AEC could bring mixed blessings

The media has quoted optimistic views of analysts on the new era of the auto industry focusing on the AEC. Consultants have organised conferences around the topic to catch the attention of their prospective clients in the auto industry. Amid stagnancy in developed markets and slower growth in other emerging markets, Asean appears to provide a safe haven for anybody affiliated, and the concept of a more integrated market in the AEC additionally looks promising. The question is, however, is this for real?

Although we do not argue about the significant importance of Asean in its global automotive value chain and its members’ fast expanding car markets, we ascertain that there will be no significant or immediate impact resulting from the realisation of the AEC. This is because the AEC's central idea of a trade agreement is essentially nothing new, and because there are still huge challenges for additional cooperation of the framework.

The core of AEC is a tariff reduction agreement between member countries (Asean Trade in Goods Agreement ), which is essentially just a new alias for previous similar agreements including the Common Effective Preferential Tariff (CEPT) under the Asean Free Trade Area (AFTA), and an inclusion of a regional investment incentive programme, previously known as the Asean Industrial Cooperation (AICO).

While the AFTA/CEPT originated in 1993 and most tariff reduction targets were gradually completed by 2010, AICO began in 1996 and has since allowed approved projects the privileges of the final targeted AFTA/CEPT tariff rates.

These programmes have long been implemented, and have enhanced the regional automotive production network in Asean. Toyota’s utilisation of these programmes for the IMV project since 2004 is a well-known example. 

As of February 2013, the proportion of products with zero per cent tariff rates was already at 99 per cent for the six original members. For the other four – Cambodia, Laos, Myanmar and Vietnam, which joined later – the percentage was 69 per cent and the complete reduction is, in fact, scheduled later for 2018, not 2015. As a result, the implementation of AEC in 2015 will barely induce any additional impact further from the current trade scheme.

Furthermore, although a few new areas besides the tariff reduction were added into the AEC, which could potentially benefit the automotive industry in the long term, we do not expect them to generate any significant immediate impact. The newly established Asean Comprehensive Investment Agreement (ACIA) and the start of negotiation of the mega regional free trade area of the Regional Comprehensive Economic Partnership (RCEP), if successful, would certainly strengthen Asean as a single destination of investment, and thus empower its global automotive manufacturing status.

We doubt the success of ACIA, however, as member states share a similar industrial development path and compete for foreign investment. Current investment incentive programmes for the automotive industry, such as eco-car in Thailand, energy efficient Vehicles in Malaysia, and the Low Cost Green Car in Indonesia, clearly show the heated competition among Asean countries. Political obstacles also await the RCEP from both the inside and the outside. China, Japan, and Korea, which are all taking part in the negotiation, are unlikely to conclude any deal soon due to political tension, whereas the US has been backing a rival free trade area, the Trans-Pacific Partnership, for its presence in East Asia.

Another area of cooperation, which we anticipate would pose the largest likelihood of impact on the medium and heavy commercial vehicle sectors, is in transportation and logistics. Standardised and smoother custom procedures along border checkpoints, coupled with the currently increasing trend of cross-border trade, should understandably encourage more freight traffic on the mainland, and could even be extended to southern China. One big challenge that remains, however, is the members’ willingness and readiness to comply with the cooperation, which is currently far from our expectation.

The realisation of AEC at the end of 2015 would simply be another step towards the integration of the highly fragmented region. While OEMs will continue to be challenged by the diverse tastes of consumers in each of the ten different markets with comparatively small volume, the governments of late comers, and particularly Myanmar, will not yet have found a suitable place between liberalisation and protection.

 

Kon Thueanmunsaen is a senior analyst at Asean LMC Automotive. He can be contacted at [email protected]