Is Thailand Still An Attractive Location for Manufacturing? (Special Article) on 05/11/2007

 

 

David R. Nardone
President & CEO, Hemaraj Land And Development PLC
4 May 2007

Is Thailand still an attractive location for manufacturing? The simple answer is yes.

With proposed changes to the Foreign Business Act, imposition of capital controls as a response to the strengthening of the baht (but since watered down), a weakening of intellectual property rights, emission worries from petrochemical investments slowly being resolved, and an uncertain timetable for a return to democracy, one can raise questions about the investment environment related to manufacturing. Aren’t China India and Vietnam booming with lower costs to boot?

Attracting foreign investment includes demonstrating an open and consistent level playing field for foreigners by the Thai government while the representatives of multinationals manage nurture and explain the investment climate back home. In a one-year snapshot of the political investment and economic environment in Thailand, confidence can be shaken on all sides by focusing on the moment and discounting what has been accomplished to date.

Luckily, manufacturing investment plans in key industries implemented over the last 25 years with a consistent Thailand investment policy and massive private and government infrastructure investments have left Thailand both in a strong regional and competitive position for many years to come.

Over the last 25 years, Thailand has implemented a progressive infrastructure and utility cluster development with its Eastern Seaboard Development Program. Laem Chabang, Chonburi is now one of the world’s 20th largest container ports with access to multiple private industrial estates in the coastal corridor and nearby home to all major automotive manufacturing brands. Further southeast, in Map Ta Phut, Rayong is the National Petrochemical Complex with a liquid and bulk port development now well established to serve the adjacent petrochemical and heavy industry. Water distribution and integrated reservoirs, a reliable level of public and private power, population and education centers, and a road and transport network are in place and expanding. The new airport is east of Bangkok, further improving the industrial corridor.
 
Two industries that readily come to mind that are seeing significant investment levels and expansion are automotive and petrochemical. Both of these industries support supplier development for plastics, electronics, metal, appliance, and consumer products with similar suppliers and process technology or by providing higher value-added feedstock integration.

The automotive market in Thailand has been a huge niche market success story for the Japanese platform 1-ton pickup, which has increasingly developed over the last 20 years. The 2007 domestic automotive market will be flat at 660,000 vehicles sold, with another 600,000 vehicles exported. The Thailand industry projection for 2010 is for some 1,650,000 vehicles produced. This contrasts to the Vietnam 2006 local market of some 40,000 units, with China and India at approximately eleven and two and one-half times the Thailand market.
 
Globally, automotive export volumes are facilitated in countries that have a large local or proximity consumption of automobiles, Japan, U.S., Korea, Germany, and Mexico being the prime examples with China and India in the future likely given their volumes. Thailand with a two third one-ton pickup derivative market is the 2nd largest global consumer. All Japanese pickup platforms have relocated to Thailand for market access and cost considerations.
Much as the U.S. has relied on Mexico and NAFTA for lower cost manufacturing close to its market and the Europeans with emerging EU countries in Eastern Europe, Japan dominates the automotive sales in Southeast Asia with a relocated production base. Toyota has just opened their third integrated manufacturing plant, with ambitions for exports beyond the one-ton pickup market. The newly signed Japan-Thailand FTA will provide opportunities for Thailand to increase auto part exports to the 11.5 million vehicles, and surprisingly growing, Japanese production volumes.
 
Where Thai-based U.S. auto parts manufacturers also export, the anticipated U.S.-Thailand FTA could provide export benefits for U.S. and multiple country auto suppliers. At the Eastern Seaboard Industrial Estate, General Motors manufacturers Chevrolet Colorado pickups for local and export markets, Isuzu 1 ton-pickups for export, and Chevrolet local passenger and SUV models. Ford with its partner Mazda manufactures Ford Ranger pickups for the local market with the majority of pickups exported to over 130 global markets. Both have expanded since starting in the mid-90’s, as have most of our other 114 automotive manufacturing customers.
   
The automotive investments, despite the local constraints, are continuing. Recently Hanil Forging, the largest forging company in Korea invested in Thailand. At an opening of tier one auto supplier Kiriu in March of 2007, I was proud to hear their casting plant in Thailand was the most modern of their 6 in Japan, U.S.A., Europe, and China. Thai Okawa relocated and expanded to the Eastern Seaboard simply as the auto market is growing in Thailand.

Petrochemical investment in Map Ta Phut Rayong, as referenced above began 25 years ago with the establishment of infrastructure and gas separation plants

from the offshore gas exploration by PTT (Petroleum Authority of Thailand PLC), Unocal (now Chevron) and others. The two PTT joint venture refineries in Map Ta Phut, are integrated as feedstock at the National Petrochemical Complex supplying heavy aromatics or Naptha for Aromatics and Olefins production in addition to petroleum derivative products. The five natural gas separation plants by PTT provide higher value-added in the petrochemical industry than using the natural gas feedstock for
power plant energy consumption, which surprisingly is still 80% of the gas demand today.

The second stage of investment led to wider petrochemical product integration and establishing competitiveness in exporting products, with Thailand delivered costs now comparable or favorable with Singapore, Korea, Japan and Taiwan to locations like Indonesia, Taiwan, China, and Vietnam. Olefins and aromatics-based intermediate products, such as the ethylene, propylene, and aromatics chains, create downstream product opportunities for increasing domestic consumption with Thailand’s increasing industrialization.

There are numerous integration and clustering petrochemical investments being made today and coming on line from 2007 to 2011. Some recent investments including Cement-Thai Chemicals and Dow for Naphtha Cracker in 2010, PTT’s 1 million ton Ethane Cracker that will come online in 2009, PTT Phenol investment used for polycarbonate in auto and electronics industry that will start in 2009, PTTCH TOC Glycol opened in 2006 used for polyester fiber and PET bottle, ACN from PTT Asahi Chemical for acrylic fiber and ABS in 2009 and many others. There is significant investment continuing in the petrochemical industry over the next 5 years.
 
Investment conditions and competitiveness can be measured in a few areas where investors feel comfortable. The 2007 World Bank Ease of Doing Business Survey for 2007 ranks Thailand at the 18th easiest (from 175 rankings) place to do busines, up from 19 in 2006. China improved to 93 from 108 in 2006, Vietnam at 104, down slightly from 98 in 2006. Ease and cost of opening a business scored high, with Thailand mid-ranked but well above China and Vietnam in restrictive labor areas. Taxes are high and the cost-to-import were weak areas in the Thailand scoring.

 

Board of Investment (BOI) incentives have been consistent for 25 years, with tax holidays, the right to own land for a factory, free remittance of dividends and other non-cash incentives. The investment number for the BOI has been at a level of the boom mid 90’s with more than 1,300 project applications in 2005 and 2006 and investment levels of $18 billion and $13 billion respectively. Automotive and Chemicals represent roughly 40 % of the total investment.

Thais themselves are, despite recent perceptions, open and welcoming for foreign investment while the foreigners like it here as well. The government has been stable over time with the monarchy also revered by foreigners. Availability and costs in general are reasonable, which includes housing, schools, construction, professional and direct labor, direct and indirect materials, and (of course) world-class industrial estates.

Areas to improve include for those paying taxes the individual and corporate rates are high for the region. Raising local capital or loans is difficult for smaller companies. Labor costs to hire and fire are restrictive with outdated labor mobility laws. Technical labor perception never seems enough but we had some recent job fair positive surprises. The 2006 export growth of 17 % accompanied with an import growth of 2 % and production at near capacity levels for many industries indicates a delay in investment decisions and this pressures the baht to strengthen further.

China, India, and Vietnam? They are all good locations to manufacture with their own strengths and weaknesses with access to large expanding domestic markets or export opportunities with a host of varying reasons by country.

Is Thailand still an attractive location for manufacturing? The reflective answer taken in the perspective of 25 years of industrial development is still yes.

 

 

 

 

Source, Thai Olefins PTT 2006

April 10, 2007