Thailand’s first car-buying scheme vs cash for clunkersBy Bangkok Pundit Oct 24, 2013 10:00AM UTC
The tax breaks, which the World Bank estimates cost Thailand $2.5 billion, were intended to revive auto manufacturing in the region’s biggest car-making hub following devastating floods in 2011.
But much like the U.S. “cash for clunkers” program in 2009, the incentives distorted the market, creating a boom in demand that collapsed once the tax breaks expired in December.
Aberdeen New Thai investment trust’s chief investment officer has warned of economic headwinds for the Asian country after it fell into a technical recession.
Adithep Vanabriksha said Thailand had experienced two consecutive quarters of negative growth this year meaning it fell into a technical recession for the first time since 2008.
He said the situation was not helped by a number of government initiatives that attempted to bolster the economy, including a farming initiative that pushed up the price of rice and a subsidy on cars that ended last year, meaning sales have slumped in 2013.
A generous car-buying incentive program has hit a major pothole in Thailand, which touts itself as the Detroit of Southeast Asia—presumably referring to the auto manufacturing, not crushing levels of government debt—in the latest in a string of questionable stimulus programs.
The $2.5 billion car-buying scheme was similar to the US “cash for clunkers” plan, but without the clunkers—first-time buyers simply received a tax refund of up to $3,200 in an attempt to encourage lower-income Thais to buy domestically made cars.
Prime Minister Yingluck Shinawatra launched the program after massive floods in 2011 hit the country’s auto industry. Thailand is a regional hub for many car companies, especially Japanese manufacturers such as Honda, Mitsubishi, and Toyota, and autos comprise 12% of the country’s GDP, and at first the plan seemed to work like gangbusters, with 2012 auto production skyrocketing 67% from the previous year.
But the problem with encouraging low-income buyers is they often can’t make their car payments. Reuters reported this week that more than 100,000 new buyers have defaulted on their loans, with their cars seized by finance companies. With the resulting used-car glut and the absence of the subsidies, demand for new cars has cratered, threatening the very industry that the plan was meant to help.
The woeful outcome shouldn’t have been a surprise—the US cash for clunker program was widely seen as a failure for some of the same reasons in 2009.
BP: The QZ article links to a Business Insider article which includes the below chart:
Source: Business Insider
BP: As you see there was short-term growth, but then sales actually returned to pre-program levels and then later dropped – a Wikipedia chart shows something similar. However, for Thailand, this is not the case. The scheme started on September 16, 2011 and ended on December 31, 2012 (source: BOT)
NOTE: The yellow-blue indicates the start and end of the first car scheme
The Bangkok Post:
Domestic car sales over the month totalled 94,859 units, down 28.5% on last September, and a 5.41% decline on August.
Car sales over the first nine months of the year stood at 1,034,199 units, up 3.4% on the same period last year.
BP: So as you can see from the Bangkok Post article and the chart, sales up until the end of September are actually up until 2012. Hence, BP fails to see how you can argue that car sales have slumped in 2013…. To put this in perspective:
NOTE: 2013 sales are up until September 2013
In fairness to Reuters,* from the article cited above:
Although sales have dropped for four consecutive months, they are still running well ahead of the 700,000 units sold in 2010, the year before the plan was launched.
BP: This though understates that sales up until the end of September have exceeded every year ever. Sales for 2013 will be well above 2010. There has been no slump or cratering of demand. Unlike, cash for clunkers, sales did not drop below pre-program sales.
Also, from Reuters article:
The glut of almost-new vehicles hitting the market has had a knock-on effect of automakers, who are being forced to offer promotions or discounts to move stock.
Mitsubishi Motors MMOTH.UL (7211.T), which operates three vehicle plants in the kingdom, said April-to-June Thai sales dropped 24 percent year-on-year to around 20,800 vehicles and it expects further falls.
“The end of the incentives scheme created an irregularity which may trade off the benefits to some extent. We’ve come to see it as an unavoidable cost of the program,” said Nobuyuki Murahashi, President of Mitsubishi Motors (Thailand).
Mitsubishi, Thailand’s largest exporter of cars, has launched sales promotions around the country, including lucky draws and a no-interest payment scheme spread over 48 months.
BP: The problem though here is with Mitsubishi. Just-Auto:
Mitsubishi’s Thai sales in April-June dropped 24% year on year to around 20,800 vehicles. That compares with a 1% drop in Thailand’s industry-wide vehicle sales in April-June.
The company has revised down its estimates for industry-wide sales for the fiscal year to 31 March 2014 to around 1.1m or 1.2m vehicles, Kuroi said.
BP: Other manufacturers, such as Toyota, had predicted sales for 2013 of 1.2 million unit. Given we have had sales of 1,034,199 units for the first 9 months, we are likely to see sales between 1,260,000-1,310,000 for all of 2013 so this has hardly created a glut…
As the BOT has also noted on the first car scheme:
The scheme led to historical records of automobile production and sales in 2012 and helped boost related manufacturing and service industries. Moreover, the scheme also boosted additional investment in the automobile and related industries in response to high demand. Thus, it could be said that the scheme was an important driver of economic growth in 2012, details are as follows. Automakers gave priority to domestic orders before exports and accelerated production to full capacity. As a result, the total number of cars produced last year reached a new record high of 2.4 million. The expansion of the automobile industry also benefited related industries such as automobile parts, insurance, and services. Even though the scheme ended at end-2012, it is expected that its impact would continue into the first half of 2013 given that delivery has not yet been completed. This partly motivated automakers to accelerate investment to expand production capacity, especially production of small- sized cars which has a high number of backlog orders.
BP: This is not to say there have been no negative consequences, but just that BP views they have been over-exaggerated with little focus on any positives from the scheme. For example, one criticism of the scheme is that it has caused the value of used cars to drop – see Reuters and the Bangkok Post – but this affect also means it is easier for those on lower incomes to purchase second-hand cars given the value has decreased. The US cash-for-clunkers program removed second-hand cars from the market so it resulted in the opposite type of criticism. Per Wikipedia:
Jacksonville State University economist and Ludwig von Mises Institute scholar Christopher Westley said that the program “sticks it” to the poor and lower-middle classes by raising the price of the remaining cars in the secondary market, as well as by raising the general price level resulting from the monetary inflation required to finance it. Westley called CARS the “I Hate the Poor Act of 2009″.
BP: The Thai scheme didn’t, although if it had then we would likely have got the same criticism….
There will be a second blog post looking at NPLS and the overall scheme…