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25 May 2007


Eco-Cars: Hope for the Thai Automotive Industry amid Steep Oil Prices (Business Brief No.1994)

The eco-car project is back in the limelight of the automotive industry with carmakers and consumers. The concept of a Thai-built small and fuel-efficient car, otherwise known as an ‘eco-car', was first proposed in 2003, and then later reintroduced in late 2006 by the administration of Prime Minister Gen. Surayud Chulanont as part of an effort to boost production potential, distribution and exports for the local auto industry. On November 20, 2006, a meeting of the Board of Investment (BoI) resolved to support eco-car production in Thailand and establish the three key criteria for carmakers who want to apply for BoI-promotional privileges. They are:
1. A clear, detailed plan must be submitted on car assembly, engine production plus auto-parts manufacturing and procurement.
2. A 5-year investment and manufacturing plan must be submitted, featuring an annual output of not less than 100,000 units from the 5th year onward.
3. The vehicles to be produced must be energy-efficient with a fuel consumption of not more than 5 liters per 100 km.; meet the Euro 4 exhaust emission standards and UNECE (United Nations Economic Commission for Europe) auto safety standards.
Bright prospects seem to lie ahead for the eco-car project, thanks to expected scores of promotional privileges to be granted by the government to prospective carmakers. However, the vehicle excise tax is a thorny issue that has stalled the eco-car project for many years now. Several automakers and related agencies have proposed reductions on the excise tax imposed on eco-cars to lower the cost of production, making the vehicles more affordable for consumers and attractive for investment here. The proposed tax rate is in a range of 10-25 percent, compared to the current excise tax of 30 percent levied on small-to-medium passenger cars (with engine sizes up to 2,000 cc.).
However, the excise tax on cars is a sensitive issue because it may affect government revenues, and in particular, the domestic car market structure. The topic of how much the excise tax incentives on cars should be has to be considered carefully. Government agencies such as the ministries of Industry and Finance have different opinions from car industry manufacturers. Some manufacturers are worried that if eco-cars gain excessive excise tax preferences, the cost of production and price of cars of project participants will adjust much lower. That could affect the overall domestic car market; particularly compact sedans, because the eco-car would constitute a new domestic product segment. Such cars could encroach on the market shares of other vehicle segments that are dominated by the major market leaders at present, thus affecting the current balance between car manufacturers.
KResearch is of opinion that, the concept of the eco-car demonstrates the need for development of automotive standards in Thailand. KResearch expects that trends in the world car market in the future will focus more on the qualities and standards of such vehicles, specifically on three factors: fuel economy, environmental friendliness and high safety standards, because oil prices are still rising higher continuously as well as growing environmental concerns. Also, manufacturers are becoming more aware of consumer safety. These main factors will define the design and performance of cars to meet future market demand. Hence, the government sector should support any automotive model (no matter whether they join the eco-car project or not) that excels in those three qualities, as they would benefit the public in general. KResearch
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