Production Networks, Trade and Investment Policies, and Regional Cooperation in Asia: A Case Study of Automotive Industry in Thailand

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Concurrent Session: Regional Production Networks and Implications for (Domestic) Trade and Investment Policies and Regional Cooperation in East Asia Production Networks, Trade and Investment Policies, and Regional Cooperation in Asia: A Case Study of Automotive Industry in Thailand Samart Chiasakul Faculty of Economics Chulalongkorn University, Thailand Abstract This paper intend to investigate the production network of automotive industry in Thailand, by connecting up the organizational dimension of MNC network (both internal and external) with the geographical dimension. The periods under analysis, are divided into 3, per-1991 period, liberalization & deregulation period, industrial restructuring for closer regional. The pre-1991 period, the production networks was limited by small domestic market, limited model of vehicle, high tariffs. This led the MNCs auto assemblers to reorganize its networks inside the companies to supply CKD parts to its subsidiary in Thailand. It was only in 1971 when parts and component industry were promoted and overseas operations seen as integral part of complex network of flows of parts and components, products, resources, people information among interdependent units. The liberalization and deregulation policies adopted by the government have provided new environments for automotive industry such as lowering import tariffs, allowing more models of vehicle, and promoting supporting industries, and etc. The policies have strengthened the local production networks in preparation for the changing trend in global sourcing. Complementary products have been exchanged through the networks of auto assemblers under the Asean’s AICO programme. The industrial restructuring period started immediately after the eruption of crisis in 1997 when fall-out in demand left the expanded capacity underutilized, and many SME’s parts and component suppliers went out of business. Abolishment of local content requirement have encouraged more production of automobile for export. Intra-trade among members of Asean member countries have enabled the market expansion in the regions, with more types of vehicles traded among leading auto assemblers. It is expected that the tariff rates among member countries will be reduced to 0.5% in 2010. Thailand proposed that the tariff reductions be implemented sooner (in 2005-2007) in order to promote more investments and trade within the Asean region. 1 The 6th ADRF General Meeting, 2004 Bangkok, Thailand Concurrent Session: Regional Production Networks and Implications for (Domestic) Trade and Investment Policies and Regional Cooperation in East Asia Contents Page I. Introduction II. Structure of Thai Automotive Industry 2.1 2.2 2.3 2.4 Number of Auto Assemblers and their production capacity Parts and Components Industry Locations of Automotive Industrial Networks in Thailand Employment in the Automotive Industry 2 4 6 8 1 III. Changing Production Networks in Automotive Industry 3.1 3.2 3.3 The Creation of the Auto Industry Production Network in Thailand (Pre-1991 period) Liberalization period Industrial Restructuring For Closer Regional Networks (Since 1997) IV. Performance (Production and Export Structure of Thai Automotive Industry) 4.1 4.2 4.3 4.4 4.5 Production and Domestic Demand Thailand As a Production Base of 1 ton Pick-up Capacity utilization Thailand Vehicle and Part Export Prospects of External Trade of Thai Automotive Industry 19 20 22 22 27 12 15 11 V. Industry Trend 5.1 5.2 5.3 5.4 5.5 Consolidation and Strategic Alliances The Module System Approach Persistent price pressures Shifting design capabilities Emphasis on R&D initiatives 29 29 30 30 31 Concurrent Session: Regional Production Networks and Implications for (Domestic) Trade and Investment Policies and Regional Cooperation in East Asia page VI. Government’s Roles and Policies 6.1 6.2 6.3 6.4 6.5 6.6 Government’s Roles and Production Network in Automotive Industry Changing roles of the government Government’s policies on regional Cooperation Comparison of Tax structures in Automotive Industry Free Trade Area Agreement Clustering system 32 35 36 37 37 40 41 31 Conclusion and Recommendation References Concurrent Session: Regional Production Networks and Implications for (Domestic) Trade and Investment Policies and Regional Cooperation in East Asia I. Introduction The automotive industry in Thailand had started in 1962, and experienced a transformation. Four key influences govern the change. Firstly, the global geography of the industry is being transformed by the rapid growth of automotive production and consumption in emerging markets. Over the next decade, the major auto companies are expecting much of the global industry to come in the large emerging markets namely, China, India and the Asean. Secondly, relationships between assemblers and suppliers are being restructured and globalized. The development of global supplier networks is increasing the centralization of design activities in the core operations of the leading component producers, while decentralizing production activities around the world. Thirdly, liberalization policies have greatly freed up the flow of capital into Thailand, since 1991 when Thai government under the close cooperation with Thai Automobile Industry Association (TAIA) has gradually deregulated the formerly protected and inward focused industries and integrated into broader regional and global networks of production and consumption. Fourthly, the financial assistance extended by the major assemblers to their subsidiaries, as well as to their part-makers in Thailand, in order to keep them in operations during the crisis. Moreover, the capital inflows had enabled the utilizations of expanded production capacity, which integrated them into the Asean regional programs of brand-to-brand exchanging projects under the regional production networks. This paper intends to examine the transformation of automotive industries in Thailand, where roles of government has been closely linked with the privately-run institutions, namely Thailand Automotive Industry Association (TIA) and Thailand Automotive Institute, in promoting the automotive industry. The Thai automotive industry has shown enormous dynamism in 1990s, when the policy of liberalization and deregulations were adopted to comply with the period of global sourcing in the production networks. Economic crisis in 1997, followed by deep recession in 1991 led to major restructuring as some Japanese companies had rescued part and component suppliers in their production networks in Thailand, and also used regional networks to promote capacity utilization and economies of scale of the newlyexpanded production capacity of the Thai automotive industry. The paper is organized to answer the main research problem, with the following objectives: (1) To examine the evolution of production network in Thailand during the periods which are divided into 3 periods, firstly, pre-1990 period (the creation of automotive production-network in Thailand). Secondly, the liberalization and global sourcing period. Thirdly, the industrial restructuring for closer regional networks. (2) To investigate the changing pattern of intra-trade and investment in the Asian region, and Asian countries with China. (3) To analyze the changing trend of global automotive industry, shifts of production base to Thailand, and possibility of achieving the vision of Thailand "Detroit of Asia". (4) To analyze the policy of setting up of "Automotive Clustering" and its 1 The 6th ADRF General Meeting, 2004 Bangkok, Thailand Concurrent Session: Regional Production Networks and Implications for (Domestic) Trade and Investment Policies and Regional Cooperation in East Asia implications of promoting part and component suppliers, trade and investments in the region. II. Structure of Thai Automotive Industry 2.1 Number of Auto Assemblers and their Production Capacity The automotive industry in Thailand emerged from the import substitution policy adopted in 1960, when the government had enacted the Industrial Promotion Act, providing incentives for foreign investors to set up automobile plant in Thailand. As a result, the first automotive assembly plant, Anglo-Thai Motor Company opened its plant in Thailand, which started operation in 1961. After more than 40 years of development, the number of assembly plant in Thailand increased to 12, of this Japanese assemblers accounted for 50%. These auto assemblers represent various global brands; as given here; (1) European brand : BMW, Volvo, Daimler, Volkswagen, Citron, and Peugeot. (2) USA (3) Japan : GM, Chrysler, Ford. : Toyota, Honda, Isuzu, Nissan, Mitsubishi, Hino, Mazda. The production capacity is 1.2 million units per year, of this one-ton pock up, the production champion of Thailand accounted for 54.5% of the total. Details of production capacity in 2004 are given in Table 1. Table 1 Production capacity of Thai Automotive Industry in 2004 PC 1 Ton P/V 1. Toyota 126,000 170,000 2. Mitsubishi 50,000 100,000 3. Isuzu 150,000 4. Auto Alliance 2,700 132,300 5. Honda 120,000 6. Nissan 35,200 66,400 7. General Motors 60,000 40,000 8. Hino 9. Daimlerchrysler 16,300 10. YMC Assembly 12,000 11. BMW 10,000 12. Volvo 10,000 Total 440,200 658,700 Source : Thailand Automotive Industry Association. Note : PC-passenger car CV - commercial vehicle PV - pick-up CV 38,000 20,200 20,000 2,400 28,800 109,400 Total 334,000 170,200 170,000 135,000 120,000 102,000 100,000 28,800 16,300 12,000 10,000 10,000 1,208,300 2.2 Parts and components Industry 2 http://www.adrf.org Asian Development Research Forum Concurrent Session: Regional Production Networks and Implications for (Domestic) Trade and Investment Policies and Regional Cooperation in East Asia In 1971, the government made a series of announcements to progressively increase localization. There was a boom in auto parts and components production operated mainly by Japanese and local sub-contractors. However, the localization policy was not effective enough due to inadequate tariff incentive for CKD assembly to complete with CBU import. Moreover, too many car model made the local assemblers run the plant at below the economies of scale production level. In order to increase the economies of scale for local production, the government production of auto parts and components, prohibiting the establishment of new assembly plants for passenger vehicles, imposing ban on imports of CBV passenger cars, reducing number of model for passenger cars, raising import duty on CKD kits from 50% to 80% and simultaneously revising local content requirement ratios upward. The local contents are settled at 54% for passenger cars, and 62% for commercial vehicles. Structure of Thai auto parts and component industry and classified by relationship-tier, characterized by the relationships in terms of ownership, technical assistance and nationality, as illustrated in Fig 1. Assembler (Car 12 companies) Foreign Tier 1 (709 companies) Tier 2, 3 Lowers (1,100 companies) J/V Foreign Thai Pure Majority Majority Thai 287 Co. 68 Co. 354 Co. Local suppliers LSEs SMEs Fig 1. Structure of Relationship between Auto-Assemblers and Part Component Suppliers Source: Thailand Automotive Industry Association. Structure of Thai auto parts and component industry; (1) First-tier of parts and component industry comprises 709 companies, with 40% of these are owned by the majority of foreign companies, 100% Thai-owned companies constitutes 50%. Moreover, it is interesting to observe that, the value of 1st-tier contract works extended to Thai companies was limited to only 8-10% of the total, reflecting the lower technical capacities possessed by Thai subcontractors. Local subcontractors were also in a commercially disadvantageous position. Subcontractors are commercially controlled, particularly in the case of exclusive subcontracts. It was because of this asymmetric relationship that parent companies of auto assemblers interfered with production cost details and demanded cost cut, and were able to create competition among subcontractors. Many subcontractors claimed that the relationship between sub-contractors and auto-assemblers is an unfair one. (2) The second-tier suppliers are mainly Thai companies, with the total number 3 The 6th ADRF General Meeting, 2004 Bangkok, Thailand Concurrent Session: Regional Production Networks and Implications for (Domestic) Trade and Investment Policies and Regional Cooperation in East Asia of 1000. They are mostly family owned and inward looking, even they produce quality components. They are already feeling the pressure from the local assemblers which have endless calls for price reduction. Table 2, show the number and percentage share of 1st-tier suppliers, categorized by parts functions, and nationality of equity owners. It is clearly seen that foreign owned companies are engaged in base engine and safety parts in the local content requirement. Table 2 First Tier Suppliers categorized by Parts Functions Group Pure Thai (%) Thai Majorit y (%) 13 19 12 3 14 5 5 12 7 10 Foreign Majorit y (%) 55 52 55 60 38 49 59 49 30 44 Total (%) 100 100 100 100 100 100 100 100 100 100 63 52 52 35 119 39 22 382 327 1,091 Unit : % Total Number 1) Engine parts 33 2) Electrical parts 29 3) Drive, Transmission and 33 steering parts 4) Suspension and Brake part 37 5) Body parts 48 6) Accessories 46 7) Mould & Die 36 Total 1-7 39 8) Other 63 Total 1-8 46 Source: Thailand Automotive Institute. 2.3 Locations of Automotive Industrial Networks in Thailand Investment promotional privileges and relocation incentives provided by the government, coupled with their production and procurement system had put the automotive networks at the existing locations. These areas are sometimes car production base, or cluster of automotive industry. One area (in Samutprakarn) which is the production network of the leading Japanese auto-assemblers and called by some logistic expert as the Automotive Industry cluster of Thailand. According to the mapping of locations, automotive assembly plants, parts and components are highly concentrated in the provincial areas, within the 70 kilometrs radius of the Bangkok. After 1997, the newly promoted automotive assemblers had invested in the new industrial estates in the Eastern provinces of Thailand which are around 230-250 kms from Bangkok. Table 3 Location of Automotive Assembly Plants in Thailand 4 http://www.adrf.org Asian Development Research Forum Concurrent Session: Regional Production Networks and Implications for (Domestic) Trade and Investment Policies and Regional Cooperation in East Asia Chonburi Samatprakarn - MMC - Toyota Motor Sittiphol Thailand (Mitsubishi) - Isuzu Motors - Siam Nissan Automotive - Siam V.M.C. Automobile - Thai Auto Work Samutsakorn Bangkok - Thai Rung - Bangchan Union Car General - Thai Swedish Assembly (Volvo) - Hino Motors - Thonburi (Thailand) Auto Assembly Chachoengsao Rayong - Toyota - Auto Motor Alliance Thailand (Thailand) - GM (Thailand) Source: Thailand Automotive Industry Association. 5 The 6th ADRF General Meeting, 2004 Bangkok, Thailand Concurrent Session: Regional Production Networks and Implications for (Domestic) Trade and Investment Policies and Regional Cooperation in East Asia Table 4 Location of Automotive Part and Component Suppliers Chonburi Total Supply = 55 Body part = 25% Engine parts = 22% Drive Transmission & Steering part = 15% Electrical parts = 9% Accessories = 5% Suspension & brake parts=4% Mould & Die = 4% Other = 16% Bangkok Total Supplier = 232 Body part = 9% Engine parts = 6% Electrical Parts = 6% Drive Transmission = 6% Steering part = 6% Accessories = 6% Rayong Total Supplier = 41 Body parts = 24% Engine parts = 15% Drive Transmission & Steering Part = 15% Suspension & brake part =12% Electrical parts = 10% Accessories = 7% Mould & Die = 2% Other = 15% Samutprakarn Total supplier = 158 Body parts = 22% Electrical parts = 15% Engine parts = 8% Drive Transmission & Steering parts = 8% Suspension & brake Parts = 5% Mould & Die = 4% Accessories = 3% Other = 3% Pathumthani Total supplier = 39 Body parts = 18% Engine parts = 13% Electrical parts = 13% Suspension parts & brake parts =10% Drive, Transmission and steering parts = 8% Accessories = 8% Other = 31% Source: Thai Auto-Part Association. Concurrent Session: Regional Production Networks and Implications for (Domestic) Trade and Investment Policies and Regional Cooperation in East Asia 2.4 Employment in the Automotive Industry Automotive industry which comprises automotive assembly plants, parts and component industry, motorcycle assemblers and other related industries, are currently employing 113,512 workers. Small and medium sized enterprises account for 36.2% of the total employment. They are mainly the 2nd-tier parts and components suppliers. Table 5 Employment in the Thai Automotive Industry (1)Large-scaled factories - Auto-assembly plants - Auto parts and components - Motor-cycle assembly plants - Modify-plants (2) Small-to-medium factories - Auto-parts and components - Other factories (3) Plastic-parts for automobile (4) Inner-tube for auto-tyre (5) Mould and Die makers Total Employment Source: Thai Automotive Institute 52,319 workers 17,119 21,668 8,402 7,297 41,606 workers 11,344 20,262 2,663 workers 5,986 workers 10,938 workers = 113,512 workers 7 The 6th ADRF General Meeting, 2004 Bangkok, Thailand Concurrent Session: Regional Production Networks and Implications for (Domestic) Trade and Investment Policies and Regional Cooperation in East Asia III. Changing Production Networks in Automotive Industry Production network, is part of industrial network, established by MNCs in manufacturing sector, which seek opportunities to expand market, achieve sustainable growth in their markets. To many manufacturers, industrial networking means effectiveness in production, delivery and cost efficiency to improve competitiveness of industries. Meanwhile to Asian manufacturers, they refer the industrial network, as the relationships between assemblers and part-component makers which established network by integrating production units vertically or horizontally into one unit. If the established unit works efficiently it will produce efficiently, and proceed to the sustainable growth in the competitive markets. Most of the manufacturers have also adopted the following strategic measures in networking system, such as procurement, financial assistance, logistic and etc, to support the relationships. Moreover, the relationship in term of equity participation which may start as strategic partners, would later turn into joint-venture, as the companies (assemblers) see the opportunities to strengthen their competitiveness. The narrow definitions of networking system known among Asian manufacturers as the clustering system, (MOI 2003) which has the following characters; - Specialization by each participant (which mean both competition and cooperation). - High connectivity (trust and geographically concentration). - Customer-oriented marketing (supporting activities are prevalent). - Effective absorption and transfer of technology (government offices and educational institutions play important roles). Many industrial sectors, automotive, electrical appliances and electronics and textile industries, are those engaged in the networking system, have contributed to the industrialization in Thailand, creating value added in GDP, employment and foreign exchanges for the country. Mr.Yoichi Koike, had conducted a survey on production networks of Japanese multinational corporation in electronics sector, and their supplier network links are depicted in Fig 2 as follows: 8 http://www.adrf.org Asian Development Research Forum Concurrent Session: Regional Production Networks and Implications for (Domestic) Trade and Investment Policies and Regional Cooperation in East Asia End Products SONY, NEC, TOSHIBA, IBM, SEAGATE, DELL Suppliers Wires, plastics, Semiconductors Metal stamping etc. R&D Enabling Technologies Design & Engineering Exports Micro assembly various stages Services Banking Packaging shipping Fig 2 Networking in Electronics Industry Source: Yoichi Koiki [1998] Note: Line of supply and information. 9 The 6th ADRF General Meeting, 2004 Bangkok, Thailand Concurrent Session: Regional Production Networks and Implications for (Domestic) Trade and Investment Policies and Regional Cooperation in East Asia 3.1 The Creation of the Auto Industry Production Network in Thailand (Pre-1991 period) Thai automotive industry emerged under the import substitution policy, when the government had enacted the 1960 Industrial Promotion Act to provide incentives for investment. This led to the setting up the first automotive assembly in Thailand in 1961. During the first decade, the government had adopted high tariff rates on CBU, and CKD passenger which were aimed at earning revenue to improve the balance of payment deficit. After a decade of development in automotive industry, the domestic assembled passenger cars increased to 9017 representing 50% of the domestic passenger car market in 1971. However, the beginning of local content requirement had started in 1971, after the Automobile Industry Development Committee (AIDC) was set up to play active role in promoting industry. In 1971, it set the minimum local content requirements at 25% for the assembly industry. However, the local content requirements became effective three years later, on December 31, 1973. Due to an increasing trade deficit, the government had increased tariffs on CBU passenger cars from 80 to 150 percent, and CKD passenger cars from 50 to 80 percent, and imposed an import ban on small CBU passenger car (with engine size 2300 CC and smaller) in 1978. During the early period of development in auto parts and components, the production of peripheral autoparts, such as starters, attertors, filters, exhaust pipes, radiator and safety glass increased rapidly. In addition, the production of auto parts based on casting process such as brake drums crankshaft pulleys and flywheels also increased (IFCT, 1993). The production of small-pressed body parts also increased significantly in early 1970, which was really the beginning of auto part industry in Thailand-Large-scaled part makers were established to produce pressed parts, diesel engine pistons, ball joints, plastic parts, rubber parts (BOI 1995). Production networks during the period was organized to develop technical capabilities of Thai counterparts and local worker in operative technology, production management and etc. Local content requirements are the important factors which support the creation of production networks in Thailand. Japan 10 Asian Development Research Forum Automotive http://www.adrf.org company Auto-assembler (Subsidiary) in Thailand Coordinator And Consulting Concurrent Session: Regional Production Networks and Implications for (Domestic) Trade and Investment Policies and Regional Cooperation in East Asia Information flow Part-component suppliers (Subsidiaries) 1st – tier Part-component Suppliers 2nd – tier Part-component Suppliers (local firms) Fig 3 Production and Procurement Networks by Japanese Auto Assemblers 3.2 Liberalization period (1992-1996) The Thai automotive industry enjoyed high growth rate, averaging 12% during the period of 1992-1996, which was considered as one of the highest among all the countries in the region. This liberalization period had been characterized by liberalization of auto industry, with tax restructuring program to allow more competition, after a long period of protection for local industry. Price levels of automobile, both passenger vehicle (PV) and commercial vehicles (CV) had dropped to attractive levels which spurred higher demand for automobile during the periods. Production and domestic sales in 1996 had reached the historic level, but dropped to the lowest level in 1998 when Thailand experienced the economic crisis. High growths experienced during this period, coupled with the global sourcing of parts and components implemented by major auto assemblers, global sourcing has become more important, especially for the complex parts or the module approach, which have a direct impact on the performance of the vehicle. Production network will classify part components into 2 groups. For complex parts or module components a contract will be given for the life of the part, although the price will have to match the world price. In the case of parts which are less complex and have a lower technological content, contracts are shorter and price continues to be a critical factor. In these cases, the contract is frequently allocated on the basis of a "price auction". The FOB price for the component is taken as the starting point for negotiations. With these practices, the part-components are being integrated into sub-assemblies, forcing first tier and second or third tier to work together in the supply network. Part and component suppliers have been clearly defined by leading autoassemblers in Thailand, reflecting the technical capabilities and ownership structures 11 The 6th ADRF General Meeting, 2004 Bangkok, Thailand Concurrent Session: Regional Production Networks and Implications for (Domestic) Trade and Investment Policies and Regional Cooperation in East Asia in those companies. The 1st-tier suppliers are mainly owned by foreign companies and/or joint companies with the local companies whose technological capabilities are up to international standards. Definitions of first and second class tiers are:(1) First-tier suppliers - are responsible for blackbox parts, the groups have highly-qualified engines who can work closely with resident engineers of the autoassemblers in providing design and blue-print and work closely with the 2nd-tier suppliers in making module part and component kits. (2) Second-tier suppliers are responsible for detail-controlled parts. They are sub-contractors who worked closely with the 1st-tier suppliers. They are suppliers of plastic parts, rubber parts, body parts and etc. (3) General-suppliers are sometimes called suppliers of proprietary parts which provide standard parts (spark plug and etc.) which are made independently of any particular car project. The changed structure of production network of automotive industry indicated that the production units of part-component suppliers had highly concentrated in the area where major auto-assembly plants are located. Production management under the Toyota’s Just In Time system is one example that part-component suppliers have to adopt production plan in accordance with the auto-assembler’s plan. Lack of logistic system and traffic congestion have contributed to the newly-planned establishment of production-networks in clustering system. Firstly, the relationship between the parent company and its key suppliers (No.1 in the figure) involves greater coordination and two-way information flows. In certain company, like Toyota Motors Thailand, they have its own units, responsible for more than 200 first-tier part-component suppliers. Toyota Motors Thailand has strengthened close cooperation with its 1st tier suppliers by setting up “Cooperative club” to provide informal get-together and consultation between its technical staffs and its suppliers, in order to promote efficiency relation. Secondly, the relationship between parent company and local assembler in Thailand (relation No.2) has always been in close-connection, as they have to apply production network in compatible with their production plan. Thirdly, the most important relationship is No.4 which require design information and criteriors for contract selection, based on quality, cost and delivery. Fourthly, the relationship No.3, as shown in Fig. 3.2 is the same with relationship No.4 in the networking system of Japanese assemblers in Thailand. Meanwhile, the American auto assemblers have adopted independent coordinators in part and component procurement systems, these coordinators have set up office in Thailand and seek sub-contract works both in Thailand and in other countries in the region. Assembler : Home company 12 http://www.adrf.org 1 Component Supplier: Network Coordinator Global Sourcing Network Asian Development Research Forum Concurrent Session: Regional Production Networks and Implications for (Domestic) Trade and Investment Policies and Regional Cooperation in East Asia 2 4 1st-tier Assemblers in Thailand 3 (JIT) Logistic providers 2nd-tier - Through network of assemblers in other countries - AFTA’s Fig 4: Assembler-Supplier Relations (2nd period – Liberalization) Source: Survey 3.3 Industrial Restructuring for closer regional networks (since 1997) After the eruption of economic crisis in 1997, the automobile market had shrinked and capacity glut was clearly observed in this industry. Demand dropped to 140,000 units in 1998, only one-fourth the number sold in the peak year of 1996. Local part & component suppliers had laid of their workers and adopted every measures at cost-saving, while waiting for the economic recovery. Billions of baht were poured in during the peak period by auto assemblers to grab a higher share of the domestic and produce for the entire region. The country has a capacity glut, that will last well into the next century. Major new factories by late-comers, General Motors Corp and Ford Motor Co. increased the total capacity up to 1.2 million cars and trucks. During the crisis, the government had to adopt the fiscal policies mandated by the International Monetary Fund, and increased value-added taxes, excise taxes and import duties on goods including cars. Weakened market and excess capacity forced major auto assemblers to increase export in order to compensate for weak local demand. Some auto assemblers have adopted strategies of moving their production line to Thailand, in order to utilize the newly-installed capacity and gain economies of scale in production. Longer term they were looking forward to 2003, when tariffs on car traded with the Asean were expected to drop to 5% and intra-trade within the region would increase. Any delay in implementing the tariff reduction, the leading auto assemblers would continue to trade of CBU automobile under the Brand to Brand Complement scheme (BBC) which started in 1992. During the crisis, Thai automobile business had been hardest affected, and many of them (part and component suppliers, dealers) had to go out of the business. Japanese auto companies had joined together and supplied loans, advance payments and other forms of assistance to financially toubled suppliers. Toyota Motors Corporations had to inject more than 4 billion baht to keep its operation, without laying off a single workers. The bankruptcy of almost all of Thailand’s finance companies because of the crisis poses another problem, customers can not get financing to buy cars. Some 10% of purchasers now pay cash compared with just one-third before the downturn. 13 The 6th ADRF General Meeting, 2004 Bangkok, Thailand Concurrent Session: Regional Production Networks and Implications for (Domestic) Trade and Investment Policies and Regional Cooperation in East Asia Parent companies in Japan Affiliated companies in Thailand Supported by Affiliated system 1) Information Technology System 2) Labour 3) Data system 4) Promotion system 5) R&D Financial Assistance System Procurement System Strategies (1) Partnership (Strategic alliances) (2) Taking equity participation (M&A) Fig. 5 : Supporting Activities Extended by Japanese Auto-Assemblers in strengthening the production networking in Thailand Source: Samart (Study on Industrial Networks in Asia) [2000] During the periods immediately after the crisis, the Thai government had in 1998 adopted the industrial restructuring program for 13 industries. As for automotive industry, many part and component suppliers have joined the program, and concepts of global production and sourcing in industrial networks are explained to them, as clearly indicated in Table. 14 http://www.adrf.org Asian Development Research Forum Concurrent Session: Regional Production Networks and Implications for (Domestic) Trade and Investment Policies and Regional Cooperation in East Asia Table 6: Global Production and Sourcing Business Conditions Low economic growth Business Production objectives concpet Cost reduction Minimize number of plaform Quick delivery Parts & Components Standardization Unit parts (module) parts for common use Procurement Policy follow sourcing Global sourcing Stagnated technological differentiation innovation Varied demands mega-competition Source: Y. Koike (2000) Production networks in Asia have been strengthened since the end of crisis and will continue in the automobile industry as overseas output by Japanese carmakers are expected to exceed production in Japan. In 2003, overseas output of Japanese carmakers reached 8.5 million, and this number would increase to 10 million units as early as 2005, and surpass their output in Japan. In the early 1990s, output capacity in Japan totaled around 14 million units, and the industry has experienced excess capacity due to the economic slow down. With the on-going restructuring of production network in Thailand, and improving economic conditions in the Asean countries, the new foreign direct investment especially in automotive industry will strengthen economic cooperations between the countries. During the past few years, Japanese investments have contributed 40% of the total, with some projects would contribute to more trade among Asean member countries. Table 7: Example of Projects in Automotive Industry in Asean during the last 2-3 years Project Market 1-1.3 litre-MPV Toyota Thailand, Indonesia Avanza 1.5 litre-passenger vehicle Thailand, Japan, Indonesia in Thailand (Jazz) - Plastic fuel tank Minivan (Grandic) Thailand Export to Europe Company’s Name 1. Toyota and Daihatsu plan for production in Indonesia 2. Honda’s investment plan for production base in Thailand 3. Mitsubishi’s production plan for Thailand 4. Toyota’s global production base Pick-ups and Multi- 150 countries worldwide purpose vehicles or IMV project Source: Toyota Motors Thailand (TMT). 15 The 6th ADRF General Meeting, 2004 Bangkok, Thailand Concurrent Session: Regional Production Networks and Implications for (Domestic) Trade and Investment Policies and Regional Cooperation in East Asia IV. Performance (Production and Export Structure of Thai Automotive Industry under the Changing Industrial Networks) 4.1 Production and Domestic Demand The production of Thai automobile has increased rapidly since the latter half of 1980’s, the average growth of production during 1993-96 was 9.53%, attributed to liberalization policy which lowered the prices of automobile in the local market. The production of Thai automobile reached the highest level during the last decade in 2003, when Thailand exported almost 200,000 units of CBU cars. Many auto assemblers has utilized their production network to export more cars in order to compensate the declined share of domestic market. As for domestic demand, the domestic sales of automobile during 1993-1997, exceeded the production indicating that more CBU passenger cars were imported to fulfil the gap. Table 8 Production and Domestic Sales of Automobile in Thailand Year Production Domestic Sales (unit) (unit) 1993 419,861 456,461 1994 434,001 486,678 1995 525,680 571,580 1996 547,312 589,126 1997 360,303 363,156 1998 158,130 144,065 1999 327,233 218,330 2000 411,721 262,189 2001 459,418 297,052 2002 584,951 409,362 2003 750,512 533,176 Source: Thailand Automotive Industry Association. 4.2 Thailand As a Production Base of 1 ton Pick-up Thammavit (1997) attributed the high percentage share of production in commercial vehicles (CV) to the government’s policies and strong demand for multipurpose uses. See table 9, for the percentage share of type of vehicle in production of automotive industry in Thailand. After the financial crisis in 1997, the production networks have immediately adjusted their production structure to commercial vehicle, 72.9% during the period of 1998-2003. Approximately 25-30% of the production of commercial vehicles were made for exports, mainly to Australia and many countries in Europe. 16 http://www.adrf.org Asian Development Research Forum Concurrent Session: Regional Production Networks and Implications for (Domestic) Trade and Investment Policies and Regional Cooperation in East Asia Table 9 Thailand’s Production Classified by Type Year Passenger Vehicle 1993 144,419 (34.4) 1994 109,830 (25.3) 1995 127,242 (24.3) 1996 138,579 (25.3) 1997 112,041 (31.1) 1998 32,008 (20.2) 1999 72,716 (22.2) 2000 97,129 (23.6) 2001 156,066 (34.0) 2002 169,321 (28.9) 2003 251,684 (33.6) Figures in parenthesis indicate percentage share. Source: Thailand Automotive Industry Association. Commercial Vehicle 275,444 (65.6) 324,171 (74.6) 398,438 (75.7) 408,733 (74.7) 248,262 (68.9) 126,122 (79.8) 254,517 (77.8) 314,592 (76.4) 303,352 (66.0) 415,630 (71.1) 498,828 (66.4) 17 The 6th ADRF General Meeting, 2004 Bangkok, Thailand Concurrent Session: Regional Production Networks and Implications for (Domestic) Trade and Investment Policies and Regional Cooperation in East Asia 4.3 Capacity utilization Capacity utilization, is an indicator of economies of scale in production, usually at the 60% of the total. Capacity utilization in automotive industry reached the peak in 1996, especially for the commercial vehicles (78.2%) and 65.7% for the overall categories. During the crisis (1997-2000) the capacity utilization went below the 50% level, as the domestic sales shrank to only 144,065 units in 1998. But the production of commercial vehicles for export market pulled the rate back to 62.1%, almost matched that of 1996. See Table 10. Table 10: Capacity utilization in Automotive Industry Year 1996 1997 1998 1999 2000 2001 2002 2003 Passenger Vehicle 54.9 39.4 13.0 23.6 24.7 37.0 43.4 57.7 Commercial Vehicle 78.2 52.2 22.1 37.5 44.1 41.6 56.6 64.9 Total 65.7 45.3 17.2 30.0 33.7 39.1 53.6 62.1 Source: Bank of Thailand. 4.4 Thailand Vehicle and Part Export During the pre-crisis period, exports of vehicle and parts and components were less than 10 million dollars, as marketing was penetrated only on domestic market. Only 14,020 units of CBU of vehicle were exported in 1996, mainly commercial vehicles. Fall-out from the crisis had forced the leading car companies namely Mitsubishi, Isuzu and Toyota shifted their production base to Thailand, especially production of commercial vehicles for exports. Production networks have gradually diversified export structure of Thai automotive industry, as more OEM parts and component continued to increase during the recent periods. Exports of OEM parts and components increased from only 976 million baht ($36 million) in 1996 to 22 billion baht ($556 million) a fifteen-fold. Automotive Resource Asia (ARA) predicted the 4 Asean countries would ship 600,000 vehicles abroad in 2006, more than twice their combined exports of 250,000 units in 2001. Thailand will contribute 500,000 units out of this 600,000. 18 http://www.adrf.org Asian Development Research Forum Concurrent Session: Regional Production Networks and Implications for (Domestic) Trade and Investment Policies and Regional Cooperation in East Asia Table 11 Thailand Vehicle and Part Export (1996-2003) Total CBU Engine Amount Unit Amount Amount 1996 6,295.55 14,020 4,253.36 801.98 1997 20,722.84 42,218 16,226.99 2,023.89 1998 34,110.33 67,857 28,125.55 1,536.77 1999 60,105.53 125,702 50,187.21 3,731.81 2000 83,245.46 152,835 63,349.15 7,106.22 2001 107,110.60 175,299 83,894.70 7,481.38 2002 107,729.72 180,554 82,474.66 6,087.28 2003 114,737.54 196,800 85,393.48 4,552.28 Amount: Million Baht Source: The Thai Automotive Industry Association Year Spare Part Amount 215.44 505.28 722.79 883.42 1,245.65 1,758.56 1,796.41 1,796.63 Jig & Die O.E.M. Part Other Unit amount Body Part Compo.Part amount 43.66 373.62 602.16 5.33 17 56.34 1,037.60 845.16 27.58 6,013 63.70 1,347.27 2,288.36 25.89 177 141.35 1,424.40 3,678.86 58.48 119.96 1,556.45 9,531.17 336.86 5 141.19 1,989.49 11,748.57 96.71 18 145.26 2,879.77 14,196.28 150.06 2 148.36 3,348.01 18,928.13 570.65 Remarks (Jan.-Oct) 19 The 6th ADRF General Meeting, 2004 Bangkok, Thailand Concurrent Session: Regional Production Networks and Implications for (Domestic) Trade and Investment Policies and Regional Cooperation in East Asia 4.4.1 Export Market of Thai Automobile (CBU) in 2003 The major destination shows that Asean countries constitute for one-third of the total or 35.5%. This trend might reflect the benefit of preferential tariffs applied under AFTA scheme. Percentage share of major export markets of Thailand’s CBU market are given in Table 12. Table 12 Major Export Market for Thailand Automotive (CBU) Year 2001 Indonesia Japan Philippines Belgium Australia Others Unit : % share 22.92 20.02 12.57 11.70 11.56 21.23 Source: Custom Department, Ministry of Finance 4.4.2 Export Markets for Automotive Parts and Components Export statistical data for 10 major items which constitute for 80% of the total, show that intra-trade among AFTA member countries accounted for one-fourth (26%) of the total exports in parts and components. 20 http://www.adrf.org Asian Development Research Forum Concurrent Session: Regional Production Networks and Implications for (Domestic) Trade and Investment Policies and Regional Cooperation in East Asia Table 13 Top 10 Export Destinations of Thai Auto Parts and Components in 2001 Unit: % share (1) Japan 30.0 (2) Malaysia 13.8 (3) South Africa 15.8 (4) USA 10.3 (5) Sweden 9.4 (6) Indonesia 6.6 (7) Philippines 5.6 (8) Australia 2.3 (9) Pakistan 1.4 (10) Vietnam 0.6 Source: Custom Department, Ministry of Finance. 4.4.3 Import structure of Thailand Automotive Industry Only 10,000 units of CBU vehicle were imported in 2001, mainly from Japan, Europe and South Korea. Details of imports are given in Table 14 Table 14 Thailand’s Imports of CBU Vehicle Country 1998 1999 Europe 1,377 2,372 Japan 723 4,655 S.Korea 6 42 Others 443 31 Total 2,549 7,100 Source: Custom Department, Ministry of Finance. 2000 5,695 5,342 1,360 163 12,560 Unit: Vehicle unit 2001 5,765 1,454 2,781 79 10,079 21 The 6th ADRF General Meeting, 2004 Bangkok, Thailand Concurrent Session: Regional Production Networks and Implications for (Domestic) Trade and Investment Policies and Regional Cooperation in East Asia 4.4.4 Import Structure of Thailand Parts and Components Industry Since automotive production networks are owned and operated by parent companies operating in major industrialized countries, like Japan, Germany, Sweden, and USA, which contribute to the source of import where major parts and components come. Details of import sources are given in Table 15. Table 15 Imports of Parts and Components (Sources of Thailand’s Imports) in 2001 Country % share (1) Japan 72.5 (2) Germany 9.4 (3) Philippines 6.5 (4) Sweden 2.1 (5) Indonesia 1.7 (6) USA 2.6 (7) Malaysia 1.1 (8) Taiwan .7 (9) S. Korea .1 (10) UK .3 Source: Information Centre of Ministry of Commerces 4.5 Prospects of External Trade of Thai Automotive Industry Global sourcing and Thailand’s vision of “Detroit of Asia” will push Thailand’s auto production to reach one million units in 2006, and 40% targeted for export. The net international trade of Thai automotive industry shows that Thailand has still suffered the trade deficits in auto parts and components, (see Table 16) which means that if Thai auto parts and components suppliers can not upgrade their technical capabilities to the 1st-tier suppliers, and are not able to manufacture higher valueadded parts and components, then Thailand will not benefit from being the production base and part of the auto production networks. Table 16 Trade in parts and components of Thai Automotive Industry during 1994-2001 Year Import 1994 137.1 1995 189.4 1996 158.9 1997 98.6 1998 44.9 1999 64.6 2000 96.8 2001 75.3 Source: Ministry of Commerce. Export 28.2 23.1 25.6 36.4 53.6 54.6 65.1 67.5 Unit: Million Baht Balance -108.9 -166.3 -133.3 -62.2 8.7 -10.0 -31.7 -7.8 V. Industry Trend 22 http://www.adrf.org Asian Development Research Forum Concurrent Session: Regional Production Networks and Implications for (Domestic) Trade and Investment Policies and Regional Cooperation in East Asia To propel Asean and especially Thailand to become strong auto production network of leading auto makers, Thailand has to strengthen the part and component suppliers to cope with the changing trend in automotive industry. Asean countries had a combined market size of about US $8.6 billion in 2002, with almost 1700 parts manufacturers producing both OEM and after market parts. An estimated 60% of component manufacturers in Asean has either a foreign partners or receives foreign technical assistance. Some of international companies such as Denso, Autoliv, Daikin, Visteon, Delphi, TRW, Yuasa and Johnson Control have already set up manufacturing in Asean region. These international giants are partly responsible in bringing the lastest industry trends in Asean parts and component market.. A. Jalaluddin (2004) pointed out some of the recent global trends that are making the impacts on Asean parts are; (1) Consolidations and strategic alliances (2) The module systems approach (3) Persistent price pressures (4) Shifting design capabilities (5) Emphasis on R&D initiatives 5.1 Consolidations and startegic alliances Mergers, acquisitions and alliances in the component parts are the strategies adopted by leading part and components to expedite the excess capacity, to have a global presence sharing a complementary product line. Asean based manufacturers are slow to adapt to this trend in trade integration. The reason is that the fragmented vehicle type in Asean results in few parts that complement each other in the region. Thailand, Indonesia and Philippines part suppliers concentrate on van and truck parts while Malaysian parts makers focus on car parts. However, it is expected that strategic alliances among Asean manufacturers to gradually increase once AFTA comes into full force in 2008. 5.2 The Module system approach A module system is a group of components that are linked by function and are supplied to the automotive assemblers. Complex modules which incorporate multiple functions are still in its early stage in Asean. But big auto assemblers in Thailand, and Malaysia are currently applying this module system with groups of supplier working closely together. Asean manufacturers need extensive R&D initiatives and high investment to devise ways to take core parts and show them into highly efficient assemblies. Moreover, a large number of Asean factories are not flexible enough to produce integrated system which demand a frequent shift in manufacturing capabilities. The present system is not designed to cater to various models set up but targeted to mostly limited parts models. 23 The 6th ADRF General Meeting, 2004 Bangkok, Thailand Concurrent Session: Regional Production Networks and Implications for (Domestic) Trade and Investment Policies and Regional Cooperation in East Asia 5.3 Persistent price presures Cost cutting is the essential part in keeping the growth of this industry. However, cost reductions and price pressures have been intensified since 2001, as a result of intense competition in the global automotive market. Leading vehicle makers are pushing for price reduction in the range of 5% per year for major component parts supplied to the OEMs. This similar scenario is happening at the Asean level. As pricing becomes a key determinant in attracting buyers of cars in Asean, vehicle manufacturers are passing cost reduction to the component part suppliers. The cost reduction method is applicable to every supplier in the OEM parts supply chain from tier 1 to tier 3 level suppliers. 5.4 Shifting design capabilities Large OEMs like Ford, GM, and Daimler Chrysler, not to mention Toyota, have transferred design responsibility to tier1 suppliers without relinquishing control over the design and quality aspects. Their main reasons are to concentrate on the core task of marketing and selling the vehilces and other related activities. Global tier one suppliers like Visteon, Delphi and Johnson Controls are taking an increasing share of risk from the OEMs to meet their tough requirements. The idea of outsourcing design aspects is gaining grounds in Asean automotive market mainly in Thailand and Malaysia. It is expected that regional outsourcing to escalate as most Asean countries join AFTA scheme in promoting trade within the region. The reason why many Japanese and European OEMs are pushing for greater local involvement in parts design and manufacturing is to arrive with models that suit the local demand. However, most of the design projects are undertaken by companies that are subsidiaries of large part manufacturers that are based in Asean region. The level of participation of purely domestic companies in the design is very limited. 5.5 Emphasis on R&D initiatives Well-established parts and component manufacturers would incorporate a host of technologies both materials and of manufacturing process in order to create cost efficient product differentiation and high value added components. This is not the case for Asean manufacturers, as they have low level of technology infusion. A large number of parts and components suppliers are still producing low value added parts for many years. The low priority of modern technology among Asean manufacturers comes from inadequate engineering capabilities, high R&D costs, and lack of awareness among manufacturers and consumers alike. However, with proper assessment of the industry trends might lead to more competitive, technology driven and efficient Asean component parts industry. It is then important that Asean parts and components industry give closer cooperation in promoting the objective of AFTA, an integrated free trade region. Greater collaboration among parts manufacturers, common parts sourcing, more integrated component system approach, and sharing of R&D initiatives can increase cross border alliance. Then a strong and unified Asean components industry would be able 24 http://www.adrf.org Asian Development Research Forum Concurrent Session: Regional Production Networks and Implications for (Domestic) Trade and Investment Policies and Regional Cooperation in East Asia to benefit from the changes in the global automotive market and able to withstand the competitive threats of other markets. VI. Government's Role and Policies 6.1 Government's Role and production network in automotive industry This section will analyze the compatibility of government's role and policies which help support the growth and development of production network in automotive industry. In the early period (1961-1970), the Industrial Promotion Act was adopted to promote the establishment of auto assembly plant, and high tariffs were adopted to protect local assembly plant from imported CBU. During this period, the small local market detered the economies of scale in production. Moreover, the weak economy forced the government to adopt high import tariff and excise taxes to finance deficit budgeting. The early stage of production networks had been supported by the promotional privileges for FDI, local content requirement which induced more supporting industries to establish production base in Thailand. The second period (1992-1996) was liberalization and deregulation period, when tax rates were restructured, excise and value added taxes were introduced. The liberalization measures also included, abolishment of ban on imports of CBU, ban on new assembly plants. More promotional privileges were extended to new FDI on supporting industries. After the crisis, the government's policies were aimed at rescuing the manufacturers in this sector, through the revision of promotional privileges in provincial area. Rules and regulations were adjusted to support the expansion of production capacity in the existing capacity. On January 1, 2003, local content requirements were abolished to support the global sourcing and to promote closer regional cooperation in production network. 6.2 Changing roles of the government Since the liberalization and deregulation policies were adopted in 1991, the government has gradually changed its roles. (1) Change the roles of protection the industry to monitoring the trend, in order to prepare all measures and policies in support of upgrading the technical capabilities and industry competitiveness in the changing global trend with WTO's rules and regulation. (2) Prepare all necessary inputs and facilities to handle with the changing technology in-order to increase competitiveness of the industry in the following aspects. (a) HRD (b) Testing laboratory (c) Automotive Research and Development Centre (d) Technology Transfer (e) Basic infrastructure (telecommunication and transportation) (f) Information technology (3) Revise laws and regulations which are against the tariff and tax 25 The 6th ADRF General Meeting, 2004 Bangkok, Thailand Concurrent Session: Regional Production Networks and Implications for (Domestic) Trade and Investment Policies and Regional Cooperation in East Asia structures. (4) Find measures and solutions for trade negotiations in order to protect national interests. (5) Promote and/or support trade mission in order to find new markets. 26 http://www.adrf.org Asian Development Research Forum Concurrent Session: Regional Production Networks and Implications for (Domestic) Trade and Investment Policies and Regional Cooperation in East Asia Table 17: Government's Policies and Automotive Production Networks Period 1. Pre-1991 General Characteristic Driving forces - From small market to the - Domestic emerging networks. demand - Diseconomies of scales - Baht devaluation (1984) - High economicgrowth (86-89) - Lower taxes pushed the price of automobile down - Economy showed signs of weakness - Upward trend in domestic sales - FDI - Strong domestic demand Policy measures - Import substitution - Industrial Promotion Acts - High import tariffs - Local content requirement (1971) - Limit model of car assembly - Revised local content - Partial liberalization - Lift ban on import of CBU - Lower tariffs and business taxes on imported CBU - Promote SMEs in automotive industry - Revise promotional privileges for new assembly plants - Abolish local content requirement (2000) - Create trade through regional cooperation and FTA Networking Development - Establishment of parts and component (1974) - Cooperation between auto assemblers and part makers - Investment in supporting industry - Expansion of production capacity. - Establishment production network with more local supporting industries - Promotion of cooperation through AFTA program - Global sourcing - Relocation of production base to Thailand (pick-up) - New trend in global part and component industry - New technology in automotive industry 2. Liberalization and deregulation (19921996) 3. Industrial restructuring for closer regional cooperation (1997now) - Financial crisis led to drop - Intra-regions in demand. trade - Business in trouble (lack - Exports of cash flow) - Industrial restructuring 27 The 6th ADRF General Meeting, 2004 Bangkok, Thailand Concurrent Session: Regional Production Networks and Implications for (Domestic) Trade and Investment Policies and Regional Cooperation in East Asia 6.3 Government's policies on regional cooperation Asean countries have attempted to integrate automotive industry, and formed common effective preferential tariff (CEPT) scheme under the AFTA set up in 1993. However, most assemblers did not take account of the CEPT scheme in their planning because automotive industry was on the sensitive list. However, the fast-changing liberalization in automotive industry, and promotion of bilateral trade among trading countries involving Thailand (FTA) have moved tariff reduction among member countries sooner than earlier planned. The newly-planned for tariff reduction is .05 percent to be implemented in 2010, but the Thai Automotive Industry Association proposed the 0% CBU in 2005, regarding AFTA as an important base of maintaining competitiveness of Asean automotive industry. AFTA needs to realize earlier than FTA. Moreover, the Asean member countries agreed to promote intra-regional trade in automotive parts and components and introduced Brand to Brand Complement Scheme (BBC). The scheme assigned specific parts production to different Asean countries to exploit comparative advantages and develop economies of scale. It allowed assemblers in each of the participating countries receiving local contents accreditation and a 50% reduction in their import duty for imported components from Asean countries. Unfortunately, only 3 countries, involving 4 auto makers participated in this program, since the BBC scheme has some limitations. Thus, the Asean agreed to have a new scheme, called Asean Industrial Co-operation Scheme (AICO), which was formed in April 1996. AICO will provide following privileges; (1) 0-5% import duty rates immediately (2) local content accreditation, and (3) no restriction on the export of the AICO products for the participating countries. As expected the AICO scheme has enhanced intra-Asean trades of vehicles and auto parts. Production networks and global sourcing have started to promote intraregion trade, especially soon after the crisis. Moreover, as the cooperation among the Asean countries increased, several assemblers have designed cars for the Asean market which effectively promote trade and exploit economies of scale. Among them, they are Toyota (Soluna designed and assembled in Thailand, Avenza assembled in Indonesia), and Honda city assembled in Thailand. 6.4 Comparison of Tax structures in Automotive Industry Thai Automotive Industry Association has complained on the distortion of import tariff against parts and components industry, since the tariff rates of imported new materials for parts and components production are higher than those imposed on parts and components. (CKD) Law materials are levied at 10-50% rates, meanwhile the parts and components under the AICO Scheme are set at 0-5% only. Part components manufacturers are put at disadvantage competing with the imported parts and components. 28 http://www.adrf.org Asian Development Research Forum Concurrent Session: Regional Production Networks and Implications for (Domestic) Trade and Investment Policies and Regional Cooperation in East Asia Table 18 Tax Structure of Asean Countries Type of tax 1) Import tariff - CBU - CKD 2) Excise tax(%) 3) Value added Tax 4) Others Thailand 80 30 38.5-62.6 7 Interior tax 10% of excise Malaysia 140-300 42 65 10 Indonesia 65-80 10-15 40 10 Philippine 30 10 15, 35, 50, 100 depending on engine displacement 10 - Source: Automotive Industry Development Master Plan. (prepared by Thai Automotive Institute) 29 The 6th ADRF General Meeting, 2004 Bangkok, Thailand Concurrent Session: Regional Production Networks and Implications for (Domestic) Trade and Investment Policies and Regional Cooperation in East Asia 6.5 Free Trade Area Agreement The Thai government has moved to promote bilateral trade with 10 countries, each with different stages of preparation for implementation. Bilateral agreement with the following 4 countries have progressed at satisfactory level and automotive trade in Thailand's FTAs are as follow; Australia: A zero tariff is set in 2010 with Thailand proposed 3 steps of implementation Thailand’s tariff = 20% in 2005 10% in 2007 and 0% in 2010 Australia’s tariff in 2005 is 0% A free trade agreement was signed on Oct 9, 2003. Automotive parts are included in the list of 84 products going into effect in March 2004. Zero tariffs will be achieved by 2010. Automobiles is a priority sector for both countries. Currently the US levies 25% tariffs on imported pick-up trucks. Free trade in industrial goods would begin in January 1, 2004. Cars and components are one of China’s principal taxable imports. All tariffs will be eliminated by 2010. India : USA China : : 6.6 Clustering system The government has revised industrial development plan and adopted the M. Portor’s clustering concept in promoting the efficiency of entrepreneurs in SMEs and overall competitiveness of Thai industries. The geographical concentration of the 5 targeted industries are planned by the Committee on Competitiveness Promotion of National Economic and Social Development Board (NESDB), the central planning agency in Thailand. The five targeted industries include, Food, Fashion industry (garment, leather, jewellery) electrical appliances and electronics, tourism, and automotive industry. The automotive clusters are planned in the eastern parts of Bangkok, where major car assemblers are located. Main locations are Samutprakarn. The newly established locations are Rayong, Chacheongsao, Chonburi in the eastern part and Ayudhaya in the central part of Thailand. Thai Automotive Institutes has recently drafted the Master Plan for development of Thai Automotive industry and proposed the groups of related activities to be included in this clustering system. Moreover, the supply chain management and/or logistic system is now being studied by the Japanese consulting firms, and should be ready soon. It is important that the logistic providers will support the development of supply chain in Thailand, because there has been increased integration within the supply chain. Outsource logistics, a major driver for car makers because, it helps reduce costs and allows concentration on the core business of making cars. At the same time, the skills and competencies of a professional partners allows economies of scale to ensure a proper logistics process. 30 http://www.adrf.org Asian Development Research Forum Concurrent Session: Regional Production Networks and Implications for (Domestic) Trade and Investment Policies and Regional Cooperation in East Asia 31 The 6th ADRF General Meeting, 2004 Bangkok, Thailand Concurrent Session: Regional Production Networks and Implications for (Domestic) Trade and Investment Policies and Regional Cooperation in East Asia Fig 6 Structure of Automotive Cluster. Up-stream industry Steel Plastics Rubber Electronics Glasses Clothings Leather Machinery Tools & equipment Mould & Dies Jig&Fixture Private institute and association 1st-tier suppliers 2nd and 3rd tier suppliers Financial Testing services Sepcific service advisory Legal advisory Other services Educational Institution & Technical Institution Government office Other related services Distribution Main Activities Motorcycle Passenger commercial Makers car makers car makers 32 http://www.adrf.org Asian Development Research Forum Concurrent Session: Regional Production Networks and Implications for (Domestic) Trade and Investment Policies and Regional Cooperation in East Asia Conclusion and Recommendation During the past 30 years, the government’s policy measures have been on the right track in promoting growth and development of automotive industry, through supporting the production network, as laid down by the leading assemblers. The liberalization and deregulation policies which started in 1992, have supported the network production of major auto assemblers, especially the relocation of production base for commercial vehicles (pick-up trucks) by Toyota and Isuzu. Pick-up truck is a product champion for Thailand, and is destined to more than 150 countries worldwide. Regional economic cooperation which promoted trade and investment under the AIJE program, has greatly benefited the production network, as it created the scale of production, and division of works among the companies engage in the exchange program, namely Ford and Toyota. As Asean has become the emerging production base and market for automotive industry, as they have in China and India. The joint efforts in drafting the policies for development, should aim at improving competitiveness of local SMEs in part-making for OEM and REM markets. This will strengthen the production networking, and drive the industry into the sustainable development path. Among the 6 challenges which Thailand and other countries in the region, have to encounter are; - Positioning of Thai and Asean Auto Industry in the global market - Linking Thai SMEs to the automotive supply chain - Empowering Thai workforces for the automotive industry - Developing and integrating supporting industries into Thai auto industry - Moderning the automotive industry through logistics and IT, in order to strengthen competitiveness - Innovating to succeed through research and development. 33 The 6th ADRF General Meeting, 2004 Bangkok, Thailand Concurrent Session: Regional Production Networks and Implications for (Domestic) Trade and Investment Policies and Regional Cooperation in East Asia References Annuar Jalalud. “Asean Auto Components; Embracing the trends in Global Component Market”. Asean Autobiz, vol 3 No.22 (January 2004): 22-25. Aye Ko Ko. “The Age of Exports”. Asean Autobiz, Vol.3 No.22 (January 2004): 36-38. Chakchai Panichapak. “Development of Automotive Industry in Thailand”. Regional Conference of Automotive Industry in Thailand and the Mekong SubRegion, Bangkok, Oct 14, 1996. Japan International Corporation Agency (JICA) and Ministry of Industry, Thailand. “The Study in Industrial Sector Development Supporting Industries in the Kingdom of Thailand”. Tokyo. Unico International Corporation. Ministry of Industry “Regional Networks and Industrial Development in the provinces of Thailand. Bangkok 2003. Mipon Paopongsakorn. “The success of Thai Automobile Industry” A paper prepared for “The Asian of Automotive Industry”. Organized by the Institute for Economic and Social research (LPEM FEUI) University of Indonesia, Jakarta, 1996. John Humphrey. “Globalization, FDI, and the Restructuring of Supplier Networks: The Motor Industry in Brazil and India in “Learning, Liberalization and Economic Adjustment”, Tokyo, 1998. Prapapan Monmahachinda. “Factors Affecting the Exportation in Automobile Parts Industry in Thailand” M.A. Thesis. Faculty of Economics, Thammasat University 1993. Samart Chiasakul. “The Study on Industrial Networks in Asia”, A case study of Thailand, Institute of Developing Economies, Japan External Trade Organization, 2000. Shegeki Hizashi. “The Automotive Industry in Thailand: From Petection Promotion to Liberalization”. In The Automotive Industry in Asia: The Great Leap Forward? Tokyo: Institute of Developing Economies. 1995. Thammavit Terdudomtham. “The Automotive Industry in Thailand”. ASP-5 (SubProgramme on Liberalization of Trade and Investment. Thailand Development Research Institute. September 1997. Uniresearch, Chulalongkorn University. “Industrial Restructuring in Thailand; Pre and Post Crisis”. Ministry of Industry Bangkok, October 2003. Yoichi Koike. “Globalization of Japanese Subcontract Transaction and Asian Suppliers”. In the “Learning Liberalization and Economic Adjustment. Tokyo: Institute of Develoing Economies, 1998. 34 http://www.adrf.org Asian Development Research Forum
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Concurrent Session: Regional Production Networks and Implications for (Domestic) Trade and Investment Policies and Regional Cooperation in East Asia Production Networks, Trade and Investment Policies, and Regional Cooperation in Asia: A Case Study of Automotive Industry in Thailand Samart Chiasakul Faculty of Economics Chulalongkorn University, Thailand Abstract This paper intend to investigate the production network of automotive industry in Thailand, by connecting up the organizational dimension of MNC network (both internal and external) with the geographical dimension. The periods under analysis, are divided into 3, per-1991 period, liberalization & deregulation period, industrial restructuring for closer regional. The pre-1991 period, the production networks was limited by small domestic market, limited model of vehicle, high tariffs. This led the MNCs auto assemblers to reorganize its networks inside the companies to supply CKD parts to its subsidiary in Thailand. It was only in 1971 when parts and component industry were promoted and overseas operations seen as integral part of complex network of flows of parts and components, products, resources, people information among interdependent units. The liberalization and deregulation policies adopted by the government have provided new environments for automotive industry such as lowering import tariffs, allowing more models of vehicle, and promoting supporting industries, and etc. The policies have strengthened the local production networks in preparation for the changing trend in global sourcing. Complementary products have been exchanged through the networks of auto assemblers under the Asean’s AICO programme. The industrial restructuring period started immediately after the eruption of crisis in 1997 when fall-out in demand left the expanded capacity underutilized, and many SME’s parts and component suppliers went out of business. Abolishment of local content requirement have encouraged more production of automobile for export. Intra-trade among members of Asean member countries have enabled the market expansion in the regions, with more types of vehicles traded among leading auto assemblers. It is expected that the tariff rates among member countries will be reduced to 0.5% in 2010. Thailand proposed that the tariff reductions be implemented sooner (in 2005-2007) in order to promote more investments and trade within the Asean region. 1 The 6th ADRF General Meeting, 2004 Bangkok, Thailand Concurrent Session: Regional Production Networks and Implications for (Domestic) Trade and Investment Policies and Regional Cooperation in East Asia Contents Page I. Introduction II. Structure of Thai Automotive Industry 2.1 2.2 2.3 2.4 Number of Auto Assemblers and their production capacity Parts and Components Industry Locations of Automotive Industrial Networks in Thailand Employment in the Automotive Industry 2 4 6 8 1 III. Changing Production Networks in Automotive Industry 3.1 3.2 3.3 The Creation of the Auto Industry Production Network in Thailand (Pre-1991 period) Liberalization period Industrial Restructuring For Closer Regional Networks (Since 1997) IV. Performance (Production and Export Structure of Thai Automotive Industry) 4.1 4.2 4.3 4.4 4.5 Production and Domestic Demand Thailand As a Production Base of 1 ton Pick-up Capacity utilization Thailand Vehicle and Part Export Prospects of External Trade of Thai Automotive Industry 19 20 22 22 27 12 15 11 V. Industry Trend 5.1 5.2 5.3 5.4 5.5 Consolidation and Strategic Alliances The Module System Approach Persistent price pressures Shifting design capabilities Emphasis on R&D initiatives 29 29 30 30 31 Concurrent Session: Regional Production Networks and Implications for (Domestic) Trade and Investment Policies and Regional Cooperation in East Asia page VI. Government’s Roles and Policies 6.1 6.2 6.3 6.4 6.5 6.6 Government’s Roles and Production Network in Automotive Industry Changing roles of the government Government’s policies on regional Cooperation Comparison of Tax structures in Automotive Industry Free Trade Area Agreement Clustering system 32 35 36 37 37 40 41 31 Conclusion and Recommendation References Concurrent Session: Regional Production Networks and Implications for (Domestic) Trade and Investment Policies and Regional Cooperation in East Asia I. Introduction The automotive industry in Thailand had started in 1962, and experienced a transformation. Four key influences govern the change. Firstly, the global geography of the industry is being transformed by the rapid growth of automotive production and consumption in emerging markets. Over the next decade, the major auto companies are expecting much of the global industry to come in the large emerging markets namely, China, India and the Asean. Secondly, relationships between assemblers and suppliers are being restructured and globalized. The development of global supplier networks is increasing the centralization of design activities in the core operations of the leading component producers, while decentralizing production activities around the world. Thirdly, liberalization policies have greatly freed up the flow of capital into Thailand, since 1991 when Thai government under the close cooperation with Thai Automobile Industry Association (TAIA) has gradually deregulated the formerly protected and inward focused industries and integrated into broader regional and global networks of production and consumption. Fourthly, the financial assistance extended by the major assemblers to their subsidiaries, as well as to their part-makers in Thailand, in order to keep them in operations during the crisis. Moreover, the capital inflows had enabled the utilizations of expanded production capacity, which integrated them into the Asean regional programs of brand-to-brand exchanging projects under the regional production networks. This paper intends to examine the transformation of automotive industries in Thailand, where roles of government has been closely linked with the privately-run institutions, namely Thailand Automotive Industry Association (TIA) and Thailand Automotive Institute, in promoting the automotive industry. The Thai automotive industry has shown enormous dynamism in 1990s, when the policy of liberalization and deregulations were adopted to comply with the period of global sourcing in the production networks. Economic crisis in 1997, followed by deep recession in 1991 led to major restructuring as some Japanese companies had rescued part and component suppliers in their production networks in Thailand, and also used regional networks to promote capacity utilization and economies of scale of the newlyexpanded production capacity of the Thai automotive industry. The paper is organized to answer the main research problem, with the following objectives: (1) To examine the evolution of production network in Thailand during the periods which are divided into 3 periods, firstly, pre-1990 period (the creation of automotive production-network in Thailand). Secondly, the liberalization and global sourcing period. Thirdly, the industrial restructuring for closer regional networks. (2) To investigate the changing pattern of intra-trade and investment in the Asian region, and Asian countries with China. (3) To analyze the changing trend of global automotive industry, shifts of production base to Thailand, and possibility of achieving the vision of Thailand "Detroit of Asia". (4) To analyze the policy of setting up of "Automotive Clustering" and its 1 The 6th ADRF General Meeting, 2004 Bangkok, Thailand Concurrent Session: Regional Production Networks and Implications for (Domestic) Trade and Investment Policies and Regional Cooperation in East Asia implications of promoting part and component suppliers, trade and investments in the region. II. Structure of Thai Automotive Industry 2.1 Number of Auto Assemblers and their Production Capacity The automotive industry in Thailand emerged from the import substitution policy adopted in 1960, when the government had enacted the Industrial Promotion Act, providing incentives for foreign investors to set up automobile plant in Thailand. As a result, the first automotive assembly plant, Anglo-Thai Motor Company opened its plant in Thailand, which started operation in 1961. After more than 40 years of development, the number of assembly plant in Thailand increased to 12, of this Japanese assemblers accounted for 50%. These auto assemblers represent various global brands; as given here; (1) European brand : BMW, Volvo, Daimler, Volkswagen, Citron, and Peugeot. (2) USA (3) Japan : GM, Chrysler, Ford. : Toyota, Honda, Isuzu, Nissan, Mitsubishi, Hino, Mazda. The production capacity is 1.2 million units per year, of this one-ton pock up, the production champion of Thailand accounted for 54.5% of the total. Details of production capacity in 2004 are given in Table 1. Table 1 Production capacity of Thai Automotive Industry in 2004 PC 1 Ton P/V 1. Toyota 126,000 170,000 2. Mitsubishi 50,000 100,000 3. Isuzu 150,000 4. Auto Alliance 2,700 132,300 5. Honda 120,000 6. Nissan 35,200 66,400 7. General Motors 60,000 40,000 8. Hino 9. Daimlerchrysler 16,300 10. YMC Assembly 12,000 11. BMW 10,000 12. Volvo 10,000 Total 440,200 658,700 Source : Thailand Automotive Industry Association. Note : PC-passenger car CV - commercial vehicle PV - pick-up CV 38,000 20,200 20,000 2,400 28,800 109,400 Total 334,000 170,200 170,000 135,000 120,000 102,000 100,000 28,800 16,300 12,000 10,000 10,000 1,208,300 2.2 Parts and components Industry 2 http://www.adrf.org Asian Development Research Forum Concurrent Session: Regional Production Networks and Implications for (Domestic) Trade and Investment Policies and Regional Cooperation in East Asia In 1971, the government made a series of announcements to progressively increase localization. There was a boom in auto parts and components production operated mainly by Japanese and local sub-contractors. However, the localization policy was not effective enough due to inadequate tariff incentive for CKD assembly to complete with CBU import. Moreover, too many car model made the local assemblers run the plant at below the economies of scale production level. In order to increase the economies of scale for local production, the government production of auto parts and components, prohibiting the establishment of new assembly plants for passenger vehicles, imposing ban on imports of CBV passenger cars, reducing number of model for passenger cars, raising import duty on CKD kits from 50% to 80% and simultaneously revising local content requirement ratios upward. The local contents are settled at 54% for passenger cars, and 62% for commercial vehicles. Structure of Thai auto parts and component industry and classified by relationship-tier, characterized by the relationships in terms of ownership, technical assistance and nationality, as illustrated in Fig 1. Assembler (Car 12 companies) Foreign Tier 1 (709 companies) Tier 2, 3 Lowers (1,100 companies) J/V Foreign Thai Pure Majority Majority Thai 287 Co. 68 Co. 354 Co. Local suppliers LSEs SMEs Fig 1. Structure of Relationship between Auto-Assemblers and Part Component Suppliers Source: Thailand Automotive Industry Association. Structure of Thai auto parts and component industry; (1) First-tier of parts and component industry comprises 709 companies, with 40% of these are owned by the majority of foreign companies, 100% Thai-owned companies constitutes 50%. Moreover, it is interesting to observe that, the value of 1st-tier contract works extended to Thai companies was limited to only 8-10% of the total, reflecting the lower technical capacities possessed by Thai subcontractors. Local subcontractors were also in a commercially disadvantageous position. Subcontractors are commercially controlled, particularly in the case of exclusive subcontracts. It was because of this asymmetric relationship that parent companies of auto assemblers interfered with production cost details and demanded cost cut, and were able to create competition among subcontractors. Many subcontractors claimed that the relationship between sub-contractors and auto-assemblers is an unfair one. (2) The second-tier suppliers are mainly Thai companies, with the total number 3 The 6th ADRF General Meeting, 2004 Bangkok, Thailand Concurrent Session: Regional Production Networks and Implications for (Domestic) Trade and Investment Policies and Regional Cooperation in East Asia of 1000. They are mostly family owned and inward looking, even they produce quality components. They are already feeling the pressure from the local assemblers which have endless calls for price reduction. Table 2, show the number and percentage share of 1st-tier suppliers, categorized by parts functions, and nationality of equity owners. It is clearly seen that foreign owned companies are engaged in base engine and safety parts in the local content requirement. Table 2 First Tier Suppliers categorized by Parts Functions Group Pure Thai (%) Thai Majorit y (%) 13 19 12 3 14 5 5 12 7 10 Foreign Majorit y (%) 55 52 55 60 38 49 59 49 30 44 Total (%) 100 100 100 100 100 100 100 100 100 100 63 52 52 35 119 39 22 382 327 1,091 Unit : % Total Number 1) Engine parts 33 2) Electrical parts 29 3) Drive, Transmission and 33 steering parts 4) Suspension and Brake part 37 5) Body parts 48 6) Accessories 46 7) Mould & Die 36 Total 1-7 39 8) Other 63 Total 1-8 46 Source: Thailand Automotive Institute. 2.3 Locations of Automotive Industrial Networks in Thailand Investment promotional privileges and relocation incentives provided by the government, coupled with their production and procurement system had put the automotive networks at the existing locations. These areas are sometimes car production base, or cluster of automotive industry. One area (in Samutprakarn) which is the production network of the leading Japanese auto-assemblers and called by some logistic expert as the Automotive Industry cluster of Thailand. According to the mapping of locations, automotive assembly plants, parts and components are highly concentrated in the provincial areas, within the 70 kilometrs radius of the Bangkok. After 1997, the newly promoted automotive assemblers had invested in the new industrial estates in the Eastern provinces of Thailand which are around 230-250 kms from Bangkok. Table 3 Location of Automotive Assembly Plants in Thailand 4 http://www.adrf.org Asian Development Research Forum Concurrent Session: Regional Production Networks and Implications for (Domestic) Trade and Investment Policies and Regional Cooperation in East Asia Chonburi Samatprakarn - MMC - Toyota Motor Sittiphol Thailand (Mitsubishi) - Isuzu Motors - Siam Nissan Automotive - Siam V.M.C. Automobile - Thai Auto Work Samutsakorn Bangkok - Thai Rung - Bangchan Union Car General - Thai Swedish Assembly (Volvo) - Hino Motors - Thonburi (Thailand) Auto Assembly Chachoengsao Rayong - Toyota - Auto Motor Alliance Thailand (Thailand) - GM (Thailand) Source: Thailand Automotive Industry Association. 5 The 6th ADRF General Meeting, 2004 Bangkok, Thailand Concurrent Session: Regional Production Networks and Implications for (Domestic) Trade and Investment Policies and Regional Cooperation in East Asia Table 4 Location of Automotive Part and Component Suppliers Chonburi Total Supply = 55 Body part = 25% Engine parts = 22% Drive Transmission & Steering part = 15% Electrical parts = 9% Accessories = 5% Suspension & brake parts=4% Mould & Die = 4% Other = 16% Bangkok Total Supplier = 232 Body part = 9% Engine parts = 6% Electrical Parts = 6% Drive Transmission = 6% Steering part = 6% Accessories = 6% Rayong Total Supplier = 41 Body parts = 24% Engine parts = 15% Drive Transmission & Steering Part = 15% Suspension & brake part =12% Electrical parts = 10% Accessories = 7% Mould & Die = 2% Other = 15% Samutprakarn Total supplier = 158 Body parts = 22% Electrical parts = 15% Engine parts = 8% Drive Transmission & Steering parts = 8% Suspension & brake Parts = 5% Mould & Die = 4% Accessories = 3% Other = 3% Pathumthani Total supplier = 39 Body parts = 18% Engine parts = 13% Electrical parts = 13% Suspension parts & brake parts =10% Drive, Transmission and steering parts = 8% Accessories = 8% Other = 31% Source: Thai Auto-Part Association. Concurrent Session: Regional Production Networks and Implications for (Domestic) Trade and Investment Policies and Regional Cooperation in East Asia 2.4 Employment in the Automotive Industry Automotive industry which comprises automotive assembly plants, parts and component industry, motorcycle assemblers and other related industries, are currently employing 113,512 workers. Small and medium sized enterprises account for 36.2% of the total employment. They are mainly the 2nd-tier parts and components suppliers. Table 5 Employment in the Thai Automotive Industry (1)Large-scaled factories - Auto-assembly plants - Auto parts and components - Motor-cycle assembly plants - Modify-plants (2) Small-to-medium factories - Auto-parts and components - Other factories (3) Plastic-parts for automobile (4) Inner-tube for auto-tyre (5) Mould and Die makers Total Employment Source: Thai Automotive Institute 52,319 workers 17,119 21,668 8,402 7,297 41,606 workers 11,344 20,262 2,663 workers 5,986 workers 10,938 workers = 113,512 workers 7 The 6th ADRF General Meeting, 2004 Bangkok, Thailand Concurrent Session: Regional Production Networks and Implications for (Domestic) Trade and Investment Policies and Regional Cooperation in East Asia III. Changing Production Networks in Automotive Industry Production network, is part of industrial network, established by MNCs in manufacturing sector, which seek opportunities to expand market, achieve sustainable growth in their markets. To many manufacturers, industrial networking means effectiveness in production, delivery and cost efficiency to improve competitiveness of industries. Meanwhile to Asian manufacturers, they refer the industrial network, as the relationships between assemblers and part-component makers which established network by integrating production units vertically or horizontally into one unit. If the established unit works efficiently it will produce efficiently, and proceed to the sustainable growth in the competitive markets. Most of the manufacturers have also adopted the following strategic measures in networking system, such as procurement, financial assistance, logistic and etc, to support the relationships. Moreover, the relationship in term of equity participation which may start as strategic partners, would later turn into joint-venture, as the companies (assemblers) see the opportunities to strengthen their competitiveness. The narrow definitions of networking system known among Asian manufacturers as the clustering system, (MOI 2003) which has the following characters; - Specialization by each participant (which mean both competition and cooperation). - High connectivity (trust and geographically concentration). - Customer-oriented marketing (supporting activities are prevalent). - Effective absorption and transfer of technology (government offices and educational institutions play important roles). Many industrial sectors, automotive, electrical appliances and electronics and textile industries, are those engaged in the networking system, have contributed to the industrialization in Thailand, creating value added in GDP, employment and foreign exchanges for the country. Mr.Yoichi Koike, had conducted a survey on production networks of Japanese multinational corporation in electronics sector, and their supplier network links are depicted in Fig 2 as follows: 8 http://www.adrf.org Asian Development Research Forum Concurrent Session: Regional Production Networks and Implications for (Domestic) Trade and Investment Policies and Regional Cooperation in East Asia End Products SONY, NEC, TOSHIBA, IBM, SEAGATE, DELL Suppliers Wires, plastics, Semiconductors Metal stamping etc. R&D Enabling Technologies Design & Engineering Exports Micro assembly various stages Services Banking Packaging shipping Fig 2 Networking in Electronics Industry Source: Yoichi Koiki [1998] Note: Line of supply and information. 9 The 6th ADRF General Meeting, 2004 Bangkok, Thailand Concurrent Session: Regional Production Networks and Implications for (Domestic) Trade and Investment Policies and Regional Cooperation in East Asia 3.1 The Creation of the Auto Industry Production Network in Thailand (Pre-1991 period) Thai automotive industry emerged under the import substitution policy, when the government had enacted the 1960 Industrial Promotion Act to provide incentives for investment. This led to the setting up the first automotive assembly in Thailand in 1961. During the first decade, the government had adopted high tariff rates on CBU, and CKD passenger which were aimed at earning revenue to improve the balance of payment deficit. After a decade of development in automotive industry, the domestic assembled passenger cars increased to 9017 representing 50% of the domestic passenger car market in 1971. However, the beginning of local content requirement had started in 1971, after the Automobile Industry Development Committee (AIDC) was set up to play active role in promoting industry. In 1971, it set the minimum local content requirements at 25% for the assembly industry. However, the local content requirements became effective three years later, on December 31, 1973. Due to an increasing trade deficit, the government had increased tariffs on CBU passenger cars from 80 to 150 percent, and CKD passenger cars from 50 to 80 percent, and imposed an import ban on small CBU passenger car (with engine size 2300 CC and smaller) in 1978. During the early period of development in auto parts and components, the production of peripheral autoparts, such as starters, attertors, filters, exhaust pipes, radiator and safety glass increased rapidly. In addition, the production of auto parts based on casting process such as brake drums crankshaft pulleys and flywheels also increased (IFCT, 1993). The production of small-pressed body parts also increased significantly in early 1970, which was really the beginning of auto part industry in Thailand-Large-scaled part makers were established to produce pressed parts, diesel engine pistons, ball joints, plastic parts, rubber parts (BOI 1995). Production networks during the period was organized to develop technical capabilities of Thai counterparts and local worker in operative technology, production management and etc. Local content requirements are the important factors which support the creation of production networks in Thailand. Japan 10 Asian Development Research Forum Automotive http://www.adrf.org company Auto-assembler (Subsidiary) in Thailand Coordinator And Consulting Concurrent Session: Regional Production Networks and Implications for (Domestic) Trade and Investment Policies and Regional Cooperation in East Asia Information flow Part-component suppliers (Subsidiaries) 1st – tier Part-component Suppliers 2nd – tier Part-component Suppliers (local firms) Fig 3 Production and Procurement Networks by Japanese Auto Assemblers 3.2 Liberalization period (1992-1996) The Thai automotive industry enjoyed high growth rate, averaging 12% during the period of 1992-1996, which was considered as one of the highest among all the countries in the region. This liberalization period had been characterized by liberalization of auto industry, with tax restructuring program to allow more competition, after a long period of protection for local industry. Price levels of automobile, both passenger vehicle (PV) and commercial vehicles (CV) had dropped to attractive levels which spurred higher demand for automobile during the periods. Production and domestic sales in 1996 had reached the historic level, but dropped to the lowest level in 1998 when Thailand experienced the economic crisis. High growths experienced during this period, coupled with the global sourcing of parts and components implemented by major auto assemblers, global sourcing has become more important, especially for the complex parts or the module approach, which have a direct impact on the performance of the vehicle. Production network will classify part components into 2 groups. For complex parts or module components a contract will be given for the life of the part, although the price will have to match the world price. In the case of parts which are less complex and have a lower technological content, contracts are shorter and price continues to be a critical factor. In these cases, the contract is frequently allocated on the basis of a "price auction". The FOB price for the component is taken as the starting point for negotiations. With these practices, the part-components are being integrated into sub-assemblies, forcing first tier and second or third tier to work together in the supply network. Part and component suppliers have been clearly defined by leading autoassemblers in Thailand, reflecting the technical capabilities and ownership structures 11 The 6th ADRF General Meeting, 2004 Bangkok, Thailand Concurrent Session: Regional Production Networks and Implications for (Domestic) Trade and Investment Policies and Regional Cooperation in East Asia in those companies. The 1st-tier suppliers are mainly owned by foreign companies and/or joint companies with the local companies whose technological capabilities are up to international standards. Definitions of first and second class tiers are:(1) First-tier suppliers - are responsible for blackbox parts, the groups have highly-qualified engines who can work closely with resident engineers of the autoassemblers in providing design and blue-print and work closely with the 2nd-tier suppliers in making module part and component kits. (2) Second-tier suppliers are responsible for detail-controlled parts. They are sub-contractors who worked closely with the 1st-tier suppliers. They are suppliers of plastic parts, rubber parts, body parts and etc. (3) General-suppliers are sometimes called suppliers of proprietary parts which provide standard parts (spark plug and etc.) which are made independently of any particular car project. The changed structure of production network of automotive industry indicated that the production units of part-component suppliers had highly concentrated in the area where major auto-assembly plants are located. Production management under the Toyota’s Just In Time system is one example that part-component suppliers have to adopt production plan in accordance with the auto-assembler’s plan. Lack of logistic system and traffic congestion have contributed to the newly-planned establishment of production-networks in clustering system. Firstly, the relationship between the parent company and its key suppliers (No.1 in the figure) involves greater coordination and two-way information flows. In certain company, like Toyota Motors Thailand, they have its own units, responsible for more than 200 first-tier part-component suppliers. Toyota Motors Thailand has strengthened close cooperation with its 1st tier suppliers by setting up “Cooperative club” to provide informal get-together and consultation between its technical staffs and its suppliers, in order to promote efficiency relation. Secondly, the relationship between parent company and local assembler in Thailand (relation No.2) has always been in close-connection, as they have to apply production network in compatible with their production plan. Thirdly, the most important relationship is No.4 which require design information and criteriors for contract selection, based on quality, cost and delivery. Fourthly, the relationship No.3, as shown in Fig. 3.2 is the same with relationship No.4 in the networking system of Japanese assemblers in Thailand. Meanwhile, the American auto assemblers have adopted independent coordinators in part and component procurement systems, these coordinators have set up office in Thailand and seek sub-contract works both in Thailand and in other countries in the region. Assembler : Home company 12 http://www.adrf.org 1 Component Supplier: Network Coordinator Global Sourcing Network Asian Development Research Forum Concurrent Session: Regional Production Networks and Implications for (Domestic) Trade and Investment Policies and Regional Cooperation in East Asia 2 4 1st-tier Assemblers in Thailand 3 (JIT) Logistic providers 2nd-tier - Through network of assemblers in other countries - AFTA’s Fig 4: Assembler-Supplier Relations (2nd period – Liberalization) Source: Survey 3.3 Industrial Restructuring for closer regional networks (since 1997) After the eruption of economic crisis in 1997, the automobile market had shrinked and capacity glut was clearly observed in this industry. Demand dropped to 140,000 units in 1998, only one-fourth the number sold in the peak year of 1996. Local part & component suppliers had laid of their workers and adopted every measures at cost-saving, while waiting for the economic recovery. Billions of baht were poured in during the peak period by auto assemblers to grab a higher share of the domestic and produce for the entire region. The country has a capacity glut, that will last well into the next century. Major new factories by late-comers, General Motors Corp and Ford Motor Co. increased the total capacity up to 1.2 million cars and trucks. During the crisis, the government had to adopt the fiscal policies mandated by the International Monetary Fund, and increased value-added taxes, excise taxes and import duties on goods including cars. Weakened market and excess capacity forced major auto assemblers to increase export in order to compensate for weak local demand. Some auto assemblers have adopted strategies of moving their production line to Thailand, in order to utilize the newly-installed capacity and gain economies of scale in production. Longer term they were looking forward to 2003, when tariffs on car traded with the Asean were expected to drop to 5% and intra-trade within the region would increase. Any delay in implementing the tariff reduction, the leading auto assemblers would continue to trade of CBU automobile under the Brand to Brand Complement scheme (BBC) which started in 1992. During the crisis, Thai automobile business had been hardest affected, and many of them (part and component suppliers, dealers) had to go out of the business. Japanese auto companies had joined together and supplied loans, advance payments and other forms of assistance to financially toubled suppliers. Toyota Motors Corporations had to inject more than 4 billion baht to keep its operation, without laying off a single workers. The bankruptcy of almost all of Thailand’s finance companies because of the crisis poses another problem, customers can not get financing to buy cars. Some 10% of purchasers now pay cash compared with just one-third before the downturn. 13 The 6th ADRF General Meeting, 2004 Bangkok, Thailand Concurrent Session: Regional Production Networks and Implications for (Domestic) Trade and Investment Policies and Regional Cooperation in East Asia Parent companies in Japan Affiliated companies in Thailand Supported by Affiliated system 1) Information Technology System 2) Labour 3) Data system 4) Promotion system 5) R&D Financial Assistance System Procurement System Strategies (1) Partnership (Strategic alliances) (2) Taking equity participation (M&A) Fig. 5 : Supporting Activities Extended by Japanese Auto-Assemblers in strengthening the production networking in Thailand Source: Samart (Study on Industrial Networks in Asia) [2000] During the periods immediately after the crisis, the Thai government had in 1998 adopted the industrial restructuring program for 13 industries. As for automotive industry, many part and component suppliers have joined the program, and concepts of global production and sourcing in industrial networks are explained to them, as clearly indicated in Table. 14 http://www.adrf.org Asian Development Research Forum Concurrent Session: Regional Production Networks and Implications for (Domestic) Trade and Investment Policies and Regional Cooperation in East Asia Table 6: Global Production and Sourcing Business Conditions Low economic growth Business Production objectives concpet Cost reduction Minimize number of plaform Quick delivery Parts & Components Standardization Unit parts (module) parts for common use Procurement Policy follow sourcing Global sourcing Stagnated technological differentiation innovation Varied demands mega-competition Source: Y. Koike (2000) Production networks in Asia have been strengthened since the end of crisis and will continue in the automobile industry as overseas output by Japanese carmakers are expected to exceed production in Japan. In 2003, overseas output of Japanese carmakers reached 8.5 million, and this number would increase to 10 million units as early as 2005, and surpass their output in Japan. In the early 1990s, output capacity in Japan totaled around 14 million units, and the industry has experienced excess capacity due to the economic slow down. With the on-going restructuring of production network in Thailand, and improving economic conditions in the Asean countries, the new foreign direct investment especially in automotive industry will strengthen economic cooperations between the countries. During the past few years, Japanese investments have contributed 40% of the total, with some projects would contribute to more trade among Asean member countries. Table 7: Example of Projects in Automotive Industry in Asean during the last 2-3 years Project Market 1-1.3 litre-MPV Toyota Thailand, Indonesia Avanza 1.5 litre-passenger vehicle Thailand, Japan, Indonesia in Thailand (Jazz) - Plastic fuel tank Minivan (Grandic) Thailand Export to Europe Company’s Name 1. Toyota and Daihatsu plan for production in Indonesia 2. Honda’s investment plan for production base in Thailand 3. Mitsubishi’s production plan for Thailand 4. Toyota’s global production base Pick-ups and Multi- 150 countries worldwide purpose vehicles or IMV project Source: Toyota Motors Thailand (TMT). 15 The 6th ADRF General Meeting, 2004 Bangkok, Thailand Concurrent Session: Regional Production Networks and Implications for (Domestic) Trade and Investment Policies and Regional Cooperation in East Asia IV. Performance (Production and Export Structure of Thai Automotive Industry under the Changing Industrial Networks) 4.1 Production and Domestic Demand The production of Thai automobile has increased rapidly since the latter half of 1980’s, the average growth of production during 1993-96 was 9.53%, attributed to liberalization policy which lowered the prices of automobile in the local market. The production of Thai automobile reached the highest level during the last decade in 2003, when Thailand exported almost 200,000 units of CBU cars. Many auto assemblers has utilized their production network to export more cars in order to compensate the declined share of domestic market. As for domestic demand, the domestic sales of automobile during 1993-1997, exceeded the production indicating that more CBU passenger cars were imported to fulfil the gap. Table 8 Production and Domestic Sales of Automobile in Thailand Year Production Domestic Sales (unit) (unit) 1993 419,861 456,461 1994 434,001 486,678 1995 525,680 571,580 1996 547,312 589,126 1997 360,303 363,156 1998 158,130 144,065 1999 327,233 218,330 2000 411,721 262,189 2001 459,418 297,052 2002 584,951 409,362 2003 750,512 533,176 Source: Thailand Automotive Industry Association. 4.2 Thailand As a Production Base of 1 ton Pick-up Thammavit (1997) attributed the high percentage share of production in commercial vehicles (CV) to the government’s policies and strong demand for multipurpose uses. See table 9, for the percentage share of type of vehicle in production of automotive industry in Thailand. After the financial crisis in 1997, the production networks have immediately adjusted their production structure to commercial vehicle, 72.9% during the period of 1998-2003. Approximately 25-30% of the production of commercial vehicles were made for exports, mainly to Australia and many countries in Europe. 16 http://www.adrf.org Asian Development Research Forum Concurrent Session: Regional Production Networks and Implications for (Domestic) Trade and Investment Policies and Regional Cooperation in East Asia Table 9 Thailand’s Production Classified by Type Year Passenger Vehicle 1993 144,419 (34.4) 1994 109,830 (25.3) 1995 127,242 (24.3) 1996 138,579 (25.3) 1997 112,041 (31.1) 1998 32,008 (20.2) 1999 72,716 (22.2) 2000 97,129 (23.6) 2001 156,066 (34.0) 2002 169,321 (28.9) 2003 251,684 (33.6) Figures in parenthesis indicate percentage share. Source: Thailand Automotive Industry Association. Commercial Vehicle 275,444 (65.6) 324,171 (74.6) 398,438 (75.7) 408,733 (74.7) 248,262 (68.9) 126,122 (79.8) 254,517 (77.8) 314,592 (76.4) 303,352 (66.0) 415,630 (71.1) 498,828 (66.4) 17 The 6th ADRF General Meeting, 2004 Bangkok, Thailand Concurrent Session: Regional Production Networks and Implications for (Domestic) Trade and Investment Policies and Regional Cooperation in East Asia 4.3 Capacity utilization Capacity utilization, is an indicator of economies of scale in production, usually at the 60% of the total. Capacity utilization in automotive industry reached the peak in 1996, especially for the commercial vehicles (78.2%) and 65.7% for the overall categories. During the crisis (1997-2000) the capacity utilization went below the 50% level, as the domestic sales shrank to only 144,065 units in 1998. But the production of commercial vehicles for export market pulled the rate back to 62.1%, almost matched that of 1996. See Table 10. Table 10: Capacity utilization in Automotive Industry Year 1996 1997 1998 1999 2000 2001 2002 2003 Passenger Vehicle 54.9 39.4 13.0 23.6 24.7 37.0 43.4 57.7 Commercial Vehicle 78.2 52.2 22.1 37.5 44.1 41.6 56.6 64.9 Total 65.7 45.3 17.2 30.0 33.7 39.1 53.6 62.1 Source: Bank of Thailand. 4.4 Thailand Vehicle and Part Export During the pre-crisis period, exports of vehicle and parts and components were less than 10 million dollars, as marketing was penetrated only on domestic market. Only 14,020 units of CBU of vehicle were exported in 1996, mainly commercial vehicles. Fall-out from the crisis had forced the leading car companies namely Mitsubishi, Isuzu and Toyota shifted their production base to Thailand, especially production of commercial vehicles for exports. Production networks have gradually diversified export structure of Thai automotive industry, as more OEM parts and component continued to increase during the recent periods. Exports of OEM parts and components increased from only 976 million baht ($36 million) in 1996 to 22 billion baht ($556 million) a fifteen-fold. Automotive Resource Asia (ARA) predicted the 4 Asean countries would ship 600,000 vehicles abroad in 2006, more than twice their combined exports of 250,000 units in 2001. Thailand will contribute 500,000 units out of this 600,000. 18 http://www.adrf.org Asian Development Research Forum Concurrent Session: Regional Production Networks and Implications for (Domestic) Trade and Investment Policies and Regional Cooperation in East Asia Table 11 Thailand Vehicle and Part Export (1996-2003) Total CBU Engine Amount Unit Amount Amount 1996 6,295.55 14,020 4,253.36 801.98 1997 20,722.84 42,218 16,226.99 2,023.89 1998 34,110.33 67,857 28,125.55 1,536.77 1999 60,105.53 125,702 50,187.21 3,731.81 2000 83,245.46 152,835 63,349.15 7,106.22 2001 107,110.60 175,299 83,894.70 7,481.38 2002 107,729.72 180,554 82,474.66 6,087.28 2003 114,737.54 196,800 85,393.48 4,552.28 Amount: Million Baht Source: The Thai Automotive Industry Association Year Spare Part Amount 215.44 505.28 722.79 883.42 1,245.65 1,758.56 1,796.41 1,796.63 Jig & Die O.E.M. Part Other Unit amount Body Part Compo.Part amount 43.66 373.62 602.16 5.33 17 56.34 1,037.60 845.16 27.58 6,013 63.70 1,347.27 2,288.36 25.89 177 141.35 1,424.40 3,678.86 58.48 119.96 1,556.45 9,531.17 336.86 5 141.19 1,989.49 11,748.57 96.71 18 145.26 2,879.77 14,196.28 150.06 2 148.36 3,348.01 18,928.13 570.65 Remarks (Jan.-Oct) 19 The 6th ADRF General Meeting, 2004 Bangkok, Thailand Concurrent Session: Regional Production Networks and Implications for (Domestic) Trade and Investment Policies and Regional Cooperation in East Asia 4.4.1 Export Market of Thai Automobile (CBU) in 2003 The major destination shows that Asean countries constitute for one-third of the total or 35.5%. This trend might reflect the benefit of preferential tariffs applied under AFTA scheme. Percentage share of major export markets of Thailand’s CBU market are given in Table 12. Table 12 Major Export Market for Thailand Automotive (CBU) Year 2001 Indonesia Japan Philippines Belgium Australia Others Unit : % share 22.92 20.02 12.57 11.70 11.56 21.23 Source: Custom Department, Ministry of Finance 4.4.2 Export Markets for Automotive Parts and Components Export statistical data for 10 major items which constitute for 80% of the total, show that intra-trade among AFTA member countries accounted for one-fourth (26%) of the total exports in parts and components. 20 http://www.adrf.org Asian Development Research Forum Concurrent Session: Regional Production Networks and Implications for (Domestic) Trade and Investment Policies and Regional Cooperation in East Asia Table 13 Top 10 Export Destinations of Thai Auto Parts and Components in 2001 Unit: % share (1) Japan 30.0 (2) Malaysia 13.8 (3) South Africa 15.8 (4) USA 10.3 (5) Sweden 9.4 (6) Indonesia 6.6 (7) Philippines 5.6 (8) Australia 2.3 (9) Pakistan 1.4 (10) Vietnam 0.6 Source: Custom Department, Ministry of Finance. 4.4.3 Import structure of Thailand Automotive Industry Only 10,000 units of CBU vehicle were imported in 2001, mainly from Japan, Europe and South Korea. Details of imports are given in Table 14 Table 14 Thailand’s Imports of CBU Vehicle Country 1998 1999 Europe 1,377 2,372 Japan 723 4,655 S.Korea 6 42 Others 443 31 Total 2,549 7,100 Source: Custom Department, Ministry of Finance. 2000 5,695 5,342 1,360 163 12,560 Unit: Vehicle unit 2001 5,765 1,454 2,781 79 10,079 21 The 6th ADRF General Meeting, 2004 Bangkok, Thailand Concurrent Session: Regional Production Networks and Implications for (Domestic) Trade and Investment Policies and Regional Cooperation in East Asia 4.4.4 Import Structure of Thailand Parts and Components Industry Since automotive production networks are owned and operated by parent companies operating in major industrialized countries, like Japan, Germany, Sweden, and USA, which contribute to the source of import where major parts and components come. Details of import sources are given in Table 15. Table 15 Imports of Parts and Components (Sources of Thailand’s Imports) in 2001 Country % share (1) Japan 72.5 (2) Germany 9.4 (3) Philippines 6.5 (4) Sweden 2.1 (5) Indonesia 1.7 (6) USA 2.6 (7) Malaysia 1.1 (8) Taiwan .7 (9) S. Korea .1 (10) UK .3 Source: Information Centre of Ministry of Commerces 4.5 Prospects of External Trade of Thai Automotive Industry Global sourcing and Thailand’s vision of “Detroit of Asia” will push Thailand’s auto production to reach one million units in 2006, and 40% targeted for export. The net international trade of Thai automotive industry shows that Thailand has still suffered the trade deficits in auto parts and components, (see Table 16) which means that if Thai auto parts and components suppliers can not upgrade their technical capabilities to the 1st-tier suppliers, and are not able to manufacture higher valueadded parts and components, then Thailand will not benefit from being the production base and part of the auto production networks. Table 16 Trade in parts and components of Thai Automotive Industry during 1994-2001 Year Import 1994 137.1 1995 189.4 1996 158.9 1997 98.6 1998 44.9 1999 64.6 2000 96.8 2001 75.3 Source: Ministry of Commerce. Export 28.2 23.1 25.6 36.4 53.6 54.6 65.1 67.5 Unit: Million Baht Balance -108.9 -166.3 -133.3 -62.2 8.7 -10.0 -31.7 -7.8 V. Industry Trend 22 http://www.adrf.org Asian Development Research Forum Concurrent Session: Regional Production Networks and Implications for (Domestic) Trade and Investment Policies and Regional Cooperation in East Asia To propel Asean and especially Thailand to become strong auto production network of leading auto makers, Thailand has to strengthen the part and component suppliers to cope with the changing trend in automotive industry. Asean countries had a combined market size of about US $8.6 billion in 2002, with almost 1700 parts manufacturers producing both OEM and after market parts. An estimated 60% of component manufacturers in Asean has either a foreign partners or receives foreign technical assistance. Some of international companies such as Denso, Autoliv, Daikin, Visteon, Delphi, TRW, Yuasa and Johnson Control have already set up manufacturing in Asean region. These international giants are partly responsible in bringing the lastest industry trends in Asean parts and component market.. A. Jalaluddin (2004) pointed out some of the recent global trends that are making the impacts on Asean parts are; (1) Consolidations and strategic alliances (2) The module systems approach (3) Persistent price pressures (4) Shifting design capabilities (5) Emphasis on R&D initiatives 5.1 Consolidations and startegic alliances Mergers, acquisitions and alliances in the component parts are the strategies adopted by leading part and components to expedite the excess capacity, to have a global presence sharing a complementary product line. Asean based manufacturers are slow to adapt to this trend in trade integration. The reason is that the fragmented vehicle type in Asean results in few parts that complement each other in the region. Thailand, Indonesia and Philippines part suppliers concentrate on van and truck parts while Malaysian parts makers focus on car parts. However, it is expected that strategic alliances among Asean manufacturers to gradually increase once AFTA comes into full force in 2008. 5.2 The Module system approach A module system is a group of components that are linked by function and are supplied to the automotive assemblers. Complex modules which incorporate multiple functions are still in its early stage in Asean. But big auto assemblers in Thailand, and Malaysia are currently applying this module system with groups of supplier working closely together. Asean manufacturers need extensive R&D initiatives and high investment to devise ways to take core parts and show them into highly efficient assemblies. Moreover, a large number of Asean factories are not flexible enough to produce integrated system which demand a frequent shift in manufacturing capabilities. The present system is not designed to cater to various models set up but targeted to mostly limited parts models. 23 The 6th ADRF General Meeting, 2004 Bangkok, Thailand Concurrent Session: Regional Production Networks and Implications for (Domestic) Trade and Investment Policies and Regional Cooperation in East Asia 5.3 Persistent price presures Cost cutting is the essential part in keeping the growth of this industry. However, cost reductions and price pressures have been intensified since 2001, as a result of intense competition in the global automotive market. Leading vehicle makers are pushing for price reduction in the range of 5% per year for major component parts supplied to the OEMs. This similar scenario is happening at the Asean level. As pricing becomes a key determinant in attracting buyers of cars in Asean, vehicle manufacturers are passing cost reduction to the component part suppliers. The cost reduction method is applicable to every supplier in the OEM parts supply chain from tier 1 to tier 3 level suppliers. 5.4 Shifting design capabilities Large OEMs like Ford, GM, and Daimler Chrysler, not to mention Toyota, have transferred design responsibility to tier1 suppliers without relinquishing control over the design and quality aspects. Their main reasons are to concentrate on the core task of marketing and selling the vehilces and other related activities. Global tier one suppliers like Visteon, Delphi and Johnson Controls are taking an increasing share of risk from the OEMs to meet their tough requirements. The idea of outsourcing design aspects is gaining grounds in Asean automotive market mainly in Thailand and Malaysia. It is expected that regional outsourcing to escalate as most Asean countries join AFTA scheme in promoting trade within the region. The reason why many Japanese and European OEMs are pushing for greater local involvement in parts design and manufacturing is to arrive with models that suit the local demand. However, most of the design projects are undertaken by companies that are subsidiaries of large part manufacturers that are based in Asean region. The level of participation of purely domestic companies in the design is very limited. 5.5 Emphasis on R&D initiatives Well-established parts and component manufacturers would incorporate a host of technologies both materials and of manufacturing process in order to create cost efficient product differentiation and high value added components. This is not the case for Asean manufacturers, as they have low level of technology infusion. A large number of parts and components suppliers are still producing low value added parts for many years. The low priority of modern technology among Asean manufacturers comes from inadequate engineering capabilities, high R&D costs, and lack of awareness among manufacturers and consumers alike. However, with proper assessment of the industry trends might lead to more competitive, technology driven and efficient Asean component parts industry. It is then important that Asean parts and components industry give closer cooperation in promoting the objective of AFTA, an integrated free trade region. Greater collaboration among parts manufacturers, common parts sourcing, more integrated component system approach, and sharing of R&D initiatives can increase cross border alliance. Then a strong and unified Asean components industry would be able 24 http://www.adrf.org Asian Development Research Forum Concurrent Session: Regional Production Networks and Implications for (Domestic) Trade and Investment Policies and Regional Cooperation in East Asia to benefit from the changes in the global automotive market and able to withstand the competitive threats of other markets. VI. Government's Role and Policies 6.1 Government's Role and production network in automotive industry This section will analyze the compatibility of government's role and policies which help support the growth and development of production network in automotive industry. In the early period (1961-1970), the Industrial Promotion Act was adopted to promote the establishment of auto assembly plant, and high tariffs were adopted to protect local assembly plant from imported CBU. During this period, the small local market detered the economies of scale in production. Moreover, the weak economy forced the government to adopt high import tariff and excise taxes to finance deficit budgeting. The early stage of production networks had been supported by the promotional privileges for FDI, local content requirement which induced more supporting industries to establish production base in Thailand. The second period (1992-1996) was liberalization and deregulation period, when tax rates were restructured, excise and value added taxes were introduced. The liberalization measures also included, abolishment of ban on imports of CBU, ban on new assembly plants. More promotional privileges were extended to new FDI on supporting industries. After the crisis, the government's policies were aimed at rescuing the manufacturers in this sector, through the revision of promotional privileges in provincial area. Rules and regulations were adjusted to support the expansion of production capacity in the existing capacity. On January 1, 2003, local content requirements were abolished to support the global sourcing and to promote closer regional cooperation in production network. 6.2 Changing roles of the government Since the liberalization and deregulation policies were adopted in 1991, the government has gradually changed its roles. (1) Change the roles of protection the industry to monitoring the trend, in order to prepare all measures and policies in support of upgrading the technical capabilities and industry competitiveness in the changing global trend with WTO's rules and regulation. (2) Prepare all necessary inputs and facilities to handle with the changing technology in-order to increase competitiveness of the industry in the following aspects. (a) HRD (b) Testing laboratory (c) Automotive Research and Development Centre (d) Technology Transfer (e) Basic infrastructure (telecommunication and transportation) (f) Information technology (3) Revise laws and regulations which are against the tariff and tax 25 The 6th ADRF General Meeting, 2004 Bangkok, Thailand Concurrent Session: Regional Production Networks and Implications for (Domestic) Trade and Investment Policies and Regional Cooperation in East Asia structures. (4) Find measures and solutions for trade negotiations in order to protect national interests. (5) Promote and/or support trade mission in order to find new markets. 26 http://www.adrf.org Asian Development Research Forum Concurrent Session: Regional Production Networks and Implications for (Domestic) Trade and Investment Policies and Regional Cooperation in East Asia Table 17: Government's Policies and Automotive Production Networks Period 1. Pre-1991 General Characteristic Driving forces - From small market to the - Domestic emerging networks. demand - Diseconomies of scales - Baht devaluation (1984) - High economicgrowth (86-89) - Lower taxes pushed the price of automobile down - Economy showed signs of weakness - Upward trend in domestic sales - FDI - Strong domestic demand Policy measures - Import substitution - Industrial Promotion Acts - High import tariffs - Local content requirement (1971) - Limit model of car assembly - Revised local content - Partial liberalization - Lift ban on import of CBU - Lower tariffs and business taxes on imported CBU - Promote SMEs in automotive industry - Revise promotional privileges for new assembly plants - Abolish local content requirement (2000) - Create trade through regional cooperation and FTA Networking Development - Establishment of parts and component (1974) - Cooperation between auto assemblers and part makers - Investment in supporting industry - Expansion of production capacity. - Establishment production network with more local supporting industries - Promotion of cooperation through AFTA program - Global sourcing - Relocation of production base to Thailand (pick-up) - New trend in global part and component industry - New technology in automotive industry 2. Liberalization and deregulation (19921996) 3. Industrial restructuring for closer regional cooperation (1997now) - Financial crisis led to drop - Intra-regions in demand. trade - Business in trouble (lack - Exports of cash flow) - Industrial restructuring 27 The 6th ADRF General Meeting, 2004 Bangkok, Thailand Concurrent Session: Regional Production Networks and Implications for (Domestic) Trade and Investment Policies and Regional Cooperation in East Asia 6.3 Government's policies on regional cooperation Asean countries have attempted to integrate automotive industry, and formed common effective preferential tariff (CEPT) scheme under the AFTA set up in 1993. However, most assemblers did not take account of the CEPT scheme in their planning because automotive industry was on the sensitive list. However, the fast-changing liberalization in automotive industry, and promotion of bilateral trade among trading countries involving Thailand (FTA) have moved tariff reduction among member countries sooner than earlier planned. The newly-planned for tariff reduction is .05 percent to be implemented in 2010, but the Thai Automotive Industry Association proposed the 0% CBU in 2005, regarding AFTA as an important base of maintaining competitiveness of Asean automotive industry. AFTA needs to realize earlier than FTA. Moreover, the Asean member countries agreed to promote intra-regional trade in automotive parts and components and introduced Brand to Brand Complement Scheme (BBC). The scheme assigned specific parts production to different Asean countries to exploit comparative advantages and develop economies of scale. It allowed assemblers in each of the participating countries receiving local contents accreditation and a 50% reduction in their import duty for imported components from Asean countries. Unfortunately, only 3 countries, involving 4 auto makers participated in this program, since the BBC scheme has some limitations. Thus, the Asean agreed to have a new scheme, called Asean Industrial Co-operation Scheme (AICO), which was formed in April 1996. AICO will provide following privileges; (1) 0-5% import duty rates immediately (2) local content accreditation, and (3) no restriction on the export of the AICO products for the participating countries. As expected the AICO scheme has enhanced intra-Asean trades of vehicles and auto parts. Production networks and global sourcing have started to promote intraregion trade, especially soon after the crisis. Moreover, as the cooperation among the Asean countries increased, several assemblers have designed cars for the Asean market which effectively promote trade and exploit economies of scale. Among them, they are Toyota (Soluna designed and assembled in Thailand, Avenza assembled in Indonesia), and Honda city assembled in Thailand. 6.4 Comparison of Tax structures in Automotive Industry Thai Automotive Industry Association has complained on the distortion of import tariff against parts and components industry, since the tariff rates of imported new materials for parts and components production are higher than those imposed on parts and components. (CKD) Law materials are levied at 10-50% rates, meanwhile the parts and components under the AICO Scheme are set at 0-5% only. Part components manufacturers are put at disadvantage competing with the imported parts and components. 28 http://www.adrf.org Asian Development Research Forum Concurrent Session: Regional Production Networks and Implications for (Domestic) Trade and Investment Policies and Regional Cooperation in East Asia Table 18 Tax Structure of Asean Countries Type of tax 1) Import tariff - CBU - CKD 2) Excise tax(%) 3) Value added Tax 4) Others Thailand 80 30 38.5-62.6 7 Interior tax 10% of excise Malaysia 140-300 42 65 10 Indonesia 65-80 10-15 40 10 Philippine 30 10 15, 35, 50, 100 depending on engine displacement 10 - Source: Automotive Industry Development Master Plan. (prepared by Thai Automotive Institute) 29 The 6th ADRF General Meeting, 2004 Bangkok, Thailand Concurrent Session: Regional Production Networks and Implications for (Domestic) Trade and Investment Policies and Regional Cooperation in East Asia 6.5 Free Trade Area Agreement The Thai government has moved to promote bilateral trade with 10 countries, each with different stages of preparation for implementation. Bilateral agreement with the following 4 countries have progressed at satisfactory level and automotive trade in Thailand's FTAs are as follow; Australia: A zero tariff is set in 2010 with Thailand proposed 3 steps of implementation Thailand’s tariff = 20% in 2005 10% in 2007 and 0% in 2010 Australia’s tariff in 2005 is 0% A free trade agreement was signed on Oct 9, 2003. Automotive parts are included in the list of 84 products going into effect in March 2004. Zero tariffs will be achieved by 2010. Automobiles is a priority sector for both countries. Currently the US levies 25% tariffs on imported pick-up trucks. Free trade in industrial goods would begin in January 1, 2004. Cars and components are one of China’s principal taxable imports. All tariffs will be eliminated by 2010. India : USA China : : 6.6 Clustering system The government has revised industrial development plan and adopted the M. Portor’s clustering concept in promoting the efficiency of entrepreneurs in SMEs and overall competitiveness of Thai industries. The geographical concentration of the 5 targeted industries are planned by the Committee on Competitiveness Promotion of National Economic and Social Development Board (NESDB), the central planning agency in Thailand. The five targeted industries include, Food, Fashion industry (garment, leather, jewellery) electrical appliances and electronics, tourism, and automotive industry. The automotive clusters are planned in the eastern parts of Bangkok, where major car assemblers are located. Main locations are Samutprakarn. The newly established locations are Rayong, Chacheongsao, Chonburi in the eastern part and Ayudhaya in the central part of Thailand. Thai Automotive Institutes has recently drafted the Master Plan for development of Thai Automotive industry and proposed the groups of related activities to be included in this clustering system. Moreover, the supply chain management and/or logistic system is now being studied by the Japanese consulting firms, and should be ready soon. It is important that the logistic providers will support the development of supply chain in Thailand, because there has been increased integration within the supply chain. Outsource logistics, a major driver for car makers because, it helps reduce costs and allows concentration on the core business of making cars. At the same time, the skills and competencies of a professional partners allows economies of scale to ensure a proper logistics process. 30 http://www.adrf.org Asian Development Research Forum Concurrent Session: Regional Production Networks and Implications for (Domestic) Trade and Investment Policies and Regional Cooperation in East Asia 31 The 6th ADRF General Meeting, 2004 Bangkok, Thailand Concurrent Session: Regional Production Networks and Implications for (Domestic) Trade and Investment Policies and Regional Cooperation in East Asia Fig 6 Structure of Automotive Cluster. Up-stream industry Steel Plastics Rubber Electronics Glasses Clothings Leather Machinery Tools & equipment Mould & Dies Jig&Fixture Private institute and association 1st-tier suppliers 2nd and 3rd tier suppliers Financial Testing services Sepcific service advisory Legal advisory Other services Educational Institution & Technical Institution Government office Other related services Distribution Main Activities Motorcycle Passenger commercial Makers car makers car makers 32 http://www.adrf.org Asian Development Research Forum Concurrent Session: Regional Production Networks and Implications for (Domestic) Trade and Investment Policies and Regional Cooperation in East Asia Conclusion and Recommendation During the past 30 years, the government’s policy measures have been on the right track in promoting growth and development of automotive industry, through supporting the production network, as laid down by the leading assemblers. The liberalization and deregulation policies which started in 1992, have supported the network production of major auto assemblers, especially the relocation of production base for commercial vehicles (pick-up trucks) by Toyota and Isuzu. Pick-up truck is a product champion for Thailand, and is destined to more than 150 countries worldwide. Regional economic cooperation which promoted trade and investment under the AIJE program, has greatly benefited the production network, as it created the scale of production, and division of works among the companies engage in the exchange program, namely Ford and Toyota. As Asean has become the emerging production base and market for automotive industry, as they have in China and India. The joint efforts in drafting the policies for development, should aim at improving competitiveness of local SMEs in part-making for OEM and REM markets. This will strengthen the production networking, and drive the industry into the sustainable development path. Among the 6 challenges which Thailand and other countries in the region, have to encounter are; - Positioning of Thai and Asean Auto Industry in the global market - Linking Thai SMEs to the automotive supply chain - Empowering Thai workforces for the automotive industry - Developing and integrating supporting industries into Thai auto industry - Moderning the automotive industry through logistics and IT, in order to strengthen competitiveness - Innovating to succeed through research and development. 33 The 6th ADRF General Meeting, 2004 Bangkok, Thailand Concurrent Session: Regional Production Networks and Implications for (Domestic) Trade and Investment Policies and Regional Cooperation in East Asia References Annuar Jalalud. “Asean Auto Components; Embracing the trends in Global Component Market”. Asean Autobiz, vol 3 No.22 (January 2004): 22-25. Aye Ko Ko. “The Age of Exports”. Asean Autobiz, Vol.3 No.22 (January 2004): 36-38. Chakchai Panichapak. “Development of Automotive Industry in Thailand”. Regional Conference of Automotive Industry in Thailand and the Mekong SubRegion, Bangkok, Oct 14, 1996. Japan International Corporation Agency (JICA) and Ministry of Industry, Thailand. “The Study in Industrial Sector Development Supporting Industries in the Kingdom of Thailand”. Tokyo. Unico International Corporation. Ministry of Industry “Regional Networks and Industrial Development in the provinces of Thailand. Bangkok 2003. Mipon Paopongsakorn. “The success of Thai Automobile Industry” A paper prepared for “The Asian of Automotive Industry”. Organized by the Institute for Economic and Social research (LPEM FEUI) University of Indonesia, Jakarta, 1996. John Humphrey. “Globalization, FDI, and the Restructuring of Supplier Networks: The Motor Industry in Brazil and India in “Learning, Liberalization and Economic Adjustment”, Tokyo, 1998. Prapapan Monmahachinda. “Factors Affecting the Exportation in Automobile Parts Industry in Thailand” M.A. Thesis. Faculty of Economics, Thammasat University 1993. Samart Chiasakul. “The Study on Industrial Networks in Asia”, A case study of Thailand, Institute of Developing Economies, Japan External Trade Organization, 2000. Shegeki Hizashi. “The Automotive Industry in Thailand: From Petection Promotion to Liberalization”. In The Automotive Industry in Asia: The Great Leap Forward? Tokyo: Institute of Developing Economies. 1995. Thammavit Terdudomtham. “The Automotive Industry in Thailand”. ASP-5 (SubProgramme on Liberalization of Trade and Investment. Thailand Development Research Institute. September 1997. Uniresearch, Chulalongkorn University. “Industrial Restructuring in Thailand; Pre and Post Crisis”. Ministry of Industry Bangkok, October 2003. Yoichi Koike. “Globalization of Japanese Subcontract Transaction and Asian Suppliers”. In the “Learning Liberalization and Economic Adjustment. Tokyo: Institute of Develoing Economies, 1998. 34 http://www.adrf.org Asian Development Research Forum
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