International Corporate Finance of Automobile Market in Thailand and Malaysia - Coursework Example

INTERNATIONAL CORPORATE FINANCE A STUDY OF AUTOMOBILE MARKET IN THAILAND & MALAYSIA Table of Contents Page 2 Introduction 3 SWOT Analysis 4 Situation in Thailand 5 Situation in Malaysia 6 Recommendations 7 Conclusions 8 Bibliography 1 Abstract The automobile manufacturing environment in Thailand and Malaysia has been analyzed for an international manufacturer. A SWOT of the industry in both countries was prepared in this connection. Various government policies and several theories on international Trade have been examined. The ground realities were also discussed. It has been established that both the ASEAN member countries have pros and cons but the scale favours Thailand both on count of open FDI policy as well as better labour conditions. It has therefore been recommended that Thailand presents a better environment for investing and setting up of an export oriented automobile manufacturing unit. 2 Introduction An enquiry has originated from The Flying Emu, Investment Bankers, on behalf of an International Automobile manufacturer desiring to establish a manufacturing base either at Thailand or Malaysia. The task necessitates a study of the Automobile market in both countries as well as an analysis of the ground realities for establishing preference of one over the other. For investing in a country the factors to consider are its policies in Globalization of Trade and Investment, Political Economy, Foreign Direct Investment, Social Cultural Factors and Intellectual Property in International Business. There are several theories on International Trade that shed light on why International Trade takes place and why investments are made internationally. 3 Theories of International Trade Mercantilism is a 16th century theory that symbolizes gold as wealth and propagates that exports should be subsidized to meet competition and imports should be penalized with tariffs to protect home industry. This severely limits the benefits and is a zero sum game. (Miller. David., et al 1987) The Absolute advantage theory was originated by Adam Smith, the father of modern Economics, and he proposed that one should produce in a place where one can be most efficient and should trade where production is marked by inefficiency. By and large this theory is in practice today. (Smith. Adam, 1776) The Comparative Advantage theory states that production should be decided on basis of relative advantage and if advantage is unavailable one should import rather than produce even if efficiency is more than that of the exporting nation. (Ricardo. David 1817) In contrast Heckcher (1919) and Ohlin (1933) theorized that one should produce and export goods from locally abundant factors of inputs and import those goods for which these factors are costly locally. Wassily Leontief (1953) developed his Paradox theory that states that Government policies affect availability of input factors as well as capital and labour. This is too totalitarian in approach. The Country Similarity theory advocated by Linder in the 1961 extended the previous theories by adding that nations with similar demand pattern trade with each other. The Product Life Cycle theory by Raymond Vernon in 1960 concluded that there are four stages of lifecycle of a product and international trade is related to them. In the first innovation stage the product is developed in its home country; in the second when it reaches its growth level it is produced in another developed country; when it is in maturity it is produced in a developing country and in the last stage where it reaches the declining stage of its life it may be produced just anywhere. This is how international trade in a product takes place. Paul Krugman and Kevin Lancaster (1980) projected that in their Market Imperfection theory the nation gains from its vantage point of specialization and economies of scale and having the first mover advantage takes centre stage with the assistance of the government. Here the use and need of the government factor is the limiting factor. Michael Porter (1990) put forward the Diamond Theory in which he stated that Basic Factors like natural resources, climate/location, and demographics when added to Advanced Factors like communications, skilled labour and technologies help in efficient production. This product is in high demand by sophisticated consumers looking for quality and innovations and firms cater to them and each feeds on the other to create International trade. There are other factors in the Diamond like related support industries, strategies in marketing, international, and domestic competition that either hinder or help in promotion of trade. These factors contribute to a company’s competitiveness. This theory has its pros and cons and needs further expansions. The diamond needs re-enforcement by adding two layers of International Trade and Global Trade with further factors built in. But this is a good base to start from. A SWOT is an analysis of an organization’s Strengths and Weaknesses (internal factors) and Opportunities and Threats (external factors). (Dibbs, Sally.& Simkins, Lyndon). 4 SWOT Analysis There are several automobile manufacturers in both countries. Both are members of ASEAN and both have good domestic demand. A number of international companies have chosen these countries for both CKD and CBU manufacturing as well as an export hub. Yet the opportunities and threats differ in both and a SWOT analysis is required to understand the situation. A SWOT analysis is the ideal method to find out the status of an industry. SWOT stands for Strengths, Weaknesses, Opportunities and Threats. The SWOT of the Thai Automobile sector reveals the following: Strengths 1 The Infrastructure likes Roads and Communications is excellent 2 Skilled workforce is available in plenty 3 Ancillary industry manufacturing parts is extensive 4 Quality of Cars is comparable internationally 5 Stable currency enhances export potential 6 Excellent support by Government 7 Moderate Taxes 8 Local Engineering enjoys confidence of World Automobile majors 9 World’s 2nd largest Pick-up Truck Market 10 ASEAN’s largest Automobile maker and assembler 11 Double digit export growth Weaknesses 1 Plants are small in size hence economies of scale are missing 2 Insurgency in South Thailand is worrisome 3 Some important parts like engines, fuel injections systems, transmissions etc are not produced in sufficient quantities and have to be imported 4 Mostly low end of technology involved in production 5 Lags behind in Research and Development activities Opportunities 1 There is vast scope for expansion of the industry for exports to other countries 2 With engineering talent available production of engines etc can be undertaken for value addition 3 Government support can enhance capacities in both manufacturing and ancillary industries Threats 1 Competitive environment in Malaysia can divert industry 2 Small population cannot absorb increased production 3 Very large assemblies for economies of scale require very large investments 4 China is a much bigger market and has a bigger and better infrastructure and manufacturing base and large international companies find it more attractive The SWOT of Malaysia shows a different picture: Strengths 1 The Infrastructure likes Roads and Communications is excellent 2 Skilled workforce is available in plenty 3 Very strong Research & Development capabilities 4 Stable currency enhances export potential 5 Political stability is good for business Weaknesses 1 Plants are small in size hence economies of scale are missing 2 Very high local taxes on cars produced locally and subsidy for local manufacturers 3 Poor quality 4 The indigenous capacities are idle 5 Bumiputra clause requiring mandatory minimum employment of Malays Opportunities 1 There is vast scope for expansion of the industry for exports to other countries 2 Government support can enhance capacities in both manufacturing and ancillary industries 3 Reduced taxation and level playing field can attract foreign investments 4 corporate tax exemptions, training, R&D grants, and soft loans, can bring more investments Threats 1 Competitive environment in Thailand can divert industry from Malaysia 3 Very large assemblies for economies of scale require very large investments 4 China is a much bigger market and has a bigger and better infrastructure and manufacturing base and large international companies find it more attractive 5 Situation in Thailand Following the Asian economic crises of 1997, Thai government and industry realized that being competitive was critical to survival. It was realized that Thailand’s economic growth was built on low-tech industrial development relying on abundant availability of cheap labour force. The crisis of 1997 was indeed a wake-up call and it revealed Thailand s deficiencies in research and development, science and technology, and in its overall education system. With increased recognition that liberalization and an economy driven by manufactured exports would not ensure sustainable growth, Thai policy makers and managers are shifting their attention to upgrading technology and human resource development. Attempts are being made to leverage FDI more strongly to support these goals. Foreign direct investment has been an important element of Thailand’s economic development process. In an increasingly competitive global marketplace the potential of the relationship between FDI and technological upgrading assumes greater importance. Thailand’s extensive ancillary auto-parts industry is crucial in contributing to its low costs and high production of about 1.5 million per annum commercial and passenger vehicle production. According to statistics from the Thai Automotive Industry Association, the country’s auto parts exports were valued at 114 billion baht (US$ 2.9 billion) in 2003 and are expected to reach 200 billion baht (US$ 5 billion) by 2006. Thailand has several automobile manufacturing units notable among them being Toyota, Ford, Mitsubishi, and Honda but not a single indigenous car is manufactured in the country and there is no restriction on foreign capital. Besides, there are several assemblers of CKD cars who serve the local market. The supporting infrastructure is important for enabling Thailand to boost automotive production to achieve the manufacturing target of 1.8 million units by 2010. (Susan Crawford) 6 Situation in Malaysia The Malaysian Government has declared that the automotive sector is a key factor in its economy. Despite this exalted position this sector lags behind in an abysmal way. Two indigenous manufacturing companies the Proton (1985) and Perodua (1993) were established as a catalyst to the development of this sector. The ancillary auto-parts industry grew along with them and indigenous technology and designing came to fore in these moves. Indeed Malaysia is the first non-developed country in the world that has its own automotive design and engineering capability. The Government is committed to provide conditions conducive for further developments. Malaysia does not have a very big domestic market, it produces less than a million vehicles per annum, but there are 4 indigenous manufacturers of passenger and commercial vehicles and 9 assemblers with several hundred component and parts manufacturers. It has a good infrastructure and wants to become an export hub. However its own indigenous companies need heavy subsidization from the government to survive. Proton has achieved cost parities and is moving to other countries like China and India attempting to set up base there but Perodua is still heavily dependant on subsidy. Import duties for non-ASEAN CBU vehicles are at 30 percent. For CKD vehicles, import duty is 10 percent. Two foreign companies Kia of Korea and Honda of Japan have already invested over $100 million each in their facilities to increase capacities. But there is no change in the excise duties for all vehicles. Excise duty on passenger cars, vans and four-wheel drive varies from 60 to 125 percent, depending on engine capacity. However import duties for all vehicles from members of the Association of Southeast Asian Nations are 5 percent, down from 15 percent. The 5 percent tariff is for completely built-up vehicles brought in from any of the nine other ASEAN countries. For completely knocked-down vehicles, there is already zero import duty. 7 Recommendations Malaysia produces its own indigenous cars but these are subsidized thus putting the foreign car manufacturers at a disadvantage. It also has a high taxation that results in high value of cars in its domestic market. The Bumiputra clause is stifling as it prevents employment of skilled labour. It is opening up the FDI in automobiles but with certain reservations on percentage. Its advantage lies in its Research ad Development capabilities that can be of advantage. Thailand has an open-door policy for inviting foreign car manufacturers and has a larger infrastructure as well as a larger ancillary support system. There are certain important components like engines that are still required to be imported as there is no local production of same. The Research and Development section is catching up as is evident from the fact that Innova from the Toyota stable was designed almost entirely by Thai engineers. It is already an export hub of companies like Toyota and Honda. Besides it is the largest producer of cars in ASEAN. There are pros and cons of setting up a manufacturing unit in either country but as of now the conditions in Thailand are more favourable and it is recommended that our international automobile client be advised to head for Thailand for setting up his new venture. 8 Bibliography. Crawford. Susan,. available at: http://www.businessinasia.com/automotive/auto_detroit.htm Dibbs, Sally.& Simkins, Lyndon. The Market Segmentation Workbook,Thomson (London) 1996 Heckscher, Eli. 1919, "The Effects of Foreign Trade on the Distribution of Income," Ekonomisk Tidskrift, Vol. 21, pp. 497-512. Heller, H., Robert. 3rd Annual Homer Jones Lecture, University of Missouri-St. Louis April 6, 1989. Krugman, Paul R. “Scale Economies, Product Differentiation, and the Pattern of Trade.” American Economic Review, 1980 70: 950-959. Lancaster, Kelvin. “Intra-Industry Trade Under Perfect Monopolistic Competition.” Journal of International Economics, 1980 10(2): 151-175. Miller. David., et al eds, The Blackwell Encyclopaedia of Political Thought (Oxford, 1987) Ohlin, Bertil. 1933. Interregional and International Trade, Harvard University Press, Cambridge, 1933. Porter, Michael.  1990.  The Competitive Advantage of Nations.  New York:  Basic Books.  Ricardo. David., The principles of political economy and taxation 1817 Smith. Adam., The Wealth of Nations, London 1776 Leontief, Wassily W. “Domestic Production and Foreign Trade: The American Capital Position Reconsidered,” Proceedings of the American Philosophical Society, 1953, pp 97, 332-349. Vernon. Raymond,. Sovereignty at Bay: The Multinational Spread of U. S. Enterprises 1960 Read More