The building of an electric car industry in South and Southeast Asia (SSEA) will be expensive. It will involve execution risk typical for cross-border expenditure, where entities will try to anticipate shifting policies over long investment horizons. And yet, we anticipate the creation of the EV sector in SSEA will be somewhat credit positive, particularly for the Chinese car firms.

S&P Global Ratings estimates rated carmakers will be spending more than US$20 billion building electric vehicle (EV) production in this region for the next few years. The expansion will likely enhance the business strength of some rated entities.

For example, production in SSEA will help Chinese carmakers diversify their operations and customer base, while competition is intense at home. It also provides a potential means of exporting to markets such as Europe, which impose steep tariffs on direct China-originated battery-EV imports.

Japanese firms will be the main outlier. They face a gradual slippage in market share, as EVs erode their dominance in light-vehicle sales over the coming decade.

That said, Japanese carmakers should maintain a leading market position enjoying healthy sales over the coming few years thanks to the strength of their internal combustion engine (ICE) and fuel-efficient hybrid vehicles. ICE and hybrids will account for most light-vehicle sales in SSEA. 

Japanese carmakers such as Toyota Motor Corp. and Honda Motor Co. Ltd. are leveraging their advantage in hybrid vehicles. Hybrids are a transition vehicle for consumers wanting the fuel savings but may be concerned about getting stranded, given the lack of charging infrastructure in the region.

Korean carmakers are in the middle. They are investing in the region to seize the growth potential. Such companies have increased their production capacity in SSEA and will leverage their ability to quickly shift between EVs and hybrid models based on market appetite. The investment in the region will likely help entities offset their weak position in China.

While firms will be incurring capital expenditure (capex) to build EV factories in the region, the financial burden will be spread over years, and typically shared with partners. Among rated entities building factories in SSEA, their investments will comprise less than 15% of the firms' combined total capex over next few years, we estimate.

SSEA Is An Important Growth Market

The region is home to over 2 billion people, and has among the lowest car ownership rates globally. Expanding economies, rising disposable income, continuous urbanization and low rates of vehicle ownership set a foundation for above-average growth in auto sales in SSEA over the next few years.

EVs will be leading the gains in many of these markets. State measures and the lower lifecycle costs of owning such a vehicle will propel sales. The region is brimming with supportive policies to bolster EV adoption, with an eye on fostering electric-car production. Many consumers in the region prioritize affordability and are more open to new technology or brands. We assume over 20% compounded annual growth in EV sales in SSEA over 2024-2026.

Table 1

Thailand

Thailand has highly supportive government policies for EVs, in line with its aim to become an EV manufacturing center. This would be a natural and necessary evolution of its car industry, which contributes about 10% of country's economy, and employs (directly and indirectly) about 850,000 people, according to the International Labour Organization.

The government is alone in the region in offering a cash subsidy on EV purchases to individual consumers--about US$700-US$3,000 per vehicle through 2024-2027. This is a substantial incentive for the country's price-sensitive consumers.

Widening product offerings, purchase subsidies, and price cuts will likely raise EV sales to about 18% of light-vehicle transactions in Thailand in 2026, from 12% in 2023.

Indonesia

Indonesia makes about 40% of the world's refined nickel, and we believe the country will leverage this output to be a key player in EV battery production in the region (see "Your Three Minutes In Indonesian Nickel: The Disruptions Are Structural," published on RatingsDirect on Feb. 27, 2024).

A growing supply chain and increasing availability of affordable EV models from international carmakers will help to induce more EV purchases in this country.

India

As the world's most populous country, India's vast market potential is attracting substantial EV-related investment. We estimate that the Tata and JSW groups alone will be investing over US$30 billion into making EVs and EV materials over the coming decade, of which about US$10 billion will be in SSEA. (see "Indian Conglomerates Poised For US$800 Billion Investment Push," Oct. 14, 2024).

EV adoption in India will progress with model launches that bring prices more in line with ICE models, and with improving charging infrastructure.

We also believe hybrids and vehicles powered by compressed natural gas will command meaningful market share alongside EVs in the light-vehicle and passenger commercial vehicle segments. The transition from ICE in India will initially be more about a shift to alternate fuels rather than pure electrification, in our view.

Government policies on imports and foreign investment will continue to play a critical role in India's vehicle electrification. We anticipate the country will remain dependent on imports such as batteries to meet its EV production targets over the next three years, at least.

The Indian government continues to push for higher EV production in the country and for greater localization of supply chains. This will be key to reaching the country's target of 30% EV penetration by 2030.

Chart 1

SSEA Will Be Important To Chinese EV Makers

Given the region's high growth prospects and fierce competition at home, Chinese producers have been increasingly expanding into SSEA.

Chinese carmakers have demonstrated a clear capability in producing low-cost, well-functioning EVs. Their challenge now is to find more markets to sell their goods. SSEA has growth potential, particularly given its relative acceptance among local consumers to Chinese brands.

We expect the share of Chinese firms in the region to climb as more players enter these markets, as well as with the commissioning of localized capacity (see table 2). This should be especially the case in Thailand, given the country's fast pace of electrification.

Table 2

Chinese brands accounted for 14% of the Thailand's light-vehicle sales in the first half this year, almost triple that of three years ago. Within the EV space, we estimate that Chinese firms accounted for over 80% of the Thai market, led by BYD Co. Ltd.

In Indonesia, Chinese players' market share rose to 5% of total light vehicle sales in the first half this year, thanks to the popularity of their affordable EVs.

Chart 2

The move to SSEA marks an important step of Chinese carmakers' true overseas expansion--that is, an expansion beyond exports. We assume the move will be modestly credit positive for Chinese auto makers.

Apart from additional business growth and geographical diversification, building manufacturing facilities in other countries may also help entities to sidestep the steep tariffs on Chinese EVs in large markets such as Europe and the U.S.

We see limited financial impact from their overseas push given that their planned capacity expansion will typically be small.

Among rated issuers, Geely Automobile Holdings Ltd. is the most active in SSEA. The company holds a 49% stake in Proton Holdings Bhd., the second-largest carmaker in Malaysia, which mainly sells ICE vehicles.

Geely recently partnered with DRB-Hicom, a Malaysian conglomerate and the controlling shareholder of Proton, to form a partnership within the country's Automotive High-Tech Valley. The project aims to position Malaysia as an EV production hub in SSEA.

The company also have plans to establish EV assembly plants in other markets, including a US$168 million factory in Vietnam that it intends to commission in 2026.

We expect Geely to continue to use local partnerships to minimize its investment. This approach will reduce execution risk, by leveraging partners' sales networks and expertise in local regulations.

Japanese Producers Will Strive To Maintain Their Lead

Japanese carmakers will likely retain their leading sales position in the SSEA region over the next two to three years at least.

ICE vehicles and fuel-efficient hybrid models will account for most light-vehicle sales in SSEA; the vehicles are an area of strength for the Japanese firms. Hybrids appeal to environmentally conscious consumers not willing to make the full transition to EVs. The Thai and Indonesian governments offer incentives on the purchase of hybrid vehicles, to reduce carbon emissions.

The Japanese firms will also continue to benefit from incumbency advantages: manufacturing efficiency based on local supply chains, and established sales networks.

Chart 3

In our view, Japanese automakers will likely command a 60%-70% share of light vehicle sales in Southeast Asia. With a history in the region stretching back to the 1960s, Toyota Motor Corp., Honda Motor Co. Ltd., and Mitsubishi Motors Corp. have strong brand recognition. Toyota controls about 35% of the Southeast Asian market, Honda more than 10%, and Mitsubishi has 7%-8% of the market.

Chart 4

That said, their challenges are rising, especially in markets where electrification is progressing faster. Southeast Asia accounts for about 10% of rated Japanese carmakers' overall sales. We believe that the spread of EVs and the further advances of Chinese automakers will erode the market share and profitability of Japanese automakers in Southeast Asia in the coming three to five years.

Indicatively, Isuzu Motors Ltd., Nissan Motor Co. Ltd., Mitsubishi, Mazda Motor Corp. and Suzuki Motor Corp., have gradually lost market share in Thailand since 2020. In 2024, Suzuki and Subaru Corp. both announced plans to stop production in Thailand. Toyota and Honda's share of this market has been stable.

The start of local EV production in SSEA will also likely intensify price competition, although Chinese automakers' share of the Southeast Asia is only around 5%.

The strategic importance of India will increase for Japanese automakers. They have little exposure to the Indian market, which comprises less than 2% of total sales for rated automakers. Suzuki is a major exception; it has a 35%-plus share of the Indian market.

Being the world's third-largest auto market, India will likely grow at an accelerating rate over the coming decade. It is becoming increasingly important for Japanese automakers to boost global sales given their sales in China are sluggish. In our view, Japanese carmakers' competition with Chinese rivals will intensify in Southeast Asia and other emerging markets.

Korean Producers Invest To Expand

India is increasingly important to the Korean entities Hyundai Motor Co. (HMC) and Kia Corp., which combined rank as the second-largest carmaker in the country. The market accounted for about 12% of the group's global sales volume in 2023. Hyundai also acquired a plant in India from General Motors Co. in 2023; with a launch of operations set for 2025.

Hyundai plans to continue investing in India, including in local EV production. It will start with its first fully electric model made in the country, launching in January 2025. The company recently completed an initial public offering in India, and part of proceeds will be used to further their growth and improve its product offerings in that market.

Korean automakers are also making sizable investments in Indonesia. They built an EV production base there, including a joint venture with a battery-cell maker LG Energy Solution Ltd. The Indonesian plants will serve as a EV production hub for the broader SSEA market. The strategic importance of SSEA for Hyundai-Kia will increase--as a market and as a production center.

Indian Producers Focus To Maximize Their Local Advantages

Tata Motors Ltd. sells the most EVs in India. It aims to maintain its top slot in the segment through model launches, even as competition grows briskly. Already India's third-largest carmaker by sales, the company targets an 18%-20% share of the passenger-vehicle market by fiscal 2030.

We believe Tata Motors has sufficient financial headroom in its credit metrics to undertake its EV investments. In September 2024, the firm announced plans to invest about US$1 billion in a new EV plant in the south Indian state of Tamil Nadu. The company raised about US$1 billion from the asset manager TPG Capital in 2021 for its EV investments.

Its parent entity, Tata Sons Pte. Ltd., has also announced an investment in a lithium-ion battery plant in the northwestern state of Gujarat, with an initial capacity of 20 gigawatt hours. The plant will support more development of the EV supply chain in that region.

A New Playing Field

SSEA will be a growth market and a testing ground for the world's EV makers. The abundance of first-time car buyers for any vehicle type offers an open lane to existing and new players. Consumers, often price-sensitive, will prioritize affordability over brands. That offer an attractive opening to new players, particularly the Chinese EV makers.

We expect rated entities to use financial discipline, and to lean on local partnerships, to manage the risks of this expansion. However, we leave open the possibility that the onset of new players and increased capacity will result in excess supply and intense price competition over the coming three to five years. We've seen this before, especially in China.

Editor: Jasper Moiseiwitsch

Digital Designer: Evy Cheung

Related Research

• China Auto: Survival Of The Fittest, Oct. 17, 2024
• Indian Conglomerates Poised For US$800 Billion Investment Push, Oct. 14, 2024
• Rated China Carmakers Can Take The Heat From European Tariff Hikes On EVs, June 17, 2024
• China EV Startups Struggling To Stay Afloat, May 28, 2024
• Hybrids Prop Up Japanese Automakers, April 26, 2024
• Glimmers Of Winners Emerge In Asia's EV Push, May 14, 2023
• The Promise And Pitfalls Of Indonesia's Nickel Boom, March 13, 2023