Auto makers are facing double trouble these days in Thailand, impacted by the global economic meltdown and a long-winded domestic political crisis.

For several months now, Bangkok has been roiled by political unrest, some of it violent, as protesters try to topple the government, and no end to the turmoil is in sight.

“It will be very difficult to resolve this crisis, because people are not talking,” says Hardy Watganai, director-automotive industry at TNT Express in Bangkok and former managing consultant for Boston Consulting Group. “Neither side will give, and things have come to an impasse.”

So far, the violence has not spread to the private sector, but the economy is suffering in other ways as the fallout from global troubles has added force to political discontent. Finance Minister Suchart Thada-Thamrongvech now warns economic growth in Thailand could slip below 4% next year.

“The Thai economy is hurting big time,” says Watganai, who notes tourism, a vital foreign exchange earner, is evaporating. Additionally, the stock market has plummeted from 1,700 to 400 points; the real-estate market is softening; and some light-industrial companies have begun relocating, mainly to Vietnam, where production costs are substantially lower.

Domestic vehicle sales have begun to slip as well, down 12.5% in July, 13% in August and 10.5% in September, compared with year-ago.

“The market is plummeting due to worsening political tension and, combined with the global crisis, this is hurting consumer sentiment,” concludes a September report by Toyota Motor Thailand Co. Ltd., the country’s leading auto maker that compiles Thai auto industry statistics.

Toyota has cut its earlier 2008 forecasts of Thai domestic sales to 650,000 units from 700,000.

“We’re projecting a small decline this year to 597,000 units and very modest growth in 2009 to 604,000 units,” says John Bonnell, a senior analyst and partner in Automotive Resources Asia in Bangkok. “Both the political turmoil and international financial problems are contributing to the economic slowdown in Thailand.”

These projections compare with peak domestic sales in Thailand of 703,432 vehicles in 2005, followed by a decline to 682,161 in 2006 and 631,251 last year.

So far, exports continue to climb, with some analysts forecasting a rise of nearly 17% this year to 770,000 vehicles. Yet growth next year may be cut in half or worse if there is a worldwide recession, as some economist are predicting.

How hard Thai auto exports are hit “will depend on how bad the global economy becomes outside of North America and Europe, since most of these exports go to Australia, the Middle East and African markets,” says Bonnell.

Most Thai auto makers remain upbeat, with more than $2 billion in new investment still planned, under way or recently completed.

For example, AutoAlliance Thailand Co. Ltd. the Ford Motor Co. and Mazda Motor Corp. joint venture, announced plans a year ago to spend more than $500 million on a highly flexible new plant with annual capacity of 100,000 units.

The JV intends to build the new Fiesta and Mazda2 small cars in 2009, with 80% to 90% of production for export to Southeast Asia, Australia, New Zealand and South Africa.

“The build-out is continuing right on schedule,” says Whitney Small, Ford’s communications director for Asia/Pacific, stationed in Bangkok.

The two auto makers already have invested more than $1 billion in their Thai manufacturing facilities, and the new investment, which will increase total capacity to 275,000 units annually, underscores the role of Thailand as a regional production hub.

Siam Toyota Mfg. Co. Ltd. is proceeding “as planned,” says a company spokesman, with a 5.4 billion baht ($157.5 million) expansion of its diesel-engine plant that will boost capacity from 200,000 units to 350,000 annually. Production start is set for 2010.

Meanwhile, Siam Toyota next year will begin producing the Camry Hybrid at its Gateway plant, making Thailand the first member of the Association of Southeast Asian Nations to build a hybrid vehicle. Initial output is targeted at 9,000 units annually.

General Motors Corp. began construction of a new plant in August adjacent to its Rayong assembly facility to build more than 100,000 2.5L and 2.8L turbodiesel engines annually, beginning in 2010.

The investment of $445 million in the engine plant and an upgrade to the assembly plant, “will support manufacturing and grow advanced-propulsion-technology capability in Thailand and across Asia/Pacific,” GM Chairman and CEO Rick Wagoner has said.

Production began on schedule in October at Asian Honda Motor Co.Ldt.’s new 6.2 billion baht ($180.9 million) assembly plant next to the auto maker’s first plant in Ayutthaya province.

The new addition, doubling capacity to 240,000 units annually, will build five models initially and add an eco-car to the lineup later, reinforcing Thailand’s role as the center of Honda’s Asia-Oceania operations.

Thailand’s Board of Investments has approved applications from six auto makers to produce small, fuel-efficient, environmentally friendly “eco-cars.”

All have agreed to requirements that include investing at least 5 billion baht ($145.9 million); building a vehicle capable of 47 mpg (5 L/100 km); and output of 100,000 units annually within five years. However, implementation of these projects varies.

Suzuki Motor Corp. is about to begin construction of its first plant in Thailand, with capacity for 100,000 units annually. Plans call for two compact cars and a production start in summer 2010, with 70% of output for export to neighboring countries.

Nissan Motor Co. Ltd. is investing more than 500 billion baht ($146 million) in an integrated eco-car assembly, engine manufacturing and parts-production project. The new operations will increase capacity at the Bangna Trad plant, east of Bangkok, to 200,000 units from 140,000 when eco-car production begins in 2010.

Toyota Motor Corp. still is working out the details of its eco-car project, while Mitsubishi Motors Corp. is in discussions with the Thai government. The present status of India’s Tata Motors Ltd. eco-car project is not clear.

“The political circus going on here has put some of the eco-car projects on the back burner,” says analyst Watganai, of TNT Express, who has serious doubts about whether all of the proposed eco-cars can be marketed.

Most eco-car production is slated for export, he says, and the question troubling analysts is whether the half million or more of these cars can be sold, since export markets soon will be flooded with small, fuel-efficient cars from auto makers located outside Thailand.

No one is willing to hazard a guess as to how long it will be before global economies recover or even when Thailand’s political stalemate might end.

The roots of the domestic crisis go deep, resulting from a great divide between the so-called urban elite centered on Bangkok, roughly 10% of the country’s 65 million people, and the less-educated rural poor that form the base of the People Power Party currently in control of the government.

The Thai military, which ruled briefly and incompetently after a coup in September 2002, is claiming neutrality. Speaking to reporters in Bangkok recently, Army Commander General Anupong Paochinda said,”It is not hard to stage a coup. But making a country function after staging one is.”

Government supporters warn that should there be another coup attempt people who gave flowers to soldiers in 2002 will hurl Molotov cocktails the next time.

“There is still raging discontent,” says Bonnell, of Automotive Resources Asia. “We can expect continued protests.”

Agrees Watganai: “Things will get worse before they get better, for sure. Five or six parties have been haggling and jousting for power since the last election, and they are the same old faces. It’s looking very bad.”

Despite the discontent, auto makers are unlikely to lose their confidence in Thailand, given their multibillion-dollar investments and the country’s position as the largest market in Southeast Asia and a strategic export base.

Yet, when things do settle down politically and economically, analysts say Thailand may find it has lost some of its glitter, with the most lasting damage to Thailand’s bold but questionable claim of being “the Detroit of the East.”

“It was always a dream that would never come to fruition,” says Watganai, noting Shanghai or Wuhan (China) more likely deserves that title. “They have the volume, the market and the know-how.”

Adds Bonnell: “Thailand will still continue to develop as a manufacturing hub and maybe become a little Tokyo, since Japanese companies will continue to make vehicles here for global markets, despite any downturn in the economy.”