Advent of Fuel Efficient Cars in ASEAN

March 2014

Executive Briefing

By Frost & Sullivan

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Contents

Overview of ASEAN

A Quick look at 2013 and Outlook of 2014

AEC – the game changer

Snapshot of Malysia’s NAP

Developments in Fuel Efficient Car segment

Policy Comparison

Opportunities

Introduction to Frost and recent offerings

3

ASEAN is currently 7th largest region, likely to become 5th largest region ahead of Japan and Russia by 2020

Rank Country Sales in 2012

1 China 19.12

2 USA 14.47

3 Japan 5.26

4 Brazil 3.51

5 Germany 3.30

6 India 3.27

7 ASEAN 3.22

8 Russia 2.93

9 UK 2.29

10 France 2.28

Rank Country Projected Sales 2020

1 China 34.65

2 USA 17.44

3 India 9.87

4 Brazil 5.75

5 ASEAN 4.38

6 Japan 4.29

7 Russia 4.18

8 Germany 3.37

9 UK 2.79

10 France 2.65

Retail sales in millions

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Japanese players dominate the passenger cars market in Thailand and Indonesia; National makes account for ~60% in Malaysia

Market Market Leader

Brand 2 Brand 3 Brand 4 Brand 5 Key Takeaways

Thailand

34% 25% 16% 7% 6%

Japanese players dominate the market

with ~90% share

Other key players are Ford (6%) and

Chevrolet (4%)

Indonesia

37% 16% 9% 9% 9%

Japanese players dominate the market

with ~95% share

Malaysia

34% 26% 13% 6% 5%

National makes control majority of the

market share

Japanese players account for ~28%

market

ASEAN Automotive Market: Key Players

5

ASEAN countries however, are not very homogenous. Among top 5 Auto markets, Indonesia is the largest and fastest growing economy

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2,000

2,200

0 50 100 150 200 250 300

GD

P (

US

$ b

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Population (million)

GDP vs. Population, ASEAN, 2012-2017

Malaysia Thailand

Vietnam

Philippines

Indonesia

• All countries are likely to grow at a CAGR of 6-9% in the next 5 years with the exception of Indonesia at 16%.

• Growth in population is averagely staying between 1-2%

• Indonesia is predicted to be the fastest growing country in next 5 years with increase GDP per capita are likely to be more than 13%

Note: Size of bubble indicates per capita GDP. Source: IMF, Frost & Sullivan analysis.

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Key Highlights of 2013

• Top 5 ASEAN markets reached 3.5 mn units of total industry volume

• Thailand remained the largest market however, saw a steep decline of 8%

• Indonesia continued to grow inching closer to its no. 1 position

Growth in ASEAN, decline in Thailand

• Indonesia, Malaysia and Thailand announced new policies for new class of products broadly classified as “Fuel efficient” vehicles

• LCGC policy rolled out in Indonesia, sales of 51,000 units in first 4 months

• Malaysia rolled out National Automotive Policy which focuses on Energy Efficient Vehicles

• Thailand annonced Eco car – 2 program to attract further investments in production capacity

Advent of Fuel efficient cars

• There has been some delay in the AEC implementation however there are some structural developments that point towards AEC being an inevitable development to unify the market

AEC implementation delayed but inevitable

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Fuel Efficient cars have changed the landscape in the top 3 ASEAN markets

Thailand’s First car buyer incentive program

Dramatic increase in Sub Compact and Compact car sales

Decisive consumer shift from pick-up

trucks to passenger cars

Malaysia’s continued tax break for Hybrid cars

Multifold increase in hybrid car sales in

Malaysia

Positive consumer attitudes towards Hybrid and EV

Launch of LCGC program in Indonesia

No luxury tax – hence 10% lower

price

Sales zoomed to 50,000 in first 4

months

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Country Share of Total Sales, ASEAN 2012-13

Despite lower sales, Thailand retained its position as the largest vehicle market in ASEAN due to rollover effects in H1 of the First Car Buyer Scheme

1,436 1,325

1,116 1,230

628 652

293 330

0

1,000

2,000

3,000

4,000

5,000

2012 2013

‘00

0 u

nit

s

Thailand Indonesia Malaysia Other ASEAN

Total Industry Volume (TIV), ASEAN 2012-13

3.47 million 3.54 million 2%

-8%

13%

4%

10%

However, Indonesia’s share in the overall ASEAN pie increased to 35% of the total market, closing the gap with Thailand (37%)

41%

32%

18%

8%

37%

35%

18%

9%

ASEAN SALES SHARE

2012 2013

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Country Share of Total Sales, ASEAN 2013-14

ASEAN Sales to remain flat in 2014 Growth in Indonesia, Malaysia and Rest of ASEAN to be negated by drop in sales in in Thailand

1,325 1,175

1,230 1,310

652 675

330 380

0

1,000

2,000

3,000

4,000

5,000

2013 2014 (F)

‘00

0 u

nit

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Thailand Indonesia Malaysia Other ASEAN

Total Industry Volume (TIV), ASEAN 2013-14

3.54 million 3.54 million 0%

-11.7%

15%

3.5%

6.5%

• Thailand’s share in regional sales to drop further from 37% to 33% • Indonesia, Malaysia and Rest of ASEAN increase their share

37%

35%

18%

9%

33%

37%

19%

11%

ASEAN SALES SHARE

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The AEC Framework Comprehensive economic integration, not just trade liberalization

Single Market & Production Base

• Free flow of goods

• Free flow of services

• Free flow of investment

• Free flow of capital

• Free flow of skilled labour

Competitive Economic

Region

• Competition Policy

• Consumer Protection

• Intellectual Property Rights

• Infrastructure Development

• Taxation

• E-Commerce

Equitable Economic

Development

• SME Development

• Initiative for ASEAN Integration to ensure technical and development cooperation along with integration

Integration with the Global Economy

• Coherent approach and “ASEAN Centrality” in external economic relations

• Enhanced participation in global supply networks

The framework comprises 4 key areas of integration

1 2 3 4

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AEC is likely to impact each player in the value chain, from OEMs to Component suppliers to countries

SCENARIO IMPACT

Impact on Key Markets

Impact on OEMs

Impact on Value Chain

Thailand

Indonesia

Malaysia

Parts & Component Suppliers

Assemblers

Dealers

JL : Japanese Large (Toyota, Honda)

JS : Japanese Small (Daihatsu, Suzuki)

LP : Local Players (Proton, Perodua)

HPC : High Potential Challenger (Ford, VW)

NP: Niche Players (Mercedes Benz, BMW)

NE : New Entrants (Tata, Chery)

1

2 3

12

AEC Implementation may happen in phases giving rise to multiple scenarios, each of them with different implications on value chain

Removal of Tariff Barriers

Mutual Recognition of Certification

Harmonization of Technical Standards

A B C D

SCENARIOS

ISSUES

CO

MP

LE

TIO

N

While Scenario A is the “worst-case” scenario reflecting status quo, Scenario D defines the most optimistic situation with all issues resolved and complete integration of the regional automotive sector a reality

Harmonization of Local content Certification

& Application of Rules of Origin

Streamlining of Customs Procedure

Full compliance Partial compliance Status quo Best case

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Status quo (scenario A) favors Large Japanese players who are challenged by their smaller Japanese counter parts

Champions

Explorers

Challengers

Defenders

NE NP

LP

JL

JS

HPC

-6

-3

0

3

6

-20% 0% 20% 40% 60%

Scenario A

Scenario A

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Full Implementation of AEC (Scenario D) would alter the competitive positions of Japanese small and High Potential Challenger segments dramatically

Champions

Explorers

Challengers

Defenders

NE NP

LP

JL

JS

HPC

NE

NP

LP

JL

JS HPC

-6

-3

0

3

6

-20% 0% 20% 40% 60%

Scenario D can be game changer

Scenario A Scenario D

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NAP : Strategic Imperative & Triggers The Malaysian Automotive Industry is plagued with structural weaknesses that make it harder to compete with Thailand and Indonesia for fresh investment and develop the local industry further

Small scale, fragmented volumes and high cost of production

Less aggressive country level growth & lack of export focus

CBU focus vis-à-vis component and sub-system focus

Lack of technology / know-how hampering vendor development

Protection of local industry at the cost of competitiveness

Key Issues &

Challenges

• Malaysian automotive market plans to liberalize and open up for global competition resulting from AEC implementation and commitments under various FTAs

• This has necessitated development of a policy and roadmap to improve the competitiveness of the local auto sector and ensure survival of Malaysian companies and protect employment

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1. Enhance Competitiveness of

Local Industry

Resolution of structural issues such as low

productivity, lack of scale, etc..

Greater export orientation and

integration with global supply chains

2. Make Malaysia a Hub for Energy Efficient

Vehicles (EEVs)

Market Liberalization through related

investment in EEVs

High technology uptake and development of local capability and

competency

Key Objectives of the Revised Automotive Policy Malaysia intends to take the industry forward through a two pronged approach

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Focus on 5 Key Enablers to help achieve twin objectives Imperative to instill competitiveness and enhance productivity across the value chain

Policy Facilitation

Productive Supply Chain

Competent Internal

Resources

Green Focus &

Orientation

Export led Growth

High Technology

uptake

• Benchmarking against Global Standards

• Participating in Global Networks

• Technology Roadmap

• Access through JV / Licensing

• New Growth Opportunities • Market Expansion &

Outreach • Revenue & Profitability

Enhancement

• EEV investment & infrastructure development

• Component level focus • Participation at Global level

• Human Capital Development

• Resource Acquisition through M&A

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Low Cost Green Car in Indonesia

Eco cars in Thailand

EEVs

in Malaysia

• Domestic Market Focused

• Price Cap ensures affordability

• Basic features / No frills

• Strong Export Orientation

• Production Volume Focus

• Euro 4 + / advanced

• Regional Aspirations

• No Binding Conditions

• Conventional to Advanced

Thailand, Malaysia and Indonesia have all embarked on “Low emission, high mileage” vehicles

Technology

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The ASEAN Green Car Conundrum The demand itself is a lot more coherent than the strategic approach and policy formulation. Though seemingly disparate the key markets have policy thrusts which complement each other

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• Heavy reliance on fuel imports increases vulnerability to volatile fuel prices • Increase in fuel import bill – rising deficit in Indonesia, etc.

Regional Green Car demand has been largely shaped through Government Policy based on 5 key factors

Fear of Technology

obsolescence

Environmental Issues

Global Market Context

The AEC Imperative

Dependence on Fuel Imports

• As a sizeable growing market if ASEAN does not keep up with the technology it may become a obsolete technology dumping ground for global players

• ASEAN among the regions most exposed to climate change. • Growing motorization and low fuel quality increasing pollution

• Opportunities for ASEAN as production hub as well as market for green cars • Greater integration with global supply networks & access to markets through FTAs

• Vital to develop competencies and establish competitive advantage as integration increases within ASEAN and the region turns into a single manufacturing base and market.

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THAILAND INDONESIA MALAYSIA

Eco Car – Phase 1 Eco Car – Phase 2 LCGC EEV

PR

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• Petrol cars: < 1,300cc

• Diesel cars: < 1,400cc

• Fuel economy: ≥ 20 kmpl

• Emission standard: Euro 4 or higher

• Carbon emission: ≤ 120g/km

• Safety standard: UNECE R94 & R95

• Petrol cars: ≤ 1,300cc

• Diesel cars: ≤ 1,500cc

• Fuel economy: ≥ 23 kmpl

• Emission standard: Euro 5

• Carbon emission: ≤ 100g/km

• Petrol ≤ 1,200cc • Diesel/semi-diesel ≤

1,500cc • Fuel economy ≥ 20

kmpl • Carbon emission ≤

120g/km • Fuel standards:

Petrol - RON92 Diesel - CN51

• All fuel types including petrol, diesel, Hybrid, EV and alternate fuels ≤ 2500cc

• Different fuel economy requirements for different kerb weights

• Emission levels to be announced

REQ

UIR

EMEN

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• Minimum investment: THB 5 billion (car assembly, engine manufacturing and component – excluding cost of land and working capital)

• Minimum production: 100,000 units within 5 years

• Manufacture at least 4 out of following 5 key engine parts: (1) Cylinder Head (2) Cylinder Block (3) Crankshaft (4) Camshaft (5) Connecting Rod

• Minimum investment:

Existing manufacturers: THB 5 billion

New manufacturers: THB 6.5 billion

• Minimum production: 100,000 units p.a. from 4th year onwards

• Price ≤ IDR 95 million (off the road, basic, excluding taxes)

• Price adjustments can be made for: Transmission

(automatic, dual clutch): 15% Safety features

(airbags, ABS): 10%

• No conditions for investment

Policy Comparison While the Thai eco Cars have stringent product and investment requirements, Malaysian EEVs cover the widest possible range of segments and vehicles

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THAILAND INDONESIA MALAYSIA

Eco Car – Phase 1 Eco Car – Phase 2 LCGC EEV

INC

ENTI

VE

• 8-year exemption on corporate income tax and machinery import duty

• 17% excise tax (instead of the normal 30%)

• Up to 90% reduction of import duties on raw materials and parts, depending on type of product

• 6-year exemption on corporate income tax, plus additional incentives for manufacturers sourcing local parts

• 14% excise tax (instead of 17% in Phase 1)

• 12% excise tax for cars compatible with E85

• Luxury Tax Exemption / Rebate

• On petrol (≤ 1,200cc) and diesel / semi-diesel (≤ 1,500cc) cars – 100% tax exemption

• For Hybrids, EVs and Alternate Fuel Cars 75% rebate for fuel economy 20-28 kmpl and 50% rebate on economy > 28 kmpl

• Customized incentives – combination of Pioneer status, investment tax incentives, grants, infrastructure facilitation, etc.

• Import & excise Duty exemption on Incentives (till 2015) and EVs (till 2017)

MA

RK

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OC

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PEN

ETR

ATI

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• Strong Export Orientation

• 50:50 split between export and domestic sales

• 34% penetration in the car market

• Strong Export Orientation

• 30:70 split between domestic sales and export

• Domestic Focus • 6% penetration in the

car market

• Export Growth objective

• Current penetration of 3% in the domestic market

Policy Comparison While Thailand provides a bouquet of incentives across income tax, excise duty and import duty, Malaysia has decided to customize its offerings based on how strategic the investment is

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Sales of Green Cars, ASEAN, 2013

• Sales of green cars in ASEAN has been growing at an incredible CAGR of ~ 90% p.a., driven mainly by the eco-car thrust in Thailand and hybrid surge in Malaysia. The TIV, on the other hand is only growing at about 17%

• The growth momentum is expected to continue for the next few years, as LCGC sales gather steam in Indonesia and Malaysia incentivizes their Energy Efficient Vehicles (EEVs).

Despite accounting for just over 11% of total car sales in 2013, demand for Green Cars has been growing rapidly (CAGR ~ 90%) across ASEAN

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1,269,142

1,608,331 1,653,831

2,169,788

2,400,000

21,461 51,182

100,598

256,751

275,000

0

100,000

200,000

300,000

400,000

500,000

0

500,000

1,000,000

1,500,000

2,000,000

2,500,000

3,000,000

2009 2010 2011 2012 2013

TIV Green Cars

Penetration 1.7% 3.2% 6.1% 11.8% 11.5% 67%

18%

7% 8%

Thailand Indonesia Malaysia Others

Thailand leads the Green car market

demand with a 67% share followed by

Indonesia.

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Key Opportunities due to Fuel Efficient Cars

Hybrid & EVs Service

Batteries and related

components

Power electronics and related

systems

Special tools and services

for fuel efficient cars

Lighter and greener

components

CNG cylinder and related components

CNG refueling

stations and related

components

Service stations for fuel efficient

cars

Skills training for fuel efficient

cars

Components for fuel efficient cars

• UK companies would be ahead on the learning curve on several high technology areas

• They can look strategic partnerships in this region to be a part of undeveloped but

growing market

• On the other hand competitive costs in this region could also be used as a cheaper

production base

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Our Value Proposition

Sector Expertise

• Consultants and Analysts with considerable experience in the automotive sector, across the value chain

• Complementary in-house expertise in other relevant sectors such as Business & Financial Services and Public Sector

Market Expertise

• Offices across ASEAN with dedicated team of local analysts and consultants, providing market insights and geographic expertise.

• Well-established local contacts in industry and government, providing easier access to information / primary research.

Subject Expertise

• Experience in managing highly strategic projects globally and locally – covering the entire ASEAN and beyond

• In-house experts with specialization in Trade Policy, Business Development, Opportunity Assessment, Automotive Operations, Sales & Marketing, Strategy, etc.

Our Value Proposition

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Frost & Sullivan has strong local presence in ASEAN

Dushyant Sinha

• Malaysia

• Principal

Consultant

• Tata

Vivek Vaidya

• Singapore

• Vice President

• Toyota, Bajaj

Masaki Honda

• Singapore

• Principal

Consultant

• Isuzu,

Bridgestone

Tran Le Kha

Vietnam

Research Analyst

Changi Airport

Team size : 15 covering all major markets

Silka Yosa

• Malaysia

• Research

Analyst

• Proton Edar

Sapthawee

• Bangkok

• Consultant

• Euromonitor

Vita Andini

• Indonesia

• Consultant

• Clarity Research

Firhan Nair

• Malaysia

• Consulting Analyst

• Farrine

Animesh Kumar

• Malaysia

• Principal Consultant

• Delloitte, Data Monitor

Dao Minh Thao

• Malaysia

• Research

Associate

Legend

Name

• Location

• Designation

• Past Employer

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Types of assignments handled

Governm

ent

departm

ents/

associati

ons

Passeng

er Car

Pick-up,

LCV,

SUV

Auto

Compon

ent OE

Auto

Compon

ent After

market

Tires /

batteries

Navigati

on,

telematic

s and

infotain

ment

Green

Car /

Evs/

Hybrids

Off-road

trucks,

construc

tion

equipme

nts

Two

wheelers

/ Electric

two

wheelers

Policy /

strategy

formulation /

implementatio

n support

√ √ √ √ √ √ √

Market entry

Strategy √ √ √ √ √ √ √ √

Product

testing /

product clinic √ √

√

Channel /

Distribution

strategy √ √ √ √ √ √

Customer

Satisfaction √ √ √ √

Branding

strategy/

brand tracking √ √

Strategic

partnership /

Customer

identification

√ √ √ √

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Objective and Scope

Objective

• Periodic monitoring of regulatory, legislative and trade policy developments in ASEAN

• To analyze the underlying factors and their impact on the market

Country Scope

• Thailand, Indonesia, Malaysia, Vietnam & Philippines

Key Management decisions

• Assess impact of policies on future strategy of the company

• Product Market strategy

• Production strategy

• Supply chain strategy

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Contacts for Further Information

Vivek Vaidya

Vice President Asia Pacific

Automotive & Transportation

+65.68900953

VivekV@frost.com