AYUTTHAYA, Thailand — Empty of machinery, the new high-ceilinged, white-walled Honda assembly plant here is cavernous. By late October, though, the building will be humming with life when production begins. It’s all part of the carmaker’s plan for Thailand to play a bigger role in its global strategy.
Once the plant — its second at the Ayutthaya site — is in full swing, Honda Motor Co. expects to double its production capacity in Thailand to 240,000 units a year.
For many global carmakers, Thailand has emerged as an increasingly important production center. In 2003, the government announced it wanted to make the country the “Detroit of Asia.” Aiming to boost vehicle production to 2 million units a year by 2010, Thailand is doing all it can to attract foreign carmakers. It is improving infrastructure — highways, ports, giant housing complexes — and promoting free-trade agreements with its neighbors.
Currently, Japanese automakers are responsible for most of the nearly 1.3 million vehicles churned out by the nation’s factories.
With its open policy, good infrastructure and competitive labor market, the country has attracted parts makers along with the auto companies.
“There are layers of supporting industries for automakers in Thailand,” said Atsusuke Kawada, vice president and senior economist at JETRO (Japan External Trade Organization) Bangkok Center. “It is a very important reason why they focus on this country as a production center.”
Putting its money where its mouth is, the Thai government in 2007 promised to give tax breaks to ecology-friendly carmakers.
Within the first five years of startup, a maker that builds at least 100,000 cars that emit no more than 120 grams of carbon dioxide per kilometer and get at least 20 km to the liter will be exempt from corporate taxes for eight years. The car tax that consumers pay for these vehicles will be lowered to 17 percent, compared to 30 percent for other cars.
Seven automakers responded to the offer: Honda, Toyota Motor Corp., Nissan Motor Co., Mitsubishi Motors Corp., Suzuki Motor Corp., Germany’s Volkswagen AG, and Tata Motors Ltd. of India.
“Such incentives and an expectation of rising demand for compact cars are the biggest reasons why foreign carmakers want to increase production of eco-cars in Thailand,” said Koji Sako, a senior economist who tracks Asia at Mizuho Research Institute Ltd.
Industry sources say high gasoline prices will continue to draw Thai drivers to fuel-efficient compact sedans, rather than traditionally popular pickups.
For Japanese makers, Thailand is poised to become one of the most attractive production centers because rising labor costs have slowed their investment in China, Sako said.
However, Thai vehicle production is still 14th in the world. Even in Asia, it trails Japan, China, South Korea and India, according to data released by the Thailand Board of Investment in July.
Unlike these countries, Thailand lacks a domestic automaker with its own brand. Consequently, the country must look to foreign makers such as Toyota, Honda and General Motors for growth. So far, business has continued to expand.
Honda, in addition to building the second Ayutthaya plant, has boosted Thailand’s role as a regional production hub since 2007.
“We set up a new system, which helps Thai workers to support production not only in the (ASEAN) region but also outside the region,” Fumihiko Ike, president and CEO of Asian Honda Motor Co., told a news conference in Bangkok in September ahead of the release of the City, the first model assembled entirely by local workers.
When Honda launched a new model here in the past, Japanese engineers flew to Thailand to support local workers. But now, the local center takes the initiative in learning the design and procuring parts for the new model. Workers from the Ayutthaya complex also train Honda engineers in other nations such as India and Pakistan.
A total of 350 engineers from five other nations spent a total of 4,000 days gaining knowhow, Ike said.
Next year, the second-biggest Japanese carmaker will also expand its Thai research and development center, set up in 2005, to reinforce the selection process for component makers.
“To boost our competitiveness in the region, the local R&D center is very important,” said Adisak Rohitasune, senior vice president of Asian Honda Motor Co., headquartered in Bangkok.
The Ayutthaya plant not only assembles cars for the Thai market but also exports them to 36 countries ranging from members of the Association of Southeast Asian Nations to markets in Africa, the Middle East, Australia and New Zealand.
Meanwhile, Toyota Motor Corp. in 2004 chose Thailand as the first production site for its innovative international multipurpose vehicle (IMV) project, which aims to build vehicles outside Japan and export them to other countries.
Japanese aren’t the only automakers interested in Thailand.
GM announced in August it plans to construct a diesel engine plant on the site of its assembly plant in Rayong, Thailand.
The U.S. auto giant will invest $445 million to build the new plant and renovate the old one. When completed in 2010, the new plant will have an initial annual production capacity of 100,000 engines, GM said.
Japanese companies began actively investing in Thailand in the 1990s amid the liberalization of ASEAN economies.
But after the Asian currency crisis hit the region’s economies in 1997, Japanese firms boosted exports of their made-in-Thailand products to other countries, said Mizuho’s Sako.
In addition, Thailand’s policy to open the market to foreign investment and promote FTAs in 2004 and 2005 under former Prime Minister Thaksin Shinawatra attracted many Japanese companies, Sako said.
Unlike China, where foreign firms need to set up joint ventures with local companies to enter the local market, the open Thai market is attractive for many Japanese firms because they do not have to worry about a technology drain, Sako said.
As a result, there is a cluster of 7,000 to 8,000 small and big Japanese firms in Bangkok, he said.
But there are concerns.
Sako said increasing exports from Thailand could increase trade friction with surrounding countries.
If exports from Thailand mark a steep gain, the baht is likely to jump against other currencies. An overly strong baht would eat into profits of Japanese makers on their made-in-Thailand products, he said.
Another concern is political uncertainty. In 2006, then Prime Minister Thaksin was ousted in a coup.
“Political stability is a must for long-term investment,” JETRO’s Kawada said.
He said clashes between supporters of the Thaksin administration and antigovernment protesters continue in the center of Bangkok.
“Unless the country has a more mature democracy, some foreign makers could start becoming cautious about investing for the long term,” he said.
Mizuho’s Sako said foreign firms will need to keep an eye on the country’s open policy for foreign investment. “It is always a concern whether the Thai government reviews its open policy for foreign firms,” he said.
But Sako added it is hard to expect the government to actually step back from the open policy because it already built up an economic structure that benefits from foreign investment.