FOURIN,Inc. - Research and Analysis of the Asian Automotive Industry

India’s international vehicle show Auto Expo 2012 was held in January at New Delhi’s largest exhibition center. At the show, which was the 11th to date, compact SUVs and small MPVs were unveiled one after another as opposed to the previous event which saw the exhibition of a number of hatchbacks. The show also witnessed the world premiere of Maruti Suzuki’s Ertiga small MPV and XAα small SUV concept, Hyundai Motor’s Hexa Space small MPV concept, Ford Motor’s EcoSport small SUV among others. As demand begins to diversify on the back of improving living standards, the announcement of 1.0L-1.5L class MPVs and SUVs, which are positioned between small hatchbacks and sedans on one side and utility vehicles on the other, are offering a new lifestyle for urbanites, bringing to light new demand.

In India, due to growing local demand and the country’s transformation into an export hub for powertrains and other products, automakers are raising annual production capacity of 1.5L and smaller gasoline and diesel engines. In addition, amid rising gasoline prices, rivalry regarding the development of fuel-efficient new gasoline engines is intensifying and more and more diesel-powered small cars are added to the product lineup. Regarding India’s diesel passenger vehicles, to date Maruti Suzuki and Tata Motors used the Fiat-based 1.3L SDE, this engine nearly fully absorbing the diesel vehicle market. However, by 2011 Ford, GM, Nissan and other automakers commenced local assembly turning sales competition of diesel-powered vehicles into a melee.

The global automotive industry faced a truly testing year in 2011, with Japanese automotive related firms reeling from the effects of the earthquake at home and massive flooding in Thailand, compounded by a strong currency. Emerging countries, such as China and India, witnessed slowing growth levels, while the latter half of the year saw fears rise that the debt crisis in Europe would pull down the global economy. Nevertheless, growth in emerging countries continues despite the pace easing, with recovery in the US also taking hold. As such, overall vehicle sales worldwide for the year maintained year-on-year growth. In 2012, growth in China, India and ASEAN is expected to recoup its tempo, with recovery tone in the US maintaining and Japan on the rebound.

Vehicle production and sales in Asia (excluding Japan and China) in 2011 are forecast to continue the previous year’s upward growth, yet the impact of negative aspects, such as rising interest rates and the severe flooding in Thailand, see the pace of expansion somewhat sluggish. In 2012, vehicle demand is projected to show solid gains on the back of economic growth, new model launches, and economic and industrial policies in various countries. However, the European debt crisis, a forecast slowdown in the Chinese economy and little progress in recovery of the US economy lead concerns over the possibility for a contraction in exports, cooling consumer sentiment and a tightened credit market. In 2011, production in nine major Asian countries is forecast to rise six percent to around 12 million units.

AVTEC Limited, part of the CK Birla Group and a leading powertrain maker in India, has four production facilities in India, from which it supplies the likes of engines, transmissions and transmission parts to more than 25 companies, including Hindustan Motors, Tata Motors, GM and Ford. Currently, plants are set up with the capacity to produce 200,000 transmissions and 100,000 engines for vehicles per year, however, eyeing further growth, the company is to invest 60 million USD through to 2014 in order to double volume. In addition to the capacity upgrade plans, AVTEC also aims to expand its customer base in a drive to raise sales from 10 billion INR in fiscal 2011 ending March 2012 to 14 billion INR in fiscal 2012.

Consolidated accounts in FY2011 of ten Japanese automakers (excluding Mitsubishi Fuso and UD Trucks, and deducting Daihatsu and Hino from the results of parent Toyota) show that net revenues were down 13.2 percent year-on-year to 20.38 trillion JPY, operating profit fell 60.6 percent to 492.1 billion JPY and current term net profit decreased 57.8 percent to 426.4 billion JPY. Decreased production and sales as a result of the Great East Japan Earthquake and the strong Japanese yen put pressure on earnings which resulted in decline in income and gain for the second half-year term since the second half of FY2010. Full-term projection sees only Nissan expecting an increase in both net revenues and profits, while others left their projection unchanged or adjusted it downwardly.

The respective automotive industries in Thailand and Indonesia have been through numerous peaks and troughs in recent years, yet are both seeing steady progression towards further growth. In Thailand, which has become the center of the ASEAN region, automakers have been forced to halt production since October 2011 due to the massive flooding which has inundated the country, pulling the brakes on local manufacturing. However, mid and long-term outlooks sight 2.5 million vehicles being produced annually by 2015, with the increased growth expected to confirm Thailand’s status as an ASEAN hub. On the other hand, with a population of 240 million, Indonesia is expected to develop its industry centered on fostering domestic demand, with aims to introduce low-cost small green cars.

Hyundai-Kia Automotive Group aims to reduce the number of platforms to six by 2013 in an effort to improve efficiency of development and production. HKAG used 18 platform types as of 2010, which are planned to be gradually reduced to six standardized platforms. From 2013, the six platforms are intended for the production of all new vehicles, however, in order to meet rising demand for small vehicles in India, Iran and other countries, some old platforms are scheduled to stay in production. The small, medium, large and sports car type as well as MPV and large SUV type platforms went into production by 2010. Out of the six, HKAG aims to increase production scale of the small and medium versions and are anticipated to account for approximately 80% of the group’s total production volume.

Mitsubishi Motors Corporation is stepping up efforts to expand its share in the growing ASEAN market. In September 2011, the company announced its mid-term business management plan for the region entitled “ASEAN Challenge 12,” which aims to increase vehicle sales in the five major countries of Thailand, Indonesia, Malaysia, the Philippines and Vietnam to 360,000 units by fiscal 2015, together with raising share to 12%. Striving to achieve these challenges, MMC is to expand its production lineup for the region with strategic small world models and compact SUVs. Moreover, production and supply systems in Thailand are to be strengthened, while at the same time, effort will be made to enhance collaboration with Malaysia’s national automaker Proton.

In Indonesia, product competition by Japanese commercial vehicle makers is becoming cutthroat on the back of strong rising demand for commercial vehicles in recent years. Sales of light and medium trucks with GVW over five ton had held at some several tens of thousands, yet with the progressive economic growth, volume in 2010 topped 100,000 units for the first time. Due to expanding domestic demand with its population of 230 million, in addition to buoyant market conditions for natural resources and agricultural commodities, truck demand in Indonesia is projected will increase further, yet at the same time, the push to launch models designed specifically to match local needs is clearly shifting to a higher gear.

In the Indian vehicle market, competition to gain share through the launch of the latest global models and those designed specifically for local users is reaching a peak, with all the major automakers having released new hatchbacks by October 2011. Moreover, product lineups of each company are rapidly becoming more and more diverse, with increasing launches of new vehicle types, such as SUVs, minivans, compact and mid-size sedans, low-cost mini vehicles, and luxury cars. As of mid 2011, the number of locally manufactured vehicles had expanded to around 65 sedans and hatchbacks, some 30 SUVs and roughly ten MPVs and utility vehicles. Furthermore, at least another 15 or more new models (excluding full model changes) are expected to be launched by 2014.

Toyota Group, in addition to raising annual production capacity, is engaged in cost cutting through the enhancement of its local procurement network and other means in order to foster Asia as a low-cost high-efficiency production base. Amid growing importance of emerging countries with expanding markets, demand for low-cost small vehicles is increasing and production of existing models is rising in Asia. The group’s annual production capacity in the region (excluding Japan and China) is expected to increase to over 2.3 million vehicles in 2013. While Toyota Motor operates production bases in nine Asian countries and plans to raise annual production capacity to 1.52 million vehicles by 2013, the company aims for further improving localization and productivity.

On the back of growing demand and the development of export bases in India as well as in major ASEAN countries, such as Thailand and Indonesia, Asia’s vehicle production capacity (excluding Japan and China) is expected to rise from 19 million units in 2011 to 19.8 million units in 2014. Although Japanese automakers halted investments in southeast Asia in response to the global financial crisis at the end of 2008, in anticipation of continuous economic growth in India in the midterm and the expansion of the middle class in Thailand and Indonesia thanks to improving income and employment situation, investment in production expansion has been gaining momentum since 2010 spurred by reviving demand in Asian nations.

In India, automakers are forecast to continue increasing investment to expand production output. Capacity for completely built-up vehicles of over 5.5 million units in 2011 is planned to be raised to 6.5 million units in 2012 and to 7.4 million units in 2013, climbing above 8 million units in 2014. Following this trend, particularly foreign automakers are actively ramping up passenger car capacity, adding a further 2 million units in capacity between 2011 and 2014. By region, investment is flowing into Gujarat State, which is taking a proactive approach to attracting new companies. As such, there is the possibility that in or after 2015 Gujarat will expand into India’s largest vehicle production base in terms of capacity.

In fiscal 2010, Indian automotive parts makers across the board posted solid performance, with both revenues and profits reaching all-time high levels. Of publically listed companies which have released end of year results, analysis of the top 100 in terms of revenues shows that all but Dunlop India saw higher revenues, while more than 70 increased pre-tax profits. On top of vehicle production in India in the fiscal year ended March 2011 rising some 30 percent, strong export demand also aided gains by parts makers. Moreover, a simple addition of revenues by 88 parts makers for which results can be compared over the past three years gives a year-on-year increase of 29 percent. Profit before tax rose 32 percent, with the margin climbing 8.7 percent.

In the first half of 2011, India’s vehicle sales maintained double-digit growth, however, due to rising interest rates and gasoline prices, increase in demand lost steam. This tendency is expected to continue in the second half of the year as well and year-round vehicle sales are forecast to grow 7 to 10 percent year-on-year to around 3.3 million units. Vehicle sales grew 15.4 percent year-on-year to 1,692,179 units. Although it maintained double-digit performance, however, growth dropped approximately 20 percentage points compared to 2010’s 34.1 points. Looking at monthly data, growth remained around 20 percent until March, but fell 10 percent from May, indicating a slowdown, while several negative factors could push down demand for especially passenger cars and medium and heavy commercial vehicles.

Total vehicle sales in 2010 by 12 Japanese automakers in 80 countries rose 2,184,583 units or 11.4 percent against a year earlier to 21,298,605 units. Sales increased in 52 of the 80 countries surveyed, including majors such as Japan, the US and China which gained on new vehicle purchase incentives and improved economic conditions, taking the entire total to 94.8 percent of the historic posted in 2007. Nonetheless, in terms of market share, declines were witnessed in 60 of the 80 countries, including the US and China, due to the massive recall by Toyota largely in North America and strong sales offensives by Western and Korean automakers. As a result, combined share in 80 countries by Japanese automakers slipped 0.8 of a percentage point to 28.7 percent.

FOURIN has collated the financial results of Korean automotive parts makers in fiscal 2010, compiling a ranking of the top 100 companies based on sales. Analysis shows that the majority of companies posted gains on a year earlier thanks to increased production by Hyundai Motor both at home and overseas, yet sales also extended on higher orders from overseas automakers as GM Korea ramped up CBU production and KD exports and Renault Samsung posted record production volume. Looking at the financials of 98 companies of the top 100 for which data comparisons could be made for the past two years, 62 companies posted record high results. By sector, makers of core parts, such as drivelines, suspension and braking systems, posted comparatively strong gains.

Sri Lanka is currently showing one of the highest economic growth rates in Asia. With 26 years of civil war between the government and separatist militant organization Liberation Tigers of Tamil Eelam coming to an end in May 2009, the Sri Lankan government and private enterprises have been promoting infrastructure development, particularly in the north and east of the country, resulting in real GDP growth in 2010 of 8.0 percent (provisional estimate). Moreover, economic growth of over 8 percent is also expected in 2011. Accompanying the country’s economic growth has come an rise in demand for vehicles, with new vehicle registrations in 2011 projected to increase 20 percent on a year earlier to 420,000 units.

Thailand’s automotive parts industry is comprised of a wide array of both foreign and local suppliers. According to the Thailand Automotive Institute, 635 tier 1 suppliers and 1,700 tier 2 and 3 suppliers have business operations supporting the country’s automotive industry. Among which, as Eco Car production gains momentum, along with a next generation of pickup trucks scheduled to go into production, there has been an upsurge recently by Japanese suppliers aiming to achieve cost reductions by further localizing or optimizing operations. Meanwhile, efforts to localize production of parts and materials requiring high levels of technology are also gaining greater traction, such as CVTs and oil seals, bringing progress in establishing a diverse supply chain.

India’s commercial vehicle industry is currently riding a solid wave of expansion. On the back of the country’s economic growth, demand for commercial vehicles continues to show gains, leading projections for the scale of production to double from over 700,000 units in 2010 to 1.4 million units in 2015. While all segments are expected to track higher, the presence of low-cost models up to 1.0L being actively launched by local automakers is on the rise, with demand for small commercial vehicles likely to climb from under 200,000 units in 2010 to over 1 million units in the future. Moreover, in the medium and heavy commercial vehicle sector, foreign majors are successively stepping up efforts to boost business, while local heavyweights have their eyes on capturing dominant share.

FOURIN has compiled 2010’s vehicle production data of models manufactured in Japan of eight Japanese vehicle manufacturers (excluding commercial vehicle makers). Total vehicle production of the eight automakers in Japan rose 20.0 percent year-on-year to 9.2 million units, with all passenger cars increasing compared to the previous year, except 1L cars and 1L car-derived MPVs whose production fell due to relocation from Japan to global locations or as a result of models going out of production. By segment, the specialty segment showed the biggest year-on-year increase due to the all-new Honda CR-Z, while SUVs achieved the second best performance thanks to reviving demand in Japan and production launch of new models.

FOURIN’s global survey of vehicle sales in 80 countries in 2010 found that volume rose 9.9 million units or 15.4 percent on a year earlier to 74,031,284 units (includes some estimated figures). Results of the top five year-on-year gains by country saw the US in second place up by almost 1.2 million units, yet the remaining positions were all taken by up-and-coming markets China, India, Russia and Brazil, highlighting that the contribution of developed countries to drive up sales is weakening. The ratio of developed countries to global sales, which stood at over 65 percent in 2006, fell below 50 percent in 2010 to 48.1 percent, yet on the other hand, emerging countries surged to 49.7 percent to overtake developed countries for the first time.

Vehicle markets in ten major Asian countries (excluding Japan and China) have been witnessing sales expansion in almost all segments as rising local demand gains traction, yet among them, the A segment and 1.5L and smaller type B segment show outstanding upward movement. Combined sales from these two segments totaled 2,718,631 units, accounting for 36 percent of the overall market. On the other hand, MPV and 1-ton pickup truck sales in 2010 both surpassed year earlier results, however, were confined to around 80 to 90 percent of levels recorded in the previous peak year. Looking ahead, sales are forecast to continue to see overall volume driven by 1.5L and smaller passenger cars as more new low-cost models are launched into the likes of India, Thailand and Indonesia.

GM Korea, Renault Samsung and Ssangyong posted higher standalone earnings in 2010. Along with a rise in overall sales at home, a recovery in global markets spurred a pickup in exports. With the positive market performance, GM Korea and Renault Samsung recorded historic highs, while Ssangyong pulled off a solid recovery in sales. In terms of profits, the three companies saw divided results. GM Korea’s operating income fell due to a high export ratio susceptible to FOREX movement, along with rising development costs to launch small global market cars. Renault Samsung posted a return to profit through cost reductions, while Ssangyong contracted operating losses thanks to cooperation with suppliers and made progress through restructuring.

Parts production in Japan, based on statistics from METI which sank 29.3 percent in 2009 to 9.1 trillion JPY, posted a 25.8 percent year-on-year increase in 2010, recovering to 11.4 trillion JPY in line with a rebound in vehicle demand. New vehicle purchase incentives in Japan saw a return to positive figures from November 2009, with recovery continuing through until September 2010. However, a drop in vehicle buying as incentives came to an end between October and December 2010 also weighed down growth in automotive parts production. In 2011, along with lackluster post-incentive vehicle sales in Japan, the effects of the Great East Japan Earthquake which struck on March 11 has seen automakers stop or cut back vehicle production, bringing forecasts for full-year parts production to decrease.

Extending vehicle sales in 2010 to a combined 5.74 million units, Hyundai Motor and Kia Motors both posted solid end of year financial results, recording historic new levels of profits. Greater earnings from increased sales and improved model mix lifted incomes, with results in the black in all global business areas, yet home market Korea stood out as being the biggest profit source. Continuing to expand, the Hyundai-Kia Automotive Group is shifting the focus of its business strategy from volume-based expansion to growth from higher quality, leading efforts to prioritize boosting brand image and profitability through an increase in higher added value products and curbing sales incentives.

FOURIN attended the Seoul Motor Show 2011 which ran from March 31 through April 10, 2011. This year’s show was highlighted by various green products, such as hybrid electrics, all-electrics, plug-in hybrids and fuel cell electrics, from local Korean automakers, while many new regular production models were also on display. Models making their world premiere included the Hyundai Blue², Kia Naimo, redesigned Renault Samsung SM7, and GM Korea’s Miray. While the display of environmentally friendly vehicles touted providing benefit for all, it could be seen as merely appealing to the Korean government which has been pushing its green vehicle strategy, while details for regular production models lacked a sense of freshness.

India’s two-wheeler industry is accelerating growth based on domestic demand which has surpassed 10 million units and production for export, bolstering production scale to 12,776,781 units in 2010. On the back of future economic growth, two-wheeler demand is expected to grow in India. Driven by increasing domestic demand, it is said that two-wheeler production will reach 20 million in 2015 and 30 million in 2020. Under these circumstances, Indian and Japanese two-wheeler manufacturers are intensifying product launches in volume-selling segments, while European and US brands appear to be aiming at entering the Indian market, heightening competition for shares across the board from low-cost products to luxury merchandise.

Vehicle sales in ten major Asian countries (excluding Japan and China) rose 25.9% year-on-year in 2010 to 7,559,088 units. As economies in the region grow, a rebound in business confidence, positive response to new models and low interest rates pushed India, Thailand, Indonesia and Malaysia to new record highs, while Korea also even achieved a high level. Sales by 12 Japanese brands increased 30.5% to 3,692,927 units, extending share to 48.9%. Moreover, Japanese brands captured 83.0 percent share of the ASEAN market. Korean brand sales totaled 1,911,378 units, of which, sales at home in Korea of 1,465,603 units accounted for roughly three quarters. European brands expanded some 56.7% on volume of 533,059 units, lifting share in Asia to 7.1%.

Toyota (including the Lexus brand) vehicle sales in six ASEAN nations rose 35.4% year-on-year to 794,193 units in 2010, capturing a 32.0% share of the market. Although volume-selling models did not enter the market, on the back of economic recovery demand in Thailand, Indonesia, Malaysia and other countries grew considerably, registering a historic high. Plans for 2011 are likely to see continued increased sales in each country, yet while other automakers, primarily Japanese, are set to launch a string of new small cars and next-generation 1 ton pickup trucks, Toyota is not scheduled to release any new core models until 2012, bringing projections of a challenging year ahead in countries such as Thailand.

India’s vehicle production rose by 33.6% year-on-year or about 887,000 units in 2010 to 3,528,988 units, the tenth consecutive historic high. On the back of economic growth, the domestic market increased approximately 773,000 units to 3.03 million units becoming the engine of booming production. Exports rose around 60,000 units to 510,000 units, growth remaining at small scale. Leading automaker Maruti Suzuki continued at full-capacity, turning out 1,214,052 units. Tata Motors, which posted solid commercial vehicle sales, rose 47.3% to 751,657 units. Hyundai Motor transferred some production to Turkey to secure domestic supply capacity. European, American and truck makers also posted impressive higher growth.

The Hyundai-Kia Automotive Group (HKAG) continues to make great strides in the global arena with worldwide vehicle production volume in 2010 expanding to 5.74 million units. Plans for 2011 look to extend to 6.33 million units, while achieving 7 million units within the near term is also in sight. Continued new plant startups and the launch of new models are projected to boost business in Europe, the US and BRICs, yet share at home in Korea, the group’s biggest profit market, is predicted will head lower. Should there be a change in earnings structure in its domestic Korean business which has propped expansion overseas, there is the potential for the brakes to be pulled on its growth model which has proved successful to date.

India’s vehicle market expanded 34.1% year-on-year in 2010 to 3.04 million units, surpassing the 3 million-unit mark for the first time. While an increase in consumer spending, infrastructure development and logistical needs are aiding rising demand, positive consumer response to new vehicles, low interest rates and other factors supported booming sales. Market leader Maruti Suzuki powered over the 1 million-mark, yet its share of passenger car sales slipped by 3.4 percentage points. While the three leading automakers in India, Maruti Suzuki, Hyundai Motor and Mahindra

Vehicle production in Asia (excluding China) climbed 31.9% year-on-year in 2010 to 11.37 million units, the first time the region has witnessed volume over 10 million vehicles. In addition to growing domestic demand, a recovery in exports saw five countries, including Thailand, India and Korea, post historic new highs. Moreover, total sales across ten Asian countries went up 25.8% year-on-year to 7.56 million units, expanding for the fourth consecutive year. In addition to economic recovery and brisk new vehicle launches which were put on hold during the financial crisis, relatively low interest rates underpinned consumers’ purchasing power prompting sales to greatly surpass beginning-of-the-new-year expectations, bringing new records in a number of markets.

Korea’s automotive industry is positioning next-generation low-environmental impact vehicles, or green cars, at the center of its growth strategy for 2015-2020, challenging global competitiveness and eyeing a place as one of the top four in the field worldwide. The Korean government announced its green car industry road map in December 2010, setting targets to increase domestic production of environmentally-friendly vehicles to 1.2 million units in 2015. However, there is skepticism over marketability in Korea, while at the same time, the HEV/EV plans of the Hyundai-Kia Automotive Group, the engine to drive the green car strategy, are said to lag some several years behind rival Japanese, American and European makers, prompting uncertainty as to how far it can extend overseas share.

Hyundai Mobis has its sights on OEM sales of 30 trillion KRW and becoming one of the world’s top five automotive parts makers in 2020. At the same time, it looks to strengthen three crucial business areas, namely modules, electronic integrated control parts and core green car parts, supporting the environmental strategy of the Hyundai-Kia Automotive Group (HKAG). Moreover, it is also aiming to increase supply outside HKAG, making progress in boosting business operations. Nonetheless, accompanying expansion comes an increasing need for product development, capital investment and quality control, making retention of competitiveness through optimization of business resources a paramount issue.

In Thailand, capital investment in response to launches of Eco Cars and next-generation 1-ton pickup trucks is on the rise. Looking at the number of investments announced by Thailand’s Board of Investment (BOI), at least 121 vehicle-related projects (manufacturing only) were approved in 2010 worth over 33 billion THB, doubling from 2009’s over 15 billion THB when investment expansion was limited by the financial crisis. Major Japanese parts makers already with local operations account for the majority of investment applications, with several tier-two suppliers also showing their intentions to foray into the market, highlighting measures to localize production of structural parts and other products.