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.
This is according to a report titled "EV Makers To Bet $20 Billion On South And Southeast Asia."
"By our estimate, rated carmakers will be spending more than US$20 billion building electric vehicle [EV] production in South and Southeast Asia for the next few years. The expansion will likely enhance the business strength of some rated entities," said S&P Global Ratings credit analyst Claire Yuan.
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.
The main outlier will be Japanese firms, which 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 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 also 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," said Ms. Yuan, adding that, "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." This report does not constitute a rating action.