Given a choice, Southeast Asians would probably prefer to be left alone. Thais, Indonesians and Malaysians live in a tropical paradise. They eat tasty food, drive lots of Hondas and Toyotas and live a life that is relaxed and easy.
But it is already too late. The door that opened a crack to let in foreign investment during the 1990s also let in the new agents of change. What does the newest intruding agent - global economic competition - want? Market access. And the intruder wants it sooner rather than later.
In 1996 the nations of Southeast Asia announced plans to create a free trade area for cars in 2005. By that year, Thailand, Malaysia, Indonesia, Vietnam, the Philippines and five smaller neighbors were to reduce tariffs on cars and trucks to 5 percent or less. That was a bold leap for a set of countries that carry some of the highest duties in the world. Southeast Asian industry leaders proclaim that free trade is just around the corner.
'We'll see a free flow of cars between Thailand, Indonesia and the Philippines by 2003. And Malaysia will join two years later' says Aishah Ahmad, president of the ASEAN Automotive Federation.
Ask someone closer to the street and the picture changes. For Chips Yap, a Malaysian auto industry expert, free trade still is a distant dream. 'Although the official stand is that Malaysia will stick to the 2005 deadline, there is still a lot of pressure from companies who fear that an open market will kill them,' he said.
On paper, the ASEAN Free Trade Area looks like a good deal. Uniting the 10 countries of Southeast Asia into a single commercial union will create a market of 500 million people quickly. Manufacturers will build cars and trucks more efficiently by concentrating high-volume production of different models in different countries. Today, protectionism forces Toyota to assemble small volumes of the same Corolla model in five countries. It is hard to imagine a less efficient manufacturing system.
Consolidation would produce substantial cost savings, permitting manufacturers to deliver higher-quality cars and trucks for less money. 'To an investor, a single market looks a lot more attractive than several smaller markets,' says Jerry Kania, President of Ford ASEAN Operations Ltd. in Bangkok, Thailand.
Despite the promised benefits of tariff reduction, not everybody is in a hurry to open up. Malaysia in November petitioned its neighbors for - and won - a two-year extension on free trade. From Vietnam to the Philippines to Thailand, the pace of reform is deliberate. Markets remain mostly shut and independent. Imports account for less than 5 percent of sales. Duties are stuck at forbiddingly high rates of 60 percent to 200 percent. In Thailand, for example, an imported Ford Ranger pickup costs $17,000 compared with $10,000 for the same one built inside the Kingdom.
Left alone, the countries of Southeast Asia would happily remain separate, protected and comfortable, just as they have for the last 30 years. But those days are over. Crashing Southeast Asia's comfort zone are two strategic trends that will force Southeast Asia to change - whether it is ready or not.
The first is China. The Middle Kingdom is soaking up tens of billions of dollars of foreign investment. China's gain is Southeast Asia's loss. During the late 1980s and early 1990s, Southeast Asia was the darling of foreign investors. Eight out of 10 dollars flowing into Asia during that period went to Southeast Asia. China, which at the time was perceived as a high-risk bastion of communism, drew less than 10 percent of the total. Today, China swallows a greedy 80 percent of investment -$40 billion - coming into Asia (not counting Japan). Countries such as Thailand, the Philippines and Malaysia must fight for a share of what is left.
In the long run, China looks to divide and conquer Southeast Asia by exporting vehicles that are so cheap they are impossible to resist. Already Chinese truckmakers Dongfeng Motors and First Auto Works export thousands of medium-duty trucks to Vietnam and Burma, while cheap Chinese motorcycles pour into Indonesia.
The second strategic change? Southeast Asia is turning into an arena for global competition. That has not always been the case. In 1990, Japanese brands accounted for 98 percent of sales in the region.
When I ordered a Honda Accord from a Thai dealer in 1990, I waited six months for delivery and had to pay cash. So strong was the Japanese oligopoly here that people routinely referred to Southeast Asia as Japan's backyard.
Today the Japanese still hold 85 percent of the market. But now they are trying to stave off aggressive challenges from Ford, General Motors and DaimlerChrysler. In Thailand, Ford has captured 10 percent of the pickup truck market in less than two years since building a plant there. GM has invested $750 million in a sophisticated factory to produce 100,000 Opel Zafiras per year. The Zafiras are exported to markets worldwide, including Europe, South Africa and Taiwan.
POLITICIANS ARE RELUCTANT
The American automakers' strategy is clear. By exporting from the region, they can achieve production volumes that match or exceed those of entrenched Japanese who enjoy a tight hold on domestic sales. Mitsubishi, Honda, Isuzu and Toyota have responded by starting their own export programs.
With production now oriented for export, it is natural for both Japanese and American companies to want easier market access. They are lobbying nations in that region to fulfill their promise of automotive free trade.
'We are working very hard with Malaysia,' says Kania of Ford. 'To delay will hurt more than it helps.'
Japanese, European and American automakers agree that the regional tariff walls must come down on schedule. But powerful politicians see things differently. For them, China and foreign investors represent threats to local auto industries. 'We did not work 30 years building our industry to just let it get blown down in one big puff,' says Preecha Yongjayut, a Thai customs official.
Malaysia is the most reluctant reformer. Its homegrown Protons capture 60 percent of the local market, thanks to tax subsidies. Mitsubishi, a minority shareholder in Proton, recently warned the Malaysians that Proton's share would be slashed to 30 percent in a hurry once free trade starts. 'They'd get their lunch eaten,' confirms Ford's Kania. Malaysia's Chips Yap says that the absence of any phased reduction in tariffs between now and 2005 suggests that the government 'is not serious enough.'
The Malaysian Automotive Association says there still is no indication that the region will phase in its tariff reductions until an abrupt drop in duties on January 1, 2005.
By contrast, Thailand wants to accelerate reforms. Thanks to favorable investment policies that include 100 percent foreign ownership rights, the Kingdom has captured 90 percent of regional automotive investments since 1995. Thailand also boasts the strongest component industry in Southeast Asia. At the same meeting where Proton won a two-year reprieve on reforms, ASEAN members also approved a special protocol allowing any country to delay tariff reductions if a particular industry is not ready for competition. This provision severely undermines hopes for a free trade agreement.
Is free trade in Southeast Asia nothing more than wishful thinking? Judging by the backsliding in November, there is good reason to believe Southeast Asia will slow-walk the transition to a free-trade union. But looming competitive threats from China and global automakers probably will force a slightly quicker pace. Southeast Asia must face the competition. Says one senior auto executive: 'They really do not have a choice.'
E-mail writer Michael J. Dunne at [email protected]