PLUAK DAENG, Thailand (Reuters) - Half a world away from the cold streets of Michigan, General Motors (GM.N) is getting ready to roll its first diesel engine out of a recently opened factory in eastern Thailand.
Welcome to the “Detroit of Asia”, a vast area 120 km (75 miles) east of Bangkok, where durian orchards have given way to car plants over the past decade and vehicles are made for export to more than 200 countries.
While facing increasing competition as an auto manufacturing hub from countries including India, China and Indonesia, Thailand looks likely to retain its dominant position and win more investment thanks to its low wage costs and strong infrastructure.
“You have a good supplier network,” said Martin Apfel, GM’s president for Southeast Asian operations. “You really have a lot of experienced suppliers across the board so there’s a potential to really localise a lot.”
“The fabric is there. You can’t just drop an assembly plant into nowhere and think that cars would just magically pop up. There has got to be the right environment that brings high-quality cars,” he said.
The automobile cluster in Rayong is a small city, spread across 3,450 acres and packed with 25,000 employees toiling out of mammoth factories including those belonging to nine of the world’s top 10 automotive suppliers, including struggling Japanese automakers burdened with a strong yen.
Toyota (7203.T), Honda (7267.T), Nissan (7201.T) and Mitsubishi (7211.T) all have sprawling operations in Thailand, drawn by its sizeable local market and access to Southeast Asia’s 600 million people.
Global vehicle makers committed about 32.5 billion baht to Thailand in 2010, down 20 percent from 2009, but holding up well despite political unrest that disrupted Bangkok for several months early in the year. Car output was unaffected.
Thailand’s Board of Investment is confident the country will remain a magnet for overseas auto firms.
“The flow of FDI this year is expected to be as high as 400 billion baht, with automotive and parts being a key sector, led by number one investor Japan,” BOI Secretary-General Atchaka Sibunruang said.
Last year, auto exports contributed about 13 percent to Thailand’s total exports of 6.18 trillion baht, making it the second-biggest sector after the electronics and computer parts, according to Commerce Ministry data. The industry accounts for 12 percent of GDP, the World Bank said in a report in November.
Part of the attraction is the low cost of labour.
The average wages for manufacturing workers in China are $412.50 a month, compared with Thailand’s $245.50, Malaysia’s $666 and $129 for Indonesia, according to a 2009 report on the International Labour Organisation’s website.
A large local market, particularly for pick-up trucks, adds to the attraction.
“Thailand still has a big market for first-time buyers. The market itself is not as mature as countries like Malaysia, where vehicle ownership is pretty high,” said Hajime Yamamoto, a director in Thailand for IHS Automotive, part of a Colorado-based market research firm.
Thailand led Southeast Asia in total vehicle sales in 2010 with 800,357 units, compared with Indonesia’s 764,088 and Malaysia’s 605,156, industry association data show.
The region’s strong growth potential means car makers and auto parts makers will further boost investments. Toyota and group firm Daihatsu Motor 7262.T are considering building a low-cost car in Indonesia aimed at consumers there and in neighbouring countries, a senior official at Indonesia’s industry ministry said this month.
Thai auto parts companies such as Thai Stanley Electric STAN.BK, Somboon Advance Technology (SAT.BK) and Aapico Hitech (AH.BK) are key players in the country’s auto chain, with their shares hitting multi-year highs as they benefit from strong order books.
The Thai automotive index .SETAU rose more than 63 percent last year, outperforming the market's .SETI 41 percent rise.
Mitsubishi Motors is spending 16 billion baht to build its new “Global Small” car and will begin production of a new model in 2012. Nissan spent 5 billion baht to develop its “March” model, which went into production last year at a plant near Bangkok. In March, Honda will launch its Brio “eco-car”.
“We now have a second product champion, which will have a long-term impact on our growth and help the transformation into a real Detroit of Asia,” said Teerawut Kanniphakul, a senior analyst at the Thai broking unit of Malaysia’s CIMB (CIMB.KL).
Tax breaks for firms making small passenger vehicles with mileage of at least 20 km/litre (47 mpg) should give the industry another boost, after the success of the pick-up truck -- Thailand is the world’s second-biggest market after the United States.
However, some analysts say Indonesia, the region’s biggest economy, could overtake the Thai market as a regional manufacturing hub by 2014 because of a jump in economic development, growing national wealth and a more stable currency.
Over the next three years, per capita income in Indonesia could rise to $3,000 from about $2,000, fuelling demand for vehicles, IHS’s Yamamoto said.
“Indonesia is not affected that much by the external market,” he said. “Their economy is driven by the domestic market, compared with Thailand, which is much more dependent on exports.”
Thailand’s car production is expected to rise nearly 22 percent to 2 million units in 2011 and reach 2.5 million units in the next five years, said Vallop Tiasiri, president of the Thailand Automotive Institute, a government research body.
“Of that 2 million units, about 1.15 million will be for exports, driven by new pick-up truck models and small fuel-efficient cars. Domestically, sales are targeted to rise to 900,000 from about 850,000 in 2010,” Vallop said.
More than 55 percent of Thailand’s production is for export to the Middle East, Asia, Australia and New Zealand, he said.
Beyond the politics, one potential risk to this success story is a lack of skilled labour, IHS’s Yamamoto said.
“Japanese investors are still very confident about investing here due to the high concentration of suppliers and strong market position, but what we need is skills.”
Additional reporting by Tara Joseph in Hong Kong; Editing by Alan Raybould and Anshuman Daga