IIF INSIGHT

Asia Regional: Vehicle Sales Shift into Low Gear

December 21, 2011

Kevin Sanker
RESEARCH ASSISTANT Asia/Pacific Department

Robust vehicle sales in 2010 faded in 2011 Supply disruptions in Japan and Thailand have hurt sales Slowing vehicle sales are also signaling weaker domestic demand

1-202-857-3314 ksanker@iif.com

Payne Simpson
STAFF ASSISTANT Asia/Pacific Department 1-202-857-3619 [psimson@iif.com

SLOWING SALES IN 2011 FOLLOW BOOM IN 2010 Total vehicle sales in the leading emerging markets in Asia were 4% greater in the first eleven months of 2011 than a year earlier, well below growth of almost 33% in the same period in 2010 (Chart 1). Part of the slowdown reflects a natural adjustment to the 2010 buying boom that has led to the expansion and modernization of national fleets, but supply disruptions in Japan and Thailand have also played a role. Sales previously were buoyed in some countries by temporary fiscal subsidies and incentives aimed at countering the potential adverse impact of the global financial crisis. Sales growth slowed sharply during the past year in China, which accounts for almost threequarters of total sales for the leading emerging markets in Asia. Total vehicle sales in China were 3% greater in the first eleven months of 2011 than a year earlier, well below growth of 34% in the same period in 2010 (Chart 2). Growth in sales for the other leading emerging markets in Asia decelerated to 6% in the first eleven months of 2011 from almost 29% in the same period a year earlier.

Chart 1 EM Asia: Total Vehicle Sales 2011 percent change from previous year 16 12 8 4

Chart 2 EM Asia: Total Vehicle Sales 2011 percent change from previous year 24 18 12 6 0 EM Asia excluding China

0 -4 Jan Mar May Jul Sep Nov

-6 -12 Jan Mar

China

May

Jul

Sep

Nov

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IIF INSIGHT

Asia Regional: Vehicle Sales Shift into Low Gear

Diminished fiscal incentives also played a role in slowing sales. The Chinese government had cut the tax on small passenger cars with engine capacities of 1.6 liters or less from 10% to 5% in January 2009, but raised it to 7.5% in January 2010 and back to 10% in January 2011. In June 2010, the government provided a cash subsidy of RMB3,000 ($500) for the purchase of small cars that was scaled back in the beginning of October 2011 which helped to offset part of the tax hike. Sales have been hurt during the past year by measures local governments have taken to try to alleviate traffic congestion, such as limiting the issue of new license plates and prohibiting the days which a vehicle may operate. Even with slowing sales, China has become established as the world's leading market. Total vehicle sales reached almost 17 million units in the first eleven months of 2011, up from 9.4 million units for 2008 as a whole. Although total vehicle sales in the U.S. rose 10% in the first eleven months of 2011 from a year earlier to almost 11.5 million units, this was about one-third less than sales in China (Chart 3). China first began selling more vehicles than the U.S. in early 2009. India is now the second largest market among the leading emerging markets of Asia behind China, and the softening in sales appears as more related to domestic market conditions than to external supply disruptions. Total vehicle sales were 7.5% greater in the first eleven months of 2011 than a year earlier, down from growth of 35% in the same period in 2010. In addition to rising fuel prices, the steady increase in interest rates has been progressively hampering sales. Growth in vehicle loans between March and October 2011 eased to 7% from 13% in the same period a year earlier. SUPPLY PROBLEMS HURT SALES Dislocations caused by the widespread floods in Thailand pulled down sales at the beginning of the fourth quarter. Total vehicle sales dropped sharply from a six-month high of 87,000 units in September to 43,000 units in October and 26,000 units in November (Chart 4). While Thailand accounts for only 3% of vehicle sales in the region, its importance as an export base and as a parts supplier means that supply difficulties have had an impact beyond its borders.
Chart 3 Vehicle Sales thousands of vehicles 5000 4500 25 4000 3500 3000 2500 U.S. 2000 1500 2008 2009 2010 2011 -50 -75 Jan Mar May Jul Sep Nov Japan 0 -25 China Chart 4 Vehicle Sales 2011 percent change from previous year 50 Thailand

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Asia Regional: Vehicle Sales Shift into Low Gear

In contrast, Japan quickly recovered from the severe dislocations caused earlier in the year by the earthquake and the tsunami. Vehicle sales in Japan peaked in mid-2010 and were already on a slowing trend prior to the earthquake, but the damage reduced sales in the second quarter of 2011 by 36% from the level a year earlier. While vehicle sales rebounded from a low of 108,000 units in April 2011 to 252,000 units in November, this was still 6% lower than the monthly average sales of 269,000 units in 2010. Supply problems in Japan depressed sales in the second quarter across the region and several countries have been adversely affected in the fourth quarter by Thailand. The Philippines was also hit hard by external factors and is the only other country besides Japan to experience a decline in sales. Compared with growth of 30% in the first eleven months of 2010, total vehicle sales were 15% lower than the same period in 2011. Toyota, Mitsubishi and Honda are the top three sellers in the country and they all experienced production dislocations this year. In Indonesia, sales in the first quarter of 2011 averaged 75,000 units per month, up 30% from the level a year earlier, but dropped 15% to an average of 64,000 units per month in the second quarter due to the earthquake in Japan. While sales recovered in the third quarter to reach 86,000 units in October, they fell by 22% to 67,000 units in November due to the floods in Thailand (Chart 5). The strained external supply chain may turn out as a longrun benefit to Indonesia as reflected by Toyota's recent announcement that it plans to invest Y30 billion ($385 million) to double its production capacity in West Java. Nevertheless, total vehicle sales were 17% greater in the first eleven months of 2011 than a year earlier, making Indonesia the strongest performer in the region. Malaysia was also affected by the dislocations in Japan and Thailand, but its sales have been more resilient and less volatile than its neighbors. Total vehicle sales in the first eleven months of 2011 were close to same level a year earlier, but this compares with growth of 13% in the first eleven months of 2010. In contrast to Indonesia and Thailand, all of the vehicle production in Malaysia is for domestic consumption. Moreover, with one out of every four Malaysians owning a car, sales are more closely tied to replacements and upgrades rather than serving an expanding market.
Chart 5 Vehicle Sales 2011 percent change from previous year 75 60 45 30 15 0 -15 -30 -45 Jan Mar May Jul Sep Nov 0 2008 2009 2010 2011
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Chart 6 Korea: Vehicle Sales thousands of vehicles 500 Domestic sales 400

Indonesia 300 200 Philippines 100 U.S. sales

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IIF INSIGHT

Asia Regional: Vehicle Sales Shift into Low Gear

Korea is the third largest market in the group, and sales typically experience seasonal weakness at the end of the year. This years weakness may have been exaggerated by renewed global financial turmoil and uncertainty. The high level of household debt may also be discouraging big-ticket purchases. Total vehicle sales were 1% greater in the first eleven months of 2011 than a year earlier, down from 7% in the same period in 2010. In contrast, sales of Korean vehicles in the U.S. were 27% greater in the first eleven months of 2011 than a year earlier, up from 20% in the same period in 2010 (Chart 6). Hyundai and Kia sales captured almost 9% of the U.S. market in November 2011. Vehicle production and sales played an important role in quickly reviving regional growth in the aftermath of the global financial crisis, but it would be hard to replicate another boom cycle like the one that occurred in 2010. Although recovery in Thailand is likely to take longer than Japan, the supply disruptions that plagued sales in 2011 should run their course during the first quarter of 2012. Demand factors will be a more prominent figure in determining sales over the near term, and the moderating trend of the past year suggests that the auto sector will perform in line with the rest of the economy.

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