Domestic Automakers Face Tough Market Conditions

Ford Lio Ho recently showed off the new equipment at its Zhongli plant to local journalists. PHOTO: FORD LIO HO

Imports continue to eat away at the Taiwan manufacturers’ market share, while vehicle sales are flat overall.

New car sales have long been flat in Taiwan. Last year, a government subsidy program boosted sales to 439,000 units, an annual increase of 4.5%, and the best performance in a decade. This year marks a return to normalcy. Through October, sells fell 4.3% to 355,768 units, according to data compiled by the Taiwan Transportation Vehicle Manufacturers Association (TTVMA).

Weak sales have hit domestic automakers – mainly assemblers of foreign-brand vehicles – the hardest. They once ruled this market, aided by steep tariffs on imported autos. But one of the conditions for Taiwan to enter the World Trade Organization (WTO) in 2002 was to lower preferential tariffs for the auto industry.

After Taiwan’s accession to the WTO, “domestic automakers found themselves more vulnerable to global competition,” says Tim Ju, president of the Ford Lio Ho Motor Co. “Our business has been adversely affected.”

Imports, meanwhile, have surged. In 2002, they accounted for just 20% of the market, according to the TTVMA. Today, imports comprise more than half of all new-car sales in Taiwan.

Among the top 10 car companies in Taiwan this year, three are premium imported brands: Mercedes-Benz (No. 4), BMW (No. 7), and Lexus (No. 10).  Through October, their sales figures rose 13.2%, 2.5% and 0.7% respectively.

“Even though Taiwan’s auto market is flat in term of overall volume, the premium market continues to grow,” says Terrence Johnsson, managing director of Audi Taiwan. Currently, premium brands account for 20% of the market, and could eventually comprise 30%, he says.

Johnsson says he expects Audi to tap more of those market opportunities on the back of new models like the Q2 mini SUV. Taiwan has proven to be a challenging market for the German automaker, which has been a top-selling brand in markets as disparate as the United States, European Union, and People’s Republic of China. Johnsson attributes that situation to the company’s frequent change of local partners in Taiwan. “Once you change your importer and local dealership network, you have to start from scratch,” he observes.

Mercedes-Benz has been Taiwan’s top luxury auto brand since 2008 and currently holds a 6.6% market share, compared to BMW’s 4.4% and Lexus’s 3.3%. An August report in CommonWealth Magazine notes that a record 25,000 new Mercedes vehicles were registered in Taiwan in 2016.  “Mercedes-Benz is doing very well –they appeal to Taiwanese consumers with a wide variety of different models,” says Chen Min-teh, secretary general of the TTVMA.

Indeed, Mercedes offers vehicles for nearly every pricepoint on the luxury spectrum. At the entry level are A-class vehicles affordable to ascendant young professionals. At the top of the line is the S-600 Maybach sedan, which costs upwards of NT$1 billion. In between are a wide variety of coupes, hybrids, SUVs, and sedans.

Mercedes’ success has moved in tandem with the overall Taiwan economy: The brand attracts affluent buyers, whose wealth has surged since the global financial crisis.

But for Taiwan’s middle class, who depend on income rather than assets, 20 years of stagnant wage growth has taken a heavy toll. “Many people are hanging onto their old cars longer than they should,” says Ford Lio Ho’s Ju.

He urges the government to implement stronger measures limiting the use of aged cars. “Right now, emissions inspections are not as stringent as they could be, and it’s reflected in our air quality,” he says.

Ferraris and other super-luxury cars have contributed to the growth of the imported vehicle segment. PHOTO: MATTHEW FULCO

Making up for lost time

 Market insiders say that the Taiwan government has not prioritized developing the local auto industry in recent years. By taking a hands-off approach, the government is jeopardizing the industry’s future growth opportunities, they maintain.

One industry source, speaking to Taiwan Business TOPICS on condition of anonymity, said that the government should consider the importance of the local auto industry for employment. “The government has signaled its commitment to new technologies like artificial intelligence but it shouldn’t forget the number of jobs created by traditional industries like ours,” he says.

Exporting vehicles would seem like an obvious solution for the local industry’s travails, but Taiwanese manufacturers generally lack the scale to serve other markets economically. A few companies – notably Toyota and also Ford Lio Ho – do export a small number of vehicles, primarily to the Middle East.

In 2010, hopes were high that Volkswagen would build an assembly plant in Taiwan to serve the China market, which was growing at a record-breaking pace. “Chinese consumers believe products made in Taiwan are high quality, so Volkswagen saw an opportunity,” says Ju.

Volkswagen waited patiently for five years. Yet despite the passage of a major Cross-Strait trade pact, the Economic Cooperation Framework Agreement (ECFA), heavy import duties remained on Taiwan’s exports of assembled vehicles to China. Volkswagen gave up in 2015 and set up a plant in Thailand instead.

“It was a big miss for Taiwan,” Ju says. Indeed, had Volkswagen established a manufacturing base in Taiwan, other top automakers might have followed suit. That could have given a major boost to the struggling domestic industry.

Under the administration of President Tsai Ing-wen, Taiwan is focusing more of its energies on Southeast Asian markets than China. Yet to realistically export vehicles to Southeast Asia, Taiwan would need to sign a free-trade agreement with ASEAN, Ju says. “Otherwise, the tariffs on imported vehicles are too high,” Ju says.

In the best of times, such an agreement would be challenging to reach. At present, it seems next to impossible, given cross-Strait political tensions. ASEAN is deferential to Beijing’s interests when it comes to Taiwan.

The one bright spot for local assemblers is the emerging electric-vehicle parts segment, analysts say. Although they are not global leaders, “Taiwanese suppliers of electric powertrain solutions [motors, batteries, entire EV platforms] are experienced and make products that are in line with basic industry standards,” says Duff Lu, a senior research manager at the market-intelligence firm TrendForce.

Lu recommends that local manufacturers use emerging markets in Southeast Asia as a springboard, providing components that the local supply chains lack and helping to establish local brands. If they can do that, they have the potential to become major players internationally, he adds.