Life in the fast lane: A resilient auto sector has quickly bounced back from disaster and is now looking to go green

In spite of absorbing some of the most substantial damage to any sector meted out by the October 2011 flooding disaster, Thailand’s automobile industry barely broke stride in its decade-long growth spurt. In fact, once the sector resumed full-scale production, output reached an all-time high of 499,000 units in the first quarter of 2012, on the strength of a 190,000-unit output in March 2012, according to data from the Federation of Thai Industries (FTI). Provided these production rates keep steady throughout the rest of the year, production will reach an all-time high of some 2m units in 2012, above the previous 2010 peak of 1.65m units and one-third greater than the 2011 figure of 1.46m.

MAIN PLAYERS: The majority of major international automotive manufacturers, including Ford, GM, Nissan, Mitsubishi, Mercedes Benz and BMW, are represented in Thailand. As a result, the country’s auto industry is South-east Asia’s largest vehicle producer and the world’s second-largest producer of pickup trucks.

Toyota is the country’s largest producer, with an annual capacity of 500,000 units per annum (upa), with another 100,000-upa expansion expected by 2013. Fellow Japanese brands Honda and Isuzu are next in line, with capacities of 360,000 upa and 358,000 upa, respectively, according to the Thailand Auto Institute (TAI). Exports just edge out imports in terms of units shipped versus domestic sales. The primary markets are Asia, with 32% of total 2011 exports, followed by the Middle East and Oceania, with 21% apiece, and Central and South America (11%), Europe (10%) and Africa (5%).

While exports are great for the country’s trade balance, Thailand’s domestic market is also thriving and accounted for 749,239 of the 1.65m (45.54%) vehicles produced in 2011, according to data from TAI. “We expect domestic sales to grow faster than exports, partly due to the volatility on international markets, foreign exchange changes and rising purchasing power locally,” Ninnart Chaithirapinyo, the vice-chairman of Toyota Motor Thailand, told OBG. While part of this trend is due to Thailand having a higher GDP per capita and a more robust road infrastructure than many of its neighbours, the government has also had a hand in encouraging domestic consumption through tax breaks.

GIVE ME A BREAK: Most recently, the cabinet implemented an excise tax refund on under-1500-cc vehicles and pick-up trucks for first-time buyers. Vehicles of a bit higher quality, however, are still taxed on a graduated scale predicated on engine displacement. Those starting with a displacement of less than 2000-ccs are generally taxed at a 30% rate (the recent tax refund notwithstanding), followed by those of up to 2500 cc at 35%, up to 3000 cc at 40% and topping out at 50% for vehicles with engines with a displacement of greater than 3000 cc. But with engines becoming increasingly efficient, making displacement size a less accurate measure of consumption and emissions, there are now discussions among the government to re-evaluate the auto tariff system, although no timetable has been set for this at the time of press. Auto manufacturing also should give a boost to the country’s tyre industry. “While Chinese tyre imports grew substantially in recent years, they have been stabilising as consumers consider the lifetime of tyres and look more closely at quality,” Yutaka Furukawa, the managing director of Yokohama Tyre Sales (Thailand), told OBG.

BUMPY ROAD: There was a time when the future of the Thai auto manufacturing was very much in doubt. After the 1990’s Asian economic crisis dragged down Thai auto exports to fewer than 150,000 upa in 1997, TAI instituted a new development plan to boost production back up to 1m units by 2006.

The plan succeeded, and the country now ships the vehicles to some 170 countries worldwide. After exceeding the volume production goals set for the 2001-06 development plan, the focus of the next five-year plan shifted to moving up the value chain in passenger vehicles. With the high-end, high-margin luxury market already established elsewhere, the Thai automotive sector turned to capitalising on growing environmental movements sweeping the globe by constructing more ecologically friendly vehicles, or eco-cars. The TAI plan experienced trouble in 2011, however, when the tsunami and ensuing Fukushima nuclear power disaster cut off supplies from Japan and when floodwaters inundated production facilities in Thailand. An auto parts shortage resulted in a temporary reduction output of approximately 50% in late April and May 2011 before resuming full production again in June. As a result, first-quarter production in 2011 declined 27% from the previous quarter. When the worst flooding in 50 years hit Bangkok-area factories, production took another hit, dipping to 173,000 units for the fourth quarter of 2011 – a 64% slide from the previous quarter.

GOING GREEN: Not content to simply hold its place among global auto export leaders, Thailand is already taking steps to secure a strong position among the eco-car trend. Touted as more ecologically friendly than their predecessors, these vehicles lean heavily on new technology such as fuel-efficient engines, battery-powered motors and the like to reduce fossil fuel consumption and harmful emissions. In order to incentivise production, Thailand’s BOI is offering a number of financial inducements specifically for eco-car producers, including exemptions from import duties on machinery and from income tax for up to eight years, and a reduced 17% excise tax offer by the Ministry of Finance. But in order to earn these, producers must also fulfil a set of criteria. These include a commitment by every applicant to invest a minimum of BT5m ($159,500) into the programme, including parts and production, and a minimum production capacity of at least 100,000 upa by the fifth year of operation while the vehicle must also attain fuel consumption of less than 5L per 100 km, emissions of Euro 4 or higher with CO2 emissions less than or equal to 120 grams per km, as well as other safety and engine displacement requirements.

EXPANDING ECO-FRIENDLINESS: While Thailand’s current staple, pickup trucks, has a limited target market, the increasing appeal of eco-cars across a spectrum of consumers has provided several opportunities for multiple global production hubs in places such as Mexico, Eastern Europe, South America and Thailand. With this in mind, the government is moving quickly to ensure Thailand is well placed to take advantage of this market segment in the future. “It is feasible that Thailand will be the Asian manufacturing base for eco-cars serving the Asia and Oceania markets,” Vallop Tiasiri, the former executive director of TAI told OBG.

Eco-car production is expected to eventually reach 1.3m-1.4m units per year, with roughly half exported. Some 800,000 eco-cars are expected to be produced in 2012, more than double the 2011 total. This new production base, combined with existing output in other areas, could push annual output to 2.5m units by 2015. With a domestic market estimated to absorb a maximum of 1.5m upa, a substantial portion of the output would be exported, with 75% expected for Asian markets and 25% meant for Europe and South America.