Car buyers' incentive plan backfires in Southeast Asia's Detroit BANGKOK (Reuters) - An incentive program for first-time car buyers in Thailand has backfired with more than 100,000 indebted consumers defaulting, leaving the big global manufacturers that dominate Southeast Asia's largest auto market struggling to defend their margins. The tax breaks, which the World Bank estimates cost Thailand $2.5 billion, were intended to revive auto manufacturing in the region's biggest car-making hub following devastating floods in 2011. But much like the U.S. "cash for clunkers" program in 2009, the incentives distorted the market, creating a boom in demand that collapsed once the tax breaks expired in December. Research from IHS Global Automotive shows around 10 percent of the 1.2 million Thais who signed on to the incentive scheme have either changed their minds or couldn't pay monthly installments. Japanese automakers, who control 80 percent of the local market, reported a 30 percent drop in sales on average in the second quarter of 2013. Once buyers canceled, the vehicles were seized by auto finance companies and sold as used cars. Our prices have plummeted. On average they've fallen 20 percent this year," said Narongrod Chataratipa, general manager of Center Used Car which operates two showrooms in Bangkok. Some smaller dealers struggled to survive and shut down. Now that people realize they can't afford to pay, their barely used cars are on the market, driving down prices even further. The glut of almost-new vehicles hitting the market has had a knock-on effect of automakers, who are being forced to offer promotions or discounts to move stock. Mitsubishi Motors MMOTH.UL (7211.T), which operates three vehicle plants in the kingdom, said April-to-June Thai sales dropped 24 percent year-on-year to around 20,800 vehicles and it expects further falls. The end of the incentives scheme created an irregularity which may trade off the benefits to some extent. We've come to see it as an unavoidable cost of the program," said Nobuyuki Murahashi, President of Mitsubishi Motors (Thailand). Mitsubishi, Thailand's largest exporter of cars, has launched sales promotions around the country, including lucky draws and a no-interest payment scheme spread over 48 months. U.S. brands like Chevrolet and Ford (F.N) have a much smaller share of the Thai market, although they have made advances in recent years. Laurent Berthet, director of communications in Southeast Asia for Chevrolet-maker General Motors Corp (GM.N), said the market had been struggling over the last three months. "Of course, it implies everybody must be extremely cautious," he said. It obliges us to work closely with our dealers to get new models out there and attract interest from our customers. Often referred to as the "Detroit of Southeast Asia," auto manufacturing is Thailand's third-largest industry and accounts for 12 percent of gross domestic product. Car production surged 70 percent in 2012 from the previous year's flood-constrained output, to 2.43 million vehicles, according to the Paris-based International Organization of Motor Vehicle Manufacturers. This year it is expected to exceed 2.5 million vehicles, but with domestic demand falling automakers will need to ship more to export markets in Europe, Japan and Southeast Asia. Nitipon Chamnansilp, a 28-year-old graphic designer, signed on to the incentive plan that offered a tax refund of up to 100,000 baht ($3,200). His computer screen saver still shows his dream car: a modest Honda. "I knew exactly which car I wanted and paid a booking deposit," said Nitipon. But living costs have gone up since then and I already have monthly installments to pay for my apartment. Adding another payment would be financial suicide. Thailand's household debt is equivalent to nearly 80 percent of gross domestic product, among the highest in Asia. Last month the central bank expressed concerns over the impact of potential defaults in auto loans that could "adversely affect prices of second-hand cars and potentially lenders." Critics have compared the car scheme to other populist policies of Prime Minister Yingluck Shinawatra's government including a rice buying scheme to aid farmers that has cost at least $4.46 billion since it was introduced in 2011. "The tax refund scheme not only distorted the auto market, it also used the national budget to compensate losses from excise tax," said Jessada Thongpak, a Bangkok-based senior analyst at IHS Automotive. Supporters say the plan gave a much-needed boost to the big Japanese manufacturers - domestic sales of passenger cars more than doubled year-on-year in 2012, according the Thai Automotive Institute. "There will be payment defaults and we might have a trough but overall it was good that the government did this scheme because the industry came to its absolute capacity limit," said Uli Kaiser, president of industry analysts the Automotive Focus Group Thailand. Never had Thailand produced so many cars. Although sales have dropped for four consecutive months, they are still running well ahead of the 700,000 units sold in 2010, the year before the plan was launched. Undaunted by the mixed results of the first incentive scheme, the Thai government is pressing ahead with phase two of a green car program that offers tax breaks to manufacturers of environmentally-friendly and compact vehicles. The scheme's first phase saw auto giants Suzuki Motor Corp (7269.T), Toyota Motor Corp (7203.T), Nissan Motor Co Ltd (7201.T), Honda Motor Co Ltd (7267.T) and Mitsubishi join, and its second phase has attracted interest from European car makers such as Volkswagen AG (VOWG_p.DE). Thailand's Board of Investment, a government agency that promotes local and foreign investment, estimates that the country will produce 700,000 eco-cars by 2015. Research from IHS shows domestic demand for such vehicles is already trailing production by half, suggesting automakers may once again be stuck with unwanted supplies. Those green cars may find their way into Southeast Asian neighbor Indonesia, which boasts a potential car market - based on population - almost four times the size of Thailand's but just half the auto manufacturing capacity. Kaiser, from the Automotive Focus Group, said Thailand remained vital to Japanese automakers as a regional export base. The Japanese have strong interests in playing down the growth perspectives of Southeast Asia because they have a lot to lose. It is the only place, apart from South Korea and Japan, where the Europeans play no significant role," said Kaiser. What Mexico is for the U.S, Thailand is for the Japanese. Thailand is their Mexico. $1 = 31.7300 Thai baht Additional reporting by Pairat Temphairojana in Bangkok and Yoko Kubota in Tokyo; Editing by Emily Kaiser and Alex Richardson