India and ASEAN, which includes Thailand, Malaysia, Indonesia, the Philippines, Vietnam, Laos, Cambodia, Myanmar, Brunei, and Singapore, signed a ground-breaking agreement on the ASEAN-India Free Trade Agreement (AIFTA) in August 2008 in Singapore. The agreement took more than five years to negotiate. The recent global financial turmoil and negotiation collapse during the Doha Round in Geneva has finally pushed both sides to conclude the deal. The official signing ceremony of AIFTA is expected in the beginning of 2009 at the ASEAN Summit.
According to the agreement, both sides will reduce tariffs for 80% of goods by 2010 and aim to eliminate tariffs by 2012. Of the remaining goods, 10% will see tariffs reduced to 5% by 2015. The AIFTA will create a potential population market of more than 1.6 billion (1.1 billion for India and 560 million for ASEAN) by 2012 and boost intra-regional trade by more than 30% by 2010 compared to 2007.
Theoretically, AIFTA will benefit the automotive industry of both regions as the integrated market will provide larger economies of scale for manufacturers. Combined light vehicle production will nearly double to 4.6 million with 2.1 million units from India and 2.5 million units from ASEAN. However, it remains to be seen who will benefit more from the new opportunities and who may be exposed to risks. According to our interviews with key automotive players in both regions, assessment on the impact of AIFTA is summarized as follows:
OEMs in both regions will be the primary beneficiaries of AIFTA. The potential benefits for the companies were expressed by the General Manager of the Purchasing Department for a global Japanese automaker:
"More options for sourcing either from India and Thailand (a major supplier base in ASEAN) will help reduce purchasing costs...by consolidating purchasing parts which need high volumes for localization in one location and supply to other regions. Adding India as a new supplier base in the region can also reduce exchange rate risks, as we have suffered from the sudden appreciation of the Thai baht from 2007 to the beginning of 2008, while the weaker Indian exchange rate makes exporting to the region easier. We will have more flexibility in our strategy."
OEMs are looking at India as an alternative for Thailand, the current regional supplier base with expectations of higher wages and exchange rate risks. On the contrary, India will be more attractive for sourcing in the future as costs are expected to be more competitive with increased vehicle production to nearly four million units by 2014, coupled with the availability of raw materials, such as steel, which ASEAN countries continue to import at a high cost. The major obstacle for sourcing from India is infrastructure bottlenecks, such as electricity power shortages and poor transportation conditions. However, these are expected to improve by the time the tariff rates among both regions are eliminated.
India also has their own local OEMs, who may first look to suppliers in their home market when they expand their production in ASEAN. For example, Tata Motors is currently importing most vehicle parts as knockdowns from India, but they are still struggling to make their presence felt in the Thailand market. With AIFTA, Tata can leverage its lower costs to penetrate the market.
Japanese suppliers, who have a large presence in ASEAN, are more defensive when it comes to AIFTA because their production base in India is weaker compared to ASEAN. According to figures prepared by the Japanese Auto Parts Industry Association (JAPIA) in 2008, there are 204 Japanese suppliers in Thailand versus only 54 suppliers in India. Some Japanese suppliers are concerned that their non-Japanese competitors will utilize facilities in India to enter the ASEAN market, and compromise Japanese suppliers' dominant position of the market in future.
Interestingly, the perception
of threat and opportunities by various players in India and Thailand is quite contrary to what we actually see. The trade gap between the two
countries has expanded over the years in favor of Thailand (see graph).
The surge in automotive related export from Thailand to India is attributed to
some components (mostly gear boxes, lighting equipment, and engine parts) being shipped at preferential tariffs under the "early harvest scheme"
between the two countries which started in 2004. Japanese OEMs are the regional leaders in vehicle production model plants in Thailand, which will
increase the exports of components to India.
We expect the continuation of Thailand's advantage in trade until foreign OEMs in India consolidate their supply base. Once they consolidate their base and achieve economies of scale, they may encourage their suppliers to supply their parts to Thailand and ASEAN region. We expect this to take around three to four years by the time AIFTA is fully realized.
In view of expected dynamic two-way trade development in the region, OEMs and suppliers will need to expand their footprints in the region to best utilize their resources in the new environment, as Toyota president Watanabe stated recently, facing the impact of global financial turmoil: "Those who can survive are not those who are the strongest, but rather the ones who can best accommodate changes."
Hajime Yamamoto may be reached via email at hajimeyamamoto@csmauto.com .
