Thailand’s attractiveness as a small-car hub
4 July 2006
Rising fuel prices and unprecedented competition among automakers have resulted in some distinct trends that are sweeping the global markets. The most noticeable among them are a growing preference toward smaller cars and the shifting of manufacturing bases to Asia.
According to an industry estimate, sales of small cars (with engine displacements below 1.6 litres) are likely to grow twice as quickly as those of big cars in the coming decades. Competition among automakers has resulted in pressure on price and hence companies are progressively shifting their production to low-cost bases.
Asian countries such as China, India and Thailand have all been known as low-cost, medium- to high-quality manufacturing locations, attracting investments from automakers. According to an industry estimate, by the middle of the next decade, Asia would contribute about 50% of the world’s car production.
Thailand, which is already the largest automotive manufacturer in Asia-Pacific, can potentially become the world’s small-car hub in the face of competition from China, India and Malaysia.
Thailand is already a global export hub for one-ton pickup trucks. About 40% of its total production for one-ton pickup trucks is exported. Thailand’s car industry has about 15 auto assemblers, more than 700 tier-I suppliers and more than 1,000 tier-II suppliers.
The country’s tier-I suppliers mostly consist of global auto-parts suppliers and their partners and a few Thai companies. Thailand has managed to turn its auto-part industry into a world-class base due to its economies-of-scale strategy and export-oriented mindset. This has resulted in automakers from all over the world making a beeline to establish their manufacturing bases in the country.
Toyota leads the local sector with a 27% share of production, followed by Isuzu (18%), Mitsubishi (15%), and the Ford-Mazda venture AutoAlliance (15%). Thailand has also aggressively pursued free trade agreements (FTAs) with various countries such as Australia and India, which has further strengthened its auto industry.
However, when it comes to small cars, Thailand faces some challenges. Small cars contribute just 15% of the total production in Thailand. The excise duty charged on pickup trucks is significantly lower than that imposed on passenger cars, making the former more attractive. This has resulted in the production of passenger cars, especially small cars, lacking economies of scale. The entire automotive industry is therefore geared toward the production and export of pickup trucks rather than cars.
A few neighbouring countries, on the other hand, have favourable policies for cars. Malaysia, the largest car market in Asean, has pursued a strategy of developing national cars. Both Proton Holdings Bhd and Perusahaan Otomobil Nasional Kedua (Perodua) now have a range of cars in the sub-1.6-litre segment.
Malaysia has also recently announced the new automotive policy (NAP) in its pursuit of new investments in its automotive sector. China, meanwhile, has a large number of domestic players and economies of scale, hence the lowest costs in the world. China’s attempts to enter car markets in North America and Europe are also gaining momentum. Efforts are also being made to improve the overall quality.
India also boasts of a well-developed domestic car market and an auto-parts industry to support it. The industry consists of a healthy mix of home-grown automakers, joint-venture companies and foreign players. It is already a global export hub for models such as the Hyundai Santro Xing (Small Car).
These countries pose a threat to Thailand’s aspiration to become a global small-car hub. To counter this threat, Thailand has a few strategic options.
The Thai small-car market will likely be dominated by Toyota and General Motors in the next few years. These players are strongly entrenched in Thailand for their pickup-truck facilities. Thailand should pursue a strategy to convince them to use the country as their global small-car bases as well.
Thailand can also leverage on Afta (Asean Free Trade Area) and its FTAs with other countries to tap auto-component markets in other countries. This might help the country overcome the lack of economies of scale for small cars in the domestic market.
If Thailand manages to win one or two big-ticket investments, it should be able to reposition itself. Thailand should also boost the domestic car market by lowering taxes and duties on small cars that meet some preset fuel-efficiency norms. This might catch the fancy of customers, as it lowers the overall total cost of ownership. It will provide a much-needed boost to local demand and encourage manufacturers and auto-part makers to build on a large scale.
Another crucial aspect is the expertise of designing, making prototypes and providing engineering support to new models. Thailand’s current perception as a low-cost manufacturing hub needs to be enhanced by the ability to provide such services. Companies should be encouraged to set up design, research and development and engineering facilities on its soil. This would provide automakers easy access to all the services, making the country stand out as a highly attractive destination.
Small cars are likely to play a big role in the global market in the future. If Thailand wants to achieve its ambition of reaching the two-million production mark by the turn of the decade, a focus on small cars will be a rewarding strategy.
Vivek Vaidya is consulting manager, automotive & transportation, for the consultancy Frost & Sullivan.