This webinar aims to examine the impact of these changes on the auto sector in selected APEC economies, namely Japan, Indonesia, Malaysia, Thailand and Vietnam.
SINGAPORE APEC STUDY CENTRE WEBINAR
Tuesday, 10 November 2020 – Singapore APEC Study Centre at ISEAS – Yusof Ishak Institute hosted a webinar on “The future of the automotive sector in selected APEC Economies: Case of Thailand and Malaysia”, delivered by Professor Patarapong Intarakumnerd, National Graduate Institute for Policy Studies (GRIPS) in Tokyo, Japan and Professor Tham Siew Yean, Visiting Senior Fellow, ISEAS-Yusof Ishak Institute, Singapore; and Professor Emeritus, Universiti Kebangsaan Malaysia.
The webinar began with Professor Patarapong sharing the landscape of the Thai automotive industry; which makes up 10% of Thailand’s Gross Domestic Product (GDP) and employs a larger number of people compared to their ASEAN peers. Thailand’s auto assemblers comprise mostly Japanese brands. Only about a third of the tier 1 suppliers and two-thirds of Tier 2 and 3 suppliers are Thai-majority owned. Amongst the tier 1 suppliers, Thai-majority owned firms produce parts that are less technologically complex compared to their foreign peers, revealing the difference in technological capabilities.
Delving into the evolution of technological capability within Thai-majority owned firms, Professor Patarapong noted that the investments from Japanese car makers into Research and Development (R&D) in Thailand created a demonstration effect, inducing other tier 1 Japanese and Thai-majority owned part makers to do the same. Other than pressuring local firms to upgrade their capabilities, technological transfer from the multinational corporations (MNCs) to part suppliers shifted from simple operational technology to higher level process engineering technology and product engineering capabilities. This also coincided with the MNCs’ new investment strategy of global sourcing, which provided opportunities to local firms that were able to meet the MNCs requirements. Professor Patarapong then went through two case studies: Daisin and Somboon group. Both cases highlighted the need for firms to independently upgrade their capabilities and seek their own joint ventures rather than rely passively on the network of MNCs they have been plugged into.
On government policies, Professor Patarapong examined the three phases of Thai government policies: Phase 1’s focus on promoting import substitution and including an element of industrial policy, Phase 2’s emphasis on export promotion and Phase 3’s priority on liberalisation and technology upgrading. However, Professor Patarapong cautioned that policies are insufficient without the visible hand of the government; there is a need for organizations like the Thailand Automotive Institute to execute policies and bridge the different interests amongst the players. Thai universities also improve companies’ technological capability by providing specialized automotive engineering degrees, having joint programs and conducting collaborative research. However, the impact has been limited.
Professor Patarapong listed the robotization of production and promotion of Electronic Vehicles (EVs) as challenges from Industry 4.0. The automotive industry has been Thailand’s lead sector in driving robotization. Similar to the case of capability upgrading, MNCs spearheaded the adoption of industrial robots and resulted in a spillover impact on the local companies. As for EV production, Thailand’s EV production is still very small compared to their Asian peers despite many government incentives. Professor Patarapong find this surprising as EV is a new disruptive technology where existing car makers do not have any advantage. Thus, barriers to entry are low and it is a huge opportunity for local firms to emerge and compete.
Professor Patarapong concluded his presentation by summarizing that MNCs act as the lead roles that create pressure and demonstration effects which affect local firms. He also reemphasized the need for firms to have independent strategies for position and technological upgrading, government policies to be sector-specific and importance of intermediary roles.
Next, Professor Tham started off her presentation with the background on the automotive sector in Malaysia. The number of establishments in the sector is very small, with a correspondingly low share of value added and employment in the whole manufacturing sector. The sector development has been policy driven with National Automotive Plans (NAPs) focusing on investment, technological development, market expansion, supply chain development and Bumiputera participation.
Reviewing the achievements of the sector based on the targets in the NAP, Professor Tham notes that the automotive industry has received a shrinking share of total approved investment in manufacturing over time and investments are mostly domestic rather than foreign. Efficient energy vehicles (EEVs) that include EVs have had increasing penetration rates, aligning with government objectives. However, the export of completely built-up (CBU) vehicles is small, dominated by exports in parts and components. With regards to the number of vendors in each supplier competitiveness level (SCL), there has been a significant increase in SCL 5 but the bulk of the vendors remain in SCL 3.
Some of the challenges that the Malaysian automotive sector faces include the use of customized incentives for firms which is negotiated case by case against non-transparent criteria, creating uncertainty amongst firms and deters investors. The sector’s exports are also very low compared to the repeatedly high targets set, despite the actual level of low exports. Professor Tham postulates two main reasons for the limited exports: the vested interests of the national cars’ technology partners determine the amount of exports and the use of excise duties in ASEAN to protect domestic markets after the tariff reductions under ASEAN FTA (AFTA). In addition, the government’s decision to have high targets in the National Automotive Plans, including exports, despite the consistent under-achievements makes it difficult for players to refer to government directions as guidelines for production and investment. Conflicting objectives on the policy side makes it difficult to attain the set goals, as illustrated in the case of the development of EVs. Malaysia has not adopted demand-side interventions as there has not been a local champion for EVs. Inclusion of demand-side interventions would result in massive imports which would hurt the national cars. Infrastructure to resolve range anxiety and investment to reduce battery replacement costs are also lacking.
Professor Tham summarized Malaysia’s current trajectory as: envisioning great ambitions without having a technological advantage. Thus, there is a need to develop domestic technology especially when the reliance on a foreign technology partner can constrain exports from the industry. Professor Tham ended her presentation with a suggestion for the government to review the goals for the automotive sector.
The webinar concluded with Professor Patarapong and Professor Tham engaging in a question and answer session with the audience. Questions answered included the benefits both country’s automotive sector have reaped from liberalisation of the regional automotive industry, how the Thai auto sector has benefited indirectly from Malaysia’s failed experiment with developing a national car and the potential for the recovery of automotive sectors in both countries from the detrimental impact of COVID-19.