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Political unrest could hurt Thailand's auto industry, Frost & Sullivan says

Tuesday, May 27, 2014 - 07:00
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The prolonged political unrest in Thailand could hurt the kingdom's lucrative automotive industry, says Frost & Sullivan.

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Dushyant Sinha, Associate Director, Automotive Practice, Asia Pacific at Frost & Sullivan said that the political unrest is impacting the auto sector at different levels.

"A more direct impact is on consumer confidence which coupled with general uncertainty and tighter financing has adversely impacted consumer spending. On a more indirect level, the ensuing weak economic performance is going to impact demand for commercial vehicles including pickups," he added.

Sinha said that different automakers are assessing the situation differently. "Planned investments are inexorably linked to strategic objectives and these differ across automakers. Most of them are cautious and worried about the ground situation, but that stage has still not been reached when decisions are to be taken whether to invest or not," he added.

He also said that although automakers have still not decided "not to invest", prolonged political unrest could make their investments unfeasible.

"As such new low cost alternatives such as Indonesia provide viable alternatives. So it depends a lot on how long the political unrest is likely to continue," he added.

Sinha said that it is also important to note that the nature of investments in Thailand and Indonesia are different. "They are in response to the local policy initiatives and cannot be swapped. What might happen is the gradual scaling down of production in Thailand meant for the local market and diverting some of it to exports," he added.

Sinha said that though most companies are closely watching the volatile situation in Thailand and are concerned, they do seem to have a positive outlook about the long term prospects of the market, especially as an automotive hub, well integrated with the global supply chains.

"To counter the current downturn in the domestic market, companies are focusing more on growing exports further. There are investments planned over the next few years, including those to be initiated under the Phase 2 of the Eco Car Program," he added.

He also said that some projects are also awaiting the issuance of the new BOI incentives which are currently stuck due to the political impasse. "If the situation sees no improvement by the end of the year, some of these investments might get jeopardized. For the moment, the OEMs are following a "wait-and-watch" approach," he added.

Sinha noted that quite a few big ticket investments are at stake. Toyota has been planning to invest close to US$ 610 million to expand its capacity by another 200,000 units. Nissan is looking at building its second plant at an investment of US$335 million. Honda has plans to set up its 3rd factory for US$ 560 million. In addition Mazda is putting a new plant for transmission systems. The Government has already announced Phase 2 of the Eco Car program, under which about 10 OEMs have agreed to participate with an investment of US$ 4.27 billion.

He said that the planned investments are crucial for Thailand to hit the goal of 3 million vehicles in 2017. "These are the investments currently at stake if the political situation shows no improvement till the end of the year," he added.

Indonesia set to overtake Thailand as largest vehicle market in ASEAN

Sinha also forecasts Indonesia to overtake Thailand as the largest vehicle market in South East Asia this year. Frost & Sullivan expects vehicles in the Indonesian market to grow 6.5 per cent this year to 1.31 million units

"Indonesia overtaking Thailand as a market is inevitable. But it will happen sooner than expected due to the current issues in Thailand. Otherwise Indonesia would have caught up only in the next 3-4 years," he added.

He said that Indonesia is currently on a roll with a strong growth momentum - growing middle class, increasing disposable incomes, stable economy - with demand for low cost green cars likely to drive the market in the near future.

"As such, motorization in Indonesia is much lower than in Thailand, so the potential to grow the market is much more. Thailand, on the other hand, is reeling under the after effects of the First Car Buyer Program, prolonged political unrest and weak economic growth. Consumer sentiment has been adversely impacted," he added.

Sinha said that Thailand's market is much smaller but because of its strong export focus, it leads Indonesia in terms of automotive production. This is likely to continue in the short to medium term, he added.

Thailand to keep its No 1 spot in automotive production in South East Asia

Sinha said that Thailand shall continue to be the automotive production hub for quite some time due to its strong export focus. "Indonesia, on the other hand is focusing more on its domestic market and current capacity building is addressing that," he said, adding that motorization in Indonesia is much lower than in Thailand, so the potential to grow the market is much more.

He said that consequently investments are likely to keep pouring into Indonesia as automakers try to capitalize on the growth in demand." There would also be rapid development of the local supply chain. In the long run these developments would start to narrow the gap between Thailand and Indonesia as production hubs," Sinha said.

He noted that the Thai automotive sector is dominated by Japanese players, with OEMs forging strong partnerships with parts suppliers. He added that in most cases, relationships extend to other markets as well.

Sinha said that there are long term contracts in place and in return OEMs help their suppliers in R&D, new product development, bulk procurement of raw material and access to new markets or segments. He also said that with most OEMs following Just in Time (JIT) procurement, due to weakening car demand, there could be inventory build-up issues in the short term. "However, OEMs have been known to help suppliers in such situations by offering better credit terms and supply diversions to other markets," he said.

Sinha said that close to 80 per cent of parts and component manufacturers in Thailand supply to OEMs. The remaining 20 per cent cater to the Independent Aftermarket. "The OE suppliers are likely to be the ones most affected in case there is a prolonged dip in demand. In addition to suppliers catering to the aftermarket, those who export would also be able to better hedge the downturn," he added.

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