AUTOMOBILES

Rolling forward more slowly

The Thai motor industry is still on top, but not in the lap of luxury as rising oil prices have made fuel-efficient vehicles a clear winner

by ALFRED THAHLA

As 2006 comes to a close, automobile sales in Thailand are still outperforming the rest of the Asean region, with vehicle sales of 597,640 units, down by 4.5% from last year, during the first 11 months of this year.

When the interim government settled in following the Sept 19 coup, the market had already sustained considerable damage from slow consumer spending driven by high interest rates, inflation, oil prices and low investor confidence.

Passenger cars overtook SUVs as market leaders in terms of sales growth in 2006.

In the view of industry executives, ‘‘damage’’ means the possibility of missing a 2006 sales target of 703,000 units, and from a long-term perspective, missing a domestic production target of two million units by 2010.

With Japanese makes controlling more than 91% of the total market according to figures compiled by Toyota and Isuzu, most senior executives of major powerhouses such as Toyota, Isuzu and Nissan still believe that the market will absorb at least 703,000 units, reflecting a stagnant growth rate.

The passenger-car segment is the only area seeing positive growth, with the overall industry, including one ton pickups and sport utility vehicles, in the red.

Meanwhile, under new Industry Minister Kosit Panpiemras, the Aces (agile, clean, economical and safe) car project might make a comeback, much to the chagrin of the one-ton pickup and passenger-car segments.

The Aces programme—also dubbed the ‘‘eco-car’’ — could result in decreased market share for both the one-ton pickup and passenger-car segments due to the low price of the small cars, which could be little as 350,000 baht now that design specifications are wide open.

On the other hand, the project could result in two product champions on the market instead of the one-ton pickup shouldering the majority of the auto export sector.

General Motors, which operates the Chevrolet brand in the Thai market, is one of the potential players in the Aces project.

The world’s largest vehicle manufacturer projects a global shift toward building small cars as most of worldwide auto industry growth will stem from emerging markets where subcompacts and even smaller cars are in increasing demand.

In the domestic market, Toyota is the leading brand with 253,635 units sold so far this year, or 42.4% of the market, and an in-house year-end target of 290,000 units. Toyota is the largest brand in Thailand and controls all sales categories including passenger cars, one-ton pickups, SUVs and vans.

Passenger cars: Toyota and Honda head the market in this segment, which saw 4.7% growth over last year during the first 11 months. They hold 48.8% and 33.7% market shares respectively.

Competition is weak, with third place going to Chevrolet at a distant 3.9% of the market, on sales of 6,625 units.

Nissan dropped to fourth with 3.4% on sales of 5,732 units, dropping 9.8% over last year during the same period, despite the introduction of its new Tiida passenger car.

The premium segment — anything above two million baht—was down by 8% in the first 10 months, with 6,498 units, against 7,069 units last year.

‘‘The luxury segment is a wait-and see situation for our customers. It’s quite disturbing because the overall passenger- car segment is up 6%, while the luxury market is down 8%,’’ said Chatvithai Tantraporn, general manager for DaimlerChrysler Thailand.

The passenger-car segment is the only market to have seen positive growth and is expected to crack 200,000 units for the first time by the end of 2006, against sales of 188,211 units in 2005.

One-ton pickups: Rumours of pickup stockpiling at dealerships are rife, with Toyota and Isuzu now battling it out. Toyota looks like it will edge out pickup champion Isuzu with sales of 143,490, against Isuzu’s 142,227 units.

Isuzu includes the two-wheel drive MU-7 sport utility in the one-ton segment, which brings the equation down to their respective definitions of a one ton pickup truck.

However, the truth will emerge when the Land Transport Department reveals official registered vehicle sales for the year 2006 in February or March 2007.

The over all segment stands at 373,026 units, down 4.4% when compared to 390,039 units during the first 11 months of last year.

Sport utility vehicles: Toyota wraps up the first 11 months of 2006 with an 83.7% market share of the gas-guzzling four wheel drives.

This is thanks to the Fortuner SUV, priced at more than 1.2 million baht and featuring a coil-spring setup on a pickup-based chassis
that distinguishes it from other premium off-roaders such as the Volvo XC90 and Land Rover.

The segment will be lucky to crack 23,000 units after selling as many as 41,609 units last year.

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Cheap is a waste of money

The success story of Thai Car-Show Automotive Products Co (TCSAP) as one of the country’s leading second tier component manufacturers had an unorthodox beginning.

TCSAP, which makes electrical parts for first-tier auto companies, has registered capital of 30 million baht paid in full and 10 founding shareholders.

Mr Lin raised eyebrows by giving out free samples but it helped TCSAP make its point about quality.

Its core business is high-quality battery clips, booster cables, wire protectors, halogen wire harnesses, fuse holders and boxes, fusible links, pigtail sockets, light sockets, relays and switches, connectors, air-conditioning switches and insulated wires.

‘‘When I first came here in 1989, I didn’t know what to do. I just came to see whether I could stay here in Thailand. Normally other businessmen know what to do,’’ says Lin Hsiang Wan, managing director of TCSAP.

Mr Lin is also one of the 10 shareholders who emigrated from Taiwan, where he left behind a successful sales career in the accessories and wire harness market.

Taiwan faced an economic downtrend in 1990 as its growing accessory industry shifted to overseas investment due to market saturation.

After an unsuccessful stint in the restaurant business and on the stock market, Mr Lin opted for stability in life and decided that Thailand would be his new home.

‘‘Thailand was a big market, but the quality of accessories and components was not good. So I asked myself ‘why?’ And the answer was simple. Thai customers like cheap products but cheap are more expensive in the long run. I saw the opportunity to make good products of good quality,’’ he recalls.

In 1990, a TCSAP factory was erected for 20 million baht. However, the initial response was poor and TCSAP had no customers at all because the market considered its products too expensive. It took five years for TCSAP to establish itself in the market by distributing free samples of cost-effective products to high earners.

‘‘They said I was stupid,’’ says Mr Lin, who stood by his theory that if he gave out free samples the market would eventually realise the benefits.

‘‘A generic socket normally costing 50 satang was being offered for 2.50 baht, but four of the 10 cheap(50 satang) sockets on the market were faulty and only two were usable. Now whose is cheaper?’’ he asks rhetorically.

‘‘I almost lost faith in the Thai market because all they (Thai customers) wanted was cheap products. I was angry.’’ TCSAP ended up distributing free samples worth more than one million baht—five times more expensive than the competition — to a handful of potential clients.

The turning point came when the low-grade products simply could not beat the high quality of TCSAP products. ‘‘Quality is my strength, but price was the obstacle.

However, in four or five months, clients who stocked my free samples sold everything because TCSAP products were more durable and customer demand was very convincing.’’

Fast-forward to2006andTCSAP, now 51% owned by Thais, is powered by 200 employees, 10 managers and has a new 100-million-baht factory in Tambon Bang Namjued in Samut Sakhon.

So, what differentiates TCSAP from the rest of the second-tier competition? Taiwan is known for its developed parts market and industry, which surpasses Thailand in terms of know-how and technology.

‘‘I know the Taiwan market. I know the consumer problems and the solutions for the customers. I put my heart into the job.’’

TCSAP expects sales of 300 million baht this year after posting sales of 200 million baht in 2005. Its main client is Koito, the leading manufacturer of automotive lighting technology in Thailand.

Armed with a night-school diploma and with humble origins, Mr Lin says he is satisfied and doesn’t want to expand his business much further.

‘‘My capabilities for this size of business are enough. But if it was to get bigger, then it would be time for new management to step in.’’

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Dealing with the China factor

The presence of China and its market potential is a no-brainer when the question arises as to whether this billion strong consumer market will be a competitive threat or a trade ally to Thailand’s automotive market.

Factories to meet surging demand for one-ton pickups have been among the major recipients of investment in Asean over the past decade.

Once Asean gets its act together, maybe the region’s 540-million-consumer market could serve as leverage but until then China is the market to be in.

Fuelling the initiative for the single Asean market are economic synergies or alliances between Asean and six other economies — Australia, China, India, Japan, Korea and New Zealand—called Asean plus 6, which has the potential to generate an automobile market size estimated at more than 17 million units or at least 29% of the world’s entire automobile sales.

Why would China compete against the aforementioned as opposed to working towards achieving an alliance that will lead to a profitable partnership? Thailand, dubbed the Detroit of Asia much to the chagrin of Japanese automakers who own 91% of the local market, is the leader in the Asean region with annual domestic production of more than one million units achieved last October.

With the strongest supporting industry supply chain in the region and future potential of increasing investments worth 100 billion baht in the future — the Board of Investment (BoI) is stepping up its road shows to attract new investors since the political change that took place last September.

Vallop Tiasiri, the executive director of the Thailand Automotive Institute, said that Chinese automotive products would not be successful in the Thai market within the current five-year time frame, ‘‘Chinese products don’t meet Thai customers’ requirements. Low priced commercial trucks make up a niche market only.

‘‘Our import tax for passenger cars and trucks is 80% and 40% respectively. This is a clear advantage for our domestic production. China isn’t ready to invest in a production base because they don’t have a supporting industry base that will give a competitive advantage.’’

Thailand, as a major player in the Asean region with regard to sales and production capability, actually benefits from trade in automotive parts with China. Thai component makers are known for their technical prowess and high skill levels that ensure top-quality standards despite having goods that are pricier than Chinese products.

China’s entry in the World Trade Organisation (WTO) in 2002 made sure that non-tariff barriers or NTBs such as import licences, import quotas and lower tariff rates allowed Thai component manufacturers to expand their businesses in China. High-technology automotive products from Thailand now have potential to leave Thai shores to compete in China.

The Industry Ministry acknowledges that the Chinese market is exciting and one of the world’s most important markets which will grow to be the second largest in the next decade. The opportunity for Thailand and Asean joining in on this projected growth is obvious.

Overall trade volume between Thailand and China resulted in a trade deficit but the country still managed a trade surplus with China on trade under the FTA guidelines, according to the Department of Export Promotion.

An influx of investment into Asean region in the past decade was spurred mainly by the automotive industry.

Primary investment was in the guise of Asean production bases for export purposes, as seen in Thailand’s one ton pickup truck production base thanks to Mitsubishi, Ford-Mazda, General Motors, Isuzu and Toyota.

The establishment of a production base for pickup exports allows the region to enjoy a volume of that reached 400,000 units last year, according to Industry Ministry statistics.

Passenger cars also were exported from Asean, from whichmorethan80% originated from Thailand. The official investment sum was close to 800 billion baht of which at least half was channelled into Thailand.

China and Thailand should feed off each other’s strengths by creating trade synergies instead of competing against each other.

A future alliance with China in the parts industry is a viable alternative because in order for Thailand to compete with major markets it must join hands with a source of semi-finished parts, and China fits the bill.