Geely’s Investment Sees BMI View Playing Out

BMI View: Geely's latest investment to assemble and eventually manufacture CBU's in Sri Lanka plays out BMI 's long-held view on the attractiveness of Sri Lanka as an upcoming auto manufacturing hub. We also believe there is plenty of growth potential for Geely's exports to its targeted South Asia and Far East markets due to the current low base of exports from Sri Lanka to these markets. The recent interest in the Sri Lankan auto industry from global automakers bodes well for new investments from component manufacturers as they aim to exploit the agglomeration effects of being close to their customers.

Chinese automaker, Geely Automobile, is planning to enter Sri Lanka in collaboration with Sri Lankan automaker Micro Cars Ltd. According to Geely director, Martin Xiang, Geely has realised that Sri Lanka has become a key market and a South Asia manufacturing hub for automakers, due to its strategic location. The new plant, with 500 employees, will start production in January 2015 and will initially assemble cars before progressing to a total manufacturing process. The company plans to use Sri Lanka as its production hub, and export to South Asia and the Far East.

Geely's proposed investment plays out BMI's view on the strong potential of Sri Lanka as an auto manufacturing hub ( see our online service, September 05, 'Hero Faces Competition In Global Expansion'). With domestic violence between the government and the Tamil Tiger separatist group ceasing over three years ago, Sri Lanka's political stability has been steadily improving which has made it a more attractive place for foreign companies to invest in. We believe that Geely's confidence in the market will create a strong signal for other foreign automakers to consider investing in Sri Lanka, due to Geely's increasing prominence as a global auto player after buying Swedish automaker Volvo.

Geely's decision to start with the assembly of completely knocked down (CKD) kits before progressing to full-scale auto production is similar to the entry-to-market strategies of Bajaj Auto and Atul Auto ( see our online piece, July 18, 'Atul Investment Backs BMI View'), two Indian motorcycle manufacturers, which are expanding into Sri Lanka. We believe this is a less risky strategy for Geely as it gives it time to understand the market and build up supplier networks before jumping into full auto production.

Plenty Of Room To Grow
Sri Lanka- Export Trade With Selected Countries, US$ Millions (LHS); Share Of Total Exports Among Selected Trading Partners (RHS)

Looking at the export figures of the markets where Geely plans to export cars to (South Asia and the Far East), we see plenty of potential to increase trade due to the current low base. Furthermore, BMI believes that Pakistan and India, the two immediate neighbours of Sri Lanka, hold plenty of promise for the export of competitively priced cars. The Indo-Sri Lanka Free Trade Agreement (ISFTA) together with the Sri Lanka Pakistan Free Agreement would be an added incentive for Geely to export cars to these countries. Exports will benefit from the short geographical distance as well as tariff-free status with the two countries.

This recent interest from automakers in the Sri Lankan auto market provides ample opportunities for component manufacturers. Going forward, we believe as factories begin to move towards full production, global component manufacturers will be enticed to invest in Sri Lanka to take advantage of the agglomeration effects coming from being close to their customers.

This article is tagged to:
Sector: Autos
Geography: Sri Lanka, India, Pakistan

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