Asia Pacific Auto Report

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Contents

Aia Pacic

Amiv InsIGHtMIs monthly market intelligence, trend analysis and forecasts for the automotives industry across Asia Pacific

ob 2010 I 53

Regional Focus

VW Targets ASEAN In March To Global Leadership ...............................................

China

Government Looks To EVs To Address Overcapacity Fears ....................................

GM Primed For Further Success With Opels China Strategy ..................................

GM-SAIC Milestone Project Marks Coming Of Age For Domestic Carmakers............

Spain Stands As A Strong Contender For Chery Investment ..................................

Tyre Import Duty To Hurt EU-China Relations; Renault and BMW At A Loss ...........

Volvo Faces First Test Under New Ownership .......................................................

India

Tata Takes Nano To High-Growth EMs As Competition Emerges ............................Continental Targets Key Market But BMI Warns Of Cost Risks ..............................

Mahindra Eyes Global SUV Strength Through Ssangyong Deal ..............................

Trend Of Emerging Market Firms Expanding Will Continue As MSSL Seeks Purchase

Mahindra And Importers Future Uncertain As Expansion Takes Its Toll ..................

Pakistan

Japanese Dominance Threatened As Yen Forces Up Car Prices .............................

Thailand

Ford And Mazda Invest More As Cost Advantages Become Clear ...........................

Malaysia

International Partnerships Lead To Expansion For DRB-Hicom...............................

Indonesia

Steel JV Will Increase Local Content As Vehicle Demand Rises ..............................

Philippines

Ford Uncertainty Highlights Strength Of Thai Incentives Over Philippines ...............

South Korea

Exports Will Continue To Play Greater Role In Strategies ......................................

Renaults Import Plans Could Be Hampered By Aid Conditions ..............................

Kia Follows Asian Example in Uruguay, But Risk Lays In Brazils Bubble Bursting ....

FTA Will Heat Up Competition Between Asian Carmakers .....................................

Japan

Distinct Brand Strategy And Local Production To Aid Nissans Expansion Plans .......

Toyota Withdrawal: More About Protecting US Business? ......................................

Nissan Looks For GCC Growth Despite Yen Threat ...............................................

Nissan Signs EV Agreement As Government Shows Signs Of Contradictory Policy ...

Singapore

Country Will Remain An Attractive Investment Location Despite Flextronics Pull-Ou

Australia

Cross-Continent Cooperation Makes Holden Flex-Fuel A Reality .............................

reGIonAl foCus

VW Targets ASEAN In March To

Global LeadershipGerman carmaker Volkswagen (VW) has identied South East Asia

as a prime market for growth as it looks to become the worlds largest

carmaker by 2018. According to BMI forecasts, total vehicle sales in the

region (Indonesia, Malaysia, Thailand, Vietnam, Philippines, Singapore)

are projected to rise from 1.97mn units in 2009 to 2.5mn units by 2014.

VW has already cracked the worlds largest passenger car market,

claiming rst and second place in terms of sedan sales in China last year,with its Shanghai VW unit leading with sales of 708,100 units and its

FAW-VW tie-up close behind on 669,200. However, with a slowdown

in Chinas rapid vehicle sales growth expected in H210 and into 2011,

the German carmaker is looking for a safety net in the region.

An on-off relationship with Malaysian carmaker Proton had initially

offered one of the best routes to the market, until the latest round of

negotiations broke down in June. VW has since reached an agreement

with DRB-Hicom for the local assembly of its models from 2012. Local

production in the region is particularly important to take advantage of

the ASEAN Free trade Agreement, under which import tariffs between

signatories was reduced to 0-5% from January 1.

According to German press, VW is also eyeing Vietnam as a produc-

tion base. This is apparently due to its low labour and production costs

as well as its access to other markets in the region. While Vietnam is

not one of the highest ranking markets in BMIs Industry Risk/Reward

ratings for the auto sector in Asia Pacic, local assembly will help VW

avoid the increasingly high tariffs in Vietnam.

Elsewhere in the region, VW assembles the Touran multi-purpose

vehicle (MPV) in Indonesia in partnership with the Indomobil group.

There is the potential for complete production to begin from 2012,

depending on the success of the venture. Thailand is also being tapped

through VWs 19.9% stake in Suzuki Motor, which is planning a small

car plant in the country.

Apart from the growth opportunities in the ASEAN markets, one of

the major reasons for the expansion is keeping up with current globalleader Toyota Motor. In March VWs executive vice president for sales

and marketing, Christian Klingler, highlighted Toyotas sales of around

1mn units in the region, compared with the 30,000-40,000 from VW.

VW has experience of capturing market share in emerging markets,

not only in China, but also in Brazil, where it overtook Italys Fiat for

market leadership. The product mix played an integral part, with the

Fox and Gol compact models contributing signicantly to its growth.

Assembling the Touran in Indonesia, where MPV sales accounted for

65% of the total industry volume in H110, suggests VW already has its

product strategy in mind. However, with its sales in the country down

17% for the rst half of 2010 and Japanese brands accounting for nine

out of the top 10 places, the challenges are still clear.


3/17

Asia Pacific AutomotivesChInA

CHInA

Government Looks To EVs To

Address Overcapacity Fears

As the Chinese government reveals that it expects to have 200mncars on the roads by 2020, plans are being accelerated to focus on

clean energy cars, which will go some way to addressing the build

up of emissions in the worlds largest car market, and make use

of the industrys burgeoning capacity. BMI expects total vehicle

production to surpass 23mn units by the end of our forecast period

in 2014, compared with 13.8mn in 2009.

Several government departments are coming together to provide

the necessary policy framework. The Ministry of Industry and Infor-

mation Technology (MIIT) is nalising the energy saving and new

energy vehicle development plan (2011-2020), which it expects to

publish in two months, as well as working with other departments

to revise the Automotive Industry Development Policy 2004. The

Ministry of Science and Technology is drafting a plan specic toelectric vehicles (EVs) covering research and development and -

nancial subsidies. This will be backed by the Commerce Department,

which will encourage the import of advanced related technology.

China believes it can take a lead in the EV industry and also sees

it as a necessity to face up to the big challenge of having more than

200mn vehicles on the road, according to Wang Fuchang, deputy

director-general of MIITs equipment division. He also believes the

industry should increase the market share of full electric and plug-in

electric cars. BMI notes that China has skipped ahead to focus on

EVs rather than hybrids as it wants to steal a march on other coun-

tries, while hybrids are becoming more widespread.

The country already has a number of domestic carmakers produc-

ing electric vehicles, which will provide homegrown competition to

the likes of the Chevrolet Volt and Nissan Leaf due out next year.

However, Chery Automobile is showing the rst signs of the kind

of advanced development that the government is looking towards.

Chery has announced it has developed the necessary technology for

extended range EVs (E-REVs), which would provide direct com-

petition to the Volt, though to be the rst E-REV. The Volt offers

40 miles from the battery pack, which is supplemented by a petrol

engine with a 300 mile range.

Chery has taken steps towards the E-REV, with the QQ3EV,

which travels 100km (62 miles) on a single charge, followed by the

S18, which travels 93 miles (149km). Details of the full mileage

offered by the E-REV have not been revealed, but the model will

be launched during H111, in time to take on the Volt.

GM Primed For Further Success

With Opels China StrategySince China has overtaken the US as the largest market for General

Motors Company (GM) in terms of units sales in H110, the car-

maker has given the green light to its European division, Opel, to

begin sales in the country. Despite BMIs projection for a consider-

able slowdown in vehicle sales growth, to 15% in 2010, compared

with 45% last year, GM sees demand for European cars in China

and will be marketing the brand in the premium segment alongside

German big hitters such as BMW, Daimler and its ongoing rival formarket leadership in China, Volkswagen (VW). High-end brands

have continued to perform well, despite a deceleration in growth

of the market as a whole.

After recognising demand in China, Opel tested the market in

2009 with sales of 4,000 units, according to German daily Deutsche

Welle. It is not yet know which models will be coming to China.

Table: business environmenT raTings auTo indusTry asia Pacific

Rewards Risks

IndustryRewards

CountryRewards

Rewards Industry Risks Country Risks Risks Autos Risk/ Reward Rating

RegionalRanking

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

Domestic PowerhousesChinas Leading Domestic Carmakers In New Energy Projects

Source: Asia Times

Company Model Power

Chery Automobile S18 Electric

A5, A3, A13 Hybrid

BYD Auto F3DM Plug-in Electric Hybrid

E6 Electric

Geely Automobile EK-1 Electric

Chana Motors Joice HEV Hybrid Electric


4/17


Previously, Opel vehicles sold outside of Europe have been rebadged

under the Buick brand. BMI believes the key to success will be to

avoid overlapping with models from the GM group, especially in

markets where GM is successful, such as China, which is the groups

most protable overseas business.

The rst indications that Opel would move beyond its traditional

boundaries came in February 2010 when GMin its plan for restruc-

turing the unitrevealed it would make Opel the base of its overseas

operations and would also export its cars to markets in the Middle

East and Asia Pacic, if feasible. Although GM cited an improved

outlook in Europe as a factor in its decision to withdraw from the

sale of Opel to Canadas Magna International, the continued

weakening of the market has prompted Opel to seek more promis-

ing gains overseas.

With BMI forecasting a fall of around 6% in European car sales,to 15.5mn units this year, CEO Nick Reilly estimates that Opel

will be able to corner only 1mn units by the end of the yeardown

nearly 20% compared with last year. In comparison, our forecast

for 15% growth in China, albeit less than half last years growth,

offers considerably more potential.

Australia is another target for Opel. GM already has a strong

presence through its Holden subsidiary, which can be built upon,

and if Opel is targeting the higher end segments, sales of medium

and large cars are up by 14.3% and 2.6% respectively in the seven

months to July. Spokesperson Andreas Kroemer added that other

markets in Asia Pacic and South America would follow.

BMI believes that Opels choice of these new international mar-

kets is highly strategic. China, Australia and Brazilthe largest ve-

hicle market in South Americarank among the top 10 auto markets

in BMIs Business Environment Ratings for the global industry. All

these markets clearly outshine Europe in terms of potential vehicle

sales growth. In BMIs ve-year forecast, we expect vehicle sales

in Europe to grow an average 2.7% y-o-y between 2010 and 2014,

while we expect them to rise 8-10% in China and South America,

and 4% in Australia during the same period.

GM-SAIC Milestone Project

Marks Coming Of Age For

Domestic CarmakersGeneral Motors Company (GM) and its Chinese partner Shanghai

marks the rst time a domestic carmaker and international partner

have shared technology. The two will develop 1.0 to 1.5-litre direct

injection turbocharged gasoline engines, aimed at tapping into the

smaller car segment, which is eligible for government tax breaks

incentives. The project also endorses BMIs view that government

policy will increasingly inuence product development.

Work on the engines will be shared between GMs Detroit

facilities and the Shanghai GM joint venture (JV)s own Pan Asia

Technical Automotive Centre. The engines will be used in models

sold both in China and globally, in a further boost for domestically

developed technology, although it will be three years before they

are available. One GM business likely to benet is General Motors

India, now a 50:50 JV between GM and SAIC. Two of the new

models due to be launched in India are the Spark small car and the

slightly larger Aveo.While the project ts with the Chinese governments view of

creating a strong domestic industry, it also aligns with the countrys

move towards clean energy vehicles. Shanghai GM is well geared

for this with its own Drive to Green strategy, which has already

seen investment of US$1.1bn in powertrain development. Through

the programme, the JV is aiming to reduce the fuel consumption

and CO2 emissions of its vehicle eet 15% between 2011 and 2015.

The JV will also complete development work on the prototype of the

Chevrolet New Sail EV, which will again involve local production.

The engine project will give Shanghai GM a good head start

toward its targets. According to Tom Stephens, GMs vice chair-

man of global products, the new engines will help reduce carbon

emissions by around 20% when coupled with new transmissions,

also to be developed by the JV, which will improve fuel efciency

by around 10%.

Stephens also said GM plans to launch 12 fuel efcient engines

in China over the next ve years. This could mean further coopera-

tion with SAIC as the two have already spent US$1bn on combined

research and development since 2008, according to Stephens. The

tie-up is paying off, enabling SAIC to expand outside of its domestic

market to India, where BMI

Spain Stands As A Strong

Contender For CheryInvestment

0

5,000,000

10,000,000

15,000,000

20,000,000

25,000,000

2006

2007

2008

2009

2010f

2011f

2012f

2013f

2014f

China

India (four-wheeled sales)

Engine For GrowthChina and India Total Vehicle Sales (CBUs)

f = BMI forecast; Sources: CAM, SIAM

0

5

10

15

20

25

30

35

40

20

05

20

06

20

07

20

08

20

09

2010f

2011f

2012f

2013f

2014f

BRIC North America

Growing EM Domination

Market Sales As % Of Global Sales

f = forecast. Source: BMI


5/17


Chinese carmaker Chery Automobile is considering setting up its

rst European assembly facility in Catalonia, Spain. While other

potential sites in Turkey and Italy are also reportedly being looked

at, Jose Montilla, head of the regional government believes that the

Catalonia region is best positioned to aid in the Chinese carmakers

plans for vehicles sales in the European and Mediterranean markets.

Spains biggest strength lies in the fact that the country continues

to offer a highly competitive base for autos production in Europe.

Estimates from the US Bureau of Labour Statistics show that hourly

labour cost for workers employed in the Spanish autos industry

stood at US$31.78 in 2007, way lower than the US$41.65 paid in

the UK and even more competitive than the US$33.36 paid in Italy.

Cherys choosing Spain could also be inuenced by Italys rela-

tively poor record on raising productivity, widespread corruption

and an inefcient labour market. Experiences of domestic carmakerFiat have proved just how difcult and inexible operating condi-

tions can be for carmakers under pressure to improve efciency in

autos production in Italy.

Meanwhile, Spain could win the project over Turkey on the

back of its EU membership, given also that the possibility of the

latter joining the EU remains off the cards for at least the next 10

years, in our view.

However, Spains auto production has been highly vulnerable to

the current trend of manufacturers transferring production facilities

to countries in Eastern Europe such as the Czech Republic, Rus-

sia, Slovakia and, to a lesser degree, Poland in recent years. This,

combined with aggressive restructuring by carmakers resulted in

autos production falling from the record 2.88mn units in 2007 to

just over 2.17mn units by end-2009. Worse is the fact that while

Ford Motor is looking to move its Fiesta assembly to outside of

Spain, Nissan Motor has revealed it plans to operate on reduced

capacities within the country for at least the next three years. This

trend has prompted BMI to envisage a rather painful recovery for

Spanish autos production, reaching only 2.36mn units by the end

of our forecast period to 2014.

Our forecasts, however, could face upside risks now that carmak-

ers are showing interest in increasing their manufacturing footprint

in Spain. In May, Frances PSA Peugeot Citron revealed plans to

roll out a new car, specially designed for emerging markets, from its

facility in Vigo, Spain. In the same month, Ford revealed it wouldbuild its rst hybrid models for Europe at its Valencia plant. Should

Chery opt for Spain, it will be looking to build a plant with an an-

Tyre Import Duty To Hurt EU-

China Relations; Renault and

BMW At A LossThe EU is looking to impose a 22.3% import duty on Chinese alu-

minium car wheels for the next ve years in a bid to guard domesticrms from low priced tyres made in China.

The increase in the 20.6% tariff imposed in May this year will

further strain Europes relations with China. It will also put a dent

in the cost saving measures ofRenault and BMW, which both use

Chinese-made aluminium wheels.

Europes tyre market is primarily dominated by Bridgestone

Europe, Continental, Cooper Tires, Goodyear Dunlop Tires

Europe, Michelin and Pirelli. Most of these rms have streamlined

their operations in Western Europe and increased their manufac-

turing presence in lower cost Eastern European locations such as

Poland, Slovakia, Romania and Slovenia.

Europe produces about 50mn tyres a year. However, it hasbecome increasingly exposed to Asian imports, particularly from

China, India, Indonesia and South Korea. These countries made up

38% of total imports to the EU in 2007, according to the European

Rubber and Tyre Manufacturers Association (ETRMA).

BMI believes tensions between the EU and China have been

driven by two factors:

Chinese imports have increased substantially from 3.7mn in 2006

to nearly 6.1% by mid-2009, making China the largest exporter of

aluminium wheels to the EU, where it accounted for 12.4% of total

tyre imports in 2009. But just 2% of EU tyre exports go to China,

thanks to trade barriers

Increased imports of low-priced Chinese tyres have made Eu-

ropean tyre makers uncompetitive and they have lost market share.

BMI believes this trend was accentuated by a US ruling placing an

additional 35% tariff on tyre imports from China, prompting most

Chinese companies to divert their attention to Europe.

A nal law governing the aforementioned duties is likely to be

passed by mid-November this year. While we expect most European

tyre makers to welcome the ruling, there are concerns that the import

restrictions are not strong enough to ward off Chinese competition

to local industry. A 22.3% duty is nowhere near the 30% and 25%

tariffs imposed by US for 2010 and 2011 respectively.

Volvo Faces First Test Under

New OwnershipVolvo Cars has started producing the new V60 station wagon at its

Torslanda plant in Sweden. The model will offer strong competi-

tion to the BMW 3 Series Touring, Audi A4 and Mercedes-Benz

C-Class, and is an integral part of Volvos strategy to improve its

protability under its new owner Zhejiang Geely Holding Group.

Turning around Volvo is likely to prove one of Geelys biggest

challenges, given that the Swedish brand has not reported an an-

nual prot since 2005. Worse is the fact that its major markets are

Europe and the US, where BMI expect a slowdown in economic

growth in H210 and 2011.

Volvo is pinning its hopes on the V60, along with a newly intro-duced S60 sedan, to boost sales and protability in Europe. Plans

for the models sale in the US have been put on the backburner,

0

500,000

1,000,000

1,500,000

2,000,000

2,500,000

3,000,000

3,500,000

2005

2006

2007

2008

2009

2010f

2011f

2012f

2013f

2014f

Buses and Coaches production (CBUs)Trucks production (CBUs)

Light Commercial Vehicles production (CBUs)

Cars production (CBUs)

Maintaining AttractivenessSpain Autos Production (Units) : Historical Data and Forecasts

f = forecast. Source: Ana, BMI


6/17

Asia Pacific AutomotivesIndIA

Volvo hopes these new models will take its total sales to 400,000

cars a year, compared with the 334,800 units it shifted last year.

However, given that the company expects to sell 90% of the V60sin Europe, BMI is cautious about the extent to which the model

could turn the company around.

The Association des Constructeurs Europens dAutomobiles

(ACEA) estimates sales of luxury vehicles in the region have been

declining since 2007. That year, the sector made up nearly 14% of

all new passenger car sales. The share fell to close to 10% by the

end of 2009 and declined further to 9.3% in Q110.

We believe luxury cars have lost out as small vehicles have

become increasingly popular in light of the impending emission

norms and consumer preference towards engines with greater fuel

efciency.

However, we feel there are opportunities for Volvo to make

the V60 successful abroad. At the time of its acquisition, Geely

indicated it was keen to expand Volvo in other markets. Plans are

already under way for a new Volvo plant in China, to augment its

existing presence in the country.

We do not expect V60s brand image to be hurt by concerns about

its Chinese ownership, mainly thanks to the fact the vehicles will

be built, and mainly sold, in Europe. The V60 is due to go on sales

in Europe later this year and will be a litmus test for Volvo under

its new ownership.

IndIA

Tata Takes Nano To High-

Growth EMs As Competition

EmergesIndian carmaker Tata Motors is building on the domestic success of

its Nano budget car with plans to target markets in Latin America,

Africa and the Association of South East Asian Nations (ASEAN).

BMI believes there is potential for the US$2,500 car in emerging

markets with strong auto demand. We forecast average annual

growth of 5% for the combined ASEAN states and 8-9% for Latin

America over the next ve years.For other regions, the expansion of the Nanos reach is likely

to involve dropping the title of the worlds cheapest car. The Nano

airbags and a more powerful three-cylinder engine. Tata is consider-

ing launching the upgraded Nano in India after it reaches Europe.

Tata is ramping up production of the Nano for its global expan-sion. After selling more than 50,000 units since its launch in July

2009, the opening of a dedicated plant in Sanand will provide the

capacity to produce 250,000 units per year. Prakash Telang, manag-

ing director of Tata Motors, expects output of around 20,000 units

per month.

However, BMI points out that while Tata is upgrading the

Nanos features to appeal to a wider global audience, the recent

incidents of three Nanos catching re is likely to arouse concern.

An internal investigation is being carried out and all Nanos sold are

being inspected, which Tata says is to allay concerns and is not

an ofcial recall.

The importance of Tata nding new markets for the Nano hasbeen heightened since the threat of competition has emerged from a

tie-up between Bajaj Auto and the Renault-Nissan Alliance. Bajaj,

a two and three-wheeler specialist, has undertaken the research and

development work for what has been named the Ultra Low Cost

(ULC) car. In May, Bajaj said it had been working on a car that

will offer low running costs and an engine that it hopes will be one

of the most fuel-efcient in its class.

BMI believes it would be difcult to beat the original Nano on

price, which is why Bajaj has been focussing on different priorities

such as fuel efciency and running costs. According to the com-

panys managing director, Rajiv Bajaj, it has been leveraging the

lower costs structure from its production of two-wheelers to lower

the production and running costs of the car, which should enable

some of Indias millions of motorcycle owners to upgrade.

Motorcycle owners have been a target market for small car

producers, who have been trying to encourage an upgrade to four

wheels. So far, however, Indias two-wheel market has in no way

suffered from the inux of new small cars and is forecast by BMI

to surpass sales of 10mn units in the current nancial year (ending

March 2011), up 6.9% year-on-year. Within the two-wheeler sector,

motorcycle sales are expected to grow by 7.8%.

Continental Targets Key

Market But BMI Warns Of CostRisks

0

1,000,000

2,000,000

3,000,000

4,000,000

5,000,000

6,000,000

7,000,000

8,000,000

9,000,000

2006

2007

2008

2009

2010f

2011f

2012f

2013f

2014f

India* ASEAN LatAm

Targeting Similar Growth PatternsVehicle Sales In India, ASEAN And Latin America (CBUs)

* four-wheel vehicles only, f = BMI forecast; Sources: SIAM, Gaikindo, TAI, CAMPI,

VAMA, MAA, Anfavea, AMIA, Adefa, Cavenez

0

2,000

4,000

6,000

8,000

10,00012,000

14,000

16,000

18,000

20,000

2007 2008 2009

-3000

-2500

-2000

-1500

-1000

-500

0Revenue LHS

Operating Profit RHS

Reversing The LossesVolvo Cars Financial Results (US$mn), 2007-09

Source: Ford


7/17


commercial vehicle segment, which BMI expects to outperform the

market in the current nancial year. An increased workforce and

higher localisation are also on the agenda as the company looks to

capitalise on growing vehicle demand.

Continentals focus on India became apparent when the Com-

mercial Vehicle Tyre division revived its partnership with Modi in

2009 with a technical agreement, under which the local company

will produce a million truck tyres under the Continental brand. BMI

expects the commercial vehicle segment as a whole to outperform

passenger car sales for the next ve years. Despite incentive-driven

growth for the passenger car segment, the commercial vehicle

market grew 38.3% in the last nancial year. BMI expects this to

be followed up by growth of around 10.7% in the current nancial

year, with the segments growth peaking at 15% in the year endingMarch 2013.

The passenger car market is also expected to achieve strong

double-digit growth, albeit slightly below the commercial vehicle

growth. BMI expects growth of 9.8% in the current nancial year,

followed by steady growth of 10-11% for the remaining four years of

our forecast period. Continental does plan to enter the passenger car

tyre market, although managing director of Continental India, Claude

dGama Rose, says it is too early to say how or when. However, the

company does forecast growth of 35-40% in the passenger car tyre

market and 50% in the commercial vehicle tyre market.

An interesting factor in Continentals strategy for India, is the

countrys growing role as an export base. Rose added that due to the

large number of vehicle manufacturers now exporting from India,

in line with BMIs core view that emerging markets will become

global production bases, a high standard of tyre is required. BMI

expects sustained double-digit growth in total vehicle exports over

the next ve years, averaging 13.6%.

Although additional capacity will depend on the companys

growth in India, Continental does plan to expand its research and

development team by 30% this year. The German rm does plan to

increase its localisation in terms of the value chain, which includes

local design centres and production facilities.

However, BMI would outline one risk to increasing the locali-

sation of sourcing, if this were to be part of the plan, which is the

rising cost of raw materials. In July it was reported that rising rubbercosts, which are now 150% higher than in December 2008, have

prompted tyre manufacturers to increase prices by 10% already this

Mahindra Eyes Global SUV

Strength Through Ssangyong

DealIndian utility vehicle manufacturer Mahindra and Mahindra plans

to use its acquisition of a majority stake in South Koreas SsangyongMotor to gain momentum in global markets, which aligns with

BMIs view that emerging market brands will increasingly expand

globally. Mahindra has signed an agreement with the SUV special-

ist, which has been restructuring under court supervision, and due

diligence will follow.

The deal is likely to be mutually benecial. While Mahindras

automotive division president, Pawan Goenka, says it plans to tap

into Ssangyongs R&D and technology expertise by investing in a

new product range, the company also plans to create new growth op-

portunities for Ssangyong in Indias rapidly growing SUV market.

Mahindra believes the two rms are also similar in size and their

orientation towards SUVs, making them a perfect t to join forces.

Mahindra expects the deal to be nalised by November, after

which it will consider bringing Ssangyongs premium SUVs to India.

The Indian giant is already a leader in the utility vehicle segment,

which grew 23.8% in the rst four months of the current nancial

year (April to July). The acquisition of Ssangyong is aimed at adding

to the product portfolio to create a joint global brand.Outside nancing for the deal will not be required as Chair-

man Arnand Mahindra claims the company has cash reserves of

over US$500mn, although a value for the acquisition has not been

revealed. The size of Mahindras stake is also as yet unknown. At

present, creditors hold 70% of Ssangyong, while its former Chinese

parent company, Shanghai Automotive Industry Corp (SAIC),

holds 10%.

Ssangyong workers hold SAIC management largely responsible

for the carmakers near collapse. Following Ssangyongs bankruptcy

ling in February 2009, unionised workers said that they planned

to take legal action against SAIC for mismanagement. They were

looking for compensation for damages, while also claiming that thelawsuit would secure complete separation from the rm. The Chinese

carmaker, which lost management control when Ssangyong entered

Costs Inate Tyre PricesAverage Monthly Price Of Indian Standard Natural Rubber: Jun 09-May

10 (INR)

Source: Rubber Board of India

m&ms global exPansion since 2000

Year Markets Models

2000-2004 Tanzania, Sri Lanka, Congo, Madagas-car, Mozambique, Ethiopia, Rwanda,Burundi and Nigeria

Scorpio SUV, MahindraPik Up

2004 Uruguay, South Africa Scorpio, Bolero Pik Up

2005 Italy, France Scorpio (known asGoa), Bolero Pik Up

2006 Spain Goa, Mahindra Pik Up,Bolero Pik Up

2007 Bhutan, Sudan Morocco, Algeria,Ghana, Chile

Mahindra Pik Up

2008 Egypt, Brazil (both CKD production),Peru, Paraguay

Scorpio, MahindraPik Up

2009-10* US Mahindra Pik Up,Scorpio

* = planned; Source: Mahindra & Mahindra


8/17


which was approved by the Seoul Central District Court in December

2009. The SUV specialist is aiming to return to protability within

three years and triple sales in the same timeframe. BMI believes

that another positive aspect of Ssangyongs plan is that its product

strategy ts with the South Korean governments plan to speed up

mass production of electric vehicles. A revamp of the companys

product range features heavily in its turnaround plan, which includes

producing an electric and a plug-in electric hybrid model within the

next ve years. This is technology that Mahindra may be able to

take advantage of for its own development.

Trend Of Emerging Market

Firms Expanding Will Continue

As MSSL Seeks PurchasesThe trend of companies from emerging markets (EMs) making

forays into traditional markets continues to gain momentum as

Indias Motherson Sumi Systems (MSSL) seeks opportunities

for acquisitions in Europe. BMI believes that opportunities for theIndian supplier lie in the growth potential of auto production in

Europe, which we expect to reach 21.7mn units by the end of 2014,

an 30% increase between 2010 and the end of the forecast period.

While this growth is hardly anything compared with the near

48mn likely to be produced during the same period in Asia, it testies

one ofBMIs long-term core views that domestic Asian brands will

be looking to expand globally. This is despite widespread fears of a

slowdown in vehicle demand and production in Europe, indicating

that companies are drawn on one hand to the maturity and stability

of Western Europe, and also to the long-term demand and produc-

tion potential in emerging Europe.

Having established a strong client network of local majors such

as Mahindra and Mahindra, Tata Motors and Maruti Suzuki,

MSSL is keen to exploit its ties with South Koreas Hyundai Mo-

tor to help it win similar contacts in Europe. MSSL will be helped

by its European subsidiary SMR, formed after its acquisition of

Visiocorp in January last year. The subsidiary has already brought

new orders from European original equipment manufacturers for the

Indian suppliers, and reportedly increased its clientele to regional

majors such as Volkswagen, Renault and BMW. The supplier isalso reportedly building its second plant in Hungary, with production

likely to commence from March 2011.

year, and is looking to strengthen its presence in Europe, having

already built links ties with the likes of BMW and Volkswagen.

This clearly highlights a strategy that most companies from EMs

are adopting. The global economic crisis and consequent fall in the

value of businesses in Europe has made such acquisitions possible.

It not only created a ready network of client for these companies

with global ambitions, but also gave them access to well-established

manufacturing facilities in the region, making them more condent

about their investments in the region. MSSL alone is expected to

spend a signicant proportion of its INR400-INR500cr (US$80-

US$100mn) investment in Europe on increasing its production

presence in the region.

Mahindra And Importers

Future Uncertain As Expansion

Takes Its TollWhile BMI generally views the global expansion of emerging mar-

ket (EM) brands as a positive development, Indian utility vehiclemanufacturer Mahindra and Mahindra is nding its move into

the US to be a steep learning curve. After facing a lawsuit from US

importer Global Vehicles in June over the time taken to gain the

necessary testing and certication to get vehicles on the market,

Mahindra now claims that the four-year agreement between the

two has been terminated.

This is perhaps one of the rst signs of Mahindras lack of local

knowledge, as Global Vehicles claims the termination is invalid

according to both federal and state of Georgia laws. If anything, it

could only serve to plunge the Indian rm into a deeper legal mire,

particularly as Global Vehicles stated in its lawsuit that it has al-

ready spent US$35mn on preparing for the import and distributionof Mahindras compact diesel truck.

Dealers are also refusing to recognise the termination of the

import agreement. According to Automotive News there are some

300-350 to dealers with franchise agreements and some have already

started investing in showrooms. The truck is scheduled to arrive,

pending its approval by the Environmental Protection Agency

(EPA), in December, which is already 18 months after Mahindras

original target of mid-2009.

Aside from the contractual obligations, Global Vehicle is also

keen to take advantage of market performance. CEO John Perez has

expressed his keenness to have the rst four-cylinder diesel truck on

the market, which is why the company has been pushing Mahindra

to secure EPA approval. Sales data show that this is a particularly

good time as truck sales have been improving.

Light truck sales were 17.8% higher year-on-year (y-o-y) in July

and 17.3% higher for the rst seven months combined. Although

dealer incentives traditionally offered at this time of year are a fac-

tor, there has been a noticeable return to the pick-up market. The

downside risk for Mahindra is that sales of imported trucks were

down 1.3% in July and 5% for the seven months. Acceptance of an

EM brand may also be an issue, particularly if it has taken so long

to gain certication.

If Mahindra does want to go its separate ways it will be faced

with the cost of nding a new importer and dealer network, not to

mention the likelihood of trust issues following its legal wranglingwith Global Vehicles. It is a price worth paying, however, given

the importance of the market. Mahindra, which controls 65% of the

0

500,000

1,000,000

1,500,000

2,000,000

2,500,000

3,000,000

3,500,000

4,000,000

4,500,000

2007

2008

2009

2010f

2011f

2012f

2013f

2014f

Poland Czech Republic Slovakia

Romania Hungary Slovenia

Too Big To Ignore?Key European Autos Production Markets: Historical Data and Forecast

f = forecast. Source: OICA, BMI


9/17

Asia Pacific AutomotivesPAkIstAn

PAkIstAn

Japanese Dominance

Threatened As Yen Forces Up

Car PricesJapanese carmakers have been forced to increase prices in Pakistan

after the yen rose 10% against the rupee in the last three months,

threatening their sales dominance and the countrys overall produc-

tion industry. Pak Suzuki and Indus Motors, which represents

Toyota Motor in Pakistan, are likely to increase prices by 2-3% in

order to protect their operating margins. Although both companies

assemble models locally, components still have to be imported to

Pakistan from Japan, which is driving up costs.

The price hikes come at a time when the industry is already suf-

fering from a number of factors, including an earlier price increase

in April on the back of rising raw material costs. A similar 2-3%

increase was implemented as the price of steel sheet rose from

US$493 per tonne in Q109, to US$1,050. At the same time, carmak-

ers are facing declining volume sales in the wake of the countrys

worst ever oods.

Government support for the industry is negligible. The Daily

Times reports the government is actually calling for price cuts to

make cars more affordable. Additionally, rules regarding the im-

port of used cars are being changed to allow second-hand cars less

than ve years old into the country, which would further impact

domestic assembly.

In terms of import costs, the Japanese brands have such a stran-

glehold that they may not suffer relatively in market share terms. In

the passenger car segment, the only non-Japanese brand producing

locally that could have taken advantage was South Koreas Hyundai

Motor, but data from the Pakistan Automotive Manufacturers As-

sociation (PAMA) show no output data from November 2009 and

no sales gures from May 2010. It does provide an opening for

other brands to enter at a competitive advantage, however. Chinese

brands have already emerged in the truck and motorcycle market and

could see this as an opportune time to expand into passenger cars.

On the downside, the heavy Japanese presence does mean the

industry as a whole will suffer and at a time when the sector had

started to recover. After a particularly bad year in 2008-2009, sales

for 2009-2010 (July to June) rose 43% in the passenger car and light

commercial vehicle segment, while output was 37% higher. How-

ever, this does have to be seen in the context of a low base from the

previous year and the increasingly difcult conditions for carmakers

mean similar growth in the current nancial year looks unlikely.

tHAIlAnd

Ford And Mazda Invest More As

Cost Advantages Become Clear

Ford Motor and Mazda Motor will invest an extra US$350mn intheir AutoAlliance Thailand (AAT) plant in Rayong, which is prov-

ing to be just as effective for other Ford subsidiaries as for AAT itself.

The cost savings achieved by importing certain models from

Thailand, the leading South East Asian market in BMIs Industry

Risk/Reward ratings, means that Ford Australia is beneting from

its sourcing from the plant and can improve its sales by having ac-

cess to more stock.

While BMI believes that strong government policy and a well

developed production industry make Thailand one of the best export

bases in the region, Ford Australia now sources the Ford Fiesta from

the country. This is an endorsement of the AAT plant, which was

set up to produce the Fiesta and Mazda2 small cars under the gov-

ernments Eco car programme, both for domestic sale and export.

Although Ford Australia is reticent about the chances of also

sourcing the Focus when Fords sole-owned plant comes on-

stream, there are a number of reasons why it would make sense.

The US$500mn plant is producing the Focus for export throughout

Asia Pacic, which should include Australia. Ford Australia itself

has also noted the benets of cost and tax savings from importing

within the region, while also picking up on the disadvantages of its

current Focus sourcing.

At present the Focus is imported to Australia from South Africa.

However, Ford Australias marketing general manager, David

Katic, has been quoted as saying the company has had supply is-

sues and that the high variation of Focus sales is a result of that.

Katic added that Ford Australia is now looking for consistency in

its supply of the Focus.

0

200,000

400,000

600,000

800,000

1,000,000

1,200,000

1,400,000

1,600,000

2007

2008

2009

2010f

2011f

2012f

2013f

2014f

T hailand Malays ia

Ind one si a Phi li pp ine s

Thailand On TopVehicle Production In Major ASEAN Markets (CBUs)

f = BMI forecast; Sources: CAMPI, Gaikindo, Thai Automotive Federation, MAA, OICA

bmi JaPan currency forecasTs

Spot S-T Target End-10 End-11

JPY/US$ 84.55 - 87.00 89.00

JPY/EUR 126.52 - 126.15 111.25

Target Rate (%) 0.1000 - 0.1000 0.1000


10/17

Asia Pacific AutomotivesMAlAysIA

If a model cannot be built domestically it is important that deal-

ers can be assured a reliable source of stock. Before switching the

Fiesta sourcing, Katic said dealers could not aggressively market

the model as they did not have enough to sell. With sales of the

medium car segment, in which the Focus competes, up by 25% in

July and 14% for the year-to-date, having a large enough inventory

to satisfy demand will be key to being competitive. However, the

new Thai plant will not be operational until 2012.

With the Fiesta now proving its worth, the latest investment for

AAT will be aimed at building a new compact pick-up truck from

mid-2011. The money will be used to upgrade and retool the plant

to produce the truck for the domestic and export markets. Although

sales of pick-up trucks have dwindled in recent years, sales in H110

were up 47% year-on-year, while demand in other countries is also

a factor. Pick-up sales in Indonesia more than doubled in the seven

months to July, while in Australia, light commercial vehicle sales

were 6.8% higher in the same period.

MAlAysIA

International Partnerships Lead

To Expansion For DRB-HicomMalaysias DRB-Hicom has announced plans to expand the capac-

ity of its plant in Pekan, on the back of its growing ties with global

carmakers. According to the groups managing director, Datuk Seri

Mohammed Khamil Jamil, the expansion and tie-ups are a step

towards the company developing its own vehicle brand. This is in

line with BMIs view that emerging market companies will expand.

DRB-Hicoms existing partnership with Suzuki Motors is

proving popular: there is a two-month waiting list for the recently

launched Suzuki Alto small car. The latest partnership with British

sports car manufacturer Potenza will see the Malaysian rm produc-

ing completely built units (CBUs) and knocked down kits (CKDs)

for export to be assembled in the UK, while talks are ongoing to

reach an assembly agreement with Germanys Volkswagen.

The Potenza partnership is particularly signicant for the Malay-

sian rms global ambitions, as it will see DRB-Hicom produce kits

for export back to the UK to be assembled for the domestic and other

European markets. The CBUs, meanwhile, will be shipped around

the Asia Pacic region. There are also plans to produce hybrid and

electric versions of the sports cars, which will give the company ac-cess to new technology. Production is due to begin in 2012, by which

time BMI expects total industry production to exceed 650,000 units.

with assembly of CKD kits and according to Jamil, speaking at

the signing of the agreement in August, the project should play a

central role in making Malaysia a regional production hub, which

is a goal of the Malaysian government. In line with BMIs view on

government intervention in the auto sector, the Malaysian Ministry

of International Trade and Industry (MITI) has opened a dedicated

division to oversee the development of the domestic industry, as it

looks to compete with other major ASEAN states.

The partnership is also a step forward for VW, which had been

looking to expand its ASEAN presence through a relationship with

national carmaker Proton, but talks were unsuccessful. VW has had

an on-off relationship with Proton. A previous agreement collapsed

in 2007. After the most recent negotiations failed, Proton cited VWs

statement of having other priorities as a factor.

DRB-Hicoms vision of designing and developing our own

brand of vehicles in cooperation with our global partners is a strat-

egy employed by some major Chinese brands, who built up expertise

and technical capability through joint ventures with foreign carmak-

ers, before launching their own brands. One risk to this scenario is

that the new National Automotive Policy is aimed at rationalisingthe industry to two major volume producers, in order to curb the

threat of overcapacity, which is prevalent in China.

IndonesIA

Steel JV Will Increase Local

Content As Vehicle Demand

RisesA joint venture (JV) between leading South Korean steel producerPosco and Indonesias Krakatau Steel is expected to serve the

majority of Indonesias automotive steel demand if completed on

schedule in 2014, by which time BMI expects annual vehicle pro-

duction to be just short of 1mn units. The dominance of Japanese

carmakers means that a signicant amount of steel is still imported

from Japan, which given the current strength of the yen, is increas-

ingly expensive.

Krakataus vice president of corporate communications, WawanHernawan, said the new plant would enable the company supply steel

for interior parts and chassis, as well as the steel for car bodies that

0

200,000

400,000

600,000

800,000

1,000,000

1,200,000

2006

2007

2008

2009

2010f

2011f

2012f

2013f

2014f

Sales Production

Hub PotentialIndonesia Vehicle Sales And Production (CBUs)

f = BMI forecast; Source: Gaikindo

Much Improved

Malaysian Vehicle Production And Sales H110/09 (CBUs)

Source: MAA

H110 H109

Passenger car production 269,884 209,072

Commercial vehicle production 23,889 20,770

Total Production 293,783 229,842

Passenger car sales 271,873 228,420

Commercial vehicle sales 29,204 22,885

Total Sales 301,077 251,305


11/17

Asia Pacific AutomotivesPhIlIPPInes

spectively. The economic crisis hit hard in 2009 with output slipping

22%, but BMI expects a return to production growth of 34.4% in

2010, to accommodate sales growth of 40.6%.

In H110, total vehicle production was up 65% year-on-year (y-o-

y), according to data from the Association of Indonesian Automotive

Industries (Gaikindo), but Hernawan says the local steel industry

can only provide 40% of the 100,000 tonnes per year required by

the auto sector. As Japanese carmakers accounted for 99% of total

output over the six-month period, the majority of imported steel

comes from Japan.

According to Hernawan, it is not only the amount of steel required

that is an issue at present, but also the specications. The company

produces steel ats with a width of two metres, which is smaller

than the usual requirement for the auto industry. Posco has report-

edly promised to have the Cilegon-based plant operational by 2014,

producing steel that will meet the needs of the domestic industry.

Increasing the availability of domestic raw materials will be a

contributing factor to meeting the governments target for annual

production of one million units in ve years. This is largely in

line with BMIs forecast for just under 990,000 units by 2014. Itshould also increase the competitiveness of producing locally and

attract more investment, which is another aim of the government.

In April, Industry Minister MS Hidayat announced that Indonesia

is looking for ways to make its auto sector an integral part of the

ASEAN Economic Community and not just become a market for

other ASEAN countries.

For Posco, the JV is another step into a country that is not only

resource rich, but also has strong vehicle demand. The company is

also planning a US$12bn steel plant in India, where BMI forecasts

average annual vehicle output growth of 12% over the next ve years

and will take a 20% stake in a Brazilian operation run by Vale SA

and Korean steel producer Dongkuk Steel Mill Co. BMI expectsvehicle production in Brazil to grow an average 7.7% between

2010 and 2014.

PHIlIPPInes

Ford Uncertainty Highlights

Strength Of Thai Incentives

Over PhilippinesNews that Ford Group Philippines (FGP) does not have a denite

replacement for the Focus when production of the model is moved

to Thailand in 2012 supports BMIs view that Thailand is a more

attractive investment prospect due to its strong industry policy and

incentives. The uncertainty surrounding the nalisation and imple-

mentation of the latest Philippines Motor Vehicle Development

Plan (MVDP) has only served to further highlight the difference in

competitiveness.

If Ford does not replace the Focus with another model, it

will have even greater ramications for the Philippines domestic

industry, as the US carmaker is the only vehicle exporter in the

country. Out of a full capacity of 15,000 units, Ford exports around

10,000. The company acknowledges that the incentives offered

under the current MVDP have been very helpful in making thePhilippines more competitive against larger car making neighbours

such as Thailand. However, Ford has said it is keen to under-

changes to the new MVDP for consideration, incentives have beenproposed that would favour carmakers producing for export rather

than focusing on domestic demand. While this would clearly support

Ford as the industrys only exporter, details are still vague and Fords

US headquarters is already in the process of studying potential new

models to be built in the country. BMI also believes there is a risk

in supporting exports to the detriment of developing the domestic

industry as a whole. Ford itself highlighted a need to develop parts

production in order to have a competitive auto manufacturing in-

dustry, when the export issue was discussed in July.

FGPs president, Randy Krieger, told local press at the launch

of the Fiesta on August 16 that government incentives play a big

part in investment decisions. Other criteria include the size ofthe domestic market and its needs. This is similar to BMIs own

Industry Risk/Reward Ratings, which include total sales and growth

potential over the next ve years as criteria for the Industry Reward

component. With a much larger domestic market to begin with and

average annual growth of 4.9% over the next ve years, Thailand

has an Industry reward score of 51.6 out of a possible 100, compared

with 48.6 for the Philippines.

For the time being, Krieger says that Fords investment in pro-

duction of the Focus in Thailand will not impact its operations in

the Philippines up to 2012. Ford also has an advantage as it is one

of the industry players working with the government to hammer out

the details of the new industry policy.

soutH koreA

Exports Will Continue To Play

Greater Role In StrategiesSales results for August show that South Korean carmakers have

achieved some of their strongest growth in export markets, which

is a trend that BMI expects to continue as the country becomes an

important part of wider global planning. This is particularly true

of those companies with international ownership, such as Renault

Samsung Motors.Ssangyong Motor, which reached an agreement to be taken over

by Indias Mahindra and Mahindra in August this year, registered

42

44

46

48

50

52

54

Industry

Reward

Country

Reward

Overall

Reward

Score

P hil ip pi ne s T hai land

Comparing RewardsBMI Auto Industry And Country Reward Scores For Philippines And

Thailand

Note: The Rewards Rating comprises an Industry and a Country element, which have

a 65% and 35% weighting respectively. These are based upon specic Industry growth

and size dynamics within the market, and the broader economic and socio-demographic

environment of the country.


12/17

Asia Pacific AutomotivessOuth kOreA

compared with 1,072 units the year before. The impressive results,

though, are mainly the result of a labour dispute in August 2009,

when striking workers took over Ssangyongs plant in Pyeongtaek

for two months. This cost the carmaker an estimated KRW300bn

(US$245mn) in lost output and provided an especially low base for

comparison.

However, BMI believes Mahindras acquisition of Ssangyong

will give the SUV specialist access to a wider global audience and

higher export sales should be sustainable, although not at the same

levels as August. India will be one of Ssangyongs new export

destinations, as Mahindra plans to launch the companys premium

SUVs to tap into growing demand in the country.

Renault Samsung also stands to benet from its international ties,

as the Renault-Nissan Alliance has decided the strength of the yen

means that increasing capacity in South Korea to move productionfrom Japan will be more cost effective. Renault Samsungs doubling

of exports in August, to 8,736 units, made up for a 5.3% drop in

domestic sales, to 10,153 units, taking total sales up by 34%.

Growth for Kia Motors in August was split relatively evenly

between its domestic and export markets, with South Korean sales

up 53% on last year, to 38,620 units, and outbound shipments up

56%, to 111,921 units. This resulted in overall growth of 55% in the

month, considerably higher than its larger parent Hyundai Motor,

which registered 17% overall growth. However, BMI believes that

Hyundais growing network of overseas production bases means

that the need for exports is reduced. This is particularly signicant

when global models are produced overseas, such as the i20 compact

made in India.

GM Daewoo Auto and Technology was the one carmaker to

buck the trend with growth of 28.3% in domestic sales in August,

to 9,128 units, compared with a 26% rise in exports, to 39,091 units.

A new product strategy could turn this around, however, as the

GM Daewoo plant will become the rst to produce the Chevrolet

Orlando SUV in 2011. The model will rst be shipped to Europe

before being sold domestically later in the year. The company has

also commenced exports of the Matiz Creative small car, rebranded

as the Chevrolet Spark, to Uzbekistan, which will begin contributing

to this months export results.

Renaults Import Plans CouldBe Hampered By Aid Conditions

has reported, long before the models planned unveiling at the Paris

Motor Show in October. The model, only 5% of which are likely

to be imported into Western Europe from the Renault Samsung

Motors plant in South Korea, has raised the eyebrow of the French

government. Since a sharp 44% decline in Frances auto production

between 2006 and 2009mostly due to high production costs, the

government sees Renaults current strategy as part of a drive to shift

more production to low cost bases abroad.

Marketing LogicInstead, Renault sees the model as a cure for its narrowing share in

Europe, where the Laguna has lost popularity to competing models

from the Volkswagen and General Motors Company stable. While

the Laguna, introduced in H207, has missed its targeted 190,000

sales by the end of H108, the SM5 sedan has proved immensely

popular in South Korea, signicantly contributing to the carmakers

61% year-on-year increase in sales during H110. In view of this

success, company spokesperson Gaelle Gicquel has revealed the

rm is looking to import 5% of the SM5 models produced in South

Korea to Western Europe, hoping it will help increase its marketshare in the mid-size segment.

Problems for Renault, however, stem from the fact that 15% of

the company is owned by the government, which makes it possible

for the government to directly intervene in its operations. Addition-

ally, Renault is bound by the conditions of maintaining domestic

production and helping auto parts suppliers in France in return for

the near EUR6bn in aid that it and compatriot PSA Peugeot Citron

received from the government last year.

Government Standing FirmSince then the government has managed to put a considerable amount

of pressure on Renaults production plans. In 2009, Renault wasforced to reverse its plans of shifting production of the Clio Campus

from France to Slovenia, in a move that reafrmed BMIs view

that the aid will keep a check on any signicant fall in production

volumes in the country during our forecast period, to 2014.

While we continue to hold on to this view, BMI warns that a

complete recovery in auto production to past levels will not be pos-

sible in the foreseeable future. With improved nances being theutmost priority for carmakers, we do not expect French carmakers

to move production from their low cost bases to France. Rather an

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

2007

2008

2009e

2010e

2011f

2012f

2013f

2014f

0.0

0.5

1.0

1.5

2.0

2.5

3.0

Total production (CBUs mn) (LHS)

Cars production (CBUs mn) (RHS)

Preventing Further LossFrance Autos Production: Historical Data And Forecasts

e/f = forecast. Sources: Comit des Constructeurs Franais dAutomobiles, Organisation

Internationale des Constructeurs dAutomobiles, BMI

0

200,000

400,000

600,000

800,000

1,000,000

1,200,000

1,400,000

1,600,000

1,800,000

Total Passenger

cars

Buses Trucks &

SPVs

7M09 7M10

Export StrengthSouth Korean Vehicle Exports By Segment (CBUs)

Source: KAMA


13/17

Asia Pacific AutomotivessOuth kOreA

compared with 2009 levels. Renaults French plants were reportedly

operating at half of their production capacity last year.

Over time, we expect carmakers to be more inclined to boost

production overseas and gradually reduce production domestically,

after they have repaid the aid. However, we doubt if Renaults

ownership structure will encourage the company to take such bold

moves in the future.

Kia Follows Asian Example

in Uruguay, But Risk Lays In

Brazils Bubble BurstingKia Motors has become the latest Asian carmaker to aggressively

target Uruguay as a way of gaining low-cost entry into the highly

competitive Brazilian market.

Following the example of new entrants such as FAW, Chery

Automobile and, Geely Motor, the South Korean rm s Kia Motor

has launched production of its Bongo K2500 light trucks in partner-

ship with the Gandini Group at the latters plant in Montevideo.Such has been the impact of auto growth in Brazil, carmakers in

Uruguay have reportedly doubled their manufacturing in the past

four years with exports nearly tripling.

Other factors stand Uruguay in good stead:

The country has a well-established auto parts making and vehicle

assembly industries, which helps assure new investors.

Uruguays membership of Mercosur gives it open access for the

exports of all auto productsexcept motorcyclesto Brazil and Ar-

gentina, two of the biggest markets in the region. Although Brazil is

the priority market for Kias exports from Uruguay, Gandini Group

President Jose Luiz Gandini says it will also be looking to expand

into Argentina and Paraguay in 2012.In 2007, Uruguay adopted an investment promotion system giv-

ing companies more exibility in tax payments, VAT refunds on sup-

ply purchases, pre-export nancing and other perks. Firms involved

in auto parts trading can also benet from a low 2% minimum tariff,

subject to certain conditions. Such regulations have helped offer a

better business environment for investors.

Gandini has called the project with Kia a strategic industrial-

commercial alliance. The company is currently looking to build

12,000 light trucks a year through investment of US$25mn. Produc-

tion will be assisted by the sourcing of parts from 11 plants in Brazil

and six in Argentina and Uruguay.

A major threat to Uruguays growth potential, however, comes

from its excessive reliance on Brazil, which BMI fears could be

heading for a slowdown. We see little likelihood of the government

being able to reintroduce incentives, similar to the IPI tax breaks,

given its relatively weak scal position and the expected high level

of public investment ahead of the presidential elections in October.

We are also cautions that high levels of exports to China will make

it highly susceptible to a slowdown in the Asian country.

However, good opportunities lay in the fact that Uruguay has

signed a deal with Mexico enabling duty-free exports of vehicles

and parts. Mexico is undoubtedly a market no carmaker can afford

to ignore given that it serves as a platform for entry to the US.

FTA Will Heat Up CompetitionBetween Asian Carmakers

rea. Although Japanese majors Toyota Motors, Nissan Motor and

Suzuki Motor hold considerable inuence in Peru, BMI believes

their dominance could soon be eclipsed by South Koreas Hyundai

Motor and its sister rm Kia Motors, should a possible FTA be-

tween Peru and Japan be delayed further. Hyundai and Kia currently

stand as the second and the third most popular carmakers in Peru.

Automotive imports into Peru currently attract a 9% tariff. To

that, an immediate outcome of the FTA will be that Peruvian rms

will be able to import large vehicles (with engine sizes over 3,000cc)

tariff-free, the Ministry of Foreign Affairs and Trade in South Korea

has revealed. Meanwhile, imports of mid-size vehicles (with engine

sizes between 1,500cc and 3,000cc) will be made tariff-free within

the next ve years. All other vehicles will be exempt from tariffs

in the next 10 years.

That would make the auto industryalong with the electronicsegmentthe biggest beneciary from the deal, given that more

than a third of South Koreas total exports to Peru are auto-industry

related. If Korea International Trade Association estimates are to be

believed, the agreement has already made nearly half of Koreas auto

exports to Peru tariff-free, leading to a possible 10% year-on-year

increase in South Korean autos exports to Peru.

Without doubt, Japanese carmakers operating in Peru will receive

a setback, not only because talks of an FTA between Japan and Peru

are nowhere close to being sealed, but also due to a slew of FTAs

signed with other markets. As of March 1 2010, Peru entered into

a FTA with China, a major outcome of which will be an inux of

Chinese carmakers into the country. In the same month, Peru, along

with Colombia, concluded trade talks with European carmakers,

making way for in the arrival of European carmakers in the country.

Despite this, Peru may not necessarily be a lost battle for Japanese

carmakers just yet. Given that the aforementioned three Japanese

carmakers collectively hold close to a 40% market share in Peru,

there is a strong possibility that a potential FTA with Japan would

encourage these carmakers to establish a manufacturing presence in

the country. In contrast, the terms of the agreement between South

Korea and Peru have reportedly made provisions to safeguard each

countrys local manufacturing, which may pose limits on local manu-

facturing by South Korean carmakers. There are also concerns that

trade ows between the two partners will also be restricted in future.

For now, Japanese carmakers can draw encouragement fromSuichiro Megata, Japanese ambassador to Peru, who said in July

that the rst step to securing an FTA with Peru will be the elimina-

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

2004 2006 2007 2008 2009

Stregthening The TiesSouth Koreas Trade With Peru (US$bn)

Source: Korea International Trade Association


14/17

Asia Pacific AutomotivesjAPAn

jAPAn

Distinct Brand Strategy And

Local Production To Aid

Nissans Expansion PlansAs a part of its new business strategy for Argentina, Nissan

Americas has partnered with Manuel Antelo, the president of Ar-

gentinas largest automotive logistics company, CAR Group, to

help strengthen the companys sales, service and distribution and

achieve over a 5% share in the country by 2014.

Nissans operations in the country have so far been supported by

Renault Argentina. This partnership, together with the success of

the Nissan Tiida, helped the Japanese carmaker corner a 1.5% market

share in Argentina in the rst eight months of this year, compared

with less than 1% during the same period last year (according to

Asociacin de Fbricas de Automotores de Argentina estimates).

Despite this success, BMI believes Nissans need for a separate

brand strategy comes in view of the companys commitment towards

the Argentina and the fact that its French partner holds a much bigger

12% share in Argentina. We believe this difference has prompted

the two rms to pursue independent sales and marketing strategy

in the country.

With Argentina one of Renaults strongest markets in Latin

America, Renault is keen on rming its presence in the country. To

that, the French carmaker revealed it is looking to use its manufac-

turing facility in Santa Isabel plant in Cordoba to help it develop

vehicles, specically geared to the local market. Nissans break up

with Renault on marketing will therefore help the latter concentrate

on core strategy in Argentina.

On the other hand, BMI believes that a separate marketing strat-

egy will allow the Japanese carmaker to execute its Shift Mercosur

plan, aimed at increasing the proportion of its Latin American sales.

For growth in Argentina, we expect the carmaker to utilise its strong

manufacturing networks in Aguascalientes and Jiutepec, Morelos

in Mexico and Paran in Brazil, allowing the carmaker to pursueits strategy for introducing a low-cost vehicle in these countries

during 2010 and 2012.

retail business. The new agreement between Nissan and Antelo

will commence from late 2011, prior to which it will continue to be

supported by Renaults operations in Argentina.

Although BMI believes that the Argentine market is far from

saturatedthanks to its low 15.3% vehicle ownership ratewe

believe Nissan will face stiff competition from a large number of

market leaders such as General Motors Company, Volkswagen

and Peugeot Citron.

Toyota Withdrawal: More About

Protecting US Business?Toyota Motor has announced it will stop exports of its vehicles to

Iran in line with the UNs fourth round of sanctions against the coun-

try. It is not the rst carmaker to pull out of Iran. Germanys Daimler

announced in April it would sell its 30% stake in Iranian Diesel

Engine Manufacturing and shelve plans to export to the country.

In Toyotas case, it has a much smaller interest, having shipped

only 220 cars in the year up to the implementation of the sanctions

in June, which suggests there may be more to the carmakers plans.Separate US sanctions stipulate that any foreign companies ex-

porting material or technologies banned on its list will have its US

nances and business restricted. The timing could not be worse for

Toyota as its mass vehicle recalls and the resurgence of the Detroit

Three have seen its growth in the US slip to singles digits. Sales

for the rst seven months of 2010 rose 7.5%, compared with 13%,

22.8% and 10.8% for General Motors Company, Ford Motor

and Chrysler respectively. In July, Toyotas sales for the month

actually fell 3.2%.

There is much more at stake for Toyota in the US than in Iran,

where its sales account for far less than 1% of its global sales. Even

in 2008, when the company reported sales of 4,000 units in Iran, thiswas still under 1% of the 8.72mn units sold globally. It is likely that

the withdrawal from Iran is another component of its image rebuild-

ing exercise, particularly as it has recently announced new invest-

ment for truck production in Texas that it will be keen to protect.

Both Toyota and Daimler have been careful not to specically

mention sanctions, however. While Daimler CEO Dieter Zetsche

said that the policies of the current Iranian leadership were behind

its withdrawal, Toyota said only that exports have been halted in

light of the current situation.

Although the sanctions are leading to the withdrawal of major

international companies, it is also acting as a catalyst for the develop-

ment of the domestic industry. In May, state-run Saipa opened what

it claims is the Middle Easts largest car plant, which will enable the

country to produce a new domestic model and offset the effects of

international sanctions. The US$350mn (IRR4trn) plant in Kashan

will have an annual production capacity of 150,000 units. More

importantly for the industry, the plant will produce the Tiba range

of domestically designed and built small cars and sedans.

Fears of losing parts supplies from international rms have also

prompted Iran Khodro (IKCO) to go ahead with plans to produce

its own alternative fuel engine, powered by compressed natural gas

(CNG), which is readily available in Iran. Dubbed the National

Engine, it will initially be used in the Samand and the Peugeot

405. IKCO plans to produce 125,000 engines in the current Iranian

year, stepping up its efforts in line with the petrol rations that alsothreatened the industry earlier in the year. BMI has previously stated

we believe there will be little difculty for Iran becoming a dual-fuel

Volkswagen,

92,323

Renault,

53,130

Ford, 49,420

Fiat, 47,638

General

Motors, 70,060

PSA Peugeot

Citroen, 52,205

Toyota, 20,572

Mercedes-

Benz, 8,823

Nissan, 6,408

Iveco, 3,054

Scania, 1,018Others, 29,150

Fighting The MajorsArgentina New Vehicle Sales (Units), Jan-Aug 2010

Source: Adefa


15/17

Asia Pacific AutomotivessIngAPOre

Nissan Looks For GCC Growth

Despite Yen ThreatJapanese carmaker Nissan Motor is looking for ways to overcome

the eroded competitiveness of its exports from Japan thanks to the

strengthening yen, as it aims to achieve sales growth in the markets

of the Gulf Co-operation Council (GCC). Although corporate vicepresident for Nissans Africa, Middle East and India division, Gilles

Normand, acknowledges that the carmakers sales in the Middle

East and North Africa (MENA) are still below pre-crisis levels, he

expects sales for the year ending March 2011 to slightly increase

over 2009.

The risk to making these increased sales protable, however, is

that almost half of the imported vehicles come from Japan, which

is becoming increasingly expensive. Nissan has already been forcedto address this issue in other regions, taking the decision to import

its March compact model into Japan from Thailand to make it more

cost effective. There are also signs that it is increasing exports to

MENA from other countries, as it announced in April it export close

to 20,000 Tiida sedan and hatchback cars from its Mexican subsidi-

ary this year. India has been cited as another potential export base.

It is likely to be such rejigging of exports that will address the

issue rather than investing in new MENA capacity. CEO Carlos

Ghosn said there are no plans to invest in new plants in the region,

to add to the Nissan plant in Egypt and the Renault plant due to come

onstream in Morocco in 2012. While Japanese brands are welcomed

in the Middle East, Ghosn said a free trade agreement with Arab

states would be needed before going further. As a result, he saysthe best the company can do right now is hold on to market share

in the region.

The regional sales target for the year is 200,000 units, of which

the GCC states are expected to account for 130,000. Ghosn said in

February he believes that the company can double its market share

in the region, but a lack of smaller lower cost cars is holding it back.

Although small cars will undoubtedly enhance Nissans product

range in the region, BMI notes that the SUV market is traditionally

strong, particularly in the GCC markets and this is where Nissan

has an edge. Ghosns February speech marked the launch of the

Nissan Patrol SUV, which was tipped to be one of the models that

will spearhead this attempt to boost market share.

Nissan currently ranks second in the region behind Toyota Mo-tor. However, sales will need to recover from the 30% decline in

2009 While the economic crisis had an adverse impact on sales

0

200,000

400,000

600,000

800,000

1,000,000

1,200,000

Japan

WesternEurope

CEE

NorthAmerica

Latin&SouthAmerica

MiddleEast&Africa

AsiaPacific

2008

2009

Work To Do In MEANissan Global Sales By Region (CBUs)

Source: Nissan

Nissan Signs EV Agreement As

Government Shows Signs Of

Contradictory PolicyJapans Nissan Motor and the Jordanian Ministry of Environment

have signed a Memorandum of Understanding (MoU) to promoteelectric vehicles (EVs), which seems to contradict earlier policies

towards alternative fuel vehicles. While Minister of Environment

Hazem Malhas hailed the move as an obligation to our future

generations, it is only two months since the government imposed

a tax on the import of hybrid cars.

Under the MoU, Nissan and the government have agreed to

provide the necessary incentives, charging infrastructure and public

awareness campaigns to make the mass use of electric vehicles vi-

able. Nissan has entered into similar agreements with a number of

other governments, as it looks to promote it Leaf EV. In connection

with the agreement, the government is also considering acquiring

300 Leafs for the public sector to lead by example.

BMI warns that while the move to set up a full support in-

frastructure and provide incentives for the purchase of EVs is a

positive step, there is likely to be some apprehension on the part of

consumers and dealers alike following the uncertainty surrounding

the hybrid tax. In June, dealers blamed inconsistent decision mak-

ing for creating an environment where consumers are left uncertain

when it comes to vehicle purchases. The most notable example is

the hybrid import tariff.

As recently as September 2009, the government issued a state-

ment saying it would not impose a tax on hybrids, which was

becoming a growth segment for the industry. Since hybrids were

made exempt from tariffs in September 2008, over 10,000 had been

imported. However, this decision was reversed from April 30. Ac-cording to dealers quoted by The Jordan Times, consumers are now

hesitant to buy the hybrids, not only because of the tariff making

them more expensive, but because they are unsure if the decision

will be reversed again.

BMI stated at the time that Jordan could nd itself at a disadvan-

tage to neighbours such as Lebanon, which had included a tax break

for imported hybrids in its draft budget. The EV agreement appears

to be a denite attempt to get a head start on the rest of the region,

as Malhas claimed Jordan will position itself as a leader in zero

emission mobility within the Arab region. The government is also

looking into more new technology to back up the project, including

providing renewable energy for recharging EVs through solar power.

sInGAPore

Country Will Remain An

Attractive Investment Location

Despite Flextronics Pull-OutSingapore-based parts supplier Flextronics has revealed plans to

close down its plant in Mor, Hungary by March 2011, which will

result in nearly 340 job losses. Although the company has not

disclosed the exact reason for the closure, BMI sees it as a sign ofcontinued weakness in auto production, which is prompting suppliers

to consolidate and restructure their operations. However, we expect


16/17

Asia Pacific AutomotivesAustrAlIA

development. Holden claims that it has worked with its Chevrolet

Brazil sister company over the last decade to learn about ex-fuel

technology, resulting in the Australian-built 3.0-litre SIDI V6 and

6.0-litre V8 engines.

The Commodore II ex-fuel models were developed largely with

the local market in mind. Holdens chairman and managing director,

Mike Devereux, has said it is aware that Australians want better

performance, which includes greater fuel efciency and sustain-

ability. It should give the company access to a niche in the large car

segment, which grew 2.6% in the seven months to July [source?]

The issue of supporting infrastructure, which BMI believes is

crucial to the success of any alternative fuel in a country, has also

been addressed. Caltex, the local arm ofTexaco, will supply Bio E-

Flex at 31 service stations throughout Melbourne, Sydney, Canberra,

Brisbane and Adelaide by the end of October, with the number due

to increase to 100 stations by 2011. The Holden engines can run ona mixture of up to 85% ethanol and 15% petrol (E85).

Strong demand for ex-fuel vehicles in Brazil means that the

Commodore II can form the basis of a return to exports of Australian-

built vehicles. The model will be rebadged as the Chevrolet Omega

and a limited run of 600 units will be shipped from November.

Targeting the Brazilian market, where Holden estimates ex-fuel ac-

counts for 45% of all vehicle fuel used, is also part of the companys

strategy to rebuild targeted export programmes after the economic

crisis. Holden exported to Brazil between 1998 and 2008.

Even in limited form, a boost in exports for one of Australias

three remaining vehicle producers will contribute to the industrys

recovery from a 40% drop in exports in 2009. BMI expects a modestupturn in 2010, with a 4.3% increase in exports forecast, in line with

a 6.5% increase in production. However, we warn that the strength

of the currency is a risk to export growth, as is the recovery of major

export destinations. Targeting high-growth emerging markets would

protect against this to some degree.

We do not expect demand for ex-fuel vehicles in Brazil to de-

cline in the near future as up to 90% of Brazils car eet is powered

by ex-fuel engines. This has been to the detriment of other alter-

native fuels. In June, Brazilian President Luiz Incio Lula da Silva

scrapped plans to provide incentives for the production of electric

vehicles (EVs) in the country.

Asia Pacific Auto Report

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