Thailand's manufacturing sector to move further up the value chain

 

Economic stability, comparatively well-developed infrastructure and competitive investment incentives have attracted a steady flow of financing to Thailand’s manufacturing sector from both foreign and domestic sources, resulting in one of the strongest manufacturing bases in the ASEAN region and the second-largest economy within the trade block. These investments – made initially in basic industrial areas such as auto manufacturing, simple electronics and food products – have laid the groundwork for future steps up the value chain while also providing an export-driven stream of revenue for the government to provide further improvements to infrastructure and financial incentives.

Sector Figures

At 27.4% of overall GDP in 2016, manufacturing is roughly double the size of wholesale and retail trade and about four times larger than agriculture. The manufacturing sector also employs 16% of the labour force, second only to the 31% employed in agriculture. This 16% amounted to 9.3m jobs for the Thai workforce in 2016. As a result of the large role industry plays in Thailand, its success or failure often dictates the health of the overall economy. From 2001 to 2004, for instance, economic growth surged by an average annual rate of 6.5%, one of the most rapid sustained expansions in the country’s history. The manufacturing sector simultaneously experienced one of its strongest cycles ever, with the sector growing at an average annual rate of 8.8% over the three-year period.

More recently, the manufacturing sector has been suffering from a stagnant global and domestic economy, which has reduced demand for manufactured exports abroad and dampened domestic consumption. In addition, competition has increased from regional rivals such as Vietnam, the Philippines and frontier economies like Myanmar, which are emerging as alternative low-cost manufacturing destinations. Still, the sector accounted for 6.5% of economic growth in 2015 while representing nearly 30% of overall GDP value.

Thai exports, which are heavily weighted towards manufactured goods, have been hit hard over the past few years as a result of these trends, although signs of recovery came in late 2016 when fourth quarter exports of goods increased by 3.8% year-on-year (y-o-y), the first positive growth after seven quarters of decline. Manufacturing exports, which accounted for 88% of the total exports of goods, grew by 3.6% y-o-y. Shipments to the US and the EU expanded by 7% and 2.7% y-o-y, respectively, although these gains were tempered by a 0.4% contraction in exports to China, Thailand’s largest export market. The dip in demand from China was indicative of Asia as a whole, with regional trade underperforming in 2016 as exports to the CLMV countries (Cambodia, Laos, Myanmar and Vietnam) registered declines of 1.8% y-o-y and exports to all ASEAN countries fell 0.04% y-o-y. The first quarter of 2017 went on to post healthy export growth of 6.6% in US dollar terms – the highest in 17 quarters.

Manufactured goods exports for the entirety of 2016 totalled BT6.6trn ($185.4bn), up from BT6.4trn ($180.6bn) the previous year. The well-entrenched automotive sector retained its top spot, accounting for BT1.2trn ($33bn) worth of vehicles shipped on the year, along with another BT474.8bn ($13.4bn) worth of auto parts and accessories. The electronics and electrical appliances industry was also well represented, accounting for BT1.1trn ($30.7bn) and BT437.3bn ($12.3bn) worth of exports, respectively. Other major earners of foreign currency were agro-manufactured products, valued at BT903.1bn ($25.4bn), and machinery and equipment at BT674.3bn ($19bn).

Hedging Its Bets

Having successfully moved past basic natural resource exploitation and transitioning to a model built upon production efficiency, Thailand’s policymakers are now hoping to take the next step in development, which is to not only build a more diversified and profitable industrial and export base, but also to stem the tide of increasing income disparity in the country. Keenly aware of the pitfalls of slipping into the middle-income trap, which ensnares many emerging markets as economic development slows, the Thai government is vigorously promoting new high-tech industries to help drive up incomes. The Thailand 4.0 industrial development plan rolled out in 2016 embodies these concepts, emphasising building capacity for innovative products by promoting investment in cutting-edge, technology-driven industries in order to move away from a production-based economy towards a service-based one (see analysis).

Although much of the government’s promotional efforts are focused squarely on the high-tech sector, traditional heavy industrial businesses are optimistic that the accelerated government spending will lead to increased funds for a wide range of goods, from construction materials to electronics. The 2016 national budget called for overall spending increases of 5.6% to BT2.7trn ($76.6bn), with a good portion earmarked for infrastructure development. More importantly, the government rolled out its BT3.4trn ($95.2bn) Infrastructure Development Master Plan (2015-22), which allocated BT1.8trn ($50.1bn) for 20 major transport projects expected to be tendered by 2018.

Measuring Up

Undefined Apart from the established history and strong track record of the country’s industrial sector, Thailand has also fared better than many of its regional neighbours in terms of global competitiveness. The country scored quite well in Deloitte’s “2016 Global Manufacturing Competitive Index”, ranking as the 14th-most competitive country out of 40 in the world with an index score of 60.4 out of 100. This placed Thailand between 13th-ranked Sweden and 15th-ranked Poland and ahead of many regional competitors such as Malaysia, Vietnam and Indonesia, which occupied the 17th, 18th and 19th spots, respectively. When combined with India, these five rising regional manufacturing bases – dubbed MITI-V (or the Mighty Five) – are pegged by some to take up the mantle of a “New China” over the next five years by way of capitalising on low cost labour, agile manufacturing capabilities, and favourable demographic and economic profiles as China continues to shift its focus towards higher value, advanced technology manufacturing. While this projection remains a distinct possibility for Thailand in the near term, the country’s industrial development plans are targeting a higher value, knowledge-based economy of their own in the long run.

According to Deloitte, Thailand’s favourable ranking was influenced driven by the nation’s skilled workforce and high labour productivity, supported by a 90% national literacy rate along with approximately 100,000 engineering, technology and science graduates every year. The downside of this skilled workforce is a relatively higher cost of labour, which was more expensive than that of other competing nations. Yet another key factor swaying the rankings in Thailand’s favour included a lower corporate tax rate than Vietnam, India, Malaysia or Indonesia, at 20%.

Holding Fast

Despite the recent slowdown in the manufacturing sector, foreign and domestic companies remain hopeful for a turnaround in Thailand and continue to invest in the country rather than move to other markets. But while manufacturers are by and large opting to hold steady, many companies are responding with caution by tightening their belts and holding off on large investment projects.

Overall investment in the country has tailed off significantly in the past two years, with net investment applications submitted to the country’s Board of Investment (BOI) declining from 2935 projects totalling BT1.7trn ($47.9bn) in 2014 to BT197.7bn ($5.6bn) over 988 projects in 2015, but regaining some traction with BT584.4bn ($16.5bn) in 2016 for 1546 projects. Foreign direct investment (FDI) levels were hit especially hard with the combined investment of BT48.7bn ($1.4bn) for 2015 and 2016 accounting for only a fraction of the BT710.6bn ($20bn) in FDI attracted in 2014 alone.

The manufacturing sector in particular was dealt a blow, with FDI into manufacturing dropping by 40% y-o-y in November 2016. The amount of private investment approved by the Department of Industrial Works for factory construction dropped 32% y-o-y in 2016 as well, to $190.1bn spread out over 746 factories.

All Charged Up

Thailand’s automotive sector continues to play the leading role in the country’s manufacturing and exporting scene, consistently holding the top spots in terms of production value and exports. Automobile assembly was one of the first major success stories for the country stemming from the 1970s, with the government offering competitive incentive packages to lure in foreign automakers, along with providing a stable political setting, a motivated workforce and continuously improving infrastructure.

Over the past 50 years, the sector has continuously expanded to become one of largest auto exporters in Asia, adding new capacity to satisfy a growing need for cars and trucks as economies across South-east Asia surged. As of 2015 the country was the 12th-largest producer of motor vehicles in the world. Production in Thailand peaked at 2.46m vehicles in 2013 and has since receded slightly as slowing economic growth has curbed regional demand to 1.88m units in 2014. Output has subsequently recovered, increasing to 1.94m in 2016 following modest growth rates of 1.7% over the previous two years. “Pick-up trucks account for around 40% of total automotive sales in Thailand, the highest such rate in the world, and pick-up sales expanded by 4% y-o-y in the fourth quarter of 2016, helping to mitigate an overall slowdown in industry sales,” Mark Kaufman, president of Ford ASEAN, told OBG.

Exports have been accounting for an increasing amount of total production over the past four years, as domestic sales have decreased each year since a record 1.44m vehicles were sold on the local market in 2012, in part due to a successful rebate programme for first-time car buyers. New vehicle purchases have roughly halved since then, with 770,423 sold in Thailand in 2016 compared to 1.19m units exported.

Eco-Driver

One of the more recent developments in the Thai auto sector is the promotion of eco-friendly vehicles on the domestic market starting in 2007. The purpose of the strategy is two-fold: first, to boost domestic demand and create incentives for car companies to roll out new lines of automobiles in the country, and second, to encourage the use of lower emission vehicles to mitigate environmental damage. In order to incentivise production, the BOI offered a number of financial inducements specifically for eco-car producers, including exemptions from import duties on machinery, exemptions from income tax for up to eight years and a reduced 17% excise tax.

However, in order to reap these benefits, producers were required to fulfil a set of criteria as well. These include a commitment by each applicant to invest a minimum of BT5m ($141,000) in the programme, including parts and production; have a minimum production capacity of 100,000 units per annum by the fifth year of operation; the vehicles must attain a fuel consumption of less than five litres per 100 km; meet emissions standards of Euro 4 or higher; ensure emissions are less than 120 grams per km; and other safety and engine displacement requirements. Honda, Toyota, Nissan, Mitsubishi and Suzuki all took advantage of the programme, pouring billions of baht into new production lines, and saw increased sales domestically as well as increased exports.

This concept was taken to the next level in March 2017 with the introduction of new incentives for the production and purchase of electric vehicles. Segment incentives cover three types of vehicles: hybrid electric vehicles, plug-in hybrid electric vehicles and battery electric vehicles. The level of incentives offered to automakers depend on the technology employed, the varying levels of tariff exemptions for imported machinery and include exemption from corporate income tax of a period up to 10 years. “While competition from neighbouring economies such as Indonesia is increasing, Thailand remains the most competitive investment destination for the automotive industry in the region,” Vikrom Kromadit, CEO of Amata Corporation, told OBG. “It has a large and diversified production base, along with a robust network of suppliers such as spare parts and tyre makers, and plentiful natural resources for basic components.”

Electronic Age

Second only to Thailand’s robust auto industry, the electronics industry is one of the country’s strongest manufacturing segments, and accounted for 15% of export revenues in 2016 – worth a combined total of BT1.1trn ($30.7bn). The industry leads the region and currently boasts hundreds of domestic factories, many of which are operated by leading electronics companies from across the globe, including Sony, Hitachi, Mitsubishi and Panasonic of Japan, as well as European, US and South Korean manufacturers Electrolux, Schneider Electric, Honeywell, Emerson Electric, Carrier, LG and Samsung.

In spite of Thailand’s position as a key producer and exporter of electronic and computer components, export values have stagnated as a result of slower economic growth, increased competition from regional rivals and decreased demand for some components as a result of ongoing technical innovation. Although the value of electronics exports has increased in each of the past four years, 2016 sales were virtually identical to levels posted a decade ago when BT1.1trn ($30.7bn) worth of electronics were shipped.

Some of this decline has been attributed to a shift in demand with newer, higher-end technology being increasingly used in smart phones and tablet computers, which require small, more powerful and faster components than their larger laptop and PC predecessors. An example of this is in the data storage segment, which was once dominated by hard disk drives (HDDs) and is now moving increasingly towards solid state drives (SSDs) in lightweight consumer electronics. Producing roughly one-third of all HDDs worldwide, Thailand is the second-largest HDD manufacturer globally and hosts some of the largest producers in the world. These include Seagate, with operates manufacturing facilities in Samut Prakan and Nakhon Ratchasima; Western Digital Corporation operating in Pathum Thani and Ayutthaya; Toshiba Storage Device, also in Pathum Thani; and Hitachi Global Storage operating out of Prachinburi near the Cambodian border.

While it is undeniable that SDDs – the production of which is not as prevalent in Thailand – are replacing HDDs in some devices, global demand for HDDs remains strong, with some of the world’s largest manufacturers – such as Seagate and Western Digital – continuing to exhibit growth in this area. This is reflected in Thailand’s computer parts and accessories export figures, which have shown only minimal demand in recent years, and remain in line with historical levels. Computer parts and accessories continue to account for the largest component of electronics exports at BT469.2bn ($13.2bn) in 2016, followed by integrated circuits and parts (BT270.3bn, $7.6bn) and telecommunications equipment (BT127.1bn, $3.6bn).

Food Processing

Thailand is one of the world’s leading suppliers of agricultural goods, primarily due to its well-developed food processing sector, which monetises the country’s natural productivity, expanding the value chain downstream from field to market. As a result of this development, Thailand’s food processing industry has arguably become the most advanced in South-east Asia, which enables it to export value-added products to favourable international markets including Europe, Japan, China and the US. Large foreign and domestic players have established strong roots in the country, and now not only export globally, but also import a substantial amount of food inputs to add value and re-export goods abroad. Food imports in 2016 totalled BT386.5bn ($10.9bn), roughly 40% of the value of Thailand’s food exports, which were valued at BT940.7bn ($26.5). Complementing these export-driven operations are significant opportunities for food processors to serve the increasingly sophisticated domestic market, which continues to grow.

As of 2015 Thailand boasted more than 10,000 food and beverage processing factories consisting of small-, medium-, and large-scale plants. Most of these facilities are small-to-medium in size and principally serve the domestic market, while medium-to-large food processors tend to produce higher-value products for niche domestic sectors and export markets. Larger operations are generally owned and operated by premier food vendors, including Nestlé, Saha Pathana Inter Holding, Patum Rice Mill & Granary, Royal Friesland Foods, Unilever Group, Thai Union, Dole Thailand, Charoen Pokphand Group, Betagro, Saha Farms, Thai Beverage, Kellogg’s, Kraft, PepsiCo, Del Monte, Procter & Gamble, Ajinomoto and Ef-Fem Food.

Agro-manufactured exports from Thailand continue to increase, even as other manufacturing segments have begun to stagnate as a result of slower economic growth. Shipments totalled BT903.1bn ($25.4bn) in 2016, up 4.5% on the previous year and substantially more than the BT491.78bn ($13.9bn) exported in 2006. Processed seafood accounted for the largest portion of the 2016 total, valued at BT90bn ($2.5bn). Specific significant agro-exports included sugar, for which importers paid BT83.3bn ($2.3bn) to acquire more than 6m tonnes, along with processed crustaceans, poultry products and processed pineapple.

Outlook

Thailand’s relative political stability, steady economy and improving infrastructure should continue to cement the country’s position as a leading regional industrial producer and exporter. Recently launched efforts to move the manufacturing sector further up the value chain and into a technology-driven, service-based economy will be crucial in moving income levels beyond the middle-income bracket, and will depend on how successful the Thailand 4.0 initiative is in attracting investment to new industries.

Independent of this carefully planned growth strategy, short-term prospects point towards a continuation of the current environment, but sluggish growth in the manufacturing sector may be turning around as witnessed in strong early-2017 export figures. However, other external factors, such as a rise in protectionist policies, may affect Thai exports in 2017 and beyond.

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The Report: Thailand 2017

Industry & Retail chapter from The Report: Thailand 2017