Thailand's auto industry becomes a Japan-China battleground

Khodrocar - Toyota Motor commemorated the 60th anniversary of its operations in Thailand last month with a massive ceremony held at a renovated national convention center. The first Hilux truck, a 1970 Corolla and other Toyota models made in the country were on display for the 1,500 guests to see.

"The future of Toyota and Thailand is very bright, and it's only going to get brighter," company President Akio Toyoda declared on stage while introducing Toyota's first electric pickup truck for emerging markets, to be produced in Thailand. "Personally, I have always considered Thailand my 'home away from home.' If I didn't have to live in Japan for my job ... I'd live here!"

His words underlined the deep ties between Japan Inc. and Thailand, a market Toyota and some of Japan's other big corporations have come to see as part of their own backyard. No other nationality has invested so much in Thailand. In fact, corporate Japan has poured so much money into the country that it has created a leading regional motor manufacturing center.

Toyota and its group companies employ 275,000 people in Thailand. By some estimates, it accounts for 4% of the country's gross domestic product. Altogether, Japan accounted for 32% of the balance of FDI in Thailand as of March 2022, by far the largest slice, according to data from the Japan External Trade Organization (JETRO).

But structural changes in the car industry -- and in the global economy generally -- are posing tough questions about Japan's relationship with Thailand. In particular, the rise of China and its increasingly ambitious electric vehicle makers have presented Japan with its first serious rival in a country that calls itself the Detroit of Southeast Asia.

A few months before Toyoda's visit, Chinese EV maker BYD signed a deal to buy almost a square kilometer of land in Rayong, on the east coast of the Gulf of Thailand. It will start producing electric vehicles there in 2024. The seller, Thai industrial estate developer WHA, says it was the company's biggest transaction in 25 years.

The transaction also likely made China the biggest investor in Thailand for 2022, dethroning Japan for the first time since 1994, according to data compiled by JETRO.

"It shows their ambition," says David Nardone, CEO of WHA's industrial development division. "The Chinese have been the most aggressive [investor] and they are coming from a market where they have the highest [EV] volumes in the world."

EVs still make up less than 1% of Thailand's new car sales, but in that small segment, Chinese brands dominate. Great Wall Motor, which acquired a GM factory in Rayong in 2020, captured 45% of the sliver in the first nine months of 2022 with its inexpensive Good Cat subcompact EV. China's SAIC Motor followed with 24% thanks to its popular British brand MG.

More competition is on the way. In September 2022, Taiwan's Foxconn announced a bid to produce EVs in Thailand around 2024.

Chinese automakers are motivated in part by the need to skirt U.S. trade restrictions amid the U.S.-China economic decoupling. "Chinese companies are trying to arbitrage," Nardone explained.

As much as 40% of WHA customers for the past three years came from China and Taiwan, he said.

Thailand also offers a well-developed supply chain that newcomers can readily tap into. "Everyone that came in wants to utilize the Thai suppliers for metal parts, seats, interior systems, plastics," Nardone said. "The Chinese are using the same suppliers the Japanese would be. They could be Japanese suppliers or European or American."

Thailand is certainly laying out the welcome mat for Chinese investment. Prime Minister Prayuth Chan-ocha, the army general who led the 2014 coup, is keen to show that the Thai economy is modernizing ahead of general elections slated for May. In 2020, the country announced a plan to have EVs make up 30% of auto production by 2030.

Thailand is also conscious of threats from regional rivals. It has a bigger stock of FDI than Indonesia or Vietnam, but in terms of new investments Thailand has been outpaced by its neighbors since 2014.

In addition, Thailand faces a demographic disadvantage. It has 71 million inhabitants to Vietnam's 97 million and Indonesia's 273 million. Thailand's population is also the most aged in Southeast Asia, after Singapore's, and is expected to stay flat. Without a new supply of labor and more market scale, Thailand's standing in the region could be in jeopardy, some experts warn.

But that does not seem to be deterring Asia's two biggest economies from pouring money into the country, especially in the auto sector.

"The competition between Japanese and Chinese is likely to become more intense as Chinese automakers shift production to Thailand to go around the economic decoupling [of the U.S. and China]," predicts Hajime Yamamoto, a Bangkok-based auto analyst with Nomura Research Institute.

For companies that are part of the Japanese auto supply chain, the situation brings risks but also opportunities.

At auto parts maker Denso, Naoto Inuzuka is keeping a close eye on the rapidly shifting competitive landscape. "I'm really concerned that the Japanese companies would lose the business base they have built up in Thailand over the long period," said Inuzuka, the CEO of Denso Asia International.

But he also sees a potential upside. "We're seeking opportunities to supply to the newly arriving automakers," he added, referring to new investors such as BYD, Great Wall, SAIC and Foxconn. Inuzuka recently took Foxconn officials around Denso's factory. Denso is also promoting local talent to managerial positions in an effort to build a better rapport with the Thai government as well as with the new investors.

Inuzuka says that Denso is preparing to meet the demand from EV makers in Thailand, which he expects will start production in 2024-25, initially on a small scale.

The components that Denso produces in Thailand have mainly been used for gasoline- or diesel-powered vehicles, while its output in Japan includes components for electric and hybrid cars. To meet the growing demand for such vehicles in Thailand, Denso plans to convert existing production lines in the country, Inuzuka said.

Other Japanese investors are also still betting big on Thailand. In November, Sony disclosed a plan to expand production at a chip plant north of Bangkok by 70% and boost the number of employees to 3,000 from 1,000 by fiscal 2024. The plant makes image sensors used in autonomous driving systems.

Honda Motor meanwhile announced in November that it plans to start mass-producing all-electric SUVs in Thailand in 2023. It produces cars and motorcycles in Thailand, Indonesia and India but has research and development facilities only in Thailand.

For now, Honda anticipates ramping up its EV output gradually. The company cannot make a big investment unless it is sure there will be enough returns, a Honda official said. The automaker has promised investors it will raise its operating profit margin to 7% in fiscal 2025 from 5% projected for fiscal 2022.

"There is no point making something without people asking for it," the official said. "We believe the EV market is still in its early days in Thailand."

EVs from Toyota, BMW, Volvo and Tesla cost more than 1 million baht ($29,000) in Thailand -- as much as an apartment in some parts of the country. EV chargers are few and far between outside Bangkok, and many people still drive diesel-powered pickup trucks to carry both people and livestock.

Yamamoto, the auto analyst, said Japanese automakers are reluctant to move too quickly. "The age of the EV will come," he said. "Their hope is that there will be an ample transition period for them to amass cash for new investments."

But others say the clock is ticking.

"It's important to take the first move," said Stanley Kang, a former chairman of the Joint Foreign Chambers of Commerce in Thailand who runs an EV battery charging business. He pointed to the smartphone industry as an example. "Today, only Apple, Huawei and Samsung -- no other brands can sell," he said. "That's why I say whoever goes into the market earlier can catch more brand image and market share."