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30 May 2008

Energy

E85 & Eco-Car Programs: Issues to be Considered (Business Brief No.2182)

Amid lofty oil prices, the Thai government has focused on energy-saving initiatives and is introducing tangible programs such as their support of eco-car production and speeding up the use of E85 fuel – a blend of 85 percent crop-derived ethanol and 15 percent gasoline – within the third quarter of this year. Many agree that the government's policies supporting the use of alternative fuels to reduce reliance on fossil fuel is suitable to the current circumstances. However, KASIKORN RESEARCH CENTER (KResearch) takes the view that thorough consideration should be deliberated upon before this policy is implemented. This is particularly true forits impact on guidelines of the previous government-initiated programs given to the private sector and the timing of implementation, as well as an appropriate level of support needed from the government.
Early introduction of the use of E85 fuel via excise tax reductions is regarded as good. However, this may affect automakers' production plans and the marketing of eco-cars and NGV-fueled cars which have received staunch support from the government, as well. In the initial stages, Thailand is expected to rely on imported E85-campatible cars mainly from European and US automakers, as it may take around 18 months for local production to get started.
This policy may affect BOI-promoted eco-car investment projects already granted to six automakers: Honda, Toyota, Nissan, Suzuki, Mitsubishi and Tata, with pending approval for Volkswagen. The emergence of E85-powered cars at this time may prompt these car companies to review their eco-car projects worth a combined total of more than THB70 billion, i.e., whether they are still worth the investment. There may also be some impact on the growth potential of related projects in the future.
Unattractive tax incentives may be among the reasons for the review of eco-car projects. While the approved excise tax reduction on eco-car projects was 17 percent, the rate on E85-compatible cars is expected to be around 20-21 percent. This difference of only 3-4 percent is obviously quite modest. Moreover, eco-car production is required to meet many additional standards, particularly environmental standards specified by the Thai government. Meanwhile, the standards for E85-fueled vehicles are still pending, and some of those involved are concerned that standard requirements for eco-cars may be stricter. Moreover, the BOI's main criteria on eco-car production of not less than 100,000 units per year by each manufacturer from the 5th production year onward are another point of concern. Under this condition, local eco-car production would total at least 700,000 units annually, which would be mainly earmarked for exports, with the rest for the domestic market. If the government supports the use of E85 fuel in parallel, with a goal of seeing 60 percent of domestic vehicles running on E85 by 2011, manufacturers of both eco-cars and E85-compatible cars will compete head-on to win a market share. As a result, automakers may reconsider their eco-car projects, especially whether they are worth the investment.
In conclusion, although the principles and guidelines for using E85 as an alternative fuel are endorsed by many, careful deliberation by the government is needed to ensure clarity on investments, especially toward the country's automobile industry. Among the key issues involved are the timing of implementation, reasonable excise tax incentives and careful consideration of its impact on related industries.

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