Auto Makers Re-Think Thailand as Auto Hub

Thailand wants to be the Detroit of Southeast Asia

 

BANGKOK – Thailand’s political stalemate is cutting into foreign car makers sales and undermining the appeal of Southeast Asia’s largest auto-production hub.

Rising wages and political tensions have led foreign car makers to consider new investments in lower-cost countries such as Vietnam and Laos, according to Masahiro Fukuda, manager of Japan research at Fourin, an automotive-research firm.

At least half a dozen auto makers, including General Motors Co, Ford Motor Co. and Toyota Motor Corp. have warned of a sales hit amid the political unrest that has engulfed Thailand since November. Truck maker Hino Motors Ltd. is scaling back production in Thailand, while its parent, Toyota, said it may need to rethink an investment of up to 20 billion baht ($610 million) to expand capacity.

Thailand, a popular vacation destination, already is grappling with a drop in tourism and a pullback in consumer spending that economists fear could slash the country’s economic output this year to as low as 3% from 6.5% in 2012. The widening impact to Thailand’s auto industry deals another blow to the country as it braces itself for more competition for foreign investment amid the planned creation of a regional economic bloc next year.

“Thailand wants to be the Detroit of Southeast Asia, but they need additional foreign investment,” said Fred Gibson, an associate economist at Moody’s Analytics, an economic research firm. “With this political upheaval, you’re not going to get that.”

The danger is that Thailand’s lingering political impasse could cause investors to “lose their trust” in the government, Masahiro Moro, managing executive officer at Mazda Motor Corp, told reporters last week.

Steve Wilford, director of global-risk analysis at consulting firm Control Risks, said half a dozen companies he is working with, from an international school to an auto maker, are holding off on investing in Thailand because of the political strife. Japanese companies – the country’s largest foreign investors – are especially frustrated, he said.

“People think that the anchor foreign investors are going to sit this out” without reacting, Mr. Wilford said. “Their patience is running out.”

The danger is that Thailand’s lingering political impasse could cause investors to “lose their trust” in the government, Masahiro Moro, managing executive officer at Mazda Motor Corp, told reporters last week.

The political unrest, if it stretches beyond this year, also could jeopardize Thailand’s goal to increase production to three million automobiles by 2017, part of a bid to maintain dominance as Southeast Asia’s auto-production hub.

“The assumption when these numbers were set is that you would get a lot more foreign investment,” Mr. Gibson said. “Hitting those numbers will be a lot tougher now.”

In 2014, domestic auto sales are expected to fall 19% to 1.08 million cars from the year before due to the political unrest and the end of a government-subsidy program for first-time auto buyers, according to research firm IHS Automotive. Production will slip 8% to 2.2 million units this year, IHS estimates.

“Customers are feeling less enthusiastic about spending,” said Ms. Panomporn, noting the dealership has been setting up booths inside malls to woo customers.

Thailand is the largest automobile manufacturer in Southeast Asia and ninth largest in the world, with about half its cars sold domestically and the other half exported, according to the Thailand Automotive Institute.

Foreign auto makers aren’t closing their factories in Thailand, where the supply chain for auto parts is highly attractive. Honda Motor Co. said construction of its third factory in Thailand is under way and will raise the production to up to 420,000 cars a year from 300,000. Meanwhile, Mazda said it is on track to open a factory to produce transmissions in 2015.

Still, rising wages and political tensions have led foreign car makers to consider new investments in lower-cost countries such as Vietnam and Laos, according to Masahiro Fukuda, manager of Japan research at Fourin, an automotive-research firm.

Indonesia also is becoming more attractive to foreign auto makers, although the majority of the cars made in the country are sold among the population of nearly 250 million rather than exported, analysts say. Meanwhile, Malaysia’s tax incentives for energy-efficient vehicle manufacturing could draw some investment at the expense of Thailand, according to Moody’s Analytics.

Honda Executive Vice President Tetsuo Iwamura said the company “cautiously” made its 17.15 billion baht investment in a third factory in Thailand, but “we don’t have any investment plan after the current one.”

Some auto makers said they are coping with an expected drop in car sales in Thailand by exporting more of their production. Mitsubishi Motors Corp, for instance, cut its forecast for car sales in the year ending in March by 13% to 90,000 to 95,000 vehicles. It doesn’t expect a decrease in production because it ships Thai-made cars to Europe, the U.S., the Middle East and Latin America.

Honda expects car sales in Thailand to drop 23% in 2014, and Mazda cut its sales outlook for the Asean region by 10,000 to 75,000 cars for the fiscal year because of the political turmoil. Ford and General Motors also said political and economic tensions will weaken their sales but didn’t specify by how much.

At a Mitsubishi dealership in eastern Bangkok, 2 miles from one of the major protest sites, salespeople often outnumber the customers. On a typical day, only one or two customers stop by the showroom, leaving the four salespeople with little to do, said owner Panomporn Thitipoonya.

“Customers are feeling less enthusiastic about spending,” said Ms. Panomporn, noting the dealership has been setting up booths inside malls to woo customers. This hasn’t attracted the business she had hoped

Toyota Motor Corp may reconsider investing up to 20 billion baht ($609 million) in Thailand, and could even cut production, if political unrest drags on, the head of the Japanese automaker’s local unit said on Monday.

Toyota is the largest car manufacturer in Thailand, producing 800,000 vehicles a year. Plans to increase its annual capacity by 200,000 vehicles a year over the next three to four years are now uncertain, Kyoichi Tanada, president of Toyota’s Thai unit, told a news conference.

“Our new investment in Thailand may not happen if the current political crisis goes on longer,” Tanada said.

“For new foreign investors, the political situation may force them to look for opportunity elsewhere. For those that have already invested, like Toyota, we will not go away. But whether we will invest (further) or not, we are unsure.”

If the unrest affects economic growth, Toyota may cut its production in Thailand while it assesses the situation, Tanada said.

“After the shutdown, we have fewer visitors going to our showrooms. We are ready to cut down our car output if we are affected by the political situation,” he added.

Toyota produced around 850,000 cars in Thailand in 2013, selling 445,000 domestically and exporting some 430,000 vehicles. This year, it aims to sell 400,000 cars domestically and export 445,000, Tanada said.

By Kathy Chu, Nopparat Chaichalearmmongkol and Yoshio Takahashi