Shifting Thailand's economy from manufacturing towards knowledge-based industries

Pursuing a strategy of differentiation from its regional peers, Thailand’s industrial sector has preferred to target higher value-added industries over bulk unprocessed exports. The country’s relatively well developed infrastructure in terms of power, water, communication, transportation and logistics is well suited for more technical manufactured products such as automobiles, electronics and even processed food rather than bulk exports of raw materials such as minerals, hydrocarbons or logs. This strategic vision is also shaped by the country’s increasingly educated labour force, which numbers far fewer than other regional rivals such as China, India and Indonesia, all of which have been able leverage their larger populations into a legion of skilled workers to take advantage favourable scales of economy.

The ongoing transition of the economy away from its agricultural tradition is evident in its primary exports, with Thailand ranking among regional and global exporters for agricultural goods such as rice, rubber, cassava and sugar and more high-tech industries including automobiles and electronic hard discs.

Up The Value Chain

The ongoing tariff reductions with the ASEAN community is now magnifying these competitive advantages as well, and the Thai industrial sector continues to evolve in response to the inevitable relocation of labour-intensive industries to neighbouring countries with lower costs. Policies now increasingly reflect the government’s desire to move further up the value chain towards more knowledge-based and research and development (R&D)-based industries at the expense of lower-margin sectors such as textiles. Through the Ministry of Science and Technology, the government is targeting domestic R&D expenditure to reach 1-2% of GDP with a private/public sector ratio of 70:30 by 2021.

Falling tariffs and greater integration also provides significant opportunities for Thai companies, particularly in the automotive and agricultural sectors in which Thailand holds competitive advantages over other member countries. The easing of restrictions on cross-border traffic of goods and labour can also benefit businesses in Thailand by tapping into cheaper labour pools in neighbouring countries to produce basic inputs used in higher value-added processes in Thailand. In order to facilitate this, the government has already set up special economic border zones with immediate neighbours such as Myanmar to establish cross-border supply chains and boost trade for industries such as plastic manufacturing.

By The Numbers

Thailand’s economy continues to rely increasingly on the manufacturing sector both in terms of supplying goods for domestic consumption and as a foreign currency earner on the export market. As traditional industries such as agriculture play a proportionally smaller role in the economy overall, manufacturers are taking up an increasingly large share of exported goods and accounted for around 88% (BT6.41trn, $193.1bn) of total free-on-board export value in 2015, according to Bank of Thailand statistics. High-tech industries now dominate the export-oriented manufacturing industries, led by the electronics and automotive sectors, although processing of raw materials, including agriculture products and petrochemicals, also plays a significant role.

In spite of declining in share relative to other exports, the electronics and electrical (E&E) appliances industries combined made up the largest share of exports in 2015 with BT1.48trn ($44.5bn) in goods shipped on the year, accounting for approximately 20% of total exports. Serving as the automotive hub for South-east Asia, the automobile and auto parts market also played a major role in the export market, with more than BT1trn ($30.1bn) exported on the year as well (see analysis).

Other manufacturing industries playing a significant role in the economy include manufactured and processed agricultural products which were valued at BT864.8bn ($26bn) in 2015 (11.9% of exports), machinery and equipment valued at BT648.8bn ($19.5bn, 8.9% of all exports) and petrochemical exports valued at BT393.5bn ($11.8bn, 5.4%), data from the Bank of Thailand shows.

Investments

As the short-to-medium term political situation has somewhat stabilised in 2015 following the military coup in 2014, investor confidence in Thailand’s industrial sector has begun to bounce back. This is reflected in a jump in the number of investment applications over the past few years, and the manufacturing segment in particular has experienced a significant increase in investment interest.

Investments approved by Thailand’s Board of Investments (BOI) fell off from BT1.03trn ($31bn) spread over 2013 projects in 2013 to BT724.7bn ($21.8bn) over 1662 projects in 2014 before rebounding to BT809.4bn ($24.4bn) over 2237 projects in 2015. These investments were split roughly evenly between Thai and foreign investors in 2015. After the down year in 2014, nearly all the manufacturing subsectors experienced a rebound in investments in 2015, led by the chemicals, plastics and paper industry which increased annual investments by 164% to BT128.7bn ($3.9bn) in 2015. The electronics and electrical appliances industry also boosted investments from BT76.8bn ($2.3bn) to BT116.9bn ($3.5bn) (up 52%), while light industrial outlays increased to BT27.1bn ($815.7m), up 109%. By contrast, the metal products, machinery and transport equipment sector was slower to recover, recording BT128.3bn ($3.9bn) in new investments in 2015 compared to more than double that the previous year (BT302.6bn, $9.1bn).

Industrial production has followed a similar trend over the past few years as output dipped in 2014 as a result of political uncertainty. The manufacturing production index declined by 5.2 points on the year after a 2.4-point expansion the previous year. However, in 2015 the index exhibited signs of stabilisation, posting an increase of 0.3.

Electronics

A cornerstone of Thailand’s manufacturing sector, the E&E sector ranks among the country’s most valuable sectors for exports. Manufacturers have fashioned the country into one of the region’s premier electronics hubs. With a total export value of $55bn in 2014, the E&E segment accounted for at least one-fifth of Thailand’s annual export revenues on the year, according to the latest data available from the Thai Electrical and Electronics Institute. The main export destinations for these products were the US (17.3%), various ASEAN countries (16.7%), Hong Kong (12.5%), Japan (10%) and China (8.8%).

Regarded as one of Thailand’s early manufacturing success stories, the electronics industry remains a core component of the Thai industrial sector’s success in spite of increased diversification of the country’s export base. In 2014 Thailand’s overall trade in the electronics industry topped out at around $59.5bn, with export revenues totalling more than $32bn, according to data from the BOI. The main contributors to the sector were computer components and integrated circuits (IC), which accounted for 56% and 24% of total electronics exports, respectively, on the year. A large driver of this subsector is the manufacturing of data storage devices including hard drive discs, of which two of the world’s largest producers – Western Digital and Seagate – operate major manufacturing facilities out the country. Other prominent tech companies producing a variety of electronic goods in Thailand along with testing and R&D operations include Fujitsu, LG Electronics, Sony and Samsung. The primary markets for these exports in 2014 were the US (19.5%), Hong Kong (19.3%), ASEAN (14.3%), China (10.8%) and Japan (7%). Other, smaller but rapidly growing subsectors with strong potential for future expansion in Thailand include an expansion of integrated circuits (an integral component of smart phones), radio-frequency identification technology and automotive electronics.

Anchored by a strong showing in the air conditioner and refrigerator segments, the electrical appliance industry exported $23.5bn worth of goods in 2014. These were led by air conditioners accounting for 17% of the segment, of which Thailand is the second-leading producer in the world, along with refrigerators which accounted for another 6% of exports.

This output is expected to grow in the coming years after Turkish household appliance manufacturer Arçelik broke ground in January 2015 on a new $100m production plant in the country. The company’s first facility in South-east Asia is projected to produce up to 800,000 refrigerators under the Beko brand over its first three years of operations. Arçelik expects to ship 90% of production throughout the ASEAN region, targeting $500m in sales by 2018 across countries including the Philippines, Vietnam, Malaysia, Singapore, Indonesia, Australia, New Zealand and Thailand. Arçelik’s entrance into the Thai manufacturing sector will add to a growing list of global electrical appliance manufacturers already established in the country, including Bosch & Siemens, Daikin, Electrolux, Fisher & Paykel, Haier, LG, Panasonic, Samsung and Toshiba. The primary export destinations for Thailand’s electrical appliances in 2014 were ASEAN members, accounting for 20.1% of exports, followed by the US with 14.5%, Japan (14.3%), China (6%) and India and Australia accounting for 3.8% each.

Food

Building off the traditional strength of the Thai agricultural sector, domestic agribusinesses have thrived in Thailand to become one of the premier production, processing and exporters of food products in the region. Thai businesses have proven exceedingly adept at leveraging plentiful and productive commodities ranging from sugar and rice to livestock and seafood while capitalising on a robust domestic infrastructure to produce a wide range of food products which are shipped around the world. As a result, Thailand has established a unique position for itself as the only net food exporter in Asia and sits among the world’s top producing countries in a number of commodities including rice, canned tuna, frozen seafood, chicken and canned pineapples.

Thai producers exported BT864.8bn ($26bn) worth of agro-manufactured products in 2015, down from BT871.6bn ($26.2bn) the previous year but more than double the BT404.6bn ($12.2bn) exported in 2004.

General food products led all categories of exports with a value of BT501.8bn ($15.1bn) on the year, followed by sugar (BT92.3bn, $2.8bn), canned and preserved fish at BT89.8bn ($2.7bn), poultry meat (BT72.6bn, $2.2bn), cereal flour or starch (BT38.7bn, $1.2bn), crustaceans (BT35.8bn, $1.1bn), other canned and preserved fruit and vegetables (BT31.2bn, $939.1m) and pineapple (BT19.3bn, $580.9m).

Although there are numerous companies active in the sector, the Thai agribusiness sector is dominated by only a handful of companies specialising in specific niches. By far the largest two companies are Charoen Pokphand Foods (CPF) and Thai Union Frozen Products. Other major players in the sector include general food manufacturer President Bakery, sugar producers Khon Kaen Sugar Industry and Khonburi Sugar, Thai Vegetable Oil (producing soy oil and soybean products), Univanich Palm Oil, Patum Rice Mill and Granary and Siam Food Products (fruit).

Easily the biggest fish in the pond, CPF is the largest integrated agri-industrial company in the country. The company maintains a well-established value chain in the areas of livestock (poultry and pork) and aquaculture while drawing in total sales of BT426bn ($12.8bn) in 2014.

The company is 47.9% owned by Thailand-based agribusiness conglomerate CP Group and is active in both upstream activities such as feed, which is used for internal operations or sold to other companies, as well as downstream businesses via the Five Star Marketing and CP Fresh Mart retail brands. Although the majority of CPF’s revenues are derived from the domestic market, the company also has operations in animal feed, farming and meat processing in nine countries across Asia and Europe.

Sweetening The Pot

In the current competitive global marketplace, simply possessing a favourable geographic location, efficient infrastructure, stable government or stable access to natural resources is often not enough on its own to attract interest from multinational businesses searching for the optimal placement of their next factory.

In order to remain on par with regional rivals competing for finite investment dollars, Thailand offers a number of financial and other incentives for companies keen to set up shop in the country.

The most relevant of these tax-based benefits for the manufacturing sectors are those providing for the exemption and reduction of import duties on machinery, reduction of import duties for raw or essential materials, exemption of corporate income tax and juristic person income tax, 50% reduction of the corporate income tax, double deduction from the costs of transportation, electricity and water supply, an additional 25% deduction of the cost of installation or construction of facilities and the exemption of import duty on raw or essential materials imported for use in production for export.

There are also other non-tax benefits afforded to labour as well. These include special permission for a number of activities including for foreign nationals to enter the kingdom for the purpose of studying investment opportunities or to work in investment promoted activities, land ownership and financial remittance in foreign currency.

Although these corporate tax breaks and other advantages keep Thailand regionally competitive in the manufacturing sector, attracting high-end talent such as scientists and engineers required in higher value-added fields including biotechnology, bioplastics and aerospace is more challenging.

The country’s efforts to move up the value chain and establish itself as an ASEAN R&D hub will prove more difficult with established markets such as Singapore competing for these knowledge-based industries, particularly after 2015, due to further tariff reductions as a result of the implementation of ASEAN Economic Community integration policies.

Competitive Balance

Taken as a whole, the combination of Thailand’s macroeconomic climate, physical infrastructure and government institutions form in aggregate one of the region’s most attractive countries to do business in. Thailand was the 32nd-most competitive nation in the world out of 144 countries ranked in the 2015-16 edition of the Global Competitiveness Report published by the World Economic Forum. This position was one slot lower than the previous ranking of 31 due largely to the recent instability brought about from the government coup in 2014. The competitiveness rank in Thailand averaged 34.10 from 2007 until 2016, reaching an all time low of 39 in 2012 and a record high of 28 in 2008. Thailand remained among the leaders within the Asian region in terms of competitiveness as well, ranking ahead of competitors Indonesia (37) and the Philippines (47) but behind Singapore (2), Japan (6), Hong Kong (7), Taiwan (15) and China (28).

The country continued to rank highly in categories which have a strong correlation to Thailand’s industrial sector, including infrastructure (ranking 44 out of 144), macroeconomic environment (27), goods market efficiency (30), market size (18) and business sophistication (35). In spite of the favourable showing, Thailand still has some work to do if the country wants to continue to make itself more business-friendly going forward.

The primary concern of survey respondents relating to the most problematic factors in doing business in Thailand all revolved around ongoing difficulties with the government. These included the top four concerns, which were government instability/coups, with the top weighted score of 18.1; corruption, with a score of 12.5; inefficient government bureaucracy (12.3); and policy instability (12.0).

In terms of addressing these shortcomings, one of the major initiatives being undertaken at the Ministry of Industry is the easing and streamlining of the permit and licensing process, particularly targeting the process and reducing the number of steps. Factory licensing standards are being revised and streamlined, and the government has issued a law to ease the facilitation of permits with actual punishments incurred for delays. This category was a particularly poor performer in the competitive rankings in 2015-16, with the number of days to start a business averaging 27.5 days, ranking it at 109 of 144 countries.

Chasing Innovation

Having already established itself as a manufacturing hub within South-east Asia, Thailand’s industrial sector is looking to further differentiate itself from other countries by moving up the value chain and expand its capabilities to produce greater value-added products in a variety of modern industries. This strategy seeks to spur industries to progress up the technology ladder from established industries already operating in Thailand. Examples of this approach including moving from production of natural fibres to complex high-tech fibres or from electric appliances to the internet of things, petroleum-based plastics to bioplastics, conventional automobiles to hybrids and electric cars and other technologies.

One of the key initiatives launched by the government under the 2008 National Science Technology and Innovation Act, originally rolled out to foster growth and establish strong infrastructure and incentives to develop these sectors, is the science, technology and innovation policy. By utilising a wide array of government resources including research institutions, high-tech industrial parks, financial incentives and other means, the government is looking to increase the country’s competitiveness in these fields by boosting R&D activity to 2% of GDP by 2021, 70% of which would come from the private sector. These efforts are expected to translate into economic targets which include 3% annual productivity increases along with a 5% annual increase in value added for farming and businesses, along with a 5% reduction of waste and pollution.

Outlook

Thailand’s well-established manufacturing industry has diversified to the extent that it will continue on its upward trajectory and be able to absorb temporary downturns in particular subsectors. International investors have begun to return to the country, although longer-term stability and institutional reforms of bureaucratic procedures remain primary concerns which will need to be addressed to ensure future growth. Primary export-oriented manufacturing industries including automobile and electronics should continue to perform well, although longer-term success will likely depend on the ability of domestic companies to move further up the value chain in order to continue to differentiate themselves from other higher-volume, lower-quality competitors. Agribusinesses should also experience a bounce back in the short term provided crop production normalises following two years of drought conditions, which should also be aided by improving yields across all of Thailand’s major agricultural production industries.

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The Report: Thailand 2016

Industry & Retail chapter from The Report: Thailand 2016

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