Thai Auto Industry Rides on Region’s Ongoing Recovery; Political Strife Worrisome

Thailand is on the mend, economically and automotive-wise, after a severe buffeting from the global recession.

“There were dips in every sector and exports, especially automotive, were hit badly. But Thailand has ridden through the storm relatively well,” says Hardy Watganai, director-Automotive Industry, TNT Express in Bangkok. He also is a former management consultant with the Boston Consulting Group.

John Bonnell, a senior analyst with J.D. Power Forecasting in Bangkok, says although the economy remains sluggish, “there still are some bright spots. Exports are improving a little, and auto sales are moving up. However, the political situation remains tenuous.”

In the latest development, the United Front for Democracy Against Dictatorship, which supports ousted Prime Minister Thaksin Shinawatra, hoped to draw 1 million of its members to the capitol city for ongoing demonstrations, which started March 14, aimed at forcing the government’s resignation. Additionally, terrorism continues in the southern provinces, with bombings taking place.

Improvement in the global economy is given most of the credit for Thailand’s encouraging turnaround, from last year’s 2.3% contraction to the upbeat 3.5% growth projected by the Ministry of Finance for 2010.

January saw Thai exports jump 30.8%, the biggest increase in 18 months, due primarily to year-ago’s low base.

Additionally, the Thai Industries Sentiment Index rose above 100 points for the fourth consecutive month; and tourist arrivals were up robustly from the prior year, when the country was convulsed by political protests including temporary seizure of Bangkok’s airports.

Now, after a slew of sorrowful months, the automotive industry is reviving. Toyota Motor Thailand Co. Ltd., which collates industry data, reports February vehicle sales rose 57.7% from year-ago, to 54,175.

The Federation of Thai Industries is calling for a return to better times in 2010, forecasting domestic sales of 600,000 vehicles from 548,871 in 2009, which is a 9% rise. The group predicts a 40% jump in production to 1.4 million units driven by a 45% increase in exports to a record 800,000 units compared with 775,183 in 2008.

Not everyone is as optimistic about the fresh export punch.

New $537 million JV plant to make Ford Fiesta (above) and Mazda2 compact cars.

Domestic sales peaked at 703,423 in 2005. “Selling 600,000 units is probably do-able, since last year was so bad,” Watganai of TNT Express says. “But the export target of 800,000 is a little dubious, since most go to the U.S., Europe and the Middle East where car sales are not going well.”

Watganai has doubts about increased exports to neighbors in the 10-member Association of Southeast Asian Nations, even though ASEAN vehicle tariffs fell from 5% to 0% on Jan.1.

“Hidden domestic barriers can make a big difference,” he says. “For example, these countries cannot be stopped from raising excise taxes, since those are purely a domestic matter.”

May Arthapan, director of J.D. Power Asia-Pacific Automotive Forecasting in Bangkok, says vehicle orders, both domestic and export, have been much stronger than expected, but many Thai auto makers and suppliers remain cautious.

“They made major cuts last year,” she says. “Some reportedly laid off 80% of their skilled workers. Now that assemblers are calling on them to raise production, they are wary and caution is called for.”

The automotive industry is unsettled in other ways, as well.

In recent years, Thailand has become a major hub for the production of 1-ton pickup trucks by Toyota Motor Corp., Isuzu Motors Ltd., Mitsubishi Motors Corp., General Motors and the Ford- Mazda Auto Alliance (Thailand) Co., with output aimed at both domestic and export markets.

While export demand for pickups is rebounding, buyer tastes are changing in the home market.

Car sales have begun to encroach upon fullsize pickups, long the mainstay in Thailand as a combination work and family vehicle, with 63.7% of all light-vehicle deliveries in 2006. Today, the pickup segment accounts for a 46.5% share and is expected to stay even or decline in the future, according to J.D. Power analysts.

“Small cars are taking a bigger share of the domestic market, and we expect that trend to continue,” Bonnell says.

“A lot of buyers are switching from pickups to semi-pickups, semi-SUVs and passenger cars,” Watganai adds.

To capitalize on this shift, some Chinese auto makers are tip-toeing into the Thai market with their small cars.

A year ago, Chery Automobile Co. Ltd.’s 1.1L QQ, priced at 400,000 baht ($12,270), along with the 2.0l Tiggo, priced at TB800,000 ($24,540), were displayed at last year’s Bangkok International Motor Show.

The two cars reportedly were aimed at the 1.5L Honda Jazz, selling for TB597,000 ($18,312), and 1.5L Toyota Yaris, priced at TB540,000 baht ($16,564).

Sales of the QQ began last July and are minor but growing, with sales of 584 units 2009 and 1,028 so far in 2010. Tiggo sales began this year with 150 deliveries so far.

Another, Geely Automobile (Holdings Ltd.), has changed its plans for ASEAN several times, “and its commitment in the region seems low,” says Arthapan. “It finally began complete-knocked-down assembly in Indonesia in December and may start selling in Thailand late this year or early 2011.”

However, the biggest wild card in the Thai automotive deck is the government’s eco-car program, dreamed up by strategists in 2007. The objective is to strengthen the auto industry with a second best-seller, alongside pickup trucks, to help achieve 2 million units of production by 2012.

The government has set a preferential 17% excise-tax rate for the eco-cars, which must have a 1.3L or smaller gasoline engine, or 1.4L or smaller diesel mill. They must achieve 47 mpg (5 L/100 km) fuel efficiency and meet Euro-4 emissions standards with carbon dioxide not exceeding 120 g/km. Output has to reach 100,000 units annually within five years of startup.

While a number of major auto makers have shown an interest, Nissan Motor Thailand Ltd. will be the first out the gate with its 3-cyl. March (Micra) hatchback, which began production March 12.

“The eco-car project is vital, not only for the Thai domestic operation but for Nissan’s global business scope,” Nissan Thailand President Toru Hasegawa says.

Suzuki Motor Corp. broke ground in November for a $222 million plant in Thailand, with pressing, welding, painting, assembly and engine-making capability, to manufacture eco-cars. Production is scheduled to begin in March 2012, with initial output of 10,000 units, “more than half for export.”

Honda Motor Co. Ltd. is expected to introduce its eco-car next year, based on the New Small Concept unveiled at this year’s Auto Expo in New Delhi. The car will be made in Thailand, but the auto maker has yet to say whether a new plant will be built or how domestic/export sales will be split.

Toyota Motor Corp. “is still considering the specifics of our participation,” says a company spokesman, and Mitsubishi Motors Corp. does not have a concrete plan yet.

Last June, India’s Tata Motors Ltd. said plans to produce an eco-car by 2012 was still on track, but little has been said about the project since.

Volkswagen AG’s eco-car application has yet to be approved, and speculation is that some kind of tie-up with Proton Holdings Bhd in Malaysia may be a more attractive alternative.

“I’m not sure the eco-car is going to be what it was touted to be,” Watganai says. “The multi-million dollar question is where they are going to sell all these small cars.”

Arthapan agrees. “Domestically, there’s a limit on sales. Eco-car producers won’t be able to get their prices low enough to pull in enough Thai buyers to expand the market. And export markets are not bright, either.”

Although the tepid response to their eco-car program may disappoint government strategists, the Thai auto industry remains healthy.

For example, General Motors Thailand Ltd. has borrowed $407 million from three Thai banks and this, plus a $117 million infusion from its parent company, will be used to build a diesel- engine plant, expand capacity at the Rayong production facility from 110,000 units annually to more than 160,000 and develop a next-generation pickup and SUV.

Additionally, Auto Alliance (Thailand) in July opened a new 100,000-unit capacity, $537 million plant to make Ford Fiesta and Mazda2 compact cars, primarily for export. This will supplement the 50-50 joint venture’s pickup production in an existing Thai plant with capacity of 175,000 units annually.

“Automotive production and investment will continue to grow,” Bonnell says. “How quickly will be determined by the global economy and whatever hiccups are created by the political situation.

“It will take five years or so, but the foundation of a small-car industry is being put in place, yet I’m not sure eco-car production will go beyond Nissan, Suzuki and Honda. They are not building new markets for their eco-cars but replacing existing production.”

Watganai remains concerned about the collateral damage to the economy and auto industry from the ongoing political strife.

“Politically, Thailand is very unstable,” he says. “The government is a fragile coalition of splinter parties and the opposition is strong and disruptive with only one goal: to bring down the government.”

That said, Watganai still believes Thailand’s auto industry “will remain a good, small, regional player.”

Bonnell concurs. “Thailand is the regional center of automotive production. The first step was as a global production center for pickup trucks. The move to passenger cars will be a slow, second step.”