ASEAN race for number one vehicle producer

Forget China, smaller Asian nations in ASEAN (the Association of Southeast Asian Nations) are at least as likely to have a large impact on nationwide car-buying habits in Australia during the next decade.

As the middle class expands in nations around the Asia/Pacific rim there will be a surge in demand for motor vehicles – the most blatant of status symbols for the upwardly mobile. More demand will result in additional manufacturing capacity in the region to satisfy that demand.

And Australia – directly or indirectly – will likely benefit from that growth in regional automotive production.

To illustrate what's happening, Indonesia is currently on track to overtake Thailand as the largest automotive manufacturing hub in ASEAN, according to a report by an economics and commerce analyst, Ipsos Business Consulting.

Thailand is currently the leading vehicle-producing nation, says Markus Scherer (pictured), Global Automotive Sector Leader at Ipsos.

"The evidence is clear that in terms of the trend in vehicle production output, policy development, and improvements in infrastructure, the Republic [of Indonesia] continues towards increasing capacity, increasing domestic consumption and increasing export volumes. Automotive manufacturers and policy makers in Indonesia, Thailand and elsewhere will want to consider the implications," Scherer says.

Thailand, a country with which Australia has a free trade agreement, is producing two million vehicles a year, according to Ipsos. Indonesia, by contrast, produced 1.1 million in 2015. As a graph produced by Ipsos shows, the trend for both countries is upwards, with Indonesia's production projected to close to within half a million of Thailand around 2020. At that rate, and assuming no major changes to the business environment in either country, Indonesia may overtake Thailand as the automotive manufacturing powerhouse in the region by about 2025.

Ipsos makes the point that Thailand is a much more successful exporter of cars – 55 per cent shipped out to global destinations last year – than Indonesia, which exported just 23 per cent of its production in 2015. Currently Indonesian manufacturing capacity is far from stretched. Of the two million-vehicle production capacity available, only 62 per cent is utilised.

However, with a strengthening domestic market, Indonesia has the potential to build up its export sales, and is geographically well located to be a big player in ASEAN if the country can entice foreign investment from companies looking to Asia for increased revenue.

"Global automotive players who do not yet have a significant production base in Indonesia will increasingly be asking whether they are positioned to gain market share in an ASEAN market comprising more than 600 million people, and whether they can defend their existing market share as other companies look to expand in Indonesia and Asia generally," said Douglas Cassidy, Indonesia Country Head at Ipsos Business Consulting.

"A production base in Indonesia will enable them to benefit from the cost, scale and supply chain advantages of the country that seems on track to become the pre-eminent automotive power in ASEAN."

Measured against the Thai baht over a 10-year period, the Indonesian rupiah has been losing ground, which makes setting up a manufacturing plant, employing production staff and exporting to the world simply more cost-effective in Indonesia than in Thailand – in theory at least.

Since the end of 2006, when around 250 rupiah bought one Thai baht, the Rupiah has steadily fallen, to the point where one baht was buying over 400 rupiah in 2014 and early 2015. More recently the rupiah has strengthened to 370 for one baht, but the Indonesian currency remains much weaker than it was a decade ago.

While the currency exchange rate favours Indonesia for the moment at least, Ipsos argues that doing business there remains harder than in Thailand – and this will hinder Indonesia's regional aspirations. In a World Bank 'ease of doing business' index, Indonesia sits at 109 out of 198 countries studied; Thailand is ranked 49th. Indonesia's government is determined to lift the country's ranking to 40 by 2018.

What this explicitly means for Australia is unclear. Only the Suzuki APV is exported from Indonesia to Australia, and that vehicle has sold just 69 units for the first two months of this year. The combined aggregate for Thai exports to Australia – helped by the free trade agreement that exists between the two countries – totals 41,620 for January and February combined.

The Aussie dollar has remained fairly steady against the baht over the past 10 years, whereas the rupiah has been trending down against the dollar. It means that eventually Indonesia could supplant Thailand as a major supplier of exports to Australia, irrespective of the advantage the free trade agreement provides Thailand. Or Thailand will restructure its pricing for local distributors to be competitive with Indonesia.

Before all that, however, Indonesia would have to mount a convincing argument that its manufacturing plants can build a strong product that will meet the demands of consumers for quality and technology in a mature market like Australia.

Beyond the implications for Australia, Indonesia's growing automotive focus is a sign of the increasing demand for cars within the Asia/Pacific region – that aspiration to join the middle class.

It's likely that other low-cost manufacturing nations will also expand production capacity along with Indonesia, merely to meet the burgeoning regional demand.

Ultimately, that should mean a diversified range of products available at a lower landed cost for Australian consumers, regardless of where the imported cars are sourced.

Perhaps 2017 is a very opportune time for local manufacturers to close their plants in Australia after all...