Academic journal article Journal of Southeast Asian Economies

Explaining Thailand's Automotive Manufacturing Success

Academic journal article Journal of Southeast Asian Economies

Explaining Thailand's Automotive Manufacturing Success

Article excerpt

1. Introduction: Detroit of the East?

Thailand's export-oriented automotive industry is a celebrated economic success story. The production of motor vehicles and parts began in the 1960s and expanded from the early 1990s, catering solely to the highly protected domestic market. Production for export has been important only since 2000, but more than half of the industry's final output is now exported. Employment within Thailand's automotive sector--final assembly plus parts--now exceeds a quarter of a million workers.' In 2015, production exceeded 2 million units, making Thailand the world's ninth largest automotive producer. According to a 2013 report in The Economist, Thailand has become the "Detroit of the East" {Economist 2013).

The opportunity for rapid development of this form of manufacturing production within middle-income countries like Thailand was stimulated, in part, by the Plaza Accord of 1985. The United States, Japan and major Western European governments agreed on a steady appreciation of the Japanese yen, but also of the euro, relative to the U.S. dollar. Within Japan, these currency realignments and related labour market developments raised the costs of production relative to the revenues from exports. American negotiators hoped that these cost pressures would induce at least some Japanese manufacturers to relocate to the United States. In the following years some did, but more often, Asian locations outside Japan proved more attractive to Japanese manufacturers than relocation to the United States. Low labour costs in Asia were a major but not the only component of this story. Competition was intense among Asian countries to attract internationally mobile Japanese manufacturing to their countries.

In the case of automotive manufacturing for export, Thailand was very successful in attracting Japanese manufacturers, compared with neighbouring countries such as Malaysia, Indonesia and the Philippines (Doner, Noble and Ravenhill 2006). Why? In the literature on the apparent success of Thailand's automotive industry, the answers to several key questions are contested. First, is the Thai automotive sector really a success story? In contrast with the "Detroit of the East" characterization, the final assembly operations occurring within Thailand are fully foreign-owned, with production and marketing decisions, together with most of the design and technical research, occurring in Japan. Second, is the recent growth of the industry within Thailand a delayed consequence of earlier infant industry protection? Third, and more broadly, to what extent was prudent industry policy responsible for the success of the industry? Fourth, to what extent was the elimination of restrictions on foreign ownership of both final assembly and parts production, following the 1997-98 Asian Financial Crisis (AFC), responsible for the relocation of foreign manufacturers to Thailand? Fifth, did the local content requirements in operation until their abolition in 1997 lay the foundation for the development of the Thai parts and components subsector, or was the subsequent removal of these restrictions responsible? Sixth, did the export orientation of the industry since 2000 help or hinder the development of domestic linkages? Finally, to what extent did Thailand's infrastructure investments, concentrated in the Eastern Seaboard economic corridor, contribute to the growth of the automotive industry?

This study attempts to shed light on these and other related questions. The prevailing literature has tended to attribute Thailand's automotive export performance to selective industry policy ("picking winners") on the part of the Thai government. In contrast, the hypothesis in this paper is that three sets of factors jointly facilitated Thailand's success in attracting footloose automotive production, eventually leading to its export success. The first was a proactive set of infrastructure investments, beginning in the late 1980s and extending through the 1990s, known as the Eastern Seaboard Scheme, which created an economic corridor, designed to reduce costs within heavy industry in general, but without any specific sector in mind. …

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