Strong government incentives for manufacturers coupled with regional freetrade agreements and growing domestic and export demand are spurring a fast growing automotive sector in Thailand. Russell Beron and Ellen Hua take a look at how the market is developing and what LSPs are doing to keep up.
Thailand’s position as the Detroit of Asia is proving more secure as global automotive manufacturers, suppliers and logistics service providers increase their presence. Recent activity includes Volkswagen’s 2009 purchase of a 20% stake in Suzuki, followed by an announcement in early 2010 that the two companies will work on an eco-car project in Thailand. Last June, Ford announced a $450m investment in building a 100% Ford-owned passenger car plant in Rayong, complimenting Ford’s Auto Alliance Thailand (ATT) joint venture with Mazda, which in 2010 produced a total of 193,753 vehicles. For these companies and others, Thailand is both an important domestic market and a base for regional production, possibly shifting some production capacity from Japan.
While Japanese players such as Toyota, Isuzu, Honda, Nissan, Mitsubishi and Mazda have dominated the Thai automotive market for some time, European and American OEMs, such as Mercedes-Benz, BMW, Daimler, Chrysler, Volvo, Ford and General Motors, are building strength and growing their market share. Thailand is now ranked as the region’s fifth largest car production base following Japan, South Korea, China and India. China is Thailand’s strongest neighbouring competition, but has much more of a domestic focus, compared to Thailand’s more regional and global export view.
As Thailand grows into a strategic base for the South- East Asian region, auto parts suppliers are also increasing their presence to better serve their customers. More than 700 tier one suppliers already have operations in Thailand. As early movers, the Japanese are the most established, followed by the Americans and the Europeans to a lesser extent, because of their limited assembling volume. Logistics service providers have also followed their clients, including both local providers and major global players such as Ceva, NYK and DHL. According to Carrie Zhang, at Delphi: “The majority of global logistics service providers are in Thailand and have been there for quite some years.”
If performance in 2010 is indicative, Thailand’s auto sector will continue to surprise the region. Total vehicle production increased by nearly 65% to 1.64m units, a 50-year record high. Domestic sales were 800,357 units, an increase of about 46%, while 895,855 units were exported. Part of this dramatic increase may be due to a rebound from the global financial crisis in 2008-2009. “However, a low baseline does not explain it all. This is a region with huge growth potential,” says Peter Fleet, president of Ford ASEAN. “Manufacturers see the opportunities to assemble vehicles and increase scale; the government has a very clear plan to grow the automotive industry and is professional and transparent and there is a strong logistics and regulatory operating environment. All these drivers support growth in the automotive industry.”
One factor that has given Thailand a competitive edge is a government policy beginning decades ago encouraging the development of the industry and supporting foreign investment in the sector. “Most other ASEAN countries have a closed door national car programme, limiting foreign influence on the local market,” says Edwin Chow.
Thailand offers foreign companies incentives including corporate income tax holidays, reductions in import duties on machinery and raw materials and land ownership rights; it even facilitates the hiring of foreign experts. Chow also attributes Thailand’s status as a production hub to other macro factors such as the country’s talent pool and well educated workforce, a good infrastructure for the automotive industry and a strategic location for import/export activities.
According to David Dudek, “2009 was a difficult year, but 2010 growth came on the back of the export market, because of the strong manufacturing base in Thailand and also ASEAN free trade agreements (FTAs) that helped spur additional volume.” Some of the 2010 growth can also be attributed to a reduction in excise duties for smaller passenger cars which reduced prices, while consumers also found it easier to get credit. “I think they make good products in Thailand, there is strong consumer confidence, and lots of exports destinations, not only to ASEAN countries but also to other markets,” David Dudek adds.
Similar to other ASEAN countries, the automotive industry in Thailand initially developed as an import substitute, until the country was hit by the Asian financial crisis in the 1990s, which saw the local market shrink. Exports were developed to absorb excess capacity and continued to grow. The question is still open whether Thailand’s automotive sector will be primarily export driven, but the trend is pointing that way. Of the total car production in December 2010 (137,403 units), exports accounted for 71,025 units, a year-on-year increase of 32.5%, while full year numbers for 2010 were the highest figure since exports started in Thailand. Destinations include Europe, Australia, the US, the Middle East and ASEAN countries such as Malaysia, Indonesia, Laos and Vietnam. There is a considerable market for parts exports, mostly to Japan, Malaysia and South Africa. “Since the Japanese auto manufacturers are strong in Thailand, many parts suppliers also have a Japanese heritage, and ship to Japan,” confirms David Dudek.
Thailand also offers a number of export incentives, which are complemented by regional FTAs, such as those that exist with Australia, New Zealand, China and India, which have opened new markets. The ASEAN FTA has lowered tariffs to the level of 0-5%, depending on the country and the classification of vehicles and parts, a considerable reduction in duties that is now spurring ASEAN trade. Increased exports have obviously also opened more opportunities in the automotive logistics sector, with more complex supply chain requirements. “Greater sophistication in the automotive supply chain has actually brought costs down,” says Ceva’s David Dudek, “Customers benefit from a lower total cost, which makes it good for consumers, good for automakers and good for the logistics sector.”
One obvious concern for industry in Thailand is the frequent social unrest and change in governments. In March 2010, the Red Shirts demanded the dissolution of Parliament by occupying downtown Bangkok for more than two months, paralysing the capital and scaring foreign visitors and investors. However, unlike sectors such as tourism, unrest has little effect on the automotive industry. Only one month after the March-May unrest, Ford announced its $450m investment in a new manufacturing plant, a clear indication of confidence in the industry. “The 20-year focus on building the auto industry in Thailand has resulted in a solid base for manufacturing, suppliers, good infrastructure and a domestic market and export market,” says Peter Fleet, “so we believe in the long-term viability of the market.”
David Dudek of Ceva echoes these sentiments. “While there may be some political instability, when automakers look at an investment in production facilities, especially automotive facilities, they are looking at a return over several decades.” These factors explain why the OEMs have an unwavering attraction towards the country despite a sometimes shaky political climate.
Similar confidence is expressed by the major automotive suppliers. Carrie Zhang from Delphi would rather see the political turmoil and instability as something temporary, “Thailand has been relatively stable and generally we don’t think the political situation is of sufficient concern to push market players to withdraw,” says Carrie Zhang of Delphi. “Whether such unrest will disrupt the supply chain, is another question though. When we pick up goods and clear customs, we obviously don’t want to deal with protests on the roads. These are supply chain risks that we have to monitor.”
Supply chains are obviously vulnerable to political and environmental situations and companies should have their own procedures in place for such eventualities. “As a logistics company, we need to deal with challenges in the supply chain, such as the volcano in Iceland, which disrupted airspace in Europe last year. Part of logistics is managing through such issues. We try to stay close to what’s happening in the local market,” says David Dudek.
Vincent Yong of DHL Global Forwarding Thailand and Edwin Chow of DHL, explained how they managed through the crisis. “As the Subvarnabhumi airport was inaccessible, we provided both chartered flight services as well as crossborder trucking services to and from Malaysia, utilising Penang as the import/export gateway. Hence, tier one supplier auto parts were trucked to Penang and exported to other parts of the world. ”
Aside from political issues there are also other challenges in the Thai automotive market from a logistics point of view. “Because it’s a big growing market, there is lots of competition. All the time we see announcements of new assembly plants, new suppliers coming, and more logistics service providers active in the market,” says David Dudek. “Some are more aggressive, and push service costs to low levels, sometimes doing business at a loss to get in the market. OEMs and parts suppliers probably see that as good, but it’s a challenge for us. Another issue is that supply chains are becoming more complex, as sourcing becomes more global. Managing that complexity is both a challenge and an opportunity. Because of this more complicated supply chain, OEMs and suppliers are looking to outsource more of their logistics activity.”
As a result of the increased supply chain complexity in Thailand, the sector has seen the introduction of fourthparty logistics (4PL), or lead logistics providers (LLP), a practice where the 4PL neutrally manages various 3PLs and suppliers for better shipment movement and tracking, ensuring the continuance of production lines.
“The 4PL concept is still not widely adopted in managing the automotive supply chain in Thailand, but companies such as GM have pioneered such logistics management practice and in future, such practices will become an increasing trend in Thailand,” said DHL’s Yong. “However, ensuring a smooth, trouble-free flow of information between the 4PL, the 3PLs and suppliers can be a challenge.”
As with other parts of the world, the past two years were especially challenging. As a result of the global financial crisis, 2009 saw production output reductions, restructuring and downsizing by tier one suppliers. Airlines and ocean carriers responded by cutting back flights and sailings to reduce operating costs. According to Edwin Chow, in May of 2010, things began to look up and there was noticeable growth, largely due to consistent support from various governments to protect their automotive sectors and stimulate growth. Logistics service providers had to follow up immediately by increasing their logistics capacity.
On the outlook for 2011, Vincent Yong predicts that, “In terms of air and ocean carrier capacity, unlike 2009 when there was excess capacity, and 2010 when capacity tightened drastically, 2011 will be a year where the logistics industry finds a more stable equilibrium to match the production output of the market. Of all the industries though, automotive is one that is set to boom.”
Despite the challenges in Thailand’s automotive industry, there is room for optimism. Peter Fleet from Ford sees a higher projection for Thailand’s automotive production in 2011 in view of the favourable circumstances peculiar to Thailand. “When you add the strength of the industry opportunity in this region, the support from government and its agencies and the desire of manufacturers to build and scale, we see clear opportunity for the production volume to go above 2m units in 2011. It’s an exciting time.”