You don’t see many old cars in Thailand. The bulk of cars are almost brand new Japanese city cars or pickups. Rural areas are almost completely dominated by black Toyota Hilux Vigos and Isuzu D-Maxes.
The new car market in Thailand grows at an almost unbelievable rate each year. 2010 saw a 38.3% growth on 2009.
In western Europe and, to a lesser extent, the US, it’s relatively uncommon to buy a new car. The second-hand market is lively and well-regulated. A “full service history” is expected for all cars under 10 years old, so people can be reasonably confident in what they’re buying. Prices are highly predictable thanks to authoritative price guides such as Glass’s in the UK or the Kelley Blue Book in the US. The high running and repair cost of vehicles in Europe, plus a swamped market, contributes to a vertiginous depreciation in value. A five-year-old car in Europe will cost about half its original showroom price. It’s a no-brainer that second-hand is more economical than new.
In Thailand the picture is quite different. Second-hand cars, are, to European eyes, jaw-droppingly expensive. Mass car ownership is a relatively new thing and, as we’ll see below, the attraction of buying a new car is greater. This means that the second-hand car market is nowhere near as big or as mature as it is in Europe. Pricing is unregulated and the quality of second-hand cars is very difficult to predict, so there’s a high risk of being ripped off. Low insurance and extremely low labour costs for repairs* mean that most of the cost of a car is effectively pushed upfront. Prices vary wildly but a five-year-old car is likely to be priced at at least 75% of its original showroom price.
But new car prices, especially for vehicles built overseas, are also quite high in Thailand. So how can people afford them?
First of all the Thai economy is in rude health. This is a country that was untroubled by the global economic crisis and shows a steadily growing GDP (7% in 2010, a further 4.3% predicted for 2011). So people are feeling financially positive.
Secondly, most people buy on the never never. Europe’s consumers, mired in mortgages, personal debts and high interest rates, are far more wary about getting themselves into trouble with long-term hire purchase. Not so in Thailand. There is, quite simply, no reason not to defer payments over time:-
1. Interest rates here are in effect negative. Yep, inflation is higher than the central bank policy rate (usually 1.5-2%). So why save up for a car when you can get one today for no extra cost, spreading payments over a few years?
2. The lack of a centralised credit rating system means that defaulting on hire purchase payments incurs no long-term penalty. It’s almost an incentive to default every six months ago and get a brand new car for your sins. Dealers aren’t yet troubled by this: they get great sales figures and a few near-new returns that haven’t depreciated in value like they would in the west. Meanwhile the lenders aren’t worried either: with healthy net interest margins and extortionate fees, Thai banks are hugely profitable.
Whether this model is sustainable is another question. With the number of cars on the road surging, and the number of accidents ever-high, I can’t see car insurance remaining as cheap as it is at present. This will impact on the imbalance between upfront and running costs – which should in turn drive down the relative price of second-hand cars. More significantly, the sheer number of used cars becoming available will start to worry dealers. Supply will outstrip demand for independent dealers, making it very difficult to be competitive without lowering prices. And manufacturer dealerships will increasingly consider the number of returns from hire purchase defaulters as a liability.
* The one thing that isn’t growing in Thailand’s economy is wages. This also functions as a disincentive to save rather than buy now, pay later. If you save your money will devalue faster than the interest you’d be charged under HP.