of
commercial
vehicles with
weight not over 1
ton Total 30,449 35,383 100.00%
Source: http://www.toyota.co.th/red/en/sales_summary.asp
28
The governments support and promotion of automobile industry has been quite
consistent for decades. Policy and procedure have been set to facilitate the process in
which the automobile industry would grow from the assembly plant stage to the
production plant stage. Initially, governments policy was quite protective but in post
AFTA period, it is quite liberal and many MNCs are poised to take advantage of the
situation. Earlier, automobile sector was developed through an import substitution policy
where import tariff was set high, components import was restricted and promotion of
domestic investment was given due importance. In a liberal trade regime, Thailand is
now ready for fresh round of investment in the automobile sector. Government is
focusing on industrial clusters for providing opportunities to new entrants. In case of
component sector, careful attention is being given to chalk out the plans for the missing
link sub-sectors of the value chain to reduce importable components providing incentives
to produce in the country.
VI. Dynamics of Trade
It has been mentioned earlier that the international trade in the automobile sector
consists of trade in vehicles and components. The sector consists of 82 six digit HS
codes. We have divided them into 7 broad categories: rubber & glass components (Group
I), iron & steel parts (Group II) , engine& parts thereof (Group III), small parts such as
pulleys, gaskets, electrical fittings, etc. (Group IV), body parts, bumpers, brakes, clutches
and other safety components (Group V), seats, indicators, bicycle and motor cycle
components (Group VI) and full vehicles (Group VII). Changing pattern of export and
import of all these subgroups will be analysed for each one of the selected countries. Top
5 exporting markets and importing sources are identified for each sub-group in this
context.
It may be noted that earlier discussion has pointed out that trade in automotive
sector takes place either for market seeking activities or for using destination country as
offshore export platform. Trade in components is very much dependant on status of
domestic component sector, protection and government regulation in component trading,
level of technology absorption etc. Among these four countries, Thailands automobile
sector is truly export oriented. It has developed domestic component sector but still
several critical components get imported. Indias export orientation was started to tackle
the domestic overcapacity problem. Export orientation has come out as a second best
strategy for many players and as a result much focus has not been given to make
component sector internationally competitive. However, as export is increasing,
importance is being given on the component sector also. India is emerging as component
exporting country as well. Chinas domestic market is the main target of most of the
players. The strategy of J Vs has helped Chinese players to consolidate themselves with
modern technology from MNCs. Focus has also been given on development of the
component sector. Domestic component sector got flourished in a relatively weak patent
regime. Today, China is more into component trading than trading of vehicles. On the
other hand, Indonesia remained as a small market. Most players concentrated on
assembling activities as economies of scale are not being achieved through
29
manufacturing due to smaller size of the market. Though Indonesia exports some
vehicles, majority of companies play with models and makes for the domestic market
only. Component sector got developed through government protection. However,
technology absorption in the component sector is not sufficient and as a result critical
components are still imported (Nag et. al, 2007). Table 8 provides a snapshot view of
automobile trade of the selected countries. Several attempts are also being taken to
integrate fragmented international production structure of automobile industries in South
East Asia. APEC automotive Dialogue is one such forum (see Box 4).
Table 8: International Trade of Selected Asian Auto producing Countries
(Figures in Million US$)
Export Import
Description 2000 2004 2000 2004
Auto Components
3043.47 9692.39 4479.02 15058.67
China
Vehicles 1000.62 2888.99 1219.94 5447.61
Auto Components 757.01 1604.74 746.82 1610.41
India
Vehicles 338.36 1381.75 27.4 109.73
Auto Components 1335.61 3113.5 2755.76 5092.24
Thailand
Vehicles 1755.4 3935.16 523.71 717.33
Auto Components 501.42 1056.53 2465.26 2966.41
Indonesia
Vehicles 115.24 187.79 463.01 1049.11
Note: Detailed HS Codes for Auto Components and vehicles are given in the Appendix
Source: Calculated from WITS Database
VI. I Chinas automobile Trade
The distribution pattern of automobile exports of China shows that it exports more
of auto components compared to full vehicles. In 2004, more than 75% of total export
from automotive sector was mainly components. Chinas major exporting destinations
are USA, J apan, Germany, UK, Honk Kong, etc. (See Table 10). Interestingly most of
them are developed countries; particularly USA and J apan are the main two nations to
which China exports most. Among developing countries, Indonesia imports significantly
from China. During 2000-2004, highest export growth has been observed in Group V
which consists of body parts, brakes and clutches etc. Chinas vehicles have a good
market in USA, J apan and Indonesia. For most of the product groups USA occupies more
than 20% of Chinas exports from automobile sector. Among the exports of vehicles two
wheelers, passenger vehicles and vehicles for transportation of goods are worth
mentioning.
Table 9: Chinas Total Export and Import fromAutomobile Sector (US$ Million)
Export 2000 2001 2002 2003 2004 CAGR
GR-I 199.85 229.85 253.67 301.32 442.74 22.00
GR-II 422.66 269.92 332.39 410.20 1152.20 28.49
GR-III 329.09 410.38 591.25 676.61 1133.18 36.22
GR-IV 581.36 661.04 849.75 1201.67 1528.80 27.34
30
GR-V 1123.07 1351.22 1841.62 2415.53 4409.18 40.76
GR-VI 387.44 481.34 633.14 846.71 1026.29 27.57
GR-VII 1000.62 1008.38 970.14 1936.13 2888.99 30.35
Import 2000 2001 2002 2003 2004 CAGR
GR-I 134.18 159.77 230.60 385.31 512.29 39.78
GR-II 421.53 266.20 405.87 538.14 1119.69 27.66
GR-III 960.65 1114.19 1400.11 2378.13 3037.58 33.35
GR-IV 765.17 1072.56 1375.69 2008.27 2756.14 37.76
GR-V 2112.83 2515.32 2980.31 6135.27 7325.79 36.46
GR-VI 84.65 115.46 157.02 250.84 307.18 38.02
GR-VII 1219.94 1765.27 3243.72 5284.44 5447.61 45.37
Source: Calculated from WITS Database
However, in case of imports J apan occupies the top position for most of the
product groups. Other important sourcing nations of automobile imports are Germany,
Korea, Taiwan and USA. Chinas imports of vehicles are significantly higher than that of
exports. Vehicle imports registered a growth of 45.37% during the period 2000-04. The
imports of component also grew significantly. In 2004, total import for components in
group V was around US$ 7.3 billion much more than the export from that category (US $
4.4 Billion). The trading pattern of Chinas automobile sector provides the idea that
historically, China has focused on the growth of the domestic sector and as it is gaining
confidence; its export has started increasing. Currently, intra-industry trade in this sector
is significantly high. Though there are discussions on over capacity problem in China but
looking at the import figure, we get an idea that high internal demand is going to persist
for some more time and this will fuel the growth of Chinese automobile sector.
Table 10: Top 5 Export Destinations of China in 2004 (US $ million)
Summary Country-I Country-II Country-III Country-IV Country-V WORLD
GR-I USA Japan Hong Kong Australia Korea
102.50 57.65 40.95 30.26 25.82 442.74
GR-II USA Japan Germany UK Hong Kong
274.17 131.61 72.08 64.59 53.63 1152.20
GR-III Canada USA Japan Indonesia Korea
255.02 111.98 77.52 52.00 26.46 1133.18
GR-IV USA Japan Italy Hong Kong Germany
380.38 237.60 75.51 67.44 58.27 1528.80
GR-V USA Canada Germany UK Indonesia
1213.67 93.03 80.90 59.24 49.47 4409.18
GR-VI Indonesia Taiwan Japan USA Germany
99.86 79.15 74.67 68.92 56.92 1026.29
GR-VII USA Japan Indonesia UK Hong Kong
579.12 128.58 107.49 74.33 58.24 2888.99
Source: Calculated from WITS Database
Table 11: Top 5 Import Sources of China in 2004 (US $ million)
Summary Country-I Country-II Country-III Country-IV Country-V WORLD
GR-I Japan Germany Korea USA Taiwan
188.45 93.54 63.43 46.24 22.62 512.29
GR-II Japan Taiwan Germany Korea USA
31
368.79 149.21 145.88 115.20 94.84 1119.69
GR-III Japan Germany Korea USA Brazil
1133.93 617.25 282.52 212.07 81.79 3037.58
GR-IV Japan USA Korea Taiwan Italy
854.54 241.67 229.06 183.78 87.15 2756.14
GR-V Japan Germany Korea Taiwan USA
2480.70 2108.55 1123.02 369.43 226.76 7325.79
GR-VI Germany Japan Korea Taiwan USA
112.63 92.27 34.61 31.40 11.32 307.18
GR-VII Japan Germany Korea USA UK
2064.49 2047.61 376.07 309.41 108.90 5447.61
Source: Calculated from WITS Database
VI.II Indias automobile Trade
As described earlier, Indias export orientation has been developed to tackle the
overcapacity problem. As a result of this, the entire sector is not geared up equally for
exports. The export growth figure (Table 12) reveals that vehicle export growth has been
much higher than components and during 2000-04, average growth from this group was
more than 42%. The overall export is much lower than that of China but unlike China,
Indias exports are more than its imports in most of the categories. In components, overall
export and imports are very close to each other in 2004.
Table 12: Indias Total Export and Import fromAutomobile Sector (US$ Million)
Export 2000 2001 2002 2003 2004 CAGR
GR-I 37.19 36.04 42.19 63.51 62.79 13.99
GR-II 89.16 77.89 112.50 183.05 214.55 24.55
GR-III 174.69 164.34 187.35 294.10 401.97 23.16
GR-IV 73.02 73.40 119.61 143.04 202.93 29.11
GR-V 309.15 306.01 370.95 475.87 663.86 21.05
GR-VI 73.81 65.54 67.28 55.91 58.65 -5.59
GR-VII 338.36 285.09 489.97 949.13 1381.75 42.15
Import 2000 2001 2002 2003 2004 CAGR
GR-I 41.17 41.20 49.75 67.29 82.54 18.99
GR-II 43.77 44.19 61.23 81.86 101.63 23.44
GR-III 186.38 182.95 198.57 282.12 364.22 18.23
GR-IV 185.39 216.39 231.06 318.20 384.91 20.04
GR-V 281.18 249.03 220.89 423.56 661.18 23.83
GR-VI 8.93 7.65 9.05 9.55 15.93 15.58
GR-VII 27.40 33.10 86.11 94.45 109.73 41.47
Source: Calculated from WITS Database
Indias major export destinations of automobiles are developed countries such as
USA, UK, Germany, Middle East and SAARC countries. Unlike China, J apan does not
come among the top 5 export destinations of India. Also, India is making an effort to
find out a South Asian market for its products which is evident as Sri Lanka, Bangladesh
are among the major export destination of some product groups. Indias export basket is
32
more diversified compared to China in full vehicles category. India significantly exports,
motorcycles, passenger cars, tractors, vehicles for transporting more than 10 persons and
vehicles for transportation of goods. Though India is not heavily into component trading
the country is gradually specializing in safety components and engine parts. Also it is
expected that due to capability in R&D India may be a right choice for sub-system and
design development.
Table 13: Top 5 Export Destinations of India in 2004 (US $ million)
Summary Country-I Country-II Country-III Country-IV Country-V WORLD
GR-I UK USA Germany UAE Mexico
7.14 6.45 4.03 3.53 2.46 62.79
GR-II USA Bangladesh Germany UK UAE
61.26 34.37 15.26 15.03 9.74 214.55
GR-III USA Germany UK Sri Lanka UAE
89.88 60.78 28.01 22.08 11.35 401.97
GR-IV USA UK Germany Italy China
38.44 25.47 17.44 12.29 12.08 202.93
GR-V USA UK Italy Germany UAE
166.84 54.91 41.99 34.68 26.17 663.86
GR-VI UK Bangladesh USA Malawi Italy
3.02 1.90 1.90 1.85 1.82 58.65
GR-VII UK Italy USA Germany UAE
100.01 99.80 90.66 56.07 38.17 1381.75
Source: Calculated from WITS Database
In case of imports, J apan, USA, Germany, UK, Korea Rep are important sourcing
countries. Highest import is observed in body parts and safety component category.
Thailand also has come as a major sourcing country for brakes, clutches and some basic
components. India-Thailand FTA has given emphasis on trade of auto components and in
future Indias imports from Thailand is expected to increase.
Table 14: Top 5 Import Sources of India in 2004 (US $ million)
Summary Country-I Country-II Country-III Country-IV Country-V WORLD
GR-I Japan USA Germany Korea UK
17.06 13.74 9.14 6.94 6.68 82.54
GR-II Japan Germany Korea USA UK
16.53 16.23 14.95 11.90 8.47 101.63
GR-III Japan Korea USA UK Germany
82.70 60.72 41.41 29.69 24.82 364.22
GR-IV Germany Japan USA Korea Italy
104.41 56.95 43.26 25.36 20.07 384.91
GR-V Korea Japan Germany Thailand USA
208.66 128.73 56.29 51.88 27.03 661.18
GR-VI Japan China Thailand Italy Germany
5.35 3.47 2.22 1.52 0.73 15.93
GR-VII Japan Germany Korea Thailand UK
50.11 23.12 11.89 5.36 3.15 109.73
Source: Calculated from WITS Database
33
VI.III Indonesias automobile Trade
Indonesia has a small market. During 1990s, automobile sector was significantly
influenced by the government policy. Component sectors were highly protected and
assemblers were provided incentives to use local components. As the domestic market
was not big; economies of scale was difficult to achieve. Hence, production activities
were limited and the sector was operational mainly through assembling which was done
through importing critical components and using basic local components. Marketing was
very aggressive through frequent changing of models mainly by dominating J apanese
players. However, import was more flexible in post 2000 period which has been
explained earlier. Both export and import showed rising trend but much slower compared
to other selected countries in most of the product category.
Table 18: Indonesias Total Export and Import fromAutomobile Sector (US$ Million)
Export 2000 2001 2002 2003 2004 CAGR
GR-I 39.44 38.38 50.44 66.04 64.84 13.23
GR-II 22.86 30.42 35.26 35.25 45.60 18.84
GR-III 94.77 88.52 135.01 181.43 201.11 20.7
GR-IV 83.59 48.38 48.52 60.81 120.89 9.66
GR-V 230.28 261.56 294.12 386.72 533.89 23.4
GR-VI 30.48 36.57 57.50 60.74 90.20 31.16
GR-VII 115.24 88.11 92.19 82.33 187.79 12.98
Import 2000 2001 2002 2003 2004 CAGR
GR-I 40.95 41.82 42.85 53.56 65.76 12.57
GR-II 86.59 82.88 96.85 109.02 144.49 13.66
GR-III 618.51 489.41 534.70 568.02 840.15 7.96
GR-IV 339.42 312.25 352.30 348.55 597.53 15.19
GR-V 1120.89 936.33 829.68 956.38 987.59 -3.12
GR-VI 258.90 396.91 389.38 300.40 330.90 6.33
GR-VII 463.01 497.06 409.16 591.89 1049.11 22.69
Source: Calculated from WITS Database
Due to opening up of the economies import of vehicles increased significantly
during 2000-04 period. Earlier, during the protection period, basic component sector
grew. As a result of that today Indonesia is supplying components especially from Group
IV, V, and VI to many ASEAN members and also to J apan. Indonesia has specialized in
components used in CVS and MPVs. As a result of this some J apanese companies are
now investing in Indonesia in these segments for exporting vehicles to other ASEAN
members. For import, major sourcing countries for Indonesian imports are J apan and
Thailand. Most of the J apanese companies settled in Indonesia import components either
from J apan or from Thailand. Indonesia also imports components and vehicles from
Germany, China, USA , Korea Rep., etc.
34
Table 19: Top 5 Export Destinations of Indonesia in 2004 (US $ million)
Summary Country-I Country-II Country-III Country-IV Country-V WORLD
GR-I Singapore Japan Australia USA Thailand
25.08 8.16 6.59 6.31 2.54 64.84
GR-II Japan Germany Italy USA Singapore
14.57 6.92 3.54 3.51 2.65 45.60
GR-III Japan Thailand Taiwan, China Malaysia Singapore
64.85 29.40 22.90 17.35 13.14 201.11
GR-IV Thailand Japan USA Philippines Singapore
40.27 18.51 12.67 11.87 7.47 120.89
GR-V Japan UK Malaysia Thailand USA
117.76 65.10 64.61 63.13 46.61 533.89
GR-VI Thailand Japan Malaysia Vietnam Philippines
30.80 13.60 11.89 11.33 4.80 90.20
GR-VII Thailand Malaysia Vietnam Philippines Colombia
88.77 28.22 14.14 12.89 7.80 187.79
Source: Calculated from WITS Database
Table 20: Top 5 Import Sources of Indonesia in 2004 (US $ million)
Summary Country-I Country-II Country-III Country-IV Country-V WORLD
GR-I Japan USA Thailand Singapore China
32.98 9.51 6.98 3.01 2.71 65.76
GR-II Japan Thailand Taiwan, China China USA
81.21 12.22 10.06 8.02 7.19 144.49
GR-III Japan Thailand USA Germany China
567.21 105.84 41.13 20.33 18.94 840.15
GR-IV Japan Thailand USA Germany China
289.78 100.65 37.05 29.53 19.66 597.53
GR-V Japan Thailand Germany Taiwan, China Korea, Rep.
696.36 84.61 46.58 21.80 20.48 987.59
GR-VI Japan Thailand China Taiwan, China Malaysia
132.52 85.53 59.25 17.06 12.77 330.90
GR-VII Thailand Japan USA Germany Sweden
455.39 287.87 65.02 47.06 31.08 1049.11
Source: Calculated from WITS Database
Box 3 : 8
th
Meeting of APEC: An attempt for Regional Integration of Automobile Sector
APEC Automotive Dialogue is an independent forum and is attended by automotive industries and APEC state
members. This is a forum that discusses early voluntary sectoral liberalization for automotive sector in the APEC
areas. In the future, the forum will play a role to bring APEC economic area into integrating the automotive sector area.
Meanwhile the integration is aimed at strengthening regional integration efforts through liberalization, facilitation and
promotion measures to ensure full integration of the automotive sector by 2010. The Integration is also aimed at
promoting private sector participation. The 8th APEC Automotive Dialog in Bali was expected to help the integration
process of automotive industries in Asia Pacific area in general and especially Indonesia. The main topics of
discussion in the 8th APEC Automotive Dialogue include customs and trade facilitation, information technology (IT),
intellectual property rights, harmonization of regulations and road safety, environmental issues, market access, rules of
origin and certification system, ecotech, other topics as proposed and agreed by the steering committee, such as,
world trade organization Doha development and ASEAN cooperative agreement for automotive technical regulations.
Source: http://www.gaikindo.org/index.php?fuseaction=events.detail&id=150620061350496
35
VI.III Thailands automobile Trade
Thailand is a major Asian exporter of automobiles especially cars and pick up
trucks. The industry is mainly driven by J apanese companies. In 2004, exports of vehicles
from Thailand were around US $ 4 billion which registered an average growth around
22% during 2000-04. Among components, Thailand exports body parts, brakes and
clutches significantly followed by engine and its parts. However, its imports are still very
large in these two product groups (see Table 15). J apan has occupied the first position
among the sourcing countries in all product categories (see Table 17). Overall import
growth has registered much smaller rate compared to China and India.
Table 15: Thailands Total Export and Import fromAutomobile Sector (US$ Million)
Export 2000 2001 2002 2003 2004 CAGR
GR-I 86.80 73.42 87.76 110.85 158.31 16.21
GR-II 98.11 83.05 122.19 167.36 245.84 25.82
GR-III 271.84 241.23 292.55 407.41 615.67 22.68
GR-IV 166.94 170.10 202.24 259.39 339.61 19.43
GR-V 507.83 496.43 634.06 971.97 1422.68 29.37
GR-VI 204.10 173.52 188.90 237.27 331.40 12.88
GR-VII 1755.40 2029.19 2095.57 2836.86 3935.16 22.36
Import 2000 2001 2002 2003 2004 CAGR
GR-I 89.92 47.99 50.50 54.24 65.00 -7.79
GR-II 197.59 198.45 222.89 266.28 334.61 14.08
GR-III 693.18 756.62 980.68 1214.42 1363.36 18.42
GR-IV 369.93 348.67 423.77 509.68 722.89 18.23
GR-V 1337.88 1496.62 1629.10 2142.64 2512.97 17.07
GR-VI 67.25 67.69 67.52 77.48 93.41 8.56
GR-VII 523.71 401.45 439.80 653.14 717.33 8.18
Source: Calculated from WITS Database
Table 16: Top 5 Export Destinations of Thailand in 2004 (US $ million)
Summary Country-I Country-II Country-III Country-IV Country-V WORLD
GR-I Japan USA France Malaysia Australia
56.3 13.1 2.1 7.2 5.2 158.3
GR-II USA Japan Indonesia Malaysia Germany
60.2 46.9 21.0 16.9 7.3 245.8
GR-III Indonesia Malaysia Japan USA Australia
142.1 82.7 68.1 32.0 17.5 615.7
GR-IV Indonesia Japan Malaysia Australia USA
36.9 35.1 32.4 7.9 16.5 339.6
GR-V Japan Malaysia USA Indonesia Australia
298.2 181.9 106.0 127.5 47.6 1422.7
GR-VI Indonesia Japan Philippines Malaysia Italy
94.2 32.1 32.0 31.1 13.6 331.4
36
GR-VII Australia UK Indonesia Japan Philippines
697.45 368.56 452.82 90.61 207.55 3935.17
Source: Calculated from WITS Database
Earlier, Thailand was concentrating in developed country market. As AFTA is
increasingly defining intra-ASEAN trade, Thailand is now consolidating its position in
the regional market. As a result of this, Indonesia, Malaysia, Philippines etc have become
major export destination for Thailand both for vehicles and components. Thai vehicles
are sold maximum in Australia followed by UK. Export of vehicles back to J apan has
been very low. USA has come among the top 5 export destination of vehicles both in case
of India and China. However, for Thailand it is not the case. Overall component exports
are less than full vehicles which shows the export orientation of Thailand in case of final
products. Import of components has been high only in Group V and Group II which was
mainly due to inclination of J apanese producers towards J apanese components.
Table 17: Top 5 Import Sources of Thailand in 2004 (US $ million)
Summary Country-I Country-II Country-III Country-IV Country-V WORLD
GR-I Japan Indonesia USA Germany China
35.78 4.94 6.39 3.08 2.69 65.00
GR-II Japan USA Germany China Korea
217.42 17.81 8.84 11.68 5.51 334.61
GR-III Japan Germany Indonesia USA China
1179.14 24.31 32.13 12.73 13.24 1363.36
GR-IV Japan USA Germany Korea China
359.59 58.77 36.06 41.74 30.18 722.89
GR-V Japan Germany Indonesia Korea USA
1725.20 242.86 64.70 41.61 41.97 2512.97
GR-VI Japan Indonesia China Taiwan USA
32.47 23.53 13.01 4.08 1.43 93.41
GR-VII Japan Germany Indonesia Korea USA
327.10 47.58 83.09 12.98 11.21 717.33
Source: Calculated from WITS Database
VII. Tax and Tariff Structure:
Tax structure is important both for demand and production as it is treated as an
additional cost and affects demand by rising selling prices. Automobile industry in these
countries is subject to variety of taxes such as excise tax, sales tax, corporate income tax,
VAT and import duties. Table 21 provides the comparison of tax structure in these four
countries.
It may be noted that taxes on automobile industry do not have a homogeneous
structure in the selected countries. In India taxes are not vehicle specific. However, in
Thailand and China different taxes are levied on cars, motor vehicles, CVs etc. Corporate
Income tax is highest in India among all these four countries. Quite interestingly,
37
corporate income tax in China is higher in state owned enterprises (SOEs) compared to
J Vs. China is giving importance on J Vs in terms of production. This is reflected in lower
corporate income tax. In Indonesia it varies from 10-30%.
In Thailand and India import tariffs on CBU are quite high which provide
protection to domestic industries. Different vehicles have different import duties in
Indonesia and Thailand. However, for India it is same rate for all kinds of vehicles. It is
important to note that most of the countries other than India have differential duties in
case of imports. In general, duties faced by automobile industry in India are on the higher
side compared to other countries.
Table 21: Comparison of Tax Structure
INDIA CHINA INDONESIA THAILND
Corporate
Income Tax
36.75% SOEs and Chinese
companies: 33%
JVs: 16%
10 30% 30%
Tax on vehicles
Excise tax:
Cars 24%
Others 16%
Sales tax:
Cars 12 %
Others 4%
VAT: 17%
Consumption tax:
3 8% for motor-
vehicles
10% for Motorcycle
VAT 10%
Excise tax 2 20%
ad valorem
VAT: 7%
Interior tax: 10%
Excise tax:
Cars and PV 12
48%
CVs 0 3%
Bike 3 5%
Import tariffs on
CBU
All vehicles at 60% Car and light
vehicles: 43 50%
Parts and
components: 15
20%
Cars 30%
CV 20%
Bikes 30%
10% duty under
MVDP program
Cars and PV 60
80%
CV 30 80%
Bikes 30%
Source: SIAM (2004)
Table 22 below summarises the MFN average tariffs for each selected product
groups. Most of the countries have reduced the tariffs especially in component sector
except Indonesia. Indias average tariff in component sector is now reduced to 15%.
Thailands strategy is very clear in case of import duties on components. We have earlier
noticed that it exports lot of components from group V and government wants to develop
this sector further. As a result of this higher duties are there on imports in Group V.
Import duties on vehicles are relatively high in India and Thailand and both of them are
making an effort to increase their exports.
In South East Asia, trade in automobiles is now under AFTA rules where tariffs
were cut, including those on cars, to between 0 and 5%. Provided a car has a minimum
local content of 40% from any ASEAN member, the car maker has to pay just 5% duty
when exporting to member countries of the grouping. AFTA has a brought new range of
issues for discussion related to automobile trade in ASEAN region. As many ASEAN
members have effective component manufacturing capability, the intra-ASEAN trade
will provide opportunity for sourcing different components from different countries and
assembling in suitable locations for better distribution channel. The major challenge in
ASEAN is to integrate the international production system (IPN) within ASEAN for
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development of the automobile sector. As individual ASEAN member does not have very
big internal market, to achieve economies of scale, it has become compulsion on
domestic automobile sector to go for regional integration. Different tax structures and
export-import procedural differences are other major hurdles for this integration.
Currently, ASEAN automobile industry has a fragmented product make-up with
dominance of Thailand in pick-up truck production, Malaysia and the Philippines in
passenger car production, and utility vehicles and passenger vans by Indonesia. The
regional integration will bring efficiency in the production system and also develop the
market bringing homogeneity in several transportation sector related issues
.
Table 22: Average MFN Tariff on Automobile
China India Indonesia Thailand
2001 2005 2001 2005 2001 2005 2001 2005
Group I 14.59 11.02 35.00 15.00 5.91 6.25 24.55 8.75
Group II 12.43 10.27 35.00 15.00 12.42 12.73 20.00 11.82
Group III
21.05 10.23 32.27 15.00 8.00 8.00 20.91 11.82
Group IV
13.03 8.36 30.26 15.00 4.65 4.45 16.58 8.53
Group V
29.47 13.13 35.00 15.00 15.00 15.00 44.75 32.50
Group VI
20.00 15.50 32.50 15.00 9.42 9.91 25.00 13.75
Group VII
42.62 23.64 66.82 53.64 29.49 29.69 49.24 42.88
Source: Calculated from WITS Database
VIII. Epilogue
VIII.I: Comparison of Policy Framework
All these countries made serious attempts to grab the opportunities emanated from
the global restructuring of the industry and relocation of production base to developing
countries. Most leading auto-manufacturers continue to invest in R&D so that the
production costs get reduced and develop partnership with local firms which concentrate
on production activities to reduce cost. Government policies towards automobile
industries in these countries also got evolved along with this.
Policies towards liberalization of investment regime brought significant benefits
to the selected countries as private players stepped in with modern technology and FDI
started pouring in mainly through the hands of J apanese automobile majors. However, the
overcapacity problem faced by the global automobile industry also creped in the
automobile industry of these selected countries. Different countries took different policies
to handle the overcapacity problem in the sector. Chinese has attempted to consolidate
the industry through mergers and acquisition while Indians sought overseas market. In
both these countries, government policies have been towards development of the