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ANALYSIS: Thailand’s Eco-Car programme “Mark 2”

By Tony Pugliese | 3 December 2013
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Mitsubishi's low-cost Mirage hatchback was its first eco-car model for Thailand.
The Thai government launched “phase two” of its “eco-car” programme in October 2013, after it received final approval from its Board of Investment (BOI) in August. Tony Pugliese reviews Thailand's incentives and the resultant boost to the country's automotive sector.
Encouraged by the initial success of the original eco-car programme, which was launched in 2007, the government has set its sights on becoming the ASEAN region’s main production hub for small, fuel-efficient city cars. It is also targeting exports to countries outside the ASEAN trade block.

The first phase of the eco-car programme secured investments totaling THB28.8 billion (USD 900 million at the current exchange rate) and a combined production capacity of 635,000 units per year from five vehicle manufacturers: Mitsubishi, Honda, Nissan, Suzuki and Toyota.
A sixth participant, India’s Tata Motors, decided to withdraw from the programme because of the over-ambitious production and sales targets.
The government offered generous incentives, including a five-year corporation tax holidays, duty-free import of machinery, as well as reduced excise taxes (of 17% compared with 30% for conventional passenger cars) to encourage local sales.

In return, the government required participating manufacturers to invest a minimum of THB 5.5 billion, establish a minimum local production capacity of 100,000 units per year and export a minimum of 50% of the output. The cars had to have a substantial local content and meet minimum standards of fuel-efficiency and emissions, including 5 litres/100km and CO2 emissions of 120g per km.
Toyota was the last company to come to market, with the 1.2L Yaris eco-car launched only this October.

For “phase two” applications the government has set a deadline of March 31, 2014. Production licences are expected to be issued by mid-year, with actual investments expected to start in 2015.
This time round the minimum investment requirement is THB 6.5 billion, with the same minimum 100,000 units per year output to be achieved within four years of start up. The cars now have to meet Euro V emissions standards; a maximum fuel consumption of 4.3 litres per 100km; and maximum CO2 emissions of100g per km.

In return, the government is offering an eight-year corporation tax holiday, duty-free import of machinery, and local sales incentives including the lower excise tax rate of 14% (12% if compatible with E85 fuel).
The government expects at least five companies to participate in the phase two. Toyota has indicated it will also participate in phase two and is busy crunching numbers ahead of a decision. Mitsubishi, too, is considering investing in the second phase of the eco-car programme.
Ford-Mazda, having missed out on the first phase of the programme, is keen to come on board – especially as it has chosen Thailand as its main production hub for the ASEAN region. Other likely candidates include a major Chinese manufacturer - possibly SAIC, and also Volkswagen, GM-Chevrolet and Hyundai-Kia.

Vehicle manufacturers choosing not to participate in the eco-car programme will be at a disadvantage if they later choose to compete in the local small car segment.
The government expects to attract investment of between THB 30-40 billion and have in place a combined eco-car production capacity of at least 935,000 units by 2017, rising to over 1.2 million units by 2020. It also expects 70% of output to be exported.
There is no doubt that the Thai government has been by far the most proactive and successful in South-East Asia at implementing automotive policies and in attracting automotive industry investment. The country is already the main global production hub for pickup trucks outside the USA and its compact passenger cars are also widely exported –increasingly to markets within the ASEAN trade block.
But there is growing concern that vehicle manufacturers are being pressured into making investment decisions in Thailand - to build excessive capacity for which local demand is limited – for the moment at least. Vehicle manufacturers are also being pressed into adopting increasingly aggressive export policies and replace existing capacity elsewhere.

Just over 164,000 eco-cars were sold in Thailand last year, according to auto industry consulting firm LMC Automotive. A further 80,000 are estimated to have been exported.
This, admittedly, without a contribution from Toyota, which has only just launched its Yaris eco-car. But last year was also a record year, in which first-time buyers were being courted by the government with generous tax rebates.
By 2020, LMC Automotive forecasts eco-car sales in Thailand will reach 273,000 units – although this does not take into account phase two eco-car programmes, where investments have yet to be confirmed. Still, this is just over 20% of the anticipated available capacity for that year.
With Indonesia also implementing its own small-car programme along broadly the same lines as Thailand, with Toyota, Daihatsu, Honda, Suzuki and Nissan having already committed investments, the question remains - where will all this excess capacity be channeled?
Tony Pugliese



HERE IS A RECENT STORY OF WHAT IS HAPPENING WITH THE SECOND PHASE OF THE ECO CAR PROGRAM:

Thailand gears up to implement the second phase of the Eco-Car Program, carmakers worry about a glut of vehicles even as they grapple with new regulations and new production volumes.

As the application deadline of end-March 2014 approaches, the Thai automotive industry is getting increasingly excited over the second phase of the Eco-Car program. However, carmakers are a lot more nervous, contemplating how to grasp this opportunity. They have several challenges to surmount before they fully utilise this second wave of fortune; how they decide to do this will impact largely on the development of the Thai automotive industry as the first phase did recently, and on Thailand’s dream of producing three million vehicles.

This first part of a series dedicated to Eco-Car II will investigate limitations on the supply side, followed by discussing constraints on demand.
To begin with, there is a question over how much carmakers would need to commit as a minimum requirement of the new investment (five billion baht for former participants and 6.5 billion baht for new participants), and especially for the five participants of the first phase – Nissan, Honda, Mitsubishi, Suzuki and Toyota. It is unlikely that these OEMs would be willing or be able to invest as much as another five billion baht in expanding existing facilities, when they had already invested in a very similar product only a few years ago. This amount of money could potentially cover half the cost of a whole new plant, going on Nissan’s recent announcement regarding its new investment for 2017. In addition, these OEMs already invested in increasing engine localisation as part of the first-phase program which required that four out of five engine components are to be sourced locally, further restricting future investments that will be needed.

OEMS WORRY ABOUT OVERCAPACITY
Another question has risen over the requirement of expanding production volume by another 100,000 units from the fourth year. In fact, there is already high excess supply for sub-compact cars produced in Thailand. Since 2010, when the first Eco-Car model began production, more than 40 percent of all sub-compact car output was absorbed by foreign markets. This ratio is expected to increase to around 60 percent in a few years, even without the addition of phase two of the Eco-Car program. Further installation of capacity in a very limited domestic market capacity and a comparatively limited export market underlines limitations on the supply side. More details of the market side will be discussed in the next issue of Autocar Professional.

Moreover, the concept of production consolidation, which has been a key factor contributing to the success of the Thai auto industry in establishing the kingdom as a global production hub for one-tonne pickup trucks, cannot be easily applied to passenger car production. Production consolidation was logical, as the pickup market is naturally niche and fragmented in the global market, and it made sense to utilise the economy of scale and to bring all production into one place. Previously there were not many locations that actually produced trucks. In contrast, passenger cars are products traditionally found in every single market, and production especially for sub-compact cars in which the Eco-Car sub-segment falls, is distributed throughout the globe. A lot of pressure is expected with further concentration of production of sub-compact cars in Thailand.

Under the first phase, production of a few Eco-Car models, namely the Nissan March, Mitsubishi Mirage and the Suzuki Swift, had already been taken from the OEM’s home markets of Japan. There was pressure on these OEMs and their commitments to maintain a level of production in their home markets, especially after the depreciation of the yen.
This constraint was further pushed by competition for local production in the traditional export market of Thai cars. Indonesia, for example, recently launched its LCGC (Low Cost Green Car) project, and has attracted a huge amount of investment from OEMs which participated in the first phase of the Eco-Car program. Although cars produced under the LCGC are likely to be smaller, there are some overlaps.
Honda, which used to export the Brio from Thailand to Indonesia, has since begun producing a variant locally, named the Brio Satya.
Competition for local production is also expected within other global production hubs. In other words, further reinforcement of Thai production will not only transform OEMs’ strategies on regional production, but also on the global production network. This is, however, a very tough task. The Honda Brio, for example, is also currently produced in India for export to other South Asian and African countries. Production of the Suzuki Swift, which was previously in Hungary, was recently shifted back to Japan to improve the capacity utilisation rate in the country.
Another challenge for most OEMs falls on their future product planning, since at this point in time the results of the first phase of the Eco-Car program have not yet crystallised. Domestic sales in Thailand have yet to stabilise from the government’s special subsidy on first car purchases in 2012.

Of the five participants, only Nissan and Mitsubishi have reached the 100,000 unit production threshold, with the former seeing a decline of quarterly production at less than 25,000 units since the third quarter of this year. Honda and Suzuki, in the third and second year of production respectively, have struggled to reach even half of the target. This is also true for Toyota, which launched its first Eco-Car model only recently, amid concerns of overall weakening demand.

Kon Thueanmunsaen is Senior Analyst, ASEAN LMC Automotive
- See more at: http://www.autocarpro.in/opinion-col....9C7YrD2l.dpuf