For Car Companies, Happy Days are Here Again

Domestic sales this year will exceed 400,000 units, with another 100,000 for export.

By Timothy Ferry

With over 380,000 vehicles sold in the first 11 months, Taiwan this year seems sure to record its biggest year in car sales in about a decade. Toward year-end, sales are somewhat lower than average as consumers have been distracted by the elections and many are waiting to make their purchases in the new model year of 2015. Still, the final figure for 2014 is expected to approach 420,000 units, making it the best total since 2005’s record-breaking 514,000.

automotive-industry-focus_2014-12A variety of factors have contributed to this healthy picture, including an improving macroeconomic climate, falling oil prices, and rising consumer confidence. For many, though, it is simply time to buy a new car. “It’s already a decade since the peak year of car sales in 2005, and now a lot of those car owners are ready for a replacement vehicle,” observes Chen Min-teh, Secretary General of the Taiwan Transportation Vehicle Manufacturers Association (TTVMA). “That was a big factor this year and it will continue next year.”

In recent times, the worst year for Taiwan’s auto industry was in 2008, when sales dropped to 229,297 vehicles as Taiwan’s export-driven economy was hit hard by the global economic crisis. Since then, the market has been steadily improving, but the gains are not being shared equally throughout the industry. While the entire passenger car market is growing, imports are increasing faster than sales of domestic cars. The market share for imports has climbed from only 14% in 2005 to a current 33%.

Taiwan’s domestically assembled cars are primarily marketed under license from international brands. Ford Lio Ho, for instance, is a joint venture between the Ford Motor Co. and Taiwan’s Lio Ho Group, assembling several of Ford’s top sellers such as the Fiesta and Focus in its Taoyuan plant. Yulon Motors is the contract manufacturer for Nissan and also makes and sells cars under its own Yulon and Luxgen names, while its affiliate China Motors assembles Mitsubishi vehicles. Hotai Motors Corp. is the local distributor for Toyota Motor’s Toyota and Lexus brands, and is Toyota’s joint venture partner in Kuo Zui Motors, which turns out Altis, Camry, and other models at a plant in Taoyuan.

Eight of the top 10 brands in Taiwan’s passenger vehicle market are locally produced, with Toyota holding a commanding 33% market share, followed by Nissan at 12.61%, Ford at 6.29%, and Honda at 6.18%.

Nelly Liao, PR and Market Intelligence Manager for Beldare Motors Limited, the Volkswagen-importing unit for the Taikoo Motors Group, attributes the growing acceptance of imports to brand value. “If consumers need to pay the same amount of money, they want to have an imported car for the brand image and the safety,” she observes, adding that driving an imported car confers status as well. “In Taiwan the consumer feels that if you drive an import, you seem to be richer and more successful.”

While imports tend to enjoy stronger brand images in Taiwan than locally made cars, more competitive prices have been the biggest factor in their market gains. Innovative, modular manufacturing techniques that use common platforms (the frame and engine/drivetrains) across models – and even, in the case of Volkswagen, across brands – allows automakers to save on R&D expenses while achieving economies of scale, significantly reducing costs and prices. So despite higher labor costs, especially in Europe, and Taiwan’s hefty 17.5% import duty, prices for imports continue to decline. Taiwan’s domestic manufacturers, by contrast, lack the scale needed to drive down costs-per-unit. The net effect is that prices for imports and domestic makes are converging.

“Before, domestic companies needed to reach sales of about 1,000 units a month for a given model to be competitive,” explains TTVMA’s Chen. “Now the level has increased to about 1,500.” Chen says that costs are becoming an issue to the extent that some Taiwan companies are considering giving up domestic production of certain models to start importing from their foreign affiliates instead. He sees domestics continuing to lose ground against imports for market share, with a possible 50/50 split developing over the next decade.

According to Beldare Motors’ Liao, the remaining price differential between imports and domestics is not a big issue for purchasers, particularly for younger drivers. “Even though (Volkswagen models) are a little more expensive, the parents can afford it,” she says.

The burgeoning share of the market taken by imports also reflects in the rising premium segment, which outpaced the non-premium segment in 2014 (see the following story in this section) .

New models in the mix

The slew of models offered by many of the automakers this year also has had a strong influence on the market, notes Chen Min-teh. Among the launches have been a new Vios and Yaris from Toyota, Nissan Livina, Mitsubishi Outlander, Honda Fit and City, Hyundai Santa Fe, and Kia Morning.

President Thomas Fann of Ford Lio Ho, which will release several updated models in 2015, says the debut of so many new models reflects a reviving global economy. “During the downturn (post-2008), companies slowed down development of new products, but when things improve they hurry up again,” he observes. “Now everyone is eager to participate in the market.”

Kenny Wu, general manager of Hotai’s Toyota Vehicles Division, notes that the introduction of a remodeled brand can have a strong impact on sales, as high as a 30% surge in the first six months. With the introduction of updated Vios and Yaris models this year, Toyota’s strong 2014 performance reflects the “new car effect.” Wu anticipates less of an impact for Toyota in 2015 due to the unveiling of fewer all-new models, although he notes that a nominally “minor change” planned for the Camry will actually involve a very different exterior design and new engine and transmission.

Although Taiwan’s auto market is enjoying renewed momentum, it is still far from a booming market and brands are engaged in cutthroat competition for market share. “Taiwanese consumers are very sophisticated – they are probably some of the toughest customers in the world,” says Ford’s Fann. “They are tech savvy. All the customers who come to our showrooms probably have done their homework from the internet – they know almost as much as we do about the vehicle.”

To attract such consumers, all players in the market are incorporating the latest in smart and safety technologies as standard features on certain of their models, including Blind Spot Detection Systems, Lane Departure Warning Systems, and Night Vision Systems. The locally made Ford Focus and Kuga even include automated parallel parking systems, while L.C. Chen, president of Volvo Car Taiwan, notes that the industry’s concept of safety is being broadened from protective to preventive, with systems that detect dangers and may even take control of certain aspects of driving to avert an accident.

Automakers are also increasingly competing on fuel economy and “green credibility” in the Taiwan market. Technologies have advanced to the point where smaller engines can produce the same power and torque as bigger ones, but with far lower fuel consumption. “You don’t need a big engine any longer, and you don’t need to choose a hybrid,” says Beldare’s Liao. “You can choose a normal gasoline engine and still reduce the impact on the environment.”

Ford cars in Taiwan come with the option of the turbocharged, highly efficient Ecoboost engine. Fann says that its two-liter twin turbo, plus the variable chain controlling intake and outtake, can generate the same power and torque as a 3.5- or even 3.7-liter engine.

Ford has also pioneered the tiny, three-cylinder, one-liter sized Fox engine. The width and length of an A4 piece of paper, the Fox engine incorporates more than 100 patented techniques and is available in the Fiesta model. “It’s so hot globally we are constantly short of supply,” says Fann.

The market for hybrid electric vehicles is also growing in Taiwan, led by Toyota’s domestically produced hybrid Camry. Hotai’s Wu says the market has improved as customers have become more accepting of the quality and cost of the battery. He notes that many hybrid owners, especially taxi drivers, are enthusiastic about the pronounced fuel savings.

Currently, Taiwan encourages the uptake of hybrid and electric vehicles by reducing the commodity tax on the vehicle. But critics maintain that the policy has mainly benefited imported luxury hybrids and doesn’t further the long-range of goal of promoting an electric vehicles market. The Ministry of Finance is under pressure to revise the policy, but Toyota anticipates less impact as its hybrid Camry is locally produced and will still likely retain the tax advantage.

Segments getting blurry

Along with growing imports and premium markets, another global trend showing up in Taiwan is the blurring of segments. Taiwan loosely follows the European classification system, starting with A-class micro cars, B-class subcompacts, and so on, rising in size and displacement. But with smaller cars offering more interior room while bigger cars feature smaller engines, the demarcation between segments is becoming less clear.

One apparent casualty of this squeeze is the mid-size C-D segment of family sedans, which includes such global stalwarts as the Ford Mondeo (called the Fusion in the United States), Toyota Camry, and Honda Accord. Ford’s Fann notes that “five years ago it was probably one of the biggest segments and now it’s only 3 or 4% of the total industry.” One reason, explains Fann, is that C cars such as the Ford Focus are getting larger but are still cheaper than their C-D counterparts, giving the C-D segment stiff competition.

In addition, the rise of the SUV – the J-segment – provides a roomier and more practical alternative to the family sedan. In the first 10 months of 2014, sales of SUVs were up 28.7% over the same period last year. “SUVs have been increasingly popular in Taiwan, especially as prices have come down and fuel efficiency has improved,” notes TTVMA’s Chen. He concurs that much of that growth has come at the expense of C-D segment sedans, whose sales volume dropped 15% year-on-year in the same 10-month period.

Beldare’s Liao observes that the SUV class offers additional benefits to women motorists, allowing for greater visibility for the driver as well as sufficient size to thwart something she says many women complain about – bullying by male drivers. “Most male drivers think that if you’re a woman, you can’t drive very well,” she says. “But if you drive an SUV they won’t take advantage of you on the road because they won’t know who the driver is.”

Her comments point to another emerging trend in Taiwan’s auto market: the growing influence of the female driver. “The car industry is a male-dominated industry, so we don’t pay much attention to female drivers, despite a lot of research saying that the buying power and economic independence of women is growing,” notes Volvo’s Chen. In rebuilding Volvo’s image in Taiwan, the company has been emphasizing elements of Volvo’s design that reflect the relative equality enjoyed by women in Nordic countries. Unlike most brands vying in the premium segments, which are heavily skewed towards men, Volvo’s customers divide evenly between men and women.

To build and retain brand loyalty, the various players in the Taiwan auto market are also focusing more on the sales and service experience. Hotai’s Wu mentions that it is remodeling Toyota showrooms with reception desks closer to the door to make it easier to welcome people as they enter, and introducing a “Hybrid Corner” where Toyota’s line of hybrids can be showcased and the technology explained. The changes are not limited to just the showrooms, and Wu says that Toyota will be fielding a younger salesforce, wearing redesigned, more professional uniforms, who will wield iPads containing all the information needed to make a sale. “With a young-looking showroom and younger salespeople, we want to deliver a very young image,” says Wu.

Volvo will incorporate cloud and Internet of Things technologies into its service process. In the future, Volvo cars and service centers will employ sensors and communication equipment to jointly monitor the status of the vehicle, alerting the driver to maintenance needs and any potential problems. Ford also promises a new look for its network of showrooms, as well as upgraded service centers.

Another new wrinkle for the Taiwan auto industry is the growth of exports, which this year should reach a record level of about 100,000 units – nearly all of them Toyota Altis models shipped to the Middle East. Recognizing the quality of the output from the Kuo Zui joint venture, the parent Toyota Motor Co. in Japan has been incorporating increasing volumes of the Taiwan-made vehicles in its global marketing plans. Combined with another 100,000 units of Altis sold domestically, the export program provides sufficient economy of scale to permit competitive pricing. All together, Kuo Zui this year will turn out a record 200,000 cars, a new high for any Taiwan auto maker.

Considering that the Taiwan auto industry as a whole has annual production capacity of 700,000 units, far exceeding current needs, there is plenty of room for additional output for export if sufficient scale could be achieved for particular models. With that objective in mind, TTVMA has long been urging the government to negotiate an arrangement with China to permit cross-Strait trade in built-up vehicles. Chen Min-teh says the industry continues to hope that the cross-Strait Trade in Goods Agreement currently being negotiated will include provisions allowing trade in complete vehicles on a tariff-free or low-tariff basis.

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