South-east Asia gearing up for the EV revolution

GOVERNMENTS in South-east Asia are floating very ambitious plans to capture a share of the electric vehicle (EV) market. And rightfully so.

As countries around the globe prepare for carbon neutrality, the automotive industry has initiated a fundamental transformation. At the COP26 summit in November, various nations and leading car manufacturers pledged to phase out fossil-fuel-powered vehicles by or before 2040.

With governments in the region aiming to get a slice of the pie, the aim is clearly to create various opportunities for the regional industry, both for the export business as well as domestically.

Thailand has the strongest footprint in the motor vehicle sector in the region, fabricating 2.5 million units at the peak in 2013 and - after the pandemic hit - 1.7 million in 2021. The country expects 30 per cent of the output to be electric by the end of this decade, according to a roadmap published last year.

Indonesia, the world's largest producer of nickel - a key component in lithium batteries - aims to become an EV production and export hub. Vietnam, meanwhile, is growing with VinFast a national EV champion that is eager to conquer the US and Europe.

The shift towards electric mobility will be essential to safeguard vehicle manufacturing in the region. However South-east Asian buyers and most of the existing car manufactures don't seem ready to adapt and exploit the market openings, which can open opportunities for homegrown players to step in.

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Here are 3 key entry approaches as homegrown players seek to seize business opportunities.

Enter the regional champions

Currently, Japanese OEMs have a comfortable lead in the region. But local giants such as VinFast are gaining ground, often with Chinese or European help. The major global car manufacturers have set ambitious emission targets for themselves and plan to launch around 400 new battery electric vehicle models by 2025. Therefore they have a great interest to support South-east Asian countries in the transition away from the combustion engine.

For at least the next 5 years, these large international firms will continue to dominate manufacturing in the region, before the domestic champions can take control. As sales and marketing are growing, the focus has to be on the value chain, that is, aftersales and mobility-as-a-service. That area is now managed by many local small and medium enterprises (SMEs), which rely on networks that national players can tap more easily to gain an edge over their foreign competitors.

The region is nonetheless still considered a huge, high potential emerging market where the vehicle ownership ratio remains below 20 per cent. The entry segment needs to be approached with affordable, digitally sophisticated products with an attractive design. This is a main strength of Chinese players such as SAIC, Geely, and GWM, which provide a benchmark for how a new national brand like VinFast can enter the market.

Founded in 2017 with a US$5 billion investment by local conglomerate Vingroup, VinFast started producing conventional cars with BMW technology in 2019. The brand introduced its first 2 EV models at the LA Auto Show in November 2021 and plans to offer them in the US market for a competitive price, thanks to its innovative battery leasing model.

The company announced plans to open production facilities in the US by 2024 and Germany by 2025. In Vietnam, it is building a US$174 million battery cell plant which will initially produce 100,000 battery packs and ultimately achieve a capacity of 1 million.

Build a new EV component hub from scratch

Indonesia has made battery manufacturing the core part of its own EV strategy that rests on its vast resources of nickel ore. It banned exports of the metal in 2020 to protect its industry. Chinese battery giant CATL committed to a US$5 billion investment, while LG Chem will enter into an alliance with Indonesia Battery Corporation (IBC), a holding company that includes the state-owned energy, electricity, and mining firms. Taiwan-based Foxconn announced that it will produce electric vehicles and batteries in Central Java, starting later this year.

The Indonesian government is granting both fiscal and non-fiscal incentives, targeting 400,000 electric cars and 1.76 million electric motorcycles by 2025. But it will at the same time need a major effort to build out the infrastructure. Hyundai Motors, which is setting up a battery plant in West Java with LG Energy Solution, not only invests in EV production but also promised support for the development of charging stations, as well as the recycling of used batteries.

Battery recycling could become a viable alternative for countries without rare metal resources. Singapore last year inaugurated South-east Asia's first dedicated facility with a capacity to recycle 14 tonnes of lithium-ion batteries.

In the European Union, where reusage has already become a strong trend, legislators proposed a new directive requiring that from 2030, EV batteries need to contain minimal levels of recycled cobalt, lead, lithium, and nickel.

Leverage new EV platformer

Foreign investors are also driving innovation on the ground. In September, Thailand's national oil and gas conglomerate PTT launched an EV production joint venture with Foxconn, to operate a plant in the Eastern Economic Corridor. While the local partner will provide auto parts, EV infrastructure, and the customer network, the alliance will greatly benefit from Foxconn's MIH platform.

MIH ("mobility in harmony") is to EVs what Android is to mobile phones - an open platform allowing manufacturers and developers to share technological expertise and the possibility to build and add major components such as batteries, driver assistance systems, cybersecurity, or cloud connectivity on top of a base structure. For EV entrants it can be a valuable option, as it reduces complexity and costs. At the same time, it accelerates the commoditisation of the vehicles.

Thailand's government hopes that projects like this will help local suppliers to have an easier transition to EV component production. PTT further supports the growth of the industry with an EV car rental service and by installing chargers at its petrol stations around the country.

All in all, South-east Asia still has certain advantages as a global low-cost manufacturing hub, and at the same time has a very promising domestic, regional market. Business opportunities abound. They will continue to encourage more and more existing and new players to enter this highly attractive business, which in the long run will result in a transformation of the region into a production hub for worldwide affordable EVs.

The writer is principal, head of automotive practice in South-east Asia, at Arthur D Little