Thailand: Automotive Industry Policy

Kenichi OhnoVDF/GRIPS

September 2013

Background information TAI and policy drafting procedure Master Plans 1, 2 & 3 and Eco-Car policy BSID and BUILD Japanese cooperation

Export oriented FDI(located mainly in industrial estates)

Glob

al and

Region

al Mark

ets

Materials& parts

Products

Export Sector(Integrated & competitive

under free trade)

Domestic Sector（ Under-developed,

often protected)

Dual Economic Structure of Typical Latecomer Country in East Asia

The Need to Link Domestic Sector with Globally Integrated Sector

Missing link

Local firms

Thailand

Malaysia

The Thailand Model

This is the “supporting industry” development model common in Southeast Asia.

For this model to work, large absorption of mechanical-type FDI is required (electronics, motorcycles, cars, etc.)

The strategy consists of three policy components:

For each policy component, Japanese cooperation is often mobilized (expert dispatch, training, kaizen & shindan…)

FDI attractionInviting large amounts

of targeted FDI to form an industrial cluster

SME supportUpgrading selected localsupplier firms to global(Toyota, etc.) standard

Linkage policyMatching FDI buyers& local part suppliers

1. Background Information Population (2012, IMF data)

Japan 127.6m, Thailand 64.4m, Vietnam 90.4m GDP per capita (2012, IMF data)

Japan $36,266, Thailand $5,678, Vietnam $1,528 Household ownership of automobile (2010)

Japan 86.5%, Thailand 13.8%, Vietnam 1.2% Automobile production in Thailand

2011—1.46 million (negative impact of flooding)2012—2.45 million (recovery & first-car buyer incentives)2013P—2.55 million (slow growth expected due to weak

local sales and weak global demand) Export of automobiles (2012, CBU+parts)—$22.9 billion,

10% of total exportCBU: pick-up trucks to global market; passenger cars to

ASEAN market onlyPart import > part export (except 2012)

Source: Thailand Automotive Institute, Sep.2013.

Background (cont.) ASEAN Economic Community (AEC) in 2015 is a big target

and challenge for Thai industries. Tariffs on auto components are 10-30%, but ASEAN CBU &

auto part tariffs are already zero for Thailand. Motorcycle market is saturated (20 million units

registered, one unit per three persons). Board of Investment (BOI) will change FDI policy soon:

Until now—zone-based incentive system (1: Bangkok, 2: suburbs, 3:remote areas) with special treatment for machinery, transport equipment, and E&E

From Jan.2015 (details are currently being debated)—corporate income tax 30%20%, abolish zones, greater incentive to selected high-tech industries only

Minimum wage was raised to 300 baht/day for all nation (9,000 baht or $280 per month) in 2012.

“Thailand+1” strategy—use Thailand as production base but move labor-intensive processes to Cambodia, Laos, Myanmar, (Vietnam, Indonesia).

Traffic Situation in Bangkok(Sep.2013)

TAI was established in 1998, an NPO with both private & gov’t funding initially. Now it receives no gov’t money (except occasional projects). It has about 120 staff.

It is a hub of policy design and implementation for local and FDI firms, MOI and related ministries, and universities. It drafts an automotive master plan every five years synchronized with the five-year plan.

TAI also provides training and testing services. TAI is in Kongtoey, Bangkok where many other industrial

institutes are also located.

Thailand Automotive Institute (TAI)

TAI President

Vallop Tiasiri (1999-2012)

Patima Jeerapaet (2012-)

www.thaiauto.or.th

Drafting of Automotive Master Plan 2 (2007-2011)

“CEO Forum”

FDI & local firmsExporters

MoI, MoST, MoEduProfessors’ team

(Chulalongkorn Univ)

M/P SteeringCommittee

Organized by MOI

BusinessesOfficialsExperts

Brainstorming; agreeing on goals

& directions

Set up formal committee for drafting M/P

Subcommittees study identified

issues

Gov’t

Business

Experts

Business

Gov’t Experts

Human resource

Productivity

Marketing

Engineering

Investment& linkage

M/PDraftingBy TAI staff

Comment & dissemination

(Informal) (Formal)

As explained by former TAI President Mr. Vallop. TAI managed the whole process which took about 1 year.

Implementation

Drafting of Automotive Master Plan 3 (2012-2016)

As explained by TAI Vice President Ms. Tasana Piriyaput:

1. Research on global & regional trends, policies of neighboring rival countries, technology, markets, etc.

2. Initial ideas presented to “CEO Forum” (group of firms, officials & experts) for comments and suggestions

3. TAI drafts the master plan (because TAI knows the industry best)

4. Consultation meetings with industry for fine-tuning5. Board of TAI approves draft6. MOI approves draft7. Government approves draft

Note: Auto firms already acknowledge MP3, but processes 6&7 are not completed as of Sep.2013. Previous MPs did not require official approval, but this time MP3 is submitted to MOI & Government to receive specific funding (expansion of the testing center).

Vision for Automotive IndustryMP1 and MP2 “Thailand is the automotive production base in

Asia which creates more value added to the country with strong automotive parts industry.”

MP3 (next 10 years to 2021) “Thailand is a global green automotive production

base with strong domestic supply chains which create high value added for the country.”

Changes from old to new: Production base in Asia global production base “Green” added Strong parts industry strong domestic supply chains

Automotive Master Plan 1 (2002-2006)

1. Global situation2. Thai situation3. SWOT analysis4. Strategy and targets for next 5 years5. Action plan

There was no need for official approval but MP1’s projects had to be included in 5-year plan to get funding. Private firms explained MP1 to PM Thaksin directly.

Broad targets were: (i) 1 million cars, 40% exported; (ii) 2 million motorcycles, 20% exported; (iii) part export of 200 billion baht; (iv) 60% localization. All these targets were achieved ahead of schedule.

Concrete projects were given in the action plan table (because MOI requested it) but they had to be adjusted continuously to budget/ODA availability. Action plan tables were not included in MP2.

Automotive Master Plan 2 (2007-2011)

1. Introduction2. Analytical framework3. Scope of study & planning4. Review of MP1 2002-20065. Overview of auto industry capacity6. Policies of competitive countries7. Survey results & capacity analysis by TAI8. Automotive master plan 2007-20119. Committee structure for this project

Total: 227 pages in Thai language. Chapter 8, the key chapter, was translated into English executive summary.

Policy structure: Vision 4 Objectives 5 Strategies 12 Action Plans

“Action Plans” here are not tables of concrete measures or projects, but statement of more detailed policy directions.

Concrete measures and projects were introduced flexibly based on budget/ODA availability in each year.

Drafting team of MP2

Vision—“Asia’s auto production base with value-added and strong parts industry”

MP2: Vision, 5 Strategies and 12 Action Plans

Source: Thailand Automotive Institute, The Automotive Industry Master Plan 2007-2011 Executive Summary, p.4.

Note: action plans here are not tables of concrete measures and projects but statements of more detailed policy directions.

Eco-car Policy Eco-car I—since 2007, Thailand promoted small fuel-efficient

cars that met certain standards (minimum output of 100,000 units/year, <1300cc, >20km/liter, EURO4).

Incentives include corporate tax exemption for 8 years, duty-free part & machinery import, exercise tax reduction (30%17%).

This prompted five Japanese companies (Mitsubishi, Nissan, Suzuki, Honda, Toyota) to invest in Eco-car production, with total investment of 28.8 billion baht ($0.9 billion) and a total capacity increase of 585,000 units.

Small cars increased on Thai streets replacing pickup trucks; Mitsubishi Mirage & Nissan March are exported back to Japan.

Government plans to launch Eco-car II with tougher criteria for incentives. Details are not contained in MP3 because they are sensitive and must first be discussed and agreed between producers and government.

Automotive Master Plan 3 (2012-2016)

1. Executive summary & introduction2. Situation and trends (global, region, domestic)3. Review of MP2 2007-20114. Automotive industry development strategy5. Annual action plan 2012-20166. Conclusion

Total: 107 pages in Thai, 110 pages in English translation (double-spaced).

Now that Thailand is world’s no.15 car producer in 2011, more focus is placed on quality—clean, efficient and safe cars based on new technology and R&D.

Three challenges:1. Meeting global competition (R&D capability)2. Meeting environmental & safety standards3. ASEAN Economic Community (free trade) by 2015

Key objectives (targets):1. Becoming a global auto production base

- Car and motorcycle production of 3 million units each- Clean, efficient and safe (both cars & factories)

2. Business environment- HR - Testing & research - Suitable infrastructure

3. Overcoming a middle-income trap- Increase part production value by more than 50%- Produce more than 10% of Manufacturing GDP- Export of over 1 trillion baht ($31 billion)

Challenges and Key Objectives

Five StrategiesThree COEs (Center of Excellence)

Strategy 1: Research & technology developmentStrategy 2: Human resource developmentStrategy 3: Entrepreneur Strength Enhancement

Two ENVs (Good Business Environment)Strategy 4: InfrastructureStrategy 5: Government policy

Source: Automotive Industry Master Plan 2012-2016, English p.4-8.

5-Year Action Plan 2012-2016For each of the five strategies, Ch.5 lists the following:

- Guidelines (what to do in general)- Plans and projects (what to do in more detail)- Target groups- Primary responsible unit- Other responsible unit- Indicators (actually, qualitative targets)- Qualitative outcomes (similar to Indicators)

Comments:- These are similar to, but somewhat different from, standard

items in a typical action plan.- These are given verbally, not in table format.- No specific action dates are given except 2012-2016.

BSID The Bureau of Supporting Industry Development (BSID),

under Department of Industrial Promotion (DIP) of MOI, is responsible for SI development.

Machinery Industries Development Institute (est. 1988) was upgraded to become BSID in 1996.

As Thai industry grew, BSID’s role shifted from direct official support to partial subsidization of seminars, training, consultancy, projects, etc. It provides subsidies through business clubs, associations & federations.

Sectoral institutes (auto, steel, E&E, plastic, textile, food, etc.) work closely with businesses and government to produce “win-win” results.

Labor-intensive processes must now go abroad; but Vietnam is 25 years behind Thailand and has no SI base.

Thailand only adopts policies consistent with WTO rules and no tariff protection.

Mr. Panuwat TriyangkulsriDirector of BSID

BSID mascot

BUILD (build.boi.go.th)

Board-of-Investment Unit for Industrial Linkage Development (BUILD) was established for FDI-local firm matching within BOI in 1992.

The main activities include:1. Vendor-meet-customers (BOI intermediates anchor firms

& vendors)2. Marketplace (monthly meetings of anchor firms &

vendors)3. Sourcing (MNCs present their component needs)4. ASEAN Supporting Industry Database

BOI

Japanese Cooperation for Thai Automotive Sector As Thailand grows, Japanese ODA has declined significantly

after peaking in 1998-1999. The two countries now seek mutual benefits and joint regional contribution on an equal basis.

In the past the following Japanese assistance supported Thai automotive industry: Policy formulation for SMEs, SI, automobile Shindan-shi training (after Asian Crisis) Automotive HR Development Project (JTEPA-related) Supporting TPA and TNI (local NPO and university that

promote Japanese style manufacturing) At present, only a few industrial support projects remain:

AHRDIP (smaller scale than AHRDP), MOI advisor, shindan in remote areas, academic networking…

Additional Remarks The Thai shindan system has not been institutionalized. No

official certification is considered necessary in Thailand. JICA trained 450 but Mr. Panuwat (BSID) thinks that there are additional 2,000-3,000 shindan-shi of various types.

Inflow of Japanese SMEs is welcome provided that they bring high technology not available in Thailand. Local SI firms object to Japanese FDI that may compete with them.

Some experts recommend JV between Japanese and Thai SMEs but others say it is too difficult as trust is lacking.

TAI wants more automotive support from Japan; AHRDIP is too small to train a large number of Thai trainers (3-5 short-term Japanese experts per year). But Thailand should now mobilize its own resources for industrialization instead of waiting for ODA.