Industry Outlook 2019-2021: Auto Parts Industry

• ˜The Thai auto parts sector is forecast to see continuing growth through the period 2019-2021 on annual increases in domestic demand of 0-5%. This demand will be both for parts used in the assembly of new automobiles and motorcycles (the OEM market) and for spares and replacement parts (the REM market), demand for which will expand in step with the increasing size of the national vehicle fleet.
• Exports of auto parts are also forecast to rise thanks to the increasing number of foreign companies that have set up production facilities in Thailand, and although players will feel the pressures of the US-China trade war, this will also open opportunities to increase exports to the US market.

Overview

 

• The OEM market: This segment has grown in step with the growth of the Thai automotive production capacity and by value, it represents 30-40% of the total domestic auto parts market, a situation that is helped by the fact that vehicle manufacturers in Thailand are now using over 80% domestically produced parts. Those remaining parts which are imported tend to be those that are not produced in Thailand, usually because their production is dependent on high technology processes and these are thus imported from the manufacturer’s parent company or a supplier of the parent company. Examples of products in this category include the microcontroller chips (MCUs), which are exported from Japan to Thailand, and some of the parts used in Chinese trucks and buses that, following the establishment in Thailand of production facilities by Chinese manufacturers, are now assembled in the country. Examples of the latter include MG automobiles (SAIC Motor-CP), DFSK trucks (Tong Fong), and Golden Dragon buses (Bestrin Group).
• The REM market: The remaining 60-70% of the market for auto parts is taken by the REM market. Growth in the REM market tracks growth in the total number of vehicles registered in the country, as wear and tear of parts with time and use helps to determine demand for replacements. Parts are typically distributed through dealers’ service centers, wholesale and retail suppliers, and garage. Imports of replacement parts account for 10-20% of total import value of REM market, most coming from Japan (41% of all REM imports by value) and China (17% by value of the market) as they are a growing presence within it.

 

Structure of Thailand auto parts producers​

At present, there is a total of 1,800 operators active in the auto parts sector in Thailand (source: Thailand Automotive Institute).

• Tier-1 manufacturers are those which produce high-quality products that meet vehicle manufacturers’ specifications. These parts may be used either in the vehicle assembly process (the OEM market) or as replacement parts (the REM market). Currently, there are 720 tier-1 operators, of which 47% are foreign-owned, 30% are joint ventures, and 23% are Thai-owned. The majority of tier-1 manufacturers (54%) produce parts for automobiles, with 28% making parts for motorcycles, and 18% doing both.
• Tier-2 and tier-3 manufacturers are generally Thai-owned SMEs. These usually have lower levels of investment in research and development and employ lower levels of manufacturing technology than do tier-1 operators and so they are therefore at a disadvantage when competing in the OEM market. As a consequence, players in these tiers tend to occupy a niche as suppliers of raw materials, producers of auto parts and components for tier-1 operators, and/or manufacturers for the REM market. 1,100 tier-2 and tier-3 operators are now active, making parts which may be divided into two groups: (i) ‘genuine’ spare parts, which are produced on order for a vehicle manufacturer and according to their specifications, and (ii) ‘imitated’ spare parts, which are produced outside the standard control of the vehicle manufacturer and which are therefore usually cheaper and of lower quality, meeting demand from the more price-sensitive end of the market.

Situation

The auto parts sector typically sees growth in line with that of domestic vehicle production, and in the years 2012 to 2017, the auto parts sector saw varying market conditions as the health of the domestic market (60-65% of sales) went through a period of fluctuating health. However, at the same time, exports have grown steadily as foreign, and especially Japanese, manufacturers invested in or expanded their Thai production facilities, and for many of the major Japanese car companies, Thailand is now the center of production of parts for use in vehicle assembly in other ASEAN countries. Details of recent developments in the sector are given below.

• In 2012 and 2013, the automotive market in Thailand saw very positive conditions and output was raised to high levels as a result of the implementation of the first-car buyer scheme, while motorcycle production also expanded rapidly due to efforts by the government of the time to stimulate the economy in the regions and the subsequent increase in consumer purchasing power. These moves helped to inflate the OEM market, which expanded at historic levels in 2012, pushing growth in the Thai auto parts sector (measured in THB) to 32.0% YoY in 2012 and a further 7.0% YoY in 2013.
• In 2014, measured in THB, income for the auto parts sector shrunk by 11.4% YoY as both the OEM and REM markets weakened. Demand from OEM parts shrank sharply in the year on the ending of the first-car buyer scheme, the impact of the drought on the agricultural sector, the subsequent decline in prices for agricultural products, and the reemergence of domestic political conflicts. These events combined to restrain domestic consumer spending and this then caused sales of automobiles and motorcycles to contract very sharply, falling 33.7% YoY and 15.1% YoY, respectively. At the same time, exports of vehicles saw fluctuating circumstances and overall, economies in export markets remained somewhat soft and this held vehicle exports to only weak levels of growth. The market for replacements and spares (the REM market) also reported only sluggish growth as consumers deferred non-essential spending on vehicles. A further factor working against the market was the youth of the cars bought under the first-car buyer scheme, which had largely not yet clocked up enough mileage to require major spending on parts. Thus, such replacement parts as were required tended to be restricted to more quickly wearing but relatively minor items such as oil and air filters, bulbs, spark plugs, windscreen wipers and brake pads.

• The domestic market: Demand from the OEM market remained strong through 2018 on the back of rising production by the automotive sector; for the year, auto production rose 9.0% YoY to 2.17 million units, while motorcycle assembly increased by 0.4% YoY to 2.06 million units. However, demand for auto parts is softening in 2019 and for the first four months of the year, growth in production of automobiles and motorcycles slipped to 5.5% YoY (0.71 million units) and -3.6% YoY (0.65 million units), respectively. Meanwhile, the REM market continued to grow thanks to the large and growing number of vehicles registered in Thailand (Table 3), especially the increasing number of those aged 5 years or older. In addition, under the government’s ‘Shop for the Nation’ program[6], it is possible to offset purchases of new tires against personal tax, and this has helped to encourage vehicle owners to change parts. Imports of auto parts to Thailand also rose in 2018 and were up 5.8% YoY to a value of USD 17.51 bn. With a 35% share, Japan was the most important source of imports and these increased in value by 7.1% YoY to USD 6.20 bn. Japan was followed in importance by China[7], which had a 19% share and was the source of imports with a total value of USD 3.32 bn (-4.9% YoY). For the period January to April 2019, imports slowed and rose by just 0.2% YoY to a value of USD 5.67 bn on a softening of growth in the overall production of vehicles.

 

 

• Exports: In 2018, exports jumped by 13.7% YoY to a value of USD 21.23 bn but then contracted by 1.7% YoY to USD 6.73 bn in the four-month period January-April 2019 (Table 5). Details are given below
  • Engines: In 2018, engine parts jumped in export value by 24.37% YoY to USD 5.37 bn, export of engines continued to increase since 2016, following the expansion of the engine production capacity for the export of car manufacturers in the previous period. Thus, Siam Toyota has expanded the company’s diesel-engine production facilities, Honda’s parts factories manufacture 1.8-liter petrol engines and 1.5-liter VTEC turbo engines, and Mazda Powertrain Manufacturing has invested in increasing its Thailand-based production of 1.3- and 2-liter SkyActiv engines. The majority of this production goes to assembly plants run by parent companies, either in Japan or elsewhere in the ASEAN region, which together account for 43.2% of the value of exports of engines from Thailand, but as with some other product groups, the beginning of 2019 has signaled a worsening of conditions and in January to April, the value of exports of engines shrank by 16.9% YoY to USD 1.56 bn. This was caused by a combination of a general slowing of automobile production worldwide, the fact that the industry is in a period of transition from internal combustion engine-powered to electric-powered vehicles, and comparison with a high baseline in the previous year.
  • Tires: Exports of tires rose 11.5% YoY to a value of USD 5.11 bn. This segment benefited from the ongoing investment by Chinese operators in export-oriented tire production facilities in Thailand[8]. Examples of these include Huayi Group (manufacturing tires for trucks and larger buses under the brands ‘Double Coin’ and ‘Strong Man’) and Dadi Group (producing truck, bus and automobile tires under the ‘Shenzhou’ brand), which began manufacturing and exporting tires in 2017 and 2018, respectively, and which are overwhelmingly producing for markets outside Thailand (over 95% of output is bound for export). The main export markets are in fact the United States (42% of all exports of Thai tires by value), the ASEAN region (16%), and the European Union (9%). In January to April 2019, exports continued to rise, increasing 13.1% YoY to a value of USD 1.78 bn, although growth has slowed relative to the same period a year earlier.
  • Other auto parts: These can be subdivided into two further groups: (i) In 2018, exports of other parts for automobiles (e.g. complete knocked-down units (CKDs), gearboxes, braking systems, airbags, drive-shafts, chassis, etc.) had a combined value of USD 9.99 bn (10.5% YoY) but in January to April 2019, the value of these exports slipped 0.6% YoY to USD 3.13 bn. (ii) At the same time, exports of other motorcycle parts (e.g. complete knocked-down units (CKDs), wheels, brake systems, saddle, pedals, etc.) rose in value by 4.3% YoY to USD 0.77 bn. In the first four months of 2019, exports rose by another 4.4% YoY to USD 0.26 bn, though this represented a decline in the growth rate relative to the same period in 2018. The ASEAN zone is the main target for exports of other auto parts[9], taking 30% by value of all exports of other auto parts from Thailand, with these going to Vietnam, Malaysia and Indonesia in particular. These exports had a value of USD 3.2 bn in 2018 (6.4% YoY) and USD 1.03 bn in January-April 2019 (-1.3% YoY). Exports to Japan accounted for a further 13% of exports of these parts and in 2018 and the first 4 months of 2019, sales to Japan generated receipts of USD 1.37 bn (21.5% YoY) and USD 0.46 bn (9.4% YoY), respectively.

Outlook

Between 2019 and 2021, the auto parts sector is forecast to see growth in income (considered in Thai baht) of 3-5% per year. Demand will be supported by growth in both the OEM (domestic and foreign) and REM markets.​

The value of auto parts distributed to the domestic market is expected to grow by 0-3% YoY in 2019 and then by 2-5% in each of 2020 and 2021, which will be in step with growth in the market for parts for use in vehicle assembly, or the OEM market, (Figure 8). Krungsri Research forecasts that growth in production by the auto sector will be flat or decline slightly in 2019, when flat/negative growth of 0% to -2% YoY is expected on the back of a combination of a slowing of the world economy, weaker purchasing power in the agricultural sector as the effects of the drought are felt, and comparison with a high baseline in 2018. For 2020 and 2021, growth is forecast to pick up and will average 0-2% per year on an expected improvement in the domestic economy and, now that they are 6-7 years old, the increasing need to replace vehicles bought under the first-car buyer scheme, while manufacturers that have received investment support from the BOI will also need to push through increased production of eco-cars. Motorcycle assembly is forecast to grow at the slightly higher rates of 2-4% YoY, 0-2% YoY and 0-2% YoY in 2019, 2020 and 2021, respectively. Here, output will be boosted by government help for low-income earners through its welfare schemes, the ‘Rak p’Win’ program (which aims to provide financial assistance to motorcycle taxi drivers[10]) and the increasing output of ‘big bikes’ following the decision by leading global manufacturers to set up export-oriented production facilities in Thailand. The market for spares and replacements (i.e. the REM market) will also continue to grow over the next 3 years as the number of vehicles on Thai roads over 5-years old continues to rise. Demand for replacement parts is largely determined by age and mileage so these older vehicles and especially those bought during the first-car buyer scheme, which are now ageing over 7 years, are a particularly strong contributor to the REM market. As described above, the ‘Shop for the Nation’ scheme has also allowed buyers of new tires to offset the cost of these against their tax payments in the 2018 and 2019 tax years.

The export market is forecast to see stable growth in line with trading partners’ economic slowdown. The increasing tendency of foreign players to invest in production capacity in Thailand, especially Japanese companies, which have the necessary finances and technology, and which are in addition members of commercial groups that are connected to global automotive production networks will help to raise the quality and level of production technology deployed to international levels, and so it will be possible to progressively increase exports. However, there are 1,100 Thai operators in the sector and the majority of these are tier-2 and tier-3 producers, manufacturing to meet demand from the REM market. These players will face higher levels of risk as foreign-owned manufacturers, especially Japanese SMEs, invest in production capacity in Thailand and so compete with Thai producers in the REM market in larger numbers.

However, some fear that over the long-term, Thai auto parts manufacturers may suffer under the impact of government policies to encourage investment in the production of hybrid and battery electric vehicles. The government has in fact established a target of having 1.2 million electric vehicles on the road by 2036. But Krungsri Research’s evaluation of the situation is that for the early stage of EVs’ development, the domestic market for electric vehicles will grow only slowly and it will remain dominated by hybrid electric vehicles (HEVs) and plug-in hybrid electric vehicles (PHEVs) because these vehicles use the standard parts for internal combustion engines (ICEs) alongside their battery-powered components, for the period 2019-2021 OEM auto parts manufacturers will not be strongly affected by these developments as the market for pure battery electric vehicles (BEVs) will remain a niche market until such time as their price becomes competitive with ICE-powered vehicles and it is expected that it will be 5-7 years until this happens and BEVs become more popular in Thailand; it will not be until then that the development of lithium-ion batteries will be sufficient to make their use attractive[11], although the trend is very much in the right direction and whereas in 2010, lithium-ion batteries cost USD 1,200/kWh but by 2018, this had fallen to USD 175/kWh. Because BEVs use many fewer parts than ICE-powered vehicles (the typical BEV drivetrain uses around 20 parts compared to over 2,000 in that of an ICE vehicle). In the next 5-7 years, it will be a major turning point for Thai auto parts manufacturers, which in the past have focused strongly on developing the supply chain for internal combustion engines.  As BEVs come to take on a more important place in the market, the battery itself will become the major component in auto assembly, as opposed to the engine, and this is expected to consume up to 30% of all production costs for BEVs
 

Recently, investment in the manufacturing of parts for electric vehicles has indeed begun to be seen in Thailand, in particular of batteries, examples of which include Toyota’s opening of a nickel metal hydride battery factory and BMW’s plans to invest in developing lithium ion batteries. Beyond this, it is clear that demand from the OEM market for parts such as engines, radiators, exhaust systems, fuel distribution systems, petrol tanks, ignition systems, and gears will see significantly reduced demand if BEVs become popular, although this decline will be offset somewhat by continuing demand for other components, including the suspension, bodywork, lighting, and interior fittings, which will still be needed regardless of the vehicle’s engine. Demand for replacement parts will also decline because in BEVs some systems are controlled by electronic means that extend the age of components and so they will need to be replaced less frequently than are their equivalents in automobiles powered by internal combustion engines. Examples of these include tires and brake pads. In addition, improving safety thanks to computer-assisted driving systems may reduce the accident rate and this too would lower demand for repairs and replacement parts in the REM market.
 

Krungsri Research view

• Manufacturers of parts and spares: Operators in this group are forecast to see turnover remain at a good level on the back of growing domestic demand. Demand in the domestic OEM market will strengthen in line with rising automobile production, the REM market will continue to benefit from the constantly growing size of the total national vehicle fleet, and exports will also gain from overseas manufacturers establishing factories in Thailand from which to export parts to the rest of the region, although risks will exist for players in this group from the continuing tensions between the US and China over trade that may have negative impacts on the economies of Thailand’s trade partners.

• Tire manufacturers: Producers of tires will likewise see turnover remain at a good level thanks to rubber prices that have stabilized at a low level and from growing demand from both the OEM and REM markets. This will be because of growing domestic production of vehicles and for the latter, it will be due to the aging of automobiles bought under the first-car buyer scheme and their increasing need for replacement tires and the effects of the ‘Shop for the Nation’ scheme, which will have helped to boost demand for tires in 2019. Exports are also expected to rise on the move by international tire manufacturers to open export-oriented factories in Thailand, although these operators may also be affected by the US-China trade conflict.

• Distributors of spares and accessories: Income for players in this segment will grow as the OEM and REM markets expand but risks exist from mismanaging stock, while competition in the segment is fairly intense.
  • Wholesalers and retailers of new parts and accessories: It is forecast that demand for parts and spares and for decorative accessories which have a short lifespan will strengthen as sales of automobiles rise. Similarly, the growing numbers of vehicles on the road will also help to support increased demand for parts for replacement and repair. However, the large number of players in this segment means that competition on price can be strong and this will put downward pressure on profits.
  • Wholesalers and retailers of second-hand parts and accessories: Operators in this group will see growth proceed in line with growth in the size of the vehicle fleet, though particularly of that part of the national fleet aged over five years because these vehicles require more frequent repairs and replacement of parts and some owners of these will use second-hand parts to save on expenses. However, profits may be held back by a business model that requires operators to invest in carrying a wide range of stock, which in turn opens them up to the risk of holding outdated items and attendant problems with stock management.