Thailand’s leaders are resigned to a divided future: bleak to bleaker near-term, brightening in the long run.

As the global financial crisis bites deeper into this Asia/Pacific nation, everything appears be going in the wrong direction as overall growth continues to fall.

Exports, the country’s driving force, are tumbling. Unemployment is high and rising. Manufacturing is contracting, and vehicle sales are on the slide.

Finance Minister Korn Chatikavanij predicts the economy will shrink 3% this year, after expanding 2.5% in 2008. He emphasizes that without government stimulus measures the contraction could be 8% to 9%, putting nearly 2 million jobs nationwide in jeopardy.

A modest stimulus plan announced in January amounting to 116.7 billion baht ($3.3 billion) quickly was followed by another in late March, not to take effect until October. The latest scheme calls for expenditures of TB1.56 trillion ($44.2 billion) over the next three years to help boost gross domestic product by 5% and create 1.6 million new jobs.

The money primarily will be spent to improve infrastructure. There is nothing special earmarked for the auto industry, despite calls for help that include a 3% cut in the excise tax and lower interest rates for car buyers, soft loans for assemblers and parts makers and funds for worker training.

“The government is basically bumbling along,” says Hardy Watganai, director-automotive industry, TNT Express in Bangkok and a former management consultant with the Boston Consulting Group.

“No one really understood how bad the global economic meltdown was going to be, and help for the auto industry was rejected out of hand. Any special help will go to tourism and agriculture.”

Although these areas are the country’s major income generators, vehicle production has become increasingly important as Thailand turns into a major hub for the production of pickup trucks by Toyota Motor Corp., Isuzu Motors Ltd., Mitsubishi Motors Corp., General Motors Corp. and Ford-Mazda Auto Alliance (Thailand) Co. Ltd.

The auto makers’ annual output is aimed at both domestic and export markets, and both are in trouble.

“Thailand’s auto industry is falling the most drastically since the 1997 financial crisis,” says Bangkok’s Kasikorn Research Center in a recent report, predicting overall Thai exports, down 19% in the year’s first two months, will shrink as much as 20% for the full year.

“We see automotive production dropping from 1.4 million units in 2008 to around 1.1 million units this year, with vehicle exports declining around 22% to 605,000 units,” the report says.

“Domestic sales will be down about 15% to 520,000 units, and that estimate may be optimistic considering the 42% decline in the first two months of the year,” says John Bonnell, a senior analyst with J.D. Power Forecasting in Bangkok.

Pessimists are gloomier, foreseeing total output this year falling to 900,000 vehicles, half the installed capacity in Thailand, as economic growth declines as much as 5%. To match supply to plummeting demand, output is being trimmed by layoffs, shorter shifts and workweeks, plus temporary shutdowns.

“All the domestic producers are facing sales declines,” says Bonnell. “Toyota, the industry leader, is suffering along with everybody else.”

Adds Watganai: “GM, Mitsubishi and Isuzu have announced layoffs. Toyota is reducing working hours and the next step could be layoffs.

“Some industrial parks could go under, because they are so dependent on the production of electronics and vehicles. The outlook is grim. An estimated 40,000 direct jobs in the automotive industry may be lost.”

GM (Thailand) Ltd. has been especially hard hit. Production at its Rayong plant has shut down twice since December, for a total of seven weeks. The auto maker’s TB15 billion ($425 million) diesel-engine project is delayed and may be cancelled, as financing has become difficult and the government continues to ignore a plea for help.

“GM Thailand produced 103,000 units in 2008, about the same as 2007, but will likely make only 72,000 units this year,” Bonnell says. “Ford-Mazda production dropped about 5% last year to 128,000 units, and we expect a sharper decline this year to 105,000. With demand softening, both GM and Ford-Mazda are trying to find a way to survive in Thailand.”

Watganai agrees. “GM and Ford have aggressive expansion plans, but today their survival is in question.”

The industry’s plan to add capacity and the status of Thailand’s eco-car project are intertwined these days and hard to track. “The pace has slowed,” Bonnell says. “Isuzu’s expansion plan has been delayed.”

However, it looks like construction of the new $500 million Ford-Mazda plant is going forward, Honda Motor Co. Ltd. is continuing with its small-car program, and Nissan Motor Co. Ltd. may be the first car company to begin eco-car production, he says.

The eco-car was dreamed up by Thai government strategists to strengthen the domestic auto industry with a small car as another best-seller to back up pickup-truck sales. By May 2008, applications from six major auto makers had been approved.

Each agreed to invest at least TB5 billion ($141 million) to produce a vehicle fitted with an engine smaller than a 1.3L or 1.4L diesel capable of 47 mpg (5 L/100 km). The engines had to meet Euro 4 emissions standards and United Nations Economic Commission for Europe safety regulations, with output to reach 100,000 units annually within five years.

But Watganai has serious doubts about the program. “Where can (the eco-car) be sold? There’s no evidence that Thai buyers would be the least bit interested in such a small car,” he says. “And it’s not clear there’s any export market for it either. The eco-car may quietly die.”

With export markets shrinking and money tight, enthusiasm for developing the eco- car has waned. No auto maker has announced outright withdrawal from the project, but Toyota has no firm plan yet, Suzuki and Tata Motors Ltd. are delaying their entry and Mitsubishi is proceeding cautiously.

Adding to the nation’s economic problems is the political turmoil that has convulsed the nation for more than two years. A new government was sworn in last December by the country’s beloved king, following a special Parliament session after a constitutional court dissolved the People Power Party for electoral fraud.

Political protests again have turned violent again in Bangkok, buffeting the nation’s all-important tourist industry. “This is definitely going to hurt Thailand for a long time,” says Pornthip Hiranyakij, secretary general of the Tourism Council of Thailand.

In the meantime, the economy and auto industry undoubtedly will suffer from the continued tumult, as well as the global financial crisis.

“The government is fighting for survival and needs to explain what’s planned,” Watganai says. “It’s like a tube of toothpaste, squeezing a little bit out each day.”

At the moment, nothing seems more certain in Thailand than uncertainty, and the future is especially imperfect. The common view among auto makers appears to be current difficulties are temporary, while hoping stimulus plans will work.

“Thailand is at the mercy of overseas markets,” Bonnell says. “The government has announced help for exports, but the plan is short on details. “How do you get exports moving without importers importing?

“Thailand ships vehicles to 100 countries, and so much depends on the global economy,” he adds. “We may see an upturn in automotive demand next year and a return to 2008 levels in 2011.”

Phatra Securities in Bangkok has revised its forecast of negative growth in 2009 downward to -3.3% to reflect “weak domestic expenditures and a deeper and longer-than-expected global recession.”

Watganai says the whole demand-supply curve has shifted down. “We’re looking at a global reduction in automotive demand. It may be three to four years before real recovery begins.”

Vallop Tiasiri, director of the Thailand Automotive Institute, tells the Bangkok Post that, “things may bottom out next year, but we may need two years to move out of the crisis.”

Given the billions of dollars already spent on development and the solid manufacturing infrastructure in place, no one questions the long-term future of the Thai automotive industry.

“We still foresee good market potential,” Toyota Thailand President Mitsuhiro Sonoda said at a January press conference. “We believe the economy of Thailand is fundamentally strong.”

Tarisa Watanagase, governor of the Bank of Thailand, said in a Reuters report last month the economy this year would not be as bad as 1998, when it shrank 10.5% during the Asian financial crisis.

“Auto makers are committed, and Thailand will continue to progress as a production center for global markets,” Bonnell says. “Honda and Toyota have strong positions here. Nissan is raising its stake and even moving some production of the subcompact March (Micra) from Japan to Thailand. That’s progress.”