Thailand’s constitutional crisis has deepened lately as a long-standing political stalemate has been followed by a military coup. A worsening outlook for Thailand’s domestic economy is hitting confidence and is already impacting the automotive sector. Tony Pugliese considers the latest developments and outlook.
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The latest wave of political unrest to envelope Thailand has taken a heavy toll on the country’s domestic economy and once again the automotive industry has been left to count the cost.
The imposition of marshal law by the Thai military last week, which was followed shortly after by the seizure of power on May 22nd, brought to a head six months of anti-government protests, which began with accusations of unconstitutional practices and corruption, followed by calls for constitutional reform and ultimately political stalemate.
The Thai economy contracted by 0.6% year-on-year in the first quarter and by 2.1% compared with the previous quarter. Private consumption deteriorated sharply as consumer and business confidence plummeted, while government activity has been severely hampered by the protests.
The increasingly uncertain outlook for domestic demand has discouraged or delayed fixed investment, while the highly visible streets protests have had a negative effect on the country’s all-important tourism sector.
Thai auto market plummets
New vehicle sales in Thailand declined by 43% year-on-year to 297,413 units in the first four months of 2014. A significant decline had been widely expected, however, given the high volumes of vehicles sold in the equivalent year-earlier period – when the market expanded by over 42% to 522,914 units.
Last year, the market also benefited from high levels of deliveries of vehicles sold under the government’s highly-incentivised first-time buyer programme. The economy also benefited from high levels of investment as the country continued to recover from the devastating floods of late 2011.
But the steepness of this year’s decline was perhaps unexpected, with all major segments of the market sharply lower in the first four month of the year. Automakers and the government this year have continually revised down their full-year forecasts for the Thai market and the political unrest if anything has intensified.
Honda is the latest to come out with a revised 2014 forecast for the overall market, of around 1 million units, which would represent a decline of around 25% on 2013’s 1.325 million units. The market peaked in 2012 at 1.436 million units.
Auto industry under pressure
Inevitably, the sharp drop in domestic sales has put significant pressure on the vehicle manufacturers. While vehicle production was little changed at 2,457,086 units last year, due to buoyant exports, output fell by 28% to 644,222 units in the first four months of 2014 – according to the Federation of Thai Industries. This is a massive 247,725-unit year-on-year loss over just a four-month period.
Capacity utilisation so far this year is estimated at around 66% and most vehicle manufacturers have laid off their contract workers, while overtime shifts have been cut and in some cases also regular shifts.
Component manufacturers and suppliers of support services are also coping with sharply lower business volumes. Few in the industry expect this situation to improve significantly this year, given the depressed consumer and business confidence and the lack of a political compromise in sight.
Honda has just announced it has cut capacity utilisation to 60% and will delay the start up of operations at its new plant – original scheduled for April 2015, by up to a year. Manufacturers such as Toyota and Isuzu, which are also heavily dependent on the domestic market, face similar difficulties.
ASEAN dominance to be challenged?
Political turmoil seems to have become a part of day-to-day life in Thailand and the country has had more than its fair share of military coups over the years. Political tensions have bubbled close to the surface ever since the government of Thaksin Shinawatra was ousted from power under accusations of abuse of power in 2006.
Despite the continual political unrest, Thailand remains the destination of choice in the ASEAN region for automotive sector investment. It is by far the region’s largest export hub, with some 1,128,152 new vehicles shipped overseas last year, and still commands the lion’s share of the region’s automotive sector inward investment.
Obviously, the automotive industry has to take a long-term view given the scale of the average investment in this sector. Other factors are also important in choosing an investment location, such as transport infrastructure, business-friendly environment, local costs and taxation, strength of local supply chain and product quality. Local demand is also a significant factor taken into account.
Last month the Thai Board of Investment announced that inward investment applications from the vehicle, auto parts and machinery industries totalled THB 157 billion (USD 4.85 billion) in the first quarter of 2014 – a 265% increase on the same period of last year.
A total of THB 138.1 billion (USD 4.27 billion) of this comprised pledged investments by ten automakers for the second phase of the government’s Eco-Car programme. The deadline for this was the end of March.
If all of these investment applications are accepted and realised, an additional 1.5 million units in annual vehicle production capacity will come on stream by early 2020s, bringing the country’s total annual vehicle production capacity to close to 4.5 million units.
But it would be wrong for Thailand to take its dominant position in the ASEAN automotive sector for granted. The country has lost significant goodwill with the industry, not only with the increasingly frequent waves of political unrest in recent years. The floods of 2011 caused massive disruption to the industry and are still clearly etched in the minds of many in the industry.
Indonesia has overtaken Thailand as the largest vehicle market in the ASEAN and is competing for the same small-car investments with some degree of success. It also has a market with significantly better long-term domestic growth potential and lower labour costs.
If Indonesia got its act together in improving transportation infrastructure, it could challenge for a much bigger share of regional automotive investment and significantly increase its automotive export prospects.
Thailand should work towards a quick resolution to the political impasse, allowing the military to announce democratic elections sooner rather than later. Even so, it will take a long time for confidence to return. Some of those Eco-Car Phase II investments may still be up for grabs.
