Intenrational Business Essay Research Paper Turnover in

Intenrational Business Essay, Research Paper

Turnover in the Indonesian automotive components industry dropped by 80% in 1998, and the trend continued into 1999 despite efforts to generate exports and the cushion of a slightly more stable aftermarket. There were 171 local components manufacturers in 1998, employing 45,000 people–down from 65,000 the year before.

Like the vehicle industry, the Indonesian components industry now faces its greatest challenge to date–trying to overcome the worst crisis in the automotive sector’s history. Domestic demand has plummeted, and the economy is stalled. Trading conditions remain desperately subdued, with vehicle production now a tiny fraction of capacity levels. Inward investment has been delayed and in some cases diverted to other Asian countries in the light of the political and social instability in the country and, despite the elections, many political hurdles remain.

As a result of the troubles, many indigenous manufacturers are struggling to contain losses and remain in business. Those that have linked with foreign joint-venture partners are more likely to weather the crisis, but at a price. Most are expected to relinquish control and the industry’s need of recapitalisation has provided foreign partners with the opportunity to increase their equity holdings. Vehicle manufacturers have also done a lot to support their suppliers, in an effort to keep the supply chain intact. Nevertheless, the industry has been operating at a fraction of capacity, with extensive temporary closures and redundancies. As the impact of the crisis continues, many of these closures are likely to become permanent.

Assuming that some sort of political and economic stability returns soon– and that is a major assumption–then the outlook should begin to improve. Great challenges lie ahead, but the country does offer among the best opportunities for a regional production base, with among the lowest-cost labour rates and a domestic market with colossal long-term potential. With restored stability, investor confidence should eventually return.

This article is drawn from “World automotive components, 2000 edition”.

SOURCE: Automotive Research Report

There are many tales of misfortune in Asia but few are more sorry than that of the auto industry in Vietnam. It is a story of almost spectacular foolishness, driven by a blind desire to be first in a market that had not the slightest hope of being attractive anyway. Now, the multinational car and truck makers that have over-invested so rashly in the last few years face the prospect of an embarrassing and difficult withdrawal.

The story began in the early 1990s when the car and truck sectors of South Korea, China, India and the main ASEAN countries saw their most feverish expansion. Investment burgeoned as the world’s top vehicle producers convinced themselves that they had found the solution to their growth problems. It was no the longer dull, staid and mature markets of Europe, the US and Japan that were important. It was Asia.

As the fever spread, industry analysts were told to seek out the next market — to find virgin territory, to discover places where competitors had not yet ventured and where even faster growth might be achieved. The willing young executives eagerly searched their atlases for the answer. And, miraculously, they found what they needed. A market with almost 80m people right in the heart of Asia. One that was experiencing rapid economic growth. A country with a (seemingly) adapting political structure looking for inward direct investment. And a country with few cars and trucks. Vietnam.

And so began an incredible tale of misjudgement, over-investment and sheer folly — an excellent lesson in collective corporate madness.

The optimistic analysts had certainly found a market with some attractive features but they had not done their homework. It was true, for example, that the country had a large population and it was experiencing rapid economic growth. It also had few cars and trucks. And it was virgin territory, competitively.

But that was for a reason. There was no real vehicle industry in Vietnam because there was no real demand. Most of the vehicles on the roads were bicycles or (small) motorcycles and the few four-wheel vehicles that trundled around were typically ageing machines from another era (or the imported, gilded carriages of aid agencies). The market was dominated by used cars and trucks from Japan, the Soviet Union and, from a previous political incarnation, France. The fact that these were very old vehicles and that they broke down a lot did not mean that there was a huge pent-up market for new vehicles. It meant that there was a market for old, run- down and slightly decrepit ones.

And the explanation was simple. While the average income level of Vietnamese consumers was growing, it was still very low. GDP per head in Vietnam at the time was just over US$300 — around one-twentieth the level generally assumed to be necessary for a car market to take-off, and around half the level of even Pakistan at the time. The average newly-urban inhabitant of Hanoi or Ho Chi Minh cities barely aspired to a fridge let alone a Ford.

The carmakers had not done their homework in other ways, too. They had not looked properly at the changes taking place in the political system. Vietnam was not so much emerging from, and shedding, communism as merely tinkering with, and adapting, its peculiar (slightly less dogmatic) brand of Stalinist ideology; the ground rules essentially remained the same. Vehicle makers failed also to look thoroughly enough at the sales process, at the distribution network, the financing of car sales and the labour practices of local employees. They did not look at the state of the road network or the plans of the competing (and far more appropriate) motorcycle sector. Worst of all, they failed to take account of their competitors. Each thought that they alone had discovered a new market.

By early 1995 two assemblers had been established. Both made vehicles from kits shipped into the country, virtually complete. Mekong Corporation had been set up in 1991 and produced Ssangyong 4WD (four-wheel-drive) vehicles from South Korea as well as some light trucks and buses in co-operation with Fiat’s Iveco division from Italy. Vietnam Motor Corporation (VMC) had started operations in 1993 assembling (Korean) Kia- and Mazda-designed cars as well as a small LCV (light commercial vehicle) through a venture with Kia’s Filipino associate Colombian Motors. In 1995 VMC had also agreed to start assembling BMW cars.

Over the next few years additional assemblers were set up as many of the other big car and truck makers poured into the country. First was Vina Star, to produce Mitsubishi minibuses and LCVs as well as Proton cars from Malaysia. Next was VIDAMCO to build Daewoo cars, and then May 1st Automobile Plant for Mercedes vehicles. In 1996 Toyota Motor Vietnam joined the fray by starting production, closely followed by (truck-making) affiliate Hino and then General Motors Vietnam and Vindaco (Daihatsu). Isuzu, Ford, Suzuki and others came too.

Although less than 15,000 new vehicles were sold each year, a total of nine assemblers were up and running. As some were making more than one brand of vehicle, it meant that 13 of the world’s vehicle makers had a local presence by the end of 1997. With their Vietnamese counterparts, they had set up the capacity to make more than 75,000 vehicles a year according to the EIU; some claim the true figure was nearer 180,000.

Initially, the bemused Vietnamese were keen to see the investment. They shelved a “Master Plan” for the development of the industry produced in 1993 — which would have restricted the number of assemblers — and welcomed the newcomers warmly.

But within a few months the government also became worried about the impact of so many vehicles coming on to the domestic market. With little local content, senior officials realised that these would lead to a vast increase in imports at a time when the value of the currency, the dong, was already under pressure. While some saw the entrants as just an irritation — “when you open the door to let in some fresh air, you also let in dust” — others saw trouble.

With concerns about the impact of inward investment in other industrial sectors growing too, the government began a campaign against what it claimed were the social evils that foreigners, and certain foreign businesses, inflicted. This turned back the tap of reform and made life harder for the new firms.

In the automotive industry the government announced that the time horizon to develop a car for local use was to be 2020 — almost a generation away. It then cut the number of vehicles that could be imported each year, whether as completely built-up units or as kits. Regulations were introduced to force local assemblers to increase the local-content level – - a stipulation that was nigh on impossible given the rudimentary development of the local parts industry.

Then, of course, the Asian economic crisis hit, underlining the growing belief in government that opening up to the West was tantamount to inviting disaster.

As the government’s changes came into effect and the economy tumbled, the market began to shrink, particularly in the passenger car sector. Instead of almost 15,000 new vehicle sales a year, demand fell to less than 6,000 in 1997 — one-thirteenth the estimated capacity. It remained flat the following year and then fell a further 15% in 1999.

It did not take long for the country’s car and truck makers to realise they had made a large and rather dreadful mistake. Vietnam Motor Corp — the second-largest assembler — collapsed. And as the dong continued to weaken and worries about the trade deficit remained, the prospects of a rapid recovery in local demand grew ever more faint. If it was not for the distractions of other markets, where the drop in sales had been more serious, there is little doubt that there would have been a wholesale withdrawal from the Vietnamese auto sector last year.

While the story is not yet over, the end is at least becoming clearer. In 2000, sales are showing signs of dropping further still — to just 4,300 new cars and trucks, one-seventeenth the available capacity. Instead of a market for tens of thousands of cars and trucks a year as the entrants had hoped, the industry now faces the prospect of abandoned factories, layoffs and closures. Few of these consequences will find favour with the government. The costs of retreat will thus be high. Yet they will be vastly overshadowed by the costs of remaining.

With hindsight, it may seem easy to see that the world’s car and truck makers were deluding themselves in Vietnam. But it was also predictable. In 1996 the EIU wrote that Vietnam faced an “awful lot of idle auto factories in ten years time”. With recent events, even that was optimistic. Come 2005 there are unlikely to be many factories at all.