2. Development of the automotive value chains in the Mekong subregion

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1 2. Development of the automotve value chans n the Mekong subregon The automotve ndustry, whch covers all companes and actvtes nvolved n the manufacturng of automobles, parts and components, s the largest global ndustral sector wth a total unt producton of nearly 80 mllon n 2011 (OICA, 2012) and total sales of approxmately US$ 2.2 trllon n 2008 (FPRI, 2012). Its fnal products, parts and components are the second most-traded manufactured goods n the world after electronc applances and equpment, accountng for approxmately 7.5 per cent of world trade n Automakers have adopted an expanson strategy n, partcularly gven the maturng markets of the European Unon, Japan and the Unted States, wth growth comng partcularly from n developng countres (FPRI, 2012). Snce the 1960s, Thaland has gradually emerged as the major producton base of automobles and ntermedares for both Japanese and Western automakers. Later, the 1980s and the 1990s saw a wave of assembly and suppler plant constructon n Thaland and Vet Nam, respectvely, as declnng tarffs and transportaton costs allowed for more flexblty n assemblng vehcles and sourcng components from varous countres. The establshment of assembly lnes n Camboda n the 2000s further strengthened ths trend. Myanmar recently started the mass producton of commercal vehcles. Presently, major supplers have begun sourcng labour-ntensve parts and components from Lao People s Democratc Republc. Along the way, automakers have taken advantage of regonal trade and nvestment lberalzaton, such as the ASEAN Economc Communty v to develop producton facltes n and enhance the dvson of labour wthn the regon n order to acheve greater market access and economes of scale (Kohpaboon and Yamashta, 2011). v However, economc ntegraton has also evolved beyond the geographcal scope of ASEAN, buldng the formal economc partnershp of ASEAN+6 wth Chna, Inda, Republc of Korea, Australa, Japan and New Zealand. Table 1 summarzes regonal trade s pertnent to ASEAN and thus the Mekong subregon. 3

2 Table 1: Lst of regonal trade s ncludng the Mekong subregon Agreement Coverage Type Date of entry nto force ASEAN Free Trade Area (AFTA) ASEAN Trade n Goods Agreement (ATIGA) ASEAN - Chna ASEAN - Japan ASEAN Republc of Korea ASEAN - Australa - New Zealand Goods Free trade 28 January 1992 Goods Free trade 17 May 2010 Goods and servces Goods Goods and servces Goods and servces Partal scope and economc ntegraton Free trade Free trade and economc ntegraton Free trade and economc ntegraton Goods: 1 January 2005 Servces: 1 July January 2008 Goods: 1 January 2010 Servces: 1 May January 2010 ASEAN - Inda Goods Free trade 1 January 2010 Source: APTIAD (2012). Current sgnatory countres countres countres and Chna countres and Japan countres and the Republc of Korea countres, Australa and New Zealand countres and Inda Composton of regonal trade Plurlateral Plurlateral Blateral; one party s a regonal trade Blateral; one party s a regonal trade Blateral; one party s a regonal trade Plurlateral; one party s a regonal trade Blateral; one party s a regonal trade Subregon East and East and East and Oceana and and South 4

3 When lookng at the current tarff schedules for automobles and auto parts n the Mekong subregon (table 2), the countres n the subregon, except for Lao People s Democratc Republc and Myanmar, have provded preferental tarff rates wthn ASEAN, although automobles and auto parts appear on the senstve lst under the ASEAN Trade n Goods Agreement (ATIGA). Lao People s Democratc Republc and Myanmar apply flat rates wth 122 per cent and 30 per cent, respectvely, on both completely-bult unts (CBU) and complete knock-down (CKD) kts regardless whether t nvolves mports from wthn or outsde ASEAN. For the category of ntra-asean mports of CBUs, Vet Nam apples the second hghest rate wth 70 per cent whereas the tarff rates of Camboda and Thaland are sgnfcantly lower, wth 0 to 5 per cent and 0 per cent, respectvely. If the mported CBUs orgnate from outsde ASEAN, then Camboda, Thaland and Vet Nam use a 35 per cent, 80 per cent and per cent tarff, respectvely. Whle the same tarff rate s n place for both CBUs and CKDs n Camboda, Thaland and Vet Nam apply hgher rates on CKDs from outsde ASEAN (30 per cent and per cent, respectvely). The appled tarff rates for auto parts range from 0 per cent n Thaland, through 0 to 5 per cent n Camboda to 5 per cent n Vet Nam f the parts come from another ASEAN country. Otherwse, Camboda charges 7 to 15 per cent, Thaland 5 to 30 per cent and Vet Nam 0 to 30 per cent. It s thus clear that Lao People s Democratc Republc regulates automotve mports to the greatest degree, whle Camboda apples generally lower tarffs to open ts automotve market. Table 2: Tarff schedules for automobles and auto parts n the Mekong subregon Camboda Lao PDR Myanmar Thaland Vet Nam Current Tarff Rates for Personal Cars n per cent (Engne capacty < 2000 cc) CBU CKD Wthn ASEAN Outsde ASEAN Wthn ASEAN Outsde ASEAN Current Tarff Rates for Auto Parts n per cent Wthn ASEAN Outsde ASEAN 0-5 n.a. n.a n.a. n.a Source: Compled from data n the 2012 Annual Report of the AMEICC Workng Group on Automoble Industry. Note: CBU stands for a completely-bult unt, whle CKD s a complete knock-down kt. In addton to trade and nvestment lberalzaton, mprovements n transport nfrastructure and logstcs development have contrbuted to the expanson of the automotve value chans n the Mekong subregon. A number of cross-border road connectons and ther lnkages to seaports and arports wthn the subregon have been upgraded, a necessty n helpng facltate the movement of automotve parts and components (Ksoll and Brmble, 2012). Further, the sgnng of the Cross-Border Transport Facltaton Agreement (CBTA) by the fve countres of the Mekong subregon and Chna n 1999 was a major step n helpng to mprove cross-border logstcs. Ths ams to facltate and smplfy procedures requred for cross-border cargo transportaton, ncludng regulatons and measures such as sngle-wndow customs 5

4 nspecton, subregonal road transport permts and fast tracks at border checkponts (ADB, 2011). Table 3 provdes an overvew of the automotve ndustry and market n the Mekong subregon. The recent value estmates of automotve trades n the Mekong subregon are over US$ 19.1 bllon n exports and US$ 11.5 bllon n mports. Thaland and Vet Nam are the frst and second bggest tradng countres for automotve products n the subregon. Producton capactes demand and motorzaton rates n the subregon can also be seen n table 3. Thaland s by far the largest car market and vehcle producer n the subregon, whle Vet Nam s the second-largest car market and producer, accountng for 8.2 per cent of total vehcle producton n Thaland. It s mportant to note that car sales exceeded car producton n the countres n the subregon, except for Thaland, where approxmately half the volume produced was exported n 2010, manly to, South, Japan, the Mddle East and Oceana. Regardng Myanmar, t can be assumed that the number of vehcles sold also exceeds the number of vehcles produced, as the sales number for Myanmar does not reflect the mport of second-hand cars, whch s the major source of automoble supply. Generally, the observaton of ths sales-to-producton rato ndcates that opportuntes for expanson stll exst to serve consumer demand n ths subregon. 6

5 Table 3: Automotve ndustry n the Mekong subregon Country Populaton (mllon, 2011) 1 Populaton growth (per cent/year) 1 GDP per capta (current US$, 2011) 2 Camboda (estmate) Lao People s Democratc Republc Annual average GDP growth (per cent, ) 1 Export value of road vehcles (mllon US$, 2011, SITC Rev.2: 78) 3 Import value of road vehcles (mllon US$, 2011, SITC Rev.2: 78) 3 Total producton n unts (2011) 4 Total vehcle sales n unts (year) , , , ,000 (2011) Myanmar (estmate) ,779 1,779 (2011) Thaland , , , ,457, ,081 (2011) Vet Nam ,374 (estmate) , , ,533 (2011) Sales as a percentage of producton Motorzaton as unts per 1,000 populaton (year) (2005) -- 2 (2007) (2009) (2006) (2007) Sources: (1) World Bank (2012), World Development Indcators; (2) IMF World Economc Outlook Database (October 2012); (3) UN Comtrade (2012); (4) 2012 Annual Report of the AMEICC Workng Group on Automoble Industry (AMEICC, 2012); (5) ESCAP (2012) The Statstcal Yearbook for and the Pacfc 2012; (6) the author s ntervew wth automakers n Camboda; (7) estmate from the CIA (2012) The World Factbook for ; and (8) Internatonal Trade Centre (2012), Trade Map, HS 4 Code 87 (vehcles other than ralway, tramway). 7

6 Automotve producton and supply lnkages n the Mekong subregon through global value chans have been reflected n the ncreasng South-South trade flows of automotve products, such as parts, components, complete knock-down kts (CKD) and automobles, at both regonal and global levels. Fgure 2 llustrates varous regons share of automotve product flows wth the Mekong subregon, usng SITC Rev. 2 (78 for road vehcles). Durng the 2000s the mportance of South-South trade n automobles and ntermedates has ncreased, whle the mportance of advanced countres such as the European Unon 27, Japan and North Amerca declned or stagnated. In partcular, the share of automotve product trades wthn and wth the rest of the world have both ncreased. Fgure 2: Share of automotve goods trade, Mekong subregon 35% 30% 25% Percentage share 20% 15% 10% 5% 0% ASEAN Rest of the World Japan Other EU27 North Amerca Source: The author s calculaton usng data from the Unted Natons Comtrade. Evdence of strengthened lnkages wthn automotve value chans n the Mekong subregon s demonstrated by growng ntra-ndustry trade, measured by the Grubel- Lloyd (GL) ndex (cf. Srvastava and Kumar, 2012). Fgure 3 shows the GL ndex for automotve products between three countres n the Mekong subregon, namely Camboda, Thaland and Vet Nam. Intra-ndustry trade as compared to nter-ndustry trade has ncreasngly characterzed the trade of automotve products wthn the subregon durng the 2000s. Ths means that there has been growng trade wthn the automotve value chans across borders, n ths case, between Camboda and Thaland as well as Thaland and Vet Nam. In addton, the GL ndex has also rsen at the world level, ndcatng ncreasng ntegraton of the Cambodan and Vetnamese automotve ndustres wthn the global automotve value chans. The trend hghlghts that these value chans have been strengthenng both wthn and beyond the subregon. 8

7 Fgure 3: Growth n ntra-automotve ndustry trade 2000 to 2011 Grubel-Lloyd ndex of ntra-automotve ndustry trade Camboda-Thaland Camboda-World Vet Nam-Thaland Vte Nam-World 1 ( ) ], Source: ESCAP s calculaton usng the UN Comtrade database. Notes: The degree of ntra-automotve ndustry trade s measured by the Grubel-Lloyd ndex at the sectoral level (Grubel and Lloyd, 1975). Intra-ndustry trade s defned as the trade of goods between two countres wthn the same category of a standard ndustral classfcaton. The aggregated ndex X M s calculated as GL [ *100 = where GL s the Grubel-Lloyd ndex of ntra- X + M ndustry trade n product category I, and X and M denote total exports and mports of the product category, respectvely. GL takes value between 0 and 100. GL = 0 ndcates that there s only nterndustry trade n the respectve trade flows, whle GL =100 s nterpreted as there s only ntrandustry trade wthn the product category. The hgher the ndex, the more the ntra-sector trade between the countres. For ths case, SITC (Rev.2) two-dgt code (.e. 78 for road vehcles) was used. Export-sde data, a sngle seres of trade values, were taken as the base data except that Thaland s mports from Vet Nam were used due to the lack of Vet Nam export data n Total mports from the world were also taken as reported n the UN Comtrade. Fgure 4 presents the major motves for FDI n the automotve ndustry n the Mekong subregon. The man reasons for the expanson of the global automotve value chans can be grouped under three broad corporate strateges: (1) market access; (2) access to factor endowment; and (3) effcency maxmzaton. Frms are motvated to enter new markets for ther further growth (Cznkota and Ronkanen, 2007). It s also natural that frms seek to access low-cost labour, scarce materals and advanced technologes across the globe (Handfeld, 2007). They also am to reduce costs wthn the overall value chan for hgher productvty (Chrstopher, 2011), often through 9

8 offshorng. v Whle automakers and ther supplers seek resources and cost reducton by enterng the subregon, a majorty of automotve nvestors have amed to access the markets n the subregon through ther drect nvestment. Fgure 5 also shows the trend of strong FDI nflows to the automotve ndustry n the subregon. Fgure 4: Major motves of FDI for the automotve ndustry n the Mekong subregon Number of nvestment Market access Factor endowment Effcency maxmzaton Source: The author s complance based on the data of Fnancal Tmes Ltd., fd Intellgence (2013). 10

9 Fgure 5: FDI nflows to the automotve ndustry n the Mekong subregon 60 3, ,000 2,500 2,000 1,500 1, Number of projects FDI (US$ mllon) Source: The author s complance based on data from Fnancal Tmes Ltd., fd Intellgence (2013). Note: No FDI project for Lao People s Democratc Republc s reported durng the perod. 11