Explaining Thailand's Automotive Manufacturing Success.

• Author: Warr, Peter
• Position: ORIGINAL RESEARCH ARTICLES - Report

1. Introduction: Detroit of the East?

   Thailand's export-oriented automotive industry is a celebrated economic success story. The production of motor vehicles and parts began in the 1960s and expanded from the early 1990s, catering solely to the highly protected domestic market. Production for export has been important only since 2000, but more than half of the industry's final output is now exported. Employment within Thailand's automotive sector--final assembly plus parts--now exceeds a quarter of a million workers.' In 2015, production exceeded 2 million units, making Thailand the world's ninth largest automotive producer. According to a 2013 report in The Economist, Thailand has become the "Detroit of the East" {Economist 2013).

   The opportunity for rapid development of this form of manufacturing production within middle-income countries like Thailand was stimulated, in part, by the Plaza Accord of 1985. The United States, Japan and major Western European governments agreed on a steady appreciation of the Japanese yen, but also of the euro, relative to the U.S. dollar. Within Japan, these currency realignments and related labour market developments raised the costs of production relative to the revenues from exports. American negotiators hoped that these cost pressures would induce at least some Japanese manufacturers to relocate to the United States. In the following years some did, but more often, Asian locations outside Japan proved more attractive to Japanese manufacturers than relocation to the United States. Low labour costs in Asia were a major but not the only component of this story. Competition was intense among Asian countries to attract internationally mobile Japanese manufacturing to their countries.

   In the case of automotive manufacturing for export, Thailand was very successful in attracting Japanese manufacturers, compared with neighbouring countries such as Malaysia, Indonesia and the Philippines (Doner, Noble and Ravenhill 2006). Why? In the literature on the apparent success of Thailand's automotive industry, the answers to several key questions are contested. First, is the Thai automotive sector really a success story? In contrast with the "Detroit of the East" characterization, the final assembly operations occurring within Thailand are fully foreign-owned, with production and marketing decisions, together with most of the design and technical research, occurring in Japan. Second, is the recent growth of the industry within Thailand a delayed consequence of earlier infant industry protection? Third, and more broadly, to what extent was prudent industry policy responsible for the success of the industry? Fourth, to what extent was the elimination of restrictions on foreign ownership of both final assembly and parts production, following the 1997-98 Asian Financial Crisis (AFC), responsible for the relocation of foreign manufacturers to Thailand? Fifth, did the local content requirements in operation until their abolition in 1997 lay the foundation for the development of the Thai parts and components subsector, or was the subsequent removal of these restrictions responsible? Sixth, did the export orientation of the industry since 2000 help or hinder the development of domestic linkages? Finally, to what extent did Thailand's infrastructure investments, concentrated in the Eastern Seaboard economic corridor, contribute to the growth of the automotive industry?

   This study attempts to shed light on these and other related questions. The prevailing literature has tended to attribute Thailand's automotive export performance to selective industry policy ("picking winners") on the part of the Thai government. In contrast, the hypothesis in this paper is that three sets of factors jointly facilitated Thailand's success in attracting footloose automotive production, eventually leading to its export success. The first was a proactive set of infrastructure investments, beginning in the late 1980s and extending through the 1990s, known as the Eastern Seaboard Scheme, which created an economic corridor, designed to reduce costs within heavy industry in general, but without any specific sector in mind. The second factor was the exchange rate depreciation that followed the 1997-98 AFC, which made manufacturing production for export more profitable. The third factor was a combination of two policy changes introduced by the Thai government shortly after and partly in response to the AFC. These changes: (i) permitted unlimited foreign ownership of both final assemblers and parts and components manufacturers in the automotive sector for the first time; and (ii) abolished Thailand's hitherto restrictive requirements on the local content of motor vehicles produced within Thailand.

   The paper is structured as follows. The next section summarizes the recent history of the Thai automotive sector. The third section describes the policy changes affecting this development. In the subsequent section, industrial census data are used to analyse the relationships between Thai and foreign automotive producers. The final section concludes.

2. Development of the Thai Automotive Industry

   The industry has passed through two distinct phases--an import substitution phase, followed by an export phase. During the import substitution phase (1960 to 1997), the output of the automotive industry fluctuated with domestic demand. Output remained below 100,000 units per year until 1983 but expanded during the decade of economic boom from 1987 to 1996, when real GDP grew at almost 10 per cent per year, stimulating domestic demand (Warr 2005). Output reached just over half a million units in 1996, almost entirely for the domestic market. With the collapse of demand resulting from the AFC, output plummeted to just over one fourth of this level in 1998. Over the next two decades, the policy changes and infrastructure investments described below produced a resurgence of output, reaching around 2 million units in 2015. (2) Figure 1 shows that the export share of this output grew dramatically from almost zero in 1997 to over 60 per cent in 2015.

   In 2014, automotive exports earned US$33.6 billion, 16 per cent of total merchandise exports and 19 per cent of total manufactured goods exports. Table 1 shows that, of this total, just over half was export of vehicles and the remainder parts and components. Total automotive imports were US$13.5 billion, of which only 15 per cent was vehicles and the remainder parts and components. Around a quarter of all vehicle exports were to other ASEAN countries (as a result of the 1992 ASEAN Free Trade Agreement) and a further quarter to Australia (reflecting the 2005 Thailand-Australia Free Trade Agreement). Perhaps surprisingly, other ASEAN countries are the largest source for Thailand's vehicle imports, followed by the EU and Japan. Other ASEAN countries are the main destination for parts and components exports, followed by Japan and the United States.

   Value-added derived from Thailand's automotive industry is summarized in Figure 2. From just over 5 per cent of manufacturing value-added prior to the Asian Financial Crisis, this value-added share had doubled to 10 per cent by 2014. The industry's employment share within manufacturing is estimated at roughly 4 per cent; the difference between this and its value-added share reflects the high capital intensity of the automotive sector. Commercial vehicles, primarily one-ton pick-ups, currently represent 60 per cent of Thailand's total vehicle output, the same proportion as three decades earlier (Figure 3).

   A striking feature of the Thai industry is revealed in Figure 4. The imported input content of vehicles produced in Thailand has declined steadily since the early 1990s. This decline was occurring already, prior to the abolition of local content requirements (LCRs) in 2000 and continued thereafter until around 2005. The moderate increase since then is due to the high electronics content of vehicles, requiring more sophisticated imports. In 2014, the value (in nominal U.S. dollars) of imported inputs per vehicle was only 55 per cent of its level in 2000, when local content requirements were abolished.

   Earlier studies confirm that the development of the automotive industry has produced spillover benefits to other industries too, such as plastics, metallic industries (including casting and forging) through backward linkages from carmakers to local suppliers (Kohpaiboon 2007).

   Finally, Figures 5 and 6 compare Thailand's automotive production and export performance with neighbouring Malaysia and Indonesia. The main difference between these three countries was in policy. Malaysia and Indonesia were both committed to national car policies. Foreign ownership was restricted and local content requirements were enforced, as in Thailand prior to 1997. In 1999, Thailand's vehicle output was only slightly larger than Malaysia's but, by 2015, it had reached more than three times that of Malaysia. The comparison is even more dramatic in the case of exports. Malaysia's automotive exports have grown only marginally compared with Thailand's. Indonesia has performed better than Malaysia in both respects, but not as well as Thailand.

3. Thailand's Policy Environment for Automotive Development

   3.1 Infrastructure Policy: The Eastern Seaboard Economic Corridor

   By the mid-1980s, it was apparent that the Bangkok port was inadequate to support heavy manufacturing within Thailand. Not only was the port upstream on the Chao Phraya River and unable to receive large ocean-going container ships directly, requiring transshipment of cargoes on smaller vessels, but its road connection to industrial areas passed through Bangkok's notoriously congested traffic. Japanese expertise and financial support were important in designing a new port area, 75 km to the southeast of Bangkok, that came to be called the Eastern Seaboard Scheme, centred on the new port of Laem Chabang (Doner 1991)...