Ford Motor Co. (F:US)’s factories in Thailand are capable of producing eight times more vehicles than it sells locally. With help from a Thai government program, the automaker plans to make sure the excess capacity doesn’t become a liability like at its plants in Europe.
Thailand is Southeast Asia’s biggest car market and an export hub for the region as automakers such as Ford ship most of the vehicles that roll out of Thai factories to nearby countries tax-free. That includes Indonesia, which is set to dethrone Thailand in 2014, according to Englewood, Colorado- based IHS Automotive.
Ford, along with Japanese automakers, sees Southeast Asia as a salve for slowing sales in markets like Europe, and has said its expansion in Thailand is part of an “aggressive growth plan” for the region. Dearborn, Michigan-based Ford said it is ready to join a Thai program for small, energy-efficient models once new licenses become available, in the face of opposition from General Motors Co. (GM:US), maker of the Chevrolet Spark mini car.
“Southeast Asia is going to assume immense importance in the next couple of years,” said Vivek Vaidya, vice president for the automotive and transportation sector at researcher Frost & Sullivan based in Singapore. “The market share of Japanese companies is over 80 percent, hence all other players are scrambling to win their market share in this region.”
Ford, maker of the Focus compact and Ranger pickup truck, is the eighth-biggest automaker in Thailand, with a 4 percent market share, according to researcher LMC Automotive. About 40 percent of that is thanks to sales of its pickup trucks, whose ability to haul everything from machinery to families has helped them make up two out of five vehicles sold in the nation.
Consumer preference in Thailand, though, is shifting toward small cars because of their lower prices as well as operating costs compared with pickup trucks, Vaidya said.
Subcompacts, including eco models, made up more than half of passenger-car sales in Thailand last year, according to IHS. The share of eco cars will probably rise to 29 percent in 2016 from 19 percent last year, the research company said.
Ford, the second-largest U.S. automaker, plans to elevate itself in Thailand with help from the government’s eco-car project, which IHS and LMC Automotive say may be extended this year.
Under the program, eco cars are defined as those that travel more than 20 kilometers (12 miles) on a liter of fuel, don’t emit more than 120 grams of carbon dioxide per kilometer, and meet other criteria including crash-test standards. Manufacturers also must invest at least 5 billion baht ($168 million), which should include car assembly as well as engine and parts production.
Automakers approved for the project introduced in 2007 get an exemption on corporate tax and on the import duty for machinery and equipment, and as much as a 90 percent reduction on import duties for raw materials and finished parts, according to Thailand’s Board of Investment.
The tax breaks spurred demand for hatchbacks like Nissan Motor Co. (7201)’s March and the Swift from Suzuki Motor Corp. (7269), which together with Honda Motor Co., Mitsubishi Motors Corp. (7211) and Toyota Motor Corp. (7203) are the five auto manufacturers licensed under the program.
The tax breaks are scheduled to end in 2015, making a government announcement imminent because automakers keen on applying need to plan ahead, said Michael Dunne, president of Hong Kong-based Dunne & Co., an auto research company focused on Asia.
“Automakers plan future products three to five years ahead of time,” Dunne said in an e-mail. “If they develop a specific product for a market and then rules change, that’s going to be monumental financial setback.”
The Thai government may extend the eco-car project to help boost auto production to meet a goal of making 3 million vehicles by 2017, up from 2 million last year, the Bangkok Post reported in March.
Vasana Mututanont, deputy secretary general at the board of investment in Bangkok, and Kanchana Noppun, director of public relations, didn’t answer calls to their office phones.
“There are immense benefits for both carmakers and government,” said Frost’s Vaidya. “Carmakers get significantly higher volumes due to the government-backed program and the government gets increased investments, revenues and employment generation.”
Vaidya expects U.S., Korean and European carmakers to be leaders in the project, if extended.
“We would certainly be interested in participating,” Matt Bradley, president of Ford’s Southeast Asian unit, said in a telephone interview.
The subcompact market “is growing and is a sizable segment in the industry,” Bradley said. Car buyers are becoming “more fuel-economy conscious and carbon footprint conscious.”
Eco cars can also be exported tax-free to Indonesia, whose 250 million people makes up almost 40 percent of the population in Southeast Asia. Economists predict Indonesian growth will be about 6.3 percent in the three years starting 2013, second among major Asian economies only to China, according to data compiled by Bloomberg.
Ford’s strategy in Southeast Asia is based on making vehicles across segments, the company said in an e-mail. The company had no plans to set up production facilities in Indonesia, Chief Executive Officer Alan Mulally said in Bangkok in March.
“If Ford has the sales volume from eco cars, it can utilize capacity that is currently idle,” Jessada Thongpak, an analyst at IHS in Bangkok, said in a phone interview. “Buyers are definitely moving toward smaller, fuel-efficient cars.”
Ford may consider introducing the 1.2-liter, 3.6 meter-long Ka, sold in Europe and South America, or the 1.2-liter Figo that it makes in India, said Bradley. It could also build a new model, he said.
Shares of Ford have advanced 6.8 percent this year, compared with the 13 percent gain by the Standard & Poor’s 500 Index.
Ford, which shares a 290,000-unit-a-year factory with Mazda Motor Corp. (7261) in Rayong that builds its pickups and Fiesta car, opened a wholly owned facility near the existing factory. The new plant, which can build 160,000 cars annually, is where the automaker makes its Focus model. Though Ford declined to reveal specific export figures for 2012, it said it exported 75 percent to 80 percent of production to Southeast Asia as well as Australia and New Zealand.
“Along with China and India, Thailand serves as one of the key global production and export hubs for Ford Motor Company,” Ford said in a statement last year.
Ford’s North American operations earned $2.4 billion in the year’s first three months, the division’s best quarter ever, after setting annual records of $8.34 billion with a 10.4 percent profit margin last year.
“Any move to expand eco car benefits to other manufacturers will no doubt draw flak from current participants of the project,” said Ammar Master, an analyst at LMC in Bangkok.
Detroit-based GM, whose sales of Chevrolet cars such as the Sonic hatchback and Trailblazer SUVs rank just behind Ford’s in Thailand, wants an end to the eco project.
“We see no reason to continue or reopen government programs that distort competition in the small-car segment or create artificial demand,” Martin Apfel, president of GM’s Southeast Asian operations, said in an e-mail. “We believe in the principle of ‘may the best car win,’” with as little market intervention as possible, he said.
While GM and Ford have about 9 percent market share combined, that is only a fraction of the share the Japanese automakers hold. Toyota had about 37 percent share, selling 515,375 vehicles last year, followed by Isuzu Motors Ltd. (7202) with about 14 percent of the market, and Honda at 12 percent.
Ford is hoping to make a bigger dent in the market as it looks to meet its CEO’s target of 40 percent of its sales coming from Asia by 2020.
“We’re a different company today than back in 2007 when the initial eco-car policy was around,” said Bradley.
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