Shipping And Auto Export Hubs Throw Up Interesting Possibilities
BMI View : We remain bullish on the potential of both Indonesia and Thailand as key strategic auto hubs in South East Asia. Thailand's pro-business government and strong supplier presence have incentivised automakers to use the country as a production base and utilise the excellent port infrastructure to export surplus production to emerging markets such as the Middle East. Indonesia, meanwhile, competes on lower wages and tax incentives, although its stretched and ageing port infrastructure remains a risk to car exports. The implementation of the AEC in 2015 will see both these countries attract further auto-related investment as inter-country tariffs are removed.
The gravitation of global automakers to South East Asia (SEA), together with their dependence on strong port infrastructure and the shipping industry to export vehicles to markets with end demand, throws up some diverse investment opportunities in the region.
It is BMI's long-held view that Thailand and Indonesia remain key strategic auto hubs in SEA. The onset of the ASEAN Economic Community (AEC) in 2015 makes us bullish on the potential of both these countries, as we believe there remains plenty of potential to attract further investment in this sector.
Thailand: Pro-Business Government And Strong Port Infrastructure
Thailand's strength as an auto production powerhouse comes from its pro-business government and excellent port infrastructure. After the country's strong recovery from the devastating 2011 floods, investment has been pouring in from automakers, resulting in auto production reaching a record of 2.45mn vehicles in 2012. We expect production to continue growing in 2013.
Furthermore, Thailand's welcoming business environment together with the strong support provided by the massive presence of auto component suppliers has incentivised Japanese automakers to further increase their Thai investments recently. Nissan announced in October 2012 that it is building a new factory which will produce 200,000 CBUs a year ( see our online service, October 29 2012 , 'Nissan Increases Bets On Thailand' ) and Honda announced a THB20bn (US$670mn) investment in February to build a new factory as well as expand existing facilities.
While auto exports hit a high of 1mn CBUs in 2012, we expect sustained strong growth in the coming years. The recent increase in carmaker and supplier investments, together with strong demand for Thai auto exports in emerging markets, bolsters our bullish view. Going forward, we expect exports to make up a bigger proportion of domestic auto production, hitting 1.3mn units by 2017.
|Exports To Increase Share|
|Thailand - Domestic Vehicle Production, Mn Units (LHS); Vehicle Exports, Units (RHS)|
Thailand's Auto Export Boom Puts Car Carriers In Sweet Spot
Although the global shipping industry is facing a tough business environment due to a glut of tonnage in the market, car carriers are enjoying a mini-boom in part due to the success of Japanese vehicle exports from Thailand to markets such as the SEA, Middle East and Latin America.
Nippon Yusen Kaisha (NYK), the world's biggest operator of roll-on roll-off (RoRo) ships (carriers used to transport vehicles), which has Toyota as its biggest customer, is increasing its car carrier fleet in anticipation of a record 2013 in Thai vehicle exports. The firm, which has a total of 121 car carriers from its total ship fleet of 837, ordered four RoRo carriers in October 2012 and wants to increase its car carrier fleet to 130 by March 2017.
Indonesia: Competitive Wages, Booming Sales & Green Car Incentives
While Indonesia is the second largest auto market in ASEAN after Thailand, both in terms of sales and production, it retains plenty of potential as an export hub. Automakers have increased their investment in the country to take advantage of its low-cost of manufacturing vis-à-vis other regional neighbours.
|Indonesia Retains Competitive Edge|
|Manufacturing Sector - Average Annual Wages, US$|
The new low-cost green car (LCGC) law, which is in the process of being enacted, has the potential to further boost Indonesia's production outlook. Toyota Motor Manufacturing Indonesia (TMMIN) and Astra Daihatsu Motor (ADM) have unveiled their jointly-produced Toyota Agya and Daihatsu Ayla to take advantage of the tax incentives under this programme. Given that automakers such as Honda and Ford are looking to the small car segment to drive their growth in emerging markets, we see the possibility of them increasing their investments in Indonesia to produce eco-friendly cars in the future.
As automakers begin to ramp-up their eco-cars production to take advantage of the incentives under the LCGC programme, we forecast 2013 passenger car production to grow 13%, to hit 840,000 units. This then brings our 2013 vehicle production forecast to 1.2mn units, up 12%.
Another draw for carmakers to set-up production facilities in Indonesia is the strong growth potential of the domestic auto market. Domestic vehicle sales grew 30% in 2012, to a record 1.1mn units and we expect sales to enjoy an annual average growth of 8.7% over the 2013-2017 period, to hit 1.7mn units by 2017.
Indeed, 2013 is off to a good start as 2M13 vehicle sales came in at 199,974 units, up 23% year-on-year (y-o-y).
Port Infrastructure Needs To Improve
A potential headwind to additional Indonesian auto sector investment is the slow expansion of the car terminals in Tanjong Priok port, which is a key vein for Japanese car exports to emerging markets in SEA, Africa and the Middle East. With some auto export shipments having to face delays due to the overstretched capacity of the ageing port, we believe there are significant investment opportunities in upgrading the country's port infrastructure. One potential risk though is government bureaucracy, which usually impedes a swift approval process for infrastructure projects. Nonetheless, given that production decisions by automakers are usually for the long term, we expect demand for additional port capacity for vehicle exports to remain on an upward trajectory.
While the state-owned port company Pelindo II has finally received government approval to start construction on Kalibaru Port, which will be an extension of the existing Tanjung Priok port, we expect it to take at least a couple of years before capacity at the car terminals is expanded.
AEC Will Boost Trade And Investment
As the AEC moves towards implementation in 2015, we s ee a greater potential for free trade in the region. While Japan already has an Economic Partnership Agreement (EPA) with ASEAN, which removes most duties in the auto sector trade between them, the AEC will allow its member countries to negotiate effectively as a trading bloc with other global trading partners to lower tariffs and boost trade in key sectors such as automotives.
Furthermore, the onset of AEC will see inter-country tariffs between ASEAN countries removed, which would then see automakers focussing their production in several countries and exporting to markets with end-demand, in order to reap economies of scale. BMI believes this trend would further attract auto sector investment in both Thailand and Indonesia as new investment will benefit from the strengths of these countries as well as agglomeration effects.