Tough road lies ahead for auto-parts makers
Rising competition from Japanese firms causes concern
While a larger number of foreign auto-parts makers are planning to relocate their production bases to Thailand, local companies need to swiftly adjust in order to maintain their market presence.
The auto industry remains one of the country's "shining star" industries, thanks to record domestic sales of 1.4 million vehicles last year coupled with significant exports.
Auto-parts exports by local parts makers and auto manufacturers from Thailand amounted to more than Bt16 billion in January, growing by 6 per cent compared to the corresponding period last year. This is made up of Bt12.5 billion worth of components, Bt2.2 billion worth of engines, Bt1.2 billion worth of spare parts, Bt100 million worth of moulds and jigs, plus another Bt65 billion for other parts.
The growth in the kingdom's auto market has attracted a larger number of investors in automotive parts, especially from Japan. They have applied for investment privileges in Thailand. Many of these companies are relocating their production bases from Japan to Thailand due to the East Japan earthquake and tsunami in 2011 and the attractive investment promotions offered by the Board of Investment (BoI).
However, the influx of Japanese auto-parts makers into Thailand has caused concern among Thai auto parts manufacturers due to the rising competition.
Thai Auto Parts Manufacturers Association (TAPMA) honorary president Prasartsilp On-aht revealed that the entry of Japanese investors will affect domestic parts makers, particularly SMEs that are not well funded and could be forced out of the market. As much as 70 per cent of TAPMA members (500 companies) are SMEs while the remaining 30 per cent are large companies.
He said the entry of Japanese parts makers will cost Thailand, especially in terms of the market and competition. Local SMEs will receive decreased orders and could be forced to sub-contract to larger manufacturers. This will result in lower income for SMEs while foreign companies will enjoy the benefits, he said.
According to Prasartsilp, Thailand's auto parts industry has been growing along with the expanding auto market, with further growth potential expected. But it's not just Thailand that is attractive to Japanese investors, other Asean markets like Indonesia, Vietnam and Myanmar are highly attractive too.
"Japanese companies did not relocate to Thailand because we are the centre of Asean, but because of the slowing economy in Japan as well as lower labour costs here," he pointed out, adding that many of the relocations were originally targeted for China, but later moved to Thailand due to the Senkaku Islands conflict between China and Japan.
Thai Automotive Institute director Patima Jiraphaet said a large number of Japanese investors flowed into Thailand to study investment opportunities and apply for privileges with the BoI.
He said the Thai auto-parts industry has been growing continuously, while the upcoming Asean Economic Community in 2015 has made Thailand an interesting country for foreign investors.
Although the kingdom's disadvantage is its higher production costs compared to other Asean countries, it is not a problem for investors due to the high skill level of the Thai workforce, as well as quality and modern technology.
He said Indonesia is a potential competitor for Thailand, although presently Indonesian auto-parts production is for domestic use only.
"Personally, I think that Japanese investors see the potential of Thailand as a strategically located market within Asean, which helps in terms of logistics. There are plans to build a high-speed railway system from China, and Thailand borders Myanmar and Cambodia, which gives it advantage over other countries," he said.
Most of the investments made by Japanese companies are joint ventures, which benefit Thai investors due to the availability of funds for expansion, modern technology and the opening up new markets in and out of the country.
In return, foreign investors will benefit from Thai local content. Thai auto parts are also shipped back to Japan, and exported to other countries such as Indonesia, Malaysia and India.
"Thai SMEs will survive because they have their strong points as well as flexibility in management in order to adjust to the higher market competition," Patima said.
Patima believes Thailand's auto-parts industry will continue to grow. This could be a golden year for the industry with a steady flow of orders from new auto manufacturers.
"In the eyes of investors, Thailand is modern and has become more international. That is why Thailand needs to adjust to the changing world situation," he said.
THAI AUTO PARTS INDUSTRY (January 2013)
Value Y-o-Y Change
Total auto-parts exports Bt16.226 billion 6%
Comprised of the following:
Parts and components Bt12.537 billion
Engines Bt2.295 billion
Spare parts Bt1.230 billion
Moulds and jigs Bt100 million
Other parts Bt65 million