Thailand's automotive industry has been dubbed as the "Detroit of Asia", with production amounting to an astounding figure of 1.1 million units in 2005, with exports of vehicles and parts reaching a tremendous amount of Baht 294,248 mln in 2005. Thailand's automotive industry has undergone major changes since its "birth" in the early 1960s, from being a government-protected industry to a liberalised industry. In Section [A], i Capital will outline the history and policies of Thailand's automotive industry since the 1960s. In Section [B], i Capital will review the successes of the Thai auto industry of today. In Section [C], the factors that contributed to the successes of the Thai auto industry will be examined and in Section [D], i Capital will look at the challenges facing the Thai auto industry and its future prospects.

SECTION [A] : HISTORICAL DEVELOPMENT OF THE THAI AUTO INDUSTRY

Early Promotion & Initial Protection (1960-70)
The Thai government chose automotive as one of the strategic industries to be promoted under the First National Economic Development Plan (1961-66). The strong forward linkages (oil industry, consumer credit, sales activity) and backward linkages (steel, rubber, electrical components) of the automotive industry with the rest of the economy give credentials to the industry in helping to boost up the development of the country in a fast way. Thailand's auto industry began during the early 1960s with the revision of the investment promotion law to encourage automotive assembly in the country. Before 1960, automobiles were mostly imported from Europe, Japan and the US. When the Thai government began to promote the local auto industry in the early 1960s, local auto players started to assemble vehicles using imported Completely-Knocked-Down (CKD) kits.

During this early period, high tariffs and various import restrictions were adopted to protect the local assembly plants from Completely-Built-Up (CBU) vehicles, while generous tax incentives were offered to automobile assemblers. Under the 1962 Industrial Investment Promotion Act, auto assembly was classified as a Group B Industry with promotion privileges, such as a 50% reduction of duty and business tax on imported CKD kits for 5 years, exemption of corporate income tax for 5 years, permission to remit foreign exchange out of the country, as well as permission to bring in foreign experts and technicians. In order to protect the local assembly industry, the government charged import duties on CBU vehicles: 60% for passenger cars, 40% for vans and pick-ups, and 20% for trucks. Meanwhile, the CKD kits for these three groups had tariffs of 30%, 20% and 10% respectively. These promotion programmes attracted automakers from the US, Japan and Europe to set up assembly plants in Thailand. The year 1961 saw the set-up of the first local assembler, Thai Motor Industry Co Ltd, a joint venture between Anglo-Thai and the UK firm, Ford, using semi-knocked-down (SKD) kits from the UK. Others included joint ventures with Fiat and Nissan.

The expansion of the road system and highway network infrastructure, as well as a boom in the economy under Thailand's First National Economic Development Plan, helped to fuel strong domestic demand for automobiles, which rose from 3,934 units in 1961 to 70,964 units in 1968. However, the local assembly industry was not able to support the domestic demand. Only 19% of the units demanded were locally assembled, while the other 81% had to be fulfilled via CBU importation. In 1968 alone, the Thai automobile assembly industry generated a negative trade balance of Baht 2,335.4 mln. Thus in 1971, the Ministry of Industry announced a new rationalisation plan for the development of the Thai auto industry. The Automotive Development Committee (ADC) was set up and the Board of Investment stopped granting promotional privileges to new assembly plants.

First Phase of Localisation (1971-1977)
The early 1970s marked the real beginning of the auto part industry in Thailand, shifting from simple assembly of imported auto parts to localisation of auto production. The goal was to gradually move from CKD assembly towards more manufacturing activities with increasing proportions of domestically made auto parts and components.

In 1971, the ADC set up a policy to impose a minimum local content requirement on assembly plants - 25% for passenger cars, 20% for chassis-with-windshield commercial vehicles, and 15% for chassis-with-engine commercial vehicles. Tariffs on CBU cars, vans and pick-ups, and trucks were raised to the new rates of 80%, 60% and 40% respectively. CKD packages no longer benefited from the original half-rate reduction. Instead, they were imposed with the new rates of 50%, 40% and 30% respectively.

In the first half of the 1970s, Thailand experienced the first investment boom in auto part production as many Japanese subcontractors started their investment in Thailand, such as Izumi Industries (pistons for diesel engines), Nippondenso (electrical equipment) and Daido Metal (bearing metals). Also, Thai firms began to be more actively involved in auto part production, for example, Siam Iron & Steel Co. Ltd., which initially produced steel casting for cement and machinery plants, later diversified into Siam Nawaloha Foundry to manufacture cast auto parts.

The compulsory use of local contents indicated the government's attempt to transform the auto industry from merely assembly to semi-manufacturing. However, the localisation policy during this period was not effective. The local market size was too small as well as fragmented due to the numerous makes and models. There were too many assemblers producing a small number of a wide variety of vehicles in a relatively small protected market.

Second Phase of Localisation (1978-1986)
The government adopted much stricter measures to make its localisation policies more effective. Local content ratios were raised to 50% for passenger cars and to 45% for commercial vehicles in 1983, while the import duty on CKD kits was raised from 50% to 80%.

Effective 31 Jan 1978, the government imposed a ban on the imports of CBU passenger cars. Meanwhile, regarding passenger-car assembly, only up to 42 series, from 84, could be produced by the whole industry, and only 2 models were allowed for each series. In addition, in order to reduce the number of passenger-car series, any series that was not assembled would not be entitled for assembling-concession renewal, and there would be no replacement concession of those series. Existing assembly plants were not allowed to add nor change the models from the existing line-ups. Only replacement by an updated model was granted. In 1978, the Ministry of Industry announced the prohibition of establishment of new passenger car assembly plants.

A new system of local content calculation was introduced : from a cost-based to a technical-based method to prevent auto assemblers from inflating prices of locally purchased components. The old local content calculation was based on the value of parts procurement, as well as the value of the deleted CKD package; meanwhile, the new system was based on a point evaluation to each part. The new system could prevent auto assemblers from inflating prices of locally purchased components, since the value of deleted CKD in the old system was sensitive to foreign exchange rates.

The government also introduced "mandatory deletion" of specific parts from imported CKD kits, eg brake drums and exhaust systems, which could be produced locally. As a result of the development of sub-contracting and supporting firms in metal, plastic and rubber parts, several complete motor vehicle systems could be locally manufactured or assembled, including exhaust systems, brake systems, fuel systems, suspension systems, lighting systems, pressed parts and assemblies, and interior trims. Local part and component producers increased substantially during this period. Technically simple parts and components - such as alternators, exhaust pipes, filters, radiators and starters - were produced by local producers while a range of more sophisticated parts and components were produced by Japanese affiliates and Thai-Japanese joint ventures.