The Thai automotive industry:
Example of successul Japanese FDI (29-05-07)
By Jon Fernquest[Introduction|Vocabulary|Article]
[Reading Questions|Answers]
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Thailand has one of the largest automotive industries in the world.
The Thai automotive industry has not developed solely on its own initiative.
The industry is a collaborative effort between large Japanese automobile manufacturers and their Thai partners.
The industry has also been helped along with Thai government support.
As the largest automobile manufacturer in Southeast Asia, Thailand has also become the largest market for vehicles in Southeast Asia.
Through exports, the industry is also an important generator of export revenue and national wealth for Thailand.
Today's article provides a nice introduction to this important industry. Developments that are quickly changing the industry are also covered.
For further reading, check out the resources of the Thai Automotive Institute.
Read a 2003 paper on the growth of the Thai automotive industry.
Read the automobile section of the Bangkok Post's biannual Economic Review and the weekly motoring section of the newspaper.
Reading Questions
Here are some questions to guide your reading (See answers at end):1. Why is Thailand sometimes called the "Detroit of the East" ?
2. When did the automobile industry in Thailand first really start to takeoff (develop quickly)? Why?
3. What sub-market of the pickup market is particularly important in Thailand compared to other countries?
4. What evidence is there of the dominant position of the pickup truck in the Thai economy?
5. What country dominates Foreign Direct Investment (FDI) in Thailand's truck industry?
6. What manufacturers dominate Thai pickup truck production?
7. Are there a wide variety of different pickup truck models being produced by each manufacturer in Thailand?
8. How much can add-on features raise the price of pickup trucks by? (Give an example.)
9. What kind of pickup truck can perform the same function as a passenger car?
10. What other functions besides carrying goods do pickup trucks have in Thailand?
11. What incentive is there to buy a pickup truck over a passenger car in Thailand? (Give specific details)
12. What changes in the future may reduce pickup truck production and increase passenger car production over?
13. Will pickup production decrease if domestic pickup truck purchases decrease? (Use inference)
Bangkok Post Article May 29, 2007
BY InvitationThe future of the pickup market
KAREN TAN SIOK HUI
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Last year, Thailand's vehicle sales stood at 682,161 units despite a 3% drop in the overall market. For the past six years, Thailand's vehicle market has had a compound annual growth rate (CAGR) of 17% led by commercial vehicle sales.
Thailand is the largest market for commercial vehicles in Asean, with more than half a million sold in 2005. The commercial vehicle market is expected to grow to 1.36 million in 2012 (see tables).
Thailand is also the world's second-largest market for one-ton pickup trucks after the United States. Pickup trucks comprise 92% percent of commercial vehicles sold as they are very useful, especially in agricultural and light industrial sectors. The pickup market is expected to grow at a CAGR of 19.3% from 2006 to 2012, reaching 1.3 million units in 2012.
The pickup market is highly consolidated and heavily dominated by Japanese automakers. About 95% of pickup trucks are Japanese-made. Toyota and Isuzu control more than 78% of the market. These two leading manufacturers have both made Thailand the manufacturing base for their pickup trucks for domestic consumption and export purposes.
Unlike the passenger car market, only a few pickup models are offered by each manufacturer. On average, each brand offers one model, with few variations available for consumers. The premium variant price could easily fetch double that of the lowest-spec model. The best-selling Toyota Hilux Vigo ranges from 397,000 to 874,000 baht. Other top-selling models include Isuzu D-Max, Mitsubishi Triton, Nissan Frontier and Chevrolet Colorado.
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Pickup trucks are also designed to carry either passengers or goods. Since domestic consumption of pickup trucks is high in Thailand, automakers are able to lower costs of production. Pickup truck makers have also leveraged economies of scale to increase production for export. Thailand has historically targeted the niche pickup segment to avoid competing with other nations.
Global trends move towards fuel-efficient, compact cars: High fuel prices, interest rate hikes and a severe monsoon season in northern Thailand were some reasons why Thailand's vehicle market declined last year. High fuel costs prompted the Board of Investment (BoI) to encourage cars fuelled by natural gas for vehicles (NGV) to lower the dependence on petroleum.
Global fuel prices have increased over the past two years, creating demand for fuel-efficient, compact cars. This could, to certain extent, influence pickup truck demand in Thailand.
Revision of passenger car excise duty might hinder pickup sales growth: The government also may reduce the excise duty on passenger cars to encourage growth in the small-car segment. Automakers have started to look for opportunities in other vehicle segments. AutoAlliance (Thailand) Co Ltd, which manufactures Mazda and Ford products in Thailand, is investing US$430 million in a small-car plant.
If the excise duty for passenger cars is lowered, the price gap between pickups and cars will narrow further. Consumers who intend to purchase pickup trucks for recreational purposes might instead buy a passenger car.
The rising costs to produce environmentally friendly pickup trucks is another challenge facing automakers. Thailand is a leader in reducing vehicle emissions. The Board of Investment hopes to improve fuel efficiency by saving an additional five litres of fuel per 100 km. It also wants to implement the Euro 4 emission standard.
Higher emission standards would require vehicles to use advanced powertrain technologies, such as common rail diesel injection or catalytic converters in gasoline-powered vehicles. This entails a huge investment, and will ultimately lead to a more expensive pickup truck. This may further reduce the vehicle's attractiveness compared to passenger cars.
Conclusion: Domestic demand for pickup trucks in the future will be highly dependent on the economic growth in the agricultural and industrial sectors. Consumers may favour passenger cars over pickup trucks if the price drops after the government adjusts the tax structure for passenger cars.
Now many pickup trucks used for commercial purposes are overloaded. If the government implements stricter law enforcement to govern vehicle payloads, this might shift the demand for commercial vehicles toward light trucks, further restraining demand for pickups.
However, Thailand is expected to remain a pickup production base, but exports might surpass domestic demand in the medium to long term.
Karen Tan Siok Hui is a consultant with the Automotive & Transportation Practice, Asia Pacific at Frost & Sullivan. For more information on the article, please contact Alice Chia at alice.chia
Vocabulary (in discussion above)
initiative - deciding what to do and then acting (without waiting to be directed by others, has a positive meaning)
on its own initiative - acting without being told to act by others
collaborative - working with other people or companies on a project
Detroit - the US city that is the center of automobile production in the Untied States
Detroit of the East - means "the most important automobile production location in Asia"
a vehicle - non-living forms of transportation such as cars, trucks, bicycles, motorcycles, trains, ships, and aircraft, but not horses or elephants (See Wikipedia)
phenomenal - extreme and unusual
experiencing phenomenal growth - increasing unusually fast
extensive - wide coverage, covers a wide range of ideas or cases
compound annual growth rate (CAGR) - the rate of change in a value between two points in time, describes the growth over a period of time of some element of the business, usually revenue, for example 100% growth is not 25% per year but actually 18.9% per year (See Wikipedia)
a pickup truck - a light motor vehicle with an open-top rear cargo area (See Wikipedia)
a payload - the amount or weight of things carried by a vehicle (or the maximum that can be carried)
vehicle payloads - the maximum weight that can be carried by that vehicle
one-ton pickup trucks - the largest full-size pickup truck, the vehicle payload is actually greater than one ton:
"Full-size pickups in North America are sold in three size ranges - ? Ton, ? Ton and 1 Ton. These size ranges originally indicated the maximum payload of the vehicle, however modern pickups can typically carry far more than that. For example, the 2006 model Ford F-150 (a "? Ton" pickup) has a payload of between 1,400 lb and 3,060 lb, depending on configuration. Likewise, the 2006 model F-350 (a "1 Ton" pickup) has a payload of between 4,000 lb and 5,800 lb depending on configuration." (Source)
double-cab pickup truck - pickup with two rows of seats and larger passenger area (See Wikipedia on crew cab)
specs - specifications, required features
lowest-spec model - the model of truck with the fewest and cheapest features (for example, no air-conditioning, no radio, no magnesium rims...)
comprise - has as parts (for example the committee is comprised of representatives from all departments)
]
x comprises y% of z - x is y% of z
light industry - smaller factories with smaller machines, often producing consumer goods such as clothes, shoes, furniture, and household items. Formal Definition:
"Manufacturing activities that use moderate amounts of partially processed materials to produce items of relatively high value per unit weight" (Source; See Wikipedia)
* light industrial
heavy industry - large factories with big machines such as steel mills, chemical plants, refineries, shipbuilding, etc. Formal definition:
"Manufacturing activities engaged in the conversion of large volumes of raw materials and partially processed materials into products of higher value; hallmarks of this form of industry are considerable capital investment in large machinery, heavy energy consumption, and final products of relatively low value per unit weight." (Source; Seee Wikipedia)
consolidated - when many small things are joined together into one larger thing, strengthened to become more secure, powerful, and effective (See glossary)
market is highly consolidated - a few companies control the market (the competition has either been bought out or went out of business)
premium price - above the normal price (an extra amount (premium) is added to the normal price to pay for extra features or quality)
a variant price - a related price, a variation of the original price (for example, the price charged with an airconditioner added)
premium variant price - the higher price charged for additional features
fetch price - receive a price for goods sold
a regime - the system of tax rates used in a country
a tax regime - the system of tax rates used in a country
a lever - a tool used to lift very heavy things, much heavier than you could lift without the tool (See Wikipedia on levers and leverage)
leverage - using some tool or technique to get larger returns or production than normal (leveraged investments borrow money to get higher returns but also risk losing more if the price of the asset declines or returns are much below expectations)
economies of scale - cost advantages from large-scale production, fixed costs are spread over larger production, also called "increasing returns to scale" (See Wikipedia)
leveraged economies of scale - this means that, since Thailand is already producing vehicles for its domestic market, it can use (leverage) these factories and production capacity to also produce for export markets, thus generating national wealth
niche - a small specialised area
niche segment - a small market with special needs
niche pickup segment - the small market for pickups in the much larger for automobiles, trucks, and other vehicles
fuel-efficient - does not waste as much gas as other cars
compact cars - small cars
prompt - make do, cause to do
x prompted y to z - x made y do z
natural gas for vehicles (NGV) - (See Wikipedia)
a duty - a tax paid on goods bought
an excise duty - a special tax placed on some goods that are produced and sold in the country such as cigarettes and alcohol
small-car segment - the special specialised market for small cars within the much larger market for all vehicles
environmentally friendly - does not pollute, acts like a friend to the environment, does not contribute to global warming and the destruction of the environment, and the earth
emissions - release into the atmosphere (for example of a gas or radiation)
vehicle emissions - exhaust (smoke from the back of cars)
* reducing vehicle emissions
Euro 4 emission standard - a set of vehicle emission standards applying to new road vehicles sold in the EU from 2005 or later (See Wikipedia)
the powertrain of a vehicle - the parts of the car that turn gasoline into movement, "group of components that generate power and deliver it to the road surface, water, or air. This includes the engine, transmission, driveshafts, differentials, and the final drive (drive wheels, caterpillar track, propeller, etc.). Sometimes "powertrain" is used to refer to simply the engine and transmission, including the other components only if they are integral to the transmission" (See Wikipedia)
* advanced powertrain technologies
common rail diesel injection - a powertrain technology that has brough about a revolution in diesel engine technology (See Wikipedia on common rail)
a catalytic converter - a device installed in a car to reduce air pollution (See Wikipedia)
entails - implies
overloaded - carry goods over the weight limit
Frost & Sullivan - Frost & Sullivan, founded in 1961, has 26 global offices with more than 1500 industry consultants, market research analysts, technology analysts and economists. Our mission is to research and analyze new market opportunities for corporate growth. We are the world leader in growth consulting and the integrated areas of technology research, market research, economic research, corporate best practices, training, customer research, competitive intelligence and corporate strategy. (Source; See Wikipedia and website)
Answer Key:
1. Why is Thailand sometimes called the "Detroit of the East" ?
Because Thailand has the largest vehicle market and automobile industry in ASEAN (i.e. Southeast Asia).
2. When did the automobile industry in Thailand first really start to takeoff (develop quickly) ? Why?
In the late 1980s the Thai automobile industry started to experience "phenominal growth." The industry experienced this growth because the government offered "extensive support" to the industry.
3. What sub-market of the pickup market is particularly important in Thailand compared to other countries?
The one-ton pickup market. Thailand ranks second in the world after the United States in this market.
4. What evidence is there of the dominant position of the pickup truck in the Thai economy?
Pickup trucks account for 92% of all vehicles for commercial use sold in Thailand. They are especially useful in agriculture and light industry.
("Pickup trucks comprise 92% percent of commercial vehicles sold as they are very useful, especially in agricultural and light industrial sectors. The pickup market is expected to grow at a CAGR of 19.3% from 2006 to 2012, reaching 1.3 million units in 2012."
5. What country dominates Foreign Direct Investment (FDI) in Thailand's truck industry?
Japan with 95% of trucks produced being Japanese made.
6. What manufacturers dominate Thai pickup truck production?
The Japanese companies Toyota and Isuzu control 78% of production.
7. Are there a wide variety of different pickup truck models being produced by each manufacturer in Thailand?
No, each company typically produces one model with a few variations and add-on features.
8. How much can add-on features raise the price of pickup trucks by?
(Give an example.)
Add-on features can easily double the price of a pickup truck.
For example, Toyota's Hilux Vigo ranges from 397,000 to 874,000 baht.
9. What kind of pickup truck can perform the same function as a passenger car?
A double-cab pickup truck can carry as many passengers because there are two rows of seats in the passenger part of the truck, but usually withou not as much leg room.
10. What other functions besides carrying goods do pickup trucks have in Thailand?
Songthaews, pickup trucks with two rows of seats in the back part of the pickup usually used to carry goods, are a popular form of urban mass transportation in provincial Thailand and for company transport of employees in Bangkok.
("Pickup trucks are also designed to carry either passengers or goods.")
11. What incentive is there to buy a pickup truck over a passenger car in Thailand? (Give specific details)
Lower taxes. Whereas there is a 35% tax on passenger cars, there is only a 12% tax on a double-cab which can hold the same number of passengers.
12. What changes in the future may reduce pickup truck production and increase passenger car production over?
a. If taxes are reduced for passenger cars, many pickup truck consumers may switch to passenger cars.
b. If Thailand adopts environmentally friendly vehicle standards such as fuel efficiency and reduced emissions, this will lead to more expensive pickup trucks and to people switching to passenger car purchases.
c. If the government enforces laws against overloading pickup trucks, then pickup truck owners may switch to larger trucks.
13. Will pickup production decrease if domestic pickup truck purchases decrease? (Use inference)
Not necessarily, because the export market for pickup trucks produced in Thailand is already large and expected to increase in the future.
("Thailand is expected to remain a pickup production base, but exports might surpass domestic demand in the medium to long term.")
