Commercial Vehicles To Remain At The Forefront


BMI View : While there have been many positive market entry developments in Myanmar's nascent auto industry, not least due to the country's vast untapped consumer market, we believe new car sales will nonetheless remain slow in the short- to medium term, given low consumer purchasing power. We see greater potential in the commercial vehicle sector, which we expect to benefit from a plethora of opportunities such as construction, industrial and tourism sectors. Myanmar's ageing vehicle fleet throws up opportunities for replacement part suppliers as well as after-sales service providers.

Consumer Story Will Be A Slow Burner

Decades of isolation and crippling sanctions have resulted in Myanmar's vehicle fleet being one of the oldest in the world. But, with GDP per-capita incomes (slightly under US$1,000) still considerably lower than other regional country peers, we see this as a hindrance to mass market affordability for new cars. It is only sometime after 2020, the year when we forecast GDP per-capita to surpass US$3,000, that a case for strong new car adoption rates can be made. In the short- to medium term, we see the used-car segment still making up a larger share of the passenger car market.

Car import data from the Myanmar Customs Department supports our view. Of the 130,000 cars imported from October 25, 2011 to January 25, 2013, roughly 62,000 were used cars, 27,000 were for car showrooms and the rest were for miscellaneous use. With vehicle import restrictions on citizens lifted in July 2012, we expect to see a greater number of consumers importing used cars, which are just a few years old, to replace their existing cars.

We still see value in auto brands establishing a toehold in the market. The low base of new car sales suggests to us that there are attractive growth opportunities for automakers looking to enter the market through dealerships. However, we would caveat that companies need to temper their sales expectations and may even need to embrace the possibility of making initial losses due to the following reasons:

  • Mandatory tie up with local agents: This rule requires automakers to partner with government-approved agents in order to distribute their vehicles through dealerships. By no means exhaustive, the table below highlights some of the carmakers, which have begun to distribute vehicles locally or have expressed interest in doing so.

CARMAKERS ENTERING MYANMAR
Automaker Distribution Partner
Source: BMI
Hyundai & Kia Motors Diamond Star
Kia Motors Super Seven Stars Motors Industry Co
General Motors Company Pacific Alpine
Ford Capital Automotive
Jaguar Land Rover Currently in talks with three prospective partners
Toyota Currently in talks with partners
Scania Octagon International Services
Tata Motors Apex Greatest Industrial
TSL Auto Corporation Unknown

We see distribution partners having greater bargaining power in this regard and carmakers will probably need to sacrifice margins in order to establish a relationship with a local agent.

  • Import taxes: Although vehicle import taxes having been falling in the past few years, they still remain high for passenger cars, posing another hurdle to carmakers looking to price their cars affordably. Automakers may need to absorb these taxes and sell cars at a loss, in exchange for being able to create brand awareness and giving themselves a first-mover advantage in a virgin market.

VEHICLE IMPORT TARIFFS
Customs Tariff Rate Commercial Tax Rate
Source: BMI, Myanmar Customs Department
Commercial Vehicle (Includes taxi, medium and heavy truck, bus, and certain pick-up trucks) 3% 5%
Passenger Car (2000cc and below) 30% 25%
Passenger Car (Above 2000cc) 40% 25%

Dealerships Still The Less Risky Option For Now

While local car assembly operations will help to circumvent the import taxes, we still believe entering a frontier market such as Myanmar through dealership partners remains a less risky strategy for now, in part due to the lower capital investment requirements. Once sales volumes pick up, local manufacturing operations can be justified. While Chinese carmaker, Chery Automobile, is assembling its cars in Myanmar, it is able to do so at very competive prices, and we do not believe every automaker can replicate that strategy.

Proximity With Thailand Will Benefit Vehicle Imports

We see Myanmar's geographical position of being next to South East Asia's leading auto production hub, Thailand, as a distinct advantage. Should passenger car sales volumes rise in the future and import taxes further reduce, international automakers can continue manufacturing at their Thai production facilities (if they have one), where they enjoy economies of scale as well as Thailand's more conducive environment, and then transport their fully-built cars into Myanmar.

Rather than the more common sea freight route, we see road freight as a viable alternative to transport fully-built vehicles from Thailand into Myanmar. The short distance between the countries, together with reduced paperwork and the elimination of a shipping agent, clearly gives automakers more options.

Commercial Vehicles Will Be At The Forefront

It is in the commercial vehicle (CV) market where we see better prospects for automakers in the short- to medium term, given the urgent development needs of the country. It is no surprise then that import tariffs on CVs are much lower than those on cars as the government deems them a necessity.

Toyota Motors plans to enter Myanmar using its subsidiary, Toyota Tsusho Corporation. The firm is in talks with various factories and industries to sell its forklift trucks. As industrial production takes off in the country, we expect to see rising demand for capital goods such as these.

CV manufacturers such as Isuzu Motors and Tata Motors are already operating assembly plants in Myanmar. Tata plans to additionally import around 60,000 one-tonne pickup trucks a year from Thailand. Also, Suzuki Motors, is slated to re-open its existing assembly factory by 2015. We see great opportunities for firms due to the sheer number of developmental projects underway. There is already demand in Myanmar for heavy trucks used in infrastructure and dam building projects and this will increase as improved roads create better conditions for long-haul transportation of goods.

Recent foreign direct investment (FDI) flows are a good proxy for the surge in gross fixed capital formation growth in Myanmar. In FY2012/13, FDI rose to a record US$1.4bn, a 211% increase. This suggests to us that demand for CVs is going to outstrip the current availability of vehicles.

Surging Capital Investment In The Country
Myanmar - Yearly FDI Inflows, US$mn

Furthermore, tourism numbers are skyrocketing with 1.06mn visitors arriving in 2012, a 30.0% increase. Record arrivals are already creating a shortage of related services such as hotels, and also transportation. According to Myanmar's Ministry for Hotels and Tourism, tourism arrivals are forecast to exceed 7mn people by 2020 and we see huge upcoming demand for buses, vans and coaches.

Another Positive For The CV Sector
Myanmar - Yearly Tourist Arrivals, 000s

The Philippines can also serve as an example of the importance of CVs in early emerging/frontier markets. CV sales growth in the Philippines has outperformed passenger car sales growth in the past four years and CVs continue to make up two-thirds of total auto sales in the country. Only recently have passenger car sales grown on a par with CV sales, due to the consumer story in the Philippines finally taking off.

Tremendous Opportunities For Parts Suppliers

Our forecast for second-hand car sales to dominate in the passenger car category, as well as the country's ageing vehicle fleet, highlights ample opportunities for parts suppliers. After-sales service and replacement parts procurement will be important considerations for motorists.

DENSO, a tier-one global supplier, has already expressed an interest in selling replacement parts in Myanmar. With a large part of Myanmar's car market dominated by used Japanese cars, we see this as another positive for the firm, given that it is already a major supplier to Japanese automakers such as Toyota.

Can Myanmar Become An Auto Manufacturing Hub?

The presence of abundant and cheap labour in Myanmar does beg the question of whether the country can successfully use this resource to transform itself into an auto manufacturing hub with the likes of Thailand and Indonesia. On this front, we are not optimistic that a vibrant local auto manufacturing industry will be able to take root.

We note that many automakers are wary of setting up fully-fledged car manufacturing plants, especially until after the outcome of the 2015 elections. Property laws and rights under the new investment bill remain untested. Furthermore, the onset of the ASEAN Economic Community in 2015 will see tariffs between ASEAN countries eliminated causing intra-country trade to accelerate. Such a scenario will cause automakers to double down on existing production hubs in Indonesia and Thailand now rather than establishing new facilities in countries where the business environment still remains fragile.

This article is tagged to:
Sector: Autos
Geography: Myanmar, Myanmar, Thailand, Myanmar, Myanmar