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22 Jul 2010
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Thailand's automotive sector continues to grow, benefiting from the country's competitive advantages and official incentives, thanks to a range of recent and forthcoming measures. The country is aiming to become a regional centre for vehicle manufacturing, while mutually reinforcing its automotive components industry.

In 2003, the government launched a drive to establish Thailand as the region's leading car manufacturer, aiming to produce 2m units annually by 2010. Last year, some 1.3m were manufactured, and output capacity is growing apace. In order to encourage the sector's growth, the authorities are emphasising Thailand's strong business climate and open economy, and have instituted a series of incentives designed to promote the automotive sector.

Key factors include relatively low overheads and labour costs as well as a range of trade agreements facilitating both exports and the import of raw materials and products needed for vehicle manufacture. Furthermore, foreign automotive firms are permitted to operate in Thailand without having to form a partnership with a local company, as is the case in various other countries, including China.

One of the newer aspects of the government's automotive sector policy is promoting the production of more fuel-efficient and ecologically friendly vehicles. Since last year, the government has offered an eight-year tax exemption to car manufacturers that, within the first five years of start-up, annually produce more than 100,000 cars discharging 120 grams or less of carbon dioxide per kilometre and averaging at least 20km per litre. Additionally, the consumer tax rate for these vehicles is set to be reduced to 17%, compared to 30% for other cars. Lowering the tax burden on manufacturers is expected to help firms meet rising local demand for fuel-efficient vehicles, as Thais look to trim their growing fuel bills. It could also give a further boost to the entire growing sector, at a time when several firms are investing in increasing their output. Firms including Japan's Honda, Mitsubishi and Toyota; Germany's Volkswagen; and Indian outfit Tata have all expressed an interest in setting up "eco-car" factories.

Thailand notably does not have a home-grown car firm (unlike Malaysia, with Proton and Perodua), which has led it to open up its markets to foreign car manufacturers. "Thailand has maintained a very good policy of not promoting a national car brand," Vithit Leenutaphong, chairman of Thai automobile distributor and component manufacturer Yontrakit told OBG. "This has persuaded a great deal of Japanese companies to relocate their automotive operations to Thailand."

Honda hopes to complete the process of doubling its production in the country to 240,000 units per annum by the end of October, as it opens its second plant in Ayutthaya, in the centre of the country. The firm is also extending its research and development (R&D) operations in Thailand, indicating a shift in innovation responsibility from headquarters in Japan to the Thai branch. In the same vein, Toyota chose in 2004 to locate its first international multipurpose vehicle (IMV) plant in the country, aiming at exports across the region, and announced in June that it would commence production of its Camry Hybrid, a family saloon, in Thailand next year. The company currently operates three factories in the country, which produced a total of 502,000 units last year. This figure includes complete knocked-down kits (CKDs), which are entire car part kits that are sent elsewhere for assembly - usually exported to a country where there are high automobile import tariffs.

The growth of Thailand's automotive industry has gone hand-in-hand with that of its vehicle parts suppliers, as has been the case in several successful car manufacturing countries, such as Romania and Morocco. "There are layers of supporting industries for automakers in Thailand," said Atsusuke Kawada, vice president and senior economist at JETRO (Japan External Trade Organisation) Bangkok Center. "It is a very important reason why they focus on this country as a production centre," he told the local press.

Additionally, the growth of Thailand's vehicle parts sector gives its industry a competitive edge over countries that assemble cars largely from CKDs, and thus have less demand for components.

One recent example of investment in the component sector came in August, when General Motors (GM), the US automotive giant, announced that it would be investing $445m in its diesel engine building operations in Thailand, increasing annual output to 100,000.

Vithit argues that there is still room for improvement if domestic firms can move up the value chain. "The government must encourage local parts manufacturers to become world class, first tier players with their own brands, as there are currently not any manufacturers operating on this level," he said. "As the segment grows, their will be a huge demand for auto parts suppliers, and Japanese firms will look to China if Thai firms do not undertake an innovation drive."

If there is a recent fly in the ointment in the broader sector, it is local demand. Thai automobile sales fell 13% in August on the same month last year, to just over 47,100, as consumers backed away from car purchases in light of high fuel costs.

However, a closer look at the statistics inspires more confidence. Domestic vehicle sales in the first eight months of the year totalled 414,400, 3.9% up on the same period of 2007, and purchases of cars categorised as "fuel efficient" grew by more than 20%. Nonetheless, with inflation biting across Asia, and some economies slowing in the wake of global events, sales growth over the short term may not be as brisk as had been hoped.

Given a likely decline in oil prices combined with renewed global expansion, the medium-to-long term prospects for Thailand's automotive sector are looking strong. However, as worldwide interest in eco-friendly vehicles continues to expand, the policy of sharpening Thailand's competitive advantages in the more fuel-efficient market segment looks wise indeed.

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