Since crashing to a crisis low of 144,000 units in 1998, recovery in the Thai vehicle market has been steady – if not quite matching the break-neck recover rates seen in other regional markets such as Malaysia, Korea and even Indonesia. Four years after hitting rock bottom, the 406,000 new vehicle sales in 2002 amounted to little over two-thirds of their pre-crisis peak levels. Nevertheless, steady progress has been made and the growth that is currently taking place looks among the most sustainable in the region. Tony Pugliese reports.

Auto companies are expecting sales in Thailand to rise to 470,000-480,000 units this year and in excess of 500,000 units in 2004. The vehicle industry itself is doing even better. Exports of parts have risen twelve-fold since before the financial crisis, and exports of fully built-up vehicles are growing as Thailand consolidates its position as the main global supply base for pickup trucks and as the main production hub for passenger car sales in south-east Asia.

An industry transformed
Both the vehicle industry and the components sector have made very significant progress in improving quality and manufacturing processes and are beginning to reap the long-term rewards. Vehicle manufacturers are beginning to establish product R&D centres – a sure sign that Thailand is becoming a global player. The recent political instability in countries such as Indonesia and the Philippines, and an overly protective Malaysia, has meant that Thailand has ended up with perhaps more than its fair share of regional automotive investment.

But it is not all down to luck – the government has worked closely with the industry to create a policy environment conducive to inward investment, while maintaining a stable post-crisis political and economic environment. Today, the Thai automotive industry has significantly reduced its dependence on its domestic market, something that was not in place before the financial crisis and still lacks in its neighbouring Asean countries. By the end of the decade, vehicle production will likely exceed 1.2m units – more than two times the volumes that can be expected from either Indonesia or Malaysia.

The vehicle market

Steady 5% GDP growth
Despite weakness in overseas markets, Thai economic growth has been remarkably resilient over the last few years. GDP growth has been in excess of 5% for almost every quarter since the strong bounce-back immediately after the economic crisis. While the tourism industry has been a stabilising force for the economy throughout, additional growth momentum in recent years has come from Prime Minister Thaksin’s rural stimulus programme.

More recently, falling interest rates and improvements in the lending environment have stimulated additional domestic spending. The export sector has also kept its neck above water throughout and has begun performing extremely well this year. The Federation Of Thai Industries is forecasting annual growth of 9% for 2002, with the automotive sector leading the way. Agricultural output and prices have also strengthened this year, while low interest rates are contributing to the revival of the property and construction sectors.

Despite the SARS setback, which reduced GDP growth in the second quarter of 2002, the Thai economy is broadly expected to grow by at least 5% this year, with the rate of growth potentially accelerating in 2004 if global economic conditions improve as expected.

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Toyota, Honda car sales almost double
Low interest rates, improved credit facilities, broadening economic growth and – last but not least – the replacement of the country’s two best-selling car models have led to a major bounce in the Thai domestic passenger car market this year. Toyota, which launched the Vios – effectively replacing the Soluna “Asia Car” which was originally launched in 1996 – has seen volumes almost double in the first five months of 2003, following on from very strong growth in 2002. Toyota added a second shift to the Gateway plant near Rayong last month to cope with the rising demand. As well as serving the domestic market, the car is being exported in CBU format for the first time to major regional markets such as Indonesia. Overall, the company is targeting a 33% rise in vehicle output this year to 180,000 units. In the second half of 2003, Toyota’s two assembly plants are expected to produce at close to their combined capacity levels of 240,000 units.

Honda has also seen a similar surge in demand in response to the replacement of its City “Asia Car”. Its passenger car sales volumes in the first five months of 2003 are up around 90%. Combined, both brands have accounted for a staggering 81% of new passenger car sales so far this year, compared with 68% in 2002. Mercedes-Benz was one of the few other companies to see volume growth this year, thanks to the launch of new E-class range – putting pressure on rival BMW. Chevrolet also saw sales growth, mainly as a result of an improvement in finance packages – including 0% down-payment offers. Local assembly of the Optra (Daewoo Nubira) begins this month, and exports from Thailand to Indonesia will start soon.

The outlook for domestic passenger car demand remains good, as economic growth is expected to gather some momentum and interest rates remain low. The competitiveness of the industry will continue to improve as exports rise and economies of scale improve overall. As well as Toyota and Honda, Mitsubishi, Nissan and BMW are working towards concentrating ASEAN passenger car output in Thailand.

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Rising global appeal of pickups, especially double-cab models
The commercial vehicle sector has also performed strongly this year, thanks in great part to strong demand for one-ton pickup trucks – particularly for the mixed-use double-cab models. Isuzu’s D-Max truck is by far the most popular, and has come along way in terms of design and technology since the previous generation of trucks. Production will be ramped up to 140,000 units this year, from 90,000 last year, and the truck will also be sold overseas for the first time under the Chevrolet and Holden badges. The Toyota Hilux and the Ford Ranger have also increased their market appeal, in Thailand as well as overseas, while leaving Nissan to struggle to maintain current volumes and facing market share loss.

Underlying demand for medium and heavy trucks rising
Demand for vans and other light delivery vehicles have also been growing, reflecting a robust domestic economy driven by rising consumer spending. The medium and heavy commercial vehicle segments, while seeing some degree of growth in the last two years, remain at a fraction of their pre-crisis levels. In the foreseeable future, demand will struggle to reach the heady heights of 1996, when combined volumes came close to 50,000 units per year.  Nevertheless, there are growing signs that these segments are entering a new growth cycle.

Industrial overcapacity has declined very significantly in the last few years, which may spur on a new cycle of capital investment growth. Growing export demand and rising trade volumes have contributed to the increased capacity utilisation, as well as the reduction in overcapacity in the road haulage sector. New life has been injected into the property sector, and construction activity is also picking up. An upturn in sales is likely in the short-term, and companies such as Volvo and Hino are repositioning themselves already to take advantage of the improved outlook. Volvo has said that Thailand will become its south-east Asian heavy truck production centre, while Hino too has taken control of its local assembler.

The automotive industry

Supply chain rescued from bankruptcy
The financial meltdown that enveloped Thailand in 1997 marked a major turning point in the development of Thailand’s automotive industry. Like most sectors of the Thai economy, the automotive industry had been predominantly domestically focused, and although based almost entirely on Japanese technology it was firmly under domestic control. The sharp currency depreciation and the subsequent decline in domestic sales pushed the industry close to collapse.

Fearing an irreversible breakdown in the manufacturing supply chain, Thailand’s automotive industry (and its Japanese partners) was forced to look outward, and to Japan in particular, in the immediate wake of the crisis. A relaxation in foreign investment regulations allowed dozens of insolvent component manufacturers to be recapitalised and taken over by their Japanese technology licensors.

Parts industry emerges more capable
Nevertheless, before the component industry could begin to look for export markets to offset the domestic demand shortfall, significant improvements in manufacturing processes and product quality were needed. Under the control of the Japanese, quality improvements were quick to materialise and the export prospects were greatly enhanced not only for the country’s component sector, but also for the vehicle assembly industry itself.

Today, Thailand’s automotive industry is in much better shape than it was before the crisis, albeit in large part under foreign control. There are however some very large domestically owned component manufacturing groups. But thanks to the significant improvements in component manufacturing processes and investments in new vehicle assembly capacity, the industry is moving into a new growth phase. Vehicle production last year was just below 585,000 units, ahead of the pre-crisis highs notched up in 1996.

Moving towards 1.2m units annually…
The main thrust behind the recent momentum has been not only the recovery of domestic demand, but also the emergence of a vehicle export industry that continues to gather strength. CBU exports have risen sharply, from just over 14,000 units in 1996 to an expected 200,000 units this year and many analysts expect export volumes to at least double once again in the next few years, and rise to around 500,000 – 600,000 units by the end of the decade. Combined with vehicles for domestic sale, overall output volumes are likely to exceed 1.2m units by the end of the decade – twice as many vehicles that are likely to be produced in Malaysia or Indonesia.

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Pickup industry goes global
As well as becoming a major production hub for mid-sized cars for ASEAN’s major markets, Thailand is fast becoming the global production base for one-ton pick up trucks. The appeal of these vehicles is growing rapidly – especially for double-cabin models that are fast becoming popular as lifestyle products in southern Europe, Australia and even in South-east Asia itself. Thai pickup truck production will replace most of the equivalent operations in Japan within the next two years, and this will open up additional markets for Thai CBU exports.

New opportunities with pickup-based AUVs
Also, starting next year we will see a new generation of Asian utility vehicle – built on the pickup platforms – entering the market. This too is likely to add momentum to the Thai vehicle industry. All current pickup truck manufacturers based in Thailand have been working such programmes for some time. Ford-Mazda, Isuzu and Mitsubishi are expected to build these products in Thailand. At this stage, Toyota looks like the only company preparing to build its “IMV-V” Hilux-base utility vehicle in Indonesia. In most cases the forthcoming wave of pickup-based utility vehicles will not directly replace the current generation of utility vehicles, but will likely form a more upmarket sub-segment sold alongside and a range of smaller, compact utility vehicles. For Thai-based manufacturers, however, these developments represent additional CBU, CKD and parts export opportunities.

Automotive industry growth reflected in export data
The growing strength of the Thai automotive industry can be illustrated in the huge growth in component exports over the last seven years. In 1996, the total value of OE and replacement part exports was just under Bt2bn (US$48.2m), compared with over Bt25bn last year, according to figures released by the Thai Automotive Industry Association. This twelve-fold increase comes in additional to the higher proportion of local parts fitted to Thai-made vehicles, and the sharp rise in CBU exports.

If anything, Thailand’s strength in south-east Asia’s automotive industry continues to grow, helped in great part by the much-improved capabilities of the component manufacturing industry. The individual companies now offer a collective strength that has given Toyota, Ford and Isuzu the confidence to establish vehicle R&D activities in the country. This is the clearest endorsement yet of the growing competence of Thailand’s automotive components industry.

Toyota’s Thai managers will look on pride to the dark days of 1997 and 1998, when the company had to concern itself with the cashflow of its suppliers. In those days, it was forced to pay cash up-front for parts orders, and even had to purchase raw materials on behalf of its suppliers. What a difference a few years makes.