Eco-Cars: Modest or No Greenhouse Gasses
Many people consider their car an essential part of everyday life. The ability to move around freely and in comfort and to possess the means to transport oneself from point A to point B have become fixtures of modern society. However, cars are major polluters and cause damage to the environment. A conventional car works using an internal combustion engine, which burns fuel to create motion. The overwhelming majority of cars on the road use fuels (e.g. gasoline and diesel) that are extracted from petroleum oil, a fossil fuel that is non-renewable and will one day run out. Moreover, the burning of fossil fuel results in the emission of greenhouse gases into the atmosphere. Indeed, greenhouse gases have been proven to contribute to global warming trends throughout the world. An eco-car is a motor vehicle that emits either modest or no greenhouse gasses and as such is less harmful on the environment, in comparison to conventional internal combustion engine vehicles running on gasoline or diesel, or one that uses certain alternative fuels. Ten years ago, eco-cars were considered a novelty, but nowadays eco-cars have gone mainstream. More and more of the best-selling cars across the world are being offered in hybrid, diesel or even pure electric form, giving buyers the ability to drive the car they want with the engine power and gas mileage they prefer. Thailand's automotive industry success is the result of its decades-long evolution from import-substitution policies to becoming a contender to become a top-ten world manufacturer. The addition of eco-car manufacturing represents
a response to consumer demands that has characterized the Kingdom's successful rise in the automotives hierarchy and will secure its place in a 21st century market. Furthermore, Thailand's goal to be a manufacturing hub for small, fuel-efficient cars came closer to reality when two Japanese auto makers launched their new made-in-Thailand eco-car models back in 2010. However, entry into this niche market has its origins with the introduction of a government-approved plan a few years earlier. In June 2007 the Board of Investment (BOI) announced its investment promotion scheme for Eco-Car manufacturing, whereby maximum incentives were offered for integrated car assembly and key parts manufacturing projects. Under the new incentives, projects needed to have a minimum investment value of approximately US$168 million and were offered a corporate income tax exemption of 8 years, regardless of the projects' location in Thailand, along with duty-free importation of machinery. Comprehensive implementation of an eco-car policy could ultimately prove as lucrative and successful as Thailand's pick-up truck manufacturing, which has propelled the country to the ranking of world's number one pick-up truck manufacturer. (The most popular vehicle on the Thai market because of its multiple-commercial applications in the country's still largely agriculture-based economy.) Hence, the BOI's eco-car incentives package was launched in 2007 with a view towards competing in this new high potential segment of auto manufacturing. Adding further attraction for eco-car manufacturers were the excise tax incentives being offered by the Finance Ministry: a 17% excise tax rate on eco-cars that have engines smaller than 1,300cc for petrol engines and 1,400cc for diesel engines. Manufacturers of low carbon emission vehicles enjoy reduced excise taxes and other tax incentives, as long as they meet government requirements on fuel consumption, safety standards, engine size and production levels. Likewise, all manufacturers are required to achieve a production of 100,000 vehicles a year by the fifth year of operation. In fact, the Thai government devised its eco-car program as a bid to attract more foreign investment in its local auto assembly and parts manufacturing industry, a major source of employment and export revenues. Often referred to as the "Detroit of Southeast Asia", auto manufacturing is Thailand's third-largest industry and accounts for 12% of gross domestic product. Car production surged 70% in 2012 from the previous year's floodconstrained output, to 2.43 million vehicles, according to the Paris-based International Organization of Motor Vehicle Manufacturers. This year it is expected to exceed 2.5 million vehicles, but with domestic demand falling automakers will need to ship more to export markets in Europe, Japan and Southeast Asia.
In maintaining its export edge and trying to hurry ahead of the global trend of tightening regulations on the environmental quality of vehicles, Thailand imposed a very strict emissions standard for "eco-cars," requiring a limit of 120 grams of CO2 per kilometer. In contrast, the European Union standard is 130 grams of CO2 per kilometer. Such a strict standard has had great impact on increasing the environmental quality of vehicles produced in Thailand and helps increase industrial competitiveness. By adhering to stringent standards, manufacturers can easily export to other high-standard markets. A total capital investment of 69 billion baht was committed initially to the eco-car program and it has generated around 11,000 jobs. What's more, the total production capacity has amounted to 658,000 cars per year, of which more than 60% are exported, which is equivalent to 113 billion baht. Certainly, the Thai auto market is experiencing a transformation. Still, according to Vallop Tiasiri, former President of the Thailand Automotive Institute - one of the chief architects of the eco-program - "The pickup will remain popular upcountry, but the eco-car is better suited to the cities". Both the one-ton pickup and eco-car enjoy lower excise taxes than other models on the road, making them cheaper and thus more accessible to first-entry buyers. The eco-car models also offer lower fuel consumption, helping to cut carbon emissions while saving money for the owner. Consumer preference in Thailand, though, is shifting toward small cars because of their lower prices as well as operating costs compared with pickup trucks. Nissan Motor's March model, the first eco-car model that was launched on the Thai market in 2010, has been highly successful, selling about 3,000 units a month. In 2011, Nissan produced about 100,000 March units, of which an estimated 60% were exported. It must be mentioned that subcompacts, including eco models, made up more than half of passenger-car sales in Thailand in 2012, according to the market research firm IHS. Furthermore, the share of eco cars will probably rise to 29% in 2016 from 19% last year. Under the program, eco cars are defined as those that travel more than 20 kilometers (12 miles) on a liter of fuel, do not emit more than 120 grams of carbon dioxide per kilometer, and meet other criteria including crash-test standards. Manufacturers also must invest at least 5 billion baht ($168 million), which should include car assembly as well as engine and parts production. In 2007 automakers approved for the project received an exemption on corporate income tax and on the import duty for machinery and equipment, as well as on the import duty for raw materials used for the production for export, and as much as a 90% reduction on import duties for a period of two years for raw materials and finished parts that cannot be produced in Thailand which are used for production for the domestic market.
The tax breaks spurred demand for hatchbacks like Nissan Motor Co.'s March and the Swift from Suzuki Motor Corp., which together with Honda Motor Co., Mitsubishi Motors Corp. and Toyota Motor Corp. are the five auto manufacturers licensed under the program. Involving manufacturers has been the key to success. The Government included manufacturers in the policy-making processes, which contributed to their acceptance of the eco-car program. As a result, the Government appears to have achieved its objective of attracting foreign investment to facilitate a competitive new product. This shows that even strict environmental regulations are welcome if they are combined with attractive tax incentives. Similarly, there has been no
ownership restriction for the program, enabling 100 percent foreign-owned companies to benefit. In August of this year, the BOI approved promotional privileges to produce the country's second batch of eco-cars with a minimum investment capital of Bt6.5 billion. Industry Minister Prasert Boonchaisuk declared that the application deadline was set for 31st of March 2014 and that manufacturing must begin in 2019. Existing and new manufacturers are welcome. The production must include bodies, engines and parts with at least 100,000 units manufactured annually from the fourth year. The new lot of eco-cars must be installed with Euro 5 engines emitting less than 100gm/km carbon dioxide and energy efficiency of 4.3 litres for 100km. The maximum engine size is 1300cc for gasoline and 1500cc for diesel. Udom Wongviwatchai, Secretary General of the Board of Investment, said the new eco-car would be Bt10,000 more expensive than the present one but the Euro 5 engine is high in quality and fuel consumption is reduced from five litres to 4.3 litres per 100km. He predicted manufacturers' interest in manufacturing eco-cars in the next 5-6 years and expected full manufacturing capability to 580,000 units in 2016. Additionally, he said the BOI will encourage the upgrading of local parts makers with an additional year of income tax exemption for eco-car manufacturers who spend at least Bt500 million on the development of Thai auto parts suppliers and mold and die manufacturers within five years. If a manufacturer uses more than Bt800 million on the development in five years, two more years income tax exemption will be added, or a total of eight years. Imports of production machinery and raw materials will be exempted from duty - similar to the first batch. The first batch of manufacturers can apply to expand production or reinvest in phase II with no less than 5 billion baht (US$ 155.3 million) of capital (excluding land costs). But new manufacturers must invest no less than 6.5 billion baht. The second phase will focus on economy, consumer and social goals. The economy factor aims to increase investments in car manufacturing clusters to strengthen Thailand as car manufacturer and export base in the region while consumer is to boost safety and fuel efficiency of the vehicles. Finally, the social factor must support the expansion of cities by reducing carbon dioxide emissions. Manufacturers must produce no less than 100,000 cars a year from the fourth year onward. Equally important, the government is being urged to help with measures to protect firms awarded a license to make eco-cars in the first phase of its investment promotion. Nonetheless, a key objective of the new promotion scheme is to improve eco-car manufacturing to become more competitive in the global market and focus more on exports, said Dr. Atchaka Sibunruang, Director General, Department of Industrial Promotion, Ministry of Industry.
Furthermore, Industry Minister Prasert Boonchaisuk has stated for the record that he believed the BOI's second phase eco-car investment promotion project should attract five or six automobile manufacturers, one of which was likely to be a company already taking part in the first phase. When combining both phases of the project, there will be a combined production capacity of 930,000 eco-cars in 2018 - and an overall Thai production capacity of more than 3 million vehicles. Of the total production at that time, 70% will be for exports, compared to the current 50:50 split between overseas and domestic sales. Yet, the second phase of the project will offer equal opportunities to existing ecocarmakers and newcomers, so as to ensure fair competition. The rise of Thailand's car industry is no accident. After Asia's financial crisis in 1997 the country did away with much regulation in the sector; unlike in India or Malaysia, foreign firms do not need to enter joint ventures with local partners. Thailand's Board of Investment offered generous incentives to produce ecofriendly cars. The Government cut the corporate tax rate from 30% to 20%, below that of Indonesia, Malaysia and even Vietnam. On top of all that came investment incentives after the floods and a first-time car-buyer scheme, which gave a further boost to domestic demand. What is more, Thailand is not just a place where carmakers assemble their products. Most parts come from local companies. At more than 80% the country has the highest localization in South-East Asia, according to IHS. Thailand also exports parts worth about US$5 billion - more than the other member states of the Association of South-East Asian Nations (ASEAN) combined. Potentially, the Thai eco-car sector can achieve sustained success and function as an engine in the country's drive towards a knowledge-based, innovation-oriented economy.