Coup won't drive car firms from Thailand, but rivals beckon

By Khettiya Jittapong

CHONBURI Thailand (Reuters) – Thailand’s second military coup in a decade will not scare off foreign car firms, who still prize its skilled labour force and network of parts suppliers, but expansion plans are on hold after months of unrest as Indonesia lures some investment away.

The auto industry accounts for about 11 percent of Southeast Asia’s second largest economy, and most of the big global players use the country as a regional hub.

“That will not change,” said Takao Katagiri, Nissan Motor Co Ltd’s <7201.T> regional chief. “There is a strong foundation there including the supplier network. That’s not something that can be changed so easily.”

In the short term, the turmoil that prompted the army to seize power in a bid to end seven months of sometimes violent street protests has not changed much for the big car makers, who are likely to export around half the cars they make in Thailand this year.

“What is happening now has not had a direct impact on actual livelihoods and corporate activities. Manufacturing is operating smoothly and our sales and business operations are going on as usual today,” Katagiri said.

Smaller players in the supply chain are suffering more, due to the damage the unrest has inflicted on domestic demand. Auto parts maker Aapico Hitech Plc said on Thursday its 2014 revenue would fall 10-15 percent, worse than earlier forecast.

At the sprawling Amata Nakorn industrial estate at Chonburi, 60 km east of Bangkok, 30-year-old Rungsan Seagproa said he had suffered a drop in his 19,000 baht-a-month ($580) salary after the auto parts supplier he works for cut back on production.

“The factory is running at around 30-40 percent,” said the assembly worker. ”I lost about a few thousand baht after the company cut the overtime shift. Now, I need to be careful about spending.”

At least 30,000 subcontracted workers in the auto sector have been laid off because of the slowdown this year.

“COUP BEATS DYSFUNCTIONAL GOVERNMENT”

Scores of politicians were detained for a while after the coup and censorship imposed, but some Thais welcomed the relative calm and the return of functioning government. One Toyota executive familiar with the country agreed.

“We’ll take an orderly coup d’etat any time over a highly dysfunctional democracy that led to a gap in political leadership in Thailand over the past six months,” he said.

Car industry executives say the mood in Thailand was morose even before the coup.

Domestic vehicle sales had surged a heady 80 percent in 2012 to 1.44 million vehicles, fuelled by a state subsidy for first-time car buyers that was part of government efforts to boost the economy after floods devastated great swathes of Thailand in 2011, including huge industrial parks in the central provinces.

That couldn’t last, and sales fell nearly 8 percent to 1.33 million in 2013, according to the Federation of Thai Industries. Toyota Motor Corp <7203.T> has forecast a further drop of 14 percent this year as political turmoil has pushed consumer confidence to a 12-year low.

It is not just the auto industry that is suffering because of the unrest. Figures on Wednesday showed factory output was lower than a year before for the 13th consecutive month in April and capacity utilisation in industry stood at just 56.6 percent, the lowest since the peak of the flooding in December 2011.

Imports were 14.5 percent lower than a year before as the domestic economy stagnated and exports continued to struggle, down 0.9 percent compared with April 2013.

Thailand’s car sector is suffering from longer-term problems, too, including a shortage of labour and wages that are higher than elsewhere in the region.

Japan Automobile Manufacturers Association head Fumihiko Ike, who is chairman of Honda Motor Co Ltd <7267.T>, said car makers were starting to look at Indonesia and India, both of which have vast long-term growth potential.

Indonesia is a second Southeast Asian hub for Toyota Motor, the world’s biggest car maker, but it can’t match Thailand as a manufacturing base, an Indonesian-based Toyota executive said.

“In terms of parts supply infrastructure and human resources, Indonesia isn’t that sophisticated as yet and cannot compete well with Thailand as a place to operate all aspects of the business, from product development to manufacturing to sales and marketing,” he said.

Shingo Ikeda, a Singapore-based expert on Southeast Asia’s automotive industry with Roland Berger Strategy Consultants, said, judged by the number of parts suppliers, Thailand’s auto industry was around three times the size of Indonesia’s, which he reckoned would take around a decade to catch up.

“It’s very hard to switch investment from Thailand to Indonesia,” Ikeda said. “As an automotive hub in Southeast Asia in the shorter term Thailand is very, very strong because of this huge supplier base.”

INFRASTRUCTURE ADVANTAGE

Thailand’s Hemaraj Land Development Pcl has attracted the likes of Ford Motor Co and General Motors Co plus many parts firms to its five industrial states.

“Infrastructure like power, communications, ports, other than road bottlenecks, are very good. There is an excellent automotive supplier base, labour and production costs are reasonable, and the ease of business is favourable in Thailand,” said David Nardone, its managing director.

To be sure, Japanese firms have pulled in their horns in Thailand, and politics has been a factor.

Honda said on May 22, hours before the coup, that it had cut output at one plant to 60 percent of capacity. It is delaying the start-up of a new plant by up to a year from April 2015, according to company officials in Thailand, but may reconsider if demand picks up.

Toyota said back in January it could reconsider planned investment of up to 20 billion baht in Thailand or even cut production if political unrest dragged on.

But the Japanese car makers have been in Thailand for decades and have already invested heavily in manufacturing capacity in the country that cannot be easily shifted.

“We don’t have any plans right now to expand capacity over and above that which is already built. So we don’t have any difficult decisions to make,” said Andy Palmer, chief planning officer at Nissan, which is opening a second Thai plant soon.

“If this was happening two years ago, that might be a different situation. One might pause and think, but right now we are already pregnant. The baby is coming whether you like it or not.”

(Additional reporting by Yoko Kubota and Maki Shiraki in Tokyo and Yokosuka, Japan and Norihiko Shirouzu in Beijing; Writing by Alan Raybould; Editing by Alex Richardson)

Coup won't drive car firms from Thailand, but rivals beckon