SECTION [A] : HISTORICAL DEVELOPMENT OF THE THAI AUTO INDUSTRY /cont'd

Liberalisation (1990s)
In the 1990s, Thailand's automotive industry was liberalised drastically under Prime Minister Anand Panyarachun in order to comply with prevailing economic conditions, international trade and consumer benefits. Local automotive players, who had been protected for over 20 years, were forced to improve efficiency, technology and product quality. The Thai government started to promote export orientation for the automotive industry, a turnaround from the protected, import-substitution-oriented policy in the 1960s.

The government granted incentives for the assembly of automobiles for export purposes, which included exemption from import duty for auto parts and exemption from corporate income tax for 8 years from the plant establishment year. The Ministry of Industry called off the limitation on the number of allowed series for passenger car assembly. Restriction on the imports of passenger cars was also abolished. In 1994, the Ministry abolished the ban on the registration of new assembly plants in order to increase investment and productivity of the industry.

In 1999, the Ministry of Industry formally announced the abolishment of local content requirement. Tariffs and taxes were also revised. Import duties on passenger cars were reduced from 300% to 100% for those with engine displacement over 2,300 cc and from 180% to 60% for those with not more than 2,300 cc. Import duty rate on CKD kits was reduced from 112% to 20%. In 1992, there was a major revision of import duty as part of the implementation of value-added tax (VAT) in place of business tax. Import duties on CBU passenger cars were further reduced from 60% to 42% for those with engines of no more than 2,400 cc and from 100% to 68.5% for those with engines over 2,400 cc. The Board of Investment (BOI) played its role by providing incentives to stimulate investment in Thailand and to foster closer relationships between the government and investors. BOI designed incentive packages, such as generous tax incentives, to attract foreign automakers and to strengthen the country's industrial competitiveness.

Part and component suppliers were clearly defined by leading auto assemblers, reflecting the technical capabilities and ownership structures in those companies. Suppliers were classified into three groups. [a]. The first-tier suppliers were mainly owned by foreign companies and/or joint companies with local ones whose technological capabilities were up to international standards. This group of suppliers was responsible for black box parts and they had highly-qualified engineers who could work closely with resident engineers of the auto assemblers in providing designs and blueprints and worked closely with the 2nd-tier suppliers in making module part and component kits. [b]. The second-tier suppliers were responsible for detail-controlled parts. They were subcontractors who worked closely with the 1st-tier suppliers. They supplied plastic parts, rubber parts, body parts etc. [c]. The third group of general suppliers was sometimes called suppliers of proprietary or standard parts (spark plug etc), which were made independently of any particular car project.

Since the liberalisation and deregulation policies adopted in 1991, the government has gradually changed its role of protecting the industry to monitoring the trend, in order to prepare measures and policies to upgrade the technical capabilities and competitiveness of the industry in a changing global environment under the WTO's rules and regulations. The government also needed to revise laws and regulations which were against the tariff and tax structures, find measures and solutions for trade negotiations in order to protect national interests, as well as to promote and support trade missions to find new markets.

During the liberalisation period, lower taxes pushed the price of automobiles down, leading to an upward trend in domestic sales. The market was driven by foreign direct investment and strong domestic demand. Networking was further developed with the expansion of production capacity, establishment of production networks with more local supporting industries, as well as the promotion of cooperation through the AFTA program.

Current Policies
From the early 1960s till late 1980s, the development of Thailand's automotive industry was based on import-substitution. At present, it has shifted towards more liberalised policies to correspond with current global trends. These include loosening tariff barriers, abolishing local content measures, promoting investments and exports, as well as cooperating with international communities, such as ASEAN, APEC and WTO. The local content requirement was abolished in Jan 2000. Automobile assemblers are no longer obligated to a minimum percentage of locally manufactured parts to be used in all locally assembled automobiles. The automotive market in Thailand is now more open since new automotive companies enjoy free entry. Incentives were given for automotive exports such as tax reimbursement on imported materials for export production as well as tax redemption on exported parts and vehicles.

Thailand's BOI is trying to attract high-level parts suppliers to invest in key auto part production in Thailand, such as moulds and dies, electronic fuel injection systems, and braking systems, by offering them 'priority activity' status. The 'priority activity' status offers incentives of eight-year tax holidays, duty-free machinery, visa and work permit support, and land ownership rights.

By continuing to establish her own main suppliers and key parts production, Thailand hopes to drive its auto sector to become a major Asian production hub.

Regional Networks
Thailand holds various co-operations with the ASEAN countries in promoting its automotive industry. It has been a common interest among the ASEAN countries to develop a strong and integrated Southeast Asian auto industry. Yet, the main obstacle is that each nation wants to have its own auto industry and make its own auto parts. Strict local content requirements in individual nations forced automakers to put up with costly and low quality local auto parts.

Under AFTA, Thailand has reduced automotive tariffs to 0-5%. Tariff reductions under AFTA would help to expand the size of the consumer market, thus giving automotive manufacturers the opportunity of benefiting from economies of scale. Stiffer competition would help to boost the cost efficiency and productivity of auto firms, compelling them to meet global standards.

Before AFTA came into effect in 2003, ASEAN countries established the Brand-to-Brand Complementation (BBC) scheme to promote co-operation and economies of scale in auto parts manufacturing. Import tariffs on parts traded within ASEAN countries were reduced by 50% while parts sourced within ASEAN countries were to be included in local content calculation in each country. The aim of this scheme was to promote specialisation in auto parts and components manufacturing.

To be more effective than the BBC, the ASEAN Industrial Cooperatives (AICO) scheme was formed in Apr 1996. AICO provides privileges of 0-5% import duty rates, local content accreditation and no restrictions on the exports of the AICO products for participating countries. An ASEAN government may grant AICO privileges to projects implemented under the previous BBC scheme to improve competitiveness of the ASEAN auto industry by allowing automakers to take advantage of economies of scale through massive sourcing of manufactured parts. Exchanged parts and components within ASEAN would be treated as local parts under the local content requirement rule in each respective country.