Government initiatives seek to maintain Thailand's position as a leading automotive manufacturer

Auto manufacturing has long been at the centre of Thai industry. For more than half a century the segment has been the target of incentives, and these efforts have successfully attracted many foreign investors. As a result, the country is now a major international player in the making and selling of vehicles, and is the largest producer in South-east Asia. However, production costs are increasing, competition is intense, automobile technology is evolving at a fast pace and some policies have misfired. The cornerstone of Thai manufacturing is therefore facing headwinds, resulting in relatively stagnant production levels in more recent years.

In order to revive the sector, the government has made next-generation automotive manufacturing one of the First S-Curve industries of its flagship Thailand 4.0 policy. The aim is to attract investment in technologies that will enable the sector to regain sales momentum and ensure its leading position in the region. The auto industry is concentrated within the Eastern Economic Corridor (EEC), which is set to undergo extensive infrastructure development in the coming years to boost productivity and catalyse investment. Thailand 4.0 aims to develop more environmentally friendly cars and their components, as well as establishing centres for the relevant research and development within the EEC.

Long Game

Automobile manufacturing has a long history in Thailand. Anglo-Thai Motor was formed in 1946, selling Fords on Surawong Road. Manufacturing work, however, began in 1961 when the company began to assemble knock-down kits. It produced the Anglia, Cortina and Thames models and manufactured 525 units in its first year of operation. Thonburi Phanich Company, a distributor for Mercedes-Benz and Fiat, followed. A number of Japanese companies came soon thereafter, including Siam Motors and Nissan, Toyota Motor Thailand, Prince Motor Thailand, MMC Sittipol and Thai Hino Industry. By 2011, 17 automobile assembly plants were up and running. Total passenger car exports were in the single digits until 1980, and still below 1000 a year until 1988. By pursuing relatively open policies, Thailand’s automotive industry experienced remarkable growth. The country manufactured 1.99m units in 2017 and 1.94 in 2016, up from 500,000 in the late 1990s. Additionally, almost 872,000 domestic sales were recorded in 2017. The Thai auto industry is the largest in South-east Asia, even though the Indonesian sales market is larger, and the 12th largest in the world, with Thailand making more cars than the UK or Italy. The sector is also vital to the economy, generating 12% of GDP and employing 500,000 people.

However, output has been inconsistent in recent years. In 2012 and 2013 the country was ranked 9th globally, having produced more than 2m units, of which more than 1m were sold overseas. The government’s first-time car buyer scheme, initiated in 2011, drove the higher production volumes. Equally, the end of the scheme in 2012 caused a precipitous fall. Vehicles purchased under the programme could not be sold for five years, which significantly impacted medium-term demand. In 2014 production fell by 24.5% and domestic sales dropped by 33.7%. The industry has consistently run below its capacity of 3.5m plated vehicles per year.

Output is rising, but remains below the historic peaks. In March 2018 production hit 195,257 units, which was the highest level since 2014, but still lower than 2013, when the monthly figure broke 250,000. In April 2018 output dropped to 134,779 units, though this was still 11.87% higher year-on-year (y-o-y). In the first quarter of 2018 production was up by 11.3% y-o-y and domestic sales rose by 15.5% y-o-y, with sales rising by 25.2% in April alone. Exports increased by 4.1% y-o-y in the first quarter of 2018. The expectation is that the 2m-unit production mark will be broken again in 2018.

Despite the recent recovery in sales figures, a number of stakeholders still feel that more fundamental improvements in the macroeconomic environment are necessary before a significant and more sustainable sector expansion can take place. “The returning growth in sales in 2017 and 2018 is mainly the result of the push from the major Japanese auto manufacturers, but growth overall has been uneven,” Yeap Swee Chuan, president and CEO of AAPICO Hitech, a local manufacturer of automotive parts, told OBG.

Environmental Approach

The authorities, meanwhile, aim to secure long-term growth by diversifying and modernising automobile offerings. Previous attempts to encourage the production of environmentally friendly cars were met with mixed success. For example, enthusiasm for the eco-car programme launched in 2007 was underwhelming, as the minimum production levels required proved onerous. However, subsequent initiatives have had more success.

In order to encourage the production of more advanced and environmentally friendly vehicles, an excise tax was introduced in 2015 based on CO sions, E85 gasoline compatibility and fuel efficiency. It was aimed at pickup trucks and SUVs, and a spike in sales of these vehicles was noted before the introduction of the tax. The government aims to have 1.2m electric vehicles (EVs) on the road and 690 charging stations across the country by 2036.

The ultimate goal is to make the country a global centre for the production of eco-friendly cars. The National Reform Steering Assembly proposed supporting the production of EVs in 2015, and in 2017 the Board of Investment (BOI) approved a range of new incentives for EV manufacturers, including tax holidays between five and eight years. The most noteworthy incentives are being offered to battery EV (BEV) makers, which are eligible for tax holidays of five to 10 years, and makers of some EV parts can receive exemptions of up to 10 years. Plug-in hybrid EVs (PHEVs) and hybrid EVs (HEVs) are eligible to receive an exemption of three years.

These efforts have broad-based support, with the Ministry of Industry, the Thai Automotive Industry Association, the Eastern Economic Corridor and the Electric Vehicle Association of Thailand all backing the drive.

In March 2016 Prime Minister Prayut Chan-o-cha told Japanese automakers that the government is supporting the making of vehicles that run on electricity, biodiesel, ethanol and hydrogen. The executives attending the meeting included those from Toyota, Isuzu, Nissan and Honda. According to the government, all attendees expressed an interest in making next-generation cars in Thailand. In fact, many of these carmakers already have plans under way: the first hybrid produced in the country was Toyota’s Hybrid Camry model in 2009; Mercedes Benz began making hybrid engines in 2013 and is set to make PHEV batteries from 2018; and in early 2018 the German carmaker applied for BOI incentives to produce fully electric cars and plans to begin production this year. BMW has been undertaking PHEV assembly in Thailand since 2016 and is considering setting up a BT2bn ($57.9m) plug-in hybrid vehicle battery facility. The government has expressed hope that the factory would be up and running in 2019. In addition, Honda and Mazda have both announced plans to produce HEVs.

Potential Roadblocks

Thailand has traditionally pursued relatively low value-added production and the leapfrog into advanced, next-generation automotive manufacturing will not be easy. The country is ranked 17th in the world in terms of value added per vehicle at $6354 per unit, while the average among the top-30 global automakers is $8776 per unit.

While Thailand’s component supplier network is extensive, it mostly produces and supplies relatively simple parts, and subcontractors are accustomed to manufacturing primarily with imported equipment and utilising foreign designs and specifications. In terms of assembly, the sector remains dominated by foreign interests. Only 10% of assemblers, 23% of first-tier suppliers, and 42% of second- and third-tier suppliers are completely locally owned. Although the country has been well served by its openness, some critics have speculated that its liberal policies may have also contributed to the lack of local value-added players.

To succeed in next-generation vehicles, more component makers are also required, and Thailand is seeking a critical mass in the supply chain to make the new technologies work. “It will be easy for the premium segment to penetrate the EV market, the only issue in this part of the world is that EV is not a mass market product, so government support will be required to reduce manufacturing and consumption costs,” Sanjay Mishra, CEO of Tata Motors Thailand, told OBG.

Domestic Appeal

In 2017 there 102,308 registered HEVs and PHEVs registered with the Land Transport Department, and only 1394 BEVs. BEV registrations have remained low in recent years: in 2017, 165 BEVs were registered and only 27 of these were passenger cars. To make next-generation vehicles more attractive in the domestic market, there needs to be more infrastructure to ensure that eco-friendly vehicles are practical to use on local roads. Most companies are now focused on hybrids, as the necessary utilities for fully electric cars are not yet ready. In addition to filling and charging stations and storage technologies, greater consumer awareness and demand are also needed.