Mitsubishis low-cost Mirage hatchback was its first eco-car model for Thailand.

Mitsubishi's low-cost Mirage hatchback was its first eco-car model for Thailand.

The Thai government launched "phase two" of its "eco-car" programme in October 2013, after it received final approval from its Board of Investment (BOI) in August. Tony Pugliese reviews Thailand's incentives and the resultant boost to the country's automotive sector. 

Encouraged by the initial success of the original eco-car programme, which was launched in 2007, the government has set its sights on becoming the ASEAN region's main production hub for small, fuel-efficient city cars. It is also targeting exports to countries outside the ASEAN trade block.

The first phase of the eco-car programme secured investments totaling THB28.8 billion (USD 900 million at the current exchange rate) and a combined production capacity of 635,000 units per year from five vehicle manufacturers: Mitsubishi, Honda, Nissan, Suzuki and Toyota.

A sixth participant, India's Tata Motors, decided to withdraw from the programme because of the over-ambitious production and sales targets. 

The government offered generous incentives, including a five-year corporation tax holidays, duty-free import of machinery, as well as reduced excise taxes (of 17% compared with 30% for conventional passenger cars) to encourage local sales. 

In return, the government required participating manufacturers to invest a minimum of THB 5.5 billion, establish a minimum local production capacity of 100,000 units per year and export a minimum of 50% of the output. The cars had to have a substantial local content and meet minimum standards of fuel-efficiency and emissions, including 5 litres/100km and CO2 emissions of 120g per km.

Toyota was the last company to come to market, with the 1.2L Yaris eco-car launched only this October.  

For "phase two" applications the government has set a deadline of March 31, 2014. Production licences are expected to be issued by mid-year, with actual investments expected to start in 2015.

This time round the minimum investment requirement is THB 6.5 billion, with the same minimum 100,000 units per year output to be achieved within four years of start up. The cars now have to meet Euro V emissions standards; a maximum fuel consumption of 4.3 litres per 100km; and maximum CO2 emissions of100g per km.

In return, the government is offering an eight-year corporation tax holiday, duty-free import of machinery, and local sales incentives including the lower excise tax rate of 14% (12% if compatible with E85 fuel).

The government expects at least five companies to participate in the phase two. Toyota has indicated it will also participate in phase two and is busy crunching numbers ahead of a decision. Mitsubishi, too, is considering investing in the second phase of the eco-car programme. 

Ford-Mazda, having missed out on the first phase of the programme, is keen to come on board – especially as it has chosen Thailand as its main production hub for the ASEAN region. Other likely candidates include a major Chinese manufacturer - possibly SAIC, and also Volkswagen, GM-Chevrolet and Hyundai-Kia.

Vehicle manufacturers choosing not to participate in the eco-car programme will be at a disadvantage if they later choose to compete in the local small car segment.

The government expects to attract investment of between THB 30-40 billion and have in place a combined eco-car production capacity of at least 935,000 units by 2017, rising to over 1.2 million units by 2020. It also expects 70% of output to be exported.

There is no doubt that the Thai government has been by far the most proactive and successful in South-East Asia at implementing automotive policies and in attracting automotive industry investment. The country is already the main global production hub for pickup trucks outside the USA and its compact passenger cars are also widely exported –increasingly to markets within the ASEAN trade block.

But there is growing concern that vehicle manufacturers are being pressured into making investment decisions in Thailand - to build excessive capacity for which local demand is limited – for the moment at least. Vehicle manufacturers are also being pressed into adopting increasingly aggressive export policies and replace existing capacity elsewhere. 

Just over 164,000 eco-cars were sold in Thailand last year, according to auto industry consulting firm LMC Automotive. A further 80,000 are estimated to have been exported. 

This, admittedly, without a contribution from Toyota, which has only just launched its Yaris eco-car. But last year was also a record year, in which first-time buyers were being courted by the government with generous tax rebates.

By 2020, LMC Automotive forecasts eco-car sales in Thailand will reach 273,000 units – although this does not take into account phase two eco-car programmes, where investments have yet to be confirmed. Still, this is just over 20% of the anticipated available capacity for that year.

With Indonesia also implementing its own small-car programme along broadly the same lines as Thailand, with Toyota, Daihatsu, Honda, Suzuki and Nissan having already committed investments, the question remains - where will all this excess capacity be channeled?

Tony Pugliese

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