The rising preference for foreign cars is boosting overall industry sales but presenting increased challenges for local automakers. Due to the depreciation of the yen and euro, imported vehicles have become more price competitive, and now account for a 37% market share. Luxury brands have been doing particularly well. While auto sales this year are flat overall, the luxury segment rose by 20% in the first half of the year.
An import car boom is reshaping the Taiwan auto market as foreign brands from Mazda to Mercedes-Benz post record-breaking sales.
Once a niche market for wealthy consumers, imports are fast encroaching on the territory of locally assembled cars. Imported cars now hold a 37% share of the market, up from 14% in 2005. From January through September this year, some 113,500 imported cars were sold in Taiwan, up 15.2% from the same period in 2014, according to government data.
The depreciation of the euro and Japanese yen has made imported cars more affordable to Taiwanese consumers. As a result, foreign automakers are ramping up exports to the island.
Ford, which operates in Taiwan through its local joint venture Ford Lio Ho Motor Co., is tapping that rising demand for imports with the introduction of its Mondeo Hybrid, manufactured in Valencia, Spain. Launched in Taiwan in late November, the Mondeo Hybrid – in the North American market the model is known as the Fusion – is one Ford’s most technologically advanced vehicles to date. It achieves class-leading fuel consumption 25.1 km/L (city 27.2 km/L; highway 23.96 km/L) and 190 ps horsepower. The Mondeo Hybrid also features first-in-class inflatable safety belts, providing additional protection for rear-seat passengers.
At the Computex exhibition in Taipei in June, Ford announced its Smart Mobility Plan as it unveiled the Mondeo Hybrid. “Ford Smart Mobility is our plan to use innovation to take Ford to the next level in connectivity, mobility, autonomous vehicles, the customer experience and big data,” said Thomas Fann, president of Ford Lio Ho. “Our ultimate goal is to create a better customer experience, develop more flexible user-ship models for customers, and connect with every customer in a socially collaborative and rewarding way.”
Additionally, Ford has brought the Mustang to Taiwan. The Detroit-based automaker first introduced the iconic American muscle car to the Taiwan market in September 2012 as a limited-edition product: Just 150 units were made available and the first 100 were sold within a month. In March 2015, Ford launched the New Mustang in Taiwan. 150 units of that vehicle have been sold to date, while there are more than 100 outstanding orders. This month, Ford will launch the Mustang 5.0L GT in Taiwan.
Domestic automakers struggling
Prospects for Taiwan’s domestically assembled cars – most of which are Japanese brands marketed under license – are less sanguine. To begin with, they are at a disadvantage because of a relatively low imported-car tariff of 17.5% established after Taiwan joined the World Trade Organization (WTO) in 2002. Since high duties on imported auto parts remain in place, some locally assembled models using those parts retail for nearly the same price as imports in the same category.
With their competitiveness further eroded recently by the weak yen and Taiwan’s feeble economy, domestic auto brands are struggling. In September, Hotai Motor sold 5,393 units, down 53% from a year earlier. China Motor Corp. shipped 2,478 units in September, down 31% percent from the same period a year ago. Yulon Nissan’s September sales fell 37.9% year-on-year.
That poor performance came amidst the worst stretch for Taiwan’s economy since the global financial crisis. In the quarter ending in September, the economy contracted by 1.01% year-on-year as an export slump began to weigh on consumption. “A car is the second-most expensive durable good after a house,” says Fann of Ford Lio Ho. Given Taiwan’s poor economic performance this year, “the auto industry is naturally coming under pressure,” he adds.
As a result, the middle-class consumers who comprise the bulk of domestic car buyers are holding off on auto purchases, says Champion Chen, publisher of the Reve Motor magazine and a 19-year veteran of the automotive publishing sector. “When the middle class can’t afford to buy a car, local manufacturers are hit the hardest,” he says.
The one bright spot for domestic automakers is sport-utility vehicles (SUV), the only domestic auto segment to record positive growth this year. According to data from auto vendors, sales of new SUVs from January to September rose 12.7% year-on-year.
Chen Min-teh, secretary general of the Taiwan Transportation Vehicle Manufacturers Association (TTVMA), attributes the rise in SUV sales in Taiwan to falling fuel prices and a change in lifestyle. “There is an increasing emphasis on work-life balance in Taiwan,” he says. With their storage capacity and offroad capabilities, SUVs are ideal for family excursions, he adds.
Among SUVs, the Toyota RAV4 has been a top performer. Since its launch more than three years ago, the fourth-generation RAV4 has seen its sales volume steadily rise. In 2013, a total of 1,215 RAV4 units were sold in Taiwan. That figure climbed to 1,392 in 2014, and 1,483 units were sold in the first half of 2015 alone.
While Luxgen’s overall sales are down this year by about 10% on an annual basis, its U6 SUV is selling well, says company CEO K.C. Hu. Accumulated sales volume of the U6 reached 7,907 units through October. Still, “it will be challenging” for the company to reach its 2015 sales target, Hu says.
Honda is planning to jump on the SUV bandwagon with the local launch of its HR-V, which will feature a competitive price tag compared to same-class imports, analysts say. The locally assembled HR-V will likely be sold for less than NT$700,000 (US$23,000), according to an October China Economic News Service (CENS) report. By introducing the new HR-V to Taiwan, Honda’s local affiliate hopes to offset revenue loss it has suffered from decreasing passenger-car sales on the island, the report said.
Cash for clunkers
With the local auto industry under pressure, Taiwan’s Ministry of Economic Affairs (MOEA) has proposed an automotive commodity-tax rebate to boost new-car sales. Under the rebate plan, which would take effect after enabling legislation is passed by the Legislative Yuan, a buyer would receive up to NT$50,000 per vehicle in exchange for either exporting or scrapping it.
At a September news conference, Finance Minister Chang Sheng-ford urged Taiwan to tap the burgeoning global used-car market. Of the 7.55 million vehicles on the road in Taiwan, 53% are more than 10 years old, according to government data. Meanwhile, 500,000 cars are traded on the global used-car market every year. Many of those cars are exported from Japan, South Korea, and Singapore, but none from Taiwan, he pointed out.
The minister did not explain why Taiwan has yet to pursue the export of used cars, but cumbersome regulations may be to blame. Under current Taiwanese law, a used-car exporter must register the items to be exported “with the Headquarters of the Third Special Police Force, National Police Administration, Ministry of the Interior, or with a police force under its command” to verify the items are not stolen, according to Taiwan’s official website for World Trade Organization (WTO) affairs. Next, the exporter should “directly submit the Examination Report issued by the Third Special Police Force Headquarters or a police force under its command to Customs for customs clearance.”
Meanwhile, the tax-rebate program would be a boon for the auto sector and consumers, experts say. Firstly, the subsidy would boost consumer willingness to purchase new cars. Secondly, the resulting higher new car sales would strengthen the bottom lines of auto parts producers. In addition, the repair and maintenance sector would benefit, since it would be responsible for tuning up the used cars for export.
The replacement of old cars with new models would also contribute to lower pollution, better fuel consumption to aid energy conservation, and improved road safety.
Overall, the Taiwanese government expects the commodity-tax rebate to boost new-car sales by 10,000 units per year and add NT$12.67 billion (US$385.11 million) to the automobile industry annually.
“When this policy goes into effect, it will definitely boost new-car sales,” says Chen of TTVMA. For now, though, the proposal is having the opposite effect, he observes. “Now that consumers are aware there will likely be a tax rebate on new-car purchases, they are holding off on buying a car until the amendment becomes law.”
At the earliest, the amendment would pass through the Legislative Yuan in December, he reckons, but it could well be delayed until next year.
To strengthen the domestic car industry’s prospects, more supportive government policy is needed, experts say. Volks-wagen’s decision in March to set aside consideration of plans to build production plants in Taiwan is cited as a case in point. For five years, Europe’s largest automaker had been mulling the idea of setting up a production base in Taiwan, chiefly as a means of boosting exports to China and Southeast Asia, two of the world’s fastest growing auto markets.
Volkswagen already manufactures a huge number of vehicles in China for the PRC domestic market through its local joint ventures. But from the standpoint of the German automaker, “there is a difference in quality between ‘Made in Taiwan’ and ‘Made in China,’” says economist Cheng Cheng-Mount, president of the Agricultural Bank of Taiwan. Volkswagen reportedly had hoped that cross-Strait negotiations under the Economic Cooperation Framework Agreement (ECFA) would lead to arrangements liberalizing the shipment of built-up vehicles in both directions across the Taiwan Strait, but that liberalization did not materialize.
Unsurprisingly, the Taiwan market alone was not large enough to justify the massive investment required for the factories. Nor would locally assembled Volkswagens enjoy price advantages over imports, company executives said during a video conference in June 2014, citing high labor costs and unfavorable tax policies.
What Volkswagen has done instead is step up efforts to import autos to Taiwan. In January, it set up a wholly owned Taiwanese subsidiary to take over the local marketing and sales of Volkswagen cars, Volkswagen commercial vehicles, and the Audi and Skoda brands. The purpose of that move is to curb the role of middlemen in Volkswagen’s Taiwan operations, giving the German automaker greater control over its brand portfolio on the island, market observers say.
The company has not ruled out production in Taiwan in the future, but that will depend on whether Taiwan can persuade China to include preferential duties on assembled vehicles under ECFA, Volkswagen executives say.
The failure of the Cross-Strait Service Trade Agreement (CSSTA) to pass the Legislative Yuan in 2014 forced Volks-wagen to scrap its plans to build a Taiwan production base, reckons Cheng. Even if the CSSTA had passed, it isn’t certain that Taiwan would have been able to persuade China to lower the duties on assembled vehicles, he says. But the failure of the CSSTA to pass sent a negative message about Taiwan’s openness to FDI.
For now, Taiwan is losing out as Volkswagen turns to Southeast Asia for its regional production needs. In February, a company spokesman said Volkswagen had received approval from Thai authorities to build a 1-billion euro manufacturing plant for fuel-efficient cars near Bangkok. Up to 300,000 vehicles per year could roll off the plant’s assembly lines, according to a report by Reuters in February.
Volkswagen aims to take advantage of tax breaks Thailand is offering to automakers that manufacture locally, the report said. The Southeast Asian country has already attracted such investment from Ford and General Motors.
The allure of luxury
Among foreign automakers, luxury brands are faring especially well in Taiwan, rising 20% year-on-year during the first half of 2015. That increase should make it possible for total new-car sales to reach parity with last year’s nine-year record high of almost 430,000 units, experts say, despite an anemic economy that contracted by more than 1% in the third quarter. From January through October, new-car sales totaled 344,104 units, down 1.1% year-on-year.
Indeed, luxury car sales have remained resilient even as the larger auto market has cooled. In September, new-car sales plunged 27% from August to 25,226 deliveries.
By contrast, Mercedes-Benz and BMW, buoyed by the launch of new models, saw sales rise by 32.7% and 14.8% month-on-month in September, respectively. On an annual basis, sales of Mercedes-Benz and BMW increased 2.4% and 2.8% in September, respectively.
Mercedes-Benz has been a top performer in the Taiwan imported auto segment in recent years. It sold an unprecedented 19,309 units in 2014, comprising almost 4.4% of the total new-car purchases made in Taiwan. Through the first 10 months of this year, it sold 17,683 units, boosting its share of the Taiwan auto market to more than 5%. In 2015, “it is almost certain we will have another record year,” says Andy Stockhecke, vice president of sales and marketing for Mercedes-Benz Taiwan.
Changing consumer tastes in Taiwan have been a key catalyst of the import-car boom, particularly in the luxury segment, which has surged since the global financial crisis. “In the past, wealthy Taiwanese would think, ‘I’m rich, so I want to drive an expensive imported car,’ ” says Champion Chen of Reve Motor. “Now they are becoming more selective. Their thinking is ‘I want to drive something special, something that reflects my personality.’”
Stockhecke of Mercedes-Benz divides typical Taiwanese buyers of the German brand into two categories. Traditional customers “are people well into their careers who have already enjoyed a considerable degree of success and want to show their success with the car,” he says, while newer customers are younger, more knowledgeable about the brand and “more interested in performance and styling.”
Lance Ou, a 31-year-old financial-services professional based in Taipei, bought a Mercedes-Benz C200 in 2011 for roughly NT$2 million (US$61,000). While the car was slightly pricier than comparable BMW or Audi models, Ou says he prefers the Mercedes’ sleek interior and understated elegance.
“BMW is too high profile for me,” he says, adding that Mercedes-Benz cars depreciate slower than BMWs or Audis, thus fetching a higher price in Taiwan’s used-car market. That makes the purchase of a Mercedes-Benz a better investment, he says.
The luxury auto segment has been able to broaden its Taiwanese customer base – attracting younger buyers in particular – by introducing a wider product range, notes K.C. Hu of Luxgen Taiwan. Among the new models are entry-level luxury cars like the BMW 1, Mercedes CLA, and Audi Q3, which are less expensive than the other vehicles those brands sell in Taiwan, he observes.
“There has been a push to attract volume brand customers into the premium market,” says Ryan Searle, managing director of Audi Taiwan. For its part, Audi is enjoying unprecedented success in the Taiwan market, with sales up 10% annually as of the end of September, according to company data. The German automaker is “growing ahead of the premium market” and aims to sell more than 5,000 units this year, up from 4,901 in 2014, and 10,000 by 2017, Searle says.
Volvo also has ambitious plans for Taiwan. In July, according to media reports, the Swedish automaker’s local wholly owned subsidiary, Volvo Car Taiwan Ltd., announced that it will invest US$100 million to introduce more new models and renovate all its sales points island-wide from this year. It will launch the Volvo S90 luxury sedan and V90 luxury sport utility vehicle (LSUV) in Taiwan next year.
In the meantime, Fann of Ford Lio Ho expects Japanese imports to continue encroaching on domestic players as the weak yen makes the purchase of Japanese-made cars an attractive proposition.
Hu of Luxgen says Taiwanese customers believe imported cars are superior in terms of value for money and the image they project. “Taiwanese think buying a car is a very rational thing. They aren’t patriotic in that way like the Koreans, who will buy a Kia because it’s made in Korea.”
That ensures a bumpy road ahead for domestic automakers, he concludes. “If a Taiwanese buyer is looking at two similarly priced Japanese cars – one imported from Japan and the other made in Taiwan – the buyer will almost definitely purchase the Japanese import.”