ASEAN Case Study: The Auto Industry and GM

By Edward Barbour-Lacey

With the ASEAN Economic Community going into effect at the end of this year, many companies are now seriously considering moving their operations to the region. However, the question remains as to where in ASEAN to base your business. As such, it is helpful to consider corporations that have made the move to ASEAN in the past and to try and understand their reasons for doing so. Below we delve into GM’s expansion into the region and provide snapshots of their operations in a few key countries.

Why ASEAN?

In 2014, GM split its Asian operations into two separate business units – one focused solely on China, and one focused on ASEAN as well as the remaining Asian countries and the Middle East. The ASEAN focused business unit was named GM International and its headquarters was located in Singapore. For many companies, Singapore has proven to be the perfect place to base their operations in the ASEAN region in order to take advantage of the rapidly growing markets located therein.

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According to Tim Zimmerman, president of General Motors, Southeast Asia Operations, “There is an opportunity for growth in the ASEAN markets, given the high population, growing middle class and increasing need for mobility.” As such, there is much reason to believe that there are long-term growth opportunities available in the emerging markets of the region.

GM’s recent move was also based on the advice of consulting companies, such as Boston Consulting Group, who have called upon multi-national companies to look beyond the BRIC countries to Southeast Asian countries like Indonesia, Malaysia, and Thailand.

GM’s international operations (including China) are the company’s second largest profit source after North America – they generated a pretax profit of US$2.19 billion on revenue of US$27.69 billion in 2012. The split in the company’s international operations was designed to allow the company’s mainland business to focus solely on China, the world’s largest car market. By the end of 2015, the company plans to have introduced 40 new models across the ASEAN region; these will mainly be mid-sized autos and trucks.

ASEAN is a made up of 10 nations and is home to a population of about 600 million and has a combined gross domestic product just behind those of China and Japan. Taken as a whole, ASEAN is the world’s fifth largest automobile market.

Singapore

While Singapore has no auto manufacturing activities of its own (although it make parts and accessories for the industry), it is increasingly serving as a base of operations for executives who are conducting business in Southeast Asia. Chief among its attractions are its stable business environment and dynamic economy. Additionally, business executives find the quality of life of being based in a first-world country in Asia to be very attractive.

The country has been very successful at attracting multi-national corporations such as GM, by offering generous tax breaks and other financial incentives, such as a corporate tax rate of 17 percent. In the words of Mr. Lim Kok Kiang, assistant managing director of Singapore’s Economic Development Board, “With our pro-business environment, excellent connectivity and infrastructure as well as talented workforce, Singapore is an ideal base for companies with a strong international presence, like GM, to manage and grow their business in Asia and the rest of the world.”

In 2014, GM shifted most of its non-Chinese international operations from Shanghai to Singapore. It is instructive to look at the history of GM’s operations in this region in order to gain a deeper understanding of the trends taking place now. In 1993, GM first established its Asia-Pacific headquarters in Singapore. The company then moved its operations to Shanghai in 2004 in order to take advantage of the exploding China car market. Now, the winds have changed direction again and GM is back in Singapore and looking to take advantage of the ASEAN market, among others. In fact, the company’s Singapore unit is now responsible for sales and marketing, product planning, and communications activities for ASEAN, Africa, India, South Korea, and the Middle East. In addition, the Singapore office is also managing Chevrolet’s European operations, and GM’s luxury Cadillac brand. It is very clear that in the eyes of GM, Singapore is a key power location for its business operations.

“More or less, all markets are 7 to 8 hours of reach from Singapore. Singapore offers a great infrastructure and offers an easy entry into the city to establish a regional hub. And maybe most important it offers a vast amount of talent which we could recruit here for our operations,” said Stefan Jacoby, GM International President.

Thailand

While Thailand has seen all segments of its markets take a hit as a result of the military coup earlier in the year, for example auto sales fell by 30 percent in the first half of 2014, GM has announced plans to build new factories, and expand existing ones, in the country.

Thailand is known as the “Detroit of the ASEAN region.” In 2013, the country produced around 2.5 million vehicles: 1.4 million commercial vehicles and 1.1 million passenger cars. Forty percent of the vehicles produced were exported, primarily to countries within Southeast Asia.

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Thailand is strategically located for exports throughout the ASEAN region. The government has created a regulatory regime that is very favorable to auto manufacturing, for example by allowing foreign investors to own majority shareholdings in vehicle-assembly facilities, and giving investors the freedom to source vehicle parts from other countries.

The terms of the ASEAN Free-Trade Area are also very favorable for auto manufacturers like GM – exports of Thai auto parts and vehicles are subjected to a maximum tariff of five percent within ASEAN.

Indonesia

Thailand is not the only country that is attracting GM. One of the main attractions of Indonesia is that it is a high-growth market with a large supply of low-cost labor.

After halting its operations in Indonesia in 2005, GM recently began again to seek opportunities back in the country – in 2014, it invested US$150 million into reopening its old factory in Bekasi, West Java, in order to produce seven-seat sports utility vehicles (SUVs) for the local market. However, recent reports point to the company again closing its Bekasi factory later in 2015 – this time the closure is due to GM’s cars not being priced competitively enough against competing products. The market is certainly there – Japanese companies have been very successful – but finding the right niche can still be difficult.

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Indonesia is the world’s fourth most populous country, with 250 million people, but until recently it had comparatively low levels of car ownership. However, this is starting to change in a big way, in the past five years auto sales have more than doubled and 1.2-1.3 million units are expected to be sold this year – this would exceed Thailand. By 2019, sales are expected to have doubled again, reaching around three million.

The Indonesian government is investing heavily into the auto industry since it sees the sector as a key driver of the country’s economic expansion and integral to its goal of becoming the leading economy in Southeast Asia.

Vietnam

GM has been operating in Vietnam since 1993, when the company started a joint venture with a Vietnamese state-owned enterprise. Auto sales have been climbing in the country due in part to Vietnam’s lowering of interest rates and improved liquidity throughout the economy. The country has a fast growing middle class, with rising wages and a desire to move beyond the more common forms of transportation such as motorbikes. 

Despite an increasingly competitive auto market throughout the ASEAN region, Vietnam has stated that it intends to work aggressively to build up its own domestic auto industry.  One of the key reasons for this goal is that, if the country relies solely upon imports, the foreign exchange balance will be negatively affected.  Additionally, the auto industry has the potential to create thousands of jobs for locals and create a strong system of supporting industries.

Vietnam will also cut its car import tariff incrementally over the next four years for goods originating in ASEAN countries, according to the ASEAN Trade in Goods Agreement. The current import tariff of 50 percent is expected to be reduced to 35 percent in 2015, 20 percent in 2016, 10 percent in 2017, and will be zero in 2018. Despite these tariff reductions, the National Assembly has announced that the special consumption tax will remain at current levels.

Laos

While Laos is still one of the least developed countries in Asia, it is seeing strong economic growth – in 2013, growth was 8.3 percent. Per capita GDP is now over US$3,100. As a result of its becoming a member of the WTO in 2013, the country is set to embark on a number of economic reforms and grow its export sector.

Auto sales in Laos are still very low, 2013 saw only 3,500, but is expected to increase fourfold over the next ten years. GM is among a number of auto companies that have already entered the country with the anticipation of strong growth to come. In April 2013, GM opened a dealership, a JV with a local partner, in Vientiane, the capital of the country.

What does all this mean for my company?

As can be seen from the above, ASEAN holds many opportunities for multi-national companies. Although many companies may be attracted to Singapore, at least as a base for their regional operations, the other ASEAN countries are becoming increasingly attractive for a variety of business operations. While more recognizable countries like Thailand, Indonesia, and Vietnam are certainly countries that must be contemplated, up-and-coming countries like Laos and Myanmar must also factor into any operational considerations in the region.

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