Look East policy for auto sector

It couldn't have been a worse year for Toyota and Honda, with a double blow of the tsunami in Japan and the flooding in Thailand. Both countries are supply hubs for a host of critical components, and operations across the globe, including India, were severely hit.

For many years, Thailand remained a key hub for these Japanese automakers in the ASEAN region, but this is slowly changing. Even before the tsunami and flooding, Indonesia was already on the radar as the new strategic pillar, while Honda has also zeroed in on Malaysia. Clearly, this decision has been motivated by the growing potential of these markets, as well as the imperatives of global platforms for the future.

FREE TRADE AGREEMENT

However, the Thai floods will add yet another dimension in prompting Toyota and Honda to build a new de-risk business model for the future, where Indonesia and Malaysia (along with Vietnam), will play an important role. It is here that the role of India comes under the scanner. Here is a country which, after China, is the next big thing in the automobile industry, along with Brazil and Russia. However, it is still, in a sense, divorced from the ASEAN region, largely because there is no full-fledged free trade agreement (FTA) in place.

Will this be a heavy price to pay in the future? Honda, for instance, already supplies car components from India to its plants in Malaysia and Thailand.

It plans to grow this business in the future, but clearly there are limitations from the viewpoint of logistics and freight costs. People believe there could be some cultural issues too, which could be an impediment. “For all we know, some of these countries wouldn't be too kicked regarding imports from India. The bonding just isn't there,” they say.

It is no secret that Japanese automakers have been trying hard for FTAs with India, simply because the overall costing structure, sans tariffs, works out to everyone's advantage. Yet, they also acknowledge that the Indian market, on its own, is a lot larger, which assures enough demand for their products. In addition, companies like Toyota are already planning to leverage the benefits here for their operations in Brazil for the Etios.

One wonders, though, if the Indian auto sector isn't losing out on some big opportunities in ASEAN, especially when Indonesia, Vietnam, and Malaysia are poised to take the lead from Thailand as the growth drivers of the future. Japanese automakers will increasingly look at higher platform synergies, and this is where India could play a big role as the ‘mother country', which supplies a host of critical components in the ASEAN region.

Ammar Master, Manager of the Thailand-based LMC Automotive (which specialises in vehicle forecasting and intelligence), agrees that India will benefit from closer trade relations with ASEAN. “FTAs are one way to achieve this, though I'm not certain if the countries here, with their own domestic automotive markets, will open the auto sector in a big way for India. While engines and transmission components are part of the early harvest scheme in the Indo-Thai FTA, I don't think this will be expanded further,” he says.

Companies like Nissan and Honda already have near-identical models in the form of the Micra and Brio, in India as well as in Thailand for its eco-car project. Toyota and Suzuki are poised to follow suit, though specific details still haven't been spelt out. Mitsubishi, likewise, could look for a similar play in both India and Thailand, which means the scope for supply of parts is immense. Once Indonesia and Vietnam join the fray, the sky will be the limit.
AUTOMOTIVE INDUSTRY

Master is of the view that India's automotive industry shouldn't wait for FTAs to expand its business in ASEAN. He believes ancillary suppliers have the quality, but perhaps not the capacity, to supply to automakers in this region.

“They may want to set up operations instead, which would allow them to circumvent the otherwise high import duties on non-ASEAN imports,” he says.

What cannot be wished away is the fact that Chinese automakers will also be gauging the situation carefully. SAIC Motor Corp, which is already gearing up for a big India play with General Motors, will next look at entering Thailand, Malaysia and Indonesia. This could be equally true for some other Chinese companies, which could expand operations in ASEAN and have a supplier base which will work on an aggressive costing structure. It is here that the Indian auto industry may need to be extra vigilant, and ensure it doesn't miss the bus.

Indonesia is clearly going to emerge a force to reckon with in the ASEAN automotive arena. According to Master, carmakers will now strive to find a balance in operations, both here and in Thailand.

This will also help as a de-risking model, so that a supply disruption in one location (as with the flooding in Thailand), can be supplemented by a second operation.

He cautions, though, that a lot of this will depend on the Indonesian government's stability and long-term investment policies. “For instance, Thailand's success hinges largely on stable investment policies, regardless of changes in government. This is perhaps why manufacturers remain confident in the country,” Master avers.

Vietnam could be the next big thing to happen, once it brings down its import duties to be at par with Thailand, Malaysia, Indonesia and the Philippines. This is expected to happen by 2018, which means Vietnam could emerge an important automotive market in ASEAN.

What does this integration among countries in Southeast Asia imply to India? There is no question that our automotive industry has the potential to offer a lot in the region, irrespective of FTAs. With Europe going through a crisis, and the US just beginning to show signs of recovery, India's automakers may want to start looking further southwards in Asia. It could also be a pragmatic de-risk model, especially when there is uncertainty all around.