International -- Cover Story -- Asia
ASIA'S NEW CAR CAPITAL (int'l edition)
Kamnuan Shakan showed up at Siam VMC Safety Glass Co.'s factory seven years ago cradling his five-month-old girl, Kanita. An education in electrical engineering couldn't get him a job in Thailand's poor, rural northeast, where he lived. Even when he moved to Bangkok, he had to struggle to support his family with sporadic construction work at $3 a day.
Kamnuan won an apprenticeship at the Thai-owned VMC, completing it in a mere seven months. He shot up the management ladder, and now his salary as a sales manager is more than $300 per month, making him distinctly middle-class by Thai standards. He has bought a new Mazda Familia pickup truck and put a downpayment on a house. "Getting that job changed everything for me," says the 31-year-old. The growth of Thailand's auto industry has "given a lot of people jobs and improved their lives," he adds.
Thailand is not only creating jobs--it's winning the race for auto dominance in Southeast Asia. The payoff for Thailand and the foreign auto companies that have helped create the industry could get even bigger. By transforming itself into a manufacturing hub--the Detroit of Southeast Asia--Thailand is positioned to export vehicles and parts through a region of half a billion people, including Vietnam, as trade barriers gradually fall.
CARROT AND STICK. Auto sales in the region are already about 1.1 million a year and are expected to double over the next 5 to 10 years. Although still only a fraction of the size of the 15-million-vehicle U.S. market, that makes Southeast Asia one of the world's fastest-growing auto markets. Thailand alone is expected to account for half of Southeast Asia's total demand.
Thailand's auto-industry success is a case study for Pacific Rim leaders gathering in Osaka beginning Nov. 15 for the annual meeting of the Asia-Pacific Economic Cooperation (APEC) (page 16). While some Asian leaders are balking at potentially painful market-opening measures, Thailand's gathering strength is largely thanks to freer investment and trade policies. "Thailand, Malaysia, and Indonesia were on par three or four years ago, but because of liberalization, the Thai market has moved ahead of the other two," says Geoffrey Rowe, vice-president for marketing for Volvo (Thailand). Volvo makes Jeep Cherokees and Volvos in a small joint venture with Chrysler Corp.
In contrast to Thailand, Malaysia and Indonesia insisted on developing their own ability to assemble finished autos. "Every country wants three things," says Dennis R. Root, vice-president and general manager for Asia-Pacific operations at Chrysler. "Its own flag, its own airline, and its own auto industry. Everyone wants to build everything, but it doesn't always make economic sense."
If that's so, Thailand may demonstrate how to create an auto industry without fortress-like barriers and without picking national champions. With both a regulatory carrot and stick, Thailand started early on luring foreign carmakers and suppliers into joint ventures, transferring needed technology and management skills. Malaysia, in contrast, insisted that its national champion, Perusahaan Otomobil Nasional, have majority control in its deal with Mitsubishi Motors to make the Proton series of vehicles. "We never adopted a `choose the winner' approach," says Secretary General Staporn Kavitanon of Thailand's Board of Investment. "Our model is, `Let the market decide."'
The Japanese were the first to establish themselves in Thailand, providing low-cost vehicles for Thai pocketbooks. Toyota's best-selling model is the Hilux light truck, starting at a mere $9,960. Aside from the finished vehicles, the Thais have obtained the vast majority of their manufacturing base, training, and technology from Japanese auto makers, who enjoy about 90% market share. In some cases, the Japanese have turned to Thai-owned suppliers, but in others they rely on Japanese-owned suppliers in Thailand, elsewhere in Southeast Asia, or in Japan itself. "Like it or not, the Japanese dominate in this industry," Kavitanon says.
Because of Japan's head start, it will be tough for the Americans, Europeans, or Koreans to dislodge competitors such as Toyota, Mitsubishi Motors, and Honda Motor. But Thailand is too attractive to ignore, with a market that grew 267% from 1989 to 1994, to 485,000 vehicles, and shows no sign of stopping. So Ford Motor Co. and Chrysler are investing in new factories. Hyundai Motor Co. relies on a local partner to assemble knock-down kits. Like the Japanese, these newcomers clearly see Thailand as a hub for the region.
JEEP SCRAP. All of which explains why Thailand's $11 billion auto industry is the envy of its Asian neighbors. It employs some 50,000 workers and accounts for about 15% of Thailand's gross domestic product, compared with 3% in Indonesia and just over 1% in the Philippines. There are some 300 Thai parts makers supplying the assemblers and an additional 200 to 300 suppliers for after-sale repairs. The Export-Import Bank of Japan ranks Thailand as the second-most-attractive place to invest worldwide, ahead of its sister members of the Association of Southeast Asian Nations (ASEAN) and the U.S. "The government is stable, the country risk is low, and they've got a good balance between quality and wage levels," says Saichiro Fujie, president of Honda Cars (Thailand) Co.
Already, 13 Thai factories have a combined capacity of a half-million vehicles a year, and over the next few years new plants will boost that by at least 300,000. To keep ahead of Korean, American, and European arrivistes, Honda Motor Co. is spending $100 million on a new plant for the Accord and Civic. Toyota Motor Corp. will invest $360 million to expand production at an existing plant and build a training center for service technicians as well as a new factory. Mitsubishi Motors Corp. will spend at least $560 million to move a large part of its pickup-truck production from Japan to Laem Chabang, a new industrial zone on Thailand's eastern seaboard.
Newcomers are breaking in with both import sales and new production facilities. General Motors Corp.'s Opel unit made a stunning debut in 1993, grabbing 5% market share in one year. Last year, Daewoo Corp. formed Auto Network Thailand Co. to establish a sales network and is expected to have its first Thai assembly lines by 1996. Ford and Mazda Motor Corp. recently announced a $472 million joint venture to produce 135,000 pickups a year, some for exports.
To the disadvantage of Johnny-come-latelies, the Japanese have clout with policymakers. When Chrysler initially tried to get into the market, it found the vehicle classification for Jeeps taxed them out of the market. Defined as a passenger car, at $56,000 a Jeep cost twice as much as its nearest competitor, Mitsubishi's Pajero, which was defined as a pickup truck. In the face of pressure from Mitsubishi and Thai interests, it took two years and more than 80 meetings with officials at the Board of Investment, Finance Ministry, and Industry Ministry to get the Jeeps moved to a tax category that would enable them to enter the market at about $45,000 each.
WONKS' WORK. That kind of fight is not unusual. Siam Guardian Glass, a joint venture between Thailand's Siam Cement and Michigan-based Guardian Glass, had a similar experience, with market leader Asahi Glass trying to keep it out. "Some producers want to maintain themselves as the sole producer," says Dusit Nontakorn, a Siam Cement vice-president. "We just gave the government the real picture."
The government is torn over how to manage the entry of so many newcomers. Japanese investment money is still welcome, but the Thais are also wary of becoming dependent. "Thai," after all, means "free." "We want the Americans to come back," says Roy Jutabha, executive director of MDX Public Co., which owns an industrial estate where Toyota's new plant will be built. "It's only good business sense. We want a diversified customer base."
If the Japanese are vulnerable, it's in their insularity. Asians, including some Thais, complain that Japanese companies rely too heavily on their own suppliers, not providing enough technology and jobs. The Japanese are still establishing multitiered, Japanese-owned parts networks. Sony Corp., for example, has just announced a $60 million car audio factory. Some Thai companies have established joint ventures with the Japanese, but many others are 100% Thai-owned. Often they are able to provide only lower-value-added components.
That's why many Thais are open to new suitors. There appears to be a reservoir of positive feeling left for the Americans, despite regret at what Thais perceive as American abandonment in the 1970s. "I don't know why the Americans left Thailand," says Industry Ministry official Anusorn Nuangpholmak. "But after the Vietnam War, they moved out, so the Japanese came. Now its hard for them to get back in."
Much of the credit for building Thailand's industry goes to these government policy wonks. Starting in the 1970s, the government adopted restrictions designed to build up the local components industry, including local-content requirements and bans on new assembly plants as well as on imported cars. Local-content requirements on cars rose from 25% in 1980 to 54% today.
PROTON PROTECTION? In 1990, however, the government began to liberalize the industry. The last of the import bans was lifted in 1991, and in 1993, new assembly plants were approved. Last year, the Board of Investment began offering reductions on corporate taxes and raw-materials and machinery-import duties to ventures outside the overcrowded Bangkok area. While local-content regulations persist, World Trade Organization and APEC regional rules require their abolition over five years. "We will have to stop the local-content policy," says the Industry Ministry's Nuangpholmak.
Liberalization can't come fast enough for some. Take Siam VMC Safety Glass, where Kamnuan Shakan works. This year, it's doubling production capacity at two plants after a $5.2 million expansion in 1990 and a $2.4 million expansion in 1985. "For the next five years, all I see is growth," says Vivat Praepriwngam, who started the company in 1960 with $800. "The market is huge." Although relatively satisfied with government policy, he would like to see tariff reductions accelerated, especially for raw materials and machinery.
But reflecting Asia's ambivalence about an entirely free-trade model, others in Thailand, including Japanese executives, want the government to maintain a manageable pace of change. "Suppose there were suddenly total market liberalization around the world," says Kazushige Nagura, director of Toyota Motor Thailand Co. "Suppliers here wouldn't be competitive enough."
Another question is how fast Malaysia would liberalize to make way for Thai-made cars. Malaysia's own national champion isn't doing terribly well, with a much less competitive assembly and parts-supply network. Because of a stiff tariff wall, Proton vehicles hold 74% of the Malaysian market. But it's a small market. "Our cost structure is not as economical as that of the bigger players--this is the problem," says Datuk Nadzmi Salleh, Proton's 40-year-old managing director. Because of Proton's vulnerability, Malaysia could resist allowing foreign-made cars to swamp its market.
Indonesia, which boasts a huge population of 190 million, also may not prove an ideal market. Tariffs on imports were lowered in May from 275% to a mere 200%. Although tariffs will continue to drop, the Indonesian auto industry has fallen so far behind Thailand's that it too could resist encroachments through a combination of tariffs and attractively priced, locally assembled Japanese vehicles. Indonesia's major assembler is PT Astra International, which builds Toyota and Daihatsu vehicles.
But in general, the hunger for automobiles throughout the region means that Thai exports almost certainly will be able to grow rapidly. Thailand is surrounded by emerging nations with tremendous pent-up demand. Sales in Myanmar and Vietnam were only about 12,000 last year, but those numbers represent 21% growth over the prior year.
Its home market will be Thailand's largest, despite infrastructure problems. The new port at Laem Chabang, for example, was built in 1992 to reduce congestion in Bangkok, but, as David N. LaForest, managing director of TRW Fuji Serina Co., notes, "they're not getting the full benefit of Laem Chabang because they forgot to build the high-speed train to go there."
None of those problems, not even Bangkok's nightmarish traffic congestion, seems likely to put a dent in Thailand's auto boom. The Thais are extremely patient, and cars are a major status symbol. Traffic problems may actually increase sales of individual autos, because getting stuck on public buses is so unpleasant.
That helps explain why it's tough to find a Thai pessimist. There's a boomtown feeling in Bangkok. More Thais such as Kamnuan Shakan are discovering the upside of deregulated markets, and Thais feel ready to compete. If APEC can make headway in knocking down the barriers that stifle trade, there will be even more opportunity for little Kanita Shakan as she grows up.By Edith Hill Updike, with Robert Horn, in Bangkok and Michael Shari in Jakarta