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Thailand Emerges as the Mightiest of the Mighty Five Manufacturers

With a shift in global manufacturing preferences, Thailand is emerging as a new production powerhouse, particularly in the automotive sector. Despite this, the country still faces the challenge of on-going political and economic uncertainty.

Photo: Auto-focussed: The Honda plant in Thailand’s Rojana Industrial Park. (Shutterstock.com/Sukiyashi)
Auto-focussed: The Honda plant in Thailand's Rojana Industrial Park.
Photo: Auto-focussed: The Honda plant in Thailand’s Rojana Industrial Park. (Shutterstock.com/Sukiyashi)
Auto-focussed: The Honda plant in Thailand's Rojana Industrial Park.

Amid a global shift in the manufacturing hierarchy, the Mighty Five (MITI-V) cluster – Malaysia, Indonesia, Thailand, India and Vietnam – is seen as assuming an increasingly significant role. Its ascendance comes as India seems the only member of the BRIC nations to be truly fulfilling its potential on that front, with the remainder – Brazil, Russia and China – having either fallen a little by the wayside or shifted their focus. The most notable instance of the latter is China, with the country now moving towards a higher value, more technology-intensive manufacturing model.

Within the Mighty Five, it is Thailand that is emerging as the leading manufacturing destination. According to Deloitte's 2016 Global Manufacturing Competiveness Index, Thailand's manufacturing exports were worth US$167 billion in 2014. While this puts it slightly behind India, it sees it well ahead of Malaysia, Vietnam and Indonesia.

Thailand's success in achieving this level of output has been primarily attributed to its highly literate, skilled workforce and its high labour productivity. Overall, these factors are seen as more than compensating for the country's comparatively high labour costs, with the average monthly wage recorded as US$383 as of September 2016.

Overall, though, the country remains an attractive prospect for foreign investors. Its appeal has been boosted by the adoption of a number of policies designed to foster liberalisation and spur free trade, particularly in areas likely to enhance local skill sets, facilitate technology transfer and promote innovation.

The success of these policies has been acknowledged globally. In 2014, the World Bank rated Thailand 18th overall in terms of the dollar value of its manufacturing output. In 2016, Deloitte promoted the country to 14th place based on the same criteria, a position it is expected to maintain until at least 2020.

In terms of specific incentives, Thailand offers manufacturers tax holidays of up to 10 years, as well as other tax exemptions and preferential import duties. It also has a low duty regime with regard to capital goods and any raw materials used in the production of export-oriented items.

Its manufacturing industry has a particular focus on electronics, canned goods, plastics, jewelry, electric appliances, furniture, toys, computers and parts. It is also made increasing inroads into the integrated circuits, machinery, automobiles and automotive parts sectors.

Indeed, Thailand now lays claim to being home to Asia's most developed auto-parts industry, something that has seen it established as a manufacturing hub for a number of global motoring brands, including Toyota, Honda and Mercedes-Benz. According to McKinsey's Understanding ASEAN: The Manufacturing Opportunity report, between 2009 and 2013, the automotive industry accounted for 42% of Thailand's total FDI.

Such investment has allowed Thailand to attract an impressive array of manufacturers and assemblers, including BMW, Ford, Mazda, Mitsubishi and Nissan. It has also seen it develop a substantial base of domestic auto component suppliers. This, in turn, has had a knock-on effect to nurturing the country's steel production industry.

In general, the country's investor-friendly policies are seen as making it particularly easy for foreign investors to do business in Thailand. Thailand's corporate tax rate of 20%, for instance, is lower than that of Vietnam, India, Malaysia or Indonesia.

Thailand's Board of Investment (BOI), meanwhile, offers a range of tax incentives, support, services and import duty exemptions/reductions across a wide range of industries. More specifically, any manufacturing company in receipt of investment promotion privileges from the BOI is also exempt from all foreign equity restrictions, with no local content export requirements in place.

The country's competitiveness is also seen as being enhanced by its relatively well-developed infrastructure. In all, it has six deep sea ports and two international river ports, while its growing highway system connects every province, as well as offering rapid overland access to Laos, Cambodia and Vietnam.

In terms of future infrastructure projects, plans are now in place for a high-speed rail network serving all four corners of Thailand, as well as providing a direct freight link to southern China. There are also moves to extend Bangkok's mass transit system into more suburban areas.

Despite the positive environment nurtured by its government, manufacturing in Thailand is not without its challenges. The large-scale civil upheavals of 2006, 2008 and 2010, culminating in the 2014 military coup, all acted to undermine economic growth, for instance, while contributing to an ongoing climate of political instability.

In terms of natural disasters, the central region of Thailand experienced severe flooding in 2010. This had a hugely adverse effect on the country's manufacturing output, resulting in the overall level dropping by 36% in 2011. Most specifically, the floods saw more than 100 automotive components makers struggle to fulfill orders.

Collectively, these political and environmental problems saw Thailand's economic growth slow substantially. After the 2014 coup, growth dropped to just 0.9%. It rallied again in 2015, reaching 2.8%, while the final figure for 2016 is expected to be in the region of 3-3.5%. Concerns remain, however, over the possible impact of rising labour costs.

There are concerns too over the long-term stability of the local currency. Although the baht has weakened against a surging dollar over the past three months, it is expected to strengthen in the long-term. Such a development is seen a posing a potential risk to the continuing growth of the country's increasingly export-oriented economy.

Addressing the problem of currency fluctuations, Sanan Angubolkul, Vice-chairman of Thailand's Board of Trade, said: "If the baht does not fluctuate or appreciate to a level that could affect competitiveness, export growth is expected to be around 0-2%. If the baht continues its appreciation, however, then Thai exports could register negative growth this year."

Geoff de Freitas, Special Correspondent, Bangkok

Content provided by Picture: HKTDC Research
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