AUTOMOTIVE Archives

29/03/2016by EOS Intelligence EOS Intelligence No Comments

Driving Growth in Kazakh and Uzbek Passenger Vehicles Markets

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The past two years have brought a mixed bag of experience for both Kazakh and Uzbek automotive industries. Passenger vehicles sales volumes witnessed growth, however at a varied rate, affected by internal as well as external macroeconomic disruptions and regional developments. Amid these conditions, 2016 is likely to be an uncertain year for the automotive industries in both countries. Although growth is likely to be challenging, by re-thinking its current focus along with the help of the right government policies, growth prospects over the long term are promising.

While the Kazakh and Uzbek economic and automotive industries scenarios differ to quite an extent, and both countries have witnessed a varied growth in recent years, their macroeconomic and sector dynamics have continued to remain under a strong impact of the global slump in oil prices, volatile economic and political environment in neighboring regions, as well as currency devaluations. While Kazakhstan automotive industry, with sales volume CAGR of 67.8% during 2010-2014, was one of the fastest growing auto markets worldwide, the country’s GDP was witnessing a fluctuating y-o-y growth ranging from 7.5% in 2011 to 4.4% in 2014. At the same time, while Uzbek’s economy posted strong and steady GDP growth at around 8% annually between 2011 and 2014, its car sales volume grew at a mere CAGR of 1.4% during 2010-2014.

Uzbekistan’s automotive industry is currently around twice the size of the industry in Kazakhstan, however its sales volume growth has recently stalled putting a question mark on Uzbek industry future growth dynamics. Kazakhstan might soon be seen to be catching up, with more than healthy sales volume growth rate, much of it supported by recent government reforms to boost local production and sales.

EOS Perspective

With Russia’s economy still struggling to recover amid Western sanctions, banking on vehicle exports is unlikely to take Kazakhstan and Uzbekistan any further. Passenger vehicles sales and production figures in most likelihood will continue to be impacted by internal as well as external macro-economic factors in 2016. In order to grow in the current environment, OEMs will have to look beyond their status-quo. Automakers will have to start focusing on domestic markets, which are still underserved with rapidly increasing demand for new cars.

The governments will have to work together with industry participants to create consistent as well as comprehensive industry policies that can attract more investments and stimulate growth. Measures such as financial incentives, special land allotment, creating SEZs, and various other schemes can significantly boost investor (both local and foreign) confidence. At the same time, reforms such as increasing local content requirement will drive more local producers to enter the industry. This might be a great help to the overall vehicle manufacturing and auto components industry in its development and growth trajectory.

With automakers trying to scale down their operations in Russia and Ukraine, growth opportunities are ripe for region’s manufacturers to capture and fill the market gaps in neighboring regions such as EEU and CIS. By leveraging their strategic location and proximity to European, CIS, and Asian markets, Uzbekistan and Kazakhstan could potentially attempt to reinvent themselves as the region’s next automotive export hub.

11/09/2015by EOS Intelligence EOS Intelligence No Comments

Emerging Markets Take Vehicle Safety Standards Seriously (At least on Paper)!

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The article was first published in Automotive World’s Q3 2015 Megatrends Magazine

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Across emerging and frontier markets, most car buyers have generally focused on pricing, maintenance cost, and fuel economy, thereby ignoring the very important aspect of safety. The governments in these countries have also not given due importance to this aspect, as basic safety features such as air bags and ABS are not compulsory as per regulations. Taking advantage of this nonchalance of both customers and governments, OEMs have for long compromised on safety features, which are a critical part of all cars sold in developed markets.

In recent years, however, with customers becoming more aware and global safety organizations cajoling for higher safety standards, some emerging countries have introduced increased safety measures, which in turn will require significant changes in the cars sold by leading OEMs. While this is expected to affect the bottom-line of OEMs in these price-sensitive markets, not abiding to the changing environment is likely to prove equally costly, if not in the immediate term, but surely over the medium-to-long term.

Among the key emerging and frontier markets, vehicle safety standards in South Korea match the levels in Europe, while China has also shown immense progress in adopting the standard safety requirements in automobiles. But other developing countries, such as Mexico, India, and Brazil, lie far behind. As per current car safety standards, Mr. David Ward, Secretary General, GNCAP (Global New Car Assessment Programme) rates China-7, Brazil-5, and India-3 on a scale of 10. “This rating is based on three key factors – the state of legislation, level of penetration of different technologies in the market place, and consumer awareness levels.” However, with India and Brazil initiating the implementation of several safety-standards in recent months, they are likely to match global standards at least for crash testing. Crash prevention, on the other hands, continues to be a long term goal.

It was a big blow to India, when GNCAP conducted tests on some of its most popular entry-level variants (Maruti Suzuki Alto 800, Hyundai i10, Ford Figo, Volkswagen Polo, Tata Nano, Maruti Swift, and Datsun Go) and awarded zero-star adult-protection rating to all of them. This, in addition to having the highest number of road fatalities globally, instigated the government to commit to introducing regulations for mandatory safety standards. As per new regulations, by October 2017, all new cars will be required to pass frontal and side crash tests, whereas the deadline for new versions of existing models would be extended to October 2019. To pass this test, cars will need to have reasonable body shell strength and be equipped with airbags and other standard safety features. For conducting the test, the government plans to develop two crash test facilities, which are expected to come online in 2015/2016. In addition, the authorities plan to launch its own NCAP. India is also creating a vehicle recall policy, which will encompass testing for manufacturing defects. However, this legislation is yet to be passed.

As safety standards gain priority in India, it is a cause of concern for car manufacturers in the country, which have for long focused on only pricing and fuel efficiency in the market. From the manufacturing infrastructure and technology front, OEMs may not require many changes to adapt to these proposed changes in safety standards. This is primarily because most car models do offer basic safety features (such as airbags and ABS) in their higher variants and they also use India as major export hub for their cars destined for Europe and the US. However, this will definitely erode a fraction of the bottom-line for car manufacturers as India is an extremely price sensitive market. Moreover, a large portion of the audience in the country is not very mature and still does not put a high value to the safety factor, thereby restricting the price tag carmakers can attach for these features.

“The first reaction of the OEMs is that they are not very happy, since it will make their cars more expensive. But in the longer term, they will adapt to it as they have done in other countries. People will become aware and ask for safety. OEMs focus will be to meet the safety standards at affordable prices. For example, child support restraints are not made in India and are imported. OEMs can ask the government for concessions on these imports.” says Rohit Baluja, Director, Institute of Road Traffic Education, India.

Several leading OEMs have criticized the government’s call to boost safety standards in India. An engineer working with a leading car manufacturer in India stated, “At this moment, there are no talks about any changes being introduced to the body. These matters are handled at a very strategic level. Nothing has been discussed on this aspect as of now. In India, safety can’t really become a USP right now. Price is and will continue to remain the main selling point. If we talk about metro cities, the demand for frontal airbags has increased. So yes safety has become more important. But this is the case in metro cities only.”

It also seems that the government has succumbed to pressure from the OEMs and has softened down several of the safety standards. As per the regulations, India will be following China’s footsteps and introducing crash testing at a speed of 56km/hour instead of 64km/hour, which is followed globally (while China started testing at 56km/hour in 2006, it also increased its speed from 56km/hour to 64km/hour in 2011). Moreover, the authorities plan to conduct only ‘head impact’ tests for Indian pedestrians against the ‘head and leg impact’ norms adopted by Euro NCAP. It has further slashed the requirement for the use of child dummies for some side impact tests, which is a global standard. Decisions regarding mandatory safety belt alarm, child alert alarm, pre-tensioners, and airbags are also pending.

While several leading OEMs, have not been very supportive of the Indian government’s decision of mandatory crash tests, the ones which have preemptively incorporated these features in their cars have been the winners. Toyota, which made airbags mandatory in all its models in October 2014 in India, has seen sales surge by 34% between October 2014 and April 2015. Volkswagen, which also made airbags a standard feature in all its Polo hatchbacks, has seen the sales of its entry-level variant rise, since the decision was made in February 2014. Post its poor performance in the crash test held by GNAP, Nissan Motors has also worked on strengthening the body shell of its Datsun Go by using higher-grade steel (having a tensile level of 520 mega pascal compared with the earlier 320 mega pascal) and adding side beams on both sides to enhance the strength and rigidity of the vehicles.

Thus the way forward definitely begins with OEMs embracing the introduced changes. It is not incorrect to say that the consumers continue to be price sensitive, but that is because they are not well informed about safety. Thus, to see an actual shift towards safety, both the government and car manufacturers have to work together in changing the mindset of the consumer and promoting vehicle safety as an equally important factor in purchase decisions.

“It’s a shared responsibility of government and manufacturers to inform the consumers and move the market forward. Our project of testing cars has also helped build awareness and get media attention. We will do more testing end this year and get results beginning next year. The combination of government action on regulation, the response of individual manufacturers and the work done by NCAP will improve the whole situation in India.” says Mr. Ward of GNCAP

Brazil has a similar story, where the cheapest models of few most selling cars, such as Volkswagen Gol Trend, Fiat Palio, Chevrolet Celta, Ford KA, Peugeot 207, and Fiat Novo Uno, received only 1 star when crash tested by Latin-NCAP. Moreover, Chinese car, Geely was awarded zero stars in a similar test. This was underpinned by the absence of basic safety features such as airbags, lack of body reinforcements, lower-quality steel, weaker weld spots to support the vehicles, and outdated designs of car platforms. As a result of this, the Brazilian government mandated air bags and anti brake locking systems on all cars in 2014. Like India, this regulation faced much criticism from automakers and was at the verge of being postponed as it leads to an increase in the prices of basic models and also results in a layover of several employees in the case of few models being discontinued. However, the government pushed ahead with the regulations as decided, but offered lower import tariffs for key safety equipment to subdue the expected price rise.

In addition, the government is considering making electronic stability control a standard in all cars; however, it is still in the future. Moreover, the government plans to launch a US$50 million independent crash test center by 2017. While the center is expected to run as a government body, OEMs may provide part of the funding for its operation and even use the center; this raises concerns regarding the autonomous working of the lab. Moreover, since the regulations lack a ‘conformity of production’ clause (which requires automobile safety performance to be spot checked for the entire time the model is produced), the car models are only required to meet the crash test requirements once. Companies can also send a car of their choosing. These factors further may compromise on the credibility of the testing.

The Case of China

Unlike India and Brazil, the upgradations in China’s vehicle safety standards are stemmed from the country’s CNAP (China’s New Car Assessment Programme) initiatives. While the Chinese government has only mandated the use of seat belts and frontal airbags, the number of airbags in vehicles in China is reaching the same level as in Europe and the US. This is primarily due to the aggressive promotion of CNCAP’s safety assessment by the Chinese government, which has encouraged the country’s population to value car safety as an important aspect. “We undertake a lot of promotional initiatives such as advertisement and highway hoardings to promote safety features among consumers. This has really helped in making consumers aware regarding the importance of safety.” says Mr. Guo from CNAP. Furthermore, CNCAP has upgraded its test protocols to match its European counterpart and is expected to be at par with their standards by 2018. CNCAP has also started focusing on accident research and plans to include a test for pedestrian protection in future vehicles. It has also been considering including test scenarios for automatic emergency braking systems that will further help mitigate pedestrian collisions.

Even in case of China, the pricing of the vehicles increased with the addition of safety features but the entire price is not passed down to the consumers, especially in the base-level cars.

However, one of the key reasons why China has upped its vehicle safety standards is to build a good reputation for exports. As Chinese cars gain traction due to competitive pricing and design, they suffer a poor reputation when it comes to quality. Thus, they have consciously increased focus on safety norms to meet global standards. While they are on the right lines, they still have a long way to go in achieving global standards with regards to safety.

Safety-Standard Levels across the Major Emerging Automotive Markets

Thus, as safety-standards improve across emerging markets, the onus now lies on OEMs to adapt to these changes. While this will definitely impact the bottom line of the companies, it also presents an opportunity for the carmakers to gain a strong market foothold by offering these safety-features at a minimal pricing. Moreover, although these changes are happening primarily in India and Brazil right now, companies must be prepared for similar regulations to come in Mexico and other Latin American countries in the coming years.

Apart from crash testing standards, there are a lot of talks going on regarding crash prevention technology, the most important being electronic stability control (ESC). While, this has already become a standard in several countries, such as Australia, Canada, EU, Israel, Japan, South Korea, the Russian Federation, Turkey, and the USA, the Global NCAP is working towards making ESC a mandate in all cars manufactured by 2020. “Our overall priority is to ensure that all passenger cars, irrespective of where they are produced, must have the appropriate minimum crash test standards and the most important crash prevention technology (i.e. ESC) by 2020. To achieve this, the most important countries to act are China, India, and Brazil.” states Mr. Ward. With crash test standards becoming a ‘standard’ also among key emerging markets, the introduction of ESC also does not seem far from reality. In fact, Brazil and China have already begun considering making it mandatory. The OEMs that anticipate this and work towards it will have an advantage.

While it has taken several key emerging and frontier automotive markets time to realise the importance of vehicle safety, both for drivers and passengers, and for other people on roads, it is a welcome change with governments introducing several policy measures in recent months to bring about this change. The implementation of regulations and the variation in standards that exists across these markets is a cause of concern, and aspects that OEMs might use to their advantage by bypassing certain global standards. It is important that consumers also make it a point to make safety a priority when purchasing a vehicle, which would force OEMs to ensure that global standards are also followed in emerging and frontier markets. Brazil, China, India must lead the way, and demonstrate that it is possible to make safety a standard, so that OEMs follow this as a standard operating procedure across other emerging and frontier markets.

08/07/2015by EOS Intelligence EOS Intelligence No Comments

North Africa: Is It The Next Frontier Market For Automotive Manufacturing?

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The article was also published in Automotive World’s Q2 2015 Megatrends Magazine

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Rapid urbanization, growing consumer base with rising disposable income, significant infrastructure investments, and proximity to the EU are some of the key reasons why automotive companies are increasingly attracted towards the North African markets. In spite of the impact of political upheavals on the region’s economy in recent times, the value proposition for global auto manufacturers remains strong.

The North African markets of Algeria, Egypt, Morocco, and Tunisia have attracted the eyes of multinational automakers in the last few years, thanks to rapid urbanization, rising disposable incomes, and continuous investments in infrastructure. In recent years, several automotive companies have assessed and entered these markets due to its favorable demographics.

North Africa’s market attractiveness relative to other regions has improved dramatically over the past years. According to E&Y’s Africa Attractiveness Survey of 2014, nearly three out of four respondents believed that Africa’s attractiveness will improve further over the next three years. Morocco and Egypt were seen as the two most attractive countries in North Africa by 55% of the respondents.

Despite several political and economic challenges, there is growing consensus that the region’s growth curve is on an upward trajectory, aptly supported by improvements in the EU economies, steadier inflation rates, and policy reforms undertaken by individual governments to harness growth.

While the FDI inflow statistics shows a different picture, the trend is expected to change as investors have been encouraged by the gradually restored political stability in these countries, as well as recent government initiatives to create business friendly regulatory frameworks.

What’s attracting automakers to North Africa?

In the North African region, Algeria, Egypt, Morocco, and Tunisia together accounted for a giant share of over 90% of the total new passenger car sales in 2014, as per statistics from International Organization of Motor Vehicle Manufacturers.

These four countries represent approximately 42% of the total African passenger cars market. After witnessing a steep decline in 2013 due to the weak external demand as well as the region’s volatile political environment, new car sales figures picked up in 2014. With the region’s growth back on track, rising investors’ confidence, and uptick in tourism, these sales figures are projected to increase in the next coming years.

For global OEMs, lower labor costs, proximity to Europe, expanding port facilities, various financial incentives, and increasing network of auto parts suppliers and subcontractors are making the region’s value proposition stronger.

North Africa’s strategic geographic location and its skilled labor force at competitive wages, has provided a perfect solution for vehicle manufacturers, allowing easy exports in order to cater to the needs of the European automotive industry. Besides, the region also serves as a gateway to the rapidly growing African and Middle-eastern automotive markets.

The region’s favorable demographics – a young and rapidly growing population, increased urbanization, and rising income levels are attracting many global automotive players. Consumers today in North Africa are more brand-conscious and technologically savvy. Forecasts from the OPEC suggest that car ownership in the Middle-East and Africa will nearly triple to 66 million by 2035, compared to 23 million in 2010, making it among the fastest growing markets in the world over the next few decades.

Individual governments have also played a vital role in the industry’s growth story by creating a favorable investment regulatory framework. Despite economic pressures and tight budgets, governments in these countries have continued to make significant investments towards infrastructure across ports, roads and railway networks. In addition, a range of financial incentives are offered to foreign investors in the auto industry. This includes free trade zones, multiple tax incentives, special land allotment, and partial contribution towards infrastructure expenses for auto industry projects. Further, the government has also invested towards training programs to build a skilled labor force that can fulfill the demands of the growing auto industry.

North Africa’s Big 4 Markets – Morocco, Algeria, Egypt and Tunisia

Morocco has aggressively marketed itself as the new regional automotive hub for global automotive players. According to a 2013 report by PricewaterhouseCoopers, the Kingdom will be the 19th-largest vehicle producer in the world by 2017. Renault, Delphi, Lear, Leoni, Yazaki, Faurecia, Sumitomo, and Hirschmann Automotive are some examples of key investment projects in recent years. These companies are not just providing employment, but, are also supporting a thriving automotive SME sector.

Renault’s operations in Morocco have provided a major boost to its automotive industry, as more than 40% of the parts are sourced locally. Renault aims to further expand its production capacity in Morocco and is also considering setting up an engine production plant to serve the two production plants. This represents large scale potential opportunities for auto parts manufacturers and suppliers. In October 2014, the Moroccan government announced the signing of five MoU deals with leading manufacturers of automotive wiring, vehicles interior & seats, metal stamping, and batteries.

As demand from both local as well as export markets grows, the industry is going to witness higher investment growth in the near future. Further, car makers that enter the Moroccan markets are also able to leverage on the pool of skilled labor and network of more than 40 Tier-1 suppliers.

Algeria’s automotive industry relies heavily on imports from Europe and China, importing approximately 75,000 cars annually. The age of current passenger vehicles plying on Algerian roads and low ownership rates present a significant potential for passenger car manufacturers. The Algerian government has played its part by promoting investments, and creating a business-friendly environment for the auto sector.

Mercedes Benz recently announced that it aims to transfer its investments from Egypt to Algeria in 2015 in order to take the advantage of benefits and facilities provided by Algerian government to foreign automakers. Renault’s production unit that became operational in 2014 has facilitated the development of local subcontracting and network of suppliers to create a local automotive industry. In order to meet the growing demand, Renault plans to triple its production output to 75,000 units by 2019, and has also committed to increase the level of local content.

With an increased interest of OEMs in the Algeria story, several opportunities will arise for suppliers of auto spare parts, plastic injection, paint as well as bodywork facilities.

In spite of being one of the smaller countries in the region, the automotive industry in Tunisia boasts of more than 80 companies, employing over 60,000 people, with a turnover of TND 2 billion (US$ 1.02bn) in 2013. The recent MoU signed with Iran for co-operation in car manufacturing will also help the Tunisian automotive industry grow further in the next few years.

Tunisia has a robust network of suppliers in the automobile wiring sector, and an abundant pool of skilled engineers and technicians at its disposal. The bigger benefit is the fact that the cost of hiring such talent is not only one-third the cost of that in the EU, but is also lower than its North African peers. Investment in manufacturing automotive components for exports is a priority sector for the government and in order to attract more investments, the government offers fully integrated sites with industrial, logistics, and infrastructure support to companies seeking to establish their manufacturing operations in Tunisia. There are plenty of opportunities for companies that manufacture automotive electronic, mechanical, and plastic components dedicated for exports to European and African markets.

New passenger cars sales in Egypt posted a solid growth of nearly 25% in 2014. With ongoing government plans to develop and encourage investment in the sector, and the improving tourism industry, new car sales are expected to grow further beyond 2015.

Nissan motors in October 2014 announced that it will invest an additional US$60 million towards expanding its assembly operations in Egypt. The government is also encouraging a vehicle production joint venture between domestic firm Nasr Automotive Manufacturing and Russia’s AvtoVAZ. The deal will not only give automotive production industry a major boost, but, it will also create opportunities for auto parts manufacturers and suppliers. For example, tire market Pirelli signed a MoU to invest US$107 million over a three year period to increase the production capacity in order to meet the growing demand.

Egypt is well poised to see a stronger automotive growth, driven also by very favorable demographics and proximity to the Middle-east.

A Final Word – Immense Scope, Manageable Challenges

OEMs must accept that North Africa will be unable to match the potential of the BRICS, MIST or ASEAN countries; however, given the region’s positive economic growth trend and rising investor confidence, the outlook for automotive industry is upbeat.

Various initiatives taken by individual governments have provided a boost to the automotive industry, and continue to attract global OEMs to establish local presence for both regional and export markets. Region’s favorable demographics, strategic location and competitive wages not only make it an attractive hub for auto exports, but, also a lucrative market for auto manufacturers which seek to tap the potential of African passenger cars markets.

There are a few challenges, political and economic, that need to be managed, in order to encourage OEMs to set up shop in North Africa. On the economic front, it would be imperative to demonstrate an investor-friendly regulatory environment, as well as the willingness to provide tax breaks and similar financial incentives to OEMs to establish production base and export hubs. While on the political front, ensuring stability and managing issues surrounding external factors such as ISIS will be critical to convince automotive companies to invest both monetary and technological resources in the region.

At this point in time, given the political, economic and social dynamics of the North African region, the scope for growth of the automotive sector is immense.

23/01/2015by EOS Intelligence EOS Intelligence No Comments

Fleet Management System Adoption Gathers Pace in Eastern Europe

European truckers, in general, have lagged in the adoption of fleet management technology, which has delivered significant cost benefits to their US counterparts. Within Europe, transport/logistics companies from the established economies have been quicker in realising the technology’s potential, evident from a greater adoption rate (up to 20% in case of Germany) as compared with those based in the developing/emerging economies of Eastern Europe.

To continue reading, please go to the original article on Automotive World

24/07/2013by EOS Intelligence EOS Intelligence No Comments

Auto-Financing in China – A Valuable Business Proposition

From a humble beginning in 1998, when state-owned banks were first allowed to provide car loans, automotive financing has come a long way in China. Vehicle loans are now available through commercial banks and automotive finance companies (AFCs), which are mainly non-banking financing companies (captive subsidiaries of automotive OEMs, both domestic and foreign). According to a 2012 report by Minseng and Deloitte, outstanding car loans are expected to grow over five times to reach US$ 160 billion during the next decade, from US$ 31 billion in 2011.

China has been a late bloomer when it comes to automotive finance, mainly because of its cultural mindset, which has been against credit-based consumption (houses are still paid for in cash, so a cash purchase of a car isn’t considered a big deal). However, in the last few years, the Chinese have become more open to the idea of credit and the trend of automotive finance has caught up, mostly with younger generations. About 80% of automotive financing consumers in China are individuals in the 20-40 years age group, according to a survey conducted by China Europe International Business School. The survey also found that 30% of buyers in this age group are likely to choose some form of auto financing, compared to only 10% of buyers over the age of 40.

Auto loan penetration rate currently is about 10% and is expected to triple by 2017. Developed automotive finance markets such as USA, UK and Germany boast of penetration rate of 92%, 74% and 70%, respectively; thereby highlighting the underlying potential in the world’s largest automotive market.

This potential hasn’t gone unnoticed and China now boasts of having close to two dozen automotive finance companies; however, these AFCs only account for one-fifth of the car loans market. The market is instead dominated by commercial banks, mainly the big four state-owned banks, largely thanks to their significant first-mover advantage over AFCs (state owned banks have operated in this segment since 1998, while AFCs started offering auto-financing in 2003).

Another disadvantage for AFCs vis-à-vis commercial banks is their inability to raise funds through bank deposits or by issuing bonds. In China, AFCs are only allowed to raise funds through inter-bank lending. Consequently, interest rates offered by AFCs to car buyers are higher, making their services less competitive. Moreover, AFCs also face a mismatch between the maturity of short-terms loans they have to take from banks and the maturity of the long-term car loans they provide to their customers. With such unfavourable financial conditions, AFCs find it tough to compete with commercial banks.

In spite of the many constraints, AFCs continue to set up their businesses in China (almost 10 new entrants over the past 24 months). One luring factor is China’s gradual opening-up of its domestic financial markets to foreign investors. The world’s second-largest economy is also considering allowing foreign AFCs to issue financial bonds in China. Moving from bank loans to bond financing, should help AFCs reduce funding costs and become more competitive. Bond issuance will also help them in extending the average maturity of their liabilities and create a better maturity match between their assets and liabilities.

The market potential for automotive financing in China is obviously huge, and with the gradual easing of regulatory barriers, foreign financing companies are much more comfortable setting up a shop in the country. This will lead to more competitive financing options for automotive consumers and will also go a long way in popularizing automotive financing concept in China.

26/03/2013by EOS Intelligence EOS Intelligence No Comments

Turkey – When Being ‘The Gateway to Europe’ Wasn’t Good Enough

As with several emerging markets, Turkey’s automotive market slowed down in 2012. The ongoing crisis in Europe limited export opportunities (declined by 8% y-o-y) while domestic economic woes drove vehicles sales down (by 10% y-o-y). Although this came as a setback to the industry, which recorded strong growth during 2009-2011, the industry has bounced back as sales rebounded in the first two months of 2013.

In the last few years, Turkey, to the surprise of many industry experts, has emerged as an attractive automotive production destination. Several international OEMs, such as Ford, Hyundai, Toyota, Renault and Fiat, have set up production units in Turkey, largely to cater to growing domestic demand and as an export hub to Europe. At the same time, leading automotive OEM, Volkswagen, which has a significant presence in Turkey, remains an exception – Volkswagen does not have any plans to establish production capability in Turkey, and this has led Turkey’s Economy Minister to threaten the company with a 10% tax on the company’s imports.

The emergence of Turkey as an automotive production hub has primarily been driven by government incentives and subsidies to this sector. At the turn of 2013, the Turkish government announced incentives to encourage investment in the automotive industry as it targets USD75 billion in automotive exports over the next decade. Salient features of the incentives are as follows:

The investment scheme is an extension of a programme launched in 2009 and will offer tax breaks of up to 60% for new investments, up from 30% in 2012
Projects eligible under the latest revision include vehicle investments of more than USD170 million, engine investments of more than USD43 million and spare parts projects of more than USD11.3 million
Incentives in the lowest band include VAT and customs rebates, employee cost contributions and subsidies on land purchases

Turkey’s path to success as a preferred destination for manufacturing and as a growing automotive market has not been easy. There are several challenges facing the industry that have the potential to severely impact growth and expansion of the sector.

The Challenges

Overdependence on Europe for Exports – In 2012, Europe accounted for 70% of Turkey’s automotive exports and the country suffered in 2012 due to weak demand from the continent. As an immediate step to curb the impact of the ongoing Euro crisis, automotive OEMs are expected to shift focus towards the Middle East and North Africa to reduce its dependence on the unstable European markets.
High Taxation – Special consumption tax and VAT raise the domestic purchase price of a vehicle in Turkey to 60-100% of the pre-tax price. For instance, the price of a Ford Focus 1.6 Trend without tax is EUR15,259 in Germany whereas the same vehicle costs EUR11,000 in Turkey. While the German government imposes a 16% tax, making the final price of the car EUR17,700, the Turkish government imposes a tax of 64.6% making the price EUR18,132. In this context, if Turkey becomes a full member of the EU, it will acquire a larger share of the European market because of lower price before taxation. Turkey also has a higher tax on luxury cars compared with the EU while tax on gas is also one of the highest in the world.
Resistance from Labour Unions in the EU – Labour unions in EU are against the transfer of automotive production to Turkey while some car producers prefer to move to other emerging economies such as China and India which have experienced rapid growth in productivity.

While automotive OEMs face several constraints in the Turkish market, the opportunities seem to outweigh the challenges. Using Turkey as a production hub to cater to regions beyond Europe, such as Middle-East and North Africa is a potentially significant opportunity for automotive OEMs. At the same time, booming domestic demand should continue driving growth of players such as Volkswagen, General Motors, Ford, Hyundai, Renault and Fiat.

Even though 2012 temporarily put the brakes on rapid expansion, the Turkish automotive industry is expected to remain an attractive destination for manufacturing and a promising market for sales.
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Part I of the series – Mexico – The Next Automotive Production Powerhouse?
Part II of the series – Indonesia – Is The Consecutive Years Of Record Sales For Real Or Is It The Storm Before The Lull?
Part III of the series – South Korea – At the Crossroads!

08/03/2013by EOS Intelligence EOS Intelligence No Comments

South Korea – At the Crossroads!

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South Korea is the world’s fifth largest automobile manufacturer, behind China, Japan, the US and Germany. Automobile sales in South Korea breached the 8 million units mark for the first time in its history in 2012. The surge was mainly on account of strong overseas demand for locally-made models – exports accounted for 82% of these sales while domestic sales (accounting for the remaining 18%) actually contracted 4.2% to 1.4 million units in 2012.

Contracting domestic demand for local companies is mainly due to lack of real income growth, increased debt repayment burden and slump in the housing market in Seoul Special City (houses are often bought in South Korea for investment purposes). Meanwhile, overseas sales, cars exported from South Korea and vehicles assembled in overseas plants, expanded 7.9% to 6.8 million units in the same year.

The South Korean market is dominated by Hyundai Kia Automotive Group which accounted for 82% of domestic sales and 81% of exports in 2012. GM Korea, Renault Samsung and Ssangyong (acquired by Indian company Mahindra and Mahindra in 2011) account for 10% of the domestic sales while rest of the market is catered to by imports. BMW, Daimler (Mercedez-Benz), VW, Audi, Toyota, Chrsyler and Ford are the leading importers.

Free Trade Agreements

South Korea has aggressively pursued FTAs, with the provisional enforcement of an FTA with the EU from July 2011 and the full enforcement of an FTA with the US from March 2012. In the automotive industry, tariffs on parts and components were abolished as soon as the agreements came into force, whereas tariffs on vehicles will be abolished between South Korea and the EU over a three-to-five-year period and those with the US in the fifth year after enforcement of the agreement.

As a result of the FTA, exports to the EU sky-rocketed and the double-digit growth trend continued until March 2012. However, as the EU economy weakened, exports declined and returned to pre-FTA levels. In case of the US, exports surged around the time of the enforcement of the FTA in March, even though the tariffs on vehicles are yet to be scaled down. This phenomenon was labelled as ‘announcement effect’.

An interesting trend that has emerged is that whereas the domestic sales of South Korean cars declined by about 6.3% in 2012, domestic sales of imported cars increased by 24.6% in the same year. Moreover, for the first time, imports accounted for 10% of domestic sales, which is in sharp contrast to the 2% share about a decade back. European automotive OEMs have benefitted the most from this surge in demand for vehicles. This increased market share for European vehicles is mainly due to the fall in prices; as part of FTA between South Korea and the EU, the tariffs on large vehicles reduced from 8% to 5.6%.

Thus it can be said that while the enforcement of FTAs has been effective in boosting exports, it has brought about structural changes in South Korea’s domestic market.

Labour Strife

After an almost 4-year gap, strikes by the labor union returned to plague automotive manufacturing in South Korea in the summer of 2012. The industrial action, which also hit car parts manufacturers and some other industries, revived memories of the days when strikes were chronic in South Korea. Workers went on strike in 21 of the first 22 years since the unions’ formation in 1987; however, unions’ political influence has dimmed in recent years with declining memberships.

Hyundai, Kia and GM Korea were affected by the strikes and suffered record losses – Hyundai alone is estimated to have lost more than USD 1 billion. The main points of contention were the abolition of graveyard shift, wage increase and to confirming of permanent positions to the high proportion of contract workers. Although the companies agreed to most of the demands of regular workers, discussions with contract workers are still ongoing.

To offset the loss suffered from such strikes, OEMs are diversifying their production bases. Hyundai for one has moved to reduce the dependence on domestic manufacturing plants by expanding production in the US, China, India, Brazil and Turkey during the last decade. South Korean plants accounted for 46% of Hyundai’s capacity in 2011, down from 60% in 2008, when the last strike took place and 93% in 2000. Although another objective for establishing a global production network is to make inroads into the global markets.

Another consequence of strikes is that production costs are expected to shoot up, mainly on account of increased wages and also due to the additional investments that the OEMs will now have to undertake to make up for the reduced working hours per day; along with the abolition of the graveyard shift, another demand of the workers was to reduce the number of hours being worked in the two shifts from 20 to 17 hours.

Currency Uncertainties

The Won has been strengthening against the Yen and the US dollar since mid-2012, increasing production costs while adding to currency conversion losses, as sales in foreign markets translate into fewer Won. This has significantly eroded South Korean automotive OEMs competitiveness; companies such as Hyundai and Kia have consequently ceded market share to Japanese OEMs which are enjoying resurgence on the back of a brightening export outlook.

The Yen is also on a two-year low against the US dollar while the Won was at the highest level against the dollar since August 2011 in January 2013. Toyota can now in principle offer a discount of more than 10% to its US customers whereas South Korea’s Hyundai Motor has to raise the dollar price by over 5% to keep up with the Won.

A December report by the Korean Automotive Research Institute (KARI) states that South Korean export would shrink by 1.2% annually for every 1% drop in the Yen against the Won.

Over the years, the strategy of the South Korean Automotive OEMs has revolved around exports and the companies have established global production network to cater to geographies around the world. However, the recent upheaval in the foreign exchange markets have raised serious doubts about the company’s short-medium term prospects.

With increasing competition from global OEMs both in the domestic and global markets (resulting from FTAs) and currency uncertainties nullifying cost advantages that the Korean car makers have traditionally relied on, it is perhaps time for country’s OEMs to shift focus from quantity to quality – stressing superior design and engineering over sales growth.

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In our fourth discussion in this series, we understand the automotive market dynamics of Turkey. Its proximity to Europe and cultural affinity to Asia has seen a growing presence of both European and Asian OEMs. Is Turkey a long-term growth market for automotive OEMs, or is the market as developed as most western countries?

22/02/2013by EOS Intelligence EOS Intelligence No Comments

Indonesia – Is The Consecutive Years Of Record Sales For Real Or Is It The Storm Before The Lull?

Part II of our Automotive MIST series brings us to Asia – Indonesia, now the second largest South-east Asian automotive market.

Indonesia, South-east Asia’s biggest economy, is now set to become the region’s largest automotive market as well. While Indonesia sold more vehicles than Thailand for the first time in 2011, the land of white elephants made a strong recovery in 2012 and regained its status as the biggest automotive market in the region. This, however, wasn’t enough to take the sheen off the performance of Indonesia’s automotive market in 2012. The country crossed the 1 million mark (vehicles sold in a calendar year) for the first time, surpassing expectations and beating all forecasts. This is the third consecutive year of record sales and represents something of a gold rush for automotive OEMs.

Indonesia achieved GDP growth of 6.2% in 2012 only slightly lower than the 6.5% it clocked in 2011. Over the past decade, its GDP growth has averaged 5.7%, highlighting a positive domestic economic environment. Rising average income levels has created a burgeoning middle class (half of its population of 240 million). Low borrowing costs, rising purchasing power, cheap subsidized fuel, reduced inflation and currency stability have positively influenced the automotive sector. Huge construction projects and mining investment drove the demand for commercial vehicles.

It is no surprise, then, that car-makers are lining up to increase output, with both incumbents and new entrants making large investments to improve their production capacity in the country. The market is currently dominated by Japanese OEMs, with a share of almost 90%. Toyota (along with its affiliate Daihatsu) accounts for almost half of domestic sales, while Mitsubishi, Suzuki, Honda and Nissan are the other important players (in that order).

The Japanese automotive OEMs are on a massive expansion drive in Indonesia – major automotive OEMs and over 50 automotive component makers from Japan committed an investment of about USD 2.4 billion in 2012 to boost production capacity. Car production is expected to increasefrom 900,000 units in 2012 to 1.5 million units in 2015.

Toyota Motor Manufacturing Indonesia (TMMI) is building two manufacturing plants at a combined cost of USD 534.4 million to double its annual production capacity to 240,000 units.
Suzuki Indomobil Motor, a joint venture between Suzuki Motor and Indomobil Sukses Internasional plans to spend USD 782.6 million to double its annual production capacity to 200,000 units.
Nissan Motor plans to invest USD 400 million to increase production capacity from 150,000 to 250,000.
Honda Motor is building an automotive plant that would triple its production capacity to 180,000 per year. The plant is expected to be operational by 2014 and create 2,000-5,000 jobs.
Astra Daihatsu Motor, a joint venture between Daihatsu Motor and Astra International is spending USD 233.1 million to boost capacity from 330,000 to 430,000 units.
Isuzu Astra Motor Indonesia (joint venture of Isuzu Motors and Astra International) and Krama Yudha Tiga Berlian Motors (subsidiary of Mitsubishi Motors) are investing USD 111.1 million and USD 27.8 million, respectively to expand their production capacities.

Other fringe players such as GM, Ford and BMW are also expanding their presence while Tata Motors also recently entered the market.

In August 2011, GM announced that it would be resuming operations at its plant in West Java which has been shut since 2005. The company is investing USD 150 million and the plant is expected to be operational by this year.
BMW also recently doubled its production capacity through an investment of USD 11.15 million.

The next step up for Indonesia is to come out of Thailand’s shadow and establish itself as an export hub. In 2012, exports accounted for 45% of Thailand’s automotive industry while the corresponding figure was only 16% for Indonesia. After the floods in Thailand in 2011, automotive OEMs are keen on diversifying production and Indonesia has emerged as the manufacturing hub at about the right time for them. Consequently, OEMs have committed over USD 2 billion to expand their production capacities in Indonesia.

Underlying Growth Potential

Vehicle ownership levels in Indonesia are very low at 32 per 1,000 people, compared to 123 cars per 1,000 people in Thailand, 300 cars per 1,000 people in Malaysia and around 460 cars per 1,000 people in developed countries. Hypothetically, to reach the same penetration rate as its neighbouring countries, Indonesia would require additional 108 million cars on the road. Given that Indonesia is the fourth most populous country in the world, the potential is obvious and these statistics fuel belief that despite the record sales, there is significant scope for continued rise in sales. Industry experts forecast annual sales of 2 million cars by the end of the decade and by then the country would have long since overtaken Thailand as the region’s biggest automotive market.
In 2013, the Indonesian government announced the ‘Low Carbon Emission (LEC)’ program to spur the development of eco-friendly vehicles to include hybrid cars, electric cars and ‘Low Cost Green Cars (LCGC)’ – vehicles with efficient fuel consumption. With the automotive industry ready to commit USD 4.5 billion on the project, Indonesia has the potential to be a major player in the LCGC market if the government goes ahead with its promise to provide tax incentives and other support for the production of these LEC vehicles. The project will completely change Indonesia’s position in the global automotive industry and may also transform the landscape of the domestic industry by boosting car sales in the long term. With bigger volumes generated from LCGC program, manufacturers operating in Indonesia could also catch up with Thailand by exporting to new markets, particularly other developing economies.
Over the years, automobile manufacturers have been notorious for their penchant to establish production set-ups close to component suppliers – to the extent possible. Indonesia has now reached a stage where it has a substantial base of local component suppliers, making the country an even more attractive destination for vehicle production, and with OEMs now planning production expansion in the country, this should further stimulate growth of the components industry.

The Challenges

The success story is not without its woes though. The economic meltdown in Europe and critical challenges in the domestic market will potentially slow down growth if not addressed timely and properly.

Fuel Subsidy – The Indonesian government wants to reduce the fuel subsidy to free up funds to invest in the development of the country’s infrastructure. The government had planned to increase the fuel prices but the proposal was shot down by the parliament in March 2012. The price increase is, however, inevitable and once the proposal does go through, it increases the total cost of vehicle ownership and maintenance, thereby reducing purchasing power of vehicle buyers. (Read our Perspectives on India’s fuel subsidy struggles: India – Reducing Reliance on Diesel)
Enforcement of Minimum Down-payment – To prevent the risk of a ‘car loan bubble’ the government reduced the Loan-to-value ratio (LTV) to 70% when borrowing from banks to buy cars – essentially forcing buyers to pay more down-payment than before. Loans account for 70% of all new car purchases in Indonesia and although it did not affect vehicle sale in 2012 it is expected to have an impact on sales in 2013.
Dependence on Japanese OEMs – With Japanese OEMs accounting for almost 90% of the Indonesian automotive market, Indonesia is overly reliant on Japan. This became evident during the 2011 earthquake in Japan, when disruptions in supply chain were felt across ASEAN, including Indonesia. Although automotive sales in Indonesia did witness impressive growth, such dependence acts as a hindrance and might hold the country’s automotive industry back from fulfilling its potential in the long run.

So, is the upswing in the Indonesian automotive market for real or is it tempting to deceive again? After sticking with the country as other companies bailed out during one of its periodic meltdowns, Japanese auto OEMs are now benefiting from the consecutive years of record vehicle sales in Indonesia. And the extremely low vehicle penetration rate highlights the huge underlying potential. However, critical challenges remain and the country must tackle them effectively if it wants to become the preferred manufacturing hub in the ASEAN region.

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We study the South Korean automotive market in our next discussion. Being the most developed automotive sector amongst the MIST countries, we try and understand the underlying growth potential in this Asian giant and evaluate the challenges faced by OEMs and component suppliers.

Mexico – The Next Automotive Production Powerhouse? – read the first part of our MIST series.

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