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Analysis Of Japanese FDI In Thai Automotive Industry

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The objective of this paper is to analyze Japanese FDI in Thai automotive industry. The paper starts with brief history of how Thai automotive industry started and become one of the most important automotive producer and exporter in ASEAN market and Japanese market.

Thai automotive industry has strong domestic market and international markets that support the industry. Export of vehicles has increased dramatically after the joining of ASEAN (Association of South-East Asia Nations). Free trade between ASEAN nations eliminates tariff rate on automobiles and some of automotive parts. Free trade between Japan does not increase export of vehicles dramatically like ASEAN markets but JTEPA and AJCEP lower production cost and improved competitiveness in Thai automotive industry. We have found out that FDI can increase productivity through technological transfer.

Chapter 1: Introduction

Developing countries like Thailand, we rely export as an engine of growth for the country with export accounts more than two thirds of GDP growth (Economy of Thailand, Wikipedia-2010). The main industry in Thailand is automobiles and automotive parts with the size of 11% in total industry (Economy of Thailand, Wikipedia-2010). Not just the largest size that automobiles and automotive parts industry has better than other industries but Thailand has a strong automotive industry as well. In 2010 automobiles and automotive parts has grown more than 63% (Thai Automotive Industry Association). With more than 1.6 million cars are produced in this year and this figure rank Thailand as 13th in the automobile production country in the world (Thai Automotive Industry Association) Experts in automotive industry predicts that in 5 years Thailand will be rank top 10 in automobile production. However the automobile and automotive parts are not able to grow this fast if the industry does not have Foreign Direct Investment (FDI) from overseas. We all know from economics text book that FDI can increase production through A and K which stands for technology and capital.

Y= A f(K,L)

Caves (1974) suggested that there are 2 productivity effects from FDI. First effect is called direct technology transfer and second effect is called competitive pressure. He also argued that FDI improve host country productivity through technology transfer can occur when there is economic contact between foreign and local firms. Empirical evidence for increase in productivity due to FDI will be discussed further in Literature Review section. In this paper I will be concentrate on Japanese automotive brands since Japanese automotive brands dominates the market with market share of more than 91%. Figure 1 shows share of market in automotive brands in year 2009 and 2010. This market share is calculated by using only sales figures of passenger cars. In the automotive industry, there are 2 main types of vehicles are produced which are passenger cars and commercial cars. Types of vehicle production will be discussed later in this paper.

With the largest industry in the country, high volume of productions and exports and huge market shares of Japanese automotive brands in Thailand, I really think that Japanese FDI flow into Thai automotive industry has some degree of significant to Thai economy in the futures

There are 2 objectives and expected benefits from this senior research.

Firstly, to explore the situation of Japanese FDI in Thai automotive industry in present and trends in the future. As I have mention above Japanese automotive firms have significant impact to Thai automotive industry by massive flow of FDI which increase technology level and productivity as caves (1974) have suggested. Understanding the current situations and have an idea of how future of the industry will be like is important and this leads to second objectives and expected benefits of this paper. Thus second objectives and expected benefit is to suggest policies to enhance the competitiveness, productivity and increase in technology to Thai automotive industry. Basically suggest policies to improve Thai automotive industry to benefit the country.

Scope of my study will concentrate on analyzing domestic and international market and show what the future will be for these markets. International market will include ASEAN, CLMV and Japan. The reason to include international market is that Japanese automotive firms see Thailand as vehicle production hubs for south-east Asia. For domestic market, my analysis of the market will start from year 1961 to current year that is 2011. The reason to start analyzes in year 1961 is that Thailand start production of vehicles on that year with only 525 vehicles are produced (Thai Automotive Industry Association). However the main analysis of Thai automotive industry will start after year 1997 that is the year that Thailand faced with financial crisis. In addition, analyze of future period will end at year 2015 that's the year that ASEAN Economics Community will be integrated. Analyze of future periods will apply in all domestic, Japan and international market. For both Japan and international market, analyze of automotive market will start from year 2001 to present time plus future which is until year 2015.

Chapter 2: Literature Review

There are large number of investigation and studies about FDI and automotive industry. This paper uses qualitative method to analyze Japanese FDI in Thai automotive industry.

The study conducted by Caves (1974) suggested that there are 2 productivity effect direct technology transfer and increase in competitive pressure. He concluded that FDI improve host country's productivity through technology transfer. Transfer of technology happened when there is contact between local and foreign firms.

The study conducted by Wilbur et al (2003) (Foreign Investment and Productivity) said that inflow of FDI by Japanese firms increased competition pressure in automobile assemblers and automotive parts. Productivity is improved by competition pressure by Japanese firms.

The study conducted by Nickell (1996) concluded that competition tends to increase total factor productivity growth.

Most of the study concluded that transfer of technology and competitive pressure can stimulate the productivity.

The study conducted by Louis (1969) said that production of product outside the country should start when foreign market become large enough to produce at average cost lower than marginal cost plus transportation and duties.

The study about free trade agreements with title of (Final report of CEPEA Track Two: Phase I). CEPEA is free trade agreements between ASEAN plus other 6 6 nations. the study conclude that FTA can increase GDP. member of CEPEA will have GDP growth average of 2.11% while ASEAN benefits more than other 6 nations in CEPEA. with average GDP growth for ASEAN is 3.83%. Thailand benefit from CEPEA with growth of 4.78%.

Chapter 3: Research Methodology

Chapter 3.1: Conceptual Framework.

The figure above shows conceptual framework for this paper. My conceptual framework starts with Japan. Most of Japanese automotive firms invest in Thailand in the form of building factories in the country. These factories include both factory that produce automobile and automotive parts. Therefore these investments are recorded in Thailand as FDI from Japan. As in the figure FDI from Japan flows to Thailand. These FDI made Thailand become one of the most highly technological in production and increase productivity. At the early year of vehicles production, Thailand produced vehicles less than demand in the country thus at that time Thailand had to import vehicles from overseas. However when Thailand became productive and number of vehicle productions is greater than domestic demand, Thailand starts to export to other countries like ASEAN and CLMV. Since then Thailand become one of the most important vehicles producers in ASEAN market. As level of technology and production quality increased, Thailand start to export to Japan. Export of Japanese product back to Japan is called re-import for Japan. Japan start to re-import vehicles from Thailand in year 2010, since Nissan, March is no longer produced in Japan.

Now all of the demand for Nissan, March in Japan is supply by Thailand. Therefore we can see the arrow from Thailand to Japan. In addition, Thailand has exported vehicles to Japan before year 2010 but with very small volume of export. Thailand has exported vehicles to other countries than ASEAN, CLMV and Japan but this paper will concentrate on only these 3 markets as mention in scope of study. Exports of vehicles are not freely done. There are tariff and Non-Tariff Barrier (NTB) to each market. However Free Trade Agreement (FTA) in each market became one of the most important roles to increase export of vehicles from Thailand. Terms of FTA for each market will be discussed later in the papers.

Chapter 3.2: Data Collections

Most of my data are collected from Thai Automotive Industry Association or TAIA. However most of the statistics are available only for the member of Thai Automotive Industry Association. Some of the main statistics that are used in this paper are productions, sales and exports of Thailand's automotive industry since year 1961. Sales of both passenger cars and commercial cars divided into automotive brands that are the member of Thai Automotive Industry Association.

These are the main data from Thai Automotive Industry Association. (details of statistic can be seen at appendix section). Another source of my data for this paper is The Customs Department. The customs departments are used to find the value of vehicles export to ASEAN, CLMV and Japan market from year 2001 to 2010. Statistics from the customs departments are shown in million of baht instead of number of vehicles like what statistics from Thai Automotive Industry Association gives. Finally the last main source of data used in this paper is Bank of Thailand (BOT) and Board of Investment (BOI). FDI from Japan, USA and Korea are collected since year 1970 to present time.

Chapter 4: Overview of Automotive Industry

Automotive industry in Thailand started in year 1961with only 525 cars were produced and domestic sales were 6860 cars. In year 2010, more than 1.6 million cars were produced and more than 800,000 cars were sold domestically (Thai Automotive Industry Association). Automotive industry can divide its product into 2 main groups that are passenger and commercial cars.

Passenger cars are divided into 6 groups according to engine size.

Engine between 1,201 - 1500 cc

Engine between 1,501 - 1,800cc

Engine between 1,801 - 2,000 cc

Engine between 2,001 - 2,500cc

Engine between 2,501 - 3,000 cc

Engine more than 3,000cc

Commercial cars are divided into categories below

Van Micro Buses

Buses

Picks Up less than 1 ton

1 ton Picks Up

Trucks between (5 tons - 10 tons)

Trucks more than 10 tons

There are only 14 producers producing both passenger cars and commercial cars in Thai automotive industry and only 9 of them are producing passenger cars.

Chapter 5: Domestic Market.

Thailand has strong domestic and international automotive markets which are proved by number of domestic productions, number of domestic sales and number of cars exported. In year 2010, Thailand produced more than 1.6 million cars and this rank Thailand as 13th place in automobile production in the world. In this chapter, only domestic market will be discussed.

Productions of automobiles started in year 1961 with only 525 cars were produced by 4 pioneers.

Thai Motor Industry Co., Ltd.,

Kannasoot Co., Ltd.,

Siam Khonlakarn and Nissan Co., Ltd.,

Thonburi Car Assembly

Thai Motor Industry Co., Ltd., was the first assembly plant in Thailand. The company is supported by Anglo-Thai Motors Co., Ltd., which is Ford distributor in Thailand. Products of the company were Anglia, Ford tractor and Consul 105, Ford truck. The second company to establish a plant in Thailand is called Kannasoot General Assembly which is FIAT distributor. Siam Khonlakarn and Nissan Co., Ltd., was the third company to establish a plant and is the first Japanese automobile brand to establish a plant in Thailand. However the company was entirely operated by Thai people. The company is the distributor of Datsun and Nissan. Thonburi Car Assembly which is the distributor of Mercedes-Benz and truck manufacture was the forth company to start production in the country. These four companies are able to serve only 7.65% of domestic demands. The success of domestic production was due to announcement of support for domestic car assembly by government in year 1960. Before 1960, there was only one tax rate on imported Complete Build Up (CBU) and Complete Knocked Down (CKD) parts. However in 1960, government had announced to keep tax rate on imported CBU unchanged and reduced tax rate on imported CKD parts by 50%. In addition during 1964 to 1969, Board of Investment (BOI) had promoted the automotive assembly industry according to investment promotion Act. According to this Act, more than 10 automotive assemblers have joined the industry. 10 companies are listed below.

Pattana Automobile Co., Ltd.,

Prince Motor Thailand Co., Ltd.,

Toyota Motor Thailand Co., Ltd.,

Isuzu Motor (Thailand) Co., Ltd.,

Thai Hino Industry Co., Ltd.,

Thai Auto-Invent & Assembly Co., Ltd.,

Nailerd Co., Ltd.,

Product and Package Delivery Authority

International Engineering Co., Ltd.,

Bangchun General Assembly Co., Ltd.,

Although in 1969, Thailand has14 assemblers with domestic production were 12,140 vehicles but this is equivalent to 18.55% of domestic demand. After 1969, even though the productions of vehicles were not sufficient to meet domestic demand, BOI closed investment promotions for automobile assembly. Gave the reason that too many assemblers will fail to reach economies of scale. After announcement of BOI there were only 9 assemblers in operations.

Figure 3: Domestic Production, Domestic Sales and Export (1988 - 2010)

(Source: Thai Automotive Industry Association)

Thai automotive industry has domestic production capacity greater than domestic demand since 1988 with more than 150,000 vehicles were produced in that year. Excess of domestic demand were exported and this was the year that Thailand start exporting of vehicles. Thailand became export oriented since 1996 which is shown in figure 3; from point A in figure 3 represent the year that Thailand became export oriented. Export of vehicles has grown more than 33% on average since the beginning of the exporting periods. One of the reasons to explain this fast growth of export of automotive is production base. Mr. Atsuo Kurada, president of the Japanese External Trade Organization (JETRO) in Bangkok said that "Thailand has become a very favorable export and production base for Japanese assemblers" he also added that "several auto-manufacturers have closed their Japanese factories to shift production to Thailand".

Thai automotive industry has grown exponentially since the beginning of the production in 1961 to 1996; which are shown in figure 2. In 1997 due to Asia Financial Crisis, both domestic production and domestic sales drop sharply. This is shown in point B in figure 3. Domestic production in year 1997 dropped by 35.47% and domestic sales decreased by 38.36%. In year 1998 these 2 figures have further dropped and reach its highest negative growth of 56.11% for domestic productions and 59.74% for domestic sales. However during the financial crisis, one thing that Thai automotive industry is doing well is export.

Export has grown sharply in both 1997 and 1998 with more than 200% in growth rate in 1997 and more than 60% in 1998. Thai automotive industry had gained benefit from this financial crisis since collapse of the Thai baht caused by the decision of the Thai government to float the baht and this result in devalue of Thai baht. Thai made automobile were become more attractive. In 1999 one year after huge drop in domestic production and sales figure, Thai automotive industry was managed to maintain high growth rate with more than 100% in domestic production, 50% increase in domestic sales and export grow more than 80%. Recovery of Thai automotive industry was miracle.

Another important financial crisis that slowed down the growth of Thai automotive industry occurred in year 2008. This financial crisis is caused by liquidity shortfall in the United States banking system and leaded to severe global economics recession. Due to 2008 financial crisis, domestic production had shrank by more than 28% and sales dropped by 10%. Since the crisis lead to global economics recession, exports of automobiles have damaged a lot with number of vehicles decreased by more than 30%. Drop in domestic production, domestic sales and exports are shown in point C in figure 3.

In figure 3 we can notice that the industry rebound in year 2010 especially domestic production and export have grown more than 60%. Domestic sales also grow more than 45%. There must be some reasons that Thai automotive industry has recovered this fast. Financial crisis in 2008 was much bigger than 1997 Asia financial crisis and have effect globally not just Asia and ASEAN. One of the reasons behind this fast recovery of Thai automotive industry is the shifting of production base of Nissan, March. Nissan has announced that the company will shift their Nissan, March production base to Thailand. The reason behind shifting of production base is to minimize the production cost said by Nissan. The shift in production base means that Nissan, March is no longer produce in Japan and all the production will be done in Thailand. Thus increase in domestic production must be demand for Nissan, March in Japan. Sharp increase in export should also be result from shift in production base by Nissan, March since we need to export Nissan, March back to Japan. Producing own product outside the country and import back to the country is called "re-import". Nissan uses "re-import" strategy to reduce their production cost.

Shifting of Nissan production base benefit more than just increase in domestic production and export of vehicles but also increase technological level to each plant associate with production of Nissan, March. This will increase productivity and hopefully the technological knowledge will be transfer to other assembly plant in Thailand and hopefully increase productivity of Thai automotive industry.

FDI plays an important role in production of vehicle in Thailand especially to technological level and capital level in the country

Figure 4: Flow of FDI to Automotive sector by Japan and USA

(Source: Board of Investment, BOI)

We can clearly see that Japan have invested more money in automotive sector than USA. This is not surprising figure since Japan has larger market share in automotive market in Thailand. With the largest market share that Japanese assemblers have, can FDI from Japan increase production of Thai automotive industry? The relationship between domestic production and Japanese FDI are shown in the figure below. To see weather flow of Japanese FDI has any positive effect on domestic production, flow of Japanese FDI is shown in horizontal axis (unit in thousands of millions of baht) and domestic production is shown in vertical axis. Method of calculating correlation coefficient is used to show how Japanese FDI and domestic production are correlated.

Figure 5: relationship between domestic production and Japanese FDI

(Source: Thai Automotive Industry Association, TAIA and Board of Investment, BOI)

The result tells us that domestic production is positively highly correlated with flow of Japanese FDI with correlation coefficient equal to 0.89 (calculation of correlation coefficient is shown in appendix section).

Thus we can conclude that flow of FDI especially Japanese FDI to automotive sector can stimulate number of vehicles produced domestically. This result is same as what (caves 1974) has concluded. He concluded that FDI has 2 main effects on productivity. First effect is the technological transfer by oversea assemblers and second effects is the increase in competitive pressures that will increase productivity. However, we are not yet able to show how increase in competitive pressure can increase the production.

Automotive industry is one of the strongest industries in Thailand with strong domestic market that support the industry. Thai automotive industry has grown steadily since the beginning of the production in 1961 but with some slowdown in growth rate during 1997 Asia financial crisis and 2008 financial crisis in USA. Both crisis are serious and have damaged global economy but Thai automotive industry can still handle these crisis.

Foreign assemblers are the key role in this industry. I believe that Thai automotive industry cannot grow this fast or recover this fast from major financial crisis without supporting from foreign assemblers; FDI from major automotive producers and change in production strategy by Nissan. With the strength of domestic market that Thai automotive industry has, I believe that there still rooms for growing and become one of the major automobile producers and exporter in the world.

Chapter 6: International Markets

In modern era, it's impossible to avoid trading with other countries especially trading of products that Thailand is good at producing that is automobile. In this chapter we will be analyzing international markets which include ASEAN markets and Japanese market analysis of ASEAN market will be divided into 2 groups which are ASEAN-5 and CLMV. ASEAN-5 consists of Malaysia, Singapore, Indonesia, Brunei and Philippines while CLMV is joined by Cambodia, Lao, Myanmar and Viet Nam.

To begin with ASEAN has been one of the most important regions for Thai automotive industry. The total value of trading between ASEAN markets in 2010 is greater than 88,000 millions of baht. The reason to split ASEAN market into 2 groups is that CLMV has joined ASEAN late. In order to join ASEAN for CLMV, they are required to sign ASEAN Free Trade Agreement (AFTA). This agreement will eliminate tariffs and Non-Tariff Barriers (NTB) within ASEAN members. To achieve this goal, The Common Effective Preferential Tariff (CEPT) scheme is necessary for each ASEAN members. What this does to each ASEAN member is that each ASEAN members are required to apply tariff rate between 0 to 5%. Since CLMV has joined ASEAN late, some of the tariff rate is not between 0 to 5% yet. Thus it's expensive for them to import automobiles from Thailand and comparison of vehicles export to ASEAN is not possible to do because ASEAN-5's tariff rate is exempted from ASEAN member. Therefore it is necessary to divide ASEAN into 2 groups.

The figure 6 below shows the value of automobile export to ASEAN. In year 2001, the export value of automobile from Thailand to ASEAN-5 is very low. This is because at this point AFTA is not fully operated yet. Even though ASEAN members have signed AFTA agreements in 1992. In year 2003, AFTA is now fully operated and this results in huge increase in export of automotive to ASEAN-5 which is shown in figure 6 point A.

Figure 6: Export of vehicles to ASEAN markets

A

(Source: The Customs Department)

Export of vehicles to ASEAN-5 market is growing at very fast rate with average growth of more than 100% since the beginning of 2001. After the joining of AFTA by ASEAN-5, Thailand cannot ignore this market because of this huge value of export are traded between them. One of the reasons behind this large value of export of automobile is the production capacity that Thailand has. Figure 7 shows the production of vehicles by ASEAN-5 countries.

From the figure above we can noticed that Thailand has the highest vehicle production among ASEAN-5 countries. Thailand can produce automobile twice as good as Indonesia. Half of total vehicles productions in ASEAN-5 countries are coming from Thailand in both 2009 and 2010. The production capacity is now compared to population between ASEAN-5 produces. Size of population and production Capacity are shown in figure 8 below.

Firstly, let's assume that each nation in ASEAN-5 has same demand for automobile according to their populations. Thus this mean nation with high population will demand more vehicles than nation with lower population. By this assumption, any nation with population higher than Thailand should has production capacity higher than Thailand. For simplicity we will assume that demand of vehicles are supply by each nation, no trades are involve. Thus nation such as Indonesia, Philippines should have higher production capacity than Thailand. But in reality these 2 countries have lower production capacity than Thailand. In order to serve their domestic demand, they need to import. Therefore Thailand needs to supply their demand. As a result we saw huge increase in export of vehicles to ASEAN-5 nations. From figure 7 and 8, we could say that Thailand has become automobile production hubs in South-East Asia.

The figure 9 below shows the export of automobile to CLMV markets. Export of vehicles to CLMV market is growing at very fast rate especially Lao. Thai export to Lao with value of only 120 million baht in year 2001. After AFTA export of Lao has grown more than 40 times since 2001. In 2010 Thailand export vehicles to Lao with export value greater than 4,000 million baht. However value of export to Lao may seems very high in CLMV markets but when Value of automobile export to Lao is compared to ASEAN-5 nation such as Indonesia, Thailand export vehicles to Indonesia with value nearly reached 30,000 million baht. That's nearly 1/10 of Lao's value. In figure 9, we noticed that Cambodia, Lao and Myanmar have higher export value than Vietnam. This is because these 3 countries have boarder next to Thailand and it makes transportation of vehicles much easier.

Figure 9: Export of automobile to CLMV markets

(Source: The Customs Department)

Both ASEAN-5 and CLMV markets have been one of the most important markets for Thai automotive industry. As Thailand become more efficient in production of vehicles and technological level has reached its standard level accepted by most developed countries. As a result export of vehicles to Japanese market has been important market for Thai automotive industry. Thailand has signed free trade agreements with Japan called Japan Thai Economic Partnership Agreement (JTEPA) in 2007. The purpose of this deal is not just the reduction or elimination of tariff but also focuses on training and technological transfer which will make Thai producer become more competitive in World market. Thailand immediately removed tariff on imported Japanese steel by 50% after signing of JTEPA and will fully eliminate tariff on imported Japanese steel in 2017. This will definitely reduce cost to automotive assemblers in Thailand and makes it more attractive to international markets. Another benefit from JTEPA is the elimination of tariff on most of auto-parts by 2012. All auto-parts will be duty free in 2017. Again this will benefit Thai automotive industry.

Another free trade agreement that Thai made with Japan is AJCEP which stands for (ASEAN-Japan Comprehensive Economic Partnership). Actually this agreement is not between Thai and Japan but its ASEAN and Japan. The objectives of this free trade agreement are transfer of technology into ASEAN and improve human resource. Of course, the main objective is to reduce or eliminate tariff between ASEAN nations and Japan. However AJECP does not have any benefit to Thai automotive industry since Tariff for this industry is exactly the same as JTEPA. There are only 71 products that benefit from AJECP that are agricultural products. These 2 free trade agreements, JTEPA and AJCEP does not increase the export value to Japanese market but these 2 agreements definitely increase Thailand's competitiveness to ASEAN and world market because of reduction or elimination of tariff on Japanese imported steel and automotive parts.

The figure 10 shows the export value of automobile to Japan compare with ASEAN markets. The values of exports are compared in 3 year starting from year 2008, 2009 and 2010.

Figure 10: Export value of Automobile to Japan.

A

(Source: The Customs Department)

From figure 10 point A, we can see that Thailand export small value of vehicles to Japan especially in year 2009. We can rarely see the bar on the figure. As mention above those 2 free trade agreements do not increase the size of export value to Japan. However, in year 2010 we can see huge increase in export value of vehicles to Japan. This huge increase is due to shift in production base of Nissan, March. On July 2010, Nissan has announced to shift their Nissan, March production base to Thailand. The main reason behind this decision is to lower the production cost. Nissan said that Thailand has high level of technology in production of automobiles and advantages in location since Thailand is located in center of South-East Asia. By shifting the production base to Thailand, Nissan can lower their production cost by 10%. Currently Nissan, March is sold at less than 1 million yen or less than 370,000 baht. Japan. Shift in production base means that Nissan, March are no longer produced in Japan and demand for Nissan, March is served by Thailand. Thus the export value of vehicles to Japan sky rocketed. In addition, shifting in production base increase technological level in Thailand and this will increase productivity and competitiveness to Thai automotive industry.

Thailand's automotive industry has strong international market that could lead Thailand to become one of the most important automotive productions in the future with high rate of growth in export value to ASEAN markets which includes ASEAN-5 and CLMV market and opportunity to expand export of vehicles to new market such as Japan. Quality of automotive productions are becoming more and more acceptable by overseas. Thai automotive industry has a very bright future.

Chapter 7: SWOT Analysis

In this chapter, SWOT analysis is used to analyze Thai automotive industry in term of domestic production, domestic sales and international sales or export to international markets. In each section, strength, weakness, opportunity and threat will be analyzed by both experts and my opinions towards Thai automotive industry.

Chapter 7.1: Strength of Thai automotive industry

The first strength of Thai automotive industry is the advantages in geographical location to become production hubs. Thailand is located in a center of Asia and this gives us the opportunity to trade with countries in Asia. Thus the geographical location gives opportunity for Thai automotive industry to expand to new international market.

The second strength of Thai automotive industry is the Joining of ASEAN members. ASEAN give us the opportunity to trade freely within the regions by AFTA. This benefit Thai automotive assemblers since some components used in production of vehicles are expensive to produce domestically and AFTA help assemblers to lower their cost by importing of automotive parts.

The third strength of Thai automotive industry is that Thailand has strong domestic and international market. Strong in this place means value of vehicles sold. It's strong enough to support the current production capacity of 1.6 million vehicles in 2010. If domestic and international market is not strong enough, it is possible that Thai automotive assemblers will decrease its production.

The forth strength of Thai automotive industry is high level of technological transfers and productivity by FDI from countries like Japan and USA. We have shown that FDI is highly positively correlated with productivity. The production technology has been developed from upstream to downstream industries.

Chapter 7.2: Weakness of Thai Automotive Industry

It is hard to think of weakness in Thai automotive industry because everything seems to be perfect in the industry. However, there must be weakness in order to improve the industry to the next level.

The first weakness of Thai automotive industry is limitation of communication with foreign automotive assemblers. Miscommunications between workers are common and this could leads to lower productivity and transfer of technology is not maximized.

The second weakness of Thai automotive industry is machines and technologies are heavily depending on foreign. It is expensive to buy or replace machines used in production of vehicles since some machines are not able to produce domestically since it requires technologies.

Chapter 7.3: Opportunity of Thai Automotive Industry

The first opportunity of Thai automotive industry is the expansion of international markets due to free trade agreements by ASEAN. Such as Thailand-EU free trade agreement which could increase competitiveness in automotive sectors. In addition, it is opportunity for Thai automotive industry to learn technologies from European.

The second opportunity of Thai automotive Industry is shifting of production base by major vehicles assembles suck as Toyota and Honda. Honda has just introduced its new product called Brio which is second eco-car in Thailand after Nissan, March. Honda, Japan announced that shifting of production base to Thailand is possible due to cheaper production cost and Honda believes that technological level in Thailand is sufficient to produce the vehicles.

Chapter 7.4: Threat of Thai Automotive Industry.

The first threat of Thai automotive industry is the emerging of competitors in Asia such as India and China. China has very low production cost and this could make China become one of the most important productions base for foreign assemblers. Also India has an advantage in human resource and this could give foreign assemblers more option to choose for their production base.

The second threat of Thai automotive industry is the emerging of grey automotive market. Grey market in this place means the business owner import vehicles from overseas and sell it cheaper than official dealer. Most of vehicles sold in this market are mostly European brand and some Japanese brand. This will reduce domestic sales

The final threat of Thai automotive industry is the expansion of public transportation especially BTS (Bangkok Mass Transit System Company Limited) which has extended 7 more BTS stations in Skhumvit line.

Thai automotive industry has more strength and opportunity than weakness and threat that the industry faced. Support of strength and opportunity for Thai automotive industry will definitely make industry stronger, knowing weakness and threat is important. Improvement of weakness and threat will make industry attractive to foreign investors.

Chapter 8: Future of Thai Automotive Industry

The future of Thai automotive industry in my opinion will be expansion of international markets by free trade agreement sign by ASEAN. Example of free trade agreement would be Thailand-EU free trade agreement. The reason that I choose this free trade agreement is that EU is similar to ASEAN where many nations are joined and EU is developed country. Thailand-EU free trade agreements should have significant impact to Thai automotive industry.

What are the benefits that Thai automotive industry could receive by signing Thailand-EU free trade agreements? Expected benefits from this free trade agreement are similar to what Thailand benefit from AJCEP and JTEPA. Since both Japan and EU are developed countries. As we saw from international market sections, free trade agreements from Japan such as JTEPA and AJCEP does not increase the value of export directly and immediately unlike AFTA. When Thailand signed AFTA we noticed fast growth in both ASEAN-5 and CLMV market. Since these countries need vehicles and AFTA allowed them to import vehicles from Thailand without Tariff rate. However, in JTEPA or AJCEP we didn't see the change in value of export by Thailand to Japan. But these free trade agreements benefits in lowering production cost such as elimination of automotive parts and possibly transfer of technological. So since EU is very similar to Japan in the way that both are developed countries and do not need to purchase automobiles from Thailand and more importantly both Japan and EU have its own automotive brands. The benefit from Thailand-EU free trade agreements that Thailand could benefit should be similar to what Thailand benefit from JTEPA and AJCEP. Such as lower production cost of European automobile brand due to reduction or elimination of tariff on automotive parts and possibly transfer of technology. Expansion of international market is necessary for Thai automotive industry to become highly skilled and technological production base in South-East Asia.

Chapter 9: Conclusion

In conclusion, the paper has analyzed Japanese FDI in Thai automotive industry. The paper starts with brief history of how Thai automotive industry started and become one of the most important automotive producer and exporter in ASEAN market and Japanese market.

Thai automotive industry has strong domestic market and international markets that support the industry. Export of vehicles has increased dramatically after the joining of ASEAN (Association of South-East Asia Nations). Free trade between ASEAN nations eliminates tariff rate on automobiles and some of automotive parts. Free trade between Japan does not increase export of vehicles dramatically like ASEAN markets but JTEPA and AJCEP lower production cost and improved competitiveness in Thai automotive industry. We have found out that FDI can increase productivity through technological transfer. Caves (1974) suggested that there are 2 effects on flow of FDI. FDI will increase productivity through transfer of technologies and increase in competitiveness. From what we have discussed in SWOT analysis, Thai automotive industry has more strength over the weakness and more opportunity are waiting in to improve Thai automotive industry in the futures. From what paper illustrate, we could conclude that Thailand is now become automotive production hubs in ASEAN.

Appendix

Appendix 1: Domestic Market Share in year 2009 and 2010.

Source: Thai Automotive Industry Association

*Unit in number of vehicles

Appendix 2: domestic production, sales and export.

Source: Thai Automotive Industry Association.

*Unit in number of vehicles

Appendix 3:Flow of FDI from Japan and USA

Source: Board of Investment

*unit in million of Baht

Appendix 4: relationship between Japanese FDI and Production

Source: Board of Investment and Thai Automotive Industry Association

Appendix 5: Export of vehicles to ASEAN-5, CLMV and Japan

Source: Thai Automotive Industry Association


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