VW Said to Consider Setting Up First Car Factory in Thailand

Apr 02, 2014 4:03 am ET

(Updates with VW shares in fifth paragraph.)

April 2 (Bloomberg) -- Volkswagen AG, Europe’s largest automaker, has applied to set up its first car plant in Thailand to help narrow the gap with Toyota Motor Corp. in Southeast Asia, people familiar with the matter said.

The company, based in Wolfsburg, Germany, is seeking to participate in a government program offering tax exemptions for automakers investing at least 6.5 billion baht ($200 million) in local manufacturing, said the people, who asked not to be identified because a final decision has not been made.

VW currently lags far behind Asian rivals in the region. Toyota led the Thai market last year, delivering 30 percent of the 725,135 vehicles sold, according to data from industry researcher LMC Automotive. Japanese automakers together accounted for 88 percent of the market in 2013, according to LMC. VW is pushing into the region as part of broader plan to nab the top spot in global sales from Toyota by 2018.

“VW has always been one of the manufacturers trying to position itself globally,” Juergen Pieper, a Frankfurt-based analyst at Bankhaus Metzler, said by phone. “Current sales volumes in Southeast Asia are much smaller than in China or the U.S., but it’s one of the regions where Japanese carmakers are significantly ahead of VW, so there’s room for growth.”

VW shares gained as much as 2.10 euros, or 1.1 percent, to 193.75 euros and were up 0.8 percent as of 10:02 a.m. in Frankfurt. The stock has climbed 23 percent in the last year, valuing the manufacturer at 88.2 billion euros ($122 billion).

Thai Production

To receive the Thai government incentives, annual production must reach 100,000 cars in the fourth year after starting operations, and manufacturing must begin by 2019. The program from the Industry Ministry includes vehicle assembly, components and engine production. Carmakers had until March 31 to apply, according to a ministry statement from October.

Volkswagen hasn’t made a final decision yet on producing vehicles in Thailand as the exact terms and conditions may still change, the people said. VW declined to comment on any plans it has for the country.

VW forecasts industrywide sales will increase on average 4.5 percent annually through 2018 in the region comprising Indonesia, Thailand, Malaysia, Philippines and some smaller countries in the area. VW started assembling Passat sedans in Malaysia with local automaker DRB-Hicom Bhd. in 2012.

VW sees a “strong market opportunity” in Southeast Asia, Chief Financial Officer Hans Dieter Poetsch said in a presentation published on the company’s website last week.

Growing Demand

The Asean region is also attractive to VW because of the growth potential. Deliveries will probably rise 30 percent to about 4.4 million vehicles by 2020 from 3.4 million last year, according to market researcher IHS Automotive. By comparison, 2.95 million cars were sold in 2013 in Germany, Europe’s biggest auto market.

“It’s a good strategy by Volkswagen to build production facilities in Southeast Asia as they’re trying to increase their sales in emerging markets,” said Jessada Thongpak, an analyst with IHS Automotive in Bangkok. “What we will have to see is what will be their strategy, given that Asean is dominated by Japanese brands.”

Market leader Toyota, which first set up local production in Southeast Asia in the 1960s, has built its presence in the region with robust and spacious vehicles that can be used by business customers, while at the same time offering enough space to transport large families.

The automaker in 1970s introduced no-frills minivans and pickups in the Philippines and Indonesia. Toyota manufactured the bodies by bending and welding sheet metal, rather than importing stamping equipment, to make the vehicles cheaper.

Sales Push

VW Chief Executive Officer Martin Winterkorn said last month that the automaker may sell more than 10 million vehicles worldwide in 2014, four years earlier than initially planned. The automaker delivered 9.73 million vehicles in 2013 as a boost in Chinese demand helped it surpass General Motors Co. to become the world’s second-biggest carmaker.

VW, which also owns the Audi and Porsche premium marques and Seat and Skoda mass-market nameplates, will introduce more than 100 models through 2015. VW outlined plans in November to invest 84.2 billion euros through 2018 to build new models and expand production.

Thailand has been encouraging automakers to make and sell vehicles with higher fuel efficiency.

In 2007, when it first unveiled the eco-car policy that exempts manufacturers from paying corporate tax for eight years and includes no levies of import duty on machinery and equipment, five companies applied to set up factories. Last year, the government decided to allow more manufacturers with a six-year tax break, according to Thailand’s Board of Investment.

The program provides tax exemption if the companies make vehicles that travel more than 23 kilometers (14 miles) on a liter of fuel, don’t emit more than 100 grams (3.5 ounces) of carbon dioxide per kilometer, and meet other criteria including crash-test standards.

--With assistance from Siddharth Philip in Mumbai.