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.

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