SECTION [D] : CHALLENGES AND FUTURE PROPECTS

Foreign Competition
The steady growth of mega economies such as China and India, and the growth of the ASEAN Free Trade Area (AFTA) trading bloc would bring Thailand face-to-face with more competition. The huge market in China and India, for example, would lure foreign automakers away from Thailand. A liberalised tariff structure and incentives to attract foreign investors have placed Thailand in the best position to take advantage of the opportunities in becoming the regional hub of the global automotive industry. However, it has to be pointed out that the bright picture is based mainly on the active involvement of foreign investors. The liberalisation process has increased the exposure of the auto industry, making it dependent on external economic environment. Foreign investors are keen on sourcing parts and components from the most competitive suppliers. If the major foreign auto manufacturers shift their production and assembling bases to other lower-cost countries, Thailand's dream to become the "Detroit of Asia" would not materialise.

On the other hand, Thailand may be able to fend off some of the threat of emerging markets through specialisation. Thailand is already the largest commercial vehicle market, especially for pickup trucks, in ASEAN, accounting for 55% of the total commercial vehicle market in 2004 alone. With such a large slice of the ASEAN market, Thailand has a chance to maintain a strong foothold in the automotive industry as the dominant commercial vehicle market in ASEAN.

Lack of Skills and Technology
Although joint ventures between local firms and foreign auto manufacturers, especially Japanese firms, have brought considerable benefits to local firms, the transfer of production engineering and design technology have been only moderately successful. A rough measure of the benefits of technology transfer is the number of local suppliers and the growing sophistication of the parts and components produced locally. Japanese auto companies, which are the dominant foreign players in Thailand, are reluctant to transfer technology to local players. There is no collaboration with local R&D institutions; instead, most foreign auto assemblers and manufacturers have their own R&D facilities.

The skills of the Thai workforce have yet to reach international standards Thai technicians are not yet able to design major parts and components, let alone a complete vehicle. It is up to the foreign auto companies in Thailand to train the local workforce. The auto industry would not have started without the promotional activities carried out by the government. However, the Thai government made a mistake of not developing the skills of the local workforce from the start; instead, it has only focused on attracting foreign investors through tax incentives. For any sector of the economy to achieve sustainable growth, the capability of the local workforce is the most crucial.

Thailand's local part and component industry is still weak. Most local firms are still in the second and third-tier of the auto industry, producing low-technology products. Some local firms have managed to produce auto parts and components such as bumpers, door panels, speedometers, steering wheels, windshields, and seats. However, Thailand still does not have the capability to produce more complex parts like passenger car engines, fuel injection pumps, transmissions, differential gears, injection nozzles, electronic systems, and electronic control units.

Figure 3 : Parts Procurement of Thai Auto Industry

As shown in figure 3, almost 75% of the parts and components used in the Thai auto industry are sourced from FDI firms and imports. Only 25% are sourced from pure Thai firms. As shown in figure 4 below, most auto parts suppliers are joint venture companies. For example, for engine parts, there are only 20 pure Thai suppliers and 43 joint venture companies, with 8 of them majority owned by Thais and the rest by foreigners. This shows that Thailand does not have the technology yet to produce her own auto parts and components, and still has to rely on foreign assistance.

Figure 4 : Automotive part suppliers, Original Equipment Manufactures (OEM), 2003

The removal of the local content requirement would pressure local parts makers to improve their quality up to international standards. Local part and component manufacturers need to improve their quality and cost-effectiveness in order to be able to compete with global players. This means that Thailand needs to improve her R&D capability, as well as develop highly skilled engineers. Thailand needs to shift from attracting foreign investment through granting tax incentives to improving the quality of local suppliers.

Dependence on Foreign Partners
The liberalisation process of Thailand's automotive industry has attracted foreign auto manufacturers to invest in the country. Thus, the future of Thailand's auto industry depends very much on the active involvement of foreign investors, especially the Japanese auto players. Japanese auto manufacturers are the main pillar behind the growth of the local part and component firms.

Table 1: Automobile Production Companies

As shown in table 1 and table 2, the Japanese hold majority stakes in the joint ventures between Japanese companies and local firms, both for automobile production companies and components manufacturing companies.

Table 2 : Component Manufacturing Companies