Thailand’s Auto Export Problem

in 2019 thailand exported nearly half a million cars worth over 9 billion dollars they are the 17th largest automotive exporter in the world the third largest in asia and the biggest in southeast asia yet the country's success in building and exporting cars and car parts has largely gone under the radar and that is for a specific reason in this video we're going to talk about how thailand developed and nurtured an automotive export industry and why it might not have turned out as successful as desired but first let me talk about the asianometry newsletter if you subscribe to the channel you should also sign up to the newsletter check out videos you might not have seen before thanks to the algorithm and read writings that i never bothered to turn into a video you can find the link to the newsletter in the video description below or you can just go to asianometry.com as of right now you can expect a new newsletter every thursday at 1 am taiwan time alright back to the show the modern thai automotive industry starts with a 1960 industrial promotion act at that time the domestic industry produced very few cars in 1961 only 525 cars were made in thailand the majority of the 6080 units sold in thailand came from abroad they arrived in two forms fully assembled or in a knock down format with the latter the car arrives in a kit and some person or company has to put it together the act raised import tariffs on fully assembled car imports from eighty percent to one hundred and fifty percent for car kits the tariffs went from fifty percent to eighty percent with these new rates the government sought to build up its local ability to substitute for its imports foreign car assembler companies entered thailand to evade these tariffs the first was a joint venture between ford's uk-based subsidiary and their thailand-based importer thai motor industry company others followed like fso and fiat's connor suta general assembly company as well as a joint venture between nissan and siam motors by 1971 the industry assembled over 9000 passenger cars a year and supplied half the domestic market on the surface it seems like the government executed on its policy goals but look a little deeper and what you realized that it was a bit of a sham nothing was being made locally rather companies were importing kits and putting them together plentiful government incentives and a low barrier to entry created an oversupply of these assemblers worse yet the industry was making no progress towards bringing that work home tax policies to encourage the production of parts like tires batteries radiators and leaf springs failed to make meaningful progress thus in 1971 new policies were passed to encourage a localization of certain vehicle parts car assemblers were required to source at least 25 percent of their parts locally these limits were scheduled to take place in 1973. to deal with the oversupply of low-value added domestic assemblers the government also proposed limits to the number of available models and entry conditions for any future new assemblers had these latter policies gone into effect they probably would have substantially consolidated and right-sized the market but it would have come at a cost of substantial industry pain and job losses australia faced a similar situation at around this time so political pressure from the industry struck those from the agenda the 25 local content policy came online has proposed but those limits were not high or specific enough to significantly influence the industry's direction over the next five years gm and ford motor thailand entered the thailand assembler market domestic vehicle assembly numbers rose four times representing 65 percent of sales but thai made cars remained expensive and poorly made furthermore the industry suffered from oversupply plants were running at a sixth of their total capacity at the same time the country's automotive trade deficit deepened by 1977 reaching six times what it was in 1971. finally in 1978 the thai government did two very impactful things first they imposed a complete ban on fully built small passenger vehicle imports and raised the tariffs on kits yet further second the government extensively negotiated with the various constituencies within the industry to implement a more fully featured localization policy over the next five years the local content requirement would be gradually raised first from 25 to 35 percent and then 5 each year until 1983 the goal would be to have cars made with 50 domestic parts great but there was still something missing now ever heard of something called okrs it stands for objectives and key results it is a goal setting framework famously used by intel and google the objective is a concrete goal and key results are measurable success criteria for achieving aforementioned objective to be honest i don't really care for it that much anyway one of the bits in okrs is that you want to set pairs of key results that counter each other like if you set one for quantity you need to have another for quality the 1978 thai law set a quantity key result 50 domestic parts content within five years but without a quality key result there was a risk of achieving the number without achieving the goal like the assemblers buying local leather plush for the seats but importing the most critical bits of the actual car thus the thai auto policy also dictated to the local assemblers the specific parts they needed to localize over those coming years brake drums exhaust systems etc this policy was referred to as mandatory deletion and it set up a collaborative roadmap for both the assemblers and the local thai car parts industry to follow in the coming future the 1978 policy was ultimately successful in setting the thai automotive supply industry on the intended track the 1970 policy worked but not without a little pain there was no way to avoid a shakeout the thai automotive industry consolidated as large assemblers toyota and nissan managed to meet the new local content requirements smaller ones like hillman simca and dodge could not and closed down in addition ford and gm could not meet their sales goals in the country and withdrew from the market the government continued managing the industry thereafter further pushing the vehicle localization limits and chasing economies of scale for instance they finally implemented the aforementioned limits to models and series starting in 1984 the industry can only produce 42 series and two models the government also set up large export and industrial zones in three eastern thai provinces with japanese support they built a massive infrastructure system anchored by a new port lam chaban 75 kilometers south of bangkok and its notoriously bad traffic this successfully turned the country's east region into a manufacturing juggernaut second only to the bangkok urban area then in 1985 japan and the united states settled the plaza accord it realigned and revalued the japanese yen upwards this hit at the country's wages and export competitiveness as a result japan's various manufacturing industries fled abroad thailand already a close japanese trading partner benefited greatly from this rejiggering of industries foreign investment capital after 1985 more than doubled from an annual average of 287 million to 744 million the nature of the fdi changed as well moving into actual local production time-made cars were increasingly made with thai made parts in 1986 the government moved towards localizing one of the core technologies in the car the engine they set local content requirements for diesel engines aiming to have 70 of the engine built by 1996. three large engine suppliers would arise to meet these goals siam toyota manufacturing thai automotive industry and isuzu engine manufacturing thailand in 1987 a major milestone mitsubishi thailand would become the first thai company to produce and export fully thai built vehicles some 500 vehicles to canada a major milestone by the end of the 1980s the automotive industry was thailand's most protected foreign imports were either heavily tariffed or outright banned the booming thai economy from 1987 to 1991 helped push this sector along with an average annual growth rate of 10 percent it seemed to signal thailand's success following the standard east asian import substitution playbook the same as practiced by japan taiwan korea and china in 1991 however an interesting turn anan panyarotun took power in the country in the wake of a military coup anan implemented a series of reforms including an hiv aids policy wage increases and the implementation of a vat tax he began liberalizing the country's automotive industry lifting some of its protections import bans were lifted and tariffs were lowered additionally foreign ownership restrictions were eliminated joint ventures with local companies were no longer required provided they exported 60 of their output why two reasons the first was the lower prices on domestic automobiles consumers and regulators complained that these local content regulations had done little but made cars more expensive for thai consumers the second was to diversify foreign direct investment away from japan the thai auto industry at the time enjoyed substantial protections and benefits but since they were so closely tied to the japanese it was seen as government benefits going to foreigners the liberalization measures brought in a flood of south korean and american competitors and indeed it forced the japanese-owned assemblers to streamline and get more market competitive introducing cars like the honda city from 1992 to 1996 the average growth of the automotive industry in thailand was around 12 on the back of an overall growing economy 1996 saw a historic high in domestic car sales then came the 1997 financial crisis thailand was one of the countries most affected by the crisis demand collapsed in the automotive industry by 38 in 1997 and a further 60 percent in 1998 creating a massive capacity blood local companies cut costs and laid off workers toyota had to inject over a hundred million dollars to keep its subsidiary afloat the glutton capacity reoriented the country's industry towards exports the financial crisis had devalued the thai currency making its products cheaper abroad 1998 would be the first year that thailand exported more cars than they made the country thereafter seized upon this success and repositioned itself has an export base for foreign car makers japanese and american car makers can retain 100 of the profits from their subsidiaries while benefiting from the cheap labor and local automotive supplier ecosystems that already existed in 2000 thailand had to drop their local content requirements to meet wto requirements in response the government shifted its policy direction to specialize in specific national champion product variations this is in contrast to other countries which select national champion companies being china and its national champions huawei and kaidel thailand chose the champion the pickup truck category and the industry responded positively for instance toyota moved their pickup truck production to thailand building millions of toyota hilux for export to all over the world they deepened their involvement further by moving over r d too government policy in recent years has adjusted that direction in light of recent market trends the country will still heavily focus on pickup trucks but it has started to invest additional resources in smaller more efficient eco cars and the eevee market today thailand is a car exporting giant it exports over half of its annual vehicle production they export to dozens of countries that australia is their biggest market thailand has been the biggest beneficiary of the fall of australia's domestic automaking industry i did a video about it if you're interested in watching that but the country also exports hundreds of millions of dollars worth of cars to its southeast asian neighbors vietnam philippines and indonesia china saudi arabia and mexico are also big markets the majority of this output are commercial vehicles primarily one ton pickups though this has been steadily changing again due to the government's promotion of smaller more efficient eco-cars a thailand strong supplier ecosystem is likely to keep these foreign automakers in the country for the long run thailand has over 2 300 part suppliers nearly twice more than what indonesia and malaysia have combined 95 of toyota thailand's first tier suppliers are local the big problem with this exporting success however is that it is all owned by foreigners 100 of the management decisions and equity profits from selling time made cars flows up to companies in japan and the united states this traces back to that critical policy change made in the early 1990s the one that allowed foreigners to own 100 of their joint ventures in the country many of thailand's auto suppliers are owned by thai people but they remain trapped within the influence of the final assembler the automaker their engineering design and marketing chops in the consumer space are not competitive and the sheer size of companies like gm toyota and honda have kept a thai owned brand from ever emerging into prominence probably the most well-known thai brand is tairung a union car established back in 1967 the company exports to countries like iran and north korea this is a similar issue to the country's other high technology industry hard drives government policy primarily focused on attracting and servicing foreign direct investment and later on promoting exports but it never focused on science and technology policies to upgrade its own indigenous industries once that foreign investment actually arrived think about taiwan and his micro electronics industry yes they spent money to woo foreign investors like phillips but they took just as much care to push their domestic companies to improve the technologies they acquired and to do it on their own for instance at its founding in 1987 tsmc received a 2 and 3 micron fabrication technology from taiwan's government they quickly worked on improving it successfully offering a 1.5 micron technology node in 1988. the shinawatra government of the 2000s focused on macroeconomic stability amidst its lower class they did identify some competitive areas for improvement within industry but the execution of these policies was lacking power was quite centralized and policy focus wavered from place to place political instability led to policy paralysis for several years the next significant regime the abbasid government advocated thailand's cultural power thai massages thai food and the like this creative economy policy was discontinued in 2014 after a military coup the new government implemented a new industrial cluster policy which for the most part remains ongoing modern policies remain rather unclear and the government has yet to really start focusing on indigenous technology upgrading throughout its native hard drive and automobile industries as a result thai owned companies remained on a lower tier than their foreign owned counterparts of course there is no point to legislate the past government officials working decades ago probably had no idea that the policies they promoted or not promoted would end up the way it did today thailand's economy finds itself in a middle income trap its people's income have been upper middle class for the past 15 years 40 of the population have been lifted out of poverty in a single generation from 1984 to 2010. however the economy's domestic growth is stagnant and unable to ascend into the upper income tiers growth up until the 1990s was an impressive seven percent in recent years it has topped out at three policy recommendations are few and far between but i think a good place to start would be again to follow in its neighbor's footsteps a focus on technology upgrading developing the country's science and technology capabilities and transferring them to thai companies would be a good start all right that's it for tonight thanks for watching if you enjoyed the video consider subscribing check out the newsletter or follow the twitter want to send me an email drop me a line at john asianometry.com i love reading your emails introduce yourself to just a topic or more until next time i'll see you guys later

Channel: Asianometry

Views: 109,811

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Id: RdpKDD0v_GM

Length: 18min 3sec (1083 seconds)

Published: Thu Feb 17 2022