7 th June 2004 Associate Prof. Samart Chiasakul Faculty of Economics Chulalongkorn University

1. Production Networks, Trade and Investment Policies and Regional Cooperation in S.E. Asia : A case study of Automotive Industry in Thailand 7th June 2004 Associate Prof. Samart Chiasakul Faculty of Economics Chulalongkorn University Bangkok 10330, Thailand 1

2. Contents 1) Structure of Thai Automotive Industry in Thailand 2) Evolution of Production Networks in Thai Automotive Industry 3) Regional Cooperation Measures and changes in production networks and trade linkage in the region 4) Global sourcing and trends in automotive industry 2

3. Production Networks in Thailand Car Assembly In-house parts production First-tier Supplier 508 companies Corporate group (member) (100-220 com.) (20%) Import part (30-40) 1100 companies 40-50%) (2nd-tier) 2nd-tier Jig & fixture mould & die 3 3nd-tier Suppliers

4. Factors determining growth in the Automotive Industry (1) Economic conditions (2) Market size (3) Capacity utilization rate (4) Globally integrated strategy from the MNC’s perspective (5) Government’s policies 4

5. Car Production and Sales (selected year) unit Year Production Sales 1961 526 3,934 1991 206,177 268,560 1996 420,846 589,126 1998 158,130 144,065 2003 750,512 533,176 5

6. Structure (continued) Import/production (91) = 30.2 % (96) = 40.0 % (98) = 8.9% (03) = 28.9% Import tariffs (2003) CBU = 60% - 80% CKD = 20% - 30% Excise tax (2003) = 38.5 - 62.6 VAT = 7% 6

7. II. Production Networks in Thai Automotive Industry 2.1 The creation of the Automotive Production Network in Thailand (Pre -1991) 2.2 Liberalization and Deregulation period (1991-1997) 2.3 Industrial restructuring for closer regional networks (since 1997) 7

8. 2.1 The Creation of Production Networks (Pre 1991) (1) Production Network: - Limited scales of production - Parts were mainly imported for assembly, by auto-makers - Local content requirement (1971) - Auto parts industry established in 1974 - More investment in supporting industry (1986) - Cooperative clubs between car assemblers and part markers were formed 8

9. 2.1 Pre-1991 (continued) (2) Policy measures - Import substitution - High tariffs protected local imported CBU (3) Positive Factors - Local market - High economic growth (during 1986-1991) - Strong export (during 1986-1991) 9

10. 2.2 Liberalization and Deregulation (1992-1997) (1) Production Network: - Lifted ban on imports of small CBU - Lower tariff for imported CBU and CKD (112% to 20%) - Production networks for exports (PV and CV in 1988) - More models and international brands induced more investment in supporting industry - Production networks of US auto markers planned to set up plants in 1995 10

11. Liberalization (continued) (1992-1997) (2) Policy measures: - Liberalization - Deregulation - Promote supporting industry - Deepen industry linkage - Promote regional cooperative (mainly trade) (3)Positive Factors - High economic growth - Domestic demand stimulated by more models and lower prices 11

12. 2.3 Industrial restructuring for closer cooperation (since 1997) (1) Production Network: - Abolish local content requirement - Production networks were used to increase capacity utilization - Trade in OEM and general parts and components in SE-Asia - Thailand has become one of the production base for CV - Global sourcing and new trend in automotive industry 12

13. Automotive industry since 1997 (2) Policy measures - Revise investment promotional privileges - Restructure industrial sectors including automotive - Lift local content on Jan 2000 - Promote clustering system in automotive industry - Strengthen roles of private sector associations and institutes (3) Positive Factors - Exports - Intra-region trade - FDI 13

14. III. Regional Cooperation Measures and Changes in production network a) BBC - Brand to Brand exchange - Lower tariff by 50% of original rate in each member country - Promote specialization in making parts and components (Thailand-Diesel engine, Malaysia - Wheel, Indonesia- Benzine engine Philippine- Tranmission and steering part 14

15. III. Regional Cooperation Measures (continued) b) AICO - Tariff rate on CKD (on exchange list) will be subjected to 0- 5 % - Exchanged parts and components will be treated as local parts (under local content rule) 15

16. III. Government’s measures (continued) c) AFTA - Thailand will lower tariff rates to 0-5 % no later than 2010 - Thai Automotive Industry Association propose CBU = 15% CKD = 10% Raw material = 0- 5 % (in 2007 - 2009) - AFTA needs to relize earlier than FTA 16

17. III. Government’s Policy (continued) d) FTA - Bilateral agreement with 10 countries will lead to more trade and investment - India, China, and Australia will be trading partners in auto industry - Trade in CBU, parts and components will be promoted - Thailand is expected to lower tariffs to 0% in 2010 (in trading with Australia) 17

18. Deepening of production chain in Thailand Deepening of production chain was made through (1) Increase in FDI and number of parts and components industry in body parts, engine parts, electrical parts, suspension and branke, and etc. (2) Increase in exports and trade in OEM among auto makers 18

19. Trade in CBU Increase from 170.1 Million $ in 1996 to 2134.8 Million $ in 2003 19

20. Trade in Parts and Components Unit: Million Baht D 1996 2003 % 1) Engine 801 4,552 467.6 2) Spart-part 215 1,796 735.3 3) Jig and Die 44 148 236.4 4) OEM-part - Body part 373 3,348 797.6 - Component part 602 18,928 3,044.2 5) Other 5 570 11,300 Total 2,040 29,342 1,338.3 20

21. Complementary of production network - Network production started with separate market, and no linkage within the region (high protection tariff policy) - Complementary increased with improved efficiency, more model of automobile, and economies of scales and divisions of work - Global sourcing will lead to more cooperation between part suppliers in the region 21

22. Industry Trend is Global sourcing (1) Consolidation and strategic alliances (2) Cost reduction (3) The module system approach (4) Shifting design capabilities (5) Emphasis on R&D initiatives 22