Thailand’s auto sector faces headwinds

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With domestic demand for vehicles likely to remain weak and new levies on the horizon, Thailand will be relying on stronger exports to help carry its automotive industry closer to year-end sales targets.

Thailand marked its 25th consecutive month of declining auto sales in May. Production dropped by 8.8% year-on-year (y-o-y), while domestic sales fell 18.3% on weaker purchasing power and tighter credit conditions, according to a report by the Federation of Thai Industries (FTI) issued at the end of June. Analysts attribute the slump in part to the end of the government’s first-car subsidy scheme in 2012, which had artificially inflated the domestic market, boosting sales by 81% that year.

Vehicle exports, a traditional area of strength for Thai automakers, fell 6.2% y-o-y in May due to a change in the assembly line production of one automaker’s pickup truck model, the FTI noted. However, year-to-date exports were up 9.5% y-o-y to nearly 500,000 units, thanks to recovery in the Australian and Asian markets, and growing demand for eco-cars in Europe and North America.

Progress on the Trans-Pacific Partnership (TPP) trade deal also has the potential to fuel Thai vehicle exports over the long term, as the agreement could herald the dismantling of the 25% import duty on light trucks imposed by the US. While Thailand is not directly involved in the TPP talks, the government has repeatedly expressed interest in joining, particularly once the deal is completed, which could usher in more favourable trade terms.

Mixed results

The industry’s first-half results are consistent with the decline witnessed in 2014, when production fell 23.5% y-o-y to 1.88m units, below the 2.1m target set by the industry. While exports remained steady over the year, at 1.12m vehicles, domestic sales slumped 33.7% to 881,832 units.

Weak commodity prices and a drought, which left Thai farmers and food processers short on capital and therefore less likely to invest in new vehicles, were also cited as contributing factors. The industry will be hoping that a rebound in produce prices in the coming months lifts sales of commercial vehicles in the remainder of the year.

Vehicle sales were also affected by the slower pace of overall economic growth and weak consumer confidence, with buyers seemingly adopting a wait-and-see approach to major purchases. More stringent loan approval by commercial banks in the face of rising household debt is also likely to impact domestic sales.

Strength abroad

While the FTI’s full-year sector outlook, issued back in March, predicted overall production of 2.15m units, the industry’s disappointing year-to-date performance prompted the group to lower its domestic sales forecast from 950,000 to 850,000-900,000 vehicles.

The impact of slower sales is being felt along the entire supply chain. In early June Thai Rung Union, an assembler and parts supplier, lowered its forecast for sales growth from 10-12% to 5-6%, as more than half the company’s revenues come from auto parts. With net profits falling 39% y-o-y in the first quarter, the downward revision of sales projections indicates fairly flat earnings expectations for 2015.

Tackling emissions­­

The restructuring of excise duties on imported vehicles – expected to come into force late this year – and changes to emissions regulations, planned for January, risk driving down sales of some models. The government aims to introduce an emissions levy on new vehicles, payable on a sliding scale based on fuel efficiency. While some low-emission vehicles stand to benefit, a 5-10% tax hike could result in a 2% increase in retail prices, Piengjai Kaewsuwan, president of the Thai Automobile Industry Association, told local media in March, with trucks and commercial vehicles likely to be the hardest hit.

The Ministry of Energy is targeting the transport industry as part of a broader programme aimed at reducing energy consumption and emissions. Its estimates suggest that 13.7m tonnes of oil equivalent could be saved per annum by greater adoption of low-emission vehicles through 2036, based on projections that domestic sales of new cars and light commercial vehicles over the next 20 years will reach 11m and 4m units, respectively.

The new duty, which comes into force on January 1, provides an added incentive for manufacturers to produce fuel-efficient vehicles as a means of avoiding higher tariffs that would have to be passed on to already price-sensitive consumers. 

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