Natural Disasters, Economic Changes Create Uncertainty in Asia Auto Industry

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Mohit Arora

The Asia Pacific region has been experiencing a steady increase in light-vehicle sales, and by 2015, it is projected that light-vehicle sales in the region will reach 44.1 million units. This rosy outlook for the Asia Pacific region is underscored by China reigning supreme in 2010 with 17.2 million units in light-vehicle sales, surpassing the next largest market—the United States—by more than 5 million unit sales. In India, light-vehicle sales reached 2.7 million units, making it possible for India to surpass more mature markets such as France, the U.K. and Italy to become the sixth-largest light-vehicle market in the world.

India Grows as a Production Center

In terms of production, automakers including Hyundai and Nissan Groups and Ford Motor Company, have recently chosen India as their global production base for the Hyundai i10, Nissan Micra and Ford Figo, respectively, bearing testament to the automakers’ confidence in Asia. Japanese nameplates have also been ramping up production in Thailand—their long-preferred stronghold for production of automotive parts to fortify against the cost penalties of the rising Japanese Yen. Total automotive production in Thailand rose from 986,000 units in 2009 to 1.6 million units in 2010, a 64% increase (which represents a nearly 18% increase from pre-Asian financial crisis levels).

Ford Figo

2011 Disasters in Japan and Thailand Hamper Asia Pacific Auto Industry

However, recent headwinds have been blasting the Asia Pacific automotive industry. Just barely recovering from the earthquake in Japan in March (Japanese nameplates are still tallying their losses), several automakers were faced with the devastating Thailand floods that halted worldwide production and disrupted the global supply chain. Production forecasts for 2011 in the region were revised downwards, especially for Japan (11.4% decrease year-over-year) and Thailand (-9.9%).

Hyundai101

The Japan automakers’ strategy of focusing on a single supplier for many automotive parts is now being severely challenged. Relying on a single supplier, though cost efficient, is effective only in times of high certainty. When presented with the unpredictable and culling effects of Mother Nature, this strategy has to be rethought. Diversifying automakers’ supplier bases seems to be the logical answer, and the next likely destination is India, where labor is plentiful and land is aplenty.

India May Become a Hub for Parts Supplies

Although some Indian parts suppliers have a relatively poor reputation of employing yesterday’s technology and delivering inconsistent quality, the investment in this area has not yet been fully realized. The challenge is how to ensure that these suppliers are provided with the technological know-how and the resources to bring them up to par with their Thai and other global counterparts. While the journey has begun for several auto-component suppliers, many others still need hand holding.
Not all setbacks are ecological in nature. Interest rates have climbed after successive rate hikes by the Reserve Bank of India (RBI). The key rate now stands at 8.5%, the 13th increase since March 2010. The rate hikes have caused contracting industrial production. Coupled with uncertainty in the global economy—think spillover effects of the Greek and the Italian crises—overall investment activity is likely to slow down, placing a damper on advances in the automotive components industry in India that the Japanese automakers so crucially need in these uncertain times.

India Automaker Employee Strike Curbs Supplier Development

Then there’s the changing mindset of the employees. The strike at the Manesar plant of Maruti Suzuki, India’s largest producer and seller of vehicles, is just the tip of the iceberg, exposing poor working conditions faced by many workers in the automotive industry. Contract workers, accounting for more than one-half of the workforce, are no longer content with modest wages. These workers are aware of the widening income gap with their permanent contract counterparts, and they are banding together to demand better pay. This collective strike has cost Maruti Suzuki an output loss of 12,600 vehicles, at an estimated value of US $90 million (4.65 billion INR). Considering that Maruti Suzuki is already one of the better-paying automakers in India, the floodgates may not hold for much longer for other India-based automakers.

Maruti-Suzuki Manesar Plant

Outlook Remains Positive with Consumer Demand, Quality Advances

So is it all gloom and doom for the Asia automotive industry? In spite of these challenges, the region still holds a lot of promise. The outlook is still positive in the long-term, bolstered by a consumer-driven culture, a more open, market-driven economy, and improvements in car quality and technology.
In China, J.D. Power Asia Pacific has reported a historic high in overall initial quality after improving steadily during the past decade. However, China is facing its own set of challenges stemming from the government’s policy to cut subsidies on purchases of fuel-efficient and small vehicles. Gasoline prices have rebounded and there has been a general cooling economy in China, yet the country will finish 2011 with light-vehicle sales of 17.9 million units, a 3.2% increase from 2010. The mid- to long-term forecasts for India also remain very positive.

Automakers Need to Prepare to be Nimble

Automakers have to be nimble to react to changing situations and they are proving that they can overcome the forces of nature. Leading Japanese automakers restarted production within two weeks of the flood waters in Thailand barely receding. A new level of solidarity has been forged. For example, Mitsubishi has seen renewed cooperation from many of its subsidiaries in Indonesia and India that are responding to its aid by supplying components to its operations. These times are real tests for often-overlooked business continuity programs. As an old proverb states: “A crisis is an opportunity riding the dangerous wind.” Crises, such as the earthquake and tsunami in Japan, floods in Thailand, economic changes, and employee discontent, can only serve to build more resilient companies. May the fittest survive.—Mohit Arora, executive director at J.D. Power Asia Pacific, Singapore