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Uncertain Winds In The Asian Auto Sector

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By Mohit Arora, Vice President, J.D. Power Asia Pacific

It was only three years ago that the automotive sector in ASEAN looked dramatically different from what it is today. In 2013, the larger markets of Thailand, Indonesia and Malaysia all posted new sales records. Of particular interest were the markets of Thailand and Indonesia who both surpassed the highly desirable one-million unit sales mark for the first time and gained significant traction in the Japanese media. Japanese automakers were keenly watching the developments in these markets to decide whether to pump more investments into this sector. On the other hand, Philippines and Vietnam were below the radar compared to their impressive neighbors. At that point of time, Philippines was experiencing a flat growth and worse still for Vietnam, a decline. 

Fast forward to today, there is a reversal of fortune. From record highs, the former three shining stars are currently all recording up to double-digit declines in Light Vehicle sales but interestingly, Philippines and Vietnam have escaped relatively unscathed and enjoying double-digit growth rates of 26% and 12% respectively YoY in February. 

Understandably, this creates huge uncertainties especially for market planners who could possibly have been prepared for a slowdown but not at such an unprecedented rate. Industry players across the board have acknowledged the situation and are grappling to come up with adequate response strategies to address the same. 

The deadly cocktail of internal and external unfavorable conditions is unique to the different markets in the ASEAN region but there’s no doubt that their effects are powerful and worrisome. We look ahead to discuss key trends that will dominate this region in the next few months.

Continued Economic Uncertainty 

The larger markets in the ASEAN region namely Thailand, Indonesia and Malaysia are facing difficult economic conditions where sluggish and even de-growth in these markets will immediately dampen buyers’ sentiments, resulting in a contraction of sales volumes and consequently a fall in capacity utilization. J.D. Power expects car owners to hold their vehicles for a longer period of time and exercise prudent spending on their current vehicles in terms of service maintenance and repair needs. 

Indonesia: Light vehicle sales have declined by 9% YoY in the region’s largest market. Key regions like Sumatra and Kalimantan have been severely affected as they make up the primary centers for the production of coal, crude palm and minerals. Falling commodity prices and reduced exports to China have also hit this belt hard. Coupled with this, the Indonesian government reduced the subsidy on gasoline, causing prices to increase from IDR 4500 to IDR 7400 per liter which further accelerated inflation because when cost of transportation goes up , so will the price of essential goods. 

Malaysia: In Malaysia, sales in January fell at double-digit rates (12%) in YoY terms. Due to the depreciating ringgit, automakers are facing the brunt of higher production and import costs which they could not further absorb. Most major automakers have provided advance warning to their customers that vehicle prices will increase in January 2016. In time to come, customers will be more cautious in discretionary spending for the next couple of years. The effect on customers have been rather significant - sales of Mini Cars in Malaysia soared by 85% in 2015 as consumers chose to downsize to offset the rising cost of living and the increasingly gloomy economic conditions. 

Thailand: Thailand suffers the greatest decline in the region with a fall of 14% YoY in vehicle sales in January. In Feb, the National Economic and Social Development Board has lowered the 2016 GDP growth estimate to 2.8%-3.8% from its earlier projection of 3.0%-4.0% due to the weak trade outlook and risks from a global slowdown. The Consumer Confidence Index in Thailand has also declined for two consecutive months in Feb. The government’s implementation of the new excise tax, based on a vehicle’s CO2 emissions, fuel efficiency and E85 compatibility has also raised car prices by about 5%. Car buyers are understandably reluctant to make a big ticket purchases. The recent motor show event in Thailand underscored this sentiment where the actual bookings were significantly below the target. 

 Unfavorable forex rates

The weakening of regional currencies is causing import bills for automakers to go up with Malaysia & Indonesia feeling the greatest heat from this volatile external pressure. Automakers who imports parts and components have faced an increase in overall cost of production. Given that the forex fluctuation hit swiftly and hard, it was challenging for automakers to implement measures to minimize the impact of forex losses. 

Even in Indonesia, the impact of unfavorable forex is one of the reasons that have led Ford Motor Indonesia to exit the market. Imported CBUs simply could not compete with the various locally-produced Japanese models that dominate the market resulting in poor sales and an uncertain future. It was enough for Ford Indonesia to shutter their operations even with the potential of the ASEAN Economic Community where they could possibly leverage on their Thai production base to offset costs. 

Fast Changing Consumer Preferences and Expectations

Just like the mature markets in the US and Japan, the proportion of vehicle buyers who have used the Internet in their vehicle shopping process has increased significantly in Asia. In markets like Indonesia and Thailand, this figure has doubled in the past 5 years.

Customers are coming into dealerships more well-informed than in the past – creating a knowledge shift in favor of the customer rather than the salesperson at the dealership. Most dealership networks are slow to respond to this change and continue to use traditional and outdated tactics to sell or service their vehicles.

There has also been a gradual shift in customer’s preference in segments from small cars to bigger vehicles such as the urban-SUV or compact-SUV. Markets that have been predominantly a small-car driven market like in Indonesia are seeing a segment shift in preferences where bigger cars are beginning to be more popular. However, several automakers still do not offer these kinds of models in their showrooms and face potential risks of obsolescence. A case in point is China, where the local manufacturers have gained market share as they were able to read this trend in time and create models in their portfolio that addressed the latent need-gap.

The next shift in changing consumer needs is in the growing preference and desire for more “connected” cars. As drivers in Asian markets clock more kilometers and therefore, spend more time in their cars, the vehicle becomes an extension of one’s home and office. In Thailand, several automakers have introduced Apple Car Play equipped in the Infotainment system in the new models. For e.g. customer can communicate through “Siri” even in Thai. There are several apps which run on iOS platform where customers prefer over the voice command or navigation system provided by OEM. Therefore, features that provide connectivity and convenience will gradually move from being opt-in fitments to standard fitments in new vehicles.

Complexities and challenges is the mainstay of automotive business but it is the organization that has a sound assessment on the trends with a close tab on customer preferences that will power ahead of the competition.