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Chinas Threat and Opportunity:

Challenges for Thai and Vietnamese Motorcycle Industries

Patarapong Intarakumnerd, Ph.D.1

Mai Fujita2

Extended Summary

Background

Chinas threat and opportunity is probably one of the most popular topics for Asian

academics and policy makers. Members of Association of South East Asian Nations

(ASEAN), in particular, are very much concerned with the rise of China. China is seen as

both a threat and an opportunity for ASEAN. Obviously, Chinas huge market is very

attractive for export and investment from ASEAN. Chinese tourists, increasing rapidly,

are one of main target groups of ASEANs tourism promotion authorities. Several

Chinese large conglomerates have invested in heavy industries and energy sector in

ASEAN. At the same time, for second-tier Newly Industrialising Countries (Thailand,

Malaysia, Indonesia and the Philippines), China is a fierce competitor in their key

industries such as automotive, electronics, textile and garments, and so on. For ASEANs

members which are transitional economies (Vietnam, Lao, Cambodia), the rise of China

can be viewed even more problematic, as it strongly affects efforts by these countries to

industrialise and build up their indigenous technological capabilities. Not only

opportunities for their export-led industrialization strategies lately started have been

compromised by Chinese goods, their import-substitution strategies are in jeopardy

because of flooding of Chinese consumer and industrial goods.

1 Project Manager of Thailands National Innovation System Study,National Science and Technology Development Agency (NSTDA), 73/1 Rama VI Road ,Bangkok, 10400, Thailand, [email protected] Tel. +6626448150-4 ext. 364. Fax:+6626448194

2 Researcher, Southeast Asian Studies II Department, Area Studies Center, Institute ofDeveloping Economies, Japan External Trade Organization, 3-2-2 Wakaba, Mihama-ku,Chiba 261-8545, Japan, [email protected], Tel +81-43-299-9588, Fax +81-43-299-9729.


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On the global scale, motorcycle industry is a mid-tech and rather technologically mature

industry. Automotive sector of several Asian latecomer economies started with

assembling motorcycles and producing their parts by using imported technologies.

Within ASEAN, Thailand and Vietnam are large producers with the production capacity

of 2.86 million (almost 30,000 being exported) and 3.1 million respectively in 2004. In

both countries, markets are basically dominated by Japanese TNCs. Local companies are

suppliers, especially second- or third-tier ones. Some of them, especially at the first tier,

are joint ventures with foreign component makers.

Thailand has longer history of producing motorcycles locally. Japanese TNCs have

invested in the countries since 1960s, while investment in Vietnam started in the mid-

1990s. Each TNC has developed its own networks of suppliers. Therefore, local (owning

by Thais, foreigners, joint ventures) suppliers in Thailand have longer experiences in

learning and accumulating technological capabilities. Apart from engine and gear which

require highest technological capabilities, other components can be made locally.

Another major difference is that in Thailand there are two emerging pure-Thai companies

producing motorcycles with their own brand, distributing channels, and networks of

suppliers. Started in 2000, Tiger Motor became the fourth largest producer of

motorcycles in Thailand with the market share of 3 per cent (see Table 1). This pure-Thai

firm has an aim of not only having its own brand but trying to build and upgrade

technological capabilities of a network of pure-Thai suppliers under the slogan Tiger,

Pure-Thai Motorcycle. However, in practice, Tiger still has to seek technologically-

sophisticated parts from Japanese joint ventures in Thailand. Another is a group of Thai

suppliers, SME 007 Plus. They began with supplying motorcycle parts to Japanese TNCS

and selling their products in replacement markets both in Thailand and abroad. With five

core companies, the network of almost 100 SMEs have been built. They have jointly

developed a few motorcycle parts (e.g. chain and choke) and selling them under the co-

brand SME 007 Plus They expanded their distribution network to cover repair shops all

over Thailand. Recently, they teamed up with a Thai electrical appliance, which has


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financial strength and extensive distribution network, to produce a prototype of the whole

motorcycle to be sold in 2006.

Table 1. Market Share of Motorcycle Industry in Thailand in 2003

Company Year of Establishment Market Share

ThaiHonda Manufacturing 1965 72%

Thai SuzukiMotor 1968 13%

Thai Yamaha Motor 1966 10%

TigerMotor 2000 3%

Kawasaki Motors (Thailand) 1976 2%

Source: GMI, King Mongkut University of Technology Thonburi (2004)

Figure 1: M arket Share of M otorcycle Industry in V ietnam

0%

20%

40%

60%

80%

100%

1998 1999 2000 2001 2002 2003

O thers

H onda V ietnam C o., Ltd.

"C hinese" m otorcycles

Notes: 1) Chinese motorcycles include motorcycles assembled by Vietnamese companiesmainly using parts imported from China.2) Others include: (a) motorcycles produced by foreign motorcycles assembling companiesbased in Vietnam other than Honda Vietnam (e.g., Vietnam Export Manufacturing ProcessingCo., Ltd. (VMEP; a subsidiary of Taiwans Sanyang Motors), Vietnam Suzuki, and YamahaVietnam) and (b) imported motorcycles including those made by Hondas subsidiaries abroad(e.g., Thailand).Source: Authors interview at Honda Vietnam in September 2004.

In Vietnam, the dominance of Japanese TNCs is less pronounced because of their shorter

history. Shortly after Japanese TNCs started motorcycle assembly in Vietnam in the mid-

1990s, the imports of low-priced motorcycles from China surged from 1999 to 2001,

accounting for nearly 80 percent of the market in 2001 (Figure 1). The surge of imports

from China gave rise to the emergence of over 50 local companies that assemble Chinese


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motorcycle parts. Although the Japanese TNCs countered the Chinese motorcycles by

launching new models and rapidly recovered their market share since 2002, local

companies continue to keep certain market share due to their price advantage vis--vis

Japanese products. Yet, they have not succeeded in developing their own motorcycle

models, instead of copies of Japanese models that they continue to produce.

Motorcycle industry is also a typical example if the industry where Chinas threat on

other Asian countries has been enormous. China is the largest producer as well as the

largest market of motorcycles in the world. In 2003 the country produced over 14 million

motorcycles in 2003, 3 million of which were exported overseas. Chinese motorcycleindustry is dominated by local companies that boast competitive advantage in mass

production of low-priced products. Since the end of 1990s harsh competition at home has

driven many Chinese motorcycle assembling companies to search for export market. The

export drive of Chinese motorcycle companies has been perceived as a serious threat to

motorcycle manufacturers in the region as well as the rest of the world, though its actual

impact has varied from country to country.

Thailand and Vietnam would make an interesting comparison in this context because (1)

the extent of the Chinese shock has been so different, and (2) the ways in which the

local companies reacted to the shock as well as their outcomes were also very different.

Explanation of why they were so different might be attributed to several factors, namely,

the history of Japanese motorcycle companies (which affected the penetration of

Japanese brands, development of marketing and distribution networks, development of

networks with Japanese and local parts suppliers), the level of development of local

companies, government policies, and so on.

Themes of the Paper

1. The extent of Chinas threat: How serious was the impact of the export drive of

Chinese motorcycle companies on motorcycle market in Thailand and Vietnam? Why

was the extent of the impact so different in the two countries?


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2. The reaction of local companies: How did the local companies react to Chinas export

drive, and to what extent could they develop? What explains their success or failure?

Initial Findings

Generally, the longer presence of Japanese TNCs and higher indigenous technological

and marketing capabilities of Thai assemblers and part suppliers making Thailand less

vulnerable to Chinas threat. Parts produced from China are perceived as inferior

products than those produced locally. Thai government also tries to use standard to

block Chinese imports, as quality standards of parts are being established by responsibleThai authorities. Therefore, Chinese motorcycle/parts were not so successful in

penetrating into Thai market (see Table 2.)

Table 2: China 's Export of Motorcycles and P arts to Thailand and Vietnam

(1) M otorcycles (HS 8711) Unit: num ber of m otorcycles

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

Thailand 378 6 84 1 361 384 1,041 13,054 14,706 15,906

Vietnam 3,801 2,417 861 548 89,778 1,229,195 1,833,073 284,194 31,193 25,466

(2) Parts Unit: m illion US$

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

Thailand

Engines 0.0 0.0 0.0 0.0 0.0 0.1 0.3 2.7 8.7 6.1O ther parts 1.3 1.9 1.7 1.6 2.4 4.1 5.2 8.3 11.6 10.3

Total 1.3 1.9 1.7 1.6 2.4 4.2 5.5 11.0 20.3 16.4

Vietnam

Engines 0.0 0.0 0.0 0.0 0.0 4.9 49.6 79.8 23.0 45.9

O ther parts 0.2 0.0 0.2 0.7 2.2 19.0 35.3 51.7 35.9 46.2

Total 0.2 0.0 0.2 0.7 2.2 23.9 85.0 131.6 58.9 92.1

Notes: HS codes are as follow s: m otorcycles (8711), engines (840732), m otorcycle parts other than engines (871419).

Source: W orld Trade Atlas.

Specifically, to Japanese companies in Vietnam and Thailand, China is undoubtedly a

competitor, and they have reacted to Chinas threat in different ways. While Honda has

launched low-priced models in both countries, Yamaha has pursued higher value added,

with more emphasis on brand, design, and quality.

The focus of our analysis is, however, to be on local companies. For more established

Thai company like Tiger, China is viewed as a competitor and an opportunity provider.

To differentiate from Chinese motorcycles, Tiger is trying to produce higher-quality

product for upper market. It attempted to increase its own technological capabilities by

doing setting up design and development department and starting collaboration with local


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universities and public research institutes. At the same time, some Chinese imported parts,

not locally produced, were accepted. This gives Tiger flexibility in choosing the best parts

for their motorcycles. For SME 007 Plus, since it is a new group of companies and they

cannot produce all parts by their members, Chinese imports provide opportunity for them,

especially when the group aims to assemble the whole motorcycle under its owned brand.

In contrast to Thailand, the impact of China on Vietnams motorcycle industry has been

far-reaching. The imports of motorcycles from China increased dramatically from 1999

to 2001 (Table 2). Chinese motorcycles, priced approximately one-third to one-fourth

($600-700) of the motorcycles produced by Japanese companies (approximately $2,000)in the late 1990s, quickly penetrated into the Vietnamese market, expanding the annual

sales from 379,000 in 1998 to 1.96 million in 2001. Since Vietnamese authorities

prohibited import of completely assembled motorcycles from 1998 to 2003, the Chinese

motorcycle parts had to be assembled by Vietnamese companies, giving rise to more than

50 local motorcycle assembling companies around the year 20013.

Since 2002, some of these local motorcycle assembling companies shifted from simple

assembly of Chinese parts to in-house production of parts. For these newly emerging

companies, China has been perceived as a partner. Many of them relied on technology

transfer from Chinese companies for in-house production of some engine parts, and

sourced other key parts from Chinese companies based in Vietnam as well as parts

imported from China. While they have acquired a certain level of manufacturing

capability and increased procurement of parts from local, Taiwanese and Chinese

companies in Vietnam, they have not managed to overcome their dependence on China

for production and sourcing of key parts.

3 Since assembled motorcycles could not be imported, Chinese motorcycles went throughthe Vietnamese customs as knocked-down parts. The parts were re-assembled by

Vietnamese companies. But the Chinese customs statistics used here show that exports inthe years 1999-2001 were in the form of assembled motorcycles and not parts. Whileknocked-down parts were subject to import tariffs according to the localization ratio (i.e.,with higher localization ratio, companies were subject to lower tariffs), Vietnamesemotorcycles assembled claimed false localization ratio to benefit from low import tariffs,which could not be checked by the Vietnamese authorities until 2002, when inspectionand regulation of motorcycle assembling companies was significantly strengthened.

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