Thai auto industry comes under pressure from recent political unrest

The long political upheaval in Thailand, coupled with an equally uncertain economic situation, has begun to increasingly affect the country's appeal as Southeast Asia's largest automotive production hub. Global automakers, including heavyweights such as General Motors (GM), Ford, and Toyota, have warned of a sales decline amid the political standoff that has engulfed Thailand since last November. Truck-maker Hino is scaling back production in Thailand, while its parent Toyota has already said it may reconsider its future investments. Toyota currently has scheduled as much as 20 billion baht (USD610 million) in the country to expand capacity (see Thailand: 21 January 2014: Thailand's vehicle market declines 7.4% y/y in 2013; Toyota may reconsider investment if Thai political unrest continues). Honda's executive vice-president Tetsuo Iwamura said last month that the company "cautiously" made its THB17.15 billion investment in a third factory in Thailand but has no investment plan for the country in the immediate future. Likewise, Masahiro Moro, managing executive officer at Mazda, said that Thailand's lingering political impasse could cause investors to "lose their trust" in the government.

In addition, a number of Chinese automakers, which are looking to produce cars in Thailand as they seek to secure a foothold in the country and the burgeoning neighbouring markets of Indonesia and Vietnam, are facing even more difficulties. Shanghai Automotive Industry Corp (SAIC), which joined hands with Thai conglomerate Charoen Pokphand (CP) Group to make the Southeast Asian country its manufacturing base for right-hand-drive vehicles for both the local and export markets, has delayed the expected start of production from July to the fourth quarter this year, reports the Wall Street Journal. SAIC-CP, the joint venture (JV), has acknowledged that it is struggling to decide on the target customers for its UK-designed MG cars in Thailand, long dominated by Japanese automakers, which control around 90% of the market. A handful of senior Thai executives have also left the JV in recent months due to conflict with the Chinese staff, according to unnamed sources within the JV, which is faced with a key issue of whether to import auto parts from China or to procure them locally. Another Chinese automaker, Great Wall Motor, said last month it had postponed plans to build a sport utility vehicle (SUV) manufacturing plant in Thailand because of the country's protracted political unrest (see China - Thailand: 26 February 2014: Great Wall stalls plans for Thai plant). Likewise, Dongfeng Motors (Thailand), an independent distributor of the Chinese Dongfeng brand of minivans and minitrucks in Thailand, shelved a USD10 million expansion plan last year, citing political unrest and a weak economy.

IHS view

IHS Automotive expects Thai vehicle production to be delayed up to six months due to the political crisis "given the domestic market slowdown and sluggish vehicle demand", according to our senior analyst, Jessada Thongpak, who expects a majority of the MG car components to be imported by SAIC-CP initially from China. That said, the JV has to ensure that its vehicles meet the minimum local-content requirement of 40% to be able to avoid heavy tax on exports from Thailand to the rest of Southeast Asia, which could dent its competitiveness. However, Wu Huan, the JV's president, expects to meet the local-content requirement and expects its manufacturing plant in Thailand's eastern province of Rayong to produce 25,000 cars in the first year and 50,000 cars in the second year. However, IHS Automotive estimates that the JV's actual production in 2015 will be less than 10,000 cars, and may rise to only 15,000 cars by 2020. “Because Japanese brands are so ubiquitous and accepted, SAIC may not be very successful in the domestic market for a while,” predicts Thongpak.

Outlook and implications

Thailand produced a record 2.46 million vehicles last year, while domestic sales declined 7.7% to 1.33 million units, down from an all-time high of 1.43 million units in 2012, when the market had been boosted mainly by the government's first-time car-buyer incentive scheme, which ended on 31 December 2012. Deliveries of cars booked under the scheme kept the local market afloat until mid-2013, but automakers have since struggled. Sales hit a 25-month low in January as continued political turmoil and weak economic conditions further dented consumer sentiment (see Thailand: 21 February 2014: Thai vehicle sales plunge 45.5% y/y in January).

The prolonged political stand-off, tighter loan conditions by financial institutions, a forecast drought, and falling crop prices are expected to hurt Thai car sales in 2014.

In the longer term, the situation does not augur well for Thailand as it braces itself for more competition for foreign investment amid the planned creation of a regional economic bloc next year. Thailand, which has long been attractive for car production because of its more than 50-year-old automotive supply chain and its central location in the region, is already grappling with a drop in tourism and a pullback in consumer spending that economists fear could slash the country's economic output this year to as low as 3% from 6.5% in 2012. The situation could benefit neighbouring Indonesia where Honda opened its second car-manufacturing factory last month, and Datsun, Nissan's newly reintroduced low-cost brand, is set to follow suit in April. Toyota is also reportedly looking at expanding production in Indonesia owing to the political uncertainty. It could also benefit Malaysia, whose own recently announced National Automotive Policy specifically targets foreign investment in energy-efficient vehicles, which is not too dissimilar in its intentions to the LCGC programme in Thailand (see Malaysia: 21 January, 2014: Malaysian government unveils National Automotive Policy 2014). In January, Malaysia's policy was not seen as substantial enough to move auto investment in the region, but with its stable political environment and skilled labour force, the country could benefit from the turmoil in Thailand in the longer term.

The Federation of Thai Industries expects Thai vehicle production and sales this year to stay at around 2.4 million and 1.2 million units, respectively. IHS Automotive has a more bearish view of the country's current political impasse. We expect 2014 Thai domestic auto sales to fall 19% to around 1.08 million units due to the political unrest and the end of a government-subsidy programme for first-time car buyers. We expect the country's vehicle production this year to slip 8% to 2.2 million units, a further downgrade as we expect the negative economic factors and political uncertainty to continue through the third quarter this year. However, we foresee strong export momentum of pick-ups and subcompact and compact vehicles from Thailand, where vehicle production is expected exhibit a slow pace of recovery from the fourth quarter of 2014 through the second quarter of 2015.