Thailand's automotive sector continues to face significant economic and financial headwinds as of the third quarter of 2024.
According to data provided by the Asean Automotive Federation, total vehicle sales declined by 25.3% year-on-year as of September 2024 to tally 438,303 units.
Vehicle production followed the downward trend in sales, declining by 18.6% year-on-year over the same period to total 1.13 million units. As a result, the Federation of Thai Industries reduced its car manufacturing target for the second time in 2024, to 1.5 million units from 1.7 million and 1.9 million before that.
As a consequence, we revised our 2024 vehicle production forecast for Thailand to decline 13.3% (previously 12.6%) to 1.6 million units.
The headwinds comprise slow real GDP growth, high levels of household debt and stringent auto loan requirements, weighing on consumers and weakening demand, leading to lower production output for 2024.
Looking to 2025, we expect production to recover slightly with 4.3% growth, although this accounts for the low base effect of 2024.
Downside risks from high household debt remain, although greater economic activity and interest rate cuts could help vehicle manufacturers. Several economic and regulatory factors are expected to persist, affecting the country's automotive sector.
High household debt levels, currently at 89.6% of GDP, have led financial institutions to tighten lending criteria for auto loans. The ratio of household debt to disposable income remains extremely elevated at 166% as of the second quarter of 2024, which we believe presents significant downside risks to broader economic stability, which will in turn negatively impact the automotive sector.
BIG-TICKET PURCHASES SAG
The high ratio of debt to disposable income suggests Thai households are highly leveraged and unable to service their debt, despite overall rises in real GDP. As such, we believe consumers will delay big-ticket purchases, such as vehicles, as they may be unable to take on further debt.
This has constrained consumer purchasing power and reduced demand for new vehicles, necessitating a downward revision of production targets. We expect this financial strain on households to continue into 2025, limiting the market's potential for recovery in the short to medium term.
Although real GDP growth accelerated to 3.0% year-on-year in the third quarter of 2024, up from 2.3% in the second quarter, which may provide some upside to our forecast, the extremely high levels of household debt may offset the impact.
Looking to 2025, our country risk team forecasts real GDP growth will improve to 3.0%.
In September 2024, the Bank of Thailand cut interest rates by 25 basis points (bps) to 2.25%. We expect the central bank to continue to reduce rates by a cumulative 100bps through the end of 2025. These improving macroeconomic conditions support our more optimistic forecast for vehicle production in 2025.
However, significant downside risks remain should domestic demand continue to weaken because of the continued high levels of household debt and stringent auto loan requirements.
In addition, Thailand's worsening competitiveness in the automotive sector has negatively affected its manufacturing capabilities. The Manufacturing Production Index dipped by 1.5% year-on-year in May, underscoring the sluggishness, particularly in the automotive industry.
The broader economic challenges have directly affected consumer confidence and spending, further limiting vehicle production.
Export growth hindrances, such as new emissions regulations in Australia, have dented Thailand's vehicle production outlook. Stricter emissions standards will make it more challenging for Thai manufacturers to meet export requirements, affecting overall production.
EV PLANTS OFFER UPSIDE
That said, some developments in the manufacturing sector could offer upside. For instance, China-based automaker GAC Aion opened its first electric vehicle (EV) factory in Thailand, offering initial annual capacity of 50,000 units, with plans to expand to 100,000 units.
A BYD plant that was announced in August 2022 was opened in Rayong, boasting an annual capacity of 150,000 vehicles, initially producing the all-electric Dolphin, Seal and Atto 3 models.
Yuchai opened its first overseas factory, producing both traditional internal combustion engine vehicles and EVs, starting with the K08, S06 and S04 series, with the plant to eventually produce Yuchai 2-11L series products. The plant's capacity is expected to ramp up to 30,000 units per year.
However, Tesla reportedly cancelled plans to establish an EV manufacturing plant in Thailand as of June 2024.
This commentary by BMI, a Fitch Solutions company, is not a comment on Fitch Ratings' credit ratings. Fitch Ratings analysts do not share data or information with Fitch Solutions Macro Research.