Pistons by Thailand

It's showing new power in quality car parts

Walking through the bustling Aapico Hitech Public Co. auto parts plant in the town of Bang Pa-In, two hours north of Bangkok, it's easy to forget that you're surrounded by rice fields in a developing nation. Six-meter-high die presses rapidly stamp small auto-body parts out of steel sheets while an oven glazes brake lines. Nearby, men in gray lab coats thread pieces of plastic into door hinges with gloved hands. Elsewhere, workers pack and load the parts, labeled General Motors Corp. and DaimlerChrysler.

Aapico is one of Thailand's most successful parts export businesses. Revenues grew 36% last year, to $40 million, and profits surged 700%, to $3 million. But President and Chief Executive Yeap Swee Chuan isn't sitting still. The Malaysian-born former Ford car salesman worries that next year he'll fall behind. "We must expand to compete with China and India," he says. "Once they start steamrolling, they will be too big for us to hold them back." So he's negotiating to pay $48 million for a controlling stake in a nearby factory that makes frames for Isuzu D-Max pickup trucks.

Yeap's ambition is typical of Thailand's growing auto parts industry. With a roster of players that includes international giants Delphi Corp. and Visteon Corp. plus locals such as Aapico and Thai Summit Group, Thailand has built a reputation for cranking out quality components. Last year, the country exported $2 billion worth of everything from engine blocks to door handles, up 27% from 2002. That number is expected to double by 2006.

Local suppliers got their start early, when Japanese carmakers began building Thai assembly plants in the 1980s. In the mid-1990s, American and European auto makers eager to cash in on the Asian boom followed suit. Another boost has been provided by a free-trade agreement among the Association of Southeast Asian Nations (ASEAN), which last year began cutting tariffs on cars with at least 40% of their parts from member countries. The parts makers' growth is being further fueled by the recovery of consumer confidence in Thailand, where car sales have more than doubled since 1998.

By working closely with global carmakers, the Thais have established a reputation for quality control, low costs, and technological superiority. Today, Thai-made parts are shipped worldwide. China still enjoys a lower cost base but is not known for quality. "People are worried about recalls," says Zafar Momin, an auto industry consultant at Boston Consulting in Singapore. "If someone tells you your pistons are made in China, you're not so confident."

Precision and high quality don't necessarily mean more expensive. Thai Summit, for instance, undercut competitors across the region to secure an order from Honda Motor Co. for 1 million door hinges this year -- five times more than in 2002. Thai Summit now supplies 40% of the parts for the locally produced Mitsubishi Strada pickup truck. Contracts like those helped the company boost its revenues by 30% last year, to $450 million.

The parts makers are getting more innovative, too. Take Aeroflex International Co., which in 1996 sold plastic sheets to manufacturers, which then formed them into bedliners for pickup trucks. In 1997, the company started making bedliners directly for Toyota, Isuzu, Nissan, and other pickup truck makers. Then, in 1998, Aeroflex filed a U.S. patent for a new type of bedliner that hooks onto the back of a truck and doesn't need to be screwed down, eliminating an hour of arduous metal-drilling on the assembly line. In 1999, the company invested $2.5 million in production capacity for the product, which helped boost revenues by 50% last year, to $24 million. "From this point on, we can grow very fast," says Supavadi Vitoorapakorn, executive director of Aeroflex.

Now, the Thai manufacturers are climbing up the value chain. No longer content with merely producing parts, Thailand is moving into machine tools. After years of learning about dies from operating its own 400-ton die presses, Aapico has started making and exporting the dies themselves. One satisfied customer is DaimlerChrysler, which uses five different Aapico-made dies to fashion inner-skin body parts at a plant in Germany. "We came here because it's cheaper than Germany, and the quality of the dies was always better than China and India," says Harry Goetz, a Mercedes-Benz design engineer. Aapico also sells its jigs -- large metal frames used to hold cars in place on the assembly line during welding -- to 22 countries, from China to Brazil. Yeap attributes his success to an obsession with quality control. "We're disciplined," he says. "If you think 95% is enough, you're in trouble."

Yeap and his counterparts at other companies know Thailand's advantage in auto parts can't be taken for granted. While Thailand will retain higher-end orders, Boston Consulting predicts China will overtake it in total investment value by yearend. Local demand could also suffer unless the government lifts punitive taxes on passenger cars. And a limited supply of engineering graduates could further constrain expansion. Still, "the industry is very well established in Thailand and is going to continue to be on the growth train," says Martin Conlon, regional finance director at Delphi Corp. in Singapore. But the parts makers will have to keep up the pressure if this engine of the Thai economy is to keep rolling.

By Michael Shari in Bangkok

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