Thailand’s automotive sector gearing up

Auto manufacturers based in Thailand are continuing to boost production capacity, with ground being broken for a series of new plants and expansions to existing facilities. However, there are some concerns that both domestic and export sales may ease later in the year due to expected economic cooling at home and abroad.

The automotive sector’s contribution to the Thai economy represents around 12% of GDP, making it Thailand’s third largest industry, and one of its largest employers, providing some 400,000 jobs. Unlike some of its regional rivals, Thailand’s automotive sector is fed by its own stream of parts, with locally manufactured components representing around 80% of production input. The parts sub-sector also represents a significant export earner in its own right, generating revenue of $5bn in 2012, adding to vehicle exports of more than $20bn.

Having briefly been usurped by Indonesia as South-east Asia’s largest automotive market in 2011 due to flooding that year, Thailand returned to the top position in 2012, with sales of just over 1.44m vehicles. This, combined with exports of a further 1m, took total production for the year to 2.45m, a figure the industry looks set to overtake in 2013, with output as of the end of May running to 1.123m units, well over twice the 488,000 vehicles that rolled out of Indonesia’s factories in the first five months of the year.

According to data issued by the Federation of Thai Industries in June, automotive exports for May were just over 86,500, a 28% increase month-on-month, while overall shipments for the January to May period were up 21%, to 438,000. Local demand has also been accelerating, in part due to a strong recovery from the 2011 flooding, fostered by a government support scheme offering tax rebates to first-time car buyers, which helped post domestic sales by 80% in 2012.

Rising domestic demand and higher overseas sales have prompted a number of leading manufacturers to invest in capacity, with Japanese producers Mazda and Honda both building new facilities. Honda has started construction of a plant at the Rojana Industrial Park in Prachinburi province, which when operational in 2015 will add 120,000 units to the firm’s existing production capacity of 280,000. The company is also expanding its existing factory in Ayutthaya with the aim of lifting total national output to 420,000 units by 2015. Not to be outdone, Mazda is in the process of building a plant to produce auto transmissions, with the $257m factory located in the province of Chonburi.

US manufacturer Ford is another company looking to boost its Thai output, having announced plans to expand its existing plant, a $450m factory that opened last year with a capacity of 150,000 units, up to 450,000. The first stage of this project, expected to come online this year or early 2014, will boost output to 200,000 units.

While manufacturers are increasing capacity, there could be some challenges further down the road for the industry. Some experts are predicting a cooling of domestic demand, with the Thai economy widely expected to slow slightly. Though the Bank of Thailand still believes GDP could expand by 5.1% this year, other agencies and analysts are taking a more conservative approach. The IMF has forecast growth of 4.75%, while in early July the University of the Thai Chambers of Commerce predicted the economy would increase within the range of 4% to 4.5%, down from its earlier estimates of 4.8% to 5.2%.

Slower growth in other regional markets could also see a tapering off of automotive exports, though like domestic demand, these could rebound in the new year as the global economy regains momentum, as forecast by the IMF in its latest world economic outlook report.

There is also some uncertainty over proposed changes to government’s industrial incentives, a policy that has to date benefitted the automotive sector. The state offers tax breaks to certain enterprises to set up shop in designated industrial zones, with the geography-based support scheme favouring developments in areas well away from the capital. This policy has been successful in attracting investment to regions previously lacking in employment opportunities and industrial activity. However, the government is reportedly considering a change of focus, with incentives to be directed towards industries providing higher value-added goods and services.

While the automotive sector has been designated as one of several that will be able to take advantage of the new programme, it is as yet unclear what form this support will take or whether it will be extended to cover existing investments. Government incentives may become increasingly important to Thailand’s auto industry, due to a growing shortage of skilled labour, which has pushed up wages and made it difficult to staff production lines.

Though most forecasts predict Thai domestic auto sales to increase or at least maintain last year’s levels, it is unlikely there will be the sharp jump in vehicle numbers rolling off the lots as happened in 2012. Export rates too will depend on how well overseas markets cope with the level of economic cooling predicted by the IMF, though as the increased investments by manufacturers indicates, the Thai automotive industry is looking beyond the occasional bump in the road.