ASEAN's Automotive Affair

Thailand, ASEAN, +3 and the future – The automotive industry sits this one out

"It has long baffled observers that Bangkok has no overt desire for unique models, brands or 100 per cent IP ownership a la Malaysia or China"

The auto industry invented globalisation and is bigger and more powerful than FTAs. It also doesn't conform to the norms of market drift. So the auto industry in Thailand remains relatively unaffected  by the knockabout of Thai politics and views ASEAN+3 with equanimity or even indifference.
Few vehicles exported from Thailand find their way to Japan, Korea or China anyway – or Thailand's other major export markets, Europe and the US, for that matter (although Thailand remains the world's second largest pickup market, its taste is for one-tonners, considerably smaller than those sold in the US). Some 95 percent of total exports go to Africa, Middle East and Oceania, in addition to other ASEAN nations, which also import into Thailand. Indonesia, Malaysia – and to a lesser extent Philippines and Vietnam – also have local production or assembly and have benefited tremendously from AFTA, although the implementation of the agreement has been generally and sometimes infamously inconsistent. Kuala Lumpur and Bangkok remain hardly on speaking terms over the former's protracted delay in allowing Thai-built vehicles into Malaysia at the agreed rates of duty in order to 'protect' its national carmaker Proton and its other local brand Perodua (owned by Daihatsu and thus a subsidiary of Toyota), although Protons are now on sale in Thailand. (Also starting to be seen on Thai roads are Chinese brands – Chery and Geely.)
The vogue is for individual FTAs, often prompted by automakers seeking outlets for production at viable rates of duty (eg the one between Thailand and Australia). Most ASEAN nations are developing individual agreements with outside countries as they try to reduce their dependence on trade with China, Japan and the EU.
Senior industry executives privately voice great fears about India (more than China because of the high probability of oversupply in India, while China has struggled to keep pace with demand) and its auto industry's eastward expansion following its FTA with Thailand. Tata has pulled out of the Thai eco-car project, which mandates the use of 1.4-litre or smaller engines that deliver at least 5L/100km economy and comply with Euro IV emission standards. But its bargain-basement pickups are finding favour with the large Indian diaspora there at the expense of more established brands, while the Nano was shown at the Thailand auto show in Bangkok last December and has been tested in local consumer clinics (with less than stunning results, according to insiders). The car debuted in India with a base price below USD2,500.
Observers believe Tata baulked at the eco-car programme requirements: an immediate USD215 million investment and annual production of at least 100,000 units within five years. Instead, Tata is moving forward with plans to launch its Xenon luxury pickup truck in Thailand. It plans to produce up to 20,000 of the vehicles per year at a new plant in Bangkok, and capture 5 percent of the market by 2014.
Japan-based OEMs account for four in five vehicle sales in ASEAN and there is little likelihood of change. Hence more than five years of wrangling over Thailand’s eco-car programme: the Japanese 'big two', for so long now cosy with the Bangkok ruling elite, got their way as the rules were framed to enable Nissan and Toyota to produce versions of existing Japanese or European minicars. European carmakers have no use for yet another plant to build their own minicars and no market to speak of locally.
However, Mitsubishi, which plans to make about 50,000 of the vehicles in the first year of production, is expected to be partnered by either VW or Peugeot. But time is running short (insiders claim PSA* will make an announcement at the Paris Salon at the end of September, while VW is set to tie up with Suzuki instead). The plant’s annual output is expected to eventually reach 200,000 units, thus doubling the company’s existing capacity in Thailand.
Toyota et al use countries like Thailand to source parts. One example is Japan’s U-Shin, which makes air-con and electrical system parts and will open a new USD21 million components factory in Thailand near its existing facility in Rayong within the next two years. Initially it will supply Suzuki's new assembly plant but it is also designed to supplant two existing factories in Japan which will be closed down.
Mark Apfel, president of GM Thailand and GM Southeast Asia Operations, says GM plans to increase annual purchases from suppliers in southeast Asia to as much as USD1.6 billion within three years; the bulk of the increase will be in Thailand. The parts will be used in Chevrolet trucks and cars produced in Rayong and at a new diesel engine plant being built there.
One pointer to a stable local auto industry is R&D. Thailand has hitherto lacked significant local expertise in developing new and, in particular unique products, although the next-generation Isuzu D-Max pickup will be engineered and designed in Thailand. It has long baffled observers that Bangkok has no overt desire for unique models, brands or 100 per cent IP ownership a la Malaysia or China, but this seems unlikely to change and Isuzu will be an exception to the rule unless Bangkok promotes R&D in a manner similar to the state authorities in Australia (Victoria and SA).
Some analysts had speculated that two months of anti-government protests in Bangkok might deter foreign investment in Thailand. But others say that Thailand, with its developed infrastructure, of which the most important element is a sufficient supply chain for JIT production, remains attractive to manufacturers – especially now factory workers in China are clamouring for higher wages.
Undeterred, carmakers are quietly interested in outcome of elections in Burma (a tasty potential market once unlocked, with Thailand in a good position to compete with another neighbour, China, because the latter doesn't produce pickups, which will be vital to recovery in Burma's agricultural and construction sectors) and even more interested in matters like the EIA situation around Rayong which looked likely until very recently to deter Ford from its USD425 million expansion.  BRT

*PSA Peugeot-Citroen

This article first appeared in Business Report Thailand, Issue 1, special focus report on 'Thailand's ASEAN Economy', October 2010.