BANGKOK – The Covid-19 pandemic has put the brakes on Thailand’s automotive industry, but there are healthy innovative signs the so-called “Detroit of Asia” will survive the crash as it downshifts into more new-generation electric vehicle (EV) production.
The kingdom’s automotive industry normally employs about 700,000 people and accounts for 7-8% of gross domestic product (GDP). Last year, Thailand manufactured 2.01 million vehicles – about half for the domestic market and half for export – ranking the nation as the 11th largest vehicle manufacturing base worldwide.
That production will understandably collapse in Covid-19 infected 2020. During the first seven months of this year, Thailand produced just 695,468 units, down 43.7% year-on-year. Exports during the same period amounted to 400,114 units, down 37.6%, according to Federation of Thai Industries figures.
The full Covid impact on the sector, in such areas as unemployment and business closures, remains to be seen.
“Covid will have a big impact on the auto and auto parts industry, but we don’t have the figures yet,” said Sompol Tanadumrongsak, president of the Thai Auto Parts Association. “I think a lot of companies will go bankrupt,” he said.
One leading parts supplier has cut its staff from 10,000 to 3,000, according to local reports. Of the estimated 700,000 employed in Thailand’s automotive sector, some 500,000 work for auto parts manufacturers entailing over 1,700 companies.
These parts manufacturers form the core of Thailand’s supply chain cluster, providing original equipment manufacturer (OEM) parts to car assemblers and replacement parts for the so-called “After Market”, which comprises are parts sales after a vehicle leaves the showroom.
Built up over decades, this cluster remains one of Thailand’s selling points in maintaining its automotive hub status against regional competitors such as Indonesia (800 auto parts makers) and Vietnam (300 suppliers).
Most in Thailand’s supply chain target OEM and replacement parts for pickup trucks, which generally account for 50% of domestic sales, and eco-cars another huge segment.
Both pickup truck and eco-car production have benefitted from past promotional policies, such as reduced excise taxes on locally manufactured vehicles. (Excise taxes usually account for 15% of Thailand’s sales prices). This provides a huge “After Market” for replacement parts suppliers, which will not disappear any time soon.
“That is the beauty of the After Market – the life span of the After Market is much longer than OEM,” said Sompol. “For OEM parts the life span is only three-five years, and then there is a new model, but for the After Market the life span is roughly 20 years.”
With an estimated 10 million pickups already plying Thailand’s roads and a similar number abroad, Thai auto parts makers still see a healthy “After Market” for many years, albeit not a growing one.
Compared to Indonesia and Vietnam, Thailand is no longer competitive in terms of cheap labor. Given its fast-aging population and slowing economy, the decades of impressive domestic automobile sales, recently topping 1 million units a year, may be in the rearview mirror.
Indeed, the Covid crisis is providing an early-warning signal for parts suppliers.
“This is a good opportunity for us to shift into other products, like agricultural machinery or medical equipment,” Sompol said of the auto parts makers. “A lot of filter-making companies have shifted themselves to make medical masks. They use the same technology.”
Thailand’s declining competitiveness in the automotive sector vis-a-vis its neighbors has been predicted for years, yet to date, there is little evidence of the major auto producers abandoning their Thai factories for other regional destinations.
In fact, Japan’s Nissan Motors last year closed down its facilities in Indonesia and relocated them to Thailand. America’s General Motors closed down its Thailand operation in February this year, but that had more to do with its own lack of competitiveness in the Asian market than Thailand’s waning luster. (GM also closed its factories in India and Vietnam.)
In Thailand, GM’s facilities were bought out by China’s Great Wall Motors Company, which, prior to Covid-19, had plans to manufacture pickup trucks and sport utility vehicles (SUVs) in Thailand and to import electric vehicles (EVs).
Japanese manufacturers have kept their Thai factories largely because they want to continue supplying pickups to the Thai domestic and export markets.
Furthermore, most of the major Japanese brands have signed up for a second-phase eco-car program, initiated a few years ago by the Thailand Board of Investment (BOI), following the success of the first phase eco-car package, industry sources say.
“I’m still optimistic in terms of the automotive industry in Thailand,” said BOI Secretary General Duangjai Asawachintachit. “For us, the key is how to transform the existing supply chain to meet the existing demand. That is why it’s important to develop the supply chain for the EV parts,” she told Asia Times.
Since 2017, the BOI has with some success provided incentives such as waivers on corporate income tax and reduced excise taxes to auto companies to invest in various types of EVs.
“I would say they have been successful for the hybrids,” said Titikorn Lertsirirungsun, Southeast Asia manager for LMC Automotive, an auto industry analyst. “BMW and [Mercedes] Benz are now producing plug-in EV hybrids under the BOI program. When they get the incentives they can reduce the price a lot and sell at a cheaper price, so they are removing their IC (internal combustion) models and just selling plug-ins now.”
The program has so far attracted 13 carmakers to invest in hybrid electric vehicles (HEVs), plug-in hybrid electric vehicles (PHEVs) and battery electric vehicles (BEVs), with some models already in Thai showrooms and on the road.
The Phase I participants of the BOI’s EV promotion scheme attracted a healthy mix of Japanese, German and Thai companies, including Toyota, Honda, Nissan, Mazda, Mitsubishi, Mercedes Benz, BMW, SAIC-Motor CP, FOMM and Mine Mobility.
While most of those are familiar brand names, some are newcomers.
For example, SAIC-Motor CP is a joint venture between Thailand’s CP Group and Chinese state enterprise SAIC Motor; FOMM is a private investment by a Japanese owner which has produced Thailand’s first BEV, with sales of about 300 units a year; and Mine Mobility is a subsidiary of Energy Absolute (EA), a Thailand-based alternative energy group that is listed on the Stock Exchange of Thailand (SET).
EA has produced a prototype MINE model BEV, initially using mainly imported parts from China, but postponed sales this year due the Covid crisis. EA has also produced a prototype EV boat, with plans to provide a 22-fleet passenger service on the Chao Phraya River next year, and an EV bus to serve as a mass transit option.
The challenge is that existing operators are not interested in buying EA products, which are considerably more expensive than their diesel options.
“We are begging the Thai government to help the local industry, and help the Thai industries to grow internationally,” said Somphote Ahunai, chief executive officer of EA. “We are in the middle-income trap. If we don’t develop our own technology, it is almost impossible for Thailand to escape the middle-income trap.”
EA, which has investments in a bio-diesel plant and solar farms, has received BOI privileges to invest in a lithium-ion battery cell factory in Chachoengsao province, worth an estimated 3 billion baht (US$96 million). The company has also received BOI support to construct 3,000 EV charging stations in Bangkok, of which 570 have been installed.
EA is also the only Thai investor producing lithium-ion cells – the building blocks of EV batteries- using technology from Taiwan’s Amita Technology Company, which it has bought up. Nine other companies are investing in battery-related projects under the BOI scheme.
As batteries account for about 40% of the value of EVs, the BOI has made it a requirement that for companies receiving its privileges to produce HEVs, PHEVs and BEVs they must also locally manufacture one of the four key components of EV production, namely batteries, battery management systems, the domain control unit (DCU), and the tracking motor.
“For batteries, we have approved ten projects, but for the other three parts we have very few. We need to attract more,” Duangjai said. Apart from EA, most of Thailand’s local battery projects involve assembling imported battery parts, mainly from Germany and China.
One big threat looming over Thailand’s push to become a BEV production hub – and not just hybrids, which are deemed an interim product in the world’s march towards less-polluting transport – concerns Chinese EV imports.
Through poor judgment or a lack of foresight, when the Thai government was negotiating tariffs on “sensitive goods” in 2015 under its Free Trade Agreement (FTA) with China initiated in 2003, it failed to protect locally-produced EVs from Chinese imports.
As a result, EVs imported from China arrive in Thailand with zero import tax. This has been a great boon for SAIC Motor CP, which has been successfully importing MG EV models into Thailand. Britain’s MG Motor is now owned by SAIC Motor CP.
MG sold 300 cars in Thailand in 2014, 3,778 in 2015, 8,319 in 2016, 12,013 in 2017, 23,740 in 2018, and 25,516 in 2019, up 11.9%, with the best-selling models being MG EVs.
“Of the BEV models available in Thailand, MG’s is the cheapest. It costs 1.2. million baht ($38,500), compared with Nissan’s Leaf model at 1.8 million ($57,760),” said LMC’s senior analyst Kunat Tharasrisuthi. “Our concern is that some companies may import from China rather than produce EVs in Thailand, like BMW or Mercedes Benz.”
BMW, for instance, has already announced plans to manufacture its BEV models at its China factory, aiming mainly at China’s huge domestic market. Why, analysts ask, should it also manufacture the same model in Thailand when there is a zero tariff on China imports?
There are worries that a flood of imported EVs from China could undermine the Thai government’s efforts to encourage local production in the near future.
“This was a mistake by our association also, when we were helping with negotiations four years ago,” said Auto Parts Association President Sompol. “Now the government has already approved it, so we can’t do anything about it.”
The association has suggested placing a temporary ban if there are too many EV imports in the future.
“In the beginning it is okay for the government to allow them in, to lift market awareness, but if they flood the market with CKDs (completely knocked down vehicles) I think our members would not be happy,” Sompol said.
Under a government masterplan announced earlier this year, officials hope that 30% of all transport will be EV by 2035, cutting carbon emissions and saving on energy imports.
To hit such an ambitious target, local producers of hybrids, BEVs and batteries say there is a need for the government to provide more incentives to encourage the blossoming of a local EV cluster.
“So far we have submitted eight proposals to the government to improve the market for EVs,” said Krisda Utamote, President of the Electric Vehicles Association of Thailand (EVAT).
Among the group’s suggestions are tax incentives to encourage Thais to buy EVs, such as income tax reductions, as well as the promotion of the manufacturing of other EV categories such as motorcycles and three-wheelers, known as tuk-tuks in Thailand.
EV tuk-tuks could replace the current carbon-belching models, but it would require the government to lift its current ceiling on tuk-tuk licenses, a cap imposed to phase the vehicle off the roads.
BOI is already working on a Phase II of its EV promotion scheme that would include tax incentives for the producers of EV motorcycles, small trucks and three-wheelers.
“Now that the 2nd phase is coming up, they would like to copy and paste the incentive scheme for the car on to motorcycles,” Krisda said. “So we believe that the steps that have been taken for the car will be taken for the motorcycle pretty soon.”
Still, some wonder whether Thailand’s EV push is ultimately worth the government effort and waived tax revenues, particularly in Covid-19 straitened times. BEVs use much fewer parts than combustion engine vehicles, and thus would provide less work in the long run for Thailand’s current robust parts supply chain.
While internal combustion (IC) vehicles generally have 30,034 parts, hybrids 32,607 and plug-in hybrids 33,381, BEVs only require 20,787 parts, according to Kasikorn Research Center, a Thai think tank.
The center estimates a possible supply chain loss of 3.8 billion baht ($121.8 mn) from 2019 to 2028 in the expected transition to BEVs, mainly for engine makers. BEVs also require less manual labor than their IC counterparts, raising certain questions about why the BOI is so vigorously promoting them.
“It’s a different type of employment,” BOI Duangjai argued. “You are not targeting shop floor workers, but you are hoping that companies would employ skilled labor, graduates from technical colleges or universities. Will it create more value-added for Thailand? I think so.”
There is also the worry that Thailand might lose its vaunted “Detroit of Asia” status.
“If Thailand did not support this EV sector, perhaps in the future all our auto exports would disappear,” predicted LMC’s Titikorn. “If Thailand didn’t offer any tax incentives, they would go to another country, say to Indonesia.”