International Business: ASIA
ASIA'S CAR TROUBLE
The boom is a bust. And scared consumers have stopped buying
The perfect market. That's how the world's carmakers viewed Asia until just a few months ago. Rising incomes, hundreds of millions of potential buyers--the ingredients seemed in place for the biggest car-buying binge in automotive history. The Japanese, Europeans, Americans, and Koreans all rushed to get in on the bonanza before it was too late.
Now, the boom has turned into a bust because of a currency crisis that has devastated many local economies and prompted scared consumers to shun big-ticket items like cars. In Japan, dealers are desperately seeking customers, while the Chinese are selling their most popular car, the locally made Volkswagen Santana, for 25% less than two years ago. Sales are evaporating in Thailand, Malaysia, and Indonesia. Giants like Toyota Motor Corp. and Ford Motor are grimly enduring the recession, while the national car companies of Indonesia and Malaysia face their roughest road test yet.
It's time to rethink strategies. Both Ford and General Motors Corp. want to win a 10% share of Asia's market in the next decade or so. Local production is a must, so why not pick up someone else's capacity cheap, especially in hard-hit Korea? Thus Ford is talking to Samsung and Kia, while GM is dancing with Daewoo Motor just six years after a bitter corporate divorce. Says Alan Perriton, president of GM Korea: "Trying to go it alone just doesn't make sense."
Meanwhile, the Japanese have spent billions creating an Asian auto industry from scratch. Nine out of 10 cars and pickup trucks in the region are made by Japanese companies, and they want to keep it that way. "We are not going to flee," says Honda Motor President Nobuhiko Kawamoto.
So Japan's carmakers are flying hundreds of Thai workers back to Japan for additional technical training and extending support to local suppliers to revamp their operations for export. Even before Ford and GM get rolling in Thailand, "the Japanese are digging in even deeper," says Michael Dunne, president of Automotive Resources Asia.
THAI CONCEPT. Yet the Japanese also have problems. They want to source all their parts locally: That way, a Thai plant won't have to spend huge amounts of depreciated baht to buy parts from Japan. Far better to buy locally and earn hard-currency profits in Japan, the U.S., or Europe. It's a good idea, but it needs work. Japan's carmakers in Thailand get only 70% of their parts locally, and their locations in Indonesia and the Philippines have much lower local content and so practically no cost advantage.
The cost of staying in Asia's auto markets will keep climbing as sales contract further. Carmakers have a choice: stay in the race or end up as roadkill.By Emily Thornton in TokyoReturn to top
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THE BIG CRUNCH IN THAILAND
You get a sense of how bad Thailand's recession is soon after entering Mitsubishi Motors Corp.'s regional offices in suburban Bangkok. To save on electricity, the hallways are unlit and air conditioners are set a few degrees warmer than usual. The fourth floor, once home to spacious office suites with special executive showers and washrooms, is closed completely. And Mitsubishi's car business? The company is shutting assembly lines and laying off hundreds of workers.
The worst is yet to come. After a dismal 1997, Thailand's automobile market is still shrinking. Demand could drop to 160,000 units this year, one-third the number sold in the peak year of 1996. That's even less than the capacity of Mitsubishi's four Thai facilities, not to mention the 10 plants of its Japanese and American rivals. And with demand plunging everywhere else in Southeast Asia as well, export prospects are bleak. "How can we survive?" asks Susumu Nakagawa, Mitsubishi Thailand's executive vice-president.
Not everybody will. After the world's auto makers poured billions into Thailand to grab a share of the domestic market and produce for the entire region, the country now has a capacity glut that will last well into the next century. Major new factories by latecomers General Motors Corp. and Ford Motor Co. are still going up in the former pineapple fields of an industrial estate two hours southeast of Bangkok. They will soon help push Thailand's total annual capacity to 1.2 million cars and trucks, says Dennis Meseroll, associate director of Brooker Group, a Bangkok consulting company.
DOWN, NOT OUT. It looks grim. But so far no auto makers have decided to cut and run. Instead, they are scaling back and hunkering down. GM, for example, has slashed planned output of Opel passenger cars from 100,000 annually by 1999 to 40,000 and reduced its investment by one-third, to $500 million, in part by building a smaller plant and delaying production. Meanwhile, to keep local operations from deteriorating further, Japanese carmakers are dropping work shifts, bailing out wobbly parts makers, and setting up consumer credit firms to prop up dealers and push sales.
Yet reducing output won't solve profit woes, since car plants require large production volumes to pay off. "Because the auto industry is capital intensive, you want to be running full bore to make money," says Brooker's Meseroll. Right now, the industry is running at just 30% capacity. "People are in big trouble," adds Meseroll.
The government has not made the auto makers' task any easier. Because of the fiscal policies mandated by the International Monetary Fund, the Thais have increased value-added taxes, excise taxes, and import duties on goods, including cars. Some carmakers, such as Toyota Motor Corp. with its Corolla, are swallowing these costs and actually lowering prices. Others, such as Chrysler Corp. with its Jeep Cherokee, are passing on the costs, adding as much as $20,000 to the retail price. Neither approach helps profits.
Even before the crisis, the signs of a weakening market were appearing. Honda Motor Co.'s experience with the City, a four-door car unveiled in 1996, is a case in point. The simply designed, $8,300 City is made specifically for Southeast Asian buyers in a $100 million plant near Ayutthaya. "We were hoping to create a new passenger-car market," says Satoshi Toshida, president and CEO of Asian Honda Motor Co. Yet in the past two years, only 30,000 were sold--way below expectations.
Carmakers still haven't given up hope that exports will help compensate for weak local sales. The question remains: Export where? Unlike Mexico, which survived the 1994 peso crash thanks in large part to the North American Free Trade Agreement, Thailand does not have a huge open market right next door. True, Japanese auto makers can use their Thai factories to supplant more expensive assembly lines at home. Toyota Motor Corp. wants to sell 22,000 Thai-produced pickups in Australia and New Zealand, replacing trucks that came from Japan. Yoshiaki Muramatsu, president of Toyota Motor Thailand Co., thinks that he might be able to export to smallish markets like Sri Lanka or the Middle East.
TIGHT MARKETS. But the quantities being talked about are small, and demand is slow in Japan as well. Longer term, carmakers are looking forward to 2003, when tariffs on cars traded within the Association of South East Asian Nations are supposed to drop to 5% and Thailand can export freely to nearby markets. But even if trade barriers are dismantled as promised, any relief is still years away.
Cracking developed countries will be difficult, too. Despite the cheap baht, Thai factories are too small to compete efficiently with the giant auto facilities in the U.S., Japan, or Europe. Concedes one top car executive: "We are all going to meet each other on a street corner in a foreign country and find that we are all trying to do the same thing." Says David L. Snyder, president of Ford Operations (Thailand) Co.: "We don't want to become a company that's just exporting out of Thailand."
When the Thai market finally does recover, those carmakers still standing should profit from a surge in pent-up demand for new vehicles. "That hope is still there," says Mitsubishi's Nakagawa. "But at this moment, it is rather difficult to expect that." Instead, Nakagawa can only soldier on, waiting for a comeback and looking forward to the day he can turn on a few more lights.By Bruce Einhorn in BangkokReturn to top