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back to index backASIAtalk August,  2005

Thailand automotive: Industry reaches crossroads

Since starting Able Autopart Industries nearly 20 years ago, Yeap Swee Chuan has ridden the success of Thailand's bid to become the Detroit of the East. Now, after building a $176-million-a-year company that supplies every major carmaker from DaimlerChrysler to Toyota, Mr. Yeap has seen the future of Thailand's automotive industry. And, he says, it is in China.

''The Thai market will plateau in two to three years,'' Mr. Yeap said. Last year his company, now called Aapico Hitech, shifted with the trend, buying an auto parts company near Shanghai.

Others agree that Thailand's automobile industry is at a turning point.

Using a blend of investment incentives and tariffs, Thailand lured the biggest names in automobiles to became Southeast Asia's largest vehicle producer, 15th in the world. Its industry employs 300,000 and has doubled production since 2001, with exports rising 40 percent last year.

Central to that success has been the one-ton pickup truck. Promoting this vehicle as the workhorse of its developing economy has helped Thailand become the world's second-largest market for pickups after the United States. Its factories also export all over the world, from Britain and Africa to the Middle East and Australia.

But the world needs only so many pickups, experts say, so even though Thailand may never lose its edge in one-ton trucks to China, its output will probably peak with global demand in five years. ''Thailand needs another product,'' said Kosaku Hosokawa, president of Nissan Motor's Thai subsidiary.

Just how to find a niche product sheltered from China's juggernaut in a world of falling trade barriers is a riddle that faces manufacturers everywhere. In Thailand, it has also become a source of friction with Japan, whose carmakers account for as much as 95 percent of the Thai auto market -- friction that is threatening to derail bilateral free-trade talks between the countries.

Japan's automakers have had a long relationship with Thailand, one that stretches back to the 1960's.

Thailand offered the Japanese companies not only cheap labor and raw materials, but also a crossroads location with a relatively stable government and good roads and ports.

The Thai government quickly singled out the one-ton pickup as ideal for its largely rural population, a vehicle able to haul sacks of rice and large families with equal ease. To encourage Japanese automakers to produce the trucks in Thailand, the government offered tax holidays of up to eight years and virtually eliminated excise taxes on domestic pickup sales.

It then sheltered its market behind steep import tariffs. Most important, it did not repeat Malaysia's and Indonesia's mistake of creating a domestic carmaker that would compete with the Japanese.

''Not only did they have volume, but they could basically run their own show,'' said John Bonnell, executive director of Automotive Resources Asia, a consulting firm in Bangkok.

A big catalyst behind Thailand's growth was, curiously, the Asian financial crisis of 1997-98. When the crisis hit, domestic auto sales collapsed, leaving automakers with unused capacity. ''Carmakers here had no choice; they had to turn to export markets,'' said Thitithep Nophaket, an analyst at Phatra Securities in Bangkok.

While Ford, General Motors, DaimlerChrysler and BMW have made big Thai investments in the last decade, Japan's automakers have gone even further, making Thailand their global base for pickup production. Isuzu, which makes one-ton pickups for G.M.; Mazda, which manufactures for Ford; and Toyota have all relocated pickup production to Thailand. The troubled Mitsubishi Motors now exports its Thai pickups to 139 countries, accounting for 21 percent of Thailand's auto exports. Honda Motors even exports pickups from Thailand to Japan.

The latest transplant is Nissan, which announced in March that it would invest 29 billion baht ($709 million) in Thai pickup production. ''We're transferring all pickup truck capacity to Thailand,'' Mr. Hosokawa, the Thai unit's president, said.

But as trade barriers tumble all over the world, automakers are eliminating redundant factories and concentrating production where it can be done most profitably. So while Thailand remains the region's hub for truck exports, its sedan assembly industry is threatened by imports from Australia and from other Southeast Asia nations that have free trade agreements with Thailand.

With most auto executives in Thailand expecting the one-ton pickup market to peak by 2010, Thailand is feeling squeezed. ''On one side are Japan and Korea, with high wages and high technology,'' said Vallop Tiasiri, president of the Thailand Automotive Institute, which advises the government on automotive policy. ''And at the low end are China and India.''

The solution, he said, is to convince automakers to devise new products that take advantage of Thailand's existing capacity.

Japanese automakers are already adapting their pickup assembly lines in Thailand to produce sport utility and similar vehicles. Toyota announced in April that it would invest 18 billion baht ($440 million) to build a Thai factory to make a new ''international multipurpose vehicle'' designed for the developing world.

Thailand also wants automakers to build high-end small cars with high fuel efficiency and low emissions that could compete in Europe.

One obstacle to such a move, experts say, is the Thai auto parts industry. In the industry's early years, Thailand promoted its growth by requiring that vehicles use a big proportion of locally made components to maintain their low-tariff status.

Parts makers flocked to Thailand and local companies like Aapico were joined by industry giants like Denso of Japan and Delphi, which is based in Michigan.

Mr. Yeap of Aapico realized the need to acquire competitive technologies. After his company went public in 2002, it bought the local parts business of the Dana Corporation of Toledo, Ohio, for $50 million.

But Aapico is the exception. ''The government didn't push these guys to upgrade technologically,'' said Richard F. Doner, an associate professor of Asian industrial development at Emory University in Atlanta.

As a result, Japanese carmakers have viewed Thai auto parts as inferior. Since 1997, half of the Thai-owned firms that provide top-tier parts to the industry have been replaced or bought out by Japanese companies.

Mr. Vallop of the Thailand Automotive Institute wants the government to invest 10 billion baht ($244 million) in upgrading the Thai auto parts industry and establish an institute for research and development.

The Japanese are seeking quicker relief. As part of the free trade agreement Tokyo is negotiating with Bangkok, they want Thailand to phase out import tariffs on large-engine Japanese luxury cars. But Thai auto assemblers, and European luxury car makers like BMW and Mercedes, say Japanese luxury imports would cripple their sales.

Japan also wants Thailand to phase out tariffs on high-end steel for auto bodies that cannot yet be made in Thailand. Thailand's steel makers say they need time to develop capacity to make this kind of steel, time the Japanese counter they do not have.

Meanwhile, competition from China is moving fast. Two Chinese automakers, Hafei and Chery, have already begun exporting cars to the developing world. DaimlerChrysler and Honda plan to export China-made sedans to Europe.

Mr. Yeap is not convinced that Thailand can move in time. While Thailand will always have pickups, he said, ''China's expansion will keep Thailand out of sedan production.''

Source: - GAI

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