Japanese automaker, Suzuki Motor, has had a recent spate of bad news which has given the company some negative publicity. These involve its exit from the US car market and restructuring of its US subsidiary, as well as the closure of its motorcycle facility in Spain. However, the company has announced that it will renew its focus on Asia, in particular South East Asia, with increased investments in Thailand and Myanmar. This supports BMI's view on Thailand's attractiveness as a South East Asian auto hub as well as Myanmar's growth potential as a frontier market.
To be sure, Suzuki's global financial performance for the first six months of its fiscal year is an improvement from the previous year. Suzuki's consolidated operating income for the first six months of FY2012 (April 2012-September 2012) was JPY66.1bn (US$826.9mn) up 2.2% year-on-year (y-o-y) and its consolidated net income was JPY41.9bn (US$524.2mn), up 30.9% y-o-y. However, as the charts below show, the company's operating margins in Europe and North America have been lagging for the past two years and, therefore, it is no surprise that Suzuki needs to consolidate operations in these two markets.
|Higher Margins In Japan & Rest of Asia|
|Suzuki Operating Results By Geographical Areas For H1 FY2011 (LHS) & H1 FY2012 (RHS)- Net Sales & Operating Income, JPY Millions (LHS); Operating Margins, % (RHS)|
Thailand's Auto Hub Potential
Suzuki recently announced that it plans to produce 100,000 vehicles at its new Thai plant in Rayong province by 2016. The plant has started production of the Swift compact and plans to produce 21,000 Swifts this year, of which 17,000 will be sold domestically.
It has been BMI's long-held view that Thailand is an attractive place for automakers to increase their investments in the coming years. This is due to the country's excellent infrastructure as well as its pro-business government.
Furthermore, the presence of more than 600 local component manufacturers lends support to automakers' production and enables them to exploit economies of agglomeration. Moreover, while 2011's flooding destroyed some auto production facilities, the Thai government as well as the automakers operating there, have taken steps to reinforce areas near production facilities, which we believe would minimise the impact from future floods.
Myanmar Auto Industry's Growth Prospects
Suzuki halted production of commercial vehicles (CVs) in Myanmar in 2010, but is now seeking approval from Myanmar's government to resume production in the country. We believe this move comes on the back of the recent reforms in Myanmar which have seen construction and tourism opportunities crop up ( see our online service, November 13, 'Scania Eyes Construction And Tourism Opportunities'). While Suzuki is going to face keen competition from the likes of Scania and Tata Motors, we believe the CV market is large enough to accommodate more players. Furthermore, given that Suzuki has retained engineers in Myanmar for vehicle maintenance, we believe its prior market knowledge and resources will allow it to grab market share quickly.
Furthermore, the company has recently submitted a proposal to the Myanmar Investment Commission to establish a car factory in Myanmar by 2015. This factory will manufacture 20,000-30,000 cars a year. Indeed, we see this as Suzuki planning for the future. Although the consumer story in Myanmar is still nascent, as foreign investments in the country pick-up, we could see greater disposable income in the hands of consumers which would increase demand for durables such as cars going forward. Also, while the banking sector is still underdeveloped, reforms underway could see the establishment of a consumer credit market by 2015, further boosting demand for passenger cars.
|Searching For Direction|
|Suzuki Motor Share Price (JPY)|
To be sure, Suzuki has achieved mixed success globally since the financial crisis. While it has done well in Japan and other parts of Asia, it has struggled in developed markets such as Europe and the US. We believe that should its renewed focus on the Asian market (a market it has a better track record in) be well executed, it should provide a positive catalyst for the company's share price which is currently searching for direction.