COMPETITIONTHE RACE IS ON

So do the Thais -- and the industry rumor is that they have the inside track. Unlike the Philippines, Thailand is home to 350 vehicle parts suppliers. That has already helped persuade 17 of the world's leading carmakers to set up production lines. But Bangkok was not taking any chances with the GM bid. Banharn reportedly met with company representatives last year. Soon after, the government indicated it will lift the rule requiring automakers to turn out vehicles with 54% local components, among other incentives (see table, page 49). Says Chakramol Phasukvanich, deputy secretary-general of the country's Board of Investment: "There is a 60-40 chance of them coming to Thailand." GM will decide in the next month or so.

The keen competition shows just how dead serious Asian countries are in establishing a vibrant auto industry Japan and South Korea, of course, are already exporters. Malaysia, which has a national company producing most of its vehicles,has started selling its Proton cars in Britain. Thailand now turns out virtually all vehicles sold in its market. Unlike Malaysia, they are made not by a national company but by foreigners like Toyota, Isuzu, Nissan, Ford and Chrysler. The next lap for Bangkok: the launch of its for-export "Asian Car." Later this month, Honda will roll out a version of that auto, the four-door 1.3-liter engine EK model to be built in Thailand. Last week, Toyota said it too may build a passenger car specifically for the Asian market -- to be made by Thais as well.

It's not for nothing that Bangkok is known as the Detroit of the East. Thailand makes fewer autos than Malaysia (see table above), but produces far more pick-up trucks and other commercial vehicles. Thailand's total vehicle production reached 520,000 units in 1995, more than a third of them pick-ups, which are popular in the rugged countryside. Output is expected to rise to nearly 1 million by 2000. In contrast, Malaysia still has to achieve the 350,000-units-a-year level that experts say is needed for economies of scale.

That raises the question of whether a national car project is the best route to global carmaking, something the Philippines, Indonesia, China, India and others in Asia would do well to ponder. Many of them foster ambitions of building their own finished auto. "A [national] car has high visibility and it is a great promoter of a country's identity," says Lim Kok Wing, chairman of the Designers Guild of Malaysia. "It also supports the image of a sophisticated nation." But the bottom line is that the Thai approach -- focus on the parts, not on the car -- makes more economic sense. Dominated as it is by Japanese auto makers, Thailand's car industry produces more jobs and accounts for 15% of the country's gross domestic product, giving a bigger lift to the economy than its smaller counterpart does in Malaysia.

TWO APPROACHES

In the 1970s, Thailand decided it would not champion a Thai car whatever prestige it would bring the country. Instead it focused on nurturing a components industry. The government stopped approving new assembly operations and banned car imports. It also boosted local-content requirements: from 25% of a car in 1980 to 54% today. The proportion of locally made parts in a pick-up truck was pegged even higher at 70%. With parts makers flourishing, Bangkok started allowing car imports again in 1990. Three years later, it gave out licenses for new assembly plants. Lured by Thai incentives and hit by the rising yen, Japanese manufacturers came in droves.

The Japanese also set up shop in other countries like China and Indonesia. But they bypassed Malaysia. The playing field there is skewed in favor of a chosen car. In 1985, Kuala Lumpur launched the Proton national car project with the technical help of Mitsubishi. To protect Proton, Kuala Lumpur slapped high tariffs on foreign autos and car kits imported by existing assemblers. Proton's purchases of Mitsubishi kits were exempted, allowing the state company to sell what it made at cheaper prices.

The approach is now presenting Kuala Lumpur with a tough challenge. As a member of the World Trade Organization, it is committed to gradually dismantling barriers to free trade. Local-content requirements for vehicles -- 85% currently in Malaysia -- are scheduled to be scrapped by the year 2000. Tariffs on car kits -- now at up to 42%, with Proton paying import duty of 13% -- and on finished autos (140% to 200%, depending on engine size) must also come down. Can Proton and second national carmaker Perodua fight the coming competition and retain their combined 74% share of the local market? More importantly, can Malaysia continue its drive to become a global exporter in a world where protectionism is on the way out?

MALAYSIAN MOVES

Kuala Lumpur is undeterred. Yahaya Ahmad, who last year bought a substantial stake in Hicom Holdings, which controls Proton, says Malaysia is following in the tracks of Japan and Korea. Those nations built up strong, export-oriented car industries behind sturdy protectionist walls, he says, so why can't we? "Of course, all the major manufacturing countries say, 'let's open up everything.' There's no doubt Malaysia will continue to liberalize. But we have to be realistic about it. Within limits there will continue to be some industries we have to keep nurturing, the automotive sector and component parts manufacturing, for instance."

Yahaya says one of Proton's priorities is to help develop the car-parts industry. "We could have done more for our local-content program," he told Asiaweek. "Our vendors have not been as fast and aggressive in expanding their capacities because Malaysia is a captive market." Proton is especially interested in reducing its exposure to the yen. "Our current import level for components from Japan is still quite substantial," he notes. "Savings [from reducing those purchases] could total between 15% and 20% [of our import bill]. We can also source elsewhere, not just from Japan." The possible suppliers: the U.S., Europe -- and Thailand.

With a waiting list as long as six months, Proton is hard-pressed to meet domestic demand. But it is pushing exports. An $800-million manufacturing plant on a 3,000-acre site north of Kuala Lumpur is scheduled for completion by 1999. Proton City will make autos mainly for overseas markets. Proton has also formed ventures in Indonesia and the Philippines. Yahaya concedes that Malaysia's export drive cannot fully replicate Japan's and Korea's. "Theirs was a time when the world was not so sensitive to protectionism," he says. "But we have the advantage of acquiring the latest in automobile and production technologies." That translates into lower break-even production levels -- and faster profits.

Another plus for Proton: tie-ups with foreign firms to reduce R&D costs. Proton is planning to make its next line of autos in collaboration with Peugeot-Citroen of France. "It's good to have a few sources of technology rather than depending on just one," says Yahaya. "For Japan, an alliance with another Asian manufacturer is considered an alliance in its domestic market, because Japan considers the whole of Asia as its own territory. Hence the transfer of technology is slow." He hopes things will be different with Peugeot-Citroen because "Europe is its domestic market" -- the carmaker may be more open to sharing its know-how with Asians.

CHOOSING A MODEL

Despite the uncertainties of the Malaysian approach, the ideal of a national car remains attractive. Indonesia seems determined to beat the trade liberalization clock. Jakarta recently granted Timor, an automaker owned by President Suharto's youngest son, Hutomo Mandala Putra, special sales tax and tariff exemption on imports of parts needed to develop a national car with South Korea's Kia Motors. China shares the same ambition, though given its potentially vast market, it is allowing more competition between domestic makers and selected foreign joint ventures. The Philippines also has a national car program, but the government does not seem to be actively encouraging it.

For Manila, the GM plant would be a less expensive way to jumpstart its automotive industry. The facility is projected to make 120,000 passenger cars a year, of which 80% will be exported. The American maker would need 2,500 workers; the Philippines estimates that subcontractors and suppliers would create another 30,000 jobs. "Our human resources are our best asset in this competitive game," says Trade and Industry Secretary Navarro. "And GM should not sneeze at our vehicle market. We're approaching the 100,000 mark." But that is still only about a fourth of Thailand's. The lack of an extensive network of components makers is also a drawback. Still, says Navarro, "we have offered them a very competitive package that is difficult to refuse."

Which bid will GM choose? "Everything being equal, Thailand is the better place," says Victor Sun, an auto analyst at Peregrine Securities in Hong Kong. But while the Thais are eager to host the GM plant in order to lessen their dependence on Japanese makers, they are not bending over backwards to get it. "GM wants Thailand to change the rules," says John Bonnell of Bangkok consultancy Automotive Resources. "We have Toyota producing the most vehicles here. We have Nissan and Mitsubishi, Ford and Mazda. So why should GM get any special deal?"

Manila is prepared for disappointment. "What is important is that the Philippines is finally being included in the short lists of possible investment sites," says Navarro. There will be other opportunities. GM predicts that Asia's car market will match that of the U.S. at nearly 16 million vehicles a year by 2005. But Thailand seems to be the prime destination of the world's carmakers. Ford is building a $200-million plant there. Chrysler began making Cherokee Jeeps last year. "Something in the region of $2.3 billion is earmarked for Thailand from five or six top auto assemblers to the year 1998," says Bonnell. Malaysia may emerge as a global carmaker, but it is clear that Thailand will get there first.

-- Main reporting from Manila, Bangkok and Kuala Lumpur