Industry Business Environment Overview - Singapore - Q3 2012


The aim of BMI's Business Environment Rating system for the automotive industry is to show the rewards and the risks that carmakers operating in a particular region - in this case Asia Pacific - may face. The unique system assesses crucial factors, such as sales and output growth, international trade, market size and location, and the level of market competition, in addition to taking into account a country's economic and political backdrop. The ratings system allows analysts to fully expound the potential advantages and disadvantages of investing in Asian car markets, and offers an overall comparison of the key markets in the region.

The rankings have changed slightly against the backdrop of the global economic slowdown, as some markets have proven better equipped to cope than others. Australia now leads the regional rankings, with a much higher score of 70.1 out of a possible 100, compared with 65.3 in the last ratings. The developed nature of the country means that Australia is at a disadvantage due the near-saturation status of its autos market, which reduces growth potential. On the other hand, a high GDP increases purchasing power, while market risks are reduced by low levels of corruption and a strong legal framework. This is reflected in the market's high score for its low risk. Its Country Rewards score has also risen from 66.7 to 87.2.

China has now fallen to second, although its overall score has risen from 66.5 to 67.7. The market's highest scores are still for its production and sales growth potential, based on BMI's forecasts up to 2013, although signs of a slowdown in the market have been evident. However, even though a low level of vehicle ownership can look tempting in terms of possible growth, the low score for country structure (caused by the large gap that exists between wealthy towns and poorer rural areas) acts as a clear restriction on potential penetration. In terms of China's macroeconomic environment, a healthy long-term political and economic outlook ensures strong scores for Country Risk.

A country held back by an auto market on the brink of saturation is South Korea, which has stayed in third with 66.8 out of 100, up from 64.2. Historically poor labour relations weigh on the country's overall rating, although long-term political and economic stability reduce the risks. The score for Rewards has risen this year, as the market's country score rating has gone from 52.2 to 65.8. Free trade agreements add to South Korea's sound regulatory environment, although there is room for improvement if a deal with the US can be ratified.

Japan stays in fourth with an overall rating of 61.1, up from 60.6 in the previous ratings. The risks associated with a developed market still exist, however. Just as Australia and South Korea suffer disadvantages due to their developed statuses, a saturated market also weighs on Japan's ratings. While the country scores well in terms of its Country Risk, with low levels of corruption and a sound legal framework that have bumped up the market's overall score, the auto industry is nearing full capacity, and this consequently reduces production growth potential, while the high level of vehicle ownership restricts possible sales growth. Labour costs are also high, which adds to the cost of expanding production.

Moving up to fifth is Thailand, which has benefited from an improved country risk score, taking its overall rating to 57.4. A number of new export-oriented investment projects have raised the country's production growth potential for the next five years, despite the current downturn, while several existing free trade agreements increase the reach of investors. Government incentives for manufacturers producing low-emission vehicles have boosted Thailand's regulatory environment score, along with good labour relations and trade relationships.

India is now down to sixth with a slightly lower score of 55.4, as a reduction in its Country Rewards rating drags on the Rewards category. India shares the same pros and cons as China, ranking highly in terms of high production and sales growth potential, but with a low score for country structure (again caused by a large gap between wealthy urban and poorer rural areas), which acts as a restriction on future penetration rates. However, the country's regulatory environment rating is bolstered by the government's efforts to encourage 'green' motoring, as well as a number of free trade agreements which are supporting the country's bid to become a regional export hub.

The Philippines has now moved up to seventh, although its overall score is down marginally from 54.6 to 54.0. The market offers only average sales and production growth potential based on BMI's five-year forecast. Although the market is dominated by Japanese brands, the competitive landscape is still far from saturated by carmakers and could still provide opportunities for new entrants, while the country also scores well for its regulatory environment. In terms of Country Risk, solid scores for long-term economic and political risk should assure investors.

Indonesia, which has fallen to eighth on 53.9 compared with 56.2 previously, is the region's largest passenger car market and as such, will always have an appeal for investors. Low labour costs, and a competitive environment with room for new players, increase Indonesia's attractiveness, as do its recently upgraded regulations on intellectual property rights (IPRs), which boost its regulatory environment rating. The country's risks act as a hindrance however, with low scores for corruption, bureaucracy and the legal framework. The Country Rewards score has fallen from 47.5 to 36.3 taking its score for limits to potential returns down from 53.5 to 49.5.

Malaysia follows in ninth position with a rating of 52.6, up slightly from 50.2, although there is room for improvement in terms of the country's regulatory environment. While the country is a leading light of the ASEAN trade bloc, which has made it a popular choice for regional production activities in the auto sector, there is the potential for greater things if a proposed free trade agreement with the US is finalised. In terms of the market itself, production growth potential receives an average rating, while potential sales growth is low in comparison with its peers.

Taiwan, which has climbed to 10th on 49.4 paints a similar picture to Japan, in that its macroeconomic environment is sound, with high scores for long-term economic risk and low corruption. However, auto production is set to fall over BMI's five-year forecast period, while projected sales growth is also minimal. The country receives an above-average rating for its regulatory environment, although links with the Chinese mainland may arouse concerns over IPRs.

Singapore has climbed one place to rank 11th with a rating of 48.5, compared with 45.2 in the previous ratings, with an increase in its Country Rewards score from 76.5 to 90.0. Singapore, along with Thailand, has the highest number of free trade agreements completed for any Asian market. However, in industry terms, the lack of domestic production facilities and the imposition of vehicle quotas, which restrict potential sales growth, weigh on the market's overall rating. Nevertheless, Singapore has climbed three places since our first ratings were produced.

Vietnam, meanwhile, stays in 12th. A newly liberated auto market has witnessed stellar growth, and according to the above-average rating for its potential over the next five years, sales growth should be maintained. The highest score is for Industry Risk, which stands at 85.0. Its Country Risk score has also risen from 49.8 to 51.5, taking its total score for risks up to 68.2. Vietnam is still a country we would expect to see climb the ratings in the future, particularly if its vehicle tariff policy becomes more consistent.

This leaves Hong Kong, which suffers from a lack of local automotive production, in 13th place on 46.6, although this is an improvement from its previous score of 42.9. The country scores highly for its long-term economic and political risk and regulatory environment and indeed its Country Reward score has risen from 72.0 to 87.4. However, with these scores near to the maximum achievable, and with little prospect of vehicle production on the horizon to raise Hong Kong's score for that criterion, the market is unlikely to climb much further in the ratings in the foreseeable future.

Rounding out the rankings now on 38.9, down from 42.4, is Pakistan, which is held back by low production growth potential and an average rating for sales growth. However, as a signatory to the Trade Related Intellectual Property Rights Agreement (TRIPS) under the auspices of the WTO, the country's regulatory environment scores well. A number of free trade agreements also contribute to this criterion, although forming FTA's with non-Asian countries would improve this rating further. Despite low marks for bureaucracy and corruption, the market does score well for its long-term economic risk and policy continuity.

Business Environment Ratings -- Auto Industry Asia Pacific
Rewards Risks
Scores out of 100, with 100 highest. Source: BMI.
Industry Rewards Country Rewards Rewards Industry Risks Country Risks Risks Autos Risk/ Reward Rating Regional Ranking
Australia 58.3 87.2 68.4 80.0 68.2 74.1 70.1 1
China 81.7 44.9 68.8 65.0 65.2 65.1 67.7 2
South Korea 63.3 65.8 64.2 75.0 70.4 72.7 66.8 3
Japan 51.7 76.6 60.4 50.0 75.4 62.7 61.1 4
Thailand 53.3 48.3 51.6 60.0 56.4 58.2 58.3 5
India 68.3 28.2 54.3 60.0 55.8 57.9 55.4 6
Philippines 50.0 46.1 48.6 75.0 58.0 66.5 54.0 7
Indonesia 56.7 36.3 49.5 75.0 52.9 63.9 53.9 8
Malaysia 40.0 61.2 47.4 60.0 69.7 64.8 52.6 9
Taiwan 35.0 50.0 40.3 70.0 71.5 70.8 49.4 10
Singapore 11.7 90.1 35.3 55.0 86.0 70.5 48.5 11
Vietnam 45.0 26.8 38.6 85.0 51.5 68.2 47.5 12
Hong Kong 10.0 87.4 37.1 55.0 82.9 68.9 46.6 13
Pakistan 31.7 25.2 29.4 75.0 47.0 61.0 38.9 14

The Autos Business Environment Rating is our principal rating. It is comprised of two sub-ratings, 'Rewards' and 'Risks', which have a 70% and 30% weighting respectively. In turn, the 'Rewards' Rating comprises an Industry and a Country element, which have a 65% and 35% weighting respectively. These are based upon specific Industry growth and size dynamics within the market, and the broader economic and socio-demographic environment of the country. The 'Risks' rating is comprised of Industry Risks and Country Risks, which each have a 50% weighting. These are based on a subjective evaluation of industry regulatory and competitive issues particular to that market, and the industry's broader Country Risk exposure, which is based on BMI's proprietary Country Risk Ratings. The ratings structure is aligned across all 14 industries for which BMI provides Business Environment Ratings methodology, and is designed to enable clients to consider each rating individually or as a composite, with the choice dependant on level of exposure to the industry in each particular state. For a list of the data and indicators used, please consult the appendix located at the back of the report.

This article is tagged to:
Sector: Autos
Geography: India, Singapore

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