LIFTING-THE-BARRIERS REPORT 2014 | AUTOMOTIVE & MANUFACTURING
Published date: December 2014
TABLE OF CONTENT
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- 1 ASEAN – The Growth Story
- 2 AEC – The Quest for One Market
- 3 Likely Impact and the Changing Landscape
- 4 Achievements & Challenges along the way
- 5 Destination 2015 & Beyond
INTEGRATION OF THE AUTOMOTIVE SECTOR UNDER AEC AND THE BARRIERS TO TRADE
1. ASEAN – THE GROWTH STORY
Since its inception in 1967, ASEAN has evolved into one of the most successful politico-economic groupings in the world, representing a combined GDP of US$2.4 trillion (2013), the seventh largest in the world. As far as the automotive sector is concerned, it ranks as the 5th largest global market and is likely to retain this position over the next 5 years (see Fig.1.1).
For investors and auto makers, the growth opportunities are as exciting as those presented by the BRIC countries. Most of this spectacular growth in demand can be attributed to the over 600 million inhabitants in ASEAN, as their incomes increase rapidly in the near term, riding on steady economic growth in the region. The low motorisation across ASEAN coupled with the increasing purchasing power constitutes a natural growth engine that is fuelling explosive and unparalleled market growth (see Fig.1.2). As ASEAN crosses the US$3,000 GDP per capita mark, vehicle ownership is poised to grow twice as fast as per capita income.
ASEAN has also evolved into a significant base for automotive manufacturing. The region is the 6th largest manufacturer of vehicles (see Fig. 1.3) and all set to overtake Korea as the 5th largest base. The drive for manufacturing has been led by Thailand where export driven policies have ensured that 50% of manufactures are exported. The export of vehicles in other ASEAN markets remains negligible. Other than Thailand, automotive production in ASEAN is mainly targeted at catering to domestic demand. Lack of alignment with global standards, supply chains and markets, further inhibits exports.
Other than the natural market growth, government policy has also been, and will likely to continue being, a major driver of demand in the region. This has manifested in 2 distinct forces that are shaping the automotive landscape in ASEAN – (1) The Evolution of the ASEAN Economic Community (AEC) and (2) The Impact of Free Trade Agreements (FTAs).
The role of FTAs can be counter-productive as the plethora of bilateral FTAs, and a handful of multilateral ones, has started becoming counterproductive. Ignominiously referred to as the ‘noodle bowl effect’, trade complexities arising due to different rules of origin have restrained the widespread usage of FTAs. A recent study by HSBC in 8 key Asia-Pacific (APAC) economies has shown that on an average, the usage rate of more than 50 FTAs signed by them is just 26%.
On the other hand, the evolution of the AEC and its launch on 31st December 2015 is likely to have a gradual but significant impact on the automotive sector. However, the underlying intent of transforming an economically disparate ASEAN into an EU-style economic area is fraught with challenges, and more so in relation to the automotive sector. There are significant gaps in the way the markets are currently regulated, the quality of presiding institutions and the environment in which businesses operate.
2. AEC – The Quest for One Market
The economic integration of ASEAN, through the development of the AEC, transcends the boundaries of trade liberalisation, seeking to put in place a more comprehensive framework that covers (1) a single market and production base (2) competitive economic region (3) equitable economic development and (4) integration with the global economy (See Fig.2.1)
In context of the automotive sector, regional integration aims at the following:
- Abolition of regional tariffs
- Harmonisation of automotive technical regulations
- Mutual recognition of certification
- Streamlining of customs procedure and distribution systems
- Fostering of supporting industries and human resources
- Promotion of safety and greater environmental protection
In order to achieve these objectives, key measures of integration have been identified.
- Increasing intra-ASEAN Trade and Investment
• Tariff elimination
• Decreasing non-tariff measures
• Custom cooperation
• Effective implementation of ASEAN Industrial Co-operation Scheme (AICO) and The Common EffectivePreferential Tariff (CEPT)
• Improvement of rules of origin
• Standards and conformance
• Future investment
• Improvement of logistics services
- Increasing Technological Capabilities
• Enhancing ASEAN car manufacturing capabilities
• Improving Human Resources Capability
• Training and skill certification system
By realising the objectives of sector integration, AEC aims to enhance the region’s competitiveness, create a level playing field without compromising on economic performance, bridge the development gaps and enhance ASEAN’s role as a global supplier and market. While market realities and existential threat perceptions are the biggest drivers in this endeavour, political compulsions, accentuated by development divide, serve as key restraints.
3. Likely Impact and the Changing Landscape
Impact of the AEC on the automotive landscape would be an interplay between 7 key variables:
- Market Size – Scale economies will help lower average cost of production. Larger markets have inherent advantage
- Market Growth – Low motorisation level coupled with increasing affluence will ensure sustained growth in demand
- Tax Incentives – Government support through incentives to lower production costs and enhance feasibility of investment
- Manpower Costs – This will drive overall production and assembly cost and development of component sector
- Automotive Policy – Government intent and sector focus will help attract more investment and fuel demand
- Policy Implementation – Transparency & commitment to provide assurance to investors and make sure desired objectives are met
- External Stimuli – Politico-economic Influence of China, Korea & Japan – key auto markets
While the first 4 variables signify drive towards lower costs, the last 3 reflect thrust in policy. The interaction between these variables is likely to shape the future of the industry.
The impact of AEC can be assessed across the automotive value chain – right from parts and component manufacturers and contract assemblers to original equipment manufactures (OEMs) and their channel partners. Smaller Japanese OEMs and new entrants are expected to gain the most as the level playing field will make it easier for them to expand their presence and challenge incumbents. On the other hand, dominance of big Japanese OEMs will be under threat, though they will continue to lead the market. Local OEMs such as Proton will find it challenging to maintain their existing market positions.
Across the value chain, large global suppliers are expected to make substantial inroads into the OE market as new entrant OEMs expand further. Local suppliers, starved for demand from local OEMs and access to new technology, are likely to focus more on the aftermarket. Market consolidation and new strategic partnerships are expected. On the other hand, dealers can be expected to face reduced average margins and volumes due to increase in competitive pressures.
Overall, under the AEC, Indonesia is expected to further capitalise on its large, high growth market, and low cost of labor. Despite current political turmoil, the impact on the Thai automotive sector is likely to be positive as well. However, the AEC seems to be less favourable to the Malaysian automotive market, as the dominance of national participants will come under pressure and the effects are likely to cascade across the entire value chain.
4. Achievements & Challenges along the way
While the post-AEC vision of the market seems every bit exciting, given the sheer scope and complexities of various outstanding issues, there is a strong likelihood that as the deadline draws closer certain elements of the AEC may be put on hold. Furthermore, though the impact is likely to be significant over a period of time, a quick radical transformation of the industry is highly unlikely.
That has a lot to do with the very nature of the automotive industry itself. With heavy capital investment made over decades, strong linkages to other industries and supply eco-system and significant employment ‘impact’ raise the stakes considerably. Consequently, any existential threat to the local automotive sector risks getting stuck in political quagmire and facing backlash from ‘nationalistic’ agendas.
Along the road to integration, over the years, a lot has already been achieved by the ASEAN countries. With trade and FDI being liberalised, the markets have become better integrated with the global economy. Over 70% of regional trade is carried out virtually tariff-free (CEPT rates at 0% in the case of ASEAN-6). Significant strides have also been made in trade facilitation, investment liberalisation and facilitation, and services liberalisation.
Other than the abolition of tariffs, the remaining objectives of sector integration pose significant challenges. These manifest in non-tariff barriers (NTBs) to trade that are extremely hard to overcome. The NTBs include import quotas and anti-dumping actions as well as technical, administrative, health and safety regulations that end up having protectionist effects. Some of the most important among these are non-harmonised technical standards, ‘reduced’ mutual recognition of certification and cumbersome customs procedures that do not sync with each other.
Though NTBs are supposed to be eliminated by 2015 in the case of ASEAN-6 and by 2018 for CLMV markets, the progress has been slow due to difficulties in identifying and compiling such measures at a country level. As such restrictions posed by NTBs vary considerably from member to member. While Myanmar, Indonesia and Philippines have put up most NTBs, least restrictions have been in Cambodia and Thailand.
Harmonisation of standards and mutual recognition of certification are the bedrock of Technical Barriers to Trade (TBTs). Different product standards, varying by market and non-adherence to any international standards have an adverse impact on export competitiveness for locally manufactured automotive products. Furthermore they pose issues to environmental protection and road safety. The efforts towards harmonisation cover 4 key areas – (1) Environment and Fuel (2) Certification (3) United Nations Economic Commission for Europe (UNECE) Regulation Adoption (4) ASEAN MRA (Mutual Recognition of Agreements).
Under the AEC, 19 priority UNECE standards are to be implemented by 2015. However, the progress has been non-uniform and the pace of adoption has varied considerably across the constituent markets. The wide development gap between ASEAN countries remains a serious hurdle. While Malaysia and Thailand are signatories to the World Forum for Harmonisation of Vehicle Regulations (WP29), 1958, other ASEAN countries are observers.
Since ASEAN is not a customs union, the streamlining of customs procedures becomes imperative to root out corruption, stem delays and lower the transaction costs. The Trade Facilitation Framework has been developed to integrate customs procedures, establish the ASEAN Single Window (ASW) program, enhance preferential tariff certification procedures, harmonise standards, and conformance procedures. While significant process has been made in developing the ASEAN Harmonised Tariff Nomenclatures (AHTN), ASEAN Customs Valuation Guide, ASEAN Post-Clearance Audit Manual, etc., progress has been slow with regards to the ASW Program. Not all member countries have been able to establish and operationalise their respective National Single Windows (NSWs) which aim to reduce transaction costs by speeding up clearance of shipments and release of goods by customs. The implementation challenges are many and diverse. While markets like Indonesia and Thailand are battling coordination issues, resource crunch and legal inadequacies, Philippines is facing challenges with regards to data standardisation and simplification of business processes.
A significant step was taken in the direction of trade facilitation with the launch of the first pilot project on Self-Certification in 2010. The program seeks to enable certified exporters make out invoice declarations on the origin of their goods, thereby shifting onus from the government to the industry. An ASEAN-wide consensus on self-certification is expected to facilitate intra-ASEAN trade, promote regional production networks, increase usage of ATIGA and reduce cost of doing business. The first project was joined by Thailand, Malaysia, Singapore and Brunei.
However, the other ASEAN countries stayed away until Indonesia and the Philippines championed a second pilot project in 2013, joined by Laos and in all likelihood by Vietnam in the near future. Even as the industry hopes for a merger of the two programs into one, the non-acceptance of exporters and traders and third-country invoicing by the second pilot project continues to be a bone of contention. Other than the Operation Certification Procedure (OCP) of the two projects, limited participation of automotive players and the ambivalence of Cambodia, Myanmar and Vietnam, pose significant challenges in the quest for complete and uniform implementation by 31st December 2015. In both Indonesia and the Philippines, adoption of self-certification by SMEs, which include a large number of parts suppliers, has lagged and the governments of the two countries are finding it extremely challenging to get them on board. On the other hand, by not allowing third country invoicing and exporters to self-certify, large OEMs with regional presence and some Tier 1 suppliers have not been able to reap the benefits as well.
While the import tariffs for intra-ASEAN trade have almost entirely been removed, there are domestic regimes that create differentials between imported and locally produced goods. The AP system in Malaysia is one such mechanism. Though the government is toying with the idea of removing both Open APs and Franchisee APs, political compulsions and commitment to the Bumiputera agenda pose challenges. Under the aegis of the National Automotive Policy, the local players also get various monetary benefits in the form of grants, and these negatively impact the price competitiveness of imported vehicles. Issues such as these find resonance in other markets too where “National Automotive Roadmaps” and “Policy Frameworks” offer incentives and non-financial benefits to lure FDI in the sector, inadvertently setting up protectionist policies and creating barriers to trade.
Finally, an issue of critical importance, especially for businesses that have invested in manufacturing or assembly in ASEAN, is that of labor mobility. As labour prices rise in key automotive hubs – Thailand and Indonesia – businesses are seeking flexibility in sourcing cheaper labour from other parts of ASEAN. The AEC Objectives focus on free flow of skilled labour across the region, commensurate with accelerating economic growth and increasing productivity that would likely result in an estimated 14 million new jobs across all sectors. Current migration trends are skewed towards medium and low skilled labour vis-à-vis high skilled labour and this is likely to increase further in the years to come. There is a great emphasis on market access of professionals and in this regard, MRAs have come to be the main way forward. Engineering is one of the MRAs signed for 7 professions that augment and reinforce the landmark Agreement on the Movement of Natural Persons (2012). However, the issue of labour shortage is not just about mobility but also about quality and availability. That’s where disparities in education and training create a big bottleneck. Furthermore, many MRAs have still not been ratified by all countries and those that have, are facing significant issues in implementation. What’s more, MRAs are not expected to address the issue of market access completely. Employment is a sensitive issue in most markets and there are strong political and nationalistic pressures to ensure high percentage of jobs for locals, especially in local businesses.
5. Destination 2015 & Beyond
The AEC is trying to integrate 10 extremely diverse markets that are at different stages of economic growth. While aiming for increase in intra-ASEAN trade, each country is trying hard to protect local investments, secure employment opportunities and increase FDI. Lack of a supranational authority (as in case of the EU) and the consensus driven approach to integration make the progress tardy. As a result, overall, the AEC is behind its targets to reduce and abolish non-tariff and regulatory barriers in goods, services and investment. The latest AEC Scorecard suggests that only 77.5% of targets between 2008-March 2013 have been achieved.
In all likelihood the 2015 deadline for the AEC will be missed and the real test would lie in taking the ongoing efforts forward, in the years beyond 2015 and sort out the more difficult parts of the agenda. This would be quite challenging as some markets will enter the realm of tough legislative changes and in some cases even constitutional amendments. Consequently, 2015 is likely to become a key milestone in the evolution of AEC and not just a deadline. A comprehensive post-2015 plan merits a greater involvement of the business community for taking it to fruition. From an automotive perspective the issues of non-tariff measures, standards and conformance and the mobility of skilled labour are of critical importance and need to be prioritised to have a meaningful sector integration.
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