The Auto Industry in Low Gear (But So Far Not in Reverse)

The Lexus NX 200t, part of the company's NX SUV series, proved a popular choice among Taiwanese motorists in 2019. PHOTO: KĀRLIS DAMBRĀNS UNDER A CC-BY 2.0 LICENSE.

While global auto markets faced significant setbacks and weak sales growth this year, Taiwan appears to have fared relatively well. However, challenges for domestic automakers continue to intensify as consumers increasingly choose imported vehicles.

2019 was a tough year for global auto markets. A combination of factors – declining demand, increasingly strict emissions and fuel-consumption standards, pressure on automakers to sink new money into R&D for autonomous and electrified vehicles, and gradual changes in how people are choosing to get around – has contributed to a large slump in sales of new motor vehicles worldwide.

While the auto industry in the U.S. and EU suffered declines in the number of units sold domestically this year, an even bigger drop was experienced in China, the world’s single largest auto market.

“China’s auto market starting last year began slipping, largely due to uncertainty in the industry, driven by factors like the U.S.-China trade war,” says Thomas Fann, former president of Ford Lio Ho Motor Co. “Even without the occurrence of the trade war, the industry would have been hit due to a slowdown in the growth of local economies, but not to this degree.”

Fann notes that auto sales in China through October this year have fallen around 10%, a significant decline, which has negatively impacted global automakers that have come to depend heavily on Chinese demand.

Taiwan, on the other hand, seems to have been somewhat immune to the disruptions happening elsewhere in the world’s auto markets. Although a drop has occurred in total car sales – around 3% during the period of January through October, according to the Taiwan Transportation Vehicle Manufacturers Association (TTVMA) – Taiwan also managed to register some impressive figures on a month-to-month basis.

For example, car sales rose 7% in April, likely due to the rollout of several new models of international brands, including Ford’s new Focus hatchback and sedan models and Toyota’s 2019 RAV4. A report by local car industry publication TopCar showed that in October, Taiwan’s auto industry saw sales growth of 17% – higher than any other market in the world that month. The TTVMA predicts that car sales for 2019 will total 425,000, marginally lower than last year’s 435,000.

In part, the relative stability of the Taiwan market during this period may be a knock-on effect of the U.S.-China trade war. As Taiwanese businesses with manufacturing bases in China begin moving operations back to their home turf, it stimulates investment and overall economic growth on the island.

Also encouraging is that brisker sales can be expected in the fourth quarter. Purchases of large-ticket items, particularly cars and apartments, tend to dip in August each year – Ghost Month on the lunar calendar, during which time making big purchases is considered to bring bad luck – and rise again in the final quarter.

Overall, though, car sales have remained relatively stagnant for the past several years, despite a spike in 2017, and analysts are not generally optimistic about what’s to come.

“We’ve seen a downward trend this year, especially in the area of luxury vehicles,” says Champion Chen, TopCar’s editor-in-chief. He mentions that the upcoming presidential and legislative elections are a major factor contributing to the decline. “There is an air of uncertainty over who will be elected, and so the idea is to wait until after it’s over, once things have stabilized, to decide whether to buy.”

Chen also points to Taiwan’s sluggish economic growth over the past few years as contributing to an erosion in consumer confidence, pulling down demand. “Even though analysts are saying that Taiwan’s growth rate will stay at 2.4% next year, this is still pretty minimal,” he says.

Thomas Fann echoes Chen’s analysis, adding that consumers in Taiwan, like those in other markets, are becoming less likely to want to own their own vehicle, even though traffic congestion in major metropolises like Taipei has improved in recent years. Furthermore, new disruptive technologies such as ride-hailing services and emerging driverless car businesses could increasingly make the idea of car ownership – especially in high-density urban areas – obsolete.

“Most people – even me – don’t drive very often. We take buses, we walk, we ride bikes if the weather is nice,” Fann says. “So, car ownership is now saturated, and I don’t think we will exceed the current high point of around 400,000 to 450,000 units sold per year.”

As for the luxury vehicle market, which for years has enjoyed steady growth in Taiwan, demand remains high, but is beginning to level off. Two leading brands, Mercedes and BMW, experienced some significant setbacks worldwide in 2019, but this seems to have had little effect on their Taiwan performance. Mercedes still dominates the local luxury market and is the motor vehicle brand with the fifth highest sales in Taiwan in 2019. BMW holds the number-three spot among luxury car brands.

The second-most-popular luxury brand in Taiwan, Lexus, saw the most remarkable growth this year, jumping 17.4% in the first three quarters. Behind this boost is a growing demand for Lexus’ SUV models, such as the NX, UX, and RX series, and the ES-series sedans among an expanding aspirational middle class in Taiwan.

Luxury brands have continued a strategy from recent years of introducing more reasonably priced models in an effort to bump up sales numbers and remain relevant in the market. Lexus’ NX and RX series have done very well in Taiwan this year, although sales of these models are down slightly from 2018. Similarly, Mercedes’ entry level A Class sedan was a popular choice, experiencing almost double sales growth for the first three quarters of 2019 compared with the same period last year.

“There are customers that are attached to those brands,” says Thomas Fann. “Even if what they end up buying is a lesser model, it still has the name attached to it, so you can see why so many consumers are choosing to buy them.”

Such a strategy may be effective, but it’s not without its detractors. TopCar’s Chen argues that the surge in popularity of the lower-priced luxury models indicates that things are not at all well in the car market. “It’s not healthy,” he says. “If consumers are going to buy a Lexus, such a high-end brand, they should be buying higher quality models with better equipment – more luxurious cars.”

Local automakers suffer

The more affordable models on offer from luxury brands are also exacerbating a salient long-term trend in Taiwan’s auto market: the narrowing gap between domestically produced and imported cars. In 2010, 77% of all cars sold in Taiwan were locally made, versus 23% for imports. Nine years later, that ratio has shifted to 53% and 47%, respectively, and appears set to continue along the same path until imported vehicles exceed domestically produced ones.

To the casual observer, Taiwan’s slew of import duties and value-added taxes would seem to make buying an imported car an illogical choice compared to one that’s manufactured or assembled at home. However, as Chen of TopCar points out, even if a car is assembled in Taiwan, the majority of parts and components still has to be imported, and the tariffs on these items are comparably high. As a result, the difference in cost between an imported vehicle and one assembled in Taiwan is increasingly negligible to the average consumer.

In addition, Taiwanese consumers tend to have the perception that the imported version is of better quality, Chen says, which is shrinking the already small domestic market for such cars.

Furthermore, markets that had previously been export targets for Taiwanese car manufacturers – the Middle East and more recently China – are suffering economically, decreasing demand there as well. Loss of that business means higher production costs due to reduced economies of scale, setting off a vicious cycle.

Chen of the TTVMA paints the situation in even more dire terms, emphasizing the potential for a crisis among Taiwan’s local automakers if things don’t improve. “At this point, all you would need is just one Taiwanese firm to give up and stop producing cars,” he says. “It would trigger a chain reaction, with the local supply chain collapsing due to being unable to maintain economies of scale.”

While things are looking increasingly grim for local car producers, Chen puts forward a couple of suggestions for the government to help ease the pressure they are facing. One is to extend the current scrappage policy, which Chen notes has contributed to better sales of domestically produced cars since it was instated in 2016. The program, which is set to end in January 2021, provides an NT$50,000 tax deduction for drivers who give up cars that are at least six years old in order to buy new ones.

Chen says that the next step for the government should be to reduce the import duty on auto parts used for domestic car manufacture or assembly. This suggestion is currently being discussed by relevant government agencies and the Legislative Yuan, he notes, but the TTVMA hopes that any necessary amendments to import laws can be passed quickly.

Thomas Fann argues that the authorities need to pay more attention to the local car industry because of its value to the economy. “If you ask me, the government has no auto policy,” Fann says, “and where they do, it is short-lived and inconsistent.”

Fann says that any future policy should seek to protect local automakers, but that some creative thinking is necessary. “Given the changes in the way we think about mobility, I recommend that the government think about how to leverage the technological capability Taiwan already has,” he says. “They should focus less on traditional vehicles and more on adapting that capability to produce newer, more innovative technologies.”

Tesla’s Model X experienced a major sales boost after the company slashed the price in half earlier this year. Photo: PHOTO: DON MCCULLOUGH, DISTRIBUTED UNDER A CC-BY 2.0 LICENSE.

FOR ELECTRIC VEHICLES, PROGRESS ON THE HORIZON

Taiwan’s plan to begin implementing strict emissions standards in 2020 could be the spark that ignites a widespread shift toward the electrification of transportation on the island.

Such a development would be welcome news for Taiwan, where air quality is a growing concern, and where gas- and diesel-powered cars and scooters contribute substantially to increasingly high levels of PM2.5. A 2019 study published in the medical journal The Lancet Planetary Health ranked Taiwan fourth worst in the world for childhood asthma from exposure to traffic pollution.

The emissions standards set to be adopted are the Euro 6, the EU’s most stringent yet, which have forced a number of traditional car companies to rethink their R&D strategies, diverting more resources into the development of electric models.

“The problem for car makers in markets around the world is that you first need to find a way to emit less pollution, and then try to reduce the fuel economy to the lowest amount possible,” says Thomas Fann, former president of Ford Lio Ho Motor Co. “None of the car companies believe that they will be able to meet the EU’s very stringent standards with the current combustion engine model. So the trend is going to be toward EVs.”

Fann notes that most major industry players, including Ford, Mercedes-Benz, and Volkswagen have introduced – or are in the process of bringing to market – new fully electric models.

While the sole local Taiwanese car brand Luxgen has rolled out its own line of electric cars in the past year, sales have been minimal so far, and consumers have expressed concerns about the limited range the vehicles can travel before needing to be recharged. Tesla, therefore, still dominates the electric vehicle market in Taiwan.

In previous years, the cost of Tesla’s electric cars was beyond the ability of most Taiwanese consumers to afford. However, a company decision earlier this year to reduce the price of all of its models worldwide opened the way for drivers of more modest means.

Major cuts to the price tag on the company’s higher-end models – the Model P100D went from NT$6.389 million to NT$3.06 million, a reduction of over 50% – led to a surge in sales for the company in 2019. According to Secretary General Chen Ming-teh of the Taiwan Transportation Vehicle Manufacturers Association, Tesla experienced sales growth of an astounding 453% in the first three quarters of 2019. The move also attracted the ire of early buyers, who tried and failed to obtain compensatory measures from the company in Taiwan.

An industry insider who declined to speak on the record mentioned that with an increasing number of companies focusing on producing low-emission or fully electric vehicles, Tesla is more likely to keep the prices on its vehicles affordable moving forward, targeting the mass market rather than those with deep enough pockets to spend more than an average of NT$1.5 million (the approximate cost of a basic Tesla Model 3).

Although the Tsai Ing-wen administration, the business sector, and civic groups are supportive of the move toward electrification, the proliferation of electric vehicles on the island gives rise to some other thorny issues. A big question on many minds is how to make Taiwan’s infrastructure more accommodating for electric vehicles.

Taiwan faces the issue of limited space, especially in denser metropolitan areas, which could pose a problem for installing charging stations in business and residential buildings. “In the parking garage of an average high-rise or apartment building, there just is not enough room for putting a charger in every parking spot,” says Champion Chen, editor-in-chief of local car industry publication TopCar.

The industry insider who spoke to Taiwan Business TOPICS admitted that space is an issue, as is the fact that such at-home charging stations must tap into public electric lines. But he also noted the investment Tesla has made in installing a large number of DC-powered supercharger stations around the island.

Taiwan’s government has worked on setting up its own system of public EV chargers over the past two years. There were around 1,700 such chargers in 2018, and the total is expected to be raised to about 5,000 by 2022.

The existing chargers, however, have generated some user complaints about quality and the amount of time needed for the AC-powered stations to fully charge their vehicles. Also, according to an article in local publication Digitimes, there is no set standard for the current chargers; some have multiple adapters, which drives up the cost of installation.

Another, more pressing question is how to maintain a large-scale system of chargers while continuing to confront Taiwan’s energy sufficiency issues. With the Tsai administration pushing to phase out nuclear and reduce coal power within the next several years, concerns remain as to whether Taiwan will have adequate energy supply to meet current demand – much less a nation-wide electric transportation infrastructure.

Others dismiss fears regarding a lack of energy resources, pointing out that the majority of at-home charging will be done overnight, when energy-use levels are much lower. In addition, the energy conversion rate of electric vehicles is around 59-62%, three times higher than the 17%-21% possible with conventional gas-powered vehicles.

Taipower, Taiwan’s state-owned utility, has over the past few years begun implementing Demand Response methods to combat the strain on the power grid caused by excessive consumption. Under these programs, monetary incentives are provided to factories, businesses, and private citizens in return for cutting down on peak-time energy use.

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