Strengthening localisation capacity (1978-1990)

Further localisation policies appear to have been driven primarily by a desire to reduce trade deficits. Firstly, the Ministry of Commerce imposed an import ban on CBU PVs in January 1978, and at the same time, the Ministry of Finance increased the tariff rates on CBUs and CKD kits (Abbot 2003, Higashi 2000). More importantly, a more explicit localisation policy for the automotive industry was introduced in 1978 after extensive negotiations among government officers, FTI, assemblers, and Thai parts firms. Local parts manufacturers became a powerful lobby and established the Thai Automotive Parts Manufacturer’s Association (TAPMA) in 1972 (Doner 1991, Higashi 2000).° As a result of the strong influence from TAPMA, MOI implemented the following two localisation measurements in 1978:

• • an additional LCR for passenger cars was revised from 25% to 35% in the first two years, then to increase by 5% every year until 1983, eventually reaching 50% (see Figure 5.10), and LCR for CVs with windshields was revised from 20% to 45% (Higashi 2000, Kaosa-ard 1993); and
• • to force assemblers to localise specific parts production, it introduced a mandatory deletion scheme, targeting specific parts, such as brake drums and exhaust systems, which were deemed able to be produced locally (Doner 1991).

These measures stimulated local assemblers to increase investment in components production (Busser 2008). The policy also resulted in a division among the automotive assemblers in the market. Large assemblers such as Toyota and Nissan were able to increase their LC ratios. By contrast, smaller assemblers such as Hillman and Simca failed to meet the LCRs (which were harder to meet for PVs than for CVs) and were eventually eliminated from the market in the late 1970s (Doner 1991), thus helping to reduce the multiplicity of models and sub-optimal production runs often associated in the automotive industry with import substitution in protected markets. In addition, two American giant automotive producers - Ford and GM - also withdrew from the Thai market due to sales slumps in 1976 and 1977, respectively (Adachi 1987).

In 1984, the LCRs reached 50% for PVs and 45% for CVs, which were eventually increased to 54% for PVs and 51% for CVs in 1987. Furthermore, MOI began to regulate the series and models of domestically assembled PVs by limiting to 42 series, and two models for each series, in 1984 (Higashi 1995 and 2000). In 1986, the Thai government specified locally manufactured components for PVs and also decided to commence localisation of diesel engines. The government in 1989 mandated assemblers to use locally made diesel engines for their pickup trucks production. This aimed to set an initial 20% localisation rate for engine

Figure 5.13 Production and Sales of Vehicles in Thailand, 1978-1990.

Source: Adapted from Higashi (2000: 146) and Fourin (2011: 189).

Note: Number of vehicles, PV (passenger vehicle), CV (commercial vehicle), TP (total production).

parts, which eventually increased to 60% for BOI projects and 80% for MOI projects by 1995 (Ueda 2007: 98).⁶ Vehicle production in Thailand increased slowly from the late 1970, and reached over 100,000 units for the first time in 1983 (see Figure 5.13). While the local sales exceeded local production until 1987, vehicle production has overtaken sales since 1988. It grew rapidly in the late 1980s, reaching over 150,000 units in 1988, to over 200,000 units in 1989, and finally to over 300,000 units in 1990.

Liberalisation, exporting, and the 1997 Asian financial crisis (1991-1999)

Up to the end of the 1980s, Thailand’s automotive sales had depended mainly on the growth of the domestic market. Vehicle exports started in 1987, followed by the exports of some components (Abdulsomad 1999). Rapid economic growth in Thailand in the late 1980s saw a rapid increase in vehicle demand, and exports too increased somewhat⁷ in the context of a general Thai export boom from 1986 to 1996 (that is, up to the 1997 AFC) (Lauridsen 2004: 570-572). Domestic vehicle production exceeded domestic sales for the first time in 1988 (see Figures 5.13 and 5.14), but Thai automotive production growth could not been seen as export-driven. During this time, imports of CBU PVs under 2300 cc remained banned, PVs over 2300 cc had a 300% tariff, and tariffs on CKD PV kits were 112% (Kaosa-ard 1993).

The beginning of liberalisation

A turning point in Thailand’s automotive industrialisation policies was associated with the establishment of the Anand Panyarachun government after a military coup in February 1991. The new government for the first time introduced liberalisation policies in the automotive industry, lifting the ban on imports of CBUs and substantially reducing tariffs on both CBUs and CKDs (see Figures 5.8 and 5.9). Investments for new establishments of assembly plants for PVs were approved. Foreign ownership in the automotive assembly industry was deregulated, allowing 100% foreign ownership in place of the earlier limitation to up to a maximum of 49% (enacted in 1979), provided they exported 60% of their total production. In 1994, the government also introduced a tax exemption measurement for export activities (Fourin 2000: 35, Yoshimatsu 2002b: 130).

These liberalisation policies had several purposes, one of which was to lower domestic automotive prices and increase domestic competition in part by attracting inward FDI from non-Japanese automotive assemblers. During this time, all assemblers, except for Thai Swedish Assembly (with Volvo affiliation), were associated with Japanese capital and enjoyed oligopolistic advantages in the market. Indeed, the vice minister of MOI, Vira Susangkarahan, criticised the LCR policy on the grounds that it did not facilitate the growth of automotive industry in Thailand, but just created higher automotive prices. In short, it was argued that the automotive industry had received a lot of protection, while consumers received no benefits - LCRs generating apparently ‘bad’ backward linkage effects.⁸ The Japanese-affiliated assemblers were viewed as receiving excessive rents under a virtual cartel with government protection (Ikemoto 1994: 173). Nevertheless, other measures were put in place, which were relied on to increase competition and reduce excess profits. LCRs were actually raised in 1994 (see Figure 5.8), but, finally, in 1996, the government announced their abolition by July 1998 (Fourin 2000: 35, Terdudomtham 2004: 39-40). That is, LCRs were to be abolished prior to the WTO target date, though eventually the abolition was delayed until 2000.

These liberalisation policies appeared to succeed in attracting more inward FDI: the American big three assemblers - Ford, Chrysler, and GM - decided to establish their own assembly plants in Thailand as regional hubs in Asia (Abbot 2003). Auto Alliance (a JV between Ford and Mazda) and GM relocated into the newly developed Eastern Seaboard Industrial Estate. Japanese producers, such as Toyota and Honda, decided to expand their production capacity in the suburbs of Bangkok by establishing new plants. In addition, American components suppliers such as Dana, Visteon, and Delphi also followed the American assemblers in Thailand (Terdudomtham 2004).

Impacts of the 1997 Asian financial crisis

The Thai automotive industry had developed rapidly with the liberalisation policies since 1991, but with the AFC in 1997, the number of vehicles sold in

Thailand decreased rapidly (see Figure 5.14). As a result, 600 local firms either went bankrupt or were taken over by foreign firms. A total of 20,000 jobs were lost in the industry in the period 1997-1999 (Abbot 2003: 143).

The AFC, however, proved to be a major turning point for exports. In response to the domestic sales slump, and aided by the substantial depreciation of the Thai baht during the crisis, automotive producers shifted to increasing exports well beyond the modest levels achieved by the early 1990s (see Figure 5.14). The baht depreciation also potentially helped domestic parts suppliers by increasing the cost of imported components.

In addition, foreign assemblers increased their equity share in their JVs and assisted their parts suppliers by providing various kinds of financial support (UNCTAD 2001). The Thai government changed the investment regulations in 1997, allowing foreign-majority ownership in joint ventures in order to encourage foreign investment. At the same time, it introduced new tax policies to reduce the budget deficit, increasing VAT and adding 5% excise tax on vehicles (see Figure 5.11). The Thai government sharply increased tariffs on CBU vehicles (see Figures 5.8 and 5.9), which resulted in a large reduction of imports into the Thai market, from 16,000 units in 1997 to 2,549 units in 1998 (Fourin 2000: 42). Also, in order to enhance institutional (policy) and research capacity in the automotive industry, the MOI established the Thailand Automotive Institute (TAI) in 1998.

Figure 5.14 Production, Sales, and Exports of Vehicles in Thailand, 1991-2018

Note: Number of vehicles, PV (passenger vehicle), CV (commercial vehicle), TP (total production) Source: Adapted from Fourin (2017: 35) and Fourin (2019: 27)

In 1997, rhe government announced the postponement of the abolition of LCRs to January 2000. At the culmination of its LC policy, LCRs were 72% for pickup trucks with diesel engines, and 54% for PVs in 1994 (see Figure 5.10). Before the abolition, some vehicle models were able to meet these requirements. In the case of, Toyota, for example, their strategic PV in the ASEAN market, the Soluna model, and their most popular pickup truck, the Hilux model, had achieved over 70% local content in 1999 (Fourin 2000: 34).⁹