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How Thailand Became an Auto Export Giant
If you want to watch the video, it is below
The automotive industry is one of the world’s most competitive. So Thailand’s success here is worth noting. Taiwan itself had a rather sour experience with the car industry a few years back.
In 2019, Thailand exported nearly half a million cars worth over $9 billion.
They are the 17th largest automotive exporter in the world. The third largest in Asia, and the biggest in Southeast Asia.
Yet the country's success in building and exporting cars and car parts has largely gone under the radar. And that is for a specific reason.
In this video, we are going to talk about how Thailand developed and nurtured an automotive export industry. And why it might not have turned out as successful as desired.
The modern Thai automotive industry starts with the 1960 Industrial Promotion Act. At that time, the domestic industry produced very few cars. In 1961, only 525 cars were made in Thailand.
The majority of the 6,080 units sold in Thailand came from abroad. They arrived in two forms: Fully assembled, or in a Knocked Down format. With the latter, the car arrives in a kit and some person or company has to put it together.
The act raised import tariffs on fully assembled car imports from 80% to 150%. For car kits, the tariffs went from 50% to 80%. With these new rates, the government sought to build up its local ability to substitute for its imports.
Foreign car assembler companies entered Thailand to evade these tariffs. The first was a joint venture between Ford's UK-based subsidiary and their Thailand-based importer, Thai Motor Industry Company.
Others followed, like FSO and Fiat’s Karnasuta General Assembly Company, as well as a joint venture between Nissan and Siam Motors.
Attempting to Build Local Capacity
By 1971, the industry assembled over 9,000 passenger cars a year and supplied half the domestic market. On the surface, it seems like the government executed on its policy goals.
But look a little deeper and what you would realize that it was a bit of a sham. Nothing was being made locally. Rather, companies were importing kits and putting them together. Plentiful government incentives and a low barrier to entry created an oversupply of these assemblers.
Worse yet, the industry was making no progress towards bringing that work home. Tax policies to encourage the production of parts like tires, batteries, radiators, and leaf springs failed to make meaningful progress.
Thus in 1971, new policies were passed to encourage the localization of certain vehicle parts. Car assemblers were required to source at least 25% of their parts locally. These limits were scheduled to take effect in 1973.
To deal with the over-supply of low-value-added domestic assemblers, the government also proposed limits to the number of available models and entry conditions for any future new assemblers.
Had these latter policies gone into effect, they probably would have substantially consolidated and right-sized the market. But it would have come at a cost of substantial industry pain and job losses. Australia faced a similar situation at around this time.
So political pressure from the industry struck those from the agenda. The 25% local content policy came online as proposed. But those limits were not high or specific enough to significantly influence the industry's direction.
Over the next five years, GM and Ford Motor Thailand entered the Thailand assembler market. Domestic vehicle assembly numbers rose four times, representing 65% of sales.
But Thai-made cars remained expensive and poorly made. Furthermore, the industry suffered from over-supply - plants were running at a sixth of their total capacity. At the same time, the country's automotive trade deficit deepened. By 1977 reaching six times what it was in 1971.
Setting The Right OKR
Finally in 1978, the Thai government did two very impactful things. First, they imposed a complete ban on fully-built small passenger vehicle imports and raised the tariffs on kits yet further.
Second, the government extensively negotiated with the various constituencies within the industry to implement a more fully-featured localization policy.
Over the next five years, the local content requirement would be gradually raised. First from 25% to 35%, and then 5% each year until 1983. The goal would be to have cars made with 50% domestic parts. Great, but there was still something missing.
Now, ever heard of something called OKRs? It stands for Objectives and Key Results. It is a goal setting framework famously used by Intel and Google. The Objective is a concrete goal, and Key Results are measurable success criteria for achieving aforementioned Objective. To be honest, I don't care for it that much.
Anyway, one of the bits in OKRS is that you want to set pairs of key results that counter each other. Like if you set one for quantity, you need to have another for quality.
The 1978 Thai law set a quantity Key Result - 50% domestic parts content within 5 years. But without a quality Key Result, there was a risk of achieving the number without achieving the goal. Like the assemblers buying local leather plush for the seats, but importing the most critical bits of the actual car.
Thus, the Thai auto policy also dictated to the local assemblers the specific parts they needed to localize over those coming years: Brake drums, exhaust systems, etc.
This policy was referred to as "mandatory deletion". And it set a collaborative roadmap for both the assemblers and the local Thai car parts industry to follow in the coming future. The 1978 policy was ultimately successful in setting the Thai automotive supply industry on the intended track.
Shakeout and the 1980s
The 1978 policy worked, but not without a little pain. There was no way to avoid a shakeout. The Thai automotive industry consolidated as large assemblers - Toyota and Nissan - managed to meet the new local content requirements.
Smaller ones like Hillman, Simca, and Dodge could not and closed down. In addition, Ford and GM could not meet their sales goals in the country and withdrew from the market.
The government continued managing the industry thereafter - further pushing the vehicle localization limits and chasing economies of scale. For instance, they finally implemented the aforementioned limits to models and series. Starting in 1984, the industry can only produce 42 series and two models.
The government also set up large export and industrial zones in three eastern Thai provinces. With Japanese support, they built a massive infrastructure system anchored by a new port: Laem Chabang. 75 kilometers south of Bangkok and its notoriously bad traffic
This successfully turned the country's east region into a manufacturing juggernaut, second only to the Bangkok urban area.
Then in 1985, Japan and the United States settled the Plaza Accord. It re-aligned and revalued the Japanese Yen upwards. This hit at the country's wages and export competitiveness. As a result, Japan's various manufacturing industries fled abroad.
Thailand, already a close Japanese trading partner, benefitted greatly from this rejiggering of industries. Foreign investment capital after 1985 more than doubled from an annual average of $287 million to $744 million.
The nature of the FDI changed as well, moving into actual local production. Thai-made cars were increasingly made with Thai-made parts.
In 1986, the government moved towards localizing one of the core technologies in a car - the engine. They set local content requirements for diesel engines, aiming to have 70% of the engine built by 1996.
Three large engine suppliers would arise to meet these needs: Siam Toyota Manufacturing, Thai Automotive Industry, and Isuzu Engine Manufacturing (Thailand).
In 1987, a major milestone. Mitsubishi Thailand would become the first Thai company to produce and export fully Thai-built vehicles - some 500 vehicles to Canada. A major milestone.
Liberalizing the 1990s
By the end of the 1980s, the automotive industry was Thailand's most protected. Foreign imports were either heavily tariffed or outright banned.
The booming Thai economy from 1987 to 1991 helped push this sector along - with an average annual growth rate of 10%. It seemed to signal Thailand's success following the standard East Asian import substitution playbook. The same as practiced by Japan, Taiwan, Korea, and China.
In 1991, however, an interesting turn. Anand Panyarachun took power in the country in the wake of a military coup. Anand implemented a series of reforms, including an HIV/AIDS policy, wage increases, and the implementation of a VAT tax.
He began liberalizing the country's automotive industry - lifting some of its protections. Import bans were lifted and tariffs were lowered. Additionally, foreign ownership restrictions were eliminated. Joint ventures with local companies were no longer required, providing they exported 60% of their output.
Why? Two reasons.
The first was to lower prices on domestic automobiles. Consumers and regulators complained that these local content regulations had done little but make cars more expensive for Thai consumers.
The second was to diversify foreign direct investment away from Japan. The Thai auto industry at the time enjoyed substantial protections and benefits. But since they were so closely tied to the Japanese, it was seen as government benefits going to foreigners.
The liberalization measures brought in a flood of South Korean and American competitors. And indeed it forced the Japanese-owned assemblers to streamline and get more market competitive - introducing cars like the Honda City.
From 1992 until 1996 the average growth of the automotive industry in Thailand was around 12% on the back of an overall growing economy. 1996 saw a historic high in domestic car sales. Then came the 1997 Financial Crisis.
The Financial Crisis
Thailand was one of the countries most affected by the crisis. Demand collapsed by 38% in 1997 and a further 60% in 1998, creating a massive capacity glut. Local companies cut costs and laid off workers. Toyota had to inject over a hundred million dollars (4 billion THB) to keep its subsidiary afloat.
The glut in capacity reoriented the country's industry towards exports. The Financial Crisis had devalued the Thai currency, making its products cheaper abroad. 1998 would be the first year that Thailand exported more cars than they made.
The country thereafter seized upon this success and re-positioned itself as an export base for foreign carmakers.
Japanese and American carmakers can retain 100% of the profits from their subsidiaries, while benefiting from the cheap labor and local automotive supplier ecosystem that already existed.
In 2000, Thailand had to drop their local content requirements to meet WTO requirements. In response, the government shifted its policy direction to specialize in specific national champion product variations.
This is in contrast to other countries, which select national champion companies. Think China and its national champions Huawei and CATL.
Thailand chose to champion the pick-up truck category, and the industry responded positively. For instance, Toyota moved their pick up truck production to Thailand, building millions of Toyota Hilux for export to all over the world. They deepened their involvement further by moving over R&D too.
Government policy in recent years has adjusted that direction in light of recent market trends. The country will still heavily focus on pick up trucks, but it has started to invest additional resources in smaller, more efficient "eco-cars" and the EV market.
Today, Thailand is a car exporting giant. It exports over half of its annual vehicle production. They export to dozens of countries, but Australia is their biggest market.
Thailand has been the biggest beneficiary of the fall of Australia's domestic automaking industry. I did a video about it if you are interested in watching that.
But the country also exports hundreds of millions of dollars worth of cars to its Southeast Asian neighbors Vietnam, Philippines, and Indonesia. China, Saudi Arabia, and Mexico are also big markets.
The majority of this output are commercial vehicles - primarily one ton pick-ups. Though this has been steadily changing, again due to the government's promotion of smaller, more efficient "eco-cars".
Furthermore, Thailand's strong supplier ecosystem is likely to keep these foreign automakers in the country for the long run. Thailand has over 2,300 parts suppliers, nearly twice more than what Indonesia and Malaysia have combined. 95% of Toyota Thailand's first-tier suppliers are local.
The Big Problem
The big problem with this exporting success however, is that it is all owned by foreigners. 100% of the management decisions and equity profits from selling Thai-made cars flows up to companies in Japan and the United States.
This traces back to that critical policy change made in the early 1990s. The one that allowed foreigners to own 100% of their joint ventures in the country.
Many of Thailand's auto-suppliers are owned by Thai people, but they remain trapped within the influence of the final assembler - the automaker. Their engineering, design and marketing chops in the consumer space are not competitive. And the sheer size of companies like GM, Toyota, and Honda have kept a Thai-owned brand from ever emerging into prominence.
Probably the most well known Thai brand is Thai Rung Union Car, established back in 1967. The company exports to countries like Iran and North Korea. Guess that says enough.
This is a similar issue to the country's other high-technology industry - hard drives.
Government policy primarily focused on attracting and servicing foreign direct investment - and later on, promoting exports. But it never focused on science and technology policies to upgrade its own indigenous industries once that foreign investment actually arrived.
Think about Taiwan and its microelectronics industry. Yes, they spent money to woo foreign investors like Philips. But they took just as much care to push their domestic companies to improve the technologies they acquired. And to do it on their own.
For instance, at its founding in 1987, TSMC received a 2 and 3 micron fabrication technology from Taiwan's government. They quickly worked on improving it, successfully offering a 1.5 micron technology node in 1988.
The Shinawatra government of the 2000s focused on macroeconomic stability amidst its lower class. They did identify some competitive areas for improvement within industry, but the execution of these policies was lacking. Power was quite centralized, and policy focus wavered from place to place.
Political instability led to policy paralysis for several years. The next significant regime, the Abhisit government, advocated Thailand's cultural power. Thai massages, Thai food, and the like.
This creative economy policy was discontinued in 2014 after a military coup. The new government implemented a new industrial cluster policy, which for the most part remains ongoing.
Modern policies remain rather unclear. And the government has yet to really start focusing on indigenous technology upgrading throughout its native hard drive and automobile industries. As a result, Thai-owned companies remained on a lower tier than their foreign owned counterparts.
Of course, there is no point to legislate the past. Government officials working decades ago probably had no idea that the policies they promoted or not promoted would end up the way it did.
Today, Thailand's economy finds itself in a middle-income trap. Its people's income have been upper-middle class for the past 15 years. 40% of the population have been lifted out of poverty in a single generation - from 1984 to 2010.
However the economy's domestic growth is stagnant and unable to ascend into the upper income tiers. Growth up until the 1990s was an impressive 7%. In recent years it has topped out at 3%.
Policy recommendations are few and far between. But I think a good place to start would be again to follow in its neighbors' footsteps. A focus on technology upgrading - developing the country's science and technology capabilities and transferring them to Thai companies - would be a good start.