Technological Upgrading and Challenges in the Thai Automotive Industry.

• Author: Intarakumnerd, Patarapong

1. Introduction

   Over the past sixty years, Thailand's automotive industry has evolved significantly. In 2019, it ranked first among ASEAN countries, third in Asia (after Japan and Korea), and fifteenth globally in terms of export value. The automobile industry contributes tremendously to the Thai economy, accounting for 10 per cent of the national GDP (worth US$54 billion in 2019). It is also well integrated into global and regional value chains. In 2019, the industry produced roughly 2 million vehicles, of which 50 per cent were exported. The largest export destinations of Thailand's passenger cars are Australia, Indonesia and Malaysia, while automobile parts are exported mainly to Japan, Indonesia and Malaysia (Natsuda and Thoburn 2011; Dowlah 2018). Moreover, the industry creates a large pool of domesdc employinent.

   Nonetheless, the global landscape of the automotive industry is changing, as the automotive industry has evolved considerably over the past decade. Digital and Industry 4.0 technologies have played a vital role in this evolution. Global carmakers and other key industry players are taking note of this evolution and investing heavily in these technologies. Six out of the twenty largest global R&D spenders belong to the automotive industry. Tech giants have entered the industry by using their competencies in digital technology, software, and system and application design as their competitive advantage. Google, for example, is setting the pace with autonomous driving, Apple is developing self-driving software, Amazon is deploying autonomous logistics and delivery, and Microsoft is enabling connectivity-based ecosystem with cloud infrastructure (Fernandez 2019).

   The paper aims to analyse the development of the Thai automotive industry in a changing global landscape, especially under the impact of the Industry 4.0 technologies. Specifically, it will examine the strategies and activities of both foreign carmakers/parts suppliers and local parts suppliers in response to the advent of Industry 4.0 technologies. The structure of the paper is as follows. The next section provides a brief overview of the Thai automotive industry. The third section focuses on the role of government policies in the industry's development. The subsequent section investigates technology upgrading of firms in the industry, while the fifth section explores the key challenges facing the industry under Industry 4.0. The conclusion and policy recommendations are in the last section.

2. An Overview of the Automotive Industry in Thailand

   The Thai automotive industry started in the 1950s, with the repair of imported completely built-up vehicles (CBU), followed by the assembly of imported completely knocked down (CKD) kits by foreign carmakers. Localization of components production, based on original equipment manufacturing (OEM) of lower value-added parts was carried out in the 1960s. Upgrading took place in the 1970s and 1980s, as relatively higher value-added OEM parts were localized. Since the 2000s, foreign carmakers have begun to use Thailand to carry out more technologically sophisticated activities such as advanced process engineering, product development and design by setting up regional technical centres/headquarters (see Table 1).

   As shown in Figure 1, in 2018, there were more than 2,200 firms with 440,000 employees in the automobile industry (Ministry of Labour 2018). All automotive assemblers are subsidiaries of transnational corporations (TNCs) from Japan and the United States, except one locally branded motorcycle assembly, GPX. Japanese assemblers occupy 85 per cent of the overall automobile market, whereas the rest of the market share belongs to American and European assemblers. However, these two groups of assemblers share different market segments. One-ton pick-up trucks and eco-cars are the main export products for Japanese assemblers, while American and European assemblers focus on large and luxury cars.

   There are 523 auto parts suppliers in Tier-1, of which 68 per cent belong to suppliers with foreign majority ownership. Only 32 per cent are either wholly Thai-owned or Thai majority-owned. Tier-1 suppliers are dominated by a small number of foreign global mega-suppliers, which are concentrated in "functional" parts such as engine, electrical transmission and suspension parts. These auto parts generate higher value-added when compared with "non-functional" parts such as body parts and accessories, which ai-e produced mainly by local Thai suppliers. Tier-2 and Tier-3 comprise 1,667 local suppliers with insufficient technological capacities to meet the global standard level to design and manufacture modules for assemblers (Intarakumnerd 2017).

   Over time, the Thai automotive industry has enhanced its participation in global value chains (GVCs). Thailand's domestic value-added content of exports (US$2.1 billion in 2015) is the largest in the region, thanks to the geographical advantage connecting Thailand to regional and global automobile markets, relatively extensive local supplier networks and high skill level of Thai workers. The domestic valueadded content has increased twentyfold between 1990 and 2015, while its share of total value-added has risen from 31 to 48 per cent. At the same time, the foreign value-added content of exports has increased twentyfold during the same period, as the Thai automotive industry depends extensively on imports of high value-added contents.

3. Key Policies to Promote the Thai Automotive Industry

   This section discusses the policies aimed at promoting the automotive industry and the roles of sector-specific promotion agencies, public research institutes and universities.

   3.1 Policies to Promote the Automotive Industry

   Such policies can be divided into four phases as follows:

   Phase I: Import Substitution and Entry into GVCs. Import substitution was used in the early 1960s to promote the development of the automotive industry. Thailand's investment promotion law was revised to attract automotive assemblers to the country. In 1969, the government issued a minimum local content requirement of 25 per cent on automotive assembly to increase investments in the local production of automotive parts. Before the implementation of this condition, some Japanese parts makers had already invested in Thailand to produce spare parts. Completely knocked down (CKD) of both passenger and commercial cars were imported from Japan to be assembled locally. After the local content requirement was initiated, carmakers had to purchase locally. Nevertheless, Japanese carmakers could not depend on Thai-owned firms as they could not meet their quality standards, and requested affiliated automotive parts suppliers from Japan to set up plants in Thailand.

   In the late 1970s, a localization policy was promulgated with the goal of lowering the trade deficit and boosting the industry. On top of import bans and raising tariff rates on CKDs and CBUs, the government restricted the number of automotive models and increased the local content requirement from 25 to 50 per cent for passenger cars. Since the Thai automotive industry suffered from low demand in the early 1980s, the carmakers preferred to produce the automobiles themselves to utilize their excess production capacity. To further enhance the local production of the automotive parts, the government increased the local content requirement to 54 per cent for passenger cars and 60-72 per cent for pick-up trucks (Doner 1992). This policy gave rise to new investments in automotive parts and provided business opportunities to local parts suppliers to enter GVCs.

   Phase II: Massive FDI Inflow, Export Promotion and Product Specialization. In the late 1980s, the appreciation of the Japanese yen raised the cost of key automotive parts imported from Japan, thereby triggering the relocation of Japanese parts producers to Thailand in order to reduce production costs. There was a massive increase in FDI inflows, and this enhanced the degree of TNCs' participation in the Thai automotive industry for both carmakers and parts suppliers. Japanese parts suppliers established new factories in Thailand to supply new and more sophisticated parts. In the mid-1990s, the Thai government also designated one-ton pick-up trucks a "product champion". Special tax incentive schemes and other promotions were initiated, leading to a significant increase in investment and later, export of this product. Thailand subsequently became the second-largest production site of pick-up trucks (after the US).

   Phase III: Liberalization and Technological Upgrading. Thailand faced a major economic crisis in 1997. To assist affected companies by enhancing their liquidity, the country's Board of Investment eliminated the limits on foreign shareholding and local content requirements in November 1997. Prior to this change, majority share ownership had to be held by a Thai national. Many investors, typically Japanese, benefited from this major policy change. From November 1997 to September 2000, foreign partners in 164 automotive firms transformed their respective shareholding structure from minority to majority shareholders. FDI inflows in the Thai automotive industry were higher after the 1997 Asian Financial Crisis and reached a record high by 2007.

   In the late 2000s, economically and environment-friendly car or "eco-car" was designated the second product champion. Specific preferential incentives with the condition of producing four out of five engine components locally were given to interested carmakers. The condition demonstrates an element of selective or targeted policy to induce the production of technologically sophisticated parts locally. The new product champion was a part of the "Master Plan for Automotive Industry (2012-16)", which aimed to establish Thailand as a global "green car production base". Consequently, Thailand became the centre of eco-car production in Asia. Nissan's March and...