Thailand's industrial sector looks to sustainable development projects

Thailand has seen phenomenal growth in its manufacturing industry over the last few decades, with the country establishing itself as a major base for both domestic and international industrial players.

Key moments in this expansion were the decision to establish industrial estates in the 1970s; the switching to Thailand of much of Japan’s automotive manufacturing sector in the 1980s, due to lower wages and generous investment incentives; and the discovery of gas in the Gulf of Thailand, enabling the establishment of a major petrochemicals industry, as well as power generation opportunities for industrial plants.

Manufacturing Boom

These moves fired an acceleration in GDP growth as manufacturing became the main engine of the economy. Between 1987 and 1995, the compound annual growth rate was 9.1%. Exports became the staple of the sector, with cars and computers assembled in-country from imported parts, then sent to markets across the world.

While the Asian crisis of 1997-98 caused major disruption to this pattern of growth – GDP fell 7.6% in 1998 according to the World Bank – within a relatively short time, Thailand had resumed robust expansion, with manufacturing at the forefront. By 1999, GDP was growing at 4.6%, rising to 6-7% per annum in the early years of the new century. Today, manufacturing accounts for 38% of the country’s GDP, and Thailand is the 17th-largest manufacturer of goods out of 144 countries. In 2013 it was also the world’s 11th-most-competitive manufacturing nation and the 28th-largest by exports. It has also become the ninth-largest automaker (fourth-largest in Asia), with this sector alone providing half a million jobs.

Scars Of Growth

This achievement has not come without costs, however. That many manufactured goods are assembled from imported parts and then exported means that Thai manufacturers have sometimes been at the mercy of global prices and exchange rates. At times, despite being such a large exporter, this has led the country to accumulate trade and current account deficits. At the same time, since much of this manufacturing is based on foreign investments that aim to take advantage of comparatively low Thai wage costs, there has been relatively little investment in human capital in terms of knowledge transfers and in the development of indigenous innovation and research and development (R&D). This has hindered local manufacturers’ ability to create higher value-added products.

Urbanisation

At the same time, rapid industrial expansion had a major impact on demographics. Manufacturing and industrial hubs, generally located near import-export hubs and the largest cities, drove up the country’s urbanisation rates, thus depleting rural communities. Rapid development of urban spaces has often been in an uncontrolled fashion, leaving many exposed to poor living conditions.

This has also had a major impact on the environment. As the UNDP reported in 2007, “Thailand went from being one of the most resource-abundant areas on the planet to being resource-constrained over the space of one generation.” The elimination of much forest cover, rising pressure on water resources, pollution from unregulated and often unsafe factories and plants, problems with waste disposal and other related issues have impacted the country.

These issues demonstrate the need to apply the principles of moderation, reasonableness and prudence. Growth has often been unbalanced, creating unhealthy external dependencies while fostering a neglect of domestic human capital. The deterioration of the environment also harms the well-being of local populations and merely stores up problems for the future. Resource depletion on such a scale demonstrates a failure in sustainability, as future generations are not being adequately provided for. The industrial and urban environment has also therefore become a subject for sustainable development projects.

Theory In Practice

One oft-cited example of the private sector applying sufficiency-economy theory is Siam Cement Group (SCG). The firm sponsors a wide range of projects that acknowledge that its stakeholders extend beyond the boardroom. At the same time, the company implements internal strategies that follow the King Bhumibol Adulyadej’s philosophy. One of these is care for employees. The SCG signed up to the UN Global Compact of 2012, adopting anti-discrimination policies for the workplace, along with labour rights that follow best international practice.

SCG is also a key example of a company that was hit by the 1997-98 Asian crisis but came back strongly. The crisis exposed SCG’s vulnerabilities – in particular, it had piled up debt servicing costs from earlier expansion. The company survived thanks to a radical restructuring, undertaken according to sufficiency economy ideas, with a stronger emphasis given to prudence. While peripheral businesses were jettisoned, the core cement, paper and petrochemicals businesses were maintained – and with an increased budget for human resource development. In this, the firm recognised that its people were its main asset.

Small But Significant

At the same time, the majority of Thailand’s manufacturers and industrial sector businesses are small and medium-sized enterprises (SMEs). According to the Federation of Thai Industries, SMEs account for 40% of GDP and provide 10m jobs. The country’s 2.7m SMEs make up 99% of the total, and 30% of all SMEs are in manufacturing. Often these businesses are considered unlikely places for CSR or for sufficiency economy principles, yet the size of a business is no obstacle to sustainability.

Community initiatives often take the SME form. One of these was in the Santa-u village on Lanta island. After the 2004 tsunami, the community was in ruins, yet by drawing on the ideas of prudence in sufficiency economy, the survivors set up a dockyard to repair boats, working together to rebuild houses and infrastructure and to set up craft workshops and tourism initiatives that revived their economic and social fortunes. The community acted as a beacon for others, with a network of small enterprises eventually working together across municipal boundaries.

Other examples of such principles include Pranda Jewellery, which started out modestly and now exports to many countries. Their path to success was through a deliberate policy of balanced growth, with attention given not only to company profits, but also to other businesses in the supply chain. Ensuring the success of these related businesses was key: Pranda decided that rather than trying to drive the hardest bargain possible – thus driving down these company’s profits in order to cut costs for themselves – it should preserve good relationships with its partners and thus secure longer-term benefits. The company then began to work with Social Venture Networks, a non-profit that works with similar outfits internationally. The company also paid attention to the ethical dimensions of sufficiency, paying its taxes meticulously and treating employees and customers fairly.

Relationship Matters

A further business that started small and now exports worldwide is Bathroom Design Company, which builds and installs a range of high-tech baths. The company even has an officer whose job is to make sure that its activities conform with sufficiency economy. Customer satisfaction is key: designers, sales reps, production technicians and finance are all brought together at regular meetings to ensure high-quality results across the board. After-sales service is also stressed, with a 24-hour call centre and a guarantee that any emergencies will be fixed within 24 hours. The firm also donates 5% of its annual earnings (before interest and tax) to renovating nearby orphanages and children’s homes. Employees benefit from equal opportunities policies and receive good health care and pension schemes. Major investment in human resources is also matched by investment in innovation and R&D. Materials for the baths are sourced as locally as possible.

In the food-processing business, Thai Vegetable Oil is a well-known example of a company with an ethical approach. The firm has sought to target “appropriate profit” rather than maximum profit, recognising that the latter may encourage exploitation of employees and customers. According to its management, the maximum-profit approach is non-sustainable and eventually undermines the enterprise.

Another company with similar practices is Nithi Foods, a business-to-business manufacturer and seller of dehydrated, fried and pre-prepared fresh food products, mainly geared towards the export market. The company places great emphasis on good relations with other stakeholders, such as suppliers and distributors, while also stressing customer satisfaction as a principle goal. This leads to higher standards of production – the company was among the first in its segment to achieve both HACP certification and ISO 9001:2000 – as well as good relations with its Social and health benefits for employees are also strong, with a growing budget for staff training, while levels of debt remain low due to prudent expansion and contraction. Prudence, and the risk management strategies this involves, is particularly important for the company, as feedstock prices and customer demand are both highly variable. It also invests in R&D to boost innovation and competitiveness.

Key Aims

Smith Taweelerdniti, the company’s managing director, told OBG that financial sustainability is a major aim, with Nithi Foods following a strict policy of reinvesting 20% of its net profit back into the business. The firm supports the working of a free market in agricultural products, taking a stand against hoarding by farmers – a policy which some companies employ to try to manipulate prices, but which leads to imbalances for other sector stakeholders.

Another business showing the application of sufficiency principles is Sa, a paper products business that also started small. The company moved away from use of chemical dyes – which are often imported and have a polluting effect – and instead creates its own organic dyes. Environmentally friendly water treatment processes have also been introduced, while the company’s finances have been managed by avoiding loans and pursuing prudence via risk management strategies such as product diversification.

A second manufacturing company that grew out of agricultural products is Plan Toys, a subsidiary of the Plan Group, which makes children’s playthings from sustainably sourced and recycled wood. The company tapped into the local rubber plantation sector, where traditionally rubber trees had simply been cut down or burned at the end of their cycle. Using the wood from these trees, Plan Toys invested heavily in technologies to clean this by-product – temperature control is used rather than chemicals to rid the wood of insects and bacteria – and also found ways to recycle its own sawdust back into wood that it then uses to make more toys. The company also pushes a pro-sustainability philosophy to children through its work, stressing the recycled nature of its products and the way in which they have been produced. The company, based in Trang in southern Thailand, now employs some 800 people – all hired locally – and sources all its materials from within 30 km of the factory.

Applying Principles

That the principles of sufficiency economy can apply across industry sub-sectors is also demonstrated by PE Technic, a manufacturer of parts for automotive electrical systems, which also produces alternators and regulators for Thailand’s crucial automotive sector. The company draws all of its staff from the northern province of Phitsanulok in which it is based. This hiring practice is a policy that has been designed with the community in which the firm works in mind. Having taken specific measures to benefit this community, the firm uses the positive image this localisation creates as a competitive edge against larger, Bangkok-based enterprises. It also takes other concrete steps to support the local population, such as sponsoring the education of their employees and their children. This “go local” policy also applies to the company’s supply chain. PE Technic buys from manufacturers located in Phitsanulok province whenever this is possible.

The company takes the impact of industry on the environment seriously, too. The automotive and automotive parts manufacturing sub-sectors tend to produce significant amounts of toxic waste. PE Technic invests a large proportion of its profits into waste and energy management systems, which bring dual benefits, cutting costs by boosting energy conservation, while also reducing waste production – and the cost of disposal. Safe, environmentally friendly methods to dispose of the waste are also used, benefitting the local ecology and the community.

This firm thus fulfils some of the basic criteria for a sustainable enterprise as originally formulated by business theorist GC Avery in her paper “Sustainable leadership practices for enhancing business prudence and performance.” She identified five principles: operate under a long-term perspective; really value the employees; genuinely focus on a range of stakeholders (including future generations); embrace social, ethical and environmentally friendly practices; and nurture innovation. These principles are entirely encompassed by sufficiency economy, which also stresses the need for prudence – a variety of risk management that encourages companies to hedge against market shocks, particularly global ones, by being able to rely on local resources. Such principles are compatible with a global outlook. PE Technic has by no means walked away from globalisation – indeed, the very nature of its products require it to engage with international players. All the above enterprises, in fact, are engaged in the global marketplace, with exports forming a key part of their sales. These firms are exporting an idea: that not only are sustainability and sufficiency economy compatible with business success, but often, rather, they are fundamental to it.

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The Report: Thailand 2016

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