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Will Asean Become Major Market for Parts Makers in India and China?

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Written by Ammar Master, manager, LMC Automotive and a contributor to the ASEAN Automotive Monthly—Market Trends for J.D. Power Asia Pacific

The realization of the Asean Economic Community in 2015* presents opportunities and challenges in the changing automotive landscape of the Southeast Asian region.

Foremost, a successful Asean integration will support the long‐term goal of creating a region with free movement of goods, services, investment, and skilled labor, in addition to a freer flow of capital. This in turn is likely to lead to faster economic growth and an ever‐expanding middle class.

May Arthapan, director of Asia Pacific forecasting at LMC Automotive in Bangkok, indicated in an aptly titled recent presentation that Asean could well become “Another BRIC in the Wall,”** given the region’s emergence in Asia. Not only are there opportunities for vehicle makers to expand sales in a big way, but component makers also are going to benefit from increasing manufacturing activity in Asean countries, led by Thailand and Indonesia.

Japan’s Suppliers Have Long-Term Presence in Southeast Asia

Japan’s component makers have had a long-established presence in the Asean countries, and will clearly be the biggest beneficiaries. However, there are also opportunities for companies in India and China. These companies have been eyeing the Asean region as a new market for a while. This has been evident from increased participation, especially by companies in China, at Asean region trade shows.Yet, component makers from both nations have been wary to enter unfamiliar territory and face strong Japanese competition.

Selecting the Right Market is Key

A most important factor for these component makers is making a decision about which market will be best to first set up their operations—typically it’s a choice between Thailand and Indonesia. Thailand, no doubt, will remain Southeast Asia’s biggest manufacturing base. But it also has the region’s most developed eco system, thanks to Japan’s automakers and their suppliers, which may make it less cost efficient.

For instance, India’s NRB Bearings, already braving this challenge, decided to set up a manufacturing unit in the Asean region in 2007. It hasn’t been easy. Observing this company’s challenges may be perhaps why other companies have not followed suit. Even after Tata Motors, one of India’s major manufacturers, established operations in Thailand, many component makers are not convinced that there will be high enough volumes to justify new investments.

In contrast, a faster-growing Indonesia market convinced India’s UNO Minda‐NK Minda Group to set up manufacturing operations in that country some years ago. This company supplies switches and automotive lamps to automakers and counts Daihatsu among its customers.

India’s Government May Need to Support Entry into Asean Market

An industry veteran in India points out that many companies haven’t rushed to set up operations in Southeast Asia because they need more clarity on the costing structure in the region. Brand India is weak in Southeast Asia, which means competitive pricing will be a most critical factor for India’s component makers to win new orders against Japan’s suppliers.

For these reasons, we believe that India’s companies will need to rely on value engineering to mitigate higher costs from labor, raw materials, or government duties. More support from India’s government toward businesses going global would not hurt either. The risk for India’s component makers is that as orders from Europe contract, they need to find alternative markets to maintain profit.

Southeast Asia and its integration as a market could be a solution. The all‐important decision to enter this region has to be made now. If companies delay, this window of opportunity is likely to be lost.

* The leaders of the Association of Southeast Asian Nations (ASEAN) have set Dec. 31, 2015 as the deadline for the realization of an ASEAN Community. The ASEAN Community will be based on three pillars: a shared security community; economic community; and a socio-cultural community.

** BRIC is an acronym for the countries of Brazil, Russia, India, and China. These countries are all considered to be at similar stages of newly advanced economic development.