Thailand auto industry to benefit hugely from AFTA

The 5-per cent tax on automobiles and parts traded among the six founding Asean countries -Thailand, Malaysia, Singapore, Brunei, the Philippines and Indonesia - was abolished on January 1, in a move towards turning Asean into a single market.

This would help Asean nations become more competitive against other Asian giants - particularly China and India.

Despite the global recession last year, auto sales in China reached 13 million units and in India 2.2 million units, while combined sales in Asean hit 1.8 million units.

Since major markets such as the US, Europe and Japan are saturated and stagnant, due to the financial crisis, any growth in the auto industry would have to take place in the Asian region, analysts say.

Adisak Rohitasune, vice chairman of the Federation of Thai Industries and vice president of Asian Honda Motor, says the liberalisation of the auto and parts trade will not only help Asean manufacturers, but also draw investment into the region.

"This will help increase sourcing of raw materials and parts within the region, and expand the automobile market across the region," he said.

With the tariff barrier in Asean markets lifted, it would not be surprising to see a particular product being manufactured in one country and exported to other countries within the region, he said.

"But it will also depend on the policy and risk management of each company. For Honda, we have assembly plants in several Asean countries and have been utilising the Aico (Asean Industrial Cooperation) scheme and AFTA to dramatically lower the cost for purchasing parts. This has helped strengthen our manufacturing in each country and raised the level of competitiveness," he said.

According to Kasikorn Research Centre (KResearch), Thailand's exports of auto parts could expand by 18-22 per cent this year to Bt150 billion-Bt155 billion after plunging by 23 per cent to Bt127 billion last year due to drop in demand from the global recession.

"OEM (original) auto parts will be the main category benefiting from these changes, given their high export value that is nine times higher than REM (spare) items," it stated in research published earlier this month.

KResearch said that among the six founding Asean countries, Indonesia is expected to be the most promising market for Thai parts exports, followed by Malaysia and the Philippines.

"Auto parts for small Japanese passenger cars and commercial vehicles, such as electronic components, engines and drive-train components that are of high value, have been embraced by these markets for their OEM quality. In addition, relocation of manufacturing bases of foreign automakers into Thailand is likely to boost demand for locally-made REM parts, especially for export-oriented production," KResearch said in its report.

Ninnart Chaithirapinyo, vice chairman of Toyota Motor Thailand, the country's largest producer and exporter of vehicles, said the scrapping of the import duty could help the Asean auto market increase by as much as 10 per cent.

"Thailand would benefit greatly from this, with more income for the government from the increased excise, value-added and corporate taxes," he said.

The arrival of new models produced under the Thai government's eco car project will also serve as a boost for Thai auto exports to Asean.

Nissan will be the first company to launch an eco car in March, while Honda is expected to unveil its model at the end of this year or early next year.

Other companies in the project are Mitsubishi, Tata, Suzuki and Toyota.

According to the eco car guidelines, each manufacturer must produce at least 100,000 eco cars a year by the fifth year of production, with 50,000 units exported.

Setbacks

However, the AFTA scheme also brings concerns, particularly for parts makers with high production costs and no research and development facility.

"Thai auto parts manufacturers suffer from the high import duty on raw materials, mainly steel and plastics," Adisak said.

"This means that pure Thai suppliers (1st, 2nd and 3rd tiers) need to raise their competitiveness in order to survive," he said.

Presently local parts makers have to bear higher costs than others due to raw material import duties and eventually lose competitiveness, since imports from Asean are not taxed.

KResearch also noted that local suppliers may be challenged by an influx of truck and bus parts imported from Indonesia.

"The Thai government needs to adjust the import duty structure in order to main harmony between the upstream and downstream industries," Adisak said.

Nevertheless the Thai auto industry still has brighter potential than those of other Asean nations, and cutting out the 5-per-cent import duty does not pose a big difference in retail pricing of vehicles sold within the region.

"The import duty for AFTA has been incrementally lowered over the years, and there is not much difference between 5 per cent and no import duty," he said.

Automakers in Thailand, including Honda, have been planning and running operations incorporating the AFTA scheme for years.

"Since 1996 we've been taking part in the Aico scheme which was a preparatory stage for AFTA. When AFTA was first implemented in 2003, the CEPT (Common Effective Preferential Tariff) was lowered to 5 per cent and we started to export more vehicles from Thailand to the Asean region," he said.

Asean is the largest export market for Honda, representing 78 per cent of the company's auto exports last year.

Motorcycle market not affected

Adisak said that since the motorcycle industry in each Asean country is mostly self-reliant in parts sourcing, AFTA would not mean much of a change.

"There may be some alterations in the purchasing of common parts, which we have already acknowledged and adjusted our planning for," he said.

The Asean motorbike market could expand as a result of AFTA, but not by as much as the auto market, he said.

"The motorcycle markets in many Asean countries, especially Thailand, are already saturated and for the market to expand there needs to be new models to stimulate sales," he said.

Next step

While AFTA is simply an import duty elimination scheme among Asean members, the next level of integration lies in the Asean Economic Cooperation (AEC), which is expected to completely transform Asean into one economic community by 2015.

"This is deeper than just tax reductions and will result in a freer environment for investors," Adisak said.

Apart from import duties, AEC covers services, investment relocation and labour issues.

With investment shifting from developed regions such as the US, Europe and Japan to Asia, Asean would benefit from AEC, which would serve as an incentive to attract investors.

Thai suppliers that are capable enough can also set up operations in other Asean countries, while those that are weaker may need assistance from parent companies.

"The next challenge for automobile companies in this region (as well as around the world), is the coming of the alternative energy era, and we must be prepared for this in order to be able to draw in investment and make Thailand a window to the Asean region," he said.