Thailand's automobile industry sees rise in production

Over the past 50 years Thailand has nurtured its automobile industry into a stalwart pillar of its industrial base as the country has established itself as the premier automotive hub within the South-east Asian region and beyond. A snapshot of automobile assemblers operating in the country reveals a line up fit for any international auto show replete with many of the top-selling global brands. Ford, General Motors, Honda, Mazda, Mitsubishi, Nissan, SAIC Motor, Suzuki and Toyota – the majority of premier automotive manufacturers from the US, Europe and Asia are represented in Thailand hailing.

The automotive sector, including parts and accessories, remains one of the most valuable export products shipped from the country, annually accounting for more than 10% of total export value. In 2015 the industry continued this trend with BT1.09trn ($32.8bn) worth of goods exported.

Production Numbers

Aided by additional demand on the domestic market, Thailand ranked just outside the top 10 auto producers in the world in 2015, according to data from the International Organisation of Motor Vehicle Manufacturers (OICA). Carmakers in Thailand produced a total of 1,915,420 cars and commercial vehicles in 2015, ranking it 12th overall in terms of worldwide production just ahead of the UK with 1,682,156 units and behind France’s 1,970,000 vehicles. This was on par with its 2014 placement as the 12th-largest automobile manufacturer with a total of 1.88m vehicles produced, a downgrade from the previous year when Thailand rolled out 2.5m vehicles and cracked the top 10 as the ninth-largest producer.

Toyota is the country’s largest producer as of 2015 with an annual production capacity of 718,000 units per annum (upa) with fellow Japanese brands Mitsubishi, Nissan and Honda next in line with capacities of 450,000 upa, 240,000 upa and 240,000 upa, respectively. Other high-capacity plants include Isuzu’s 220,000-upa facility, the 200,000-upa Ford plant, Chevrolet (160,000 upa) and Suzuki (135,000), with Mazda and Ford sharing the Auto Alliance factory with a combined capacity of 300,000 upa.

Domestic Market

As car companies have tapped into Thailand’s industrial infrastructure to provide a base for a steady stream of exports, the domestic market has proven far more volatile for manufactures. After stable growth through much of the 1990s and 2000s which saw domestic vehicle sales increase incrementally from 438,634 in 1993 to 796,123 by 2011, the market hit a period of dramatic instability as the result of combination of factors.

Chief among these factors was an incentive programme launched by the government in part to support its strategic shift towards the fuel-efficient automobile niche and also as stimulus to help the country recover from flooding which crippled much of the industrial sector. Designed as both an incentive for people to switch from motorbikes to cars and a measure to boost car sales in the country, the government offered tax rebates of up to BT100,000 ($3010) for first-time car buyers.

A Significant Boost To Sales

The buyers’ incentive programme proved incredibly effective in the short term, fuelling an unprecedented year-on-year spike in vehicle sales in excess of 56% as purchases jumped from 796,123 automobiles in 2011 to a whopping 1.4m the next year, according to data from the Thailand Automotive Institute (TAI). The temporary surge was due to the expiration of the incentive at the end of 2012, spurring the buying frenzy which also prompted many low-income consumers to overstretch their finances and order their first car, only to default on payments later and thus add to the volume of the used car market.

Although still stronger than pre-2012 levels, domestic sales have receded rapidly from this high-water mark to just under 800,000 units in 2015.

In addition to the incentive policy, other unforeseen variables have also buffeted the industry over the past five years, including heavy flooding of Thai industrial areas along with the tsunami hitting the Japanese supply base, both of which caused temporary production shortages in late 2011.

After a quick and dramatic recovery due to the incentive programme, domestic sales entered a period of gradual decline which continued into 2014 as a result of economic factors including slower economic growth, poor crop prices and the strict loan regulations due to high household debt.

Eco-Car

Not content to simply hold its place among global auto manufacturing leaders, Thailand has aggressively targeted a rapidly growing niche market within the global auto market – the eco-car. Borne from a climate of high oil prices and an increasing global consciousness of the impact of carbon emissions and global warming, the Thai automotive industry in 2007 began to shift its focus away from trucks in favour of fuel-efficient vehicles. In addition to personal social convictions, sales of these lower-emission cars are also driven by consumers seeking to lower their fuel bills and to benefit from numerous government incentive programmes in many nations such as tax rebates for eco-friendly cars, lower tariffs, licensing fees and registration fees and other economic benefits.

While Thailand’s earlier staple – pickup trucks – has a more limited target market, the increasing appeal of eco-cars across a spectrum of consumers was anticipated to bring new opportunities for global production hubs in locales such as Mexico, Eastern Europe, South America and Thailand. Touted as more ecologically friendly than their predecessors, these vehicles lean heavily on new technology such as fuel-efficient engines, battery-powered electric cars, hybrids and the like to reduce fossil-fuel consumption and reduce harmful emissions.

In order to incentivise production, Thailand’s Board of Investment began offering a number of financial inducements specifically for eco-car producers including exemptions from import duties on machinery, exemptions from income tax for up to eight years and a reduced 17% excise tax.

But in order to reap these benefits, producers would need to meet a stringent set of criteria as well. These include a commitment by each applicant to invest a minimum of BT5m ($151,000) in the programme including parts and production, a minimum production capacity of at least 100,000 upa by the fifth year of operation, vehicle fuel consumption of less than five litres per 100 km, emissions of Euro 4 or higher with CO emissions less than or equal to 120 grams per km, as well as other safety and engine displacement requirements.

The first phase of the eco-car programme attracted significant interest from Japanese automakers in particular, with Honda, Toyota, Nissan, Mitsubishi and Suzuki all signing on to the programme in 2007. As a result, the companies received exemptions from corporate tax and import duty for machinery and equipment, and as much as a 90% reduction in import duties for raw materials and finished parts. This led to a surge of new investments over the next five years, with each of the carmakers pouring in an average of BT7.2bn ($216.7m) to support their new eco-car models. Since the debut of the first eco-car in Thailand in 2010, the segment has expanded continuously and accounted for 35% of the total domestic market as of Q1 2015. The fuel-efficient vehicles have been even more successful in the export market, where the export value of compact and eco-cars (2014 sales of $3.2bn) were nearly on par with that of conventional cars ($3.3bn).

In spite of this success, the future of the eco-car programme remains murky: the implementation of the second phase of the programme was initiated in 2013 but has seen little progress to date. This next stage offers similar incentives to the initial programme, but also requires significantly stricter emissions criteria to facilitate exports into Western markets which have more stringent environmental standards. Ten carmakers originally announced their intention to participate in phase two with an average projected investment of BT11.2bn ($337.1m) each, although only Mazda had released funding for its programme as of late 2015.

Another carmaker, GM, has withdrawn from the programme altogether citing a prioritisation of its core Chevrolet brand which targets the SUV, truck and large passenger car segments.

Trickle Down

In addition to the primary sales of automobiles, the sector transmits a ripple effect through the economy via its many layers of support industries and suppliers from electronic components to tire producers. As of 2015, Thailand had around 709 Tier-1 auto-parts suppliers and 1700 Tier-2 and 3 suppliers. Of the top 100 auto parts manufacturers in the world, 50 operate factories in Thailand.