BMI View : While tax incentives from the eco-car scheme are scheduled to expire in 2015, we believe it is likely that they will be extended by the Thai government. These incentives have allowed production of small cars to grow strongly after 2007 on the back of Thailand's attractiveness as a production hub as well as the popularity of eco-cars in the SEA region. Moreover, the employment and tax revenue boost coming from eco-car investment, as well as growing competition from other countries in the region, as they try to introduce incentives to emulate Thailand, will ensure the government takes steps to maintain Thailand's dominance in the segment.
Ford Motor intends to join Thailand's eco-car programme introduced by the government back in 2007, should new licenses become available. This is part of Ford's regional strategy of using Thailand as a global production and export hub together with India. In order to show its commitment to its Thai production facilities, the automaker is shifting the production of its 'Ford Fiesta' model, which was Europe's best-selling small car in Q113, from Cuautitlan, Mexico to Rayong.
The eco-car programme has been a success for Thailand since it was introduced in 2007. It has allowed automakers to utilise their spare capacity and operate their Thai subsidiary as a small car export base. Eco-cars are defined as those that travel more than 20 kilometres per litre of fuel and do not emit more than 120 grams of carbon dioxide per kilometre, among other standards. Indeed, the accompanying chart shows that growth in small car production surged after 2007 and outperformed all other categories.
|Small Car Production Outperforms|
|Thailand - Production Of Automobiles Breakdown By Category, Index (2000=100)|
Assisted Japanese Automakers To Dominate South East Asia
Furthermore, automakers eligible for the programme enjoy exemption from corporate tax and machinery import duties, as well as a 90% reduction in import duties for raw materials and finished parts. It is no surprise that the five Japanese automakers registered under the programme, Nissan Motor, Mitsubishi Motors, Suzuki Motor, Honda Motor and Toyota Motor, enjoy a combined market share of 80% in the South East Asia (SEA) region. With benefits such as being able to export eco-cars tax-free to Indonesia, these carmakers have benefited immensely from the attractive incentives under the program and using Thailand as a production base to export to other parts of SEA.
We have highlighted the headwinds faced by Thai exporters due to the strengthening real effective exchange rate (REER) of the Thai baht ( see our online service, April 04 2013, 'Baht Strength Will Only Be A Minor Annoyance') and Japanese exporters in Thailand will be even more adversely affected given the sharp depreciation of the Japanese yen against most world currencies in the past few months. However, with such attractive import incentives under the eco-car programme until 2015, we believe Japanese exporters will be able to still profitably export from the region.
Eco-Car Program Likely To Be Extended
Although the tax breaks under the eco-car scheme are scheduled to expire in 2015, it is imperative for the government to announce this year whether they will extend the programme, due to the need for automakers to plan capacity a few years in advance.
We believe the Thai government will extend the programme or at least continue providing some sort of tax incentives for small cars due to a number of reasons:
Regional Competition In Eco-Car Sector
Indonesia has announced measures recently to attract eco-car production in the country ( see, 'Green Car Incentives Boost Production Outlook', December 28 2012) and Malaysia intends to release new incentives later this year to target investment in not just eco-cars, but also hybrid and electric vehicles ( see, 'EEV Policy To Encourage Malaysian Export Hub', January 28 2013). With other countries vying to capture a slice of this growing pie, it is unlikely that the Thai government will allow its dominance in this segment to wane.
Boost To Local Economy And Auto Market
Thailand has benefited immensely from being the 'Detroit of Asia' in terms of investments, tax revenues and employment creation. With the country among the top 10 largest vehicle producers in the world in 2012 and with an aim of increasing its production to 3mn units by 2017, from the current 2.5mn units, it is imperative for the government to continue providing attractive tax incentives to carmakers.
Also, preferences in the local market are shifting towards eco-cars due to the increasingly fuel-conscious consumer. While pick-up trucks accounted for about 40% of domestic sales and eco-cars about 19% of domestic sales in 2012, eco-cars are poised to increase their domestic market share in the coming years.
While sales in Indonesia's domestic auto market fell behind those of Thailand in 2012, due to the introduction of the 'first car' scheme in the latter, Indonesia is poised to wrest back the title of SEA's biggest domestic market. Indonesia enjoys the advantage of a fast growing middle class and a population which is about three times that of Thailand. We forecast the Indonesian market to overtake Thailand by 2015. While sales in Thailand will invariably contract this year after the stimulus effects of the first car scheme fade off, an extension of small car tax credits will allow the government to provide support for domestic sales without additional stimulus efforts, given that small cars are poised to capture a larger segment of the market in the coming years.
|Indonesia Set To Overtake Once Again|
|Thailand & Indonesia - Domestic Auto Sales, Units|
Should the Thai government open up new licenses for the eco-car scheme in 2013, we believe other foreign automakers such as Ford and Hyundai will be ready to take advantage of them. Ford has a target of getting 40% of its sales from Asia by 2020, and winning eco-car tax incentives will be beneficial in breaking the stranglehold of Japanese carmakers in the SEA region.