Business still prevails over politics in Thailand

The changing political landscape in Thailand has raised questions on its attractiveness as a safe haven for new investments and sustained business growth. Doubts have also been cast on the country’s position as the most important automotive market in Southeast Asia.

We believe Thailand will continue to win new investments, while its automotive market is also projected to expand over the long-term. The broader economic and investment policies have not been overhauled despite the political strife and constantly changing governments in the past eight years, and this is not likely to differ in the near-term.

For this reason, Thailand has seen a steady flow of investments, which is also true for its automotive sector.

A prime example is the Eco Car I programme, in which five major automakers – Honda, Mitsubishi, Nissan, Suzuki and Toyota – participated with committed investments of THB (Thai Baht) 5 billion each. Nissan was the first to launch its Eco Car model, the March, in March 2010 at a time when street protests were rife against the prevailing government. And in spite of the ensuing political impasse, all other Eco Car participants also brought out their models.

The Eco Car II programme has now been formulated. Ten more OEMs, including the original five automakers of the first round, submitted their applications to the Board of Investment (BoI) by this March with committed investments of THB 139 billion. The production of these new cars is scheduled to begin by 2019.

On June 18, Thailand’s newly appointed BoI approved 18 projects worth THB 123 billion. The biggest in value among these was Toyota’s THB 51.5 billion package to build 570,000 pickup trucks. And there is nearly THB 580 billion worth of other projects awaiting BoI approval. No major investment project seems to have been withdrawn since the military’s takeover last month.

An important consideration for Thailand is the opinion of Japan-affiliated companies, which are the biggest source of foreign direct investment in the country. To this degree, the affirmation from JETRO (the Japan External Trade Organization) in March 2014 that Japan was maintaining its ‘Thailand Plus One’ policy was significant. Under this policy, Thailand is used as a link between Japanese investors and other Southeast Asia markets.

This confidence in Thailand comes on top of a JETRO survey conducted in December 2013, in which 65 per cent of Japanese automotive firms in Thailand considered expanding their business.

The importance of Thailand’s automotive market, vis-à-vis its neighbours, needs to be analysed from two angles: sales and production. To say Thailand will lose its No. 1 position as Southeast Asia’s largest sales market to Indonesia is stating the obvious. Indonesia, with a much larger car buying population, is coming of age as Thailand’s domestic market reaches its saturation point. The former’s run to the top by the end of 2014 has also been made easier by the drastic fall in Thailand’s sales volume.

In the year through to April, Thailand’s light vehicle sales plunged 43 per cent year on year (YoY), compared to a volume gain of 12 per cent YoY in Indonesia. Although politics must have played a role in Thailand’s weak sales, the decline comes over a high base in January-April 2013 when OEMs were still delivering vehicles purchased under the 2012 First Car Buyer Rebate scheme. Note the government incentive programme advanced vehicle purchases from the next two years, resulting in a massive 81 per cent YoY surge in 2012.

The production story though is drastically different. Here, Thailand remains the largest producer of light vehicles in Southeast Asia since it is also a major exporter especially of one-tonne pickup trucks as well as a growing number of passenger cars more recently.

In addition, exports would also be critical for the participants of the Eco Car II programme. Indeed, we expect the share of exports to production to climb from 43 per cent in 2013 to about 60 per cent within the next couple of years.

Thailand’s strength as the region’s biggest production base lies in its better infrastructure and well-established supplier network – both of which will take time to develop in Indonesia. We, therefore, believe that Indonesia will be a more domestic play, while OEMs would continue to rely on Thailand as their main export hub in Southeast Asia.

The bottom line: Thailand’s current political situation has raised concerns, but this in itself is not likely to be the reason for OEMs’ investment decisions. And so any increase in investment in Indonesia comes on the merits of its own market, rather than at the cost of Thailand.

The writer is Senior Market Analyst (ASEAN & India), LMC Automotive

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