By Chang-Ran Kim, Asia auto correspondent
BANGKOK, Nov 28 (Reuters) - At Honda Motor Co Ltd's car plant outside Bangkok, workers slide the suspended door of a CR-V offroader towards the assembly line for welding, a procedure performed by robots at the auto maker's factories in Japan.
Employing cheap labour instead of costly machines makes the Ayutthaya plant less efficient, but Honda says there is nothing the factory cannot build that its Japanese cousins can.
"You need enough volume to bring output overseas, but technically we would have no problem building higher-end cars like sports cars and hybrids here," said Minoru Yanaidani, head of manufacturing at Honda Thailand.
That confidence won the plant an order to build the new Fit Aria sedan which was sold in quality-conscious Japan last year -- a trend that worries policymakers grappling with the "hollowing out" of Japanese manufacturing as big exporters move production overseas, taking already-scarce jobs away from Japan.
The auto industry has been among the rare bright spots in Japan's fragile economy, with cars and car parts accounting for a fifth of the country's export value.
Unlike electronics makers, which have shifted much of their production to China, auto makers have so far managed to keep annual output steady at around 10 million units for the past decade, with 60 percent going to exports.
But as the rest of Asia moves to liberalise trade and its emerging car markets explode, temptation is growing for Japan's auto makers to build more cars in Asia, drawn by cheaper costs.
"If manufacturers keep setting out to new fields like ASEAN, Japan will lose economic strength," said Tadakatsu Sano, vice minister for international affairs at the Ministry of Economy, Trade and Industry. "We're worried and feel responsible too."
Auto makers are particularly keen to benefit from a new Association of Southeast Asian Nations (ASEAN) tax scheme -- adopted so far by Thailand, Indonesia and the Philippines -- which knocks down tariffs for built-up cars to between 0 and 5 percent from as high as 80 percent.
"Japanese auto makers will move more of their production to Asia, especially for export markets," said John Bonnell, partner at research firm Automotive Resources Asia. "Domestic output would naturally fall, going forward."
LACK OF FREE TRADE DEALS
Manufacturers believe the government would have only itself to blame for the hollowing out.
Japan's penchant for protecting its farmers -- traditionally a strong support base for the ruling Liberal Democratics -- has hurt its chances of sealing bilateral free trade agreements (FTAs), threatening to leave the world's second-biggest economy out of a growing web of tariff-free trade zones.
More than 180 FTAs exist worldwide, but Japan only has one so far, with Singapore -- little help for auto makers since the city state keeps a cap on car supply.
"I know there are issues with the agricultural sector in Japan, but we want the government to be proactive with FTAs, keeping in mind that the manufacturing sector is a very important part of the Japanese economy," said Yoshihide Munekuni, chairman of the Japan Automobile Manufacturers Association.
But auto makers are not wasting any time hoping.
In a move that could reduce exports from Japan, the top three makers -- Toyota Motor , Honda and Nissan Motor -- are revving up production abroad to bring supply closer to demand and create a natural buffer against currency swings.
Katsuhiro Nakagawa, an executive vice president at Toyota, said that without FTAs his company stood to lose a lot.
WAKE-UP CALL
Data out this week showed Nissan's exports to North America fell 20 percent last month from a year ago, mainly due to the shift in production of the Maxima sedan to Tennessee from Japan.
Honda's exports to the United States are down 15 percent in the year to date. It still exports more than 40 percent of the cars it builds in Japan, but Yanaidani says: "That ratio will start to really come down from now."
Toyota, Japan's most profitable company, says it will try to maintain domestic output levels at around 3.5 million units. But it too is closing the gap between its Japanese and overseas factories, with plans to boost production by 26 percent abroad and only 2.5 percent at home this business year.
Nissan's output abroad is expected to jump 22 percent, exceeding its domestic production, which will stay flat, for the first time this year.
Honda has been the most aggressive, with Japanese output expected to fall 11 percent, while its factories abroad will roll out 14 percent more cars than last year.
"We don't lose sleep over the hollowing out of Japanese manufacturing," Yanaidani said. "If there's fear of that, it's a good wake-up call for Japan."