BANGKOK – March’s earthquake and tsunami in Japan wreaked havoc throughout the supply chain, causing lengthy halts in production, not just domestically, but throughout the world.
Thailand, which is a key manufacturing base for a string of Japan-based auto makers, including Toyota, Honda, Nissan and Mitsubishi, wasn’t exempt, as production of vehicles – even those with as high as 90% local content – ground to a halt as the pipeline for vital components ran dry.
Thailand controls Southeast Asia’s small-pickup market.
For the Japanese OEMs producing vehicles here, the race now is on to minimize their future risk and avoid repeating the scenario in which production is crippled.
Thailand, which is looking to break into the world’s Top 10 producers and establish itself firmly on the world stage, is being presented with a rare opportunity to expand its manufacturing footprint.
By the time the effects of the tsunami play out, more than 100 Japanese suppliers are expected to have operations in Thailand to support Association of Southeast Asian Nations operations.
At the same time, the country is seeing the first fruits of its bold eco-car program, as the first of the eco vehicles enter production.
Also on the horizon is the launch of the ASEAN Economic Community (AEC), which in equal measure presents opportunities, challenges and concerns. To meet these demands, new concepts are needed to adapt to the ASEAN region’s biggest-ever economic shakeup, even as Thailand tries to guess what will be the next global automotive trend and jockey to get ahead of the curve.
“It’s a transitional point,” emphasizes Panuwat Triyangkulsri, director-Bureau of Service Provider Development at the Department of Industrial Promotion in the Ministry of Industry. “We have to consider how we are going to position ourselves in the world market.”
Triyangkulsri’s remarks come at Automotive Summit 2011, the headlining conference at the Auto Manufacturing 2011 convention held at the BITEC Exhibition Center here, which this year focused on Thai-Japanese relations and the country’s future automotive direction.
Thailand has had many chapters since it began opening up to external auto industry investors in the early 1970s. It now is emerging on the global stage, with exports having surged ahead of local sales in 2006 and now growing at a faster rate.
“We will become one of the Top 10” vehicle-producing countries, predicts Piengjai Keawsuwan, president of the Thai Automotive Industry Assn.
The sharp dip in vehicle output during 2009’s global economic meltdown has been smoothly ironed out, and 2010 marked a production record with 1.6 million vehicles built. This year is targeted to surpass year-ago at 1.8 million.
“Japan has good discipline in working (practices), so the recovery is quick,” Keawsuwan adds.
While Mitsubishi was only marginally affected by the tsunami, Toyota lowered production here 70% in the wake of the disaster, Honda output was slashed in half and Nissan builds were slowed by 20%.
Overall, the 12 Japanese auto makers cut Thai production almost 50%. Overtime was eliminated and shifts chopped, but all employees were retained and much of the downtime was taken up by training.
Despite the setback, the large number of backorders on hand, along with Thai consumers’ burgeoning purchasing power, should ensure this year’s targets are met.
The forecast calling for production of 1.8 million vehicles for 2011 comes from the Thailand Automotive Institute, which predicts a 7% increase in exports to 1 million units and a 13% gain in domestic sales to 800,000.
Growth is projected to continue, with output rising to 2.5 million vehicles annually by 2016 (including 1.5 million exports). Based on last year’s global production, Thailand would move up into eighth place worldwide.
This year started robustly for the nation’s auto industry, with production climbing steadily from 146,000 vehicles in January to 150,000 in February and 172,000 in March, all marking significant jumps from year-ago.
But the supply-chain problems took a bite out of April, with output slipping to 86,000 units and May dipping to 98,000. Though ahead of like-2010 levels, total January-May production was off 11% from plan.
Hiroyuki Kondo, vice president of the Japan External Trade Organization, points positively to the rapid recovery of the Japanese OEMs, which have production back to near-normal levels, a scenario that wasn’t envisioned as recently as a month ago.
But in light of the tsunami and its aftereffects, he sees the existing supply structure as no longer adequate.
With their background in electronics, countries such as South Korea and Taiwan are poised to be early beneficiaries of supply-chain diversification. However, Thailand has a number of crucial cards to play, notably a long and close-knit business relationship with Japan’s auto makers that dates back some 40 years.
Thailand also offers a low-cost wage structure, a government will to iron out auto industry hurdles, a firm grasp of the potential for fuel-efficient and hybrid-vehicle technologies and great flexibility on tax structure. Industry, business and government all see the auto sector as pivotal to Thailand’s continuing economic development.
Triyangkulsri says Thailand can count itself among global automotive players already, thanks to its focus on the 1-ton pickup sector and the now-unfolding eco-car program, which should see output of some 500,000 cars in the next two to three years.
The eco-car program is “painting a bright picture,” Keawsuwan agrees, but cautions time is needed to determine how this huge flood of low-cost cars will be integrated into the overall market and whether any unanticipated – and unintended – consequences can be avoided.
In addition, Thailand is facing another challenge: the arrival of the AEC in 2015. With it will come a wave of market liberalization in the historically protectionist region and a free flow of goods, labor and investment money.
Thailand is the ASEAN automotive powerhouse, but it faces a challenge to maintain its dominance against countries with much higher populations and potential markets. The AEC will open up a huge and mostly untapped internal market of some 590 million people.
Indonesia (with 231 million people), the Philippines (92 million) and Vietnam (86 million) all lead Thailand (67 million) in terms of population. Despite its relatively smaller market size, Keawsuwan is convinced “the (Thai) government will smoothly support auto-industry growth.”
Thailand, with its rather mature automotive industry, has a decades-long head-start over its ASEAN neighbors. However, countries such as Indonesia are pushing aggressively to catch up, and the opportunity to grab a slice of the action in the auto industry’s emerging high-tech sector is something Thailand doesn’t want to miss.
In March, the last month free from parts-supply issues caused by the tsunami, Thailand vehicle production was up 14% year-on-year, while Indonesia saw a 30% jump, albeit on a volume of 75,000 units, less than half Thailand’s 172,000.
Malaysia output was almost flat, as it continues to seek ways to kick-start its stalled bid to become a regional automotive driver. Vietnam and the Philippines both were up 12% on volumes of less than 10,000 vehicles.
That put Thailand’s share of ASEAN car production on par with year-ago, at 54% vs. 55%, while Indonesia hiked its share to 24% from 21%.
In step with the arrival of the AEC, the ASEAN steadily is moving towards a low-cost manufacturing footprint. Thailand will “focus on a low cost base,” says Keawsuwan, who sees the country as the “strongest base” for the automotive industry in the region.
Thailand’s gross-domestic-product outlook is mixed. It bounced back from the global financial crisis last year to achieve sturdy 7.8% growth, but this year the forecast is in the more modest 4.5%-5.0% range. Inflation remains a lurking concern, at 3.6% last year and expected to edge up to 3.8% in 2011.
Another challenge for car makers is Thailand’s low unemployment rate. At 1.0% last year, it is forecast to marginally improve to 0.9% in 2011, making it that much tougher to attract needed workers.
The auto industry’s central economic role is evident. The industry employs 472,000 currently, and that is forecast to rise by 100,000 in four years, driven in a great part by the eco-car program. Productivity will rise from 3.6 cars per worker per year to 4.0 in 2015, analysts say.
Before the tsunami, Japanese automotive investment had been undergoing a shift, with Thailand moving from being a regional production base to a global hub.
This metamorphosis has been driven mainly by the eco-car program, which will hit about 200,000 units this year. Nissan’s March, the first of the eco cars out of the blocks, also was the auto maker’s first model to be exported back to Japan. More will follow.
Thailand doesn’t want to lose momentum from its stranglehold on the pickup market and its emerging eco-car sector, so it is looking towards the future in several ways. Refining of existing technology (including E85 and biodiesel), as well as moving forward through the adoption of hybrid powertrains, electric vehicles and hydrogen fuel are on the agenda.
Toyota, which builds more cars than any other auto maker here is leading Thailand down the hybrid path, building the fourth-generation Prius and Camry hybrid locally. And both Nissan and Mitsubishi plan to kick off EV trials here.
However, other nations have a head start on Thailand when it comes to the electrification movement, and EVs are “not in the next few years... probably for the future,” Triyangkulsri says.
Keawsuwan agrees. “We have to study, keep watching,” she says.
To compete in a more open ASEAN, Thailand also must continue to develop high-skilled workers, Keawsuwan adds, while increasing research and development and improving the tax structure. Thailand taxes vehicle sales based on engine capacity, rather than emissions or fuel efficiency as in some other countries, a practice she predicts will change “soon.”
Japanese investors are “keen” and “ready” to come to Thailand, says Keawsuwan, having recently returned from a trip to Hiroshima. They will “get away from taking risk in Japan and find a safe haven for investment (in Thailand).”
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