Asian automaking: Life after the crash

Manufacturing Engineering, Jan 1999

What happened to the Asian miracle? According to Mustafa Mohatarem, chief economist for General Motors Corp., inappropriate government industrial policies, real estate speculation, overexpansion, excessive debt, corruption and cronyism, fragile financial systems-and what he calls a pervasive "belief that the rules of economics don't apply to Asia"-all played a part in bringing years of rapid growth to a screeching halt.

Mohatarem and other automotive OEMs and suppliers, along with a group of Asian specialists from the University of Michigan's (Ann Arbor) Asian Automotive Program led by auto analyst David E. Cole, recently discussed the prospects for automaking in Asia.

Asian auto production slid from 6.56 million units in 1996, and the long slide hasn't stopped yet. Vehicle sales in ASEAN countries (the Association of South East Asian NationsThailand, Indonesia, Malaysia, and the Philippines), 5.80 million units in 1996, dropped to well under 4 million units in 1998.

How could the fastest-growing markets in the world become the fastest-shrinking ones in just a few months? Though depreciation of the Chinese yuan and a weak yen played a part, the rise in the US dollar's value in early 1997 got countries with currencies pegged to it, like the Thai baht, in trouble by July.

Before the crisis, Thailand hoped to be a hub for vehicle and parts production within ASEAN. After squandering much of the country's foreign reserves trying to stave off speculators, the Thai central bank floated the baht, which promptly dropped from 25 to 40 to the US dollar. Auto sales dropped 75% that year; last year sales dropped another 38%.

Indonesia's rupiah dropped 85% in 1997, pushing per capita income down 40%. Real Gross Domestic Product is now down 19%, and heavy debt, high interest rates and import costs combine with shaky leadership, widespread hunger, and social unrest to make investors put their plans on hold.

Malaysia, where real GDP dropped 7% in 1998, shows few signs that the government will reform the financial and corporate sector. Its reaction to a 40% drop in the value of the ringgit was the arrest of the finance minister who had called for political and economic reforms.

As one currency meltdown followed another last year, outsiders saw "Asia" as a house of cards that's toppling. People who do business there paint a different picture. When economic disaster strikes countries like China, Japan, India, Taiwan, and Singapore, these experts say, they can withstand it and eventually pull out, though the engines that drive recovery differ from country to country. Others remain wild cards.

Shaky economies like those of Indonesia, South Korea, and Thailand must take the drastic financial measures mandated by their IMF rescue packages. Usually they work, but sometimes they don't. In South Korea, for example, Real Gross Domestic Product (GDP) was growing at over 7% annually in 1996; two years later it actually shrank 1%. Domestic auto sales were down 50% last year, and plants are operating at only 40% of capacity.

According to Linda Lim, director of the Southeast Asia Business program at the University of Michigan, despite these grim numbers, the government has no plans to reduce assembly capacity, lay off workers, or pull back from overseas investments. Though the IMF is forcing reforms, Korea's all-powerful chaebols, or large conglomerates, continue to undermine the financial system by using funds from their profitable core businesses to buy unrelated businesses and guarantee their loans. When these subsidiaries fail, as they frequently do, the whole company and the bank that financed it may go down too.

On the plus side, Lim points to cheap currency and low asset values; a well-educated workforce; a large domestic market with a relatively high per capita income; government efforts to deregulate, restructure, and promote investment; and proximity to other Asian markets.

The Asian crisis hasn't hit India hard yet, and the country is something of a special case anyway. India as a potential market that could be bigger than China has been dazzling foreign automakers for decades. Government incentives to automakers helped push the Indian automotive sector up to $11 billion since 1993. Some automakers claim that a million Indian households can afford to buy a car now, double that number by 2000. This enthusiasm has not been dampened by the bad highways or the fact that when Indians do buy passenger cars, according to Pradeep Chhibber, a political scientist who directs the Center for South and Southeast Asian Studies at the University of Michigan, they favor the tiny Maruti, made by domestic automaker Maruti Udyog.

"Every major automaker has established itself in India, and every one is losing money," Chhibber says. He projects demand in the year 2000 not in the millions but about half a million. In fact, he says, the favorite vehicles in India are not cars but two-wheelers: 1.3 million of them were sold in five months last year, compared to 166,000 passenger cars. In 1997-98, scooter sales were up 30% and motorcycle sales up 18%.