The Thai automotive industry is now about to enter another transition stage with the new small car promotion, "Eco Car Policy", launched in 2007. The first transition was achieved when Thaksin government launched the policy of "Detroit of Asia" in 2002, giving incentives to OEMs, especially Japanese OEMs such as Toyota, to relocate production of pickups to Japan. Thanks to a favorable external and internal market environment (the weak baht and strong recovery of local demand in Thaksin government era) backed by well coordinated policies such as Free Trade Agreements with countries like Australia, the policy saw great success. As a result, Thailand became the global export hub for pickups by 2004. By 2007, the export of pickups reached more than 460,000 units, exporting to all regions except North America.
The Eco Car Policy is widely regarded as the 2nd product champion program, while Thailand now seeks to repeat the success they had with pickups in a completely different market, A-B segment, which is defined by the government as engine displacement less than 1,400 cc for diesel and 1,300 cc for gasoline. The cars are dubbed as "Eco" as cars need to pass stringent environmental and fuel economy regulations such as running fuel on 20km/L. Eco Car programs which clear all requirements by the government can enjoy special incentives by reducing the excise tax from 30% to 17%. The reaction from OEMs was a typical bandwagon effect; seven OEMs including Honda, Toyota, Nissan, Mitsubishi and three newcomers, namely Tata Motors, Suzuki, and Volkswagen applied for the Eco Car program by the end of 2007, with total production plan volume reaching 785,000 units. Many of them will start production towards the end of 2009 to 2010, with a production target of more than 100,000 units as the government stipulates that production volume needs to reach 100,000 units in five years.
These investments will naturally give opportunities for the Thai automotive industry to integrate with OEM global production strategy's in the A to B segments, which is now expected to grow much faster than light commercial vehicles (LCV) or pickups in the global market. All car makers plan to export at least 50% of their production, especially Honda and Suzuki, who have been waiting a long time to expand their production of small cars in the region. They will seize this opportunity to make their new factory in Thailand the export base for the region and for newly emerging markets.
However, not all car makers are confident or enthusiastic about this policy, especially when it comes to achieving the production volume target. There are several reasons for this: One is that Thailand has never been a market for small cars, but instead a LCV market with 60% of its total market dominated by pickups. Secondly, the requirement for localization of engines (processing of four key engine parts) and stringent fuel economy and environmental requirements will necessitate added investment costs which will eventually be passed on to the consumer. Thirdly, some OEMs already have a small car production base in the region, as in Toyota's case, which has Perodua under Daihatsu in Malaysia and Nissan is building a new factory to produce A-Platform cars in India. Lastly, there is no news of small car production relocation efforts from other regions, unlike pickups brought from Japan.
Under these constraints, our forecast estimates Eco Car production will reach around 450,000 units with medium to high risk, around 60% of the total production target by OEMs. Can Eco Car become a 2nd champion or 2nd loach? This depends on many factors, but it will be boiled down to one point of argument; are OEMs eager to concentrate or even relocate resources for Thai production as in the case of pickups? It remains to be seen.
¹ A saying in Japanese that one cannot catch a 2nd loach under a willow, meaning, lightening rarely strikes twice in the same location.
